UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
EXCHANGE ACT OF 1934
For
the quarterly period ended
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | identification number) |
(Address of Principal Executive Offices) (Zip Code)
Registrant’s
telephone number, including area code (
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| New York Stock Exchange | ||||
| New York Stock Exchange |
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer ☒ | Accelerated filer ☐ | ||
| Non-accelerated filer ☐ | Smaller
Reporting Company |
||
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Number of shares outstanding of the issuer’s common stock, $0.01 par value per share, as of August 1, 2020:
MONMOUTH REAL ESTATE INVESTMENT CORPORATION
AND SUBSIDIARIES
FOR THE QUARTER ENDED JUNE 30, 2020
C O N T E N T S
| Page No | ||
| PART I | FINANCIAL INFORMATION | |
| Item 1 - | Financial Statements (Unaudited): | |
| Consolidated Balance Sheets | 3 | |
| Consolidated Statements of Income (Loss) | 5 | |
| Consolidated Statements of Shareholders’ Equity | 7 | |
| Consolidated Statements of Cash Flows | 9 | |
| Notes to Consolidated Financial Statements | 10 | |
| Item 2 - | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 23 |
| Item 3 - | Quantitative and Qualitative Disclosures About Market Risk. | 36 |
| Item 4 - | Controls and Procedures. | 36 |
| PART II - | OTHER INFORMATION | |
| Item 1 - | Legal Proceedings. | 37 |
| Item 1A - | Risk Factors. | 37 |
| Item 2 - | Unregistered Sales of Equity Securities and Use of Proceeds. | 37 |
| Item 3 - | Defaults Upon Senior Securities. | 37 |
| Item 4 - | Mine Safety Disclosures. | 37 |
| Item 5 - | Other Information. | 37 |
| Item 6 - | Exhibits. | 37 |
| SIGNATURES | 38 | |
| 2 |
PART I:
FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2020 AND SEPTEMBER 30, 2019
(in thousands except per share amounts)
June 30, 2020 | September 30, 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Real Estate Investments: | ||||||||
| Land | $ | $ | ||||||
| Buildings and Improvements | ||||||||
| Total Real Estate Investments | ||||||||
| Accumulated Depreciation | ( | ( | ||||||
| Real Estate Investments | ||||||||
| Cash and Cash Equivalents | ||||||||
| Securities Available for Sale at Fair Value | ||||||||
| Tenant and Other Receivables | ||||||||
| Straight-line Rent Receivable | ||||||||
| Prepaid Expenses | ||||||||
| Intangible Assets, net of Accumulated Amortization of $ | ||||||||
| Capitalized Lease Costs, net of Accumulated Amortization of $ | ||||||||
| Financing Costs, net of Accumulated Amortization of $ | ||||||||
| Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
See Accompanying Notes to the Consolidated Financial Statements
| 3 |
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS – CONTINUED
AS OF JUNE 30, 2020 AND SEPTEMBER 30, 2019
(in thousands except per share amounts)
| June 30, 2020 | September 30, 2019 | |||||||
| (Unaudited) | ||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Liabilities: | ||||||||
| Fixed Rate Mortgage Notes Payable, net of Unamortized Debt Issuance Costs | $ | $ | ||||||
| Loans Payable | ||||||||
| Accounts Payable and Accrued Expenses | ||||||||
| Other Liabilities | ||||||||
| Total Liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Shareholders’ Equity: | ||||||||
| Common Stock, $ Par Value Per Share: and Shares Authorized as of June 30, 2020 and September 30, 2019, respectively; and Shares Issued and Outstanding as of June 30, 2020 and September 30, 2019, respectively | ||||||||
| Excess Stock, $ Par Value Per Share: Shares Authorized as of June 30, 2020 and September 30, 2019; Shares Issued or Outstanding as of June 30, 2020 and September 30, 2019 | ||||||||
| Additional Paid-In Capital | ||||||||
| Undistributed Income | ||||||||
| Total Shareholders’ Equity | ||||||||
| TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY | $ | $ | ||||||
See Accompanying Notes to the Consolidated Financial Statements
| 4 |
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2020 AND 2019
(in thousands)
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| 6/30/2020 | 6/30/2019 | 6/30/2020 | 6/30/2019 | |||||||||||||
| INCOME: | ||||||||||||||||
| Rental Revenue | $ | $ | $ | $ | ||||||||||||
