Q3 2020 Monmouth Real Estate Investment Corp Earnings Call
Good morning, and welcome to the Monmouth Real estate investment Corporation's third quarter 2020, <unk> earnings Conference call.
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Now my pleasure to introduce your host Ms., Becky Coleridge, Vice President Investor Relations. Thank you Ms. Colorants you may begin.
Thank you very much operator in addition to the 10-Q that we filed with the FCC yesterday, we have filed an unaudited quarterly supplemental information presentation.
Supplemental information presentation, along with the 10-Q are available on the company's website at an art I see got me.
I'd remind everyone that certain statements made during this conference call, which are not historical facts may be deemed forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Such forward looking statements that we make on this call are based on our current expectation and involve various risks and uncertainties.
Although the company believes the expectations reflected in any forward looking statements.
Based on reasonable assumptions the company can provide no assurance that its expectations will be achieved.
The risks and uncertainties that could cause actual results to differ materially from expectations are detailed in the company's third for 2020 earnings release and filings with the Securities and Exchange Commission.
The company disclaims any obligation to update its forward looking statements.
Having said that I'd like to introduce management with us today.
Eugene Landy, Chairman, Michael Landy, President and Chief Executive Officer, Kevin Miller, Chief Financial Officer, and Richard <unk>, Vice President of asset management. It is now my pleasure to turn the call over to modest President and Chief Executive Officer, Michael Landy.
Thanks, Becky good morning, everyone and thank you for joining us Manas fiscal third quarter was a very productive one and I'm happy to report our results.
During the quarter, we acquired two buildings, comprising 356000 square feet for $60.5 million.
Yes assets are located in the Greensboro, North Carolina, and Salt Lake City, Utah and assays.
Both of these brand new build to suit properties or at least for 15 years to Fedex.
Refinance these acquisitions with 215 year fully amortizing mortgage loans totaling $38.7 million at a weighted average interest rate of 3.12%.
This brings our total acquisitions, thus far in fiscal 2000 $20 million to $160 million, comprising 1.1 million square feet.
We have generated 5% growth in our gross leasable area this year and a 7% increase over the comparable prior year period.
We also grew our acquisition pipeline during the quarter to occur in total of $218.7 million or pipeline consists of four newbuildings all leased to investment grade tenants totaling 1.5 million square feet currently under construction.
These properties have a weighted average lease term of 16.8 years, approximately 49% of EUR 1.5 million square foot pipeline is leased to Fedex ground for 15 years, 43% is leased a home depot for 20 years and the remaining 8% is leased to Amazon.
For 10 years, the 120000 square foot Amazon acquisition is expected to close before the end of this fiscal year with the remaining 1.4 million square feet leased to Fedex and home depot expected to close during fiscal 2021.
We're currently working on additional deals and anticipate further growing or acquisition pipeline in the ensuing quarters.
Then in Brent collections for Mamas during the cold in 19 pandemic has been excellent.
Broken down monthly they are as follows for March 100% for April 99.6% for me, 97.9% for June 99.4% and for July 99.6% for the month of August we expect tool.
Brent corrections to be consistent with July at 99.6%.
Our resilient occupancy and rent collection results. During these challenging times highlights the mission critical nature of our portfolio and underscores the essential need for our tenants operations.
Dave We've agreed to a total of $438000 and deferred rent, which represents just 31 basis points of our total annual base rent.
We're also happy to report that we're now in the early stages of several parking expansion projects for our largest tenant Fedex.
These expansions will result in increased rents and increased lease terms, while it's still early in the process rich will have more to share with you on the scope and timing of these parking expansion projects.
Our portfolio is nearly fully occupied with the current occupancy rate of 99.4% discrete was unchanged versus the prior quarter and represents a 50 basis point increase over the same prior year period.
Thomas portfolio is now in its sixth consecutive year of being over 98% occupied.
Our weighted average lease term at quarter end was 7.2 years, representing our seventh consecutive year of having a weighted average lease term in excess of seven years.
Our gross leasable area now comprises 23.3 million square feet, consisting of 118 properties geographically diversified across 31 states the strategic concentrations around the gold Sunbelt, an east coast Port regions.
Approximately 81% of our rental revenue is generated from investment grade tenants with the remaining 19% generated from strong unrated companies.
