NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31, 2019
NOTE
1 – ORGANIZATION AND ACCOUNTING POLICIES
Monmouth
Real Estate Investment Corporation, a Maryland corporation, together with its consolidated subsidiaries (we, our, us, the Company
or MREIC), operates as a real estate investment trust (REIT) deriving its income primarily from real estate rental operations.
We were founded in 1968 and are one of the oldest public equity REITs in the world. As of March 31, 2019, we owned 113 properties
with total square footage of 21.8 million, which was 98.9% occupied, as compared to 111 properties with total square footage of
21.2 million, which was 99.6% occupied as of September 30, 2018. These properties are located in 30 states: Alabama, Arizona,
Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota,
Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee,
Texas, Virginia, Washington and Wisconsin. As of the quarter ended March 31, 2019, our weighted average lease maturity was 8.0
years and our annualized average base rent per occupied square foot was $6.23. As of March 31, 2019, the weighted average building
age, based on the square footage of our buildings, was 8.8 years. We also own a portfolio of REIT investment securities, which
we generally limit to no more than approximately 10% of our undepreciated assets (which is our total assets, excluding accumulated
depreciation). Total assets excluding accumulated depreciation were $2.1 billion as of March 31, 2019. We held $177.4 million
in marketable REIT securities as of March 31, 2019, representing 8.5% of our undepreciated assets.
We
have elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the Code), and we
intend to maintain our qualification as a REIT in the future. As a qualified REIT, with limited exceptions, we will not be taxed
under Federal and certain state income tax laws at the corporate level on taxable income that we distribute to our shareholders.
For special tax provisions applicable to REITs, refer to Sections 856-860 of the Code. We are subject to franchise taxes in several
of the states in which we own properties.
In
December 2017, as part of the Tax Cuts and Jobs Act of 2017 (the TCJA), Section 199A was added to the Code and became effective
for tax years beginning after December 31, 2017 and before January 1, 2026. Under the TCJA, subject to certain income limitations,
an individual taxpayer and estates and trusts may deduct 20% of the aggregate amount of qualified REIT dividends they receive
from their taxable income. Qualified REIT dividends do not include any portion of a dividend received from a REIT that is classified
as a capital gain dividend or qualified dividend income.
The
interim Consolidated Financial Statements furnished herein have been prepared in accordance with Accounting Principles Generally
Accepted in the United States of America (U.S. GAAP) applicable to interim financial information, the instructions to Form 10-Q,
and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP
for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three and six months ended March 31, 2019 are not necessarily
indicative of the results that may be expected for the year ending September 30, 2019. For further information, refer to the Consolidated
Financial Statements and footnotes thereto included in our annual report on Form 10-K for the fiscal year ended September 30,
2018.
Use
of Estimates
In
preparing the financial statements in accordance with U.S. GAAP, we are required to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods and related disclosure of contingent assets and liabilities. Actual results could differ
from these estimates and assumptions.
Reclassification
Certain
prior period amounts in the accompanying Consolidated Financial Statements have been reclassified to conform to the current period’s
presentation.
Stock
Compensation Plan
We
account for awards of stock, stock options and restricted stock in accordance with ASC 718-10, “Compensation-Stock Compensation”.
ASC 718-10 requires that compensation cost for all stock awards be calculated and amortized over the service period (generally
equal to the vesting period). The compensation cost for stock option grants is determined using option pricing models, intended
to estimate the fair value of the awards at the grant date less estimated forfeitures. The compensation expense for restricted
stock is recognized based on the fair value of the restricted stock awards less estimated forfeitures. The fair value of stock
awards and restricted stock awards is equal to the fair value of our stock on the grant date. The amortization of compensation
costs for the awards of stock, stock option grants and restricted stock are included in General and Administrative Expenses in
the accompanying Consolidated Statements of Income (Loss) and amounted to $215,000 and $111,000 for the three months ended March
31, 2019 and 2018, respectively and amounted to $344,000 and $242,000 for the six months ended March 31, 2019 and 2018, respectively.
During
the six months ended March 31, 2019 and 2018, the following stock options, which vest one year after grant date, were granted
under our Stock Option Plan:
|
Date
of
Grant
|
|
|
Number
of
Employees
|
|
|
Number
of Shares (in thousands)
|
|
|
Option
Price
|
|
|
Expiration
Date
|
|
|
|
1/10/19
|
|
|
|
1
|
|
|
|
65
|
|
|
$
|
12.86
|
|
|
|
1/10/27
|
|
|
|
12/10/18
|
|
|
|
12
|
|
|
|
385
|
|
|
$
|
13.64
|
|
|
|
12/10/26
|
|
|
|
1/3/18
|
|
|
|
1
|
|
|
|
65
|
|
|
$
|
17.80
|
|
|
|
1/3/26
|
|
The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in the fiscal year indicated:
|
|
|
Fiscal
2019
|
|
|
Fiscal
2018
|
|
|
Dividend
yield
|
|
|
5.03
|
%
|
|
|
3.82
|
%
|
|
Expected volatility
|
|
|
17.17
|
%
|
|
|
16.45
|
%
|
|
Risk-free interest
rate
|
|
|
2.88
|
%
|
|
|
2.37
|
%
|
|
Expected lives
(years)
|
|
|
8
|
|
|
|
8
|
|
|
Estimated forfeitures
|
|
|
-0-
|
|
|
|
-0-
|
|
The
weighted-average fair value of options granted during the six months ended March 31, 2019 and 2018 was $1.17 and $1.84 per share
subject to the option.
