ITEM
1. Financial Statements (Unaudited)
MONMOUTH
REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2020 AND SEPTEMBER 30, 2020
(in
thousands except per share amounts)
See
Accompanying Notes to the Consolidated Financial Statements
MONMOUTH
REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS – CONTINUED
AS
OF DECEMBER 31, 2020 AND SEPTEMBER 30, 2020
(in
thousands except per share amounts)
See
Accompanying Notes to the Consolidated Financial Statements
MONMOUTH
REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
FOR
THE THREE MONTHS ENDED DECEMBER 31, 2020 AND 2019
(in
thousands)
See
Accompanying Notes to Consolidated Financial Statements
MONMOUTH
REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
FOR
THE THREE MONTHS ENDED DECEMBER 31, 2020 AND 2019 – CONTINUED
See
Accompanying Notes to Consolidated Financial Statements
MONMOUTH
REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR
THE THREE MONTHS ENDED DECEMBER 31, 2020 AND 2019
(in
thousands)
See
Accompanying Notes to Consolidated Financial Statements
MONMOUTH
REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR
THE THREE MONTHS ENDED DECEMBER 31, 2020 AND 2019
(in
thousands, except per share data)
|
|
Common
Stock
|
|
|
Preferred
Stock Series C
|
|
|
Additional
Paid in
Capital
|
|
|
Undistributed
Income (Loss)
|
|
|
Accumulated Other Comprehensive Income
|
|
|
Total
Shareholders’
Equity
|
|
Balance September 30, 2019
|
|
$
|
964
|
|
|
$
|
347,678
|
|
|
$
|
662,401
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,011,043
|
|
Shares Issued in Connection
with the DRIP (1)
|
|
|
11
|
|
|
|
0
|
|
|
|
15,498
|
|
|
|
0
|
|
|
|
0
|
|
|
|
15,509
|
|
Shares Issued in
Connection with At-The-Market
Offerings of 6.125% Series C Preferred
Stock, net of offering costs
|
|
|
0
|
|
|
|
43,965
|
|
|
|
(812
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
43,153
|
|
Stock Compensation Expense
|
|
|
0
|
|
|
|
0
|
|
|
|
156
|
|
|
|
0
|
|
|
|
0
|
|
|
|
156
|
|
Distributions To Common
Shareholders ($0.17 per share)
|
|
|
0
|
|
|
|
0
|
|
|
|
(12,958
|
)
|
|
|
(3,528
|
)
|
|
|
0
|
|
|
|
(16,486
|
)
|
Stock Option Exercise
|
|
|
1
|
|
|
|
0
|
|
|
|
605
|
|
|
|
0
|
|
|
|
0
|
|
|
|
606
|
|
Net Income
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
9,625
|
|
|
|
0
|
|
|
|
9,625
|
|
Preferred Dividends
($0.3828125 per share)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(6,097
|
)
|
|
|
0
|
|
|
|
(6,097
|
)
|
Change in Fair Value of Interest Rate Swap Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December
31, 2019
|
|
$
|
976
|
|
|
$
|
391,643
|
|
|
$
|
664,890
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
1,057,509
|
|
|
(1)
|
Dividend
Reinvestment and Stock Purchase Plan
|
See
Accompanying Notes to the Consolidated Financial Statements
MONMOUTH
REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR
THE THREE MONTHS ENDED DECEMBER 31, 2020 AND 2019
(in
thousands)
See
Accompanying Notes to Consolidated Financial Statements
MONMOUTH
REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER
31, 2020
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 December 31, 2020, we owned 121 properties
with total square footage of 24.5 million, as compared to 119 properties with total square footage of 23.4 million as of September
30, 2020. Our occupancy rate at the end of the quarter was 99.7% as compared to 99.4% as of September 30, 2020. Our properties
are located in 31 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, Utah, Virginia, Washington and Wisconsin. As of the quarter ended December 31,
2020, our weighted average lease maturity was 7.5 years and our annualized average base rent per occupied square foot was $.
As of December 31, 2020, the weighted average building age, based on the square footage of our buildings, was 9.5 years.
The
future effects of the evolving impact of the COVID-19 Pandemic are uncertain, however, at this time COVID-19 has not had a material
adverse effect on our financial condition. We invest in modern single-tenant, industrial buildings, leased primarily to investment-grade
tenants or their subsidiaries on long-term net-leases. Our investments are exclusively situated in the continental United States,
and are primarily located in strategic locations that are mission-critical to our tenants’ needs. In many cases our buildings
are highly automated in order to serve the omni-channel distribution networks that have become essential today. Approximately
82% of our revenue is derived from investment-grade tenants, or their subsidiaries as defined by S&P Global Ratings (www.standardandpoors.com)
and by Moody’s (www.moodys.com). The references in this report to S&P Global Ratings and Moody’s 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.
For
many years, ecommerce demand has increased, and it has now become an integral part of the retail landscape. The COVID-19 Pandemic
has created an even greater move towards on-line shopping. As a result of state and local government-mandated shutdowns, public
health guidance and changing consumer demand, ecommerce sales as a percentage of total retail sales increased from approximately
15% to 27% during the last two quarters. It is estimated that ecommerce sales require three times the warehouse space relative
to brick and mortar retail sales. The COVID-19 Pandemic has also created a need for supply chain reconfiguration. Increased inventory
stocking is currently taking place across many industries and it appears that this trend will continue in order to accommodate
surges in demand. Additionally, U.S. manufacturing has been increasing in recent years and the COVID-19 Pandemic has accelerated
this trend as supply chains now prefer shorter distances and less reliance on foreign sources.
Our
portfolio of modern, net-leased industrial properties, continues to provide shareholders with reliable and predictable income
streams. Our resilient occupancy rates and rent collection results during these challenging times highlight the mission-critical
nature of our assets and underscore the essential need for our tenants’ operations. Furthermore, because our weighted average
lease maturity is 7.5 years and our weighted average fixed rate mortgage debt maturity is 11.5 years, we expect our cash flow
to remain resilient over long periods of time. Our overall occupancy rate and our base rent collections have remained strong throughout
the COVID-19 Pandemic. Our overall occupancy rate has been over 99% throughout the Pandemic and has recently increased to 99.7%
during the current quarter. Our base rent collections have averaged 99.8% throughout the COVID-19 Pandemic and we expect future
months to be consistent with this trend.
Income
Tax
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 non-qualified dividend income.
We
follow the provisions of ASC Topic 740, Income Taxes, that, among other things, defines a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
ASC Topic 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. Based on our evaluation, we determined that we have no uncertain tax positions and no unrecognized
tax benefits as of December 31, 2020. We record interest and penalties relating to unrecognized tax benefits, if any, as interest
expense. As of December 31, 2020, the fiscal tax years 2017 through and including 2020 remain open to examination by the Internal
Revenue Service. There are currently no federal tax examinations in progress.
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 months ended December 31, 2020 are not necessarily
indicative of the results that may be expected for the year ending September 30, 2021. 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,
2020.
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 and amounted to $57,000 and $156,000 for the three months ended December 31,
2020 and 2019, respectively.
During
the three months ended December 31, 2020 and 2019, no stock options were granted. During three months ended December 31, 2020
and 2019, no shares of restricted stock were granted. During the three months ended December 31, 2020, two participants exercised
options to purchase 130,000 shares of common stock. The first participant exercised options to purchase 65,000 shares of common
stock at a price of $10.46 per share for total proceeds of $680,000 and the second participant exercised options to purchase 65,000
shares of common stock at a price of $13.64 per share for total proceeds of $887,000. Subsequent to the December 31, 2020 quarter
end, a third participant exercised options to purchase 29,000 shares of common stock at a weighted average price of $13.79 per
share for total proceeds of $400,000. During the three months ended December 31, 2019, one participant exercised options to purchase
65,000 shares of common stock at a price of $9.33 per share for total proceeds of $606,000. As of December 31, 2020, a total of
1.2 million shares were available for grant as stock, stock options, restricted stock, or other equity-based awards, plus any
shares subject to outstanding options that expire or are forfeited without being exercised. As of December 31, 2020, there were
outstanding options to purchase 820,000 shares with an aggregate intrinsic value of $3.3 million.
Lease
Termination Income
Lease
Termination Income is recognized in operating revenues when there is a signed termination agreement, all of the conditions of
the agreement have been met, the tenant is no longer occupying the property and the termination consideration is probable of collection.
Lease termination amounts are paid by tenants who want to terminate their lease obligations before the end of the contractual
term of the lease by agreement with us.
Effective
October 1, 2020, we entered into a lease termination agreement with RGH Enterprises, Inc. (Cardinal Health) for our 75,000 square
foot facility located in Halfmoon (Albany), NY whereby we received a termination fee in the amount of $377,000 representing approximately
50% of the then remaining rent due under the lease, which was set to expire in 1.2 years on November 30, 2021. We simultaneously
entered into a 10.4 year lease agreement with United Parcel Service, Inc. (UPS) which became effective November 1, 2020. The lease
agreement with UPS provides for five months of free rent, after which, on April 1, 2021, initial annual rent of $510,000, representing
$ per square foot, will commence, with 2.0% annual increases thereafter, resulting in a straight-line annualized rent of $541,000,
representing $7.21 per square foot over the life of the lease, which expires March 31, 2031. This compares to the former U.S GAAP
straight-line rent of $574,000, representing $ per square foot and former cash rent of $ per square foot, resulting in
a decrease of $33,000, representing a 5.8% decrease on a U.S GAAP straight-line basis and a decrease of 17.0% on a cash basis.
The new 10.4 year lease agreement with UPS provides for an additional 9.3 years of lease term versus the old lease with Cardinal
Health.
Only
three of our 121 properties have leases that contain an early termination provision. These three properties contain 158,000 total
rentable square feet, representing less than 0.6% of our total rentable square feet. Our leases with early termination provisions
are our 36,000 square foot location in Urbandale (Des Moines), IA, our 39,000 square foot location in Rockford, IL, and our 83,000
square foot location in Roanoke, VA. Each lease termination provision contains certain requirements that must be met in order
to exercise each termination provision. These requirements include: the date termination can be exercised, the time frame that
notice must be given by the tenant to us and the termination fee that would be required to be paid by the tenant to us. The total
potential termination fee to be paid to us from the three tenants with leases that have a termination provision amounts to $1.7
million.
Recent
Accounting Pronouncements
In
April 2020, FASB issued interpretive guidance relating to the accounting for lease concessions provided as a result of the COVID-19
Pandemic that allows entities to treat the concession as if it was a part of the existing contract instead of applying lease modification
accounting. This guidance is only applicable to the COVID-19 Pandemic related lease concessions that do not result in a substantial
increase in the rights of the lessor or the obligations of the lessee. We have elected this option relating to qualifying rent
deferral and rent abatement agreements. For qualifying lease modifications with rent deferrals, this results in no change to our
revenue recognition but an increase in the lease receivable balance until the deferred rent has been repaid. For qualifying lease
modifications that include rent abatement concessions, this results in a direct reduction of rental income in the current period.
