Q4 2020 Monmouth Real Estate Investment Corp Earnings Call
Good morning, and welcome to the Monmouth real estate investment corporations fourth quarter and fiscal year end 2020 earnings conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star Keith followed by zero.
After todays presentation, there will be an opportunity to ask questions.
So I ask a question you May press Star then one on on Touchtone phone.
To withdraw your question. Please press Star then too.
Please note this event is being recorded.
It is now my pleasure to introduce your host Ms., Becky coolers, Vice President of Investor Relations. Thank you Ms. cooler Ritchie you may begin.
Thank you very much operator.
In addition to the 10-K that we filed with the FCC yesterday, we have filed an unaudited annual and fourth quarter supplemental information presentation. This.
This supplemental information presentation, along with our 10-K are available on the company's website at <unk> and our E I see got real.
I would like to remind everyone that certain statements made during this conference call, which are non historical facts may be deemed forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
The forward looking statements that we make on this call are based on our current expectations and involve various risks and uncertainties.
Although the company believes the expectations reflected in any forward looking statements are 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 on the company's annual 2020 earnings release and filings with the Securities and Exchange Commission.
The company disclaims any obligation to update its forward looking statements.
I would now like to introduce management with us today.
Eugene Landy, Chairman, Michael Landy, President and Chief Executive Officer, Kevin Miller, Chief Financial Officer, and Richard Mckee, Vice President of asset management.
It is now my pleasure to turn the call over them on its president and Chief Executive Officer, Michael Landy.
Thanks, Becky good morning, everyone and thank you for joining US we're pleased to report on results for the fiscal year ended September Thirtyth debt.
Fiscal 2020 was a successful year from mom and dad.
During the year, we acquired five brand new highly automated class a built to suit industrial properties containing 1.2 million square feet for a total cost of $175.1 million.
In keeping with our business model, all five properties or at least long term to investment grade tenants.
Acquisitions will generate annualized rental revenue of $10.9 million and have a weighted average lease term of 13.9 years.
During the fourth quarter, we acquired one property for $15.2 million consisting of a newly constructed 121000 square foot distribution Center. This distribution center is situated on 22 acres in Oklahoma City, Oklahoma has leased to Amazon for 10 years.
This 22 acre site is ample expansion capacity and is ideally located immediately north of the will Rogers world airports.
With regards to our current acquisition pipeline or pipeline grew over the quarter and we've now entered into agreements to purchase six properties for $338.4 million, comprising 2.4 million square feet of new class a built to suit industrial buildings situated on 416 acres.
On closing these transactions or large pipeline would represent a 10% increase in our gross leasable area.
Four of these properties are leased a fed ex our largest steel is leased to home depot for 20 years and one is leased to Mercedes Benz.
These future acquisitions will have a weighted average lease term of 15.3 years.
Subject to our due diligence, we anticipate closing each of these transactions upon completion and occupancy.
Five of these transactions are scheduled to close during fiscal 2021, and one is scheduled to close in early fiscal 2022.
In connection with three of the six properties, we have entered into commitments to obtain three fully amortizing mortgage loans totaling $139.5 million with a weighted average term of 15.8 years and with a weighted average interest rate of 2.99%.
We continue to experience strong demand for our properties as evidenced by our nearly full 99.4% occupancy rate at fiscal year end.
With 81% of our rental revenue generated from investment grade tenants and the remaining 19% generated from strong on rated companies or overall occupancy and tenant recollections throughout the cold in 19 pandemic has been excellent.
My recollection, Sip average, 99.7% and we expect November in future months to be consistent with this trend.
Since the start of the pandemic, we've agreed to a cumulative total of only $438000 in deferred rent, which represents just 31 basis points of our total annual base rent.
We have since collected $312000 or 71% of this amount.
During fiscal 2020, we raised approximately $26.4 million in equity capital, having issued 2 million shares through our dividend reinvestment plan.
Of this amount a total of $7.6 million on dividends were reinvested this year, representing an 11% participation rate among our shareholders.
Throughout the year, we also raised $122.4 million in net proceeds from our preferred stock ATM program with the sale of 5 million shares or 60 minutes per cent series C preferred stock at an average price of $25.04 per share.
As has been widely reported the COVID-19 pandemic is greatly accelerated the strong ecommerce growth trajectory.
Commerce sales as a percentage of total retail sales nearly doubled from approximately 15% to 27% during the last two quarters.
COVID-19 pandemic has also created the need for supply chain reconfiguration.
Increased inventory stocking is currently taking place across many industries as they seek to better prepare for future surges in demand.
Additionally, U.S. manufacturing, which had already been increasing in recent years has accelerated further and this trend will likely continue at supply chains now favor shorter travel distances and reduced reliance on foreign sources.
These trends are expected to continue to drive demand for U.S. industrial real estate for the foreseeable future.
With regards to the overall U.S. industrial market, our property sector continues to perform exceptionally well.
As per CBR ease third quarter report net absorption for the third quarter was 56.8 million square feet, marking the 42nd consecutive quarter of positive net absorption.
This brings year to date net absorption to 128 million square feet and represents the 10th consecutive year of over 100 million square feet of.
Adjusted net absorption.
You EPS industrial vacancy rate remained unchanged during the quarter at a record low of 4.7%.
Weighted average asking rents increased by 2% over the prior year period to $6.63 per square foot.
