Welcome to the STAG Industrial first quarter 2019 earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Matts Pinard, Senior Vice President of Investor Relations for STAG Industrial. Thank you. You may begin.
Thank you. Welcome to STAG Industrial's conference call covering the first quarter 2019 results. In addition to the press release distributed yesterday, we've posted an unaudited quarterly supplemental information presentation on the company's website at stagindustrial.com under the investor relations section. On today's call, the company's prepared remarks and the answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include statements relating to earnings trends, G&A amounts, acquisition disposition volumes, retention rates, debt capacity, dividend rates, industry and economic trends, and other matters.
We encourage all of our listeners to review the more detailed discussion related to these forward-looking statements contained in the company's filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental informational package available on the company's website. As a reminder, forward-looking statements represent management's estimates as of today. STAG Industrial assumes no obligation to update any forward-looking statements. On today's call, you'll hear from Benjamin Butcher, our Chief Executive Officer, and William Crooker, our Chief Financial Officer. I will now turn the call over to Ben.
Thank you, Matts. Good morning, everybody. Welcome to the first quarter earnings call for STAG Industrial. We're pleased to have you join us and look forward to telling you about our first quarter results. Presenting today, in addition to myself, will be William Crooker, our Chief Financial Officer, who will discuss the bulk of the financial and operational data. Also with me today are Stephen Mecke, our Chief Operating Officer, and David King, our Director of Real Estate Operations. They will be available to answer questions specific to their areas of focus. Our first quarter operating results represent a great start to 2019. The $185 million of accretive acquisitions represents the largest first quarter acquisition volume in the history of our company by a significant margin. The portfolio produced 3.5% same-store NOI growth, reflecting a strong start to the year.
These impressive metrics demonstrate STAG's ability to provide both external and internal growth. These operationally based achievements are further supported by the continuing strength of underlying industrial fundamentals. The tenants in our portfolio are both healthy and active. They continue to sign leases with significant roll-ups and elevated contractual rental escalators. After many consecutive quarters of net industrial demand exceeding new supply, the elevated supply is projected to potentially reverse that balance in 2019. However, it is important to note that this excess supply is isolated in a handful of large primary markets, and in some cases more specifically, certain submarkets within these markets. Supply remains constrained across the vast majority of markets and submarkets in which STAG operates. It should be noted that large bulk assets generally have different leasing demand drivers than smaller distribution buildings located in the same city.
It is thus vitally important to evaluate assets in the context of how they are positioned in and relative to other assets within the submarket they operate in. This is one part of the fulsome analysis that STAG performs to apply a relative value lens to assets across the 60 or so markets we are active in. The result of this broad inquiry is we regularly identify mispriced assets that can be acquired on an attractive risk-adjusted return basis. As we have always done, we continue to maintain broad diversification within our portfolio on any of the parameters that might introduce an undue degree of correlated risk. In addition to other benefits, this diversification also helps mute any exposure to submarket-specific supply considerations to the extent they were to occur.
In early April, the company executed an equity offering at very attractive pricing that directly funded our Q1 and April acquisitions, as well as reduced our overall leverage levels. This was STAG's first equity transaction outside of ATM issuance since October 2014. The offering was upsized and resulted in approximately $250 million of net proceeds to the company. This recent equity transaction demonstrates our willingness to remain flexible and evaluate all available options to efficiently capitalize the business. STAG leverages its real estate platform to create value in several ways. Our principal business is identifying, acquiring, and managing stabilized industrial real estate assets. We also pursue non-stabilized value add acquisitions. These include acquiring vacant or under-occupied assets primed for repositioning, or those with significant capital investment needs. The stabilization of these acquisitions has created an average of approximately 100 basis points of incremental value at the asset level.