As of December 31, 2020, we have entered into rent deferral agreements related to the COVID-19 Pandemic representing approximately
$438,000 of base rent otherwise owed during the months of April through October 2020 representing 31 basis points of our total
annual base rent. To date, we have collected 78% of this amount.
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.
Derivative
Instruments and Hedging Activities
In
the normal course of business, we are exposed to financial market risks, including interest rate risk on our variable rate debt.
We attempt to limit these risks by following established risk management policies, procedures and strategies, including the use
of derivative financial instruments. Our primary strategy in entering into derivative contracts is to minimize the variability
that changes in interest rates could have on its future cash flows. We generally employ derivative instruments that effectively
convert a portion of our variable rate debt to fixed rate debt. We do not enter into derivative instruments for speculative purposes.
As further described in “Note 5 – Debt”, in November 2019 we entered into an interest rate swap agreement that
has the effect of fixing the interest rate on our $75.0 million unsecured term loan (the “Term Loan”).
The
interest rate for borrowings under the Term Loan will at our election, either i) bear interest at LIBOR plus 130 basis points
to 200 basis points, depending on our leverage ratio, or ii) bear interest at BMO’s prime lending rate plus 30 basis points
to 100 basis points, depending on our leverage ratio. The re-pricing and scheduled maturity dates, payment dates, index and the
notional amounts of the interest rate swap agreement coincides with those of the underlying Term Loan. The interest rate swap
agreement is net settled monthly. The Company has designated this derivative as a cash flow hedge and has recorded the fair value
on the balance sheet in accordance with ASC 815, Derivatives and Hedging (See Note 7 for information on the determination of fair
value). The effective portion of the gain or loss on this hedge will be reported as a component of Accumulated Other Comprehensive
Income on our Consolidated Balance Sheets. To the extent that the hedging relationship is not effective or does not qualify as
a cash flow hedge, the ineffective portion is recorded in interest expense. Hedges that received designated hedge accounting treatment
are evaluated for effectiveness at the time that they are designated as well as through the hedging period. As of December 31,
2020, the Company has determined that this interest rate swap agreement is highly effective as a cash flow hedge. As a result,
the fair value of this derivative of $3.9
million and $4.4
million as of December 31,
2020 and September 30, 2020, respectively, was recorded as a component of Accumulated Other Comprehensive Income (Loss) in the
Consolidated Balance Sheets, with the corresponding liability included in Other Liabilities. The change in the fair value of the
interest rate swap agreement is reflected in the Consolidated Statement of Comprehensive Income and amounted to $433,000
for the quarter ended December 31, 2020.
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 106,000 and 125,000 shares are included in the diluted weighted average shares outstanding
for the three months ended December 31, 2020 and 2019, respectively. For the diluted weighted average shares outstanding for the
three months ended December 31, 2020 and 2019, 65,000 and 130,000 options to purchase shares of common stock were antidilutive.
NOTE
3 – REAL ESTATE INVESTMENTS
On
December 17, 2020, we purchased a newly constructed square foot industrial building, situated on 99.0 acres, located in
the Columbus, OH MSA. The building is 100% net-leased to FedEx Ground Package System, Inc. for 15 years through September 2035.
The purchase price was $73.3 million. We obtained a 15 year, fully-amortizing mortgage loan of $47.0 million at a fixed interest
rate of 2.95%. Annual rental revenue over the remaining term of the lease averages $4.6 million.
On
December 24, 2020, we purchased a newly constructed 658,000 square foot industrial building, situated on 129.9 acres, located
in the Atlanta, GA MSA. The building is 100% net-leased to Home Depot U.S.A., Inc. for 20 years through November 2040. The purchase
price was $96.7 million. We obtained a 17 year, fully-amortizing mortgage loan of $57.0 million at a fixed interest rate of 3.25%.
Annual rental revenue over the remaining term of the lease averages $5.5 million.
FedEx
Ground Package System, Inc.’s ultimate parent, FedEx Corporation and Home Depot U.S.A., Inc’s ultimate parent,
Home Depot, Inc. are publicly-listed companies and financial information related to these entities are 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 three months ended December 31, 2020, 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 properties purchased
during fiscal 2021 as asset acquisitions and allocated the total cash consideration, including transaction costs of approximately
$576,000, 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 properties acquired during the three
months ended December 31, 2020 that is accounted for as an asset acquisition (in thousands):
SCHEDULE OF PROPERTIES ACQUIRED DURING PERIOD ACCOUNTED FOR ASSET ACQUISITIONS
|
|
|
|
|
Land
|
|
$
|
16,297
|
|
Building
|
|
|
149,408
|
|
In-Place Leases
|
|
|
4,863
|
|
The
following table summarizes the operating results included in our Consolidated Statements of Income for the properties acquired
during the three months ended December 31, 2020 (in thousands):
SUMMARY OF CONSOLIDATED STATEMENTS OF INCOME FOR PROPERTIES ACQUIRED
|
|
Three
Months
Ended 12/31/2020
|
|
|
|
|
|
Rental Revenues
|
|
$
|
313
|
|
Net Income Attributable to Common Shareholders
|
|
|
276
|
|
Expansions
During
the quarter ended December 31, 2020, we completed a parking expansion project for FedEx Ground Package System, Inc. at our property
located in Olathe (Kansas City), KS for a total project cost of $3.4
million. The expansion resulted in a $340,000
increase in annualized rent effective
November 5, 2020 increasing the annualized rent from $2.2
million to $2.6
million. We anticipate additional expansion
work at this location which will further increase the rental rate and extend the lease term.
Proforma
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 properties acquired and expanded during fiscal 2021 to date,
and during fiscal 2020, assuming that the acquisitions and completed expansions had occurred as of October 1, 2019, 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 and expansions. Furthermore, the net proceeds raised
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 per Share Attributable
to Common Shareholders has been adjusted to account for the increase in shares raised through the DRIP, as if all the shares raised
had occurred on October 1, 2019. Additionally, the net proceeds raised from the issuance of our 6.125% Series C Cumulative Redeemable
Preferred Stock, $0.01 par value per share (6.125% Series C 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 Attributable to Common Shareholders as if all the preferred stock issuances had occurred on
October 1, 2019. 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.
SCHEDULE OF PRO FORMA INFORMATION
|
|
Three
Months Ended
(in
thousands, except per share amounts)
|
|
|
|
12/31/2020
|
|
|
12/31/2019
|
|
|
|
As Reported
|
|
|
Pro-forma
|
|
|
As Reported
|
|
|
Pro-forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental Revenue
|
|
$
|
36,846
|
|
|
$
|
39,102
|
|
|
$
|
34,870
|
|
|
$
|
39,012
|
|
Net Income Attributable to Common
Shareholders
|
|
$
|
25,746
|
|
|
$
|
26,209
|
|
|
$
|
3,528
|
|
|
$
|
2,951
|
|
Basic and Diluted Net Income per
Share Attributable to Common Shareholders
|
|
$
|
0.26
|
|
|
$
|
0.27
|
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
Tenant
Concentration
We
have a concentration of properties leased to FedEx Corporation (FDX) and FDX subsidiaries, consisting of 63 separate stand-alone
leases covering 11.2 million square feet as of December 31, 2020 and 60 separate stand-alone leases covering 10.4 million square
feet as of December 31, 2019. In periods of unprecedented turbulence, the services of FedEx are essential in keeping supply chains
moving and in delivering critically needed supplies throughout the world. As of December 31, 2020, the 63 separate stand-alone
leases that are leased to FDX and FDX subsidiaries are located in 26 different states and have a weighted average lease maturity
of 8.0 years. The percentage of FDX and its subsidiaries leased square footage to the total of our rental space was 46% (5% to
FDX and 41% to FDX subsidiaries) as of December 31, 2020 and 45% (5% to FDX and 40% to FDX subsidiaries) as of December 31, 2019.
As
of December 31, 2020, the only tenants, other than FDX and its subsidiaries, that leased 5% or more of our total square footage
were subsidiaries of Amazon.com, Inc (Amazon), which consists of five separate stand-alone leases for properties located in four
different states, containing 1.5 million total square feet, comprising 6% of our total leasable square feet. None of our properties
are subject to a master lease or any cross-collateralization agreements. As of December 31, 2020, 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 55%
(5%
to FDX and 50%
to FDX subsidiaries) of total Rental and
Reimbursement Revenue for fiscal 2021, and was 58%
(5%
to FDX and 53%
to FDX subsidiaries) of total Rental and
Reimbursement Revenue for fiscal 2020. The
only tenants, other than FDX and its subsidiaries, that we estimate will comprise 5% or more of our total Rental and Reimbursement
Revenue for fiscal 2021 are subsidiaries of Amazon, which is estimated to be 7% of our Annualized Rental and Reimbursement Revenue
for fiscal 2021 and was 6% for of our Annualized Rental and Reimbursement Revenue for fiscal 2020. For
the three months ended December 31, 2020, no other tenant accounted for 5% or more of our total Rental and Reimbursement Revenue.
FDX
and Amazon are publicly-listed companies and financial information related to these entities are available at the SEC’s
website, www.sec.gov. FDX and Amazon are rated “BBB” and “AA-”, respectively by S&P Global
Ratings (www.standardandpoors.com) and are rated “Baa2” and “A2”, respectively by Moody’s
(www.moodys.com), which are both considered “Investment Grade” ratings.
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 $126.3 million as of December 31, 2020. We intend to limit the size of this portfolio to no more than approximately
5% of our undepreciated assets, which we define as total assets excluding accumulated depreciation. Total assets excluding accumulated
depreciation were $2.4 billion as of December 31, 2020. We continue to believe that our REIT securities portfolio provides us
with diversification, income, a source of potential liquidity when needed and also serves as a proxy for real estate when more
favorable risk adjusted returns are not available in the private real estate markets. Our $126.3 million investment in marketable
REIT securities as of December 31, 2020 represented 5.2% of our undepreciated assets. We normally hold REIT securities long-term
and intend to hold these securities to recovery.
We
recognized dividend income on our investments in securities of $1.6 million for the three months ended December 31, 2020. There
have been no open market purchases or sales of securities during the three months ended December 31, 2020. We owned a total of
1.3 million common shares in UMH Properties, Inc. (UMH), a related REIT, as of December 31, 2020, at a total cost of $14.1 million
and a fair value of $19.9 million, representing a 41% unrealized gain. Dividends received from our UMH common shares are reinvested
through UMH’s Dividend Reinvestment and Stock Purchase Plan. During the quarter ended December 31, 2020, UMH redeemed all
of its outstanding 8.00% Series B Cumulative Redeemable Preferred Stock at a cash redemption price of $25.00 per share, plus all
accrued and unpaid dividends, of which we owned 100,000 shares at a total cost of $2.5 million.
As
of December 31, 2020, we had total net unrealized holding losses on our securities portfolio of $107.1 million. As a result of
the adoption of ASU 2016-01, we recognized Unrealized Holding Gains (Losses) Arising During the Periods in the accompanying Consolidated
Statements of Income for the three months ended December 31, 2020 and 2019 of $19.7 million and $(3.6) million, respectively.