Currently there is approximately 341 million square feet of industrial product under construction, representing a 1% increase over the prior year period.
The U.S. economy is improving with third quarter real GDP growing at 33% after falling by 31% in the prior quarter due to the broad pandemic related economic shut down.
North American freight rail traffic is come back from record low numbers in April to record high results in October U.S. railroads originated an average of just under 300000 containers and trailers per week in October representing the best month ever and an increase of 34% over April.
The COVID-19 pandemic has resulted in companies like Fedex, Amazon and U.P.S., all experiencing peak season like demand all year round demand.
Demand for this holiday season is expected to eclipse total shipping capacity current total shipping capacity in the U.S. allows for approximately 80 million packages per day anticipated demand is expected to exceed capacity by approximately 10%. This.
This is despite operations now running 24 seven.
We are working closely with our tenants to increase their throughput and our planning several parking expansion projects for the new year.
And now let me turn it over to rich monkey. So he can provide you with more property level detail as well as our progress on the leasing front.
Thanks, Mike with respect to our total property portfolio, our occupancy rate stood at 99.4% at year end, representing a 50 basis point increase from a year ago and unchanged sequentially.
Subsequent to fiscal year end, we entered into a lease termination agreement with Cardinal health for a 75000 square foot facility located in the Albany, New York MSA, We received a termination fee of $377000, which represented approximately 50% of the then remaining rent due on.
For the lease which was due to expire in November 2021, we simultaneously entered into a new 10.4 year lease agreement with United Parcel service effective November one 2020.
The new lease provides for five months of free rent and an initial annual rent of $510000 with 2% annual escalators thereafter.
The new lease represents a straight line annualized rent, a $541000 or $7.21 per square foot over the life of the lease through the end of March 2031 on.
This compares to the former GAAP rent of $7.65 per square foot, resulting in a decrease of 5.8% on a GAAP basis after.
After taking into account the $377000 termination fee the.
The overall transaction resulted in a slightly positive GAAP leasing spread over the prior expiring lease while providing us with an additional 9.3 years of lease term with this new investment grade tenants.
As of September Thirtyth, our weighted average lease maturity was 7.1 years compared to 7.6 years, a year ago, we expect our weighted average lease term to increase as we bring the new deals on line from our acquisition pipeline, which has over 15 years of average lease term.
Our weighted average rent per square foot increased 3% to $6.36 as of fiscal yearend as compared to $6.20 at the end of fiscal 2019.
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 these five leases representing 355000 square feet were renewed representing a strong 87% tenant retention for the year, which is in line with our long term average tenant retention rate of approximately 90%.
These four lease renewals had a weighted average lease term of 4.2 years and represented a 12% increase in GAAP rent and a 4.4% increase in cash rent.
We currently have on the two small vacancies in our industrial portfolio, namely our 81000 square foot facility located in the Pittsburgh, PA and say and our 55000 square foot facility located in the Hartford, Connecticut, M. essay, representing on the 60 basis points of our total gross leasable area.
In fiscal 2021, 5% of our gross leasable area, consisting of 10 leases totaling 1.2 million square feet scheduled to expire.
While it is still early in our new fiscal year to date, we have renewed four of these 10 leases, representing 532000 square feet or 44% of the amount up for renewal.
These renewed leases have a weighted average term of 3.2 years and have a GAAP and lease rate of $4 on 46 cents per square foot. The initial cash rent is $4.38 per square foot. This results in an increase of 8% on a GAAP basis, and an increase of 1.9% on a cash basis there are no.
No known move outs at this time and we are shooting for 100% tenant retention this year.
With regards to share property expansion pipeline, we have six Fedex ground parking expansion projects in progress and one recently completed with more under discussion.
Six projects plus the recently completed projects are expected to cost approximately $21 million and are projected to be completed in fiscal 2021.
These parking expansion projects will result in additional rent as well as an extension of the lease terms.
We are in discussions to expand parking at 10 additional locations. The parking expansion project that was recently completed was that our property located in the Kansas City, Kansas MSC for a total project cost of $3.4 million. The expansion resulted in a $349000 increased an annualized rent.
Effective November 5th 2020, increasing the annualized rent at this location from $2.2 million to $2.6 million.
I look forward to reporting continued progress in the next few quarters and now Kevin will provide you with greater detail on our financial results.
Thank you rich.
I will start off by discussing some of our key financial indicators for the fourth quarter and then moving to some of our key financial indicators for the full fiscal year.
Once from operations for F AFFO, which excludes unrealized securities gains or losses for the three months ended September Thirtyth 2020 were $19.2 million or 20 cents per diluted share as compared to $20.3 million from 21 cents per diluted share the same period, a year ago, representing a decrease in FFO per share on.
One cents.
Adjusted funds from operations or AFFO were $18.2 million or 19 cents per diluted share for the recent quarter as compared to $20.1 million or 21 cents per diluted share a year ago, representing a decrease in AFFO per share of two cents.
We expect the combination of our $338.4 million acquisition pipeline and our several ongoing parking expansions to positively contribute to our per share earnings and cash flow going forward.
Rent on reimbursement revenues for the quarter were $42.6 million compared to $39.7 million on an increase of 7.5 per cent from the prior year.
Net operating income increased $2.4 million from $36 million for the quarter, reflecting a 7.2% increase from the comparable period a year ago.