Further along the spectrum of utilizing our operating platform to create value is ground-up development. As a fully staffed real estate platform, we've always had the capability to develop industrial buildings. Historically, we've seen greater risk-adjusted returns available to us through acquisition, especially on a time-weighted basis. However, in 2015, we purchased an asset in central New Jersey that came with significant excess land at little or no additional cost, i.e., the cash flow returns of the transaction were sufficient to justify the acquisition without attributing value to the excess land. Given the strength and our understanding of the sub-market, we undertook and recently completed the process of subdividing and permitting this excess land, creating an attractive development opportunity. We have now formally broken ground and commenced construction on a 250,000 square foot speculative warehouse building.
The expected completion date is in Q4 of this year, and leasing interest is strong. We expect the project to stabilize above an 8% return on cost and produce a value creation margin of approximately 50%. We do not expect that the development will be a large part of our business in the near or intermediate term. We're not building a land bank, especially on the current market conditions for developable land. However, we have excess land in a number of currently owned locations that could be similarly subdivided and permitted for development. These potential opportunities will periodically be evaluated, and we'll undertake those projects that make financial sense. This is yet another way that STAG can create long-term value for shareholders and one that further demonstrates the capability of the STAG operating platform. I'll now turn it over to Bill.
Thank you, Ben. Good morning, everyone. Before I discuss the financial results, I wanted to point out some disclosure enhancements we made beginning this year. The leasing activity disclosure will reflect the lease commencement date as compared to the lease execution date. This change will connect the leasing activity reported in the period to the net operating income reported within the same period, consistent with how we view our real estate internally. We have expanded our diversification disclosure to include top 20 exposures across markets, tenants, and industries from top 10 previously. We've also eliminated our AFFO definition due to the diversity in practice surrounding this disclosure. As a replacement, we have included supplemental financial information in our non-GAAP financial statements that provide users of our financial statements the relevant information to calculate AFFO or CAD.
Moving to the financial results, core FFO was $0.45 for the quarter, an increase of 4.7% as compared to the first quarter of 2018. This core FFO growth occurred while maintaining a defensive balance sheet with net debt to run rate adjusted EBITDA of 4.8 times. Stabilized acquisition volume for the first quarter totaled $141 million, and value-add acquisition volume for the first quarter totaled $44 million. These acquisitions were acquired at a stabilized cap rate of 6.6%. This quarter's acquisitions of $185 million is the largest first quarter volume in the company history and more than $100 million greater than the first quarter of last year. Disposition proceeds for the quarter equaled $18 million. Portfolio operating results continue to reflect the strength of our markets and our portfolio.
Same store cash NOI grew by 3.5%, which was driven primarily by retention for the quarter of 80.7% and cash releasing spreads of 14.9%. Straight-line releasing spreads were extremely strong as well, coming in at 24.3% for the quarter. During the quarter, we received notice that Ditech, a tenant on our watch list operating in a non-core flex office building, had formally rejected their lease in bankruptcy and has vacated their space. This specific tenant was on our watch list in Q4 2018, and this loss of income was factored into our credit loss guidance of 50 basis points for the year. We took an impairment charge of $5.3 million related to this non-core flex office building during the quarter, and we plan to dispose of this asset this year.
We continue to closely monitor our dynamic watch list and are currently not adjusting the 50 basis points of credit loss guidance for the year. In terms of capital market activity in the balance sheet, we raised $150 million of equity through ATM issuance in Q1, resulting in quarter end net debt to run rate adjusted EBITDA of 4.8 times, fixed charge coverage equal to 4.8 times, and liquidity of $562 million. Subsequent to quarter end, in early April, we executed an equity offering at $29.25 per share, resulting in net proceeds of approximately $250 million. The net proceeds were used to repay balances on the revolver and fund our April closings. Adjusting for the equity offering and subsequent net acquisitions, leverage is currently 4.3 times. We expect to continue to operate at the lower end of our leverage guidance of 4.75 times to 6 times.
As a result of the strong start to 2019, we now expect stabilized acquisition volume to be between $650 million and $750 million, which increases the aggregate acquisition volume range to $700 million to $850 million. We continue to expect $50 million to $100 million of value add acquisitions with $44 million closed through today. All of our 2019 guidance can be found in our supplemental posted to our website in the investor relations section. With that, I will now turn it over to Ben.
