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Monmouth Real Estate Investment Corporation, founded in 1968, is one of the oldest public equity REITs in the world. The Company specializes in single tenant, net-leased industrial properties, subject to long-term leases, primarily to investment-grade tenants. Monmouth Real Estate is a fully integrated and self-managed real estate company, whose property portfolio consists of 113 properties containing a total of approximately 21.8 million rentable square feet, geographically diversified across 30 states. In addition, the Company owns a portfolio of REIT securities.
Monmouth Real Estate Investment Corporation
Juniper Business Plaza
3499 Route 9 North, Suite 3-D
Freehold, NJ 07728
Investor Relations Contact
Susan M. Jordan
Paul: Thanks. Good morning. My name is Paul Adornato. I'm an analyst with BMO Capital Markets in New York. We're very pleased to have the management of Monmouth Real Estate with us today. I'm going to hand the floor over to Michael Landy, the President and CEO, who will introduce the rest of management. We’re going to follow the same format as usual that is after a few prepared remarks we will open the floor to your questions. With that, I’ll turn it over to Mike.
Michael: Thanks Paul. To my left is Eugene Landy, Chairman and Founder of Monmouth Real Estate. He founded the company in 1968. To my right is Kevin Miller, our Chief Financial Officer. It’s good to see so many people here at NAREIT. One of the secrets to successful investing lies in being able to see what the world is going to look like years into the future. I remember being in this room many years ago talking about eCommerce. We were one of the only REITS if not the only REIT mentioning eCommerce. The room was not as crowded as it is today but I assume at REITWeek this year eCommerce will be a key subject for pretty much every company presenting. Because we were ahead of the curve and prescient in embracing consumer spending migrating from traditional brick and mortar to online retail sales, we were able to really generate a very profitable, strong omni-channel capable portfolio. Today, we have 7% of the FedEx Ground buildings in America. A lot of retailers are investing in becoming e-tailers. FedEx is a very strong company in guiding companies to become e-tailers. We have Walmart putting up 2 million square feet next to one of our FedEx buildings in Florida.
By virtue of having this vast FedEx ground network in the US, we have excellent locations that have become a magnet for other people to set up shop. Another aspect about Monmouth that maybe goes underappreciated is while we’re small we generate more investment grade revenue than any REIT, not just industrial, any property type. Eighty-five percent of our revenue is secured by investment grade tenants. In addition to FedEx we have GE, Coca-Cola, Anheuser-Busch, Jim Beam, Siemens, Caterpillar, Kellogg’s. Today you get the best of both worlds. You get a yield that’s much higher than the average REIT yield about 150, 175 basis points higher than the average REIT yield and you get low risk. I think the safety of our income streams, the high quality of our cash flow is evidenced by the fact we have the highest occupancy rate in the industrial sector. We are 99.6% occupied, so virtually fully occupied. We’re in our second consecutive year of 100% tenant retention. All of our leases have renewed this year at increased rent of 5.3%. When you have strong tenants like we have and mission critical facilities, buildings in which our tenants have made multimillion dollar investments, you tend to have very stickiness in your cash flow.
The tenants tend to stay there forever. Coca-Cola just renewed for 10 years and it results for the investor in very predictable, reliable returns. I think in addition to the forward looking nature of embracing eCommerce, we’ve positioned our portfolio from a location standpoint to benefit from two things. One, companies are migrating out of hostile environments into more business friendly climates. Just yesterday I saw an article in the paper about railroads that are trying to access the Western Port. They thought they had regulatory approval only to find out they’re in an environmental purgatory. We have no assets in California. No desire to have any assets in California. We’re in business friendly states. We’ve strategically positioned our portfolio to benefit from the Panama Canal expansion. The expansion is not even up and running. It comes online in June. There’s a lot of infrastructure build out that’s going to take years before the canal is actually benefiting all of the Gulf ports and Eastern seaports. Already for the last 5 years you’re seeing shipping container growth on the East Coast outpace the West Coast. Some people say it’s years away but it’s not even online and it’s already happening.