Our weighted average building age is 9.5 years, which represents one of the youngest portfolios in the industrial read sector.
With regards to the overall market outlook demand for industrial real estate remains robust as to covert 19 pandemic has created a surge in online shopping.
Commerce sales as a percentage of total retail sales have nearly doubled during the quarter from 15% to 27%.
Well E Commerce should continue to be the biggest catalyst driving industrial space demand. The cobot 19 pandemic has also brought about a reconfiguration of supply chains, which should translate into increased demand for U.S. industrial real estate.
There is a current trend towards de globalization and less reliance on China that should result in increased domestic manufacturing.
Additionally, following a multi decade move towards leaner inventories and just in time supply chain strategies inventory to sales ratios are trending back up due to the pandemic as companies now seek to keep more inventory on hand in order to guard against supply chain disruptions.
This trend should also result in increased demand for our property type.
As per Cushman, and Wakefield second quarter Industrial report net absorption for the quarter came in at 44 million square feet, bringing the mid year total to just under 90 million square feet of positive net absorption the national average vacancy rate increased by 40 basis points during the quarter to 5.3% most.
Most of which is being driven by smaller tenants in older buildings.
You asked industrial asking rents are up 2.1% year over year to $6.58 per square foot at quarter end.
Currently there is 314 million square feet of industrial space under construction of which approximately two thirds speculative space and one third is built to suit.
Now, let me turn it over to bridge. So we can provide you with more property level detail as well as our progress on the leasing front.
Thank you Mike with respect to our property portfolio as stated our occupancy rates stood at 99.4% at quarter end, representing a 50 basis point increase from a year ago and unchanged sequentially. Our weighted average lease maturity decreased to 7.2 years compared to 7.8 years.
One year ago, our large acquisition pipeline has a weighted average lease term of 16.8 years, so that coupled with our multiple expansion projects will drive our weighted average lease term higher our weighted average rent per square foot increased by 2% to $6.35 as compared to $6.
And then 23 cents a year ago, our weighted average rent is 3.5% below the national average asking rents of $6.58 per square foot, representing good embedded rent growth potential.
From a leasing standpoint, as previously reported in fiscal 2025 leases, representing approximately 410000 square feet or 2% of our gross leasable area were scheduled to expire.
Four of the five expiring leases, representing 355000 square feet or 87% of the expiring gross leasable area have been renewed.
These four leases result in a weighted average lease term of 4.2 years and a 12% increase in rental rates on a GAAP basis, and a 4.4% increase on a cash basis.
The one property that did not renew is a 55000 square foot buildings in the Hartford, Connecticut, I must say this property has been vacant since March of this year.
Small property is currently being marketed for sale or lease in the interest thus far has been good.
Our only other vacancy consists of an 81000 square foot building at our industrial Park and would knock a PPA.
This property is situated in close proximity to a giant $7 billion Cracker plant currently being built by Royal Dutch shell. Upon completion, we expect the cracker plant will drive increased demand for our industrial Park.
With regard to our fiscal 2021 lease expirations next year, we have 10 properties totaling 1.2 million square feet as leases come do.
There are currently no move outs that we're aware of and discussions regarding lease renewals are proceeding favorably.
With regards to the Fedex ground parking expansion projects. We currently have five separate parking expansions underway.
Five projects are expected to cost approximately $11 million from a timing standpoint, we hope to have these five projects completed by November.
These parking expansion projects will enable us to capture additional rents while lengthening the terms of our leases. We're also in discussions to expand the parking at approximately 12 additional locations, bringing the total expansion projects to 17, we expect to have more details to share with you in the ensuing quarters.
And now Kevin will provide you with greater detail on our financial results.
Thank you rich funds from operations or AFFO, which excludes unrealized securities gains or losses were 20 cents per diluted share for the recent quarter, representing a one cents decrease or 4.8% over the prior year period adjusted funds from operations or AFFO, which excludes securities gains or losses were 20 cents per diluted share for the recent quarter.
Also representing a one cents decrease or 4.8% over the prior year period.
The quarterly year over year, one cent decline in FFO and AFFO is primarily attributable to a 1.9 million dollar increase in preferred dividend expense as a result of an increase in preferred shares outstanding as well as a $1.3 million decrease in dividend income from our securities portfolio, partially offset by a 2.5 million.