Thanks, Bill. It seems that one of the most frequently mentioned topics in real estate today is data analytics, the use of data to improve decision making and operations. Some sectors of real estate, multifamily and self-storage to name a couple, have been pursuing initiatives in this area for some time with notable successes, particularly in revenue management. Our sector, industrial real estate, has been a laggard for a variety of reasons. One is inertia. Change comes slowly to this sector. Another is a relative lack of good, clean data. The industrial sector, with its large, long-term leases on relatively non-homogeneous assets, simply doesn't provide as much granular data as other sectors for our analysts to work with.
Neither of these reasons should be sufficient impediments to us not to advance the use of our data in our operations. We at STAG have always been proud of how well we use data in the efficient execution of our investment thesis. As we look forward, we can see areas where data analytics should provide meaningful additional benefits to our operations. Two areas that have garnered our attention are, one, the aforementioned revenue management, and two, deal sourcing and corporate resource allocation. The targeting of specific sub-markets, even down to individual assets based on the likelihood of accretive acquisitions being available. We have begun work in these areas and are confident they will produce a non-zero benefit to our operations. Our team will be constantly looking to improve the quality and quantity of the data that we have to work with.
In closing, I would like to touch on the other topic du jour, ESG. Advancement in the areas of environmental, social, and governance are key drivers to our operational success today and in the future. My annual letter to shareholders, located at the front of our annual report, deals with this topic on a more fulsome basis. I encourage all interested parties to read it. We thank you for your time this morning and your continued support of the company. We look forward to your questions.
Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Sheila McGrath with Evercore ISI. Please proceed with your question.
Yes, good morning. Same store NOI for the quarter was 3.5%. That's well above your annual guidance. I was just wondering if you could explain if there was something unique driving that, the quarter's results well above guidance.
Hey, Sheila, it's Bill. There were some one-time items this quarter. A few of our tenants reimbursed us for roofs in this quarter, so that increased our cash same-store NOI this quarter. Our guidance, though, we still feel comfortable with 1%-2% for the year.
Okay, great. On the equity side, you raised a lot of equity early in the year. Should we expect the remaining parts or the second half of the year, you'll be using more debt financing?
Yeah. The equity transaction we raised was primarily due to the acquisition volume in the first quarter as well as April. We were able to immediately use those proceeds for those acquisitions. As we stated in our guidance, our leverage range is 4.75-6 times, and we do plan on operating at the lower end of that range. When you factor in this equity transactions as well as subsequent acquisitions, our leverage is around 4.3 times, we will need less equity as the year goes through. Just going back to your same-store comment as well, the impact of those tenants that reimbursed us for the roofs, once factoring those in, it comes to about 2.7% same-store NOI growth for the quarter, eliminating those one-time items.
Okay, great. One last quick one. If you could give us a little bit more detail on the value-add acquisitions that you closed on in the quarter and kind of your plan or vision for a couple of those.
Hi, Sheila, it's Steve. Yeah. We acquired two properties. The first one is a vacant asset, and the plan there is to do some reconfiguration of the building, add dock doors, basically spruce up the building, bring it up to market standard, and then lease. The second building is an expansion for an existing tenant. The situation there was the seller couldn't actually fund the expansion that the tenant desired. We came in, we were able to buy it, and come to an agreement with the tenant on a longer-term lease in exchange for the expansion.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Brendan Finn with Wells Fargo. Please proceed with your question.
Hey, guys. Good morning. It looked like rent spreads were particularly strong this quarter, especially on renewals. I guess, were there any large leases in there that were driving that, or were there any of your geographic regions that were particularly strong this quarter?
The rent spreads were very broad-based. Everything rolled up during the quarter. We didn't see any outsized spikes that drove that number. We have in the past given guidance for the year in the mid-single-digit growth range. I think we'll probably end up there, maybe on the high end, high-single-digit range by the end of the year.
Okay, cool. I guess on dispositions, it looks like almost all your dispositions this quarter were Midwest assets. I guess going forward, is that kind of where you're focused for dispositions, or is that just a coincidence for this quarter?