Subsequent
to the December 31, 2020 quarter end, we sold marketable REIT securities for gross proceeds totaling $12.3
million, realizing a gain of $1.8
million.
NOTE
5 – DEBT
For
the three months ended December 31, 2020 and 2019, amortization of financing costs included in interest expense was $331,000 and
$435,000, respectively.
As
of December 31, 2020, we owned 121 properties, of which 64 carried Fixed Rate Mortgage Notes Payable with outstanding principal
balances totaling $896.4 million. The following is a summary of our Fixed Rate Mortgage Notes Payable as of December 31, 2020
and September 30, 2020 (in thousands):
SUMMARY OF FIXED RATE MORTGAGE NOTES PAYABLE
|
|
12/31/2020
|
|
|
9/30/2020
|
|
|
|
Amount
|
|
|
Weighted Average Interest
Rate (1)
|
|
|
Amount
|
|
|
Weighted Average Interest
Rate (1)
|
|
Fixed Rate Mortgage Notes Payable
|
|
$
|
896,446
|
|
|
|
3.88%
|
|
|
$
|
807,371
|
|
|
|
3.98%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Issuance Costs
|
|
$
|
12,946
|
|
|
|
|
|
|
$
|
12,377
|
|
|
|
|
|
Accumulated Amortization of Debt Issuance Costs
|
|
|
(4,747
|
)
|
|
|
|
|
|
|
(4,513
|
)
|
|
|
|
|
Unamortized Debt Issuance Costs
|
|
$
|
8,199
|
|
|
|
|
|
|
$
|
7,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate Mortgage Notes Payable, net of Unamortized Debt Issuance Costs
|
|
$
|
888,247
|
|
|
|
|
|
|
$
|
799,507
|
|
|
|
|
|
|
(1)
|
Weighted
average interest rate excludes amortization of debt issuance costs.
|
As
of December 31, 2020, interest payable on these mortgages were at fixed rates ranging from 2.95% to 6.875%, with a weighted average
interest rate of 3.88%. This compares to a weighted average interest rate of 3.98% as of September 30, 2020 and 4.05% as of December
31, 2019. As of December 31, 2020, the weighted average loan maturity of the Fixed Rate Mortgage Notes Payable was 11.5 years.
This compares to a weighted average loan maturity of the Fixed Rate Mortgage Notes Payable of 11.1 years as of September 30, 2020
and 11.5 years as of December 31, 2019.
In
connection with the two properties acquired during the three months ended December 31, 2020, which are located in the Columbus,
OH and Atlanta, GA MSAs (as described in Note 3), we obtained a 15 year fully-amortizing mortgage loan and a 17 year fully-amortizing
loan, respectively. The two mortgage loans originally totaled $104.0 million with a weighted average maturity of 16.1 years and
a weighted average interest rate of 3.11%.
Subsequent
to the quarter end, on January 26, 2021, we fully prepaid a $6.2
million mortgage loan for our property
located in Kansas City, MO. The loan was originally set to mature on December
1, 2021 and had an interest rate of 5.18%.
On
November 15, 2019, we entered into a new line of credit facility (the “New Facility”) consisting of a $225.0 million
unsecured line of credit facility (the “Revolver”) and a new $75.0 million unsecured term loan (the “Term Loan”),
resulting in the total potential availability under both the Revolver and the Term Loan of $300.0 million, which is an additional
$100.0 million over the former line of credit facility. In addition, the Revolver includes an accordion feature that will allow
the total potential availability under the New Facility to further increase to $400.0 million, under certain conditions. The $225.0
million Revolver matures in January 2024 with two options to extend for additional six-month periods. Availability under the New
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, wholly-owned industrial properties. Under the New
Facility the capitalization rate applied to our NOI generated by our unencumbered, wholly-owned industrial properties was lowered
from 6.5% under the former line of credit facility to 6.25%, thus increasing the value of the borrowing base properties under
the terms of the New Facility. In addition, the interest rate for borrowings under the Revolver was lowered by a range of 5 basis
points to 35 basis points, depending on our leverage ratio, and will, at our election, either i) bear interest at LIBOR plus 135
basis points to 205 basis points, depending on our leverage ratio, or ii) bear interest at Bank of Montreal’s (BMO) prime
lending rate plus 35 basis points to 105 basis points, depending on our leverage ratio. Currently, our borrowings bear interest
under the Revolver at LIBOR plus 145 basis points, which results in an interest rate of 1.60%. As of the quarter end and currently,
we do not have any amount drawn down under our Revolver, resulting in the full $225.0 million being currently available. The $75.0
million Term Loan matures January 2025. The interest rate for borrowings under the Term Loan will at our election, either i) bear
interest at LIBOR plus 130 basis points to 200 basis points, depending on our leverage ratio, or ii) bear interest at BMO’s
prime lending rate plus 30 basis points to 100 basis points, depending on our leverage ratio. To reduce floating interest rate
exposure under the Term Loan, we also entered into an interest rate swap agreement to fix LIBOR on the entire $75.0 million for
the full duration of the Term Loan resulting in an all-in rate of 2.92%.
From
time to time we may use a margin loan for temporary funding of acquisitions and for working capital purposes. This loan is due
on demand and is collateralized by our securities portfolio. We must maintain a coverage ratio of approximately 50%. The interest
rate charged on the margin loan is the bank’s margin rate and was 0.75% as of December 31, 2020 and 2.25% as of December
31, 2019. At December 31, 2020 and 2019, there were no amounts drawn down under the margin loan.
NOTE
6 – SHAREHOLDERS’ EQUITY
Our
authorized stock as of December 31, 2020 consisted of 300.0 million shares of common stock, of which 98.3 million shares were
issued and outstanding, 26.6 million authorized shares of 6.125% Series C Preferred Stock, of which 22.0 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
We
raised $1.3 million (including dividend reinvestments of $1.0 million) from the issuance of 82,000 shares of common stock under
our DRIP during the three months ended December 31, 2020. During the three months ended December 31, 2020, we paid $16.7 million
in total cash dividends, or $0.17 per share, to common shareholders, of which $1.0 million was reinvested in the DRIP, representing
a 6% participation rate.
On
January 14, 2021, our Board of Directors approved a 5.9% increase in our quarterly common stock dividend, raising it to $0.18
per share from $0.17 per share. This increased dividend of $0.18 per share is to be paid March 15, 2021 to common shareholders
of record as of the close of business on February 16, 2021. This represents an annualized dividend rate of $0.72 per share. This
increase represents the third dividend increase in the past five years, representing a total increase of 20%. We have maintained
or increased our common stock cash dividend for 30 consecutive years. We are one of the few REITs that maintained our dividend
throughout the Global Financial Crisis. We are also one of the few REITs that is paying out a higher per share dividend today
than prior to the Global Financial Crisis.
On
February 6, 2020, we entered into an Equity Distribution Agreement (Common Stock ATM Program) with BMO Capital Markets Corp.,
B. Riley FBR, Inc., D.A. Davidson & Co., Janney Montgomery Scott LLC, J.P. Morgan Securities LLC and RBC Capital Markets,
LLC (together the “Distribution Agents”) under which we may offer and sell shares of our common stock, $0.01 par value
per share, having an aggregate sales price of up to $150.0 million from time to time through the Distribution Agents. Sales of
the shares of Common Stock under the Agreement, if any, will be in “at the market offerings.” We implemented the Common
Stock ATM program for the flexibility that it provides to opportunistically access the capital markets and to best time our equity
capital needs as we close on acquisitions. To date, we have not raised any equity though our Common Stock Equity Program.
Our
Common Stock Repurchase Program (the “Program”) authorizes us to purchase up to $50.0 million of shares of our common
stock. 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. The Program does not have a termination
date and may be suspended or discontinued at our discretion without prior notice.
Under
the Program, during fiscal 2020, we repurchased 400,000 shares of our common stock for $4.3 million at an average price of $10.69
per share. These are the only repurchases made under the Program to date and we may elect not to repurchase any additional common
stock in the future. The remaining maximum dollar value that may be purchased under the Repurchase Program as of December 31,
2020 is $45.7 million.
6.125%
Series C Cumulative Redeemable Preferred Stock
During
the three months ended December 31, 2020, we paid $7.8 million in Preferred Dividends, or $0.3828125 per share, on our outstanding
6.125% Series C Preferred Stock for the period September 1, 2020 through November 30, 2020. As of December 31, 2020, we have accrued
Preferred Dividends of $2.8 million covering the period December 1, 2020 to December 31, 2020. 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 January
14, 2021, our Board of Directors declared a dividend of $0.3828125 per share to be paid March 15, 2021 to the 6.125% Series C
Preferred shareholders of record as of the close of business on February 16, 2021.
At-the-Market
Sales Agreement Program for our 6.125% Series C Cumulative Redeemable Preferred Stock
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 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 that provides for the
offer and sale from time to time of $125.0 million of our 6.125% Series C Preferred Stock, representing an additional $96.5 million,
with $28.5 million being carried over from the Preferred Stock At-The-Market Sales Agreement Program entered into on June 29,
2017.
On
December 4, 2019, we replaced the Preferred Stock At-The-Market Sales Agreement Program entered into on August 2, 2018 with another
Preferred Stock At-The-Market Sales Agreement Program that provides for the offer and sale from time to time of $125.0 million
of our 6.125% Series C Preferred Stock, representing an additional $101.0 million, with $24.0 million being carried over from
the Preferred Stock At-The-Market Sales Agreement Program entered into on August 2, 2018.
On
November 25, 2020, we replaced the Preferred Stock At-The-Market Sales Agreement Program entered into on December 4, 2019 with
another 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 up to $150.0 million of our 6.125% Series C Preferred Stock, representing an additional $149.3 million,
with $747,000 being carried over from the Preferred Stock At-The-Market Sales Agreement Program entered into on December 4, 2019.
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 December 31, 2020, we sold 13.6 million shares of our 6.125% Series C Preferred
Stock under these programs at a weighted average price of $24.91 per share, and generated net proceeds, after offering expenses,
of $332.4 million, of which 3.1 million shares were sold during the three months ended December 31, 2020 at a weighted average
price of $24.88 per share, generating net proceeds after offering expenses of $76.0 million. As of December 31, 2020, there is
$108.3 million remaining that may be sold under the Preferred Stock ATM Program.
As
of December 31, 2020, 22.0 million shares of the 6.125% Series C Preferred Stock were issued and outstanding.