During
the six months ended March 31, 2019 and 2018, 25,000 and 12,500 shares of restricted stock were granted, respectively. During
the six months ended March 31, 2019, one participant exercised options to purchase 65,000 shares of common stock at a price of
$8.72 per share for total proceeds of $567,000. During the six months ended March 31, 2018, three participants exercised options
awarded under the Plan to purchase an aggregate of 40,000 shares of common stock at a weighted average exercise price of $14.24
per share for total proceeds of $570,000. As of March 31, 2019, a total of 1.2 million shares were available for grant as stock
options, as restricted stock, or other equity based awards, plus any shares subject to outstanding options that expire or are
forfeited without being exercised. As of March 31, 2019, there were outstanding options to purchase 1.1 million shares with an
aggregate intrinsic value of $1.0 million.
Recent
Accounting Pronouncements
In
January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-01, “Financial
Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-01 requires
equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of
the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities
to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate
presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates
the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value
that is required to be disclosed for financial instruments measured at amortized cost. These changes became effective for our
fiscal year beginning October 1, 2018. The most significant change for us, once ASU 2016-01 was adopted, was the accounting treatment
for our investments in marketable securities that are classified as available for sale. The accounting treatment used for our
Consolidated Financial Statements through Fiscal 2018 was that our investments in marketable securities, classified as available
for sale, were carried at fair value, with net unrealized holding gains and losses being excluded from earnings and reported as
a separate component of Shareholders’ Equity until realized and the change in net unrealized holding gains and losses being
reflected as comprehensive income (loss). Under ASU 2016-01, effective October 1, 2018, these marketable securities continue to
be measured at fair value, however, the changes in net unrealized holding gains and losses are now recognized through net income
on our Consolidated Statements of Income (Loss). On October 1, 2018, unrealized net holding losses of $24.7 million were reclassed
to beginning Undistributed Income (Loss) to recognize the unrealized losses previously recorded in “accumulated other comprehensive
income” on our consolidated balance sheets.
In
February 2016, the FASB issued ASU 2016-02, “Leases”. ASU 2016-02 amends the existing accounting standards for lease
accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessee
and lessor accounting. The standard requires a modified retrospective transition approach for all leases existing at, or entered
into after, the date of initial application, with an option to use certain transition relief. The most significant changes related
to lessor accounting under ASU 2016-02 include bifurcating revenue into lease and non-lease components and the new standard’s
narrow definition of initial direct costs for leases. Since our revenue is primarily derived from leasing activities from long-term
net-leases and since we currently do not capitalize indirect costs for leases, we believe that we will continue to account for
our leases and related leasing costs in substantially the same manner as we currently do once the adoption of the ASU 2016-02
becomes effective. In addition, the guidance requires lessees to recognize assets and liabilities for operating leases with lease
terms greater than twelve months on the balance sheet. Therefore, the most significant impact for us may be the recognition of
our corporate office lease, while accounting where we are the lessor will remain substantially the same. Upon adoption, we may
recognize an asset and lease liability equal to the present value of the minimum lease payments due under our corporate office
lease. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases”. The amendment
in ASU 2018-10 affects narrow aspects of the guidance issued earlier in ASU 2016-02 by removing certain inconsistencies and providing
additional clarification related to the guidance issued earlier. We are currently evaluating the potential impact this standard
may have on our consolidated financial statements and expect that the adoption of this standard will not have a significant impact
on our consolidated financial statements and related disclosures. In December 2018, the FASB issued ASU 2018-20 “Narrow-Scope
Improvements for Lessors”. Similar to ASU 2018-10, 2018-20 affects narrow aspects of the guidance issued earlier in ASU
2016-02 as well by providing additional clarification related to the guidance issued earlier. The most significant changes related
to lessor accounting under ASU 2018-20 is the clarification of how to treat payments made by a lessee directly to a third party,
such as real estate taxes paid by the lessee directly to the taxing authority, whereby items paid directly by the lessee to a
third party should not be reflected in the lessors income statement and, thus, should not be bifurcated and included in revenue
and operating expenses. A majority of our reimbursable expenses are paid by us and are billed back to our lessees. Therefore,
these reimbursable expenses will continue to be presented separately by bifurcating these revenue and expense items in our Consolidated
Statements of Income. We are currently evaluating the potential impact this standard may have on our consolidated financial statements
and expect that the adoption of this standard will not have a significant impact on our consolidated financial statements and
related disclosures, other than any of these types of payments made by a lessee directly to a third party will no longer be presented
on a gross basis in our Consolidated Statements of Income, which will have a net zero effect on our Net Income Attributable to
Common Shareholders. ASU 2016-02, 2018-10 and 2018-20 are effective for annual reporting periods, including interim reporting
periods within those periods, beginning after December 15, 2018. Therefore, we expect to adopt these standards effective October
1, 2019.
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers, which requires an entity to recognize the
amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers”. The FASB
issued further guidance in ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients”, that provides clarifying guidance in certain narrow areas and adds some practical expedients. ASU
2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The effective date of
ASU 2014-09 was extended by one year by ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the
Effective Date”. The new standard is effective for the first interim period within annual reporting periods beginning after
December 15, 2017. Therefore, we adopted the standard effective October 1, 2018. Our revenue is primarily derived from leasing
activities and historically our property dispositions have been cash sales with no contingencies and no future involvement in
the property. Since this standard applies to all contracts with customers except those that are within the scope of other guidance,
such as leases, the adoption of this standard did not have a significant impact on our consolidated financial statements and related
disclosures.
We
do not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
effect on the accompanying Consolidated Financial Statements.