This increase was due to the additional income related to the five properties purchased during fiscal 2020 and the three properties purchased during fiscal 2019.
As mentioned earlier during the quarter, we acquired one brand new property leased to Amazon for 10 years containing 121000 square feet from $15.2 million sales.
On property NOI for the three months ended September Thirtyth 2020 remain relatively unchanged with a slight decrease of 0.3% on a GAAP basis, and a slight increase of 0.3% on a cash basis.
Net loss attributable to common shareholders was $3.9 million for the quarter as compared to net income attributable to common shareholders of $22.7 million in the previous year, representing a $26.6 million decrease.
This decrease in on net loss attributable to common shareholders was mostly due to an accounting rule change in which unrealized gains and losses on our securities investments are now reflected on our income statement.
Right to the adoption of this accounting rule change on unrealized gains and losses reflected as a change in shareholders equity.
Excluding the effect of this accounting rule change related to the $10.3 million in unrealized losses on our securities portfolio. During our fourth quarter net income attributable to common shareholders would have been $6.4 million for the current quarter compared to $8.7 million for the prior year quarter, representing a 26.9% decrease to 20.
6.9% decrease was mostly due to a decrease in dividend income from our securities investments of $2.1 million and an increase in preferred dividend expense of $1.9 million.
Increasing our preferred dividend expense relates to the 5 million shares we sold over 608% series C preferred stock under the preferred stock ATM program during the fiscal year at a weighted average price of $25.04 per share, which generated net proceeds of $122.4 million.
As we generate the full run rate of our recent acquisitions, coupled with our large $338.4 million acquisition pipeline as well as our property expansions, we expect to see meaningful cash flow growth going forward.
I would now like to cover the financial results for the full fiscal year.
FFO for the full fiscal year, 2020, with $78.5 million or 80 cents per diluted share as compared to $81.2 million or 87 cents per diluted share for the same period, a year ago, representing a decrease in FFO per share of seven cents.
Hey, AFFO was 78 cents per diluted share from fiscal 2020, as compared to 85 cents per diluted share a year ago, representing a year over year decrease of seven cents.
Rent on reimbursement revenues for the year $167.8 million compared to $154.8 million or an increase of 8.4% from the prior year.
Net operating income increased $9.5 million to $140.7 million for the year, reflecting a 7.3% increase from the comparable period a year ago.
Same property NOI for the 12 months ended September Thirtyth 2020 increased by 0.4% on a GAAP basis, and 1% on a cash basis. The 40 basis point increase in GAAP same property NOI and the 100 basis point increase in same property cash NOI were primarily driven by a 50 basis point increase in sales.
Same property occupancy.
As of the end of the fiscal year, our capital structure consisted of approximately $875 million in debt of which $800 million was property level fixed rate mortgage debt with a weighted average interest rate of 3.98% as compared to 4.03% in the prior year period.
Our weighted average debt maturity on our fixed rate mortgage debt is 11.1 years, representing one of the longest debt maturity schedules and the real sector.
On loans payable consists of a 75 million dollar term loans to $75 million term loan has a corresponding interest rate swap agreement to fix LIBOR at an all in interest rate of 2.92% we.
We also had a total of $472 million in perpetual preferred equity at year end.
Combined with an equity market capitalization of approximately $1.4 billion. Our total market capitalization was approximately $2.7 billion at year end, representing a 5% increase from a year ago.
From a credit standpoint, we continue to be conservatively capitalized with our net debt to total market capitalization at 31% and our net debt plus preferred equity to total market capitalization at 49% at year end.
For the fiscal year ended September Thirtyth 2020, our fixed charge coverage was unchanged versus the prior year period at 2.3 times and our net debt to adjusted EBITDA was also unchanged versus the prior year period at six times.
Yes.
From a liquidity standpoint, we ended the year with $23.5 million in cash and cash equivalents and the full availability on our credit facility.
In addition, we have $108.8 million in Mako to read securities, representing 4.9% of our Undepreciated assets.
Subsequent to fiscal year end the value of our securities portfolio has improved with recent positive vaccine news.
As we have previously reported early on during our fiscal year, we amended our unsecured line of credit facility, increasing the maximum availability of our revolver from $200 million to $225 million with an additional $100 million. According feature bringing the total potential availability up to $325 million.
Collars. In addition, the amended credit facility extended the maturity date of our revolver from September 2020 to January 2024 with options to extend further.
Furthermore, the amended facility was enhanced with a $75 million term loan, which matures January 2025, resulting in the total potential availability on the both the revolver and the term loan of up to $300 million and up to $400 million, including the $100 million. According feature the.
The amended line and credit and new term loan reduces our borrowing rates by a range of five to 35 basis points the.
The revolver currently busy interest at a rate of 1.61%.
We currently have the full $225 million available on their under revolver as well as an additional $100 million potentially available from the accordion feature to.
To reduce floating interest rate exposure on our term loan we entered into an interest rate swap agreement to fix LIBOR on the entire $75 million for the full duration of the term loan which is at an all in interest rate of 2.92%.
In addition, this year, we fully repaid two loans associated with two properties with a weighted average interest rate of 5.52%, which unencumbered approximately $19.7 million worth of real estate.
The continued substantial growth of our unencumbered asset pool enhances our financial flexibility and further strengthens our already strong credit profile.