NOTE
7 - FAIR VALUE MEASUREMENTS
We
follow ASC 825, Financial Instruments, for financial assets and liabilities recognized at fair value on a recurring basis. 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 December 31, 2020 and September 30, 2020 (in thousands):
SUMMARY
OF FAIR VALUE OF FINANCIAL ASSETS
|
|
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 December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities – Preferred Stock
|
|
$
|
4,705
|
|
|
$
|
4,705
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Equity Securities – Common Stock
|
|
|
121,586
|
|
|
|
121,586
|
|
|
|
0
|
|
|
|
0
|
|
Mortgage Backed Securities
|
|
|
1
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
Interest Rate Swap
|
|
|
(3,935
|
)
|
|
|
0
|
|
|
|
(3,935
|
)
|
|
|
0
|
|
Total Securities Available for Sale at Fair Value
|
|
$
|
122,357
|
|
|
$
|
126,292
|
|
|
$
|
(3,935
|
)
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities – Preferred Stock
|
|
$
|
5,860
|
|
|
$
|
5,860
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Equity Securities – Common Stock
|
|
|
102,971
|
|
|
|
102,971
|
|
|
|
0
|
|
|
|
0
|
|
Mortgage Backed Securities
|
|
|
1
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
Interest Rate Swap
|
|
|
(4,368
|
)
|
|
|
0
|
|
|
|
(4,368
|
)
|
|
|
0
|
|
Total Securities Available for Sale at Fair Value
|
|
$
|
104,464
|
|
|
$
|
108,832
|
|
|
$
|
(4,368
|
)
|
|
$
|
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 December
31, 2020, the Fixed Rate Mortgage Notes Payable fair value (estimated based upon expected cash outflows discounted at current
market rates) amounted to $943.3 million and the carrying value amounted to $896.4 million. When we acquired a property, we allocate
purchase price based upon relative fair value of all the assets and liabilities, including intangible assets and liabilities,
relating to the properties acquired lease (See Note 3). Those fair value measurements were estimated based upon independent third-party
appraisals and fell within level 3 of the fair value hierarchy.
NOTE
8 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash
paid for interest during the three months ended December 31, 2020 and 2019 was $8.8 million and $8.7 million, respectively.
During
the three months ended December 31, 2020 and 2019, we had dividend reinvestments of $1.0 million and $4.2 million, respectively,
which required no cash transfers.
NOTE
9 – CONTINGENCIES AND COMMITMENTS
We
have entered into agreements to purchase four new build-to-suit, industrial buildings that are currently being developed in Alabama
(2), Tennessee and Vermont. These four future acquisitions total million square feet, with net-leased terms
ranging from 10
to 15
years, and with a weighted average lease
term of 12.8
years. The aggregate purchase price for
these four properties is $169.3
million. Three of these four properties,
consisting of approximately square feet, or 57%,
are leased for 15
years to FedEx Ground Package System,
Inc., with the remaining property, consisting of approximately square feet or 43%,
leased for 10
years to Mercedes Benz US International,
Inc. All 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). Subject to satisfactory
due diligence and other customary closing conditions and requirements, we anticipate closing three of these transactions during
fiscal 2021 and one in the first half of fiscal 2022. In connection with one of the four properties, we have entered into a commitment
to obtain a 15
year, fully-amortizing mortgage loan totaling
$35.5
million with a fixed interest rate of
2.62%.
We
have several FedEx Ground parking expansion projects in progress with more under discussion. Currently there are six parking expansion
projects underway and one parking expansion project recently completed during the quarter. These six projects are expected to
cost approximately $16.8
million. These parking expansion projects
will enable us to capture additional rent while lengthening the terms of these leases. We are also in discussions to expand the
parking at 11 additional locations bringing the total recently completed and potential parking lot expansion projects to 18 currently.
The parking expansion project that was completed during the quarter was at our property located in Olathe (Kansas City), KS for
a total project cost of $3.4
million. The expansion resulted in a $340,000
increase in annualized rent effective
November 5, 2020 increasing the annualized rent from $2.2
million to $2.6
million. We anticipate additional expansion
work at this location which will further increase the rental rate and extend the lease term.
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.
NOTE
10 – SUBSEQUENT EVENTS
On
January 14, 2021, our Board of Directors approved a 5.9% increase in our quarterly common stock dividend, raising it to $0.18
per share from $0.17 per share. This increased dividend of $0.18 per share is to be paid March 15, 2021 to common shareholders
of record as of the close of business on February 16, 2021. This represents an annualized dividend rate of $0.72 per share. This
increase represents the third dividend increase in the past five years, representing a total increase of 20%. We have maintained
or increased our common stock cash dividend for 30 consecutive years. We are one of the few REITs that maintained our dividend
throughout the Global Financial Crisis. We are also one of the few REITs that is paying out a higher per share dividend today
than prior to the Global Financial Crisis.
On
January 14, 2021, our Board of Directors declared a dividend of $0.3828125 per share to be paid March 15, 2021 to the 6.125% Series
C Preferred shareholders of record as of the close of business on February 16, 2021.
Subsequent
to the December 31, 2020 quarter end, we sold marketable REIT securities for gross proceeds totaling $12.3
million, realizing a gain of $1.8
million.
On
January 26, 2021, we fully prepaid a $6.2
million mortgage loan for our property
located in Kansas City, MO. The loan was originally set to mature on December
1, 2021 and had an interest rate of 5.18%.
On
January 14, 2021, our Board of Directors unanimously decided to explore strategic alternatives to maximize shareholder value.
Although our Board of Directors has determined to explore strategic transactions, we are not obligated to pursue any particular
transaction or any transaction at all. Even if our Board of Directors decides to pursue a particular strategy, there is no assurance
that we will successfully implement its strategy. Our Board does not intend to disclose further developments unless and until
it approves a specific action or otherwise concludes the review of strategic alternatives. In light of its consideration of strategic
alternatives, our Board of Directors determined to suspend the DRIP on January 14, 2021 until further notice.
ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking
Statements
This
quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements provide our current
expectations or forecasts of future events. Forward-looking statements include statements about our expectations, beliefs, intentions,
plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements that are not
historical facts. Forward-looking statements can be identified by their use of forward-looking words, such as “may,”
“will,” “anticipate,” “expect,” “believe,” “intend,” “plan,”
“should,” “seek” or comparable terms, or the negative use of those words, but the absence of these words
does not necessarily mean that a statement is not forward-looking.
The
forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account
all information currently available to us. Forward-looking statements are not predictions of future events. These beliefs, assumptions
and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors
are described below and are described under the above heading “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” above and the headings “Business,” “Risk Factors” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for
the fiscal year ended September 30, 2020. These and other risks, uncertainties and factors could cause our actual results to differ
materially from those included in any forward-looking statements we make. Any forward-looking statement speaks only as of the
date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or
how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. Important factors that could cause actual results
to differ materially from our expectations include, among others:
|
●
|
the
ability of our tenants to make payments under their respective leases;
|
|
●
|
our
reliance on certain major tenants;
|
|
●
|
our
ability to re-lease properties that are currently vacant or that become vacant;
|
|
●
|
our
ability to obtain suitable tenants for our properties;
|
|
●
|
changes
in real estate market conditions, economic conditions in the industrial sector, the markets in which our properties are located
and general economic conditions;
|
|
●
|
the
inherent risks associated with owning real estate, including local real estate market conditions, governing laws and regulations
and illiquidity of real estate investments;
|
|
●
|
our
ability to acquire, finance and sell properties on attractive terms;
|
|
●
|
our
ability to repay debt financing obligations;
|
|
●
|
our
ability to refinance amounts outstanding under our debt obligations at maturity on terms favorable to us, or at all;
|
|
●
|
the
loss of any member of our management team;
|
|
●
|
our
ability to comply with debt covenants;
|
|
●
|
our
ability to integrate acquired properties and operations into existing operations;
|
|
●
|
continued
availability of proceeds from issuances of our debt or equity securities;
|
|
●
|
the
availability of other debt and equity financing alternatives;
|
|
●
|
changes
in interest rates, including the replacement of the LIBOR reference rate, under our current credit facility and under any
additional variable rate debt arrangements that we may enter into in the future;
|
|
●
|
our
ability to successfully implement our selective acquisition strategy;
|
|
●
|
our
ability to maintain internal controls and procedures to ensure all transactions are accounted for properly, all relevant disclosures
and filings are timely made in accordance with all rules and regulations, and any potential fraud or embezzlement is thwarted
or detected;
|
|
●
|
changes
in federal or state tax rules or regulations that could have adverse tax consequences;
|
|
●
|
declines
in the market prices of our investment securities;
|
|
●
|
the
effect of COVID-19 on our business and general economic conditions; and
|
|
●
|
our
ability to qualify as a REIT for federal income tax purposes.
|
You
should not place undue reliance on these forward-looking statements, as events described or implied in such statements may not
occur. Although our Board of Directors has unanimously decided to explore strategic alternatives, we are not obligated to pursue
any particular transaction or any transaction at all. Even if our Board of Directors decides to pursue a particular strategy,
there is no assurance that we will successfully implement such strategy. In the event that we consummate a strategic alternative
in the future, we cannot be certain that we would fully realize the potential benefit of such a transaction and cannot predict
the impact that such strategic transaction might have on our operations or stock price. We undertake no obligation to update or
revise any forward-looking statements as a result of new information, future events or otherwise.
Overview
and Recent Activity
The
following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction
with the Consolidated Financial Statements and notes thereto provided elsewhere herein and our Annual Report on Form 10-K for
the fiscal year ended September 30, 2020.
We
operate as a real estate investment trust (REIT). We seek to invest in well-located, modern single-tenant industrial buildings
leased primarily to investment-grade tenants or their subsidiaries on long-term net-leases. We were founded in 1968 and are one
of the oldest public equity REITs in the world.
During
the three months ended December 31, 2020, we purchased two new built-to-suit, net-leased, industrial properties, located in the
Columbus, OH, and Atlanta, GA Metropolitan Statistical Areas (MSAs) totaling approximately 1.1 million square feet, for $170.0
million. The two properties are net-leased for terms of 15 and 20 years, respectively resulting in a weighted average lease maturity
of 17.9 years and are expected to generate annualized rental income over the life of their leases of $10.1 million. In connection
with the two properties acquired during the three months ended December 31, 2020, we obtained a 15 year, fully-amortizing mortgage
loan and a 17 year, fully-amortizing mortgage loan, respectively. The two mortgage loans originally totaled $104.0 million with
a weighted average maturity of 16.1 years and a weighted average interest rate of 3.11%. As of December 31, 2020, we owned 121
properties with total square footage of 24.5 million. These properties are located in 31 states. As of the quarter ended December
31, 2020, our weighted average lease maturity was 7.5 years, our occupancy rate was 99.7%, and our annualized average base rent
per occupied square foot was $6.52. As of December 31, 2020, the weighted average building age, based on the square footage of
our buildings, was 9.5 years. In addition, total gross real estate investments, excluding marketable REIT securities investments
of $126.3 million, were $2.2 billion as of December 31, 2020.
See
PART I, Item 1 – Business in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 for a more complete
discussion of the economic and industry-wide factors relevant to us and the opportunities, challenges, and risks on which we are
focused.