Segment
Reporting & Financial Information
Our
primary business is the ownership and management of real estate properties. We invest in well-located, modern, single-tenant,
industrial buildings leased primarily to investment-grade tenants or their subsidiaries on long-term net-leases. We review operating
and financial information for each property on an individual basis and, therefore, each property represents an individual operating
segment. We evaluate financial performance using Net Operating Income (NOI) from property operations. NOI is a non-GAAP financial
measure, which we define as recurring Rental and Reimbursement Revenue, less Real Estate Taxes and Operating Expenses, such as
insurance, utilities and repairs and maintenance. We have aggregated the properties into one reportable segment as the properties
share similar long-term economic characteristics and have other similarities, including the fact that they are operated as industrial
properties subject to long-term net-leases primarily to investment-grade tenants or their subsidiaries.
NOTE
2 – NET INCOME PER SHARE
Basic
Net Income per Common Share is calculated by dividing Net Income Attributable to Common Shareholders by the weighted-average number
of common shares outstanding during the period. Diluted Net Income per Common Share is calculated by dividing Net Income Attributable
to Common Shareholders by the weighted-average number of common shares outstanding for the period and, when dilutive, the potential
net shares that would be issued upon exercise of stock options pursuant to the treasury stock method. In periods with a net loss,
the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation
because they are anti-dilutive.
In
addition, common stock equivalents of 81,000 and 164,000 shares are included in the diluted weighted average shares outstanding
for the three months ended March 31, 2019 and 2018, respectively, common stock equivalents of 103,000 and 187,000 shares are included
in the diluted weighted average shares outstanding for the six months ended March 31, 2019 and 2018. For the diluted weighted
average shares outstanding for the three months ended March 31, 2019 and 2018, 690,000 and 65,000 options to purchase shares of
common stock were antidilutive. For the diluted weighted average shares outstanding for the six months ended March 31, 2019 and
2018, 305,000 and 65,000 options to purchase shares of common stock, respectively, were antidilutive.
NOTE
3 – REAL ESTATE INVESTMENTS
On
October 19, 2018, we purchased a newly constructed 347,000 square foot industrial building, situated on 62.0 acres, located in
Trenton, NJ. The building is 100% net-leased to FedEx Ground Package System, Inc. for 15 years through June 2032. The purchase
price was $85.2 million. We obtained a 15 year, fully-amortizing mortgage loan of $55.0 million at a fixed interest rate of 4.13%.
Annual rental revenue over the remaining term of the lease averages $5.3 million.
On
November 30, 2018, we purchased a newly constructed 127,000 square foot industrial building, situated on 29.4 acres, located in
Savannah, GA. The building is 100% net-leased to FedEx Ground Package System, Inc. for 10 years through October 2028. The purchase
price was $27.8 million. We obtained a 15 year, fully-amortizing mortgage loan of $17.5 million at a fixed interest rate of 4.40%.
Annual rental revenue over the remaining term of the lease averages $1.8 million.
FedEx
Ground Package System, Inc.’s ultimate parent, FedEx Corporation is a publicly-owned company and financial information related
to this entity is available at the SEC’s website,
www.sec.gov
. The references in this report to the SEC’s website
are not intended to and do not include, or incorporate by reference into this report, the information on the
www.sec.gov
website.
We
evaluated the property acquisitions which took place during the six months ended March 31, 2019, to determine whether an integrated
set of assets and activities meets the definition of a business, pursuant to ASU 2017-01. Acquisitions that do not meet the definition
of a business are accounted for as asset acquisitions. Accordingly, we accounted for the two properties purchased during fiscal
2019 as asset acquisitions and allocated the total cash consideration, including transaction costs of approximately $324,000,
to the individual assets acquired on a relative fair value basis. There were no liabilities assumed in these acquisitions. The
financial information set forth below summarizes our purchase price allocation for these two properties acquired during the six
months ended March 31, 2019 that are accounted for as asset acquisitions (in thousands):
|
Land
|
|
$
|
11,778
|
|
|
Building
|
|
|
99,741
|
|
|
In-Place Leases
|
|
|
1,886
|
|
The
following table summarizes the operating results included in our consolidated statements of income for the three and six months
ended March 31, 2019 for the two properties acquired during the six months ended March 31, 2019 (in thousands):
|
|
|
Three
Months Ended 3/31/2019
|
|
|
Six
Months
Ended 3/31/2019
|
|
|
|
|
|
|
|
|
|
|
Rental Revenues
|
|
$
|
1,775
|
|
|
$
|
3,096
|
|
|
Net Income Attributable to Common Shareholders
|
|
|
326
|
|
|
|
800
|
|
Expansions
During
the quarter ended March 31, 2019, we completed a 155,000 square foot building expansion at our property located in Monroe (Cincinnati),
OH for a total project cost of $8.6 million. The expansion resulted in a new 15 year lease which extended the prior lease expiration
date from February 2030 to February 2034. The expansion also resulted in an increase in initial annual rent effective March 1,
2019 of $821,000 from $980,000, or $4.22 per square foot, to $1.8 million, or $4.65 per square foot. In addition, the annual rent
will increase by 2% per annum, resulting in an average annualized rent of $2.1 million over the 15 years. We obtained a
commitment to enter into a 10.8 year, fully-amortizing second mortgage loan of $7.0 million at a fixed interest rate of
3.85%. The maturity of the second mortgage loan will coincide with the maturity of the property’s first fully-amortizing
mortgage loan which is at a fixed interest rate of 3.77% and has a principal balance of $6.9 million as of the quarter end.
Dispositions
We
have not had any dispositions thus far in fiscal 2019. During fiscal 2018, there were two leases that were set to expire with
Kellogg Sales Company (Kellogg) at our 65,000 square foot facility in Kansas City, MO through July 31, 2018 and at our 50,000
square foot facility in Orangeburg, NY through February 28, 2018. Kellogg informed us that they would not be renewing these leases.
On December 18, 2017, we sold our property, located in Kansas City, MO for $4.9 million, with net sale proceeds of $4.6 million
and, on December 22, 2017, we sold our property, located in Orangeburg, NY for $6.2 million, with net sale proceeds of $5.9 million.