And now let me turn it back to Michael before we open up the call for questions.
Thanks, Kevin just to reiterate some key points, we have a substantial 2.4 million square foot acquisition pipeline in place with two large deals scheduled to close very soon.
Acquisitions will help drive our performance going forward. We also have a sizable and growing amount of expansion projects, taking place with our largest tenant Fedex in order to accommodate the rapid growth in E commerce.
We have strengthened our already strong balance sheet and have ample capital to fund our future growth.
Our resilient occupancy tenant retention 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.
Lastly, as illustrated on slide 10 of our Investor presentation, which can be found on our website, our annual dividend yield as a multiple of the yield on the 10 year Treasury note is now at historic highs of over seven times normal.
Normally this multiple is approximately two and a half times.
Achieving over seven years of income from the T. note in one year of dividend income from our common stock represents compelling relative value.
High quality real estate also provides inflation protection, while fixed income debt instruments do not.
The strong financial position of our tenants together with the long duration of our leases has provided for high quality reliable income streams throughout many business cycles.
Our dividend was maintained throughout the global financial crisis, and it has increased by 13% since then.
That's a 53 year old public real RV civilians is self evident.
We'd now be happy to take your questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Rob Stevenson of Janney. Please go ahead.
Hi, good morning, guys.
Figured out a little bit when you guys were talking about the timing of the Cardinal health move out the U.P.S. moving what is my understanding that Cardinal health is now out that 377000 termination fee was in the fiscal fourth quarter, you're going to have some vacancy for the next three months and then essentially you P.S. moves and it to be.
Getting other years. So your second fiscal quarter is that the way to be thinking about this.
Yeah, Hi, Rob so yeah. So it was the lease termination for Cardinal health was effective on.
On October 1st so that that termination fee has to be recognized in our in our fiscal first quarter. So it'll be October fee. So it's not reflected in our earnings that we just posted and then the the new tenant EWP, yes. They at least as effective November onest. So there's one month.
Well I guess, there is no rent, but on but the you know that lease termination fee more than makes up for that okay. And essentially is is that there is at that point I mean on.
Almost 100 million share so that's not a meaningful impact.
First quarter FFO, Okay, Great and then Kevin while I've got you then on a question for you with the various dividend cash. So no reinstatement and then do you want me to prefer call et cetera, What's the current securities portfolio quarterly run rate I mean, you it was like 1.46.
Thanks for the fourth quarter, but that included some.
Some stocks that werent paying a dividend that are now I think paying a dividend. Some that are caught some that are no longer around how should we be thinking about the run rate of the securities portfolio on a quarterly or annual basis now.
Yeah, I'll take that one.
Quarterly run rate is 1.4 million per quarter 5.6 million annually.
And that's net of your mates redeeming the preferred.
Okay, 1.4 quarter, Alright, and then Mike.
The 3.2 years on recent renewals seem short even if tenants just exercise five year options do you have guys that are just kicking trying to kick the can out 12 18 months.
While they build something else and move in is that are you is that a fedex type of situation. There that you normally wind up seeing how would you characterize some of these lease renewals in the sort of term on them.
Well broad picture, our Walt was 7.2 years, a year ago at 7.1, now, but it's really pro forma much more than 7.1, we have a portfolio that's about 15% of our size and the portfolios going to has a wealth of 15.3 years. So so.
Some of those acquisitions are 20 year leases and many are 15, so as we closed on our acquisition pipeline to Walt will increase we have 17 parking expansions and that number is going to grow it.
Hard to say, what the total Fedex parking expansions will plateau at but it will definitely be more than 17 going on right now so in each one of those extends the lease. So those are the drivers of Walt being much longer than the 7.1 years, So and then as far as the renewals rich.
Specifically.
Our renewal weighted average lease term was 3.2 years, what was driving that so we had two tenants that did to two year renewals just kind of kicking the can down the road the others for the rest of the year I don't anticipate many coming back under five years. So.
So thats debt.
Those two kind of stand out as the short terms for this fiscal year.
And I mean, where are those two that are only two year leases where are they in terms of utilization other space or they are growing their space and are likely to need something bigger built whether or not it's something that you guys would own in the future somebody else are they you know.
Are they in areas that.
Aren't that are partner, though the weaker parts of the economy, how do you characterize that.
No I'd say on both of those buildings are strong buildings and those tenants you net.
Ever know they could in two years a lot can happen so.
I wouldn't read too too much into those two year renewals.
Okay. Thanks, guys appreciate it.
[music].
The next question comes from Frank Lee of BMO. Please go ahead.
Hi, Good morning, everyone. Just wanted to touch on the parking expansion projects. How are these projects typically source for identified are you proactively approaching Fedex and are there.
On opportunities for similar type of parking expansions that you're actively working on the on Fedex.
Well first of all day.
Our portfolio average building age is under 10 years, and our Fedex portfolio, which roughly represents half of our 24 million square foot portfolio is even younger and these are digital buildings. They are built to specifically served the digital economy and therefore, they have much more land.
Then what we'll call the old analog wholesale type distribution buildings that just took racks in forklifts, where the extent of the technology because they serve the brick and mortar retail distribution supply chain now, we're doing home delivery omni channel distribution and so.
The.
The pandemic created.