The increase in net operating income.
Given our two recent acquisitions purchased in late May totaling $60.5 million, which will generate a full rental revenue run rate next quarter, coupled with our $218.7 million acquisition pipeline are ongoing and future property expansions and our 50 basis point increase in occupancy over last year's quarter weak.
Aspect to meaningfully grow our per share earnings going forward.
In addition, the dividend income in our securities portfolio was down by $1.3 million or 36% this quarter versus the prior year period as many Reits have either reduce or suspended their dividends in order to deal with the fallout from the Kobin related shutdowns, we continue to monitor our securities portfolio closely as the covert pet.
It continues to unfold.
Rental and reimbursement revenues for the quarter were $41.8 million compared to $38.5 million, representing an increase of 8% from the prior year.
Net operating income increased $2.5 million, the $35.2 million for the quarter also reflecting an 8% increase from the comparable period a year ago.
This increase was due to the additional income related to one property purchase since the prior year period during fiscal 2019, and the four properties purchased during the first three quarters of fiscal 2020.
Net income attributable to common shareholders was $26.9 million for the third quarter as compared to a net loss attributable to common shareholders of $3.1 million in the previous years third quarter, representing a $30 million increase.
This increase in our net income was primarily driven by a 31.2 million dollar variance from an unrealized loss on our securities portfolio of $11.6 million during the prior year quarter to an unrealized gain on our securities portfolio of $19.6 million during the current year quarter. As you know a recent accounting change requires that all securities port.
Oil as mark to market quarterly and at the changes are reflected in our net income the securities markets have seen heightened volatility this year and that is what is driving the big increase and our net income this quarter.
With regards to our same property metrics for the current three month period, our same property NOI increased by 20 basis points on a GAAP basis, and by 170 basis point on a cash basis.
These increases were primarily due to a 50 basis point increase in our same property occupancy from 98.9% in the prior year period to 99.4% currently.
As mentioned our acquisition pipeline now contains 1.5 million square feet, representing $218.7 million consisting of four property acquisitions leased on an average was 16.8 years to Amazon Fedex and home depot.
These acquisitions are scheduled to close during fiscal 2020 and 2021.
To take advantage of today's attractive interest rate environment, we've already locked in financing for three of our four acquisitions. The financing turns for these acquisitions. Some of the most favorable we have ever achieved the combined terms of these three financings are as follows $113.8 million in proceeds representing 62% over.
Total costs with the weighted average interest rate of 3.1%.
These financings consists of 215 year and 117 year self amortizing loans with a weighted average maturity of 16 years.
We expect these acquisitions to generate 11 return of approximately 13%.
We have continued to build up our unencumbered asset pool, thus far during fiscal 2020, we've fully repaid two mortgage loans with fixed interest rates ranging from 5.5% to 5.54% associated with these properties. These newly unencumbered properties generate over $1.1 million in net operating income annually.
Yeah.
Our capital structure at quarter end consists of approximately 884 million thousand debt of which $804 million was property level fixed rate mortgage debt with the weighted average interest rate of 4% as compared to 4.03% in the prior year period.
Our weighted average debt maturity on our fixed rate mortgage debt is 11.2 years, representing one of the longest debt maturity schedules and the reach sector.
Our loans payable consists of a 75 million dollar term loan and a 5 million dollar margin loan. The 75 million dollar term loan has a corresponding interest rate swap agreement to fixed LIBOR at an all in interest rate of 2.92%.
The margin line rate of interest on our securities portfolio is currently 0.75%.
The $5 million and margin debt outstanding was paid off subsequent to the quarter end. We also had a total of $434 million and perpetual preferred equity at quarter end.
Quarter end, our total debt plus preferred equity combined with an equity market capitalization of approximately $1.4 billion results in total market capitalization of approximately $2.7 billion.
From a credit standpoint, we continue to be conservatively capitalized with our net debt to total market capitalization at 32% and our net debt plus preferred equity to total market capitalization at 48% at quarter end.
For the three months ended June Thirtyth 2020 are fixed charge coverage was 2.3 times, our net debt to adjusted EBITDA was 6.2 times.
From a liquidity standpoint, we ended the quarter with $12.1 million in cash and cash equivalents. In addition, we held $118.9 million and marketing reach securities at quarter end, representing 5.4% of total undepreciated assets.