In conjunction with the sale of these two properties, we simultaneously entered into a lease termination agreement for each property
whereby we received a termination fee from Kellogg totaling approximately $210,000 which represents a weighted average of 80%
of the then remaining rent due under each respective lease.
Additionally,
Real Estate Held for Sale at March 31, 2018 consisted of two properties that sold during the third quarter of fiscal 2018. The
two properties consisted of an 88,000 square foot facility located in Ft. Myers, FL and a 68,000 square foot facility located
in Colorado Springs, CO.
Since
the sale of these two properties during the first half of fiscal 2018 as well as the two properties that were classified as Real
Estate Held for Sale did not represent a strategic shift that had a major effect on our operations and financial results, the
operations generated from these properties were not included in Discontinued Operations.
The
following table summarizes the operations of the two properties that were sold during the prior year, prior to their sales, and
the two properties that were classified as Real Estate Held for Sale that are included in the accompanying Consolidated Statements
of Income for the three and six months ended March 31, 2018 (in thousands).
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
|
3/31/2019
|
|
|
|
3/31/2018
|
|
|
|
3/31/2019
|
|
|
|
3/31/2018
|
|
|
Rental and Reimbursement
Revenue
|
|
$
|
-0-
|
|
|
$
|
278
|
|
|
$
|
-0-
|
|
|
$
|
857
|
|
|
Lease Termination Income
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
210
|
|
|
Real Estate Taxes
|
|
|
-0-
|
|
|
|
(17
|
)
|
|
|
-0-
|
|
|
|
(228
|
)
|
|
Operating Expenses
|
|
|
-0-
|
|
|
|
(36
|
)
|
|
|
-0-
|
|
|
|
(85
|
)
|
|
Depreciation & Amortization
|
|
|
-0-
|
|
|
|
(5
|
)
|
|
|
-0-
|
|
|
|
(63
|
)
|
|
Interest Expense,
including Amortization of Financing Costs
|
|
|
-0-
|
|
|
|
(12
|
)
|
|
|
-0-
|
|
|
|
(26
|
)
|
|
Income from Operations
|
|
|
-0-
|
|
|
|
208
|
|
|
|
-0-
|
|
|
|
665
|
|
|
Gain on Sale
of Real Estate Investments
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
5,388
|
|
|
Net Income
|
|
$
|
-0-
|
|
|
$
|
208
|
|
|
$
|
-0-
|
|
|
$
|
6,053
|
|
Pro
forma information
The
following unaudited pro forma condensed financial information has been prepared utilizing our historical financial statements
and the effect of additional revenue and expenses generated from property acquired and expanded during fiscal 2019 to date, and
during fiscal 2018, assuming that the acquisitions and completed expansions had occurred as of October 1, 2017, after giving effect
to certain adjustments including: (a) Rental Revenue adjustments resulting from the straight-lining of scheduled rent increases,
(b) Interest Expense resulting from the assumed increase in Fixed Rate Mortgage Notes Payable and Loans Payable related to the
new acquisitions, and (c) Depreciation Expense related to the new acquisitions. In addition, Net Income (Loss) Attributable to
Common Shareholders excludes the operations, including the exclusion of the related realized gain, of the four properties sold
during fiscal 2018. Furthermore, the net proceeds raised from our public offering of 9.2 million shares of our Common Stock in
October 2018 and from our Dividend Reinvestment and Stock Purchase Plan (the DRIP) were used to fund property acquisitions and
expansions and therefore, the weighted average shares outstanding used in calculating the pro forma Basic and Diluted Net Income
(Loss) per Share Attributable to Common Shareholders has been adjusted to account for the increase in shares raised through the
public offering and the DRIP, as if all the shares raised had occurred on October 1, 2017. Additionally, the net proceeds raised
from the issuance of our 6.125% Series C Cumulative Redeemable Preferred Stock through our At-The-Market Sales Agreement Program
were used to help fund property acquisitions and, therefore, the pro forma preferred dividend has been adjusted to account for
its effect on pro forma Net Income (Loss) Attributable to Common Shareholders as if all the preferred stock issuances had occurred
on October 1, 2017. The unaudited pro forma condensed financial information is not indicative of the results of operations that
would have been achieved had the acquisitions and expansions reflected herein been consummated on the dates indicated or that
will be achieved in the future.
|
|
|
Three
Months Ended
(
in thousands, except per share amounts
)
|
|
|
|
|
|
3/31/2019
|
|
|
|
3/31/2018
|
|
|
|
|
|
As
Reported
|
|
|
|
Pro-forma
|
|
|
|
As
Reported
|
|
|
|
Pro-forma
|
|
|
Rental Revenue
|
|
$
|
32,934
|
|
|
$
|
33,074
|
|
|
$
|
28,610
|
|
|
$
|
33,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Attributable to Common
Shareholders
|
|
$
|
23,821
|
|
|
$
|
23,927
|
|
|
$
|
7,397
|
|
|
$
|
8,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Income (Loss)
per
Share Attributable to Common Shareholders
|
|
$
|
0.26
|
|
|
$
|
0.25
|
|
|
$
|
0.10
|
|
|
$
|
0.09
|
|
|
|
|
Six
Months Ended
(
in thousands, except per share amounts
)
|
|
|
|
|
|
3/31/2019
|
|
|
|
3/31/2018
|
|
|
|
|
|
As
Reported
|
|
|
|
Pro-forma
|
|
|
|
As
Reported
|
|
|
|
Pro-forma
|
|
|
Rental Revenue
|
|
$
|
65,551
|
|
|
$
|
66,297
|
|
|
$
|
56,302
|
|
|
$
|
66,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Attributable to Common
Shareholders
|
|
$
|
(8,543
|
)
|
|
$
|
(9,450
|
)
|
|
$
|
20,710
|
|
|
$
|
14,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Income (Loss)
per
Share Attributable to Common Shareholders
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
0.27
|
|
|
$
|
0.16
|
|
Tenant Concentration
We
have a concentration of FedEx Corporation (FDX) and FDX subsidiary-leased properties, consisting of 61 separate stand-alone leases
covering 10.5 million square feet as of March 31, 2019 and 59 separate stand-alone leases covering 9.5 million square feet as
of March 31, 2018. As of March 31, 2019, the 61 separate stand-alone leases that are leased to FDX and FDX subsidiaries are located
in 25 different states and have a weighted average lease maturity of 9.1 years. The percentage of FDX and its subsidiaries leased
square footage to the total of our rental space was 49% (5% to FDX and 44% to FDX subsidiaries) as of March 31, 2019 and 48% (8%
to FDX and 40% to FDX subsidiaries) as of March 31, 2018. As of March 31, 2019, no other tenant accounted for 5% or more of our
total rental space.