| Reimbursement Revenue | ||||||||||||||||
| TOTAL INCOME | ||||||||||||||||
| EXPENSES: | ||||||||||||||||
| Real Estate Taxes | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| General & Administrative Expenses | ||||||||||||||||
| Non-recurring Severance Expense | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Amortization of Capitalized Lease Costs and Intangible Assets | ||||||||||||||||
| TOTAL EXPENSES | ||||||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Dividend Income | ||||||||||||||||
| Unrealized Holding Gains (Losses) Arising During the Periods | ( | ( | ( | |||||||||||||
| Interest Expense, including Amortization of Financing Costs | ( | ( | ( | ( | ||||||||||||
| TOTAL OTHER INCOME (EXPENSE) | ( | ( | ( | |||||||||||||
| NET INCOME (LOSS) | ( | |||||||||||||||
| Less: Preferred Dividends | ||||||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | $ | ( | $ | ( | $ | ( | |||||||||
See Accompanying Notes to Consolidated Financial Statements
| 5 |
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2020 AND 2019 – CONTINUED
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| 6/30/2020 | 6/30/2019 | 6/30/2020 | 6/30/2019 | |||||||||||||
| BASIC INCOME (LOSS) – PER SHARE | ||||||||||||||||
| Net Income (Loss) | $ | $ | $ | ( | $ | |||||||||||
| Less: Preferred Dividends | ( | ( | ( | ( | ||||||||||||
| Net Income (Loss) Attributable to Common Shareholders - Basic | $ | $ | ( | $ | ( | $ | ( | |||||||||
| DILUTED INCOME (LOSS) – PER SHARE | ||||||||||||||||
| Net Income (Loss) | $ | $ | $ | ( | $ | |||||||||||
| Less: Preferred Dividends | ( | ( | ( | ( | ||||||||||||
| Net Income (Loss) Attributable to Common Shareholders - Diluted | $ | $ | ( | $ | ( | $ | ( | |||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (in thousands) | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See Accompanying Notes to Consolidated Financial Statements
| 6 |
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019
(in thousands, except per share data)
| Common Stock | Preferred Stock Series C | Additional Paid in Capital | Undistributed Income (Loss) | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||
| Balance March 31, 2020 | $ | $ | $ | $ | $ | | $ | |||||||||||||||||
| Shares Issued in Connection with the DRIP (1) | ||||||||||||||||||||||||
| Shares Issued in Connection with At-The-Market Sales Agreement Program of | ( | ) | ||||||||||||||||||||||
| Shares Repurchased through the Common Stock Repurchase Plan | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Stock Compensation Expense | ||||||||||||||||||||||||
| Distributions To Common Shareholders ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Net Income (Loss) | ||||||||||||||||||||||||
| Preferred Dividends ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Balance June 30, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Common Stock | Preferred Stock Series C | Additional Paid in Capital | Undistributed Income (Loss) | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||
| Balance March 31, 2019 | $ | $ | $ | $ | $ | | $ | |||||||||||||||||
| Shares Issued in Connection with the DRIP (1) | ||||||||||||||||||||||||
| Shares Issued in Connection with At-The-Market Sales Agreement Program of | ( | ) | ||||||||||||||||||||||
| Stock Compensation Expense | ||||||||||||||||||||||||
| Distributions To Common Shareholders ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Net Income (Loss) | ||||||||||||||||||||||||
| Preferred Dividends ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Balance June 30, 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (1) | Dividend Reinvestment and Stock Purchase Plan |
See Accompanying Notes to the Consolidated Financial Statements
| 7 |
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 2020 AND 2019
(in thousands, except per share data)
| Common Stock | Preferred Stock Series C | Additional Paid in Capital | Undistributed Income (Loss) | Accumulated
Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||
| Balance September 30, 2019 | $ | $ | $ | $ | $ | | $ | |||||||||||||||||
| Shares Issued in Connection with the DRIP (1) | ||||||||||||||||||||||||
| Shares Issued in Connection with At-The-Market Offerings of | ( | ) | ||||||||||||||||||||||