A parabolic shift in the amount of goods moving on line. It was already growing at a 15% CAGR now it's growing at 30%, we're heading peak season, and Fedex you P.S. Amazon they can even deliver all the goods needed for that for the holiday season. So we're on.
Has the capacity of shipments the U.S. can ship 80 million packages, a day and demand is over 90 million packages for the holiday season. So so Fedex is.
Ramping up the van parking to do increase home delivery at.
18.
Properties of ours, which is 15% of our portfolio is now undergoing parking expansions and like I said that number is going to increase so so the drivers the tenant the inordinate demand for the tenant the ability for the tenant to try to serve the digital economy and the fact that our assets have ample land.
Where we could expand in the cases, where.
Where land constrained will preemptively go out and purchase land that is contiguous to our properties because we've done many property expenses for our tenants over the years and you never know when.
The expansion request on.
On to come in and there was a big period of expansions, where we did about 80 million expansions in two years about about four or five years ago and then it was quiet and now they are coming in.
Over the transom.
And I'll just add on things that for our new U P. S lease weve, they've already approached us on expanding that parking too. So it's just a case in point for home delivery how much parking. These these tenants needs.
Okay, Great and then you mentioned the vacant Hartford property. This property is still being marketed for sale. So how's activity. So far and are there any other potential sales candidate candidates within your portfolio.
The other one suppose likely not going to be sold there's it's out for signature within investment grade tenant and we're hopeful we'll have good news on that front soon.
Okay, Great and then last one for me Michael.
Mike you mentioned kind of two larger.
Acquisition debt expected closing near term.
Are you able to provide a breakdown by quarter on when you expect directs the rest of the acquisition pipeline to close over the next year.
Sure Frank.
Our two largest deals which is fedex in Columbus, and home depot, and Atlanta, representing about 50% of our 338.4 million dollar pipeline are supposed to close before the end of the calendar year. So that's 50% of the pipeline right. They are closing in December ideally.
And that's $10 million in revenue and that will really move the needle of earnings and put us in a really good position with regards to our AFFO dividend payout ratio. So we're looking forward to a announcements.
As those deals close then the other 15% nothing slated for the second quarter about 16% and this is in dollar volume is supposed to close in Q3, and then 19% in Q4 and then the remaining 50 per cent sometime in the first half of fiscal 2002.
Okay, great. Thank you.
Welcome.
The next question comes from garage Mehta of National Securities. Please go ahead.
Yes.
So you got to secure financing 0.3 on the six acquisitions.
Maybe comment on what your expectation is for diamond on the financing are you expecting to.
You bet on starting cash to fund from other manner.
Okay, Kevin it's hard to hear your growth, but I think I got it did you get that Kevin I think he's asking how does that we've locked in financing on some of the deals on the pipeline and you wanted some color on that on what on the remaining three blocks in three and how do you plan to finance the other three okay. Yes. So just just so everybody knows the we've locked in three.
Of the six deals in the pipeline its and Weve locked in with a long term on mortgage rate debt. The three deals have a weighted average maturity of 15.8 years weighted average interest rate of slightly on the 3%, 2.99% with about 62% LTV on.
And for the remaining three deals.
We expect to just continue that you know that that that way. That's the way we've always found that our pipeline and that's the way. That's just the method that works for US. These are all fully amortizing loans, we match our on our we match the lease term with the with the debt term.
Matching our revenue with our expenses and our debt maturities and that's just the way we do it and on.
On the remaining you know other 30, 35% no that's not funded with with long term debt. We have many sources of capital we could be we could use the ATM, we could raise money through the drip we have a common ATM we have a fully oh, we have a line of credit of that's not not drawn down at all so we.
On a full capacity on that on.
So just several different ways and what Monmouth does these are monmouth deals, they're long term leases to investment grade tenants. They are brand new built to suit automated digital buildings for the digital economy. So the the financing terms that we've been.
And successfully executing on the three deals on a thus far of the pipeline will be similar it'll be the same lenders will be similar terms and it's easy to model.
Okay.
The second question I was hoping if you could provide some color on whats your guidance in the acquisition market outside on the six properties that you have on the contract.
Maybe some comments on the product no on.
On the GAAP it's interesting.
Well, it's really competitive out there as it's been and the lanes as I said last quarter have narrowed and all the capital earmarked for commercial real estate wants exposure to our sector.
Unquestionably the hottest sector and so you see backs being formed and I'm told there's boxes back. So there's a lot of capital out there now as a 53 year old company, we have relationships with the merchant builder community and I'm very pleased we were able to increase our pipeline over the quarter substantially with quality.
Deals and that's all we focus on so we're not going to grow for growth sake, but I think I'm confident we'll be able to continue to land the type of deals that weve built this portfolio one high quality acquisition at the time and the people we've done transactions with our I've been partners for decades and so.
They come to us with deals and are from a Fedex and Amazon standpoint, the prospects future prospects have never been better their record revenue record shipments and they need more.
Distribution centers more fulfillment centers and the same can be said for some of our other relationships. So.
It's competitive and we're going to have to keep bidding ever decreasing cap rates, but it's still accretive and the lending rates have come down so the spreads remain good but a more people a day.
Our embracing a exactly what we do and some of the.
Other new entrants into the sector. There Powerpoint presentations look like they were cut and paste did right from ours. So you know, we we take that as a compliment, but it's definitely getting crowded out there.