I would say this probably falls under the level of coincidence. We're selling assets that are either we're culling from the herd, if you will, non-core assets or assets opportunistically. The opportunistic opportunities come up where they come up. There was definitely not a geographic focus in what we're disposing of. It was either the nature of the asset or the opportunity to sell an asset to somebody for more than we thought it was worth.
Got you. Okay. Thanks, guys.
Thank you. Our next question comes from the line of Mitch Germain with JMP Securities. Please proceed with your question.
Good morning. Ben, what do you attribute the growth in the deal pipeline to? Have you made further investment in the acquisition team? Is there anything specific you can point to?
As we've mentioned on a number of calls in the past, Mitch, and thank you for asking the question, we continue to grow the outward-facing capacity of our team. There's a direct relation, we think a pretty high correlation to the amount of transactions that we see by doing that. Our hit rate has not changed. Our return requirements haven't changed. We're just putting more assets through the filters and therefore producing more transactions that are being closed.
Got you. Just a question, obviously Ditech hit this quarter. You mentioned your watch list. Is there any tenants in there that have multiple assets or is it just really these one-off situations?
Yeah, it's just these one-off situations. Our guidance for our watchlist tenants remains unchanged at 50 basis points, and that includes Ditech. It's just one-off tenants. No material exposure there.
Mitch, as you recall, ATD, which was a multiple asset tenant of ours that went through an 11 filing last year, affirmed all their leases. Again, part of our analysis of tenants is obviously not only their credit and their potential for financial distress, but how they use the buildings and the likelihood of affirmation in a lease-
Thank you
under a default issue.
Thank you. Our next question comes from line of David Rodgers with Baird. Please proceed with your question.
Good morning, guys. Ben or Bill, maybe you could address this, but just in terms of the leverage, I think you said you're comfortable at 4.75 to 6 times EBITDA. I think that's a slight change from maybe where you've been just in the recent past, with the high end maybe a little higher. You're not going to get there, it doesn't sound like anytime in the near term, but is there something that gives you confidence to have a higher end of that range or want to stay at a different level than you have been?
Yeah, Dave, we're comfortable with that range. In the near term, I don't think we'll be at the high end of that range. The rating agencies are comfortable with our BBB and Baa3 ratings operating within that range, we feel like it's a conservative range. Given where we are today, we're very comfortable operating at the low end of that range.
Dave, we haven't changed the upper end of that range. You may not have remembered that upper end is there because we've operated so far below it, for certainly the medium term and near term. We want to have that upper end of the range out there in terms of flexibility and optionality in capital raising. As Bill points out, we have been and intend to stay at the bottom end of that range going forward. The change that we made to the range was, I believe, at the end of last year. We lowered the bottom end of the range from 5 to 4.75. That's actually the only change to the range we've made in the recent history.
That's helpful. Thanks. Then maybe on the asset sales. Talk about maybe the appetite for portfolio premiums out there and thoughts about taking some bigger portfolios to market versus the one-off picking approach that you've done and, just how you weigh the balance of those two.
Certainly we've recognized in our history that there is a demonstrable portfolio premium for aggregating these kinds of single-tenant industrial assets. We've seen, depending on how you measure contemporaneous, 100 basis points or more historic, i.e., from where we bought assets to where we sold them, in excess of 250 basis points. Having said that, we do believe that these assets within the portfolio, the diversified portfolio, that portfolio premium exists as an aggregated portfolio. The benefit of the shareholders, the stabilized, predictable cash flows that portfolio produces, is being recognized from a value perspective.
Given our operating leverage, the fact that we do have this great amount of operating leverage, continuing to grow the size of the portfolio, recognizing the value within the portfolio, has seemed like a better course of action to us rather than some form of partial liquidation through larger portfolio sales.
Great. The last question. Maybe over the last 6, 12 months or maybe it's actually over the last couple of years, as you think about the acquisitions that you've done and underwriting underlying market rent growth, how has that changed for you guys in terms of seeing the cap rates on the acquisitions come down? Have you seen a lot of additional underwriting of market rent growth as you think about those assets in the portfolios that you've purchased?