| Shares Issued Through the Exercise of Stock Options | ||||||||||||||||||||||||
| Shares Repurchased through the Common Stock Repurchase Plan | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Stock Compensation Expense | ||||||||||||||||||||||||
| Distributions To Common Shareholders ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Net Income (Loss) | ( | ) | ( | ) | ||||||||||||||||||||
| Preferred Dividends ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Balance June 30, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Common Stock | Preferred Stock Series C | Additional Paid in Capital | Undistributed Income (Loss) | Accumulated Other
Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||
| Balance September 30, 2018 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||
| Impact of Adoption of Accounting Standards Update 2016-01 | ( | |||||||||||||||||||||||
| Shares Issued in Connection with the DRIP (1) | ||||||||||||||||||||||||
| Shares Issued in Connection with Underwritten Public Offering of Common Stock, net of offering costs | ||||||||||||||||||||||||
| Shares Issued in Connection with At-The-Market Sales Agreement Program
of | ( | |||||||||||||||||||||||
| Shares Issued Through the Exercise of Stock Options | ||||||||||||||||||||||||
| Stock Compensation Expense |
| |||||||||||||||||||||||
| Distributions To Common Shareholders ($ per share) | ( | ( | ||||||||||||||||||||||
| Net Income (Loss) | ||||||||||||||||||||||||
| Preferred Dividends ($ per share) | ( | ( | ||||||||||||||||||||||
| Balance June 30, 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (1) |
See Accompanying Notes to the Consolidated Financial Statements
| 8 |
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 2020 AND 2019
(in thousands)
| Nine Months Ended | Nine Months Ended | |||||||
| 6/30/2020 | 6/30/2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Income (Loss) | $ | ( | $ | |||||
| Noncash Items Included in Net Income (Loss): | ||||||||
| Depreciation & Amortization | ||||||||
| Deferred Straight Line Rent | ( | ( | ||||||
| Stock Compensation Expense | ||||||||
| Securities Available for Sale Received as Dividend Income | ( | ( | ||||||
| Unrealized Holding Losses Arising During the Periods | ||||||||
| Changes In: | ||||||||
| Tenant & Other Receivables | ( | |||||||
| Prepaid Expenses | ( | ( | ||||||
| Other Assets & Capitalized Lease Costs | ( | |||||||
| Accounts Payable, Accrued Expenses & Other Liabilities | ||||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of Real Estate & Intangible Assets | ( | ( | ||||||
| Capital Improvements | ( | ( | ||||||
| Return of Deposits on Real Estate | ||||||||
| Deposits Paid on Acquisitions of Real Estate | ( | ( | ||||||
| Proceeds from Securities Available for Sale Called for Redemption | ||||||||
| Purchase of Securities Available for Sale | ( | |||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ( | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Net Repayments on Loans Payable | ( | ( | ||||||
| Proceeds from Fixed Rate Mortgage Notes Payable | ||||||||
| Principal Payments on Fixed Rate Mortgage Notes Payable | ( | ( | ||||||
| Financing Costs Paid on Debt | ( | ( | ||||||
| Proceeds from the Exercise of Stock Options | ||||||||
| Proceeds from Underwritten Public Offering of Common Stock, net of offering costs | ||||||||
| Proceeds from At-The-Market Stock, net of offering costs | ||||||||
| Proceeds from Issuance of Common Stock in the DRIP, net of Dividend Reinvestments | ||||||||
| Shares repurchased through the Common Stock Repurchase Plan | ( | |||||||
| Preferred Dividends Paid | ( | ( | ||||||
| Common Dividends Paid, net of Reinvestments | ( | ( | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | |||||||
| CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | $ | ||||||
See Accompanying Notes to Consolidated Financial Statements
| 9 |
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2020
NOTE 1 – ORGANIZATION AND ACCOUNTING POLICIES
Monmouth
Real Estate Investment Corporation, a Maryland corporation, together with its consolidated subsidiaries (we, our, us, the Company
or MREIC), operates as a real estate investment trust (REIT) deriving its income primarily from real estate rental operations.