The
future effects of the evolving impact of the COVID-19 Pandemic are uncertain, however, at this time COVID-19 has not had a material
adverse effect on our financial condition. We invest in modern single-tenant, industrial buildings, leased primarily to investment-grade
tenants or their subsidiaries on long-term net-leases. Our investments are exclusively situated in the continental United States,
and are primarily located in strategic locations that are mission-critical to our tenants’ needs. In many cases our buildings
are highly automated in order to serve the omni-channel distribution networks that have become essential today. Approximately
82% of our revenue is derived from investment-grade tenants, or their subsidiaries as defined by S&P Global Ratings (www.standardandpoors.com)
and by Moody’s (www.moodys.com). The references in this report to S&P Global Ratings and Moody’s 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.
For
many years, ecommerce demand has increased, and it has now become an integral part of the retail landscape. The COVID-19 Pandemic
has created an even greater move towards on-line shopping. As a result of state and local government-mandated shutdowns, public
health guidance and changing consumer demand, ecommerce sales as a percentage of total retail sales increased from approximately
15% to 27% during the last two quarters. It is estimated that ecommerce sales require three times the warehouse space relative
to brick and mortar retail sales. The COVID-19 Pandemic has also created a need for supply chain reconfiguration. Increased inventory
stocking is currently taking place across many industries and it appears that this trend will continue in order to accommodate
surges in demand. Additionally, U.S. manufacturing has been increasing in recent years and the COVID-19 Pandemic has accelerated
this trend as supply chains now prefer shorter distances and less reliance on foreign sources.
Our
portfolio of modern, net-leased industrial properties, continues to provide shareholders with reliable and predictable income
streams. Our resilient occupancy rates and rent collection results during these challenging times highlight the mission-critical
nature of our assets and underscore the essential need for our tenants’ operations. Furthermore, because our weighted average
lease maturity is 7.5 years and our weighted average fixed rate mortgage debt maturity is 11.5 years, we expect our cash flow
to remain resilient over long periods of time.
Our
overall occupancy rate and our base rent collections have remained strong throughout the COVID-19 Pandemic. Our base rent collections
have averaged 99.8% throughout the COVID-19 Pandemic and we expect future months to be consistent with this trend. Our overall
occupancy rate and our base rent collections during the COVID-19 Pandemic were as follows:
Month
|
|
|
Occupancy
|
|
|
Percentage of Base Rent Collected
|
|
|
March 2020
|
|
|
|
99.4
|
%
|
|
|
100.0
|
%
|
|
April 2020
|
|
|
|
99.4
|
%
|
|
|
99.8
|
%
|
|
May 2020
|
|
|
|
99.4
|
%
|
|
|
99.8
|
%
|
|
June 2020
|
|
|
|
99.4
|
%
|
|
|
99.7
|
%
|
|
July 2020
|
|
|
|
99.4
|
%
|
|
|
99.6
|
%
|
|
August 2020
|
|
|
|
99.4
|
%
|
|
|
99.6
|
%
|
|
September 2020
|
|
|
|
99.4
|
%
|
|
|
99.8
|
%
|
|
October 2020
|
|
|
|
99.4
|
%
|
|
|
99.8
|
%
|
|
November 2020
|
|
|
|
99.4
|
%
|
|
|
99.9
|
%
|
|
December 2020
|
|
|
|
99.7
|
%
|
|
|
99.8
|
%
|
|
January 2021
|
|
|
|
99.7
|
%
|
|
|
99.9
|
%
|
We
evaluate our financial performance using Net Operating Income (NOI) from property operations, which we believe is a useful indicator
of our operating performance. NOI is a non-GAAP financial measure that we define as Net Income Attributable to Common Shareholders
plus Preferred Dividend Expense, General and Administrative Expenses, Non-recurring Severance Expense, Depreciation, Amortization
of Capitalized Lease Costs and Intangible Assets, Interest Expense, including Amortization of Financing Costs, Unrealized Holding
(Gains) Losses Arising During the Periods, less Dividend Income and Lease Termination Income. The components of NOI are recurring
Rental and Reimbursement Revenue, less Real Estate Taxes and Operating Expenses, such as insurance, utilities, and repairs and
maintenance. Other REITs may use different methodologies to calculate NOI and, accordingly, our NOI may not be comparable to all
other REITs.
The
following is a reconciliation of our Net Income Attributable to Common Shareholders to our NOI for the three months ended December
31, 2020 and 2019 (in thousands):
|
|
Three Months Ended
|
|
|
|
12/31/2020
|
|
|
12/31/2019
|
|
Net Income Attributable to Common Shareholders
|
|
$
|
25,746
|
|
|
$
|
3,528
|
|
Plus: Preferred Dividend Expense
|
|
|
8,170
|
|
|
|
6,097
|
|
Plus: General & Administrative Expenses
|
|
|
2,272
|
|
|
|
2,264
|
|
Plus: Non-recurring Severance Expense
|
|
|
-0-
|
|
|
|
786
|
|
Plus: Depreciation
|
|
|
12,078
|
|
|
|
11,433
|
|
Plus: Amortization of Capitalized Lease Costs and
Intangible Assets
|
|
|
809
|
|
|
|
753
|
|
Plus: Interest Expense, including Amortization of
Financing Costs
|
|
|
9,159
|
|
|
|
9,209
|
|
Less/Plus: Unrealized Holding (Gains) Losses Arising During the Periods
|
|
|
(19,721
|
)
|
|
|
3,635
|
|
Less: Dividend Income
|
|
|
(1,607
|
)
|
|
|
(3,238
|
)
|
Less: Lease Termination Income
|
|
|
(377
|
)
|
|
|
-0-
|
|
Net Operating Income- NOI
|
|
$
|
36,529
|
|
|
$
|
34,467
|
|
The
components of our NOI for the three months ended December 31, 2020 and 2019 are as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
12/31/2020
|
|
|
12/31/2019
|
|
Rental Revenue
|
|
$
|
36,846
|
|
|
$
|
34,870
|
|
Reimbursement Revenue
|
|
|
6,737
|
|
|
|
6,830
|
|
Total Rental and Reimbursement Revenue
|
|
|
43,583
|
|
|
|
41,700
|
|
Real Estate Taxes
|
|
|
(5,318
|
)
|
|
|
(5,036
|
)
|
Operating Expenses
|
|
|
(1,736
|
)
|
|
|
(2,197
|
)
|
Net Operating Income- NOI
|
|
$
|
36,529
|
|
|
$
|
34,467
|
|
NOI
from property operations increased $2.1 million, or 6%, for the three months ended December 31, 2020 as compared to the three
months ended December 31, 2019. This increase was due to the acquisition of two new built-to-suit, net-leased, industrial properties,
located in the Columbus, OH and Atlanta, GA MSAs totaling approximately 1.1 million square feet purchased during the three-month
period ended December 31, 2020 and the fiscal 2020 acquisitions consisting of five new built-to-suit, net-leased, industrial properties,
located in the Indianapolis, IN, Columbus, OH, Greensboro, NC, Salt Lake City, UT and Oklahoma City, OK MSAs totaling approximately
1.2 million square feet.
Acquisitions
On
December 17, 2020, we purchased a newly constructed 488,000 square foot industrial building, situated on 99.0 acres, located in
the Columbus, OH MSA. The building is 100% net-leased to FedEx Ground Package System, Inc. for 15 years through September 2035.
The purchase price was $73.3 million. We obtained a 15 year, fully-amortizing mortgage loan of $47.0 million at a fixed interest
rate of 2.95%. Annual rental revenue over the remaining term of the lease averages $4.6 million.
On
December 24, 2020, we purchased a newly constructed 658,000 square foot industrial building, situated on 129.9 acres, located
in the Atlanta, GA MSA. The building is 100% net-leased to Home Depot U.S.A., Inc. for 20 years through November 2040. The purchase
price was $96.7 million. We obtained a 17 year, fully-amortizing mortgage loan of $57.0 million at a fixed interest rate of 3.25%.
Annual rental revenue over the remaining term of the lease averages $5.5 million.
FedEx
Ground Package System, Inc.’s ultimate parent, FedEx Corporation and Home Depot U.S.A., Inc’s ultimate parent,
Home Depot, Inc. are publicly-listed companies and financial information related to these entities are 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.
Expansions
During
the quarter ended December 31, 2020, we completed a parking expansion project for FedEx Ground Package System, Inc. at our property
located in Olathe (Kansas City), KS for a total project cost of $3.4 million. The expansion resulted in a $340,000 increase in
annualized rent effective November 5, 2020 increasing the annualized rent from $2.2 million to $2.6 million. We anticipate
additional expansion work at this location which will further increase the rental rate and extend the lease term.
Commitments
We
have entered into agreements to purchase four new build-to-suit, industrial buildings that are currently being developed in Alabama
(2), Tennessee and Vermont. These four future acquisitions total 1.2 million square feet, with net-leased terms ranging from 10
to 15 years, and with a weighted average lease term of 12.8 years. The aggregate purchase price for these four properties is $169.3
million. Three of these four properties, consisting of approximately 694,000 square feet, or 57%, are leased for 15 years to FedEx
Ground Package System, Inc., with the remaining property, consisting of approximately 530,000 square feet or 43%, leased for 10
years to Mercedes Benz US International, Inc. All 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). Subject
to satisfactory due diligence and other customary closing conditions and requirements, we anticipate closing three of these transactions
during fiscal 2021 and one in the first half of fiscal 2022. In connection with one of the four properties, we have entered into
a commitment to obtain a 15 year, fully-amortizing mortgage loan totaling $35.5 million with a fixed interest rate of 2.62%.
We
have several FedEx Ground parking expansion projects in progress with more under discussion. Currently there are six parking expansion
projects underway and one parking expansion project recently completed during the quarter. These six projects are expected to
cost approximately $16.8 million. These parking expansion projects will enable us to increase rental rates while lengthening the
terms of these leases. We are also in discussions to expand the parking at 11 additional locations bringing the total recently
completed and potential parking lot expansion projects to 18 currently.
Significant
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements,
which have been prepared in accordance with Accounting Principles Generally Accepted in the United States of America (U.S. GAAP).
The preparation of these Consolidated Financial Statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date
of our Consolidated Financial Statements. Actual results may differ from these estimates under different assumptions or conditions.
On
a regular basis, we evaluate our assumptions, judgments and estimates. We believe that there have been no material changes to
the items that we disclosed as our significant accounting policies and estimates under Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for fiscal year ended
September 30, 2020.
Changes
in Results of Operations
As
of December 31, 2020, we owned 121 properties with total square footage of 24.5 million, as compared to 115 properties with total
square footage of 22.9 million, as of December 31, 2019, representing an increase in square footage of 7.0%. At quarter end, the
Company’s weighted average lease term was approximately 7.5 years, as compared to 7.6 years at the end of the prior year
period. Our occupancy rate was 99.7% as of December 31, 2020, as compared to 99.2% as of December 31, 2019, representing an increase
of 50 basis points. Our weighted average building age was 9.5 years as of December 31, 2020, as compared to 9.2 years as of December
31, 2019.
Fiscal
2021 Renewals
In
fiscal 2021, approximately 5% of our gross leasable area, representing ten leases totaling 1.2 million square feet, is set to
expire. Six of these ten leases have been renewed thus far, for a weighted average term of 3.8 years, at a rental
rate increase of 8.5% on a GAAP basis and an increase of 2.0% on a cash basis. These six lease renewals represent
834,000 square feet, or 69% of the expiring square footage for fiscal 2021.