The East Coast ports are just benefiting because it’s a more business friendly environment and the canal is going to take away a lot of the leverage as far as longshoremen disruptions every Christmas holding up the supply chain and we just can’t have that. Goods need to be on the shelf in time. Goods need to be delivered via FedEx to your doorstep in time for the holiday season and this bottleneck in the West Coast ports is something that we’re positioned to benefit as ... You know, we’re long-term thinkers. It’s not going to happen in the immediate future but it’s already happening, and just like eCommerce, there’s no denying the growth in eCommerce, andwe’re in the early stages of that as well. The business model. We have about $500 million in debt. We’re about $1.4 billion in total market cap. Most of our debt is fixed rate, secured mortgages, weighted average interest rate of 4.6%, weighted average maturity of 9.3 years. We match our liabilities with our assets. Our lease maturities go out over 7 years. We have a lot of expansions that are coming online so actually that 7 year weighted average lease maturity is actually longer once those expansions are complete those leases will leap frog 10 to 12 years out into the future.
When people report their lease maturities, usually that’s like the best hope target they’re shooting for. With us, it’s a given and it’s actually in excess of that once the expansions are complete, the leases are signed, they just don’t commence until the expansions finish. We have some big expansions, Milwaukee Tool, is a quarter million square foot expansion. That will be done in the next month or 2 and that lease will go out 12 years in addition to where it is now. FedEx, we have been expanding buildings for FedEx for quite some time. We have 3 going on right now. As far as the growth, we’re now in our third consecutive year of double digits AFFO per diluted share growth. Four consecutive quarters of over 20% AFFO per diluted share growth. The growth of the company has definitely resulted in per share earnings accretion. We have one of the best dividend track records here of any REIT. One of the few REITS paying a higher dividend today than we paid prior to the global financial crisis. Our dividend was safe throughout the stress test of the great recession and on October 1st we raised our dividends 6.7%. We’re paying 64 cents a share. LikeI said, one of the few REITS that can boast that we’re paying out a higher dividend today than ever before.
Our pipeline for acquisitions consists of about 2.6 million square feet, about $260 million dollars in new class A build to suit industrial buildings currently under construction. All leased long-term to investment grade tenants. The pipeline has a weighted average lease maturity of 13.6 years. The expansions are another $20 million so that’s $280 million in growth capacity coming our way which will result in more double digit earnings per share accretion. We trade at about 17 times current earnings. We yield a premium to the other REITS. A lot of REITS are trading over 20 times. Even given our out performance and we’ve outperformed the REIT index over the short-term, over the midterm, over the long-term, we’re still relatively cheap to our peer group. With that, I’ll just turn it over to Gene or Kevin and then we’ll be happy to take your questions.
Gene: I am simply amazed to be here at NAREIT. Forty some years ago we were in Palm Beach with NAREIT. I think there were 10 equity REITS. The biggest REIT was Hubbard REIT of $100 million and the whole program was 3, 4, $500 million. The growth of the REIT industry is a marvel. The REIT industry does things for the economy, wonderful things. We build apartments because there is a shortage in housing. The apartment REITS are building 200,000 units a year. Monmouth REIT as we swing from internet ... From conventional shopping to buying on the internet – it’s a very smooth transition. If FedEx is going to build several billion dollars worth of buildings, the REITS are going to help them do it and we are doing that. We’re providing the industrial space. Things run smoothly and people don’t notice when things run smoothly. The REIT industry is just a wonderful industry to be in. I know of no other industry where you can’t get 1% on your savings that REITS are yielding 3, 4, 5, 6 and in some cases 7, 8% returns. I pride myself on being a spokesman for the REIT industry and what a wonderful place to invest. Monmouth REIT according to Key Banc over the last 20 years, we’ve done 900%.
We’re very proud of that but that only makes us number 25 on the REIT list. The top REITS have done 1,000, 2,000%. It’s a great industry to invest in and I want to welcome everyone here. We have a great website. We have a great annual report. It’s a marvelous company and I’m always glad to answer the questions that any of you have. With that, I turn it over to Kevin. See if he has any opening remarks. Thank you.
Kevin: Thanks Gene. The only thing I’d like to add is that as Mike and Gene pointed out, that’s just the high quality of our assets. If you have a chance, if you could get an annual report and the handout that we have here, we have a lot of pictures of our assets. You can just see what type of high quality assets that we have because we show the pictures, and we show these Class A eCommerce distribution centers that really just show not only that we have investment grade revenue, but show the quality of the assets that are generating that revenue. I just wanted to point that out. There’s not much more to add. I think Mike had covered everything. If anybody has any questions ...