We were founded in 1968 and are one of the oldest public equity REITs in the world. As of June 30, 2020, we owned
The
future effects of the evolving impact of the COVID-19 pandemic are uncertain, however, at this time COVID-19 has not had a material
adverse effect on our financial condition. We invest in modern single-tenant, industrial buildings, leased primarily to investment-grade
tenants or their subsidiaries on long-term net-leases. Our investments are exclusively situated in the continental United States,
and are primarily located in strategic locations that are mission-critical to our tenants’ needs. In many cases our buildings
are highly automated in order to serve the omni-channel distribution networks that have become essential today. Approximately
81% of our revenue is derived from investment-grade tenants, or their subsidiaries as defined by S&P Global Ratings (www.standardandpoors.com)
and by Moody’s (www.moodys.com). The references in this report to S&P Global Ratings and Moody’s are not intended
to and do not include, or incorporate by reference into this report, the information of S&P Global Ratings or Moody’s
on such websites. For many years, ecommerce demand has increased, and it has now become an integral part of the retail landscape.
The COVID-19 pandemic has created an even greater move towards on-line shopping.
| 10 |
Our base rent collections during the COVID-19 pandemic were as follows:
| Month | Percentage of Base Rent Collected | |||
| March | ||||
| April | ||||
| May | ||||
| June | ||||
| July | ||||
We have elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the Code), and we intend to maintain our qualification as a REIT in the future. As a qualified REIT, with limited exceptions, we will not be taxed under Federal and certain state income tax laws at the corporate level on taxable income that we distribute to our shareholders. For special tax provisions applicable to REITs, refer to Sections 856-860 of the Code. We are subject to franchise taxes in several of the states in which we own properties.
In December 2017, as part of the Tax Cuts and Jobs Act of 2017 (the TCJA), Section 199A was added to the Code and became effective for tax years beginning after December 31, 2017 and before January 1, 2026. Under the TCJA, subject to certain income limitations, an individual taxpayer and estates and trusts may deduct 20% of the aggregate amount of qualified REIT dividends they receive from their taxable income. Qualified REIT dividends do not include any portion of a dividend received from a REIT that is classified as a capital gain dividend or non-qualified dividend income.
The interim Consolidated Financial Statements furnished herein have been prepared in accordance with Accounting Principles Generally Accepted in the United States of America (U.S. GAAP) applicable to interim financial information, the instructions to Form 10-Q, and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation, have been included. Operating results for the three and nine months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
Use of Estimates
In preparing the financial statements in accordance with U.S. GAAP, we are required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods and related disclosure of contingent assets and liabilities. Actual results could differ from these estimates and assumptions.
Reclassification
Certain prior period amounts in the accompanying Consolidated Financial Statements have been reclassified to conform to the current period’s presentation.
| 11 |
Stock Compensation Plan
We account for awards of stock, stock options and restricted stock in accordance with ASC 718-10, “Compensation-Stock Compensation.” ASC 718-10 requires that compensation cost for all stock awards be calculated and amortized over the service period (generally equal to the vesting period). The compensation cost for stock option grants is determined using option pricing models, intended to estimate the fair value of the awards at the grant date less estimated forfeitures. The compensation expense for restricted stock is recognized based on the fair value of the restricted stock awards less estimated forfeitures. The fair value of stock awards and restricted stock awards is equal to the fair value of our stock on the grant date. The amortization of compensation costs for the awards of stock, stock option grants and restricted stock are included in General and Administrative Expenses in the accompanying Consolidated Statements of Income (Loss) and amounted to $98,000 and $231,000 for the three months ended June 30, 2020 and 2019, respectively and amounted to $368,000 and $574,000 for the nine months ended June 30, 2020 and 2019, respectively.