We
have incurred or we expect to incur leasing commission costs of $325,000 in connection with three of these lease
renewals and we have incurred or we expect to incur tenant improvement costs of $162,000 in connection with one of these lease
renewals. The table below summarizes the lease term of the leases that were renewed. In addition, the table below includes both
the tenant improvement costs and the leasing commission costs, which are presented on a per square foot (PSF) basis averaged annually
over the renewal terms.
Property
|
|
Tenant
|
|
Square
Feet
|
|
|
Former
U.S.
GAAP Straight- Line Rent
PSF
|
|
|
Former
Cash
Rent
PSF
|
|
|
Former
Lease
Expiration
|
|
Renewal
U.S
GAAP Straight- Line Rent
PSF
|
|
|
Renewal
Initial
Cash Rent
PSF
|
|
|
Renewal
Lease
Expiration
|
|
Renewal
Term
(years)
|
|
|
Tenant
Improvement
Cost
PSF over
Renewal
Term (1)
|
|
|
Leasing
Commission
Cost
PSF over
Renewal
Term (1)
|
|
Griffin (Atlanta), GA
|
|
Rinnai America Corporation
|
|
|
218,120
|
|
|
$
|
3.81
|
|
|
$
|
3.93
|
|
|
12/31/20
|
|
$
|
4.22
|
|
|
$
|
4.22
|
|
|
12/31/22
|
|
|
2.0
|
|
|
$
|
-0-
|
|
|
$
|
0.13
|
|
Fayetteville, NC
|
|
Victory Packaging, L.P.
|
|
|
148,000
|
|
|
|
3.33
|
|
|
|
3.50
|
|
|
2/28/21
|
|
|
3.40
|
|
|
|
3.25
|
|
|
2/28/25
|
|
|
4.0
|
|
|
|
-0-
|
|
|
|
0.20
|
|
Winston-Salem, NC
|
|
Style Crest, Inc.
|
|
|
106,507
|
|
|
|
3.39
|
|
|
|
3.77
|
|
|
3/31/21
|
|
|
4.10
|
|
|
|
3.90
|
|
|
3/31/26
|
|
|
5.0
|
|
|
|
0.30
|
|
|
|
-0-
|
|
Augusta, GA
|
|
FedEx Ground
|
|
|
59,358
|
|
|
|
8.64
|
|
|
|
8.64
|
|
|
6/30/21
|
|
|
8.64
|
|
|
|
8.64
|
|
|
6/30/23
|
|
|
2.0
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Corpus Christi, TX
|
|
FedEx Ground
|
|
|
46,253
|
|
|
|
9.03
|
|
|
|
9.42
|
|
|
8/31/21
|
|
|
9.89
|
|
|
|
9.89
|
|
|
8/31/26
|
|
|
5.0
|
|
|
|
-0-
|
|
|
|
-0-
|
|
St.
Joseph, MO
|
|
Woodstream
Corporation
|
|
|
256,000
|
|
|
|
3.57
|
|
|
|
3.70
|
|
|
9/30/21
|
|
|
3.89
|
|
|
|
3.75
|
|
|
9/30/26
|
|
|
5.0
|
|
|
|
-0-
|
|
|
|
0.12
|
|
|
|
Total
|
|
|
834,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
$
|
4.23
|
|
|
$
|
4.40
|
|
|
|
|
$
|
4.59
|
|
|
$
|
4.49
|
|
|
|
|
|
3.8
|
|
|
$
|
0.05
|
|
|
$
|
0.10
|
|
|
(1)
|
Amount
calculated based on the total cost divided by the square feet, divided by the renewal term.
|
These
six lease renewals have a U.S. GAAP straight-line lease rate of $4.59 per square foot. The renewed initial cash
rent per square foot is $4.49. This compares to the former rent of $4.23 per square foot on a U.S. GAAP straight-line
basis and the former cash rent of $4.40 per square foot, resulting in an increase of 8.5% on a U.S. GAAP straight-line
basis and an increase of 2.0% on a cash basis.
Effective
October 1, 2020, we entered into a lease termination agreement with RGH Enterprises, Inc. (Cardinal Health) for our 75,000 square
foot facility located in Halfmoon (Albany), NY whereby we received a termination fee in the amount of $377,000 representing approximately
50% of the then remaining rent due under the lease, which was set to expire in 1.2 years on November 30, 2021. We simultaneously
entered into a 10.4 year lease agreement with United Parcel Service, Inc. (UPS) which became effective November 1, 2020. The lease
agreement with UPS provides for five months of free rent, after which, on April 1, 2021, initial annual rent of $510,000, representing
$6.80 per square foot, will commence, with 2.0% annual increases thereafter, resulting in a straight-line annualized rent of $541,000,
representing $7.21 per square foot over the life of the lease, which expires March 31, 2031. This compares to the former U.S GAAP
straight-line rent of $574,000, representing $7.65 per square foot and former cash rent of $8.19 per square foot, resulting in
a decrease of $33,000, representing a 5.8% decrease on a U.S GAAP straight-line basis and a decrease of 17.0% on a cash basis.
The new 10.4 year lease agreement with UPS provides for an additional 9.3 years of lease term versus the old lease with Cardinal
Health.
Effective
December 15, 2020, we entered into a 10.3 year lease with Hartford HealthCare Corporation for our previously vacant 55,000 square
foot facility located in Newington (Hartford), CT, thereby increasing our current overall occupancy rate to 99.7%. The new lease
has free rent for the first four months, after which initial annual rent will be $288,000, representing $5.25 per square foot
with 2.0% annual increases thereafter, resulting in a U.S. GAAP straight-line annualized rent of $307,000, representing $5.60
per square foot over the life of the lease. Hartford HealthCare Corporation is rated “investment-grade” as defined
by S&P Global Ratings (www.standardandpoors.com) and by Moody’s (www.moodys.com).
Rental
Revenue increased $2.0 million, or 6%, for the three months ended December 31, 2020, as compared to the three months ended December
31, 2019. This increase was due to the acquisition of two new built-to-suit, net-leased, industrial properties located in the
Columbus, OH and Atlanta, GA MSAs totaling approximately 1.1 million square feet during the three months ended December 31, 2020
and the increase was due to the fiscal 2020 acquisitions of five new built-to-suit, net-leased, industrial properties, located
in the Indianapolis, IN, Columbus, OH, Greensboro, NC, Salt Lake City, UT and Oklahoma City, OK MSAs totaling approximately 1.2
million square feet.
Our
single-tenant properties are subject to net-leases, which require the tenants to reimburse us for the cost of Real Estate Taxes
as well as certain Operating Expenses such as insurance and the majority of repairs and maintenance. Reimbursement Revenue decreased
$93,000, or 1%, Real Estate Tax Expense increased $282,000, or 6%, and Operating Expenses decreased $461,000, or 21% for the three
months ended December 31, 2020 as compared to the three months ended December 31, 2019, resulting in a positive net effect on
Net Income of $86,000. Reimbursement Revenue as a percentage of Real Estate Taxes and Operating Expenses for the three months
ended December 31, 2020 was 95% compared to 94% for the three months ended December 31, 2019.
General
and Administrative Expenses increased $8,000, or 0%, for the three months ended December 31, 2020 as compared to the three months
ended December 31, 2019. General and Administrative Expenses, as a percentage of gross revenue (which includes Rental Revenue,
Reimbursement Revenue and Dividend Income) was 5.0% for the three months ended December 31, 2020 as compared to 5.0% for the three
months ended December 31, 2019. Annualized General and Administrative Expenses, as a percentage of undepreciated assets (which
is our total assets excluding accumulated depreciation) was 37 basis points for the three months ended December 31, 2020 as compared
to 41 basis points for the three months ended December 31, 2019.
On
December 23, 2019, our former General Counsel, Allison Nagelberg, announced her retirement effective December 31, 2019. In accordance
with her severance package, during the first quarter of fiscal 2020, we incurred a one-time, Non-recurring Severance Expense of
$786,000.
Depreciation
increased $645,000, or 6%, for the three months ended December 31, 2020 as compared to the three months ended December 31, 2019.
Amortization of Capitalized Lease Costs and Intangible Assets increased $56,000, or 7%, for the three months ended December 31,
2020 as compared to the three months ended December 31, 2019. These increases were primarily due to the acquisition of five industrial
properties purchased during fiscal 2020. In addition, the increases in depreciation and amortization expenses were also the result
of the capital improvements and leasing costs incurred over the last four quarters.
The
recognition of Unrealized Holding Gains (Losses) Arising During the Periods was due to the adoption of ASU 2016-01, “Financial
Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which became effective
at the beginning of the prior fiscal year. With the adoption of ASU 2016-01, the changes in net unrealized holding gains and losses
are recognized through net income. Therefore, the implementation of this accounting rule has resulted in increased volatility
in our reported earnings and some of our key performance metrics. Unrealized Holding Gain (Loss) arising during the three months
ended December 31, 2020 and 2019 was $19.7 million and $(3.6) million, respectively. We recognized dividend income on our investments
in securities of $1.6 million and $3.2 million for the three months ended December 31, 2020 and 2019, respectively, representing
a $1.6 million decrease. This decrease is due to reduced dividends from our REIT securities portfolio. The REIT securities portfolio’s
weighted average yield for the three months ended December 31, 2020 was approximately 5.0% as compared to 7.1% for the three months
ended December 31, 2019. We held $126.3 million in marketable REIT securities as of December 31, 2020, representing 5.2% of our
undepreciated assets.
Interest
Expense, including Amortization of Financing Costs, decreased by $50,000, or 1%, for the three months ended December 31, 2020
as compared to the three months ended December 31, 2019. We had a decrease of 17 basis points in the weighted average interest
rate of the Fixed Rate Mortgage Notes Payable, which decreased from 4.05% at December 31, 2019 to 3.88% at December 31, 2020.
The decrease in Interest Expense, including Amortization of Financing Costs, was partially offset by an increase in the Fixed
Rate Mortgage Notes Payable balance, which increased by $104.4 million from December 31, 2019 to December 31, 2020.
Preferred
Dividend Expense increased by $2.1 million, or 34%, for the three months ended December 31, 2020 as compared to the three months
ended December 31, 2019. These increases are due to the additional $158.0 million of 6.125% Series C Cumulative Redeemable Preferred
Stock issued between December 31, 2019 and December 31, 2020.
Changes
in Financial Condition
We
generated Net Cash from Operating Activities of $29.7 million and $18.9 million for the three months ended December 31, 2020 and
2019, respectively.
Real
Estate Investments increased by $156.0 million from September 30, 2020 to December 31, 2020. This increase was mainly due to the
purchase of two net-leased industrial properties, located in the Columbus, OH MSA and the Atlanta, GA MSA, totaling approximately
1.1 million square feet, for $170.0 million. The increase was partially offset by Depreciation Expense on Real Estate Investments
for the three months ended December 31, 2020 of $12.1 million.