Mike: Let me just add to what Kevin just said. We have the youngest portfolio, I don’t know if I mentioned that but, in industrial building age is more critical than ever before. The average, weighted average age of our building is 10 years. Modern industrial buildings have to be omni-channel capable. They have to be able to distribute not just pallets B to B, but individual small packages delivered to your doorstep. It requires a much bigger building. It requires a lot of parking for the peak season for temporary labor to handle the Christmas season. It requires high building clear. It requires a lot of power and computer IT equipment. The tenants make huge investments. Ulta Cosmetics has a fulfillment center in Indianapolis that ships out of our FedEx facility at the airport. We own the Ulta eCommerce fulfillment center. They invested over $50 million in that building. It’s a much different building than the 30 year old buildings. I’m glad you brought that up Kevin.
Paul: Agreed. Thanks so much. Are there any questions ... Yeah. We have a question.
Nathan: My name is Nathan Isikoff. I’ve been an industrial real estate for about half a century. I have always been very impressed with Monmouth. I’m frustrated in the sense that you guys and Stag and a few others have not been able to get the recognition you deserve and you’re trading, as has already been pointed out, in some cases far from your peers. Some of whom don’t hold the candle to you. What are you trying to do to get the respect and to get the yield that you trade on, similar to some of the others?
Mike: Over the years that lack of appreciation has dissipated. We’re trading at a historic high today. Albeit, still a discount so your point’s well made. What we’re doing every time we put out our quarterly results which are record numbers, full occupancy, we go out on the road. We do non-deal roadshows. There’s a gentlemen here from the Boston Company. We were just in Boston a week ago presenting. We go out. We tell our story because it’s a great story. Other than that, all we could do is keep buying 1 high quality asset at a time. Keep our buildings leased. Keep our tenants happy. It’s a marathon. It’s not a sprint. Some investors have been with us for 3 generations. There’s a lot of short-termism out there. People coming in and out of the market on a daily basis. Don’t even know what they’re buying. Don’t even know what they’re selling. We ignore that and just do what we do and try to find the right mix of shareholders who embrace our model, embrace our philosophy and appreciate what we do because some of the big buyers out there are computers today. There’s nothing we could do to let them know what our philosophy is, who we are and where we’re going.
Gene: Well I just want to add to that. It is an unusual situation that real estate today for people like the person with the question. They see what real estate is worth. They see what industrial properties sell for. Then they look at what the REITS that are in the industrial markets sell for and it doesn’t make any sense. Real estate is much cheaper today on Wall Street than it is on Main Street. Cap rates are different than ... The REITS are just a better buy. On top of that, we have the situation where you have negative interest rates in foreign countries. You’d be very surprised if the interest rate was 7% in Pennsylvania and 3% in New York. It’s like this doesn’t make any sense. Well, we have negative interest rates overseas and you have the ability to buy REITS yielding 3, 4, 5, 6, 7 and 8% in the United States. Obviously capital is going to flow into the United States and that capital will find investments in US REITS. I say somewhat in jest when they show up in Freehold, NJ, the foreign investors, you know that capital is seeking a higher return and that process takes time but it’s beginning to happen.
Speaker 1: Good morning. How are you?
Speaker 1: Good morning. Just quickly, you talked about the stickiness of your tenants. Could you quantify let’s say on a $10 million acquisition capital expenditure what the average investment is into that property by the 10 years that’s keep them there for so long?
Paul: I’m just going to repeat the question for the benefit of the Webcast. That is on the $10 million acquisition coming up, can you describe the capital expenditure that the tenant is putting up that’s keeping them at that location?
Mike: Sure Paul. It’s been a long time since we did a $10 million acquisition. The acquisitions today are much bigger, averaging $30 million. It varies. Jim Beam’s 600,000 square foot facility does not have a tremendous amount of high tech in the building. However, the product is growing and the building’s expandable. We think they’ll be there a long time because they’ve been there for 220 years on the Bourbon trail of Kentucky but other buildings like we recently purchased GE’s global research center for additive manufacturing and that’s 3D printing. Jeff Immelt was there for the grand opening. We purchased that facility for $20 million and GE’s put well over $50 million into the building. FedEx tends to make multimillion dollar investments in the conveyor, material and handling in the facilities. Human beings only touch the package taking it off the truck and putting it back on the truck. It’s all automated internally. The investments are multimillion dollar investments and that’s only going to continue and increase in the future. It’s very important to have modern, state of the art industrial facilities.