Date of Grant | Number of Employees | Number of Shares (in thousands) | Option Price | Expiration Date | ||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| Fiscal 2020 | Fiscal 2019 | |||||||
| Dividend yield | ||||||||
| Expected volatility | ||||||||
| Risk-free interest rate | ||||||||
| Expected lives (years) | ||||||||
| Estimated forfeitures | ||||||||
The weighted-average fair value of options granted during the nine months ended June 30, 2020 and 2019 was $ and $ per share subject to the option, respectively.
During
the nine months ended June 30, 2020, shares of restricted stock were granted.
During the nine months ended June 30, 2019, shares of restricted stock were granted.
During the nine months ended June 30, 2020, two participants exercised options to purchase shares of common stock at a weighted average
price of $per share for total proceeds of $
| 12 |
Recent Accounting Pronouncements
In
February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 amends the existing accounting standards for lease
accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessee
and lessor accounting. The standard requires a modified retrospective transition approach for all leases existing at, or entered
into after, the date of initial application, with an option to use certain transition relief. The most significant changes related
to lessor accounting under ASU 2016-02 include bifurcating revenue into lease and non-lease components and the new standard’s
narrow definition of initial direct costs for leases. Since our revenue is primarily derived from leasing activities from long-term
net-leases and since we previously did not capitalize indirect costs for leases, we continue to account for our leases and related
leasing costs in substantially the same manner as we previously did prior to the adoption of the ASU 2016-02 on October 1, 2019.
In addition, the guidance requires lessees to recognize assets and liabilities for operating leases with lease terms greater than
twelve months on the balance sheet. Therefore, the most significant impact for us is the recognition of our corporate office lease,
while accounting where we are the lessor remains substantially the same. Upon adoption, we calculated the asset and lease liability
equal to the present value of the minimum lease payments due under our corporate office lease and determined that the asset and
lease liability was immaterial to our Consolidated Financial Statements. In July 2018, the FASB issued ASU 2018-10, “Codification
Improvements to Topic 842, Leases.” The amendment in ASU 2018-10 affects narrow aspects of the guidance issued earlier in
ASU 2016-02 by removing certain inconsistencies and providing additional clarification related to the guidance issued earlier.
In December 2018, the FASB issued ASU 2018-20 “Narrow-Scope Improvements for Lessors.” Similar to ASU 2018-10,
ASU 2018-20 affects narrow aspects of the guidance issued earlier in ASU 2016-02 as well by providing additional clarification
related to the guidance issued earlier. The most significant changes related to lessor accounting under ASU 2018-20 is the clarification
of how to treat payments made by a lessee directly to a third party, such as real estate taxes paid by the lessee directly to
the taxing authority, whereby items paid directly by the lessee to a third party should not be reflected in the lessors income
statement and, thus, should not be bifurcated and included in revenue and operating expenses. A majority of our reimbursable expenses
are paid by us and are billed back to our lessees. Therefore, these reimbursable expenses will continue to be presented separately
by bifurcating these revenue and expense items in our Consolidated Statements of Income (Loss). We adopted these standards effective
October 1, 2019 and the adoption of these standards did not have a significant impact on our consolidated financial statements
and related disclosures. The only effect the adoption of these standards had on our consolidated financial statements and related
disclosures effective October 1, 2019 are instances where certain types of payments are made by a lessee directly to a third party
whereas these payments are no longer presented on a gross basis in our Consolidated Statements of Income, which have an immaterial
effect on our reported revenue and a net zero effect on our Net Income Attributable to Common Shareholders. In addition, in order
to conform to the current period’s presentation, Real Estate Taxes and Reimbursement Revenue for the three and nine months
ended June 30, 2019 were reduced by $
We do not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying Consolidated Financial Statements.