Additionally, we had $225 million available from our credit facility as of the quarter end as well as an additional $100 million potentially available from the accordion feature and now let me turn it back to Michael before we open up the call for questions.
Thanks, Kevin Mama went into the global pandemic, very well positioned with a strong balance sheet, a high quality tenant roster nearly full occupancy and well covered dividend.
As a result of the government shutdowns ecommerce sales surge dramatically during the quarter and the consumer is now more reliant than ever on the internet for shopping.
This is created tremendous demand for many of our properties with operations increasing to seven day work weeks and multiple property expansions scheduled in order to accommodate the strong demand.
As Kevin mentioned, the Cobot 19 pandemic has had a material negative impact on certain reach sectors, particularly in retail and that is reflected in the 36% reduction in the dividend income generated during the recent quarter.
While it is impossible to know how long the current situation will last we expect that to diminution in cash flow from our securities portfolio will be largely offset by continuing improvements in our core industrial portfolio. The performance of our best in class industrial property portfolio. During this downturn has been except.
Okay, and we expect that to continue to be the case going forward, we'd now be happy to take your questions.
We will now begin question and answer session.
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At this time, we will pause momentarily to assemble a roster.
First question will come from Frank Lee.
Please go ahead.
Good morning, Hi, Mike can you talk about what you're seeing in terms of competition in acquisitions market now versus pre covance.
You mentioned on last call that the buyer pool.
Substantially diminished and just wondering if buyers have returned now and are you seeing any new entrance into the buyer pool as well.
Yes, Thats correct things are very fluid out there and while last quarter. The buyer pool did diminish it's come back and then some.
Lanes have narrowed theres a lot of capital out there are allocated for commercial real estate and it's a reluctant to invest in office and retail in hotels and it's very interested in embracing industrial clearly the spotlight spin on industrial and continues to be on industrial, but I guess has changed.
Post pandemic is it's more discriminating capital, whereas prior to the pandemic.
Cap rates really compressed regardless of building age or credit quality of the tendency and today.
What we've always done single tenant net lease properties on long term leases to investment grade tenants is exactly this sort of assets everybody's looking for it so well.
We were hoping to trend would continue that.
We'd be able to get more favorable spreads.
Interest rates post pandemic are lower than ever before and cap rates are actually.
Lower than than pre Pandemics. So.
For the product, we do the long term leases to investigate tenants. So the buyer pool has actually increased as of now.
Okay. Thanks, and then second question I have as you're working on your 2021 exploration is now.
You talk a little bit more about how those conversations are going our tenants continuing to move forward or or even some considering some decision delaying some decision making.
And also it looks like the expiring rents are lower than the rents that expired in 2020.
Are you expecting a similar roll up on brands or potentially higher than than what you achieved on your 2020 renewal. Thanks.
Very good Frank I'll turn it over to rich on that but before I do let me just say that.
Our tenants, we have a weighted average maturity of over seven years for seven years and counting now and it went from last year 7.8 years to 7.2 years of weighted average lease maturity, but with the pipeline as rich mentioned of 16.8 years of weighted average lease term and the multiple expansion.
Projects that will extend the leases you know with mom, if youre going to get cash flow in excess of 7.2 years and you know our retention rate has been very high and that's largely driven by our largest tenant Fedex and all are tenants are investment grade and so the leases get renewed its true fed.
Next moves out on occasion, but for the most part they stay forever. There is still in the first building that.
We purchased with Fedex and that was in 1993 and there's still in that building today. So so with Monmouth when companies report weighted average lease terms.
Yeah.
Pretty confident you're going to get the number we report and you should be confident you're going to get in excess of that because the leases renew and the properties get expanded and so the leases get extended.
Understood that rich anything on the rents you're seeing for 2021 versus 2020 and everything else.
Frank was inquiring about so of the 10 buildings I'd say a lot of those discussions have have.
Been in earnest now it took a little while for them to come out of the the would work during them pandemic.
I would say, it's still a landlords market. So you could expect that these roll ups are going to happen and we don't have any known move outs at this time, so shouldn't for 100% retention and that's that's out 21 shaping up today.
If I could just add to that they slice and dice.
Real estate rents per square foot.