I think that the market rent growth has continued to be strong across most of the country. As you see equilibrium perhaps being reached on an aggregate basis, you would expect that market rent growth may be diminishing. However, contractual rent bumps continue to be very strong, which obviously impacts your projected cash flows under the penalty of the lease. That allows for potentially paying a lower cap rate. Cap rate is, we've mentioned many times, just a point-in-time measure. Perhaps indicative, but not precisely indicative of the cash flows that you'll receive over the course of the lease. The other thing that we've had is we've been seeing longer lease terms in what we're acquiring. Obviously, that affects the constancy and the aggregate cash flow you receive during a three, five or 10-year period.
The resulting cap rates that come out of our acquisition activity are reflective of, at this point, we believe, are largely reflective of mix as opposed to any change in market conditions. When you see lower cap rates, it's because the cash flows resulting from those acquisitions will grow more strongly or more secure, have less potential interruption over the three, five, and 10 periods.
All right. Thank you.
Thank you. Our next question comes from the line of Jason Idoine with RBC Capital Markets. Please proceed with your question.
Hi. Yeah, this is Jason on for Mike. I just had a question on the increased investment activity that you guys saw in the first quarter. I'm wondering if this should be the new norm that we can expect moving forward. Also, you mentioned that you've been kind of building out that team. What's the outlook look like for continuing to grow that team? Then as you continue to grow it, what kind of acquisition should we expect?
I would caution you not to simply extrapolate from the $180 million that we did in the first quarter. Historically, the first quarter has been about 15% of the annual volume. Extrapolated from that would lead you to a number in excess of $1 billion. Certainly, our guidance is not saying that. We did have a very successful first quarter. We continue to have had success in the second quarter, we're not at a point yet where we're looking to change our guidance more than we have already.
Right.
I think we raised the midpoint of our guidance.
$50 million.
Yeah.
Yeah, our guide, we're very comfortable with the $700 million-$850 million of our acquisition guidance that we put forth.
Okay, great. Thank you.
Thank you. Our next question comes from line of Sarah Tan with J.P. Morgan. Please proceed with your question.
Hi, good morning.
We're having a hard time hearing you. Could you repeat that, please?
Sure. Just a question on acquisition volumes and the split between stabilized and value add. I saw you guys raised guidance for the stabilized assets, how can we think about the split between value add and stabilized going forward?
The value add is not an initiative, if you will. We're going out and seeking value add. These are assets-
Right
that come up within our regular inquiry. They'll probably be on the order of 10% of our volume. We increased our projections for the stabilized assets because we're just seeing that mix coming in. The value add is something that we do every year, have always done. Again, it's a relatively small portion of the overall mix.
Yeah. As we put forth our guidance in February for 2019, we had some pretty good clarity into the $40 million of value add acquisitions closing in Q1. The way to think about it is I would just look at the midpoint of that guidance and somewhere in the order of another $30 million-$35 million potentially for the year for us.
Thanks.
Thank you. Our next question comes from the line of John Massocca with Ladenburg Thalmann. Please proceed with your question.
Good morning.
Morning.
Can you maybe provide some more color on the developments that you mentioned earlier in the call? Specifically, kind of what do you think the total cost is for that one development? And then I know it's early days, but broadly speaking, what do you see as kind of from, like, a dollars perspective, the potential for total development on some of these ancillary pieces of land you have at existing assets?
Yes. Specific to the New Jersey development, we are anticipating that the total cost to be about $15 million excluding the land cost, which we already had in the portfolio. On a broader note, many of our sites do have excess land capacity. We evaluate those periodically to see if they're economically viable projects we can undertake. Many of those sites are encumbered by tenant leases, so the opportunities are likely to be expansions for the existing tenants.
Is it fair to say that those will probably come in kind of fits and starts, particularly given maybe the point we are in the cycle in terms of looking at?
Yes.
Yes.