Segment Reporting & Financial Information
Our primary business is the ownership and management of real estate properties. We invest in well-located, modern, single-tenant, industrial buildings, leased primarily to investment-grade tenants or their subsidiaries on long-term net-leases. We review operating and financial information for each property on an individual basis and therefore, each property represents an individual operating segment. We evaluate financial performance using Net Operating Income (NOI) from property operations. NOI is a non-GAAP financial measure, which we define as recurring Rental and Reimbursement Revenue, less Real Estate Taxes and Operating Expenses, such as insurance, utilities and repairs and maintenance. We have aggregated the properties into one reportable segment as the properties share similar long-term economic characteristics and have other similarities, including the fact that they are operated as industrial properties subject to long-term net-leases primarily to investment-grade tenants or their subsidiaries.
| 13 |
Derivative Financial Instruments
As
further discussed in “Note 5 – Debt”, on November 15, 2019, we entered into a $
Basic Net Income per Common Share is calculated by dividing Net Income Attributable to Common Shareholders by the weighted-average number of common shares outstanding during the period. Diluted Net Income per Common Share is calculated by dividing Net Income Attributable to Common Shareholders by the weighted-average number of common shares outstanding for the period and, when dilutive, the potential net shares that would be issued upon exercise of stock options pursuant to the treasury stock method. In periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation because they are anti-dilutive.
In addition, common stock equivalents of and shares are included in the diluted weighted average shares outstanding for the three months ended June 30, 2020 and 2019, respectively, and common stock equivalents of and shares are included in the diluted weighted average shares outstanding for the nine months ended June 30, 2020 and 2019. For the diluted weighted average shares outstanding for the three months ended June 30, 2020 and 2019, and options to purchase shares of common stock were antidilutive. For the diluted weighted average shares outstanding for the nine months ended June 30, 2020 and 2019, and options to purchase shares of common stock, respectively, were antidilutive.
NOTE 3 – REAL ESTATE INVESTMENTS
On
October 10, 2019, we purchased a newly constructed
On
March 30, 2020, we purchased a newly constructed
On
May 21, 2020, we purchased a newly constructed
On
May 21, 2020, we also purchased a newly constructed
| 14 |
Amazon.com, Inc., Magna Seating of America, Inc.’s ultimate parent, Magna International Inc. and FedEx Ground Package System, Inc.’s ultimate parent, FedEx Corporation are publicly-owned companies and financial information related to these entities are available at the SEC’s website, www.sec.gov. The references in this report to the SEC’s website are not intended to and do not include, or incorporate by reference into this report, the information on the www.sec.gov website.