And so rich reported the national average rent to 658 and are in place rents are below that so 3.5% I think was number you quoted of embedded rent growth potential, but not everything is equal and our real estate has way more acreage our pipeline is over eight to one land to building.
Ratio, our and that's our acquisition pipeline are in place portfolio. The Fedex properties have six to one land to building ratios and the portfolio on oil as a whole has five to one so so per square foot of our rents are lower than market and ours.
Coverage is greater than market rents or even that much lower than market. So the potential to roll or at least is higher is even greater than comparing things as though all else equal because they have to pay rent for this additional parking and this additional land.
Okay, great. Thank you.
Well.
Our next question comes from Rob Stevenson of Janney. Please go ahead.
Good morning, Mike just to.
A follow up on.
The acquisition question, you talk about where pricing and cap rates are today versus a year or two ago. I mean is all of this interest didnt increase interest pushing cap rates down and pricing up demonstrably or is that the margins. How are your yields for your sort of core.
We're sort of Fedex, Amazon et cetera assets trending at this point.
Yeah.
As Kevin mentioned the financing, we just locked in as some of the most favorable financing terms, we've ever achieved we're locking in around 3% in some cases below 15 year fully amortizing loans and industrial in E Commerce and.
Digitally align properties or are in favor. So oh the acquisitions, we closed on this quarter that cap rates were in the low sixs because they were consummated deals.
Over 12 months ago, and you get a premium for forward.
Commitments on new build to suit product, but today those cap rates would be well.
Inside five and a half so that should give you an indication of how demonstrably things have moved okay, and so that five and a half is roughly where the the incremental deals that you signed this quarter.
Got a wind up falling out 12 months from now or later on this year when you close.
No I didn't say all that because they're not on the spot theyre not income producing at the moment and if they were I would agree with that statement, but because their new constructions in some of them arent coming onto 12 months from now.
Theres a lot of uncertainty between now and then so you get a yield premium for taking on that uncertainty. So to answer your question, Yes. Our pipeline does not have a weighted average cap rate with the six in front of it but no. It is not sub five and a half.
Okay and then our.
Fedex.
Breaking ground on any new large scale facilities.
In the immediate area of yours in other words ones that might windup, replacing your facility as the lease expires at this point that you know off.
Not that I know of but they are you know expanding the ground network. So.
There will be big Fedex ground distribution centers going up with 15 year lease terms and we hope to acquire those that are in great locations.
Okay.
And then Kevin what's your incremental appetite for preferred stock here, given where the tenure yield is and where your common stock is can you remind us what the upper limit for preferred is as a percentage of your capital stack.
Well.
We we take the position that preferred never comes due and it's a it's perpetual equity even though it's 608, right now which sounds high I guess in the current market on.
No we don't like it to be more that we're not going to take a much more high than it is now it's about 430 million maybe the most like 500 million that would be would probably be the max on that on.
And you know its callable any year about September 2021, and we'll see where rates are then and that's a huge potential to some.
Potentially take that out and have a cost savings depending on how rates are at that point.
Rob if I could just add to Kevin's remarks.
16% of our capital stock right now and as Kevin mentioned 20, 25% of the capital stack gets to be the threshold, but we're long term investors, we buy assets, we want to hold them forever and perpetual preferred equity is permanent capital and the principal payment is now.
Never do it never matures. So you know to build a portfolio with long term capital is in our mind very advantageous even though it's more expensive than shorter term capital its permanent capital the principal never matures and and then with the debt capital we have on our balance sheet that has a long term mature.
We have over 11 years so.
On the topic of.
Debt ratios. Some people are very dogmatic view that six to one net debt to EBITDA is higher gearing then four to one as though everything's equal, but everything is not equal and we have long term leases to investment grade tenants. The pandemic was a black.
And this isn't an academic discussion we have right before as a real life exercise in the tide going out and we have almost full occupancy in 100% collection. So we have the muscle to push higher gearing and if you have short term leases to mom and Pops four to one on paper looks like lower level.
Rich and a safer balance sheet, but what good this four to one do you if you're not maintaining an occupancy level and you're not collecting your rents suddenly four to one is less safe than six to one so again not all is equal and I think were proven that just like we did in the financial crisis.
And the same could be said for dividend payout ratios you know a lot of companies with the theoretically save Cushing have temporarily suspended their dividend. It went to zero and here Monmouth with 80, 85% payout ratio is very secure and our dividend will prove resilient.