Annualized
Rental and Reimbursement Revenue from FDX and its subsidiaries is estimated to be approximately 60% (5% to FDX and 55% to FDX
subsidiaries) of total Rental and Reimbursement Revenue for fiscal 2019, and was 60% (7% to FDX and 53% to FDX subsidiaries) of
total Rental and Reimbursement Revenue for fiscal 2018. No other tenant accounted for 5% or more of our total Rental and Reimbursement
Revenue for the six months ended March 31, 2019 and 2018.
FDX
is a publicly-owned company and financial information related to this entity is available at the SEC’s website,
www.sec.gov
.
FDX is rated “BBB” by S&P Global Ratings (
www.standardandpoors.com
) and is rated “Baa2” by
Moody’s (
www.moodys.com
), which are both considered “Investment Grade” ratings. The references in this
report to the SEC’s website, S&P Global Ratings’ website and Moody’s website are not intended to and do
not include, or incorporate by reference into this report, the information of FDX, S&P Global Ratings or Moody’s on
such websites.
In
addition to real estate property holdings, we held $177.4 million in marketable REIT securities at March 31, 2019, representing
8.5% of our undepreciated assets (which is our total assets excluding accumulated depreciation). These liquid real estate holdings
are not included in calculating the tenant concentration ratios above and therefore further enhance our diversification. The securities
portfolio provides us with additional liquidity, diversification and income and serves as a proxy for real estate when more favorable
risk adjusted returns are not available.
NOTE
4 – SECURITIES AVAILABLE FOR SALE AT FAIR VALUE
Our
Securities Available for Sale at Fair Value consists primarily of marketable common and preferred stock of other REITs with a
fair value of $177.4 million as of March 31, 2019. We generally limit our investment in marketable securities to no more than
approximately 10% of our undepreciated assets (which is our total assets excluding accumulated depreciation). Total assets excluding
accumulated depreciation were $2.1 billion as of March 31, 2019. We held $177.4 million in marketable REIT securities as of March
31, 2019, representing 8.5% of our undepreciated assets. The REIT securities portfolio provides us with additional liquidity,
diversification and income and serves as a proxy for real estate when more favorable risk adjusted returns are not available.
During
the six months ended March 31, 2019, we did not sell or redeem any securities. In addition, we recognized dividend income on our
investments in securities of $3.5 million and $7.9 million for the three and six months ended March 31, 2019. We also made purchases
of $49.5 million in Securities Available for Sale at Fair Value during the six months ended March 31, 2019. Of this amount, we
made total purchases of 34,000 common shares of UMH Properties, Inc. (UMH), a related REIT, for a total cost of $431,000, or an
average cost of $12.68 per share, which were purchased through UMH’s Dividend Reinvestment and Stock Purchase Plan. We owned
a total of 1.2 million UMH common shares as of March 31, 2019 at a total cost of $12.5 million and a fair value of $17.2 million
representing 3.1% of the outstanding common shares of UMH. In addition, as of March 31, 2019, we own 100,000 shares of UMH’s
8.00% Series B Cumulative Redeemable Preferred Stock at a total cost of $2.5 million with a fair value of $2.6 million. The unrealized
gain on our investment in UMH’s common and preferred stock as of March 31, 2019 was $4.8 million.
As
of March 31, 2019, we had total net unrealized holding losses on our securities portfolio of $51.8 million. As a result of the
adoption of ASU 2016-01, $27.1 million of the net unrealized holding losses have been reflected as Unrealized Holding Gains (Losses)
Arising During the Periods in the accompanying Consolidated Statements of Income (Loss) for the six months ended March 31, 2019
and the remaining $24.7 million of the net unrealized holding losses have been reflected as a reclass to beginning Undistributed
Income (Loss).
We
consider many factors in determining whether a security is other than temporarily impaired, including the nature of the security
and the cause, severity and duration of the impairment. We normally hold REIT securities long-term and have the ability and intent
to hold these securities to recovery. We have determined that none of our security holdings are other than temporarily impaired
and therefore all unrealized gains and losses from these securities have been recognized as Unrealized Holding Gains (Losses)
Arising During the Periods in our Consolidated Statements of Income (Loss). If we were to determine any of our securities to be
other than temporarily impaired, we would record an impairment charge in our Consolidated Statements of Income (Loss).
NOTE
5 – DEBT
For
the three months ended March 31, 2019 and 2018, amortization of financing costs included in interest expense was $320,000 and
$303,000, respectively. For the six months ended March 31, 2019 and 2018, amortization of financing costs included in interest
expense was $637,000 and $596,000, respectively.