We
evaluated the property acquisitions which took place during the nine months ended June 30, 2020, to determine whether an integrated
set of assets and activities meets the definition of a business, pursuant to ASU 2017-01. Acquisitions that do not meet the definition
of a business are accounted for as asset acquisitions. Accordingly, we accounted for the properties purchased during fiscal 2020
as asset acquisitions and allocated the total cash consideration, including transaction costs of approximately $
The financial information set forth below summarizes our purchase price allocation for these properties acquired during the nine months ended June 30, 2020 that is accounted for as an asset acquisition (in thousands):
| Land | $ | |||
| Building | ||||
| In-Place Leases |
The following table summarizes the operating results included in our Consolidated Statements of Income (Loss) for the properties acquired during the three and nine months ended June 30, 2020 (in thousands):
| Three Months Ended 06/30/2020 | Nine Months Ended 06/30/2020 | |||||||
| Rental Revenues | $ | $ | ||||||
| Net Income Attributable to Common Shareholders | ||||||||
Proforma information
The
following unaudited pro-forma condensed financial information has been prepared utilizing our historical financial statements
and the effect of additional revenue and expenses generated from properties acquired and expanded during fiscal 2020 to date,
and during fiscal 2019, assuming that the acquisitions and completed expansions had occurred as of October 1, 2018, after giving
effect to certain adjustments including: (a) Rental Revenue adjustments resulting from the straight-lining of scheduled rent increases,
(b) Interest Expense resulting from the assumed increase in Fixed Rate Mortgage Notes Payable and Loans Payable related to the
new acquisitions, and (c) Depreciation Expense related to the new acquisitions and expansions. Furthermore, the net proceeds raised
from our Dividend Reinvestment and Stock Purchase Plan (the DRIP) were used to fund property acquisitions and expansions and therefore,
the weighted average shares outstanding used in calculating the pro-forma Basic and Diluted Net Income (Loss) per Share Attributable
to Common Shareholders has been adjusted to account for the increase in shares raised through the DRIP, as if all the shares raised
had occurred on October 1, 2018. Additionally, the net proceeds raised from the issuance of our 6.125% Series C Cumulative Redeemable
Preferred Stock, $ par value per share (
The unaudited pro-forma condensed financial information is not indicative of the results of operations that would have been achieved had the acquisitions and expansions reflected herein been consummated on the dates indicated or that will be achieved in the future.
| 15 |
Three Months Ended (in thousands, except per share amounts) | ||||||||||||||||
| 6/30/2020 | 6/30/2019 | |||||||||||||||
| As Reported | Pro-forma | As Reported | Pro-forma | |||||||||||||
| Rental Revenue | $ | $ | $ | $ | ||||||||||||
| Net Income (Loss) Attributable to Common Shareholders | $ | $ | $ | ( | $ | ( | ||||||||||
| Basic and Diluted Net Income (Loss) per Share Attributable to Common Shareholders | $ | $ | $ | ( | $ | ( | ||||||||||
Nine Months Ended (in thousands, except per share amounts) | ||||||||||||||||
| 6/30/2020 | 6/30/2019 | |||||||||||||||
| As Reported | Pro-forma | As Reported | Pro-forma | |||||||||||||
| Rental Revenue | $ | $ | $ | $ | ||||||||||||
| Net Income (Loss) Attributable to Common Shareholders | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||
| Basic and Diluted Net Income (Loss) per Share Attributable to Common Shareholders | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||
Tenant Concentration
We
have a concentration of FedEx Corporation (FDX) and FDX subsidiary-leased properties, consisting of 62 separate stand-alone
leases covering
Annualized
Rental and Reimbursement Revenue from FDX and its subsidiaries is estimated to be approximately
FDX and Amazon.com, Inc. are publicly-owned companies and financial information related to these entities are available at the SEC’s website, www.sec.gov. FDX and Amazon.com, Inc. are rated “BBB” and “AA-”, respectively by S&P Global Ratings (www.standardandpoors.com) and are rated “Baa2” and “A2”, respectively by Moody’s (www.moodys.com), which are both considered “Investment Grade” ratings. The references in this report to the SEC’s website, S&P Global Ratings’ website and Moody’s website are not intended to and do not include, or incorporate by reference into this report, the information of FDX, Amazon.com, Inc., S&P Global Ratings or Moody’s on such websites.