Securities
Available for Sale increased by $17.5 million from September 30, 2020 to December 31, 2020. The increase was primarily due to
an Unrealized Holding Gain of $19.7 million for the three months ended December 31, 2020.
Fixed
Rate Mortgage Notes Payable, net of Unamortized Debt Issuance Costs (Mortgage Notes Payable), increased by $88.7 million from
September 30, 2020 to December 31, 2020. The increase was mostly due to the origination of two fully-amortizing mortgage loans
for $104.0 million, with a weighted average interest rate of 3.11%, obtained in connection with the two industrial properties
purchased during the first quarter of fiscal 2021. Details on these two fixed rate mortgages are as follows:
Property (MSA)
|
|
Mortgage amount (in thousands)
|
|
|
Maturity Date
|
|
Interest Rate
|
|
Columbus, OH
|
|
$
|
47,000
|
|
|
1/1/2036
|
|
|
2.95
|
%
|
Atlanta, GA
|
|
$
|
57,000
|
|
|
1/1/2038
|
|
|
3.25
|
%
|
The
increase in Mortgage Notes Payable was also partially due to the amortization of financing costs associated with the Mortgage
Notes Payable of approximately $234,000. This increase was partially offset by scheduled payments of principal of $14.9 million.
In addition, the increase in Mortgage Notes Payable was partially offset by the addition of deferred financing costs of approximately
$569,000, which is associated with two mortgages obtained in connection with two industrial properties purchased during the first
quarter of fiscal 2021.
Excluding
Debt Issuance Costs, the weighted average interest rate on the Fixed Rate Mortgage Notes Payable decreased by 17 basis points
from the prior year quarter, from 4.05% at December 31, 2019 to 3.88% at December 31, 2020.
We
are scheduled to repay a total of $79.2 million in mortgage principal payments over the next 12 months. We intend to make these
principal payments from the cash on hand, funds generated from Cash from Operations, the DRIP, the At-The-Market Sales Agreement
Program (Preferred Stock ATM Program), the Equity Distribution Agreement (Common Stock ATM Program), and draws from the unsecured
line of credit facility.
Liquidity
and Capital Resources
Net
Cash Provided by Operating Activities was $29.7 million and $18.9 million for the three months ended December 31, 2020 and 2019,
respectively. Dividends paid on common stock for the three months ended December 31, 2020 and 2019 were $16.7 million and $16.5
million, respectively (of which $1.0 million and $4.2 million, respectively, were reinvested). We pay dividends from cash generated
from operations.
As
of December 31, 2020, we held $126.3 million in marketable REIT securities, representing 5.2% of our undepreciated assets, which
we define as total assets excluding accumulated depreciation. Total assets excluding accumulated depreciation were $2.4 billion
as of December 31, 2020. In general, we may borrow up to 50% of the value of the marketable securities. The interest rate charged
on the margin loan is the bank’s margin rate and was 0.75% as of December 31, 2020. At December 31, 2020, there was no amount
drawn down under the margin loan. As of December 31, 2020, we had net Unrealized Holding Losses on our portfolio of $107.1 million
as compared to net Unrealized Holding Losses of $126.8 million as of September 30, 2020, representing an Unrealized Holding Gain
of $19.7 million for the three months ended December 31, 2020. There have been no open market purchases or sales of securities
during the three months ended December 31, 2020. We recognized dividend income on our investments in securities of $1.6 million
for the three months ended December 31, 2020. Subsequent to the December 31, 2020 quarter end, we sold marketable REIT securities
for gross proceeds totaling $12.3 million, realizing a gain of $1.8 million.
On
November 15, 2019, we entered into a new line of credit facility (the “New Facility”) consisting of a $225.0 million
unsecured line of credit facility (the “Revolver”) and a new $75.0 million unsecured term loan (the “Term Loan”),
resulting in the total potential availability under both the Revolver and the Term Loan of $300.0 million, which is an additional
$100.0 million over the former line of credit facility. In addition, the Revolver includes an accordion feature that will allow
the total potential availability under the New Facility to further increase to $400.0 million, under certain conditions. The $225.0
million Revolver matures in January 2024 with two options to extend for additional six-month periods. Availability under the New
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, wholly-owned industrial properties. Under the New
Facility, the capitalization rate applied to our NOI generated by our unencumbered, wholly-owned industrial properties was lowered
from 6.5% under the former line of credit facility to 6.25%, thus increasing the value of the borrowing base properties under
the terms of the New Facility. In addition, the interest rate for borrowings under the Revolver was lowered by a range of 5 basis
points to 35 basis points, depending on our leverage ratio, and will, at our election, either i) bear interest at LIBOR plus 135
basis points to 205 basis points, depending on our leverage ratio, or ii) bear interest at Bank of Montreal’s (BMO) prime
lending rate plus 35 basis points to 105 basis points, depending on our leverage ratio. Currently, our borrowings bear interest
under the Revolver at LIBOR plus 145 basis points, which results in an interest rate of 1.60%. As of the quarter end and currently,
we do not have any amount drawn down under our Revolver, resulting in the full $225.0 million being currently available. The $75.0
million Term Loan matures January 2025. The interest rate for borrowings under the Term Loan will at our election, either i) bear
interest at LIBOR plus 130 basis points to 200 basis points, depending on our leverage ratio, or ii) bear interest at BMO’s
prime lending rate plus 30 basis points to 100 basis points, depending on our leverage ratio. To reduce floating interest rate
exposure under the Term Loan, we also entered into an interest rate swap agreement to fix LIBOR on the entire $75.0 million for
the full duration of the Term Loan resulting in an all-in rate of 2.92%.
As
of December 31, 2020, we owned 121 properties, of which 64 carried mortgage loans with outstanding principal balances totaling
$896.4 million. The 57 unencumbered properties could be refinanced to raise additional funds, although covenants in our New Facility
limit the amount of unencumbered properties that can be mortgaged. As of December 31, 2020, Loans Payable represented $75.0 million
outstanding under our Term Loan.
As
of December 31, 2020, we had total assets of $2.1 billion and liabilities of $996.2 million. Our net debt (net of unamortized
debt issuance costs and net of cash and cash equivalents) to total market capitalization as of December 31, 2020 was approximately
29% and our net debt, less marketable securities (net of unamortized debt issuance costs, net of cash and cash equivalents and
net of marketable securities) to total market capitalization as of December 31, 2020 was approximately 25%. Our debt consists
of 92% amortizing fixed rate debt with a weighted average interest rate of 3.88% and a weighted average loan maturity of 11.5
years. We believe that we have the ability to meet our obligations and to generate funds for new investments.
On
February 6, 2020, we entered into a Common Stock ATM Program with BMO Capital Markets Corp., B. Riley FBR, Inc., D.A. Davidson
& Co., Janney Montgomery Scott LLC, J.P. Morgan Securities LLC and RBC Capital Markets, LLC (together the “Distribution
Agents”) under which we may offer and sell shares of our common stock, $0.01 par value per share, having an aggregate sales
price of up to $150.0 million from time to time through the Distribution Agents. Sales of the shares of Common Stock under the
Agreement, if any, will be 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 implemented the Common Stock ATM program for the flexibility that it provides to opportunistically
access the capital markets and to best time our equity capital needs as we close on acquisitions. To date, we have elected to
not raise any equity though our Common Stock Equity Program.
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 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 that provides for the
offer and sale from time to time of $125.0 million of our 6.125% Series C Preferred Stock, representing an additional $96.5 million,
with $28.5 million being carried over from the Preferred Stock At-The-Market Sales Agreement Program entered into on June 29,
2017.
On
December 4, 2019, we replaced the Preferred Stock At-The-Market Sales Agreement Program entered into on August 2, 2018 with another
Preferred Stock At-The-Market Sales Agreement Program that provides for the offer and sale from time to time of $125.0 million
of our 6.125% Series C Preferred Stock, representing an additional $101.0 million, with $24.0 million being carried over from
the Preferred Stock At-The-Market Sales Agreement Program entered into on August 2, 2018.
On
November 25, 2020, we replaced the Preferred Stock At-The-Market Sales Agreement Program entered into on December 4, 2019 with
another 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 up to $150.0 million of our 6.125% Series C Preferred Stock, representing an additional $149.3 million,
with $747,000 being carried over from the Preferred Stock At-The-Market Sales Agreement Program entered into on December 4, 2019.
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 December 31, 2020, we sold 13.6 million shares of our 6.125% Series C Preferred
Stock under these programs at a weighted average price of $24.91 per share, and generated net proceeds, after offering expenses,
of $332.4 million, of which 3.1 million shares were sold during the three months ended December 31, 2020 at a weighted average
price of $24.88 per share, generating net proceeds after offering expenses of $76.0 million. As of December 31, 2020, there is
$108.3 million remaining that may be sold under the Preferred Stock ATM Program.
As
of December 31, 2020, 22.0 million shares of the 6.125% Series C Preferred Stock were issued and outstanding.
We
raised $1.3 million (including dividend reinvestments of $1.0 million) from the issuance of 82,000 shares of common stock under
our DRIP during the three months ended December 31, 2020. Of this amount, UMH Properties, Inc. (UMH), a related REIT, made total
purchases of 13,000 common shares under our DRIP for a total cost of $205,000, or a weighted average cost of $15.68 per share.
During
the three months ended December 31, 2020, we paid $16.7 million in total cash dividends, or $0.17 per share to common shareholders,
of which $1.0 million was reinvested in the DRIP, representing a 6% participation rate.
On
January 14, 2021, our Board of Directors declared a dividend of $0.18 per share to be paid March 15, 2021 to common shareholders
of record as of the close of business on February 16, 2021. This represents a 5.9% increase in our quarterly common stock dividend,
raising it to $0.18 per share from $0.17 per share and represents an annualized dividend rate of $0.72 per share. This increase
is the third dividend increase in the past five years, representing a total increase of 20%. We have maintained or increased our
common stock cash dividend for 30 consecutive years. We are one of the few REITs that maintained our dividend throughout the Global
Financial Crisis. We are also one of the few REITs that is paying out a higher per share dividend today than prior to the Global
Financial Crisis.
During
the three months ended December 31, 2020, we paid $7.8 million in Preferred Dividends, or $0.3828125 per share, on our outstanding
6.125% Series C Preferred Stock for the period September 1, 2020 through November 30, 2020. As of December 31, 2020, we have accrued
Preferred Dividends of $2.8 million covering the period December 1, 2020 to December 31, 2020. Dividends on the 6.125% Series
C Preferred Stock are cumulative and payable quarterly at an annual rate of $1.53125 per share. On January 14, 2021, our Board
of Directors declared a dividend of $0.3828125 per share to be paid March 15, 2021 to the 6.125% Series C Preferred shareholders
of record as of the close of business on February 16, 2021.
We
use a variety of sources to fund our cash needs in addition to cash generated from operations. We may sell marketable securities
from our investment portfolio, borrow on our unsecured line of credit facility or securities margin loans, finance or refinance
debt, or raise capital through the DRIP, the Preferred Stock ATM Program, the Common Stock ATM Program or capital markets.