Yeah. One of the points that Dave has made to me along the way is we have an effective land bank here that we can utilize. It doesn't cost us anything. We will opportunistically look at these as they come up. One of the things that we also talk about, I mentioned in the script, I believe, is we see these developments for what they are. They're very accretive, but they're also very time-consuming. We believe that on a risk-adjusted basis, the proper deployment or the most efficacious deployment of our equity capital remains, for the most part, in buying stabilized assets as opposed to doing development. We can probably buy 10 assets in the amount of time it would take us to develop one.
Although the numbers are very strong, and I would say that the 50% profit margin that we alluded to on that development is based on pretty conservative assumptions, it still takes a lot of time to do that. We're very happy about that development. We'd expect to be producing great results out of it, but we don't believe it will be a core part of our business going forward.
Understood. Then a quick detail question. With the Houston value add property that had a tenant in place, was that paying any cash rent kind of day one? And if so, what was kind of the initial kind of non-stabilized cap rate?
The tenant is paying rent. It's a de minimis amount of rent relative to the long-term lease. It really is a situation where the tenant needed to build and expand it, and they're sort of staying in place while that activity occurs.
The asset is stabilized, and the tenant initiate this long-term lease. Probably de minimis returns at the outset.
Understood. Then on the balance sheet side, understanding you still have the term loan E available to draw down, as you look at beyond that in terms of debt market issuance, given the size of your acquisition activity, is there any thought to maybe moving kind of beyond private placements to public unsecured debt?
It's something we constantly evaluate. Given our pipeline, given the access to the private markets, given the pricing of the public versus private markets, we're very comfortable operating the private placement market in the next year or two. We'll continue to evaluate that. Again, going to your point on what does the outlook for the year in terms of debt, and we certainly look to raise some longer-term debt this year. When we fund that term loan E, we'll probably put another term loan in place with a one-year delayed draw feature as well.
Yeah. The other thing I would say is that before we enter the public market, given the initial, I mean, the discount that is usually in place for infrequent issuers, we want to approach the public markets who are ready to be a regular issuer in that market. We believe that's coming, but it won't be in the near term.
Makes sense. That's it for me. Thank you very much.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star one at this time. Our next question comes from the line of Christopher Lucas with Capital One Securities. Please proceed with your question.
Hey, good morning, guys. Just a couple of quick ones. Ben, just going back to the value add asset in Houston, the price per foot was the highest within the group of assets that you bought this quarter. Does this asset come with a fair amount of excess land? Is that the opportunity here?
Yeah. In order, obviously, to expand the building, we need the land to do it on. That asset did come with excess land, and that is all part of the opportunity, of a significant amount of excess land.
Okay. Then just going on the development side, do you guys have sort of a minimum hurdle yield over which stabilized assets could be bought that you're looking at as it relates to sort of your going-in development yield? Is there situations where you would go spec versus pre-lease? I'm just trying to understand sort of how you're thinking about that dynamic.
The asset that we're doing in Burlington, or is currently under development in Burlington, is a speculative development. It's a speculative development in a sub-market with about 2% vacancy. Very strong leasing demand. It's sized appropriately to the market. It has a bunch of things going for it that make us highly confident to go forward on a spec basis. Our activity in the build-to-suit basis has been largely on takeouts from other developers. Certainly, we're not reticent about signing a lease. If a tenant was willing to sign a lease before we broke ground, we'd be happy with that. Just getting that commitment sometimes requires, tenants have to believe the asset's going to actually get built before they'll sign the lease.
Promising them you're going to build it may not get you quite as much activity as if the dirt is moving and steel is going up, et cetera.
Okay. Thank you. Then my last question just has to do with sort of the transaction market. Are you seeing a change in sort of who's making up the willing sellers in this market? I.e., are you looking at more institutional sellers or private individuals? What's the makeup now and how does that compare to a year or two ago?