Okay. Just my last one is just a follow up on that.
Companies that have cut their dividend to next to nothing or suspended their dividends.
In the securities portfolio, how much tolerance do you have to continue to hold names that are producing income and are unlikely to produce any meaningful income in the near future those trades to purchase as income producing assets.
How are you guys thinking about the of the buy sell our whole decision on some of those names now that the the dividends have been impacted and are likely to be so for the foreseeable future.
Well it reminds me a 2008 2009, we went through it the securities portfolio is a small percentage of the overall company and so while its.
The best of times for our core business in the worst at times for our Securities portfolio. It's not a tale of two cities, it's a small factor and to sell the securities now when reads are required to payout taxable income and Theres a lot of progress being made on both the vaccine front and the therapeutic for.
So we won't be in this last down environment forever and companies will be required to reinstate dividends. So there's really no need we've seen that the our earnings are stable without the income from the securities portfolio and in time, the income will come back.
Okay. Thanks, guys appreciate it.
Our next question comes from Sarah can of Jpmorgan. Please go ahead.
Hi.
Hello.
No just a question on.
The securities portfolio of on me.
Could you talk about.
You should be using our model going forward.
Hi.
Sure I think a conservative run rate would be 2 million of quarter 8 million annually and.
Hopefully it will grow from there as companies need to reinstate their dividends, but a good conservative run rate would be 2 million a quarter.
Okay. Thank you.
[music].
Our next question comes from Michael Carroll of RBC capital markets. Please go ahead.
Yes. Thanks, Mike can you provide some color on how you plan on funding your near term investments I know you at 220 million agreed upon which is a pretty high number if you plan on keeping the preferred that these current levels with not adding much.
I mean do you need to issue common equity to fund some of those deals I guess, what's the plan there.
No the plans, mostly preferred equity we've locked in the debt financing as Kevin mentioned for three of the four deals and or maybe I mentioned that in the prepared remarks, but but anyhow that plus preferred equity will be the source. We have a common ATM that we instituted in February and the pricing is.
Is nowhere near where we would execute historically Monmouth real estate is traded at 1.5 times. The Treasury note rate go to unquote risk free rate and.
Two years ago. The Treasury rate was about 300 basis points and we were about one and a half times. The T. note rate and then a year ago is 2% today. The treasury notes at 50 basis points and the spread is over nine times. Our dividend is a multiple of nine years of treasury income in one year of our dividend.
So it's not a time, where we can access.
The common equity market its.
Unsustainable can be trading at these levels one I have times as normal 9.4 times currently is not even close.
So you would add another 80 to 100 million on your preferred capital stack to be able to fund that $220 million investments you have plan.
Thats, a potentially yes never say never as the company grows keeping it at 25% of the capital stock is not out of the question Theres. Other rates that are completely financed with perpetual preferred equity under some of the best performers gene seems to want to get in an action is yes. The yes.
Focusing in on one aspect of capital stack and you have to realize.
So that we have a whole group of Fedexs that abate expanded.
As I get expanded.
We get a.
Many of the new lease and the then those properties can be financed so basic lay a financing is I have a nice 10 year lease and go to the insurance companies and bio 10 year money.
60, 65% to the value of the properties the value of the profit is it going up the leases have been extended.
The.
We have a whole bunch of properties that are either from a clear or have very small mortgages on them and as we pay off 50 million in mortgages on some flat buddies Wifi up a 100 150 200 million and.
And value, which can be refinanced for 100 150 million of sub 3%. The financing. So basic business plant is still to do deals above 5% and refinance of 3% and have a good current majid a long term plan is that what are the landscape.
Going to be in the year 2028, the only eight years from now and we're watching the inflation potential and low doing deals the sub 6%, 5.5% even 5%.
To sum by as the that seems to be at low return on real estate, but the total return is the current income plus whatever the value of the property is at the end of the lease and there was a possibility because the government spending billions of dollars that when we get the 2028 the value.
These properties will be much higher than today and when you look at Mama fleets capital structure and potential that should play that should be put undue equation.
Okay, and then I guess the funds that equity portion if you're not happy with your common equity price coming when you consider or have you considered doing the some type of joint venture or asset sales to fund that that remaining.