Okay. Thank you.
The next question comes from Michael Carroll RBC capital markets. Please go ahead.
Yes, I'm, sorry, I'm not sure. If you guys mentioned this or not but can you talk a little bit about the current at least in the U.S. sleeves and seems like Cardinals was taking about seven Bucks a square foot previously on did you say what you Pos plans on paying and if so is there any other capital costs related to that new lease with EWC EPS coming in.
So that on net GAAP and cash basis went down, but we did pick up 9.3 years of additional term with an investment grade tenants. So that's a win for us and yes like I said, they do want to do a parking expansion that will be on our normal terms.
On how we do all of our parking expansions. So you can.
Rents are going to increase at that location.
Okay. So how much did price drop there will be a return of capital for that investment above and beyond the figures rich just gave you.
Also on fact, so what was it.
Yeah, I was going to say if you factor in the lease termination fee to its on its slightly positive on a GAAP basis.
Yes, so where's the new rent for the U.S. leases first the Cardinal rent. The 723 in the south is that a GAAP rate or is that a cash rate.
That's the GAAP rate.
And then what's the new GAAP rate for us.
The new what GAAP rate for your peers, that's the 721 on a GAAP basis.
Okay.
And then Theres no other T.I.s through Lcs related to that's the only other capital cost that you have the parking lot, which you're gonna get was that Michael that a 10% yield on those.
Yeah, Evan structured that yet there were hopefully be a 10% return and an additional lease term, but thats a comp.
Constant.
Okay is there any other T.I.s or lcs outside of that parking lot.
We had to put in new lights for them there was a few.
Just tenant improvements that we did but those were with rebates and pretty light on the T. Rowe price.
Okay.
And then Mike can you talk a little bit about the acquisition cap rates I guess with the new competition coming in I know you've been able to complete some deals in the low six cap range I mean should we expect those cap rates the drift flow six over the next 12 plus months or so on given the competition for industrial products.
No question No question I I am not bidding six is on anything these days and in some cases south of five but the next deal were going to close is a fedex ground and Columbus and we came to agreement on that deal over two years ago. So we lock that in you know.
Before a lot of this continued cap rate compression and and that's a healthy cap rate north of six so bye bye.
Supply and demand and demand is great for industrial assets and cap rates have continued to come down so.
Hopefully you are pipeline average cap rate will be in the mid fives. It's currently 5.96 and next time, we speak it will drift lower here just a question of how much lower and the important thing is interest rates continue to come down. So so the spreads are there and still very accretive.
Our for our common shareholders on a per share level for us to close these deals and then with these tenants like I said, yes suddenly Fedex has so many expansions, which will be lucrative returns and then take our walt much higher than the 7.1 years, we're showing you and it's just a very healthy.
ER business model that smoothes out the rough economic cycles, because theres a lot of distress in dire circumstances going on out there and I don't know anybody else is talking about 15% other portfolio being expanded currently.
If I may add something as everyone is interested in cap rates and returns for the last quarter.
And I keep looking ahead is seven years from now at least we these leases will be renewed.
Seven years from now you are going to have a different value of the dollar volume have considerable inflation and the the actual return on a levitz investment may be substantially more than you think.
On these.
Relationship, making that so the reason I'm not travel the cap rates are going down the road. This as Michael pointed out the spreads this though that but I think you are real return is much greater than anyone fig is because with the deficit as we have with the.
And these needs, but low interest rates for the foreseeable future I think inflation is on the horizon and the.
The the total return we're going to get from these investments is substantially more than the numbers that it would.
Looking about.
Thank you okay.
And then Mike I just wanted to touch on you said that you are bidding on some deals. Some five can you talk about those deals are those transactions that you're looking at cash completing and would you be willing to go that low.
I would if the lease term was long enough in the Escalations on talking about the going in year, one cap rate and if its a long lease with healthy bumps the average cap rate will be substantially higher than that so.
Yes, if that's what it takes to win a quality asset with a quality tenant.
And I'm confident we can get financing well inside of 200 basis points below that I will try to win those deals.
Kevin and then what type of balance when you look at they get on to that five cap. If you have go after us on what the five cap what type of bumps would be you consider healthy.
Well it too is the average these days and a rich data on Amazon renewal with 3% bumps for 10 years. So three is better than to in some cases theres slightly under two but not on meaningfully under to Kevin you want to add something I just wanted to add something you know earlier when I was talking about the deals we've locked in with the weighted average.
On interest rate of 2.99 on.
It's a you know some of those deals were locked in a long time ago before interest rates drop so that they range between three and a quarter down to 2.6. So the 2.6 is the latest one so I feel confident that we'll be getting so three you know in that 2.6 range going forward. So that will help with the with the drop in cap rate as Mike.
You mentioned the drop in interest rate as well.
Okay, and then and then can you guys talk a little bit of balance here your leverage metrics right. Now I know you talked about the the ltvs on the secured financing on the upcoming deals but were what are you going on how are you going to fund the rest of it are you willing to issue equity at these levels or should we continue to expect more preferred equity and the leverage to continue to creep higher.
Well at year end, we had 472 million in our series C preferred and there's been really strong demand for our preferred ATM.
I think we did another 35 million subsequent to year end. So is about 507 million currently outstanding and the call protection on that is another 10 months. So that tells me that investors on a new preferred issue would be substantially lower than our series C. Six.