Yeah, Chris, thank you for asking that. The backbone of the supply, if you will, of deals for us to look at remains the great unwashed, the small sellers. As we've talked about many times, the U.S. industrial market is a hugely fragmented ownership structure with, again, I think Green Street came out recently and said that the top 20 owners own just barely 10% of all the fungible assets. A lot of these assets out there, especially as we move away from primary markets, are in the hands of smaller sellers, and that's who we are typically buying from. We do buy from larger sellers, where people, some of our industrial peers deciding to exit markets, the variety of other ways that assets that are part of larger portfolios that may not meet the market requirements of the buyer, et cetera.
We try and look at things on an unbiased, what's-the-cash-flow-going-to-be basis, and buy those assets that are going to perform well for our shareholders.
Great. Thank you. That's all I have this morning.
Thanks, Chris.
Thank you. Our next question is a follow-up from the line of Sheila McGrath with Evercore ISI. Please proceed with your question.
Yes. I just wanted to clarify the 8% return on the development. Is that on the $15 million incremental capital, or is that on a number where you ascribe value to the land?
There is an implied land value included in that, yes.
Okay.
It's not just the additional cost.
Okay, it'd be a higher return on the incremental?
Yeah, absolutely. As you can tell, you can see why we went for the development. That's a pretty unusual return on cost for a Central Jersey asset.
Do you already have it listed with a broker for leasing, or where does that stand?
We do. We've had, as Ben mentioned, some strong activity on it, so we are very hopeful for the prospects of leasing it prior to completion. To clarify, Sheila, we use brokers on all of our leasing opportunities, including renewals. Certainly this as a spec development is listed.
Okay, great. Maybe you could give us a little insight on any leasing prospects or your view on how difficult it will be to backfill that recent bad debt item that you mentioned.
The Ditech building is a non-core asset, if you will. It's a legacy flex asset that we bought well before we went public, probably before 2007. The drivers of that kind of building, it's effectively a call center-type space. The demand drivers for that kind of building are not very strong. We will undoubtedly sell that building at some point during this year. We've had some user demand. It's set up well for a call center or back office operation. There is a tenant in place, a minority of the space, but they and a couple of others have come forward and have interest in buying the building. We expect to be able to exit that asset on not a home run return, but on an adequate return over the course of our investment period.
Okay, great. Last one. Ben, you did mention in your prepared remarks about the data analytics, and I know you've invested there over the years. Maybe you could give us a little bit more detail how you guys are using the tools. Is it for credit underwriting, or what exactly are you doing with that?
We're hopeful to be able to apply data analytics across the wide spectrum of things that we do in terms of analyzing assets for sale and operating those assets. The big challenge in industrial real estate, as I alluded to in my remarks, is getting good data. If you're a multi-family or self-storage, you might have 30 data points, 50 data points a week that you're getting in on somewhat homogeneous assets. That's a much lesser challenge than the kind of activity we find in industrial real estate. Getting external data where we can, obviously, comp data, et cetera, organizing it, verifying it, are all challenges that we've been working on for years and continue to work on in order to be able to exercise analytics to make better decisions.
We believe that there is opportunity to use data to be more informed in our rental rate negotiations with tenants. We believe we'll be able to use data, as I mentioned in the prepared remarks, to better target assets that we should be pursuing in our acquisition activities. I mentioned that highly fragmented nature. There's a bunch of different sellers out there, and the way you get to those sellers typically is through brokers. Identifying which ones we should be allocating our resources to pursuing is something certainly that we believe data analytics can help in. Credit, I won't say that we've been doing anything tremendously different than the rating agencies do in terms of analyzing credit and the potential for our tenant to pay us over time. We've been pretty sophisticated in that arena for a long time and continue to apply efforts.
I wouldn't say we're breaking new ground there so much as just making sure we do good, solid credit underwriting.
Okay. Thank you.
Thank you.
Thank you. That concludes our question and answer session. I'll turn the floor back to Mr. Butcher for any final comments.
Well, as always, thank you for your insightful questions today and for bearing with my head cold, which may have impacted the tonal quality at times today. We very much appreciate your support and look forward to continuing to work with you all as we continue our progress forward. Thank you.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.