Gene: Today’s my day for adding things. There’s an amazing change going on. We, as the owner of the property, are not requesting longer leases. The tenants are requesting longer leases. I marvel at that because it really makes a better investment. If you have a net leased industrial on a long-term lease to an investment grade tenant and one lease is 10 years and now they’re asking for 15 year leases, that’s a pretty good deal. I think Apple today is selling long-term bonds at 4, 5% and we’re getting higher returns on 15 year terms. That’s a very positive development for Monmouth REIT.
Paul: I guess a follow-up. Yes.
Speaker 1: Just quickly. On the 5.3% renewal rate that you spoke to, what percentage of the portfolio was renewed this year? What’s the number on an average escalator for a 10 year lease?
Paul: What’s the average escalator on renewed leases?
Mike: Our weighted average debt maturity is 9.3 years. You got a little over 10% of the debt coming due every year. Our weighted average lease maturity is about 7.3 years so you’re talking about 13, 12 times ... Twelve percent of the leases roll every year. A hundred percent renewed last year. A hundred percent renewed the prior year. The increase in rent was 5.3%. Now, I gave you the averages. The exact number of what rolled this year was 8%. Eight percent of our gross leasable area all renewed at 5.3% increase. Now, the part of your question on for instance, the average escalation on renewals, the Coca-Cola renewals, Rich Molke our Vice-President of Asset Management is here. Do you know that number? I would venture to say 2%. Two percent’s an average.
Speaker 1: Does with the longer weighted lease term decision is there any desire for you to do a little bit shorter term renewal? [inaudible 00:21:02]
Mike: Yeah. We think about that balance this way. We have an all-star tenant roster. The strength of Monmouth is the quality of our cash flow. If we could lock in a lease perpetually, we would do it. Yes, you forego a hotel type model of no lease at all and get to capture inflationary increases overnight. We’re the other end of the spectrum. We have the strongest tenants. We want to keep them in our buildings. Don’t forget these are net leases so we’re protected from inflationary forces. The tenant bears the cost of increased taxes, increased insurance and increased operating expenses so we have very predictable results. Just look at the great recession. Our occupancy was strong throughout, our earnings were strong throughout and our dividend was maintained throughout precisely because we have long-term leases to investment grade tenants.
Paul: Yes, I see another question.
Speaker 2: Since your business has been so strong, why has it taken you 9 years or so to get a dividend increase? That's the low hanging fruit that you use out of your 99% occupancy rate?
Paul: Sure. The question is if the business has been so strong, why haven’t you increased the dividend more?
Mike: It’s a good question and the answer is simple. Our earnings on a recurring basis were at a deficit to our dividend. We grew our earnings first to grow into our existing dividend. We had a lot of nonrecurring gains that earned in excess of the dividend such as gains on the sale of securities but AFFO was about 120% payout of our dividend. We now have a 90% payout ratio and yes, that certainly bodes well for future dividend increases because when you’re working your way up that slope to have free cash flow above and beyond the dividend and you don’t, you have a short fall, it’s a head wind. Now, we have free cash flow above and beyond our dividend requirement. We’re paying out 90% of our AFFO. We have cash to grow the company. I don’t think it will be another 10 years. Having said that, all the REITS that have grown their dividend several times of late are still not where they were in 2007. If you’re a long-term investor, you actually did better without the dividend increase but without the dividend cuts owning Monmouth shares than with a volatile dividend payout.
Speaker 2: Is 90% your target payout ratio?
Mike: Well, you know, we want to get an investment grade rating and the target there is going to be even a little lower. I would think 85% will be a good target payout ratio. You’re welcome.
Speaker 2: [inaudible 00:24:06]
Paul: Sure. The question is do the rating agencies consider dividend reinvestment as part of their process?
Speaker 2: As a positive.
Paul: As a positive as a source of capital.
Mike: As a long-term REIT, they love the fact that we’ve been a public company since 1968. If you look at our dividend reinvestment plan, we’ve had 20 to 25% participation for decades. They do look at that very favorably. It’s not like we went public yesterday and they can’t model what the subscription rate’s going to be for our DRIP.
Paul: Another question? Yes sir.
Speaker 3: Are your securities in adding significant portfolio over the years? [inaudible 00:25:05]
Paul: I’ll just repeat the question. The question’s regarding the securities portfolio that the company has on the balance sheet. What’s the future of that portfolio?