As
of March 31, 2019, we owned 113 properties, of which 62 carried Fixed Rate Mortgage Notes Payable with outstanding principal balances
totaling $762.3 million.
The following is a summary of our Fixed Rate Mortgage Notes Payable
as of March 31, 2019 and September 30, 2018 (in thousands):
|
|
|
|
3/31/2019
|
|
|
|
|
9/30/2018
|
|
|
|
|
|
|
Amount
|
|
|
|
Weighted
Average Interest Rate (1)
|
|
|
|
Amount
|
|
|
|
Weighted
Average Interest Rate (1)
|
|
|
Fixed
Rate Mortgage Notes Payable
|
|
$
|
762,340
|
|
|
|
4.07
|
%
|
|
$
|
719,768
|
|
|
|
4.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Issuance Costs
|
|
$
|
11,786
|
|
|
|
|
|
|
$
|
11,716
|
|
|
|
|
|
|
Accumulated Amortization
of Debt Issuance Costs
|
|
|
(3,569
|
)
|
|
|
|
|
|
|
(3,494
|
)
|
|
|
|
|
|
Unamortized Debt
Issuance Costs
|
|
$
|
8,217
|
|
|
|
|
|
|
$
|
8,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate Mortgage
Notes Payable, net of Unamortized Debt Issuance Costs
|
|
$
|
754,123
|
|
|
|
|
|
|
$
|
711,546
|
|
|
|
|
|
|
|
(1)
|
Weighted
average interest rate excludes amortization of debt issuance costs.
|
As
of March 31, 2019, interest payable on these mortgages were at fixed rates ranging from 3.45% to 7.60%, with a weighted average
interest rate of 4.07%. This compares to a weighted average interest rate of 4.07% as of September 30, 2018 and 4.11% as of March
31, 2018. As of March 31, 2019, the weighted average loan maturity of the Fixed Rate Mortgage Notes Payable was 11.6 years. This
compares to a weighted average loan maturity of the Fixed Rate Mortgage Notes Payable of 11.7 years as of September 30, 2018 and
11.5 years as of March 31, 2018.
In
connection with the two properties acquired during the six months ended March 31, 2019, which are located in Trenton, NJ and Savannah,
GA (as described in Note 3), we obtained two 15 year fully-amortizing mortgage loans. The two mortgage loans originally totaled
$72.5 million with a weighted average interest rate of 4.20%.
During
the six months ended March 31, 2019, we fully repaid a 6.0% mortgage loan for one of our properties located in Tampa, FL for $4.8
million. Subsequent to the quarter end, in April 2019, we fully repaid a 7.60% mortgage loan for our property located in Lebanon,
TN for $7.1 million.
As
of March 31, 2019, Loans Payable represented the amount drawn down on our $200.0 million unsecured line of credit facility (the
Facility) in the amount of $110.0 million and the amount drawn down on our margin loan of $19.8 million.
The
Facility matures in September 2020 with a one year extension at our option (subject to various conditions as specified in the
loan agreement). During the six months ended March 31, 2019, we paid down our Facility by $50.0 million. Availability under the
Facility is limited to 60% of the value of the borrowing base properties. The value of the borrowing base properties is determined
by applying a capitalization rate to the NOI generated by our unencumbered properties. Effective, March 22, 2018, the capitalization
rate applied to our NOI generated by our unencumbered properties was lowered from 7.0% to 6.5%, thus increasing the value of the
borrowing base properties under the terms of the agreement. Borrowings under the Facility, will, at our election, either i) bear
interest at LIBOR plus 140 basis points to 220 basis points, depending on our leverage ratio, or ii) bear interest at BMO’s
prime lending rate plus 40 basis points to 120 basis points, depending on our leverage ratio. Our borrowings as of March 31, 2019,
based on our leverage ratio, bear interest at LIBOR plus 170 basis points, which represented an interest rate of 4.20%. In addition,
we have a $100.0 million accordion feature, bringing the total potential availability under the Facility (subject to various conditions
as specified in the loan agreement) up to $300.0 million.
We
also invest in equity securities of other REITs which provides us with additional liquidity, diversification and income and serves
as a proxy for real estate when more favorable risk adjusted returns are not available. From time to time, we may purchase these
securities on margin when the interest and dividend yields exceed the cost of funds. In general, we may borrow up to 50% of the
value of the marketable securities, which was $177.4 million as of March 31, 2019. As of March 31, 2019, we had $19.8 million
drawn against the margin at an interest rate of 3.0%.
NOTE
6 – SHAREHOLDERS’ EQUITY
Our
authorized stock as of March 31, 2019 consisted of 188.0 million shares of common stock, of which 93.9 million shares were issued
and outstanding, 16.4 million authorized shares of 6.125% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per
share (6.125% Series C Preferred Stock), of which 12.0 million shares were issued and outstanding, and 200.0 million authorized
shares of Excess Stock, $0.01 par value per share, of which none were issued or outstanding.
Common
Stock
In
October 2018, we completed a public offering of 9.2 million shares of our Common Stock (including the underwriters’ option
to purchase 1.2 million additional shares) at a price of $15.00 per share, before underwriting discounts. We received net proceeds
from the offering, after deducting underwriting discounts and all other transaction costs, of $132.3 million.
We
raised $40.6 million (including dividend reinvestments of $8.5 million) from the issuance of 3.1 million shares of common stock
under our DRIP during the six months ended March 31, 2019. During the six months ended March 31, 2019, we paid $31.4 million in
total cash dividends, or $0.34 per share, to common shareholders, of which $8.5 million was reinvested in the DRIP, representing
a 27% participation rate.
On
April 2, 2019, our Board of Directors declared a dividend of $0.17 per share to be paid June 17, 2019 to common shareholders of
record as of the close of business on May 15, 2019.