On an eight or a series C was issued to redeem high coupon preferred that we had on our balance sheet in the high Sevens and so as we get closer to the maturity date of the series C. We ideally would do a new issue.
And some financial savings.
It's a big issue this 500 million outstanding and probably it by that time, even more Coos answer is yes, we will use preferred to fund the pipeline.
And then we'll start taking it down in about $100 million trenches with lower cost to capital with the securities portfolio is yielding about 4.5% currently it's up about 20% since fiscal year end, it's about a $130 million in value. So that would be a logical candidate to use that capital to take out some.
On the preferred so so those are the plans as far as issuing common equity not at these price is.
You know any of these well north of where were currently trading and so while we had a common ATM on.
Up in running since from two years now we haven't issued a single shares and nor do we ignored or nor do we intend to at these levels.
Okay, and then just real quick I guess on that Securities book are you planning on selling any securities here in the near term I guess, what would make you sell debt and what's the timing on that.
Well.
It's improved dramatically just on the vaccine news and as cold as it becomes something in our rearview mirror I'm sure. It will be even more valuable one of our largest holdings is the new MH manufactured housing and industry are the only two property types have appreciated in value post co bid so I'd be hesitant to say.
Well, the you image, but yes, we.
We certainly would harvest gains in some of our holdings, but I think as we get closer to the redemption date of the preferred.
Good.
That will be more of a catalyst in doing anything at this particular moment.
Okay, great. Thanks.
The next question comes from Fred Sao Keith of Boston University. Please go ahead.
Hi, Thank you and congratulations again on that.
Outstanding performance. My first question is on the follows the last question, but I was wondering long term, where do you sort of see that securities portfolio. Because you know we using the cash to buy these securities, but you like one on Buffett, let's take the crazy Mark to market.
Kind of a crazy thing, but you have to do that so I got the feeling that you work on that kinda over time, so reduce that just so you don't have the so saw them.
Adjustments to the to the quarter, So where does that go on long term.
Okay, I'm going to turn it over to team because reads investing in other reeds is gene Landy his brain child I do agree the new accounting has definitely made it.
Problematic.
And we haven't bought any read securities in going on two years. So we havent been allocating capital on the securities portfolio, we've been winding it down slowly.
Used to be 10% of gross assets, it's now rounding up 5% of gross assets, but gene day. Please answer his question in more detail.
You have to understand that the.
Balance sheet, we have has been planned and has worked out very well over many decades that we've maintained a liquidity and liquidity at all cost and the the liquidity. We have now is we have about the.
19 million and securities that I can pick up the phone I can borrow up 50 million tomorrow at 1% I can sell the securities I have that liquidity. The other thing you have to understand that that's part of the overall financial plan for the company.
The beauty of what's happening is we're paying down these mortgages.
Sizing mortgages over 10, 15 years, and we've been around for 50 years and as the offices announced to you that we'll renewing renewing the leases then the leases are being renewed and the mortgage is a down in balance. So that we have a substantial number of five it is free and clear.
But the properties that we have avoided.
I believe we gave an example, we paid off a few million dollars on feed up $12 million and profit is low on the big numbers, we're going to pay off the $50 million and free up on it and $50 million on properties and those had on 50 million and properties of they have leases on them with credit tenants, we can borrow against them on.
Hundred million Davos now you have to have pets. It day amount on liquidity, we're going to have so I have some questions that when we have this pipe line up to 400 million people worried where we're going to get the money well, we worried about that in advance and we have them on a very liquid and one other things we have.
Let the Securities program and fourth is the liquidity and I've always wanted to have 234 sources of liquidity. We have lines. We avenues, we have securities we have 80 EMS.
Even from May we seem to have ample liquidity right now and if we have the 50 to 60 million gallons mortgages.
Amadeus type thing that will free up a 150 million assets, which will fail on 100 and other then click on it I have no objection to selling some of the securities and paying down those mortgages or the actually generating a 100 million in cash, which the next year you might use to redeem some of the profit ads on the amount.
Its involved we have a capital stack close to 500 million at six in a day and if you can save two or three points in refinancing it you're talking about a lot of commodity is talking about 10 $15 million. So we think the capital stock of bed capital stack will eventually be.
Refinanced and the mortgages will be refinanced and is live.
As long as these leases have begun we knew that the basic economy is going well. This company is going to do very very well.
Okay. Thank you excellent response I appreciate it.
You're welcome.
The next question comes from Mike Mueller of Jpmorgan. Please go ahead.
Yes, Hi, just a quick one I was wondering can you talk about the remaining 620 21 explorations and just what you're expecting there in terms of.
Timing to knock those out what you think the spreads could look like.
Sure sure. So all of those are in discussion now some of them are further along than others and I would expect that all of our metrics will go up from our Walt to our GAAP and our cash spreads. So that's kind of what it's looking like now.
Three of the big ones are are back half weighted to the end of this year.
So Tom.
Timing wise hopefully in the next two quarters, we have most of those locked and I'll just add something in no Kevin once it get in on this as well.
Historically, we've had 90% tenant retention and that's important because their credit tenants and you want to keep the cash flow secured by investment grade tenants and last year, we had 87% tenant retention and I know rich is shooting for 100% tenant retention this year and we've had no known move out.