Mike: Yeah. We invest in real estate on Main Street and Wall Street. Our core business 90-95% of our balance sheet is single tenant, net leased industrial properties on long-term leases to investment grade tenants. Having said that, we keep a watchful eye for discrepancies in valuation on Wall Street and the parameters are 5 to 10% of our balance sheets. No more than 10%. No less than 5 generally speaking. Right now it’s about 6% of our assets are in liquid real estate so we have room to grow it. We grew our portfolio in August of last year up until February because REITS were really selling off. There’s a lot of short-term money that flowed into REITS. Fixed income money that was just there and the second they got a whiff of fed tightening, REITS sold off dramatically and we were able to buy some REITS yielding 10 to 13%. We now have ... Our fiscal year began October 1st. At September 30th we had $5.4 million in unrealized losses on our securities investments. Today we have about $6 million in unrealized gains. You’re talking about over an $11 million swing just because real estate was at ridiculous prices on Wall Street and we were able to act quickly
A lot of managers were talking about REITS trading at huge discounts to NAV but the window shut so fast they weren’t able to take advantage of it. Because we watch and invest in the liquid market, we took advantage of it and we have tremendous gains to show for that today. We’ve done this, I should just say, we’ve done this since the 90s. This is a core part of our business and we’ve generated tremendous returns in doing so. It’s going to continue to be part of our investment strategy. Go ahead Gene.
Gene: REITS investing in REITS is our unique concept. It is based on NAREIT’s 20, 30 year study that shows that if you want to own your own real estate, go ahead and own it, administer it, run it or conversely you can buy REIT securities so you can invest in REITS. And over 20, 30 years you’ll come out about the same so that’s just simply the amazing result that you can invest in someone else’s securities and do just as well as managing it yourself. A lot of people don’t accept the concept but it has worked for us for a long period of time and it continues to work. Of course I have a smile on my face today. We’re having a great day today in the market. The REITS we’ve invested in have done very, very well. It’s part of our portfolio. As Michael pointed out, it’s only 10% of our assets but it’s really the icing on the cake and we make a lot of money doing it. We are in 16, 17, 18% a year on capital. No one can say that’s not a significant return. We’re very proud of REITS investing in REITS. Our portfolio’s disclosed in our reports so you can see the stocks we’re investing in. Here again I come here to NAREIT and I say hello to the presidents of the companies that I invest in. I know them personally.
I think that’s an amazing advantage for us as investors that we know the people, chat with them and see what they are doing. It’s educational for us because we watch how other REITS are operated and sometimes we get ideas on how to operate our own REIT. We’re very proud of REITS investing REITS. We don’t intend to cut it back. We intend to keep it. It’s just been a wonderful thing for us to have.
Kevin: I just wanted to add one more thing about the REIT securities portfolio. The fact that we keep 5 to 10% of our assets in liquid real estate, it also gives us tremendous liquidity where we could either sell those marketable securities because they’re liquid or we could ... If we don’t feel it’s the right time to sell, we could borrow generally 50% margin at 2%. It’s been like that for many years. That gives us tremendous power when we need to raise equity quickly maybe for an expansion or something of that nature.
Paul: Great. We just have a few seconds left. We have just 1 more question.
Speaker 4: What if any consequences does rising rates have on Monmouth?
Paul: Question is rising rates, what’s the impact?
Mike: With rising rates you’re assuming a growing economy. We have long-term leases. We’ve locked in on our pipeline $260 million in acquisitions. We’ve locked in financing for most of those deals. I think 7 out of the 9 deals have over $150 million in financing locked in at under 4%. Rising rates will not impact the ability to generate the spreads on our acquisitions. Those favorable yield spreads are locked in. Rising rates are usually offset with a growing economy and rising rents. Inflation is good for real estate, it increases land values and replacement costs and so REITS are a great vehicle in a rising rate environment.
Kevin: I just wanted to add one other thing to that. Also as Mike pointed out earlier, about 80% of our debt is secured. A rising interest rate wouldn’t affect that. Our loans tend to be amortizing loans. Most of them are self-amortizing loans. Some of them have a small balloon payment. In case you’re wondering when those loans come due and they have to be refinanced and if the rates are higher at that point, that really wouldn’t affect us if we self-amortize the loans out.
Paul: Great. Well, thank you so much. We really appreciate management’s time and your time as well. Thank you.