We
have been raising capital through our DRIP, the Preferred Stock ATM Program, mortgage loans, draws on our unsecured line of credit,
sale of marketable securities and funds generated from our investments in net-leased industrial properties. We may raise capital
through registered direct placements, public offerings of common and preferred stock and through our Common Stock ATM Program.
We believe that funds generated from operations, from the DRIP, from the Preferred Stock ATM Program, as well as our ability to
raise funds from our Common Stock ATM Program, and our ability to finance and refinance our properties, and our availability under
our unsecured line of credit, will provide sufficient funds to adequately meet our obligations over the next year.
On
January 14, 2021, our Board of Directors unanimously decided to explore strategic alternatives to maximize shareholder value.
Although our Board of Directors has determined to explore strategic transactions, we are not obligated to pursue any particular
transaction or any transaction at all. Even if our Board of Directors decides to pursue a particular strategy, there is no assurance
that we will successfully implement its strategy. Our Board does not intend to disclose further developments unless and until
it approves a specific action or otherwise concludes the review of strategic alternatives. In light of its consideration of strategic
alternatives, our Board of Directors determined to suspend the Company’s DRIP on January 14, 2021 until further notice.
We
have a concentration of properties leased to FedEx Corporation (FDX) and FDX subsidiaries, consisting of 63 separate stand-alone
leases covering 11.2 million square feet as of December 31, 2020 and 60 separate stand-alone leases covering 10.4 million square
feet as of December 31, 2019. In periods of unprecedented turbulence, the services of FedEx are essential in keeping supply chains
moving and in delivering critically needed supplies throughout the world. As of December 31, 2020, the 63 separate stand-alone
leases that are leased to FDX and FDX subsidiaries are located in 26 different states and have a weighted average lease maturity
of 8.0 years. The percentage of FDX and its subsidiaries leased square footage to the total of our rental space was 46% (5% to
FDX and 41% to FDX subsidiaries) as of December 31, 2020 and 45% (5% to FDX and 40% to FDX subsidiaries) as of December 31, 2019.
As
of December 31, 2020, the only tenants, other than FDX and its subsidiaries, that leased 5% or more of our total square footage
were subsidiaries of Amazon.com, Inc (Amazon), which consists of five separate stand-alone leases for properties located in four
different states, containing 1.5 million total square feet, comprising 6% of our total leasable square feet. None of our properties
are subject to a master lease or any cross-collateralization agreements. As of December 31, 2020, 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 55% (5% to FDX and 50% to FDX
subsidiaries) of total Rental and Reimbursement Revenue for fiscal 2021, and was 58% (5% to FDX and 53% to FDX subsidiaries) of
total Rental and Reimbursement Revenue for fiscal 2020. The only tenants, other than FDX and its subsidiaries, that we estimate
will comprise 5% or more of our total Rental and Reimbursement Revenue for fiscal 2021 are subsidiaries of Amazon, which is estimated
to be 7% of our Annualized Rental and Reimbursement Revenue for fiscal 2021 and was 6% for of our Annualized Rental and Reimbursement
Revenue for fiscal 2020. For the three months ended December 31, 2020, no other tenant accounted for 5% or more of our total Rental
and Reimbursement Revenue.
FDX
and Amazon are publicly-listed companies and financial information related to these entities are available at the SEC’s
website, www.sec.gov. FDX and Amazon are rated “BBB” and “AA-”, respectively by S&P Global
Ratings (www.standardandpoors.com) and are rated “Baa2” and “A2”, respectively by Moody’s
(www.moodys.com), which are both considered “Investment Grade” ratings.
During
the quarter ended December 31, 2020, we completed a parking expansion project for FedEx Ground Package System, Inc. at our property
located in Olathe (Kansas City), KS for a total project cost of $3.4 million. The expansion resulted in a $340,000 increase in
annualized rent effective November 5, 2020 increasing the annualized rent from $2.2 million to $2.6 million. We anticipate
additional expansion work at this location which will further increase the rental rate and extend the lease term.
We
have entered into agreements to purchase four new build-to-suit, industrial buildings that are currently being developed in Alabama
(2), Tennessee and Vermont. These four future acquisitions total 1.2 million square feet, with net-leased terms ranging from 10
to 15 years, and with a weighted average lease term of 12.8 years. The aggregate purchase price for these four properties is $169.3
million. Three of these four properties, consisting of approximately 694,000 square feet, or 57%, are leased for 15 years to FedEx
Ground Package System, Inc., with the remaining property, consisting of approximately 530,000 square feet or 43%, leased for 10
years to Mercedes Benz US International, Inc. All 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).
Subject to satisfactory due diligence and other customary closing conditions and requirements, we anticipate closing three
of these transactions during fiscal 2021 and one in the first half of fiscal 2022. In connection with one of the four properties,
we have entered into a commitment to obtain a 15 year, fully-amortizing mortgage loan totaling $35.5 million with a fixed interest
rate of 2.62%.
We
have several FedEx Ground parking expansion projects in progress with more under discussion. Currently there are six parking expansion
projects underway and one parking expansion project recently completed during the quarter. These six projects are expected to
cost approximately $16.8 million. These parking expansion projects will enable us to increase rental rates while lengthening the
terms of these leases. We are also in discussions to expand the parking at 11 additional locations bringing the total recently
completed and potential parking lot expansion projects to 18 currently.
We
intend to acquire additional net-leased industrial properties on long-term leases, primarily to investment grade tenants or their
subsidiaries, and, when needed, expand our current properties. The funds may come from free cash flow from operations, mortgage
loans, draws on our unsecured line of credit, cash on hand, sale of marketable securities, other bank borrowings, proceeds from
the DRIP, proceeds from the Preferred Stock ATM Program, proceeds from the Common Stock ATM program, private placements and public
offerings of common or preferred stock or other securities. To the extent that funds or appropriate properties are not available,
fewer acquisitions will be made.
Off-Balance
Sheet Arrangements
We
do not have any material off-balance sheet arrangements.
Funds
From Operations and Adjusted Funds From Operations
We
assess and measure our overall operating results based upon an industry performance measure referred to as Funds From Operations
(FFO), which we believe is a useful indicator of our operating performance. FFO is used by industry analysts and investors as
a supplemental operating performance measure of a REIT. FFO, as defined by the National Association of Real Estate Investment
Trusts (Nareit), represents net income attributable to common shareholders, as defined by accounting principles generally accepted
in the United States of America (U.S. GAAP), excluding extraordinary items, as defined under U.S. GAAP, gains or losses from sales
of previously depreciated real estate assets, impairment charges related to depreciable real estate assets, plus certain non-cash
items such as real estate asset depreciation and amortization. Included in the Nareit FFO White Paper - 2018 Restatement, is an
option pertaining to assets incidental to our main business in the calculation of Nareit FFO to make an election to include or
exclude mark-to-market changes in the value recognized on these marketable equity securities. In conjunction with the adoption
of the FFO White Paper - 2018 Restatement, for all periods presented, we have elected to exclude unrealized gains and losses from
our investments in marketable equity securities from our FFO calculation. Nareit created FFO as a non-GAAP supplemental measure
of REIT operating performance. We define Adjusted Funds From Operations (AFFO) as FFO, excluding stock based compensation expense,
depreciation of corporate office tenant improvements, amortization of deferred financing costs, lease termination income, non-recurring
severance expense, effect of non-cash U.S. GAAP straight-line rent adjustments and subtracting recurring capital expenditures.
We define recurring capital expenditures as all capital expenditures that are recurring in nature, excluding capital expenditures
related to expansions at our current locations or capital expenditures that are incurred in conjunction with obtaining a new lease
or a lease renewal. We believe that, as widely recognized measures of performance used by other REITs, FFO and AFFO may be considered
by investors as supplemental measures to compare our operating performance to those of other REITs. FFO and AFFO exclude historical
cost depreciation as an expense and may facilitate the comparison of REITs which have a different cost basis. However, other REITs
may use different methodologies to calculate FFO and AFFO and, accordingly, our FFO and AFFO may not be comparable to all other
REITs. The items excluded from FFO and AFFO are significant components in understanding our financial performance.
FFO
and AFFO are non-GAAP performance measures and (i) do not represent Cash Flow from Operations as defined by U.S. GAAP; (ii) should
not be considered as an alternative to Net Income or Net Income Attributable to Common Shareholders as a measure of operating
performance or to Cash Flows from Operating, Investing and Financing Activities; and (iii) are not an alternative to Cash Flows
from Operating, Investing and Financing Activities as a measure of liquidity. FFO and AFFO, as calculated by us, may not be comparable
to similarly titled measures reported by other REITs.
The
following is a reconciliation of our U.S. GAAP Net Income Attributable to Common Shareholders to our FFO and AFFO for the three
months ended December 31, 2020 and 2019 (in thousands):
|
|
Three Months Ended
|
|
|
|
|
12/31/2020
|
|
|
|
12/31/2019
|
|
Net Income Attributable to Common Shareholders
|
|
$
|
25,746
|
|
|
$
|
3,528
|
|
Less/Plus: Unrealized Holding (Gains) Losses Arising During the Periods
|
|
|
(19,721
|
)
|
|
|
3,635
|
|
Plus: Depreciation Expense (excluding Corporate Office
Capitalized Costs)
|
|
|
12,020
|
|
|
|
11,380
|
|
Plus: Amortization of Intangible Assets
|
|
|
532
|
|
|
|
508
|
|
Plus: Amortization of Capitalized Lease Costs
|
|
|
303
|
|
|
|
271
|
|
FFO Attributable to Common Shareholders
|
|
|
18,880
|
|
|
|
19,322
|
|
Plus: Depreciation of Corporate Office Capitalized Costs
|
|
|
57
|
|
|
|
53
|
|
Plus: Stock Compensation Expense
|
|
|
57
|
|
|
|
156
|
|
Plus: Amortization of Financing Costs
|
|
|
331
|
|
|
|
435
|
|
Plus: Non-recurring Severance Expense
|
|
|
-0-
|
|
|
|
786
|
|
Less: Lease Termination Income
|
|
|
(377
|
)
|
|
|
-0-
|
|
Less: Recurring Capital Expenditures
|
|
|
(160
|
)
|
|
|
(218
|
)
|
Less: Effect of Non-cash U.S. GAAP Straight-line Rent
Adjustment
|
|
|
(618
|
)
|
|
|
(600
|
)
|
AFFO Attributable to Common Shareholders
|
|
$
|
18,170
|
|
|
$
|
19,934
|
|
The
following are the Cash Flows provided (used) by Operating, Investing and Financing Activities for the three months ended December
31, 2020 and 2019 (in thousands):
|
|
Three Months Ended
|
|
|
|
|
12/31/2020
|
|
|
|
12/31/2019
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$
|
29,692
|
|
|
$
|
18,872
|
|
Investing Activities
|
|
|
(166,774
|
)
|
|
|
(81,741
|
)
|
Financing Activities
|
|
|
142,845
|
|
|
|
59,073
|
|