It's in the tenants make big investments in the buildings. So it's not easy for them to move once they've made tens of millions of dollars in automation inside of these buildings were working on a new annual report and were featuring a lot of the infrastructure inside of the building. So you could see that you know even though industrial is one.
Big bucket of everything there's really digital assets that are so different than the analog assets and we'll be illustrating that point in our new annual report comes out on a couple of months, Kevin would you want to say I just wanted to ask Fritz I think something came in this morning on actually so that was for that renewed in our K and one.
Came in this morning again. This morning, we did have one of our Fedex leases renew for five years. So thats another one out small on but.
Positive spreads.
Got it okay. Thank you.
The next question comes from Craig Sarah of B. Riley FBR. Please go ahead.
Hey, good morning, guys.
I know you mentioned that you had six expansions currently in progress and maybe an additional 10 you might announce if those move forward would you expect those to be completed inside of 12 months or they can they be negotiated in to a longer term.
Yes, some average answer that but it's very fluid. So we have six ongoing one completed and the 10 became 11. So it's very fluid and like I said, it's going to be more we don't know what the total number is going to be but they this is going to be a multi year process.
Yeah, Mike you pretty much hit it I mean, this we've got to take down land in some instances in those approvals and that timeframe to do it.
But that ex needs. This yesterday, so they are moving as fast as they can and so are we so hopefully next year, we get a bunch from Donna but peak season is extraordinary Fedex distribution Center will go from 50 employees to 550, and all construction will come to a standstill from October to mid January.
And then start up again and ideally have additional parking capacity for next peak season, but some will go into the following year and it will just be a multiyear process as I said.
Got it and Mike you tripled the size of the company over the last seven years and you've got nearly 340 million in your acquisition pipeline I'm just given the growth of the company in the long term relationships you have with a lot of your tenants do you ever consider bringing more of a development component in house.
There's pros and cons to that you know and we know some great developers that would love to fit that bill but.
The problem is you have to bank land and that's non income producing and when it comes to bidding on the RFP is that are out there for these day.
Digital buildings on long term leases to investment grade tenants, it's a multi stage process and if we have in house development capacity.
We're competing against our legacy merchant builders and.
We feel for a company our size the better mouse trap is to have multiple relationships with the merchant builder community. That's exactly why we were able to triple the size of the company and if we had in house development on the growth would have been much slower.
Okay. Thanks.
Growth.
The next question comes from Barry Oxford of D.A. Davidson. Please go ahead.
Hey, Mike a quick question on the Securities portfolio.
Would you entertain you know maybe switching out some of the securities to get into some more stable dividends that wouldn't be up for being cut.
So you're talking about just reallocating, yes, good real estate into other right.
Right reallocation correct, yes.
You know we were thinking about rotating into preferred out of the common when the preferred market sold off in real.
Really.
We're just waiting for things to come back to to fair value it's been decimated.
The market is very short term oriented just take Monmouth for instance, I know.
Some institutions came in and took very big positions in March only to sell in the summer months and that's how people invest its really trading it's not investing and so were you were the opposite we're long term investors, we have our holdings, they've gone up and down mostly down of late and we're just going to hold them until we get to a post.
Pandemic environment, and then rotate out other securities portfolio for all the reasons, we've stated as far as moving from one instrument to another I'm not precluding that but but it's not going to be a very active.
Situation if at all.
Okay. Okay.
And then just kind of switching gears, a little bit how how much would you let the preferred become part of your capital stack.
We've said, we'll take it as high as 25% I think it's 16% currently and we're now getting back to that theme of being long term investors.
We like long term leases on the asset side and on the balance sheet side, we like long term debt maturities, we have the longest debt maturity schedule on the REIT sector with over 11 years, and then we have a big tranche about 16% of our capital structure is in perpetual permanent capital.
Never comes due so.
We will always have big tranches of preferred.
But it won't necessarily albeit on six in a series C. We're in a very low interest rate environment. I think there's 17 trillion dollars in debt instruments, yielding lessons zero and like I said the orders from our ATM on our series C or.
Our very strong so we will probably do a new issue at some point a at a lower cost to capital, but we are big believers in permanent preferred equity, even though its relatively expensive compared to short term capital for all the reasons gene said about remaining liquid you never have refinancing risk.
And if you look at the long 5000 year history of interest rates, yes people never even contemplated negative interest rates. So so.
I know a public storage is the.
Big proponent and then the first read to ever issue.
Perpetual preferred and their price issue was at 10% and other setting record lows not just in the real industry, but for the whole preferred market with sub 4% permanent capital. So our initial preferred is were seven and three quarters and now six in any case and that evolution will continue at a ever.
Decreasing cost.
As the company gets bigger and.
We continue to growth.
Perfect appreciate the color Mike.
Well.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Becky coolers for any closing remarks.
Thank you operator, I'd like to thank the participants on this call for their continued support and interest in our company.
As always we are available for any follow up questions.
On behalf of my comments I'd like to wish everyone, a healthy and happy holiday season, and a very prosperous new year.
Total ridge reporting back to you after our first quarter.
The conference has now concluded thank you for attending today's presentation the.
The teleconference replay will be available shortly.
Shortly after the call ends to access this replay please dial U.S. toll free 87734475 to nine or international total one for one too.
170, 088, the conference I'd number is 10147191. Thank you. Please disconnect your lines.