On
January 16, 2019, our Board of Directors authorized a $40.0 million increase to our previously announced Common Stock Repurchase
Program (the “Program”), bringing the total available under the Program to $50.0 million. The timing, manner, price
and amount of any repurchase will be determined by us at our discretion and will be subject to economic and market conditions,
stock price, applicable legal requirements and other factors. To date, we have not repurchased any common stock pursuant to the
Program and we may elect not to repurchase any common stock in the future. The Program does not have a termination date and may
be suspended or discontinued at our discretion without prior notice.
6.125%
Series C Cumulative Redeemable Preferred Stock
During
the six months ended March 31, 2019, we paid $8.8 million in Preferred Dividends, or $0.765625 per share, on our outstanding 6.125%
Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share, with a liquidation preference of $25.00 per share (6.125%
Series C preferred stock) for the period September 1, 2018 through February 28, 2019. As of March 31, 2019, we have accrued Preferred
Dividends of $1.5 million covering the period March 1, 2019 to March 31, 2019. Dividends on the 6.125% Series C Preferred Stock
are cumulative and payable quarterly at an annual rate of $1.53125 per share. The 6.125% Series C Preferred Stock has no maturity
date and will remain outstanding indefinitely unless redeemed or otherwise repurchased. Except in limited circumstances relating
to our qualification as a REIT, or in connection with a change of control, the 6.125% Series C Preferred Stock is not redeemable
prior to September 15, 2021. On and after September 15, 2021, at any time, and from time to time, the 6.125% Series C Preferred
Stock will be redeemable in whole, or in part, at our option, at a cash redemption price of $25.00 per share, plus all accrued
and unpaid dividends (whether or not declared) to, but not including, the date of redemption. On April 2, 2019, our Board of Directors
declared a dividend of $0.3828125 per share to be paid June 17, 2019 to the 6.125% Series C Preferred shareholders of record as
of the close of business on May 15, 2019.
On
June 29, 2017, we entered into a Preferred Stock At-The-Market Sales Agreement Program with B. Riley FBR, Inc., or B. Riley (formerly
FBR Capital Markets & Co.), that provided for the offer and sale of shares of our 6.125% Series C Cumulative Redeemable Preferred
Stock, having an aggregate sales price of up to $100.0 million. On August 2, 2018, we replaced this program with a new Preferred
Stock At-The-Market Sales Agreement Program (Preferred Stock ATM Program) that provides for the offer and sale from time to time
of $125.0 million of our 6.125% Series C preferred stock. Sales of shares of our 6.125% Series C preferred stock under the Preferred
Stock ATM Program are in “at the market offerings” as defined in Rule 415 under the Securities Act, including, without
limitation, sales made directly on or through the NYSE, or on any other existing trading market for the 6.125% Series C preferred
stock or to or through a market maker or any other method permitted by law, including, without limitation, negotiated transactions
and block trades. We began selling shares through these programs on July 3, 2017. Since inception through March 31, 2019, we sold
3.6 million shares under these programs at a weighted average price of $24.91 per share, and generated net proceeds, after offering
expenses, of $87.1 million, of which 481,000 shares were sold during the six months ended March 31, 2019 at a weighted average
price of $23.94 per share, and generated net proceeds, after offering expenses, of $11.3 million. As of March 31, 2019, there
is $107.6 million remaining that may be sold under the Preferred Stock ATM Program.
As
of March 31, 2019, 12.0 million shares of the 6.125% Series C Preferred Stock were issued and outstanding.
Subsequent
to the March 31, 2019 quarter end, through April 25, 2019, we sold 247,000 shares under our Preferred Stock ATM Program at a weighted
average price of $24.04 per share, and realized net proceeds, after offering expenses, of $5.8 million.
NOTE
7 - FAIR VALUE MEASUREMENTS
We
measure certain financial assets and liabilities at fair value on a recurring basis, including Securities Available for Sale at
Fair Value. Our financial assets consist mainly of marketable REIT securities. The fair value of these financial assets was determined
using the following inputs at March 31, 2019 and September 30, 2018 (in thousands)
:
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
Total
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
As of March
31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities –
Preferred Stock
|
|
$
|
13,787
|
|
|
$
|
13,787
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
Equity Securities – Common Stock
|
|
|
163,569
|
|
|
|
163,569
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Mortgage Backed
Securities
|
|
|
3
|
|
|
|
3
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Total Securities
Available for Sale at Fair Value
|
|
$
|
177,359
|
|
|
$
|
177,359
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September
30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities – Preferred
Stock
|
|
$
|
7,310
|
|
|
$
|
7,310
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
Equity Securities – Common Stock
|
|
|
147,608
|
|
|
|
147,608
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Mortgage Backed
Securities
|
|
|
3
|
|
|
|
3
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Total Securities
Available for Sale at Fair Value
|
|
$
|
154,921
|
|
|
$
|
154,921
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
In
addition to our investments in Securities Available for Sale at Fair Value, we are required to disclose certain information about
fair values of other financial instruments. Estimates of fair value are made at a specific point in time based upon, where available,
relevant market prices and information about the financial instrument. Such estimates do not include any premium or discount that
could result from offering for sale at one time our entire holdings of financial instruments. For a portion of our other financial
instruments, no quoted market value exists. Therefore, estimates of fair value are necessarily based on a number of significant
assumptions, many of which involve events outside the control of management. Such assumptions include assessments of current economic
conditions, perceived risks associated with these financial instruments and their counterparties; future expected loss experience
and other factors. Given the uncertainties surrounding these assumptions, the reported fair values represent estimates only, and
therefore cannot be compared to the historical accounting model. The use of different assumptions or methodologies is likely to
result in significantly different fair value estimates.