40, plus percent. So you don't have to access the preferred market.
Well dancers that I'd prefer not to it but perhaps gene as another view as well, we're well aware that the subs.
Lloyds holders of properties, so similar to as have done joint ventures and the.
There's a lot of pluses and doing those joint ventures your cost of capital short term goes down but when you have taken a platinum at 4% is still taken the partner at 4% and the values that I just thought talked about which can be 100% over 10 is you announced sharing with that so call it 4% part.
So.
Doing joint ventures, as a way of ways in capital, it's a way of approving a co and income.
In the short to medium term, but we are looking at total returns that us substantially above five five and 5%. The return we do on a current lease and so we don't want to share that with that but we've got bought and I guess, a very very good deal and the.
Do you make your choice will let you do but we don't have to do joint ventures again, we have investment grade tenants and as we pay down the mortgages and as we get we know also leases. We have we view that we can get the ample financing to finance at 250 million to you and our pipeline.
If I did just add to that.
Past is prologue for the future and I know you've been saying, we need to raise equity ever since I've known you, which is only a couple of years, but the past is we raised common equity in 2010 in 2014 in 2018, so perhaps in 2022, but we have no trouble.
Raising equity raising prefer or raising capital Kevin I just wanted to add one other thing we have many tools in our two box on we have the line of credit 225 million dollar available at 100 million accordion feature if we chose to use it or we generate funds from operations.
And and just I just wanted to just reiterate.
That 218.7 million pipeline about 62% of its locked in financing with record breaking interest rates or 3.1% is the weighted average interest rate on those three loans and it's a it's got a weighted average term of 16 years. So it that's long term money at a very low rate.
Alright. Thanks.
Our next question comes from Craig you Sarah of B. Riley FBR. Please go ahead.
Hi, Good morning up Mike I think traditionally when you complete an expansion you earn about a 10% return on the incremental capital through a higher rents at the building is that ballpark for sort of what you're thinking about.
As first round, you're completing by November.
Yes, rich is spearheading all of these expansion projects and he's doing a great job. So rich you want to add to that yeah. I'd say, that's what we're shooting for as a a 10 with a 10 year extension on all of them and to the extent that some of these happen at our 15 year lease properties, where we're going to try to kick them out 50.
10 years from the date of completion so.
Those discussions are going well and it looks like just from what we've seen so far about two and a half million per expansion some are bigger somewhere less and so.
So that's that's kind of how is shaking out for now yes. That's a key point rich. This made so the big ones I think we certainly have.
A lot of negotiating flexibility this smaller one less selling but but the plan will come out around where you said.
Got it and you know a few quarters ago, you had to deal with Komatsu that fell out because you couldn't get it.
Negotiated at the parent level is that deal unlikely to come back or is that still still potential to come back in the pipeline.
No I don't I think it's highly unlikely that it will come back into the format that mom with would be interested in acquiring it it may very well come to market and somebody else may want to purchase it with.
No parent guarantee and a weaker tenant on the lease we're not interested but we're having no trouble sourcing deals.
Oh.
The Shadow pipeline, how many we remain we win remains to be seen but we're seeing a lot of deals and we're bidding on a lot of deals and hopefully we'll have a larger pipeline to report when we next report to you.
Got it and I think you mentioned that the Amazon building, you're looking to close here in your fiscal fourth quarter was 8% of yours square footage can you put a dollar value on that.
Sure sure. So let me give you the breakdown of our pipeline in dollar terms. The total pipeline is $218.7 million, 7% of which is the Amazon deal and that will close this year in our fiscal fourth quarter.
33% will be closing ideally you know that everything is under construction, so things could slide but 33% as of now is scheduled to close in the first quarter fiscal 21, 44% is scheduled to close in the second quarter fiscal 21, and then the remaining 16% not.
Till the last quarter of 2021.
Right.
And I guess, just finally, you did mention your shadow pipeline.
Are you seeing any gift the I had there any any shifts as far as what merchant builders are showing you or is it still kind of that same cyclical group of tenants that you you've seen in the past.
Well, there's a ton of Amazon deals out there I mean every day you just get data with emails on on on all of these vast mile in cold storage million square Footers, Amazon is a huge part of the market out there right now and.
A fedex says a lot of Fedex deals.