The
fair value of Cash and Cash Equivalents approximates their current carrying amounts since all such items are short term in nature.
The fair value of variable rate Loans Payable approximates their current carrying amounts, since such amounts payable are at approximately
a weighted-average current market rate of interest. The estimated fair value of Fixed Rate Mortgage Notes Payable is based on
discounting the future cash flows at a yearend risk adjusted borrowing rate currently available to us for issuance of debt with
similar terms and remaining maturities. These fair value measurements fall within level 2 of the fair value hierarchy. At March
31, 2019, the Fixed Rate Mortgage Notes Payable fair value (estimated based upon expected cash outflows discounted at current
market rates) amounted to $753.7 million and the carrying value amounted to $762.3 million.
NOTE
8 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash
paid for interest during the six months ended March 31, 2019 and 2018 was $18.1 million and $15.1 million, respectively.
During
the six months ended March 31, 2019 and 2018, we had dividend reinvestments of $8.5 million and $6.0 million, respectively, which
required no cash transfers.
NOTE
9 – CONTINGENCIES AND COMMITMENTS
From
time to time, we may be subject to claims and litigation in the ordinary course of business. We do not believe that any such claim
or litigation will have a material adverse effect on the Consolidated Balance Sheets or results of operations.
We have entered
into agreements to purchase five new build-to-suit, industrial buildings that are currently being developed in Indiana
(2), North Carolina and Ohio (2), totaling 1.9 million square feet, with net-leased terms ranging from 10 to 15
years with a weighted average lease term of 13.7 years. The aggregate purchase price for these properties is $245.9
million. Two of these five properties, consisting of approximately 772,000 square feet, or 41%, are leased for 15 years
to FedEx Ground Package System, Inc. and one of these five properties, consisting of 613,000 square feet, or 32% is leased for
15 years to Amazon.com Services, Inc.
All
five properties are leased to companies, or subsidiaries of companies, that are considered Investment Grade by S&P
Global Ratings (
www.standardandpoors.com
) and by Moody’s (www.moodys.com). The references in this report to the S&P
Global Ratings’ website and the Moody’s website are not intended to and do not include, or incorporate by reference
into this report, the information of S&P Global Ratings or Moody’s on such websites. Subject to satisfactory due diligence
and other customary closing conditions and requirements, we anticipate closing two of these transactions during the fourth quarter
of fiscal 2019 and closing the remaining three transactions throughout fiscal 2020. In connection with two of these
properties, we have entered into commitments to obtain two fully-amortizing mortgage loans ranging from 15 years to 18 years,
with a weighted average term of 17.3 years totaling $69.5 million with fixed interest rates ranging from 4.25% to 4.27%, with
a weighted average interest rate of 4.27%.
We
obtained a commitment to enter into a 10.8 year, fully-amortizing second mortgage loan of $7.0 million at a fixed interest rate
of 3.85% for our property located in Monroe (Cincinnati), OH. We recently completed a 155,000 square foot building expansion for
this property for a total project cost of $8.6 million. The maturity of the second mortgage loan will coincide with the maturity
of the property’s first fully-amortizing mortgage loan which is at a fixed interest rate of 3.77% and has a principal balance
of $6.9 million as of the quarter end. The expansion resulted in a new 15 year lease which extended the prior lease expiration
date from February 2030 to February 2034. The expansion also resulted in an increase in initial annual rent effective March 1,
2019 of $821,000 from $980,000, or $4.22 per square foot, to $1.8 million, or $4.65 per square foot. In addition, the annual rent
will increase by 2% per annum, resulting in an average annualized rent of $2.1 million over the 15 years.
We
have entered into a new ten year lease for our future corporate office space located in Holmdel, NJ. The new lease is for 13,000
square feet and is expected to commence during our fourth quarter of fiscal 2019, at which time we expect to assign the existing
lease pertaining to our current corporate office space located in Freehold, NJ to UMH. Initial gross annual rent for our new corporate
office is approximately $410,000 or $31.00 per square foot. Our existing lease is for 5,700 square feet with annual gross rent
averaging $137,000 or $24.17 per square foot over the remaining 2.5 year lease term.
NOTE
10 – SUBSEQUENT EVENTS
Material
subsequent events have been evaluated and are disclosed herein.
On
April 2, 2019, our Board of Directors declared a common dividend of $0.17 per share to be paid June 17, 2019 to common shareholders
of record as of the close of business on May 15, 2019.
On
April 2, 2019, our Board of Directors declared a preferred dividend of $0.3828125 per share to be paid June 17, 2019 to the 6.125%
Series C Preferred shareholders of record as of the close of business on May 15, 2019.
Our
96,000 square foot facility located in Liberty (Kansas City), MO was leased to Holland 1916, Inc. through June 30, 2019. In conjunction
with terminating our lease with Holland 1916, Inc. two months early, effective May 1, 2019 we entered into a seven year lease
agreement with Dakota Bodies, LLC through April 30, 2026. Initial annual rent is $372,000, representing $3.85 per square foot,
with 3.0% annual increases thereafter. This results in a straight-line annualized rent of $407,000, representing $4.21 per square
foot over the life of the lease. This compares to the former U.S. GAAP straight-line rent of $3.46 per square foot and the former
cash rent of $3.68 per square foot, resulting in an increase in the average lease rate of 21.7% on a U.S. GAAP straight-line basis
and an increase of 4.6% on a cash basis.
In
April 2019, we fully repaid a 7.60% mortgage loan for our property located in Lebanon, TN for $7.1 million.
Subsequent
to the March 31, 2019 quarter end, through April 25, 2019, we sold 247,000 shares under our Preferred Stock ATM Program at a weighted
average price of $24.04 per share, and realized net proceeds, after offering expenses, of $5.8 million.