As far as additional.
The large companies are now realizing they have to gravitate more towards a omnichannel supply chain and so to accommodate omnichannel supply chain. They need modern buildings automated buildings. So so you're seeing the large retailers wake up.
And realized brick and mortar is not going to be 85% of the consumer spending it's going to be continuing market share.
Migrating from traditional shopping to digital so so youre seeing the big retailers.
Look to expand their presence and a lot of them we have relationships with so we're working on growing the pipeline.
Okay, great. Thanks.
You're welcome.
Our next question comes from Merrill Ross of Compass point. Please go ahead.
Hey, good morning.
You mentioned like that you did dividends to Sanjay the securities portfolio were temporary but you also just said again that you think the changes to the supply chain I call.
It also helping so do you think those changing their permanent.
We're also temporary.
Well what is permanent is that consumer spending behavior, even people who were reluctant to ever shop online. We're forced to they were locked down and the only way to get goods was to go on the Internet open up an accountant figure out how to buy things online. So so there is a permanent.
Paradigm shift.
Moving from from traditional brick and mortar to to online having said that it's clear that.
You know this 22 trillion dollar economy of which two thirds is consumer spending cannot all be on mine people need to be able to go to stores and buy things. So there is room for both there's a need for both and so.
Brick and mortar retailers, who are not all disappearing you know and retailers who tenant there centers are not all disappearing, they're going through a very difficult period, but at some point schools will reopen business travel will return and shopping in traditional brick and mortar stores will come back as well.
Yes. Thank you sign as the yen endemic accelerated it trend towards more experience so offering.
At the brick and mortar retail level.
Yeah, you know they tried to diversify their restaurants and it seemed to be working out quite well and then and you can go to restaurants. So it's been a really a perfect storm hitting the retail sector, but yes.
Yes, this too shall pass.
Well.
Thank you.
Thank you.
Our next question will come from Barry Oxford of D.A. Davidson. Please go ahead.
Great Hi, Mike can you talk a little bit about the court activity.
It where your facilities or ER and the activity of the port container traffic in <unk>.
I imagine that is down some white.
And has that had an effect on those.
Marketplaces are those sub markets that are in.
Fairly close to those ports.
Well the catalyst in shifting the market share from West Coast Port to East Coast Sports was the expanded Panama Canal, which came online in June of 2016, and suddenly you went from a 60 40 split to a 50 50 split with shipping containers three times the size the ships.
Coming up through the golf in the Eastern Seaboard, and then you had.
The tariff war with China, and that had the supply chain moving to other locations and less dependent on the Asia Pacific Route and now you have.
Fear that we're going into this protracted cold war and the supply chain is realizing we can't be dependent on.
China for antibiotics and military equipment and so the supply chain is going to be continuing to shift closer to home or re onshoring of manufacturing and we have set up our portfolio to be positioned to a business friendly locations and intermodal pool.
It's in seaports that will benefit from a return to resurgence of domestic manufacturing so.
I'd be very concerned if I was totally dependent upon the China.
West Coast trade route because that's being re thought.
And it's going to take time, you're not going to see it overnight, but I think with.
Got 60% or revenue coming from what we called the Golden Triangle, which is the sunbelt and the southeast region of the country I think for certainly well positioned and then you factor on top of that the fiscal situation and a lot of these states in cities the huge budget deficits and the want.
In destruction, taking place and the outflow of the population towards more business friendly safer locales and I think our portfolios really position to where people are currently choosing to live.
Perfect. Thanks, Mike for that for that call. It second to the extent that you know or any of your tenants reliant on the PPP money in order to make grant and again I'd say to the extent that that Youre aware.
No no we have a shopping center in New Jersey, with some mom and Pops and it's such a small percentage of gross revenue.
How many basis point to that but it but either way on next steps and so the material answer is no. Our tenants were essential they were working throughout.
And.
You know some companies are reporting.
Rent collections, plus deferments, which is essentially rent collections plus nonres collections were just require collections and they're virtually a 100% collections.
Perfect. Thanks, Mike appreciate it.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Becky cooler rich for any closing remarks.
Thank you operator, I would like to thank everyone for joining us on this call and for their continued support and interest in Atlanta as always we are available for any follow up question. We look forward reporting back to you after our fourth quarter. Thank you.
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