| 16 |
NOTE 4 – SECURITIES AVAILABLE FOR SALE AT FAIR VALUE
Our
Securities Available for Sale at Fair Value consists primarily of marketable common and preferred stock of other REITs with a
fair value of $
We
recognized dividend income on our investments in securities of $
As
of June 30, 2020, we had total net unrealized holding losses on our securities portfolio of $
NOTE 5 – DEBT
For
the three months ended June 30, 2020 and 2019, amortization of financing costs included in interest expense was $
As of June 30, 2020, we owned 118 properties, of which 61 carried Fixed Rate Mortgage Notes Payable with outstanding principal balances totaling $812.3 million. The following is a summary of our Fixed Rate Mortgage Notes Payable as of June 30, 2020 and September 30, 2019 (in thousands):
| 17 |
| 6/30/2020 | 9/30/2019 | |||||||||||||||
| Amount | Weighted Average Interest Rate (1) | Amount | Weighted Average Interest Rate (1) | |||||||||||||
| Fixed Rate Mortgage Notes Payable | $ | $ | ||||||||||||||
| Debt Issuance Costs | $ | $ | ||||||||||||||
| Accumulated Amortization of Debt Issuance Costs | ( | ( | ||||||||||||||
| Unamortized Debt Issuance Costs | $ | $ | ||||||||||||||
| Fixed Rate Mortgage Notes Payable, net of Unamortized Debt Issuance Costs | $ | $ | ||||||||||||||
| (1) |
As
of June 30, 2020, interest payable on these mortgages were at fixed rates ranging from
In
connection with the four properties acquired during the nine months ended June 30, 2020, which are located in the Indianapolis,
IN, Columbus, OH, Greensboro, NC and Salt Lake City, UT MSAs (as described in Note 3), we obtained an
During
the nine months ended June 30, 2020, we fully repaid two self-amortizing mortgage loans for our properties located in Augusta,
GA and Huntsville, AL. These loans were at a weighted average interest rate of
On
November 15, 2019, we entered into a new line of credit facility (the “New Facility”) consisting of a $
| 18 |
From
time to time we may use a margin loan for temporary funding of acquisitions and for working capital purposes. This loan is due
on demand and is collateralized by our securities portfolio. We must maintain a coverage ratio of approximately
NOTE 6 – SHAREHOLDERS’ EQUITY
Our authorized stock as of June 30, 2020 consisted of million shares of common stock, of which million shares were issued and outstanding, million authorized shares of 6.125% Series C Preferred Stock, of which million shares were issued and outstanding, and million authorized shares of Excess Stock, $ par value per share, of which were issued or outstanding.
Common Stock
We
raised $
On
February 6, 2020, we entered into an Equity Distribution Agreement (Common Stock ATM Program) with BMO Capital Markets Corp.,
B. Riley FBR, Inc., D.A. Davidson & Co., Janney Montgomery Scott LLC, J.P. Morgan Securities LLC and RBC Capital Markets,
LLC (together the “Distribution Agents”) under which we may offer and sell shares of our common stock, $ par value
per share, having an aggregate sales price of up to $
On
January 16, 2020, our Board of Directors reaffirmed our Common Stock Repurchase Program (the “Program”) that authorizes
us to purchase up to $
Under
the Program, during March 2020 we repurchased shares of our common stock for $
| 19 |
6.125% Series C Cumulative Redeemable Preferred Stock
During
the nine months ended June 30, 2020, we paid $
On
June 29, 2017, we entered into a Preferred Stock At-The-Market Sales Agreement Program with B. Riley FBR, Inc., or B. Riley (formerly
FBR Capital Markets & Co.), that provided for the offer and sale of shares of our
As of June 30, 2020, 17.4 million shares of the 6.125% Series C Preferred Stock were issued and outstanding.
Subsequent
to the June 30, 2020 quarter end, we sold shares of our 6.125% Series C Preferred Stock under our Preferred Stock ATM
Program at a weighted average price of $ per share, and realized net proceeds, after offering expenses, of $
| 20 |
NOTE 7 - FAIR VALUE MEASUREMENTS
We measure certain financial assets and liabilities at fair value on a recurring basis, including Securities Available for Sale at Fair Value. Our financial assets consist mainly of marketable REIT securities.
The fair value of these financial assets was determined using the following inputs at June 30, 2020 and September 30, 2019 (in thousands):
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| As of June 30, 2020: | ||||||||||||||||
| Equity Securities – Preferred Stock | $ | $ | $ | $ | ||||||||||||
| Equity Securities – Common Stock | ||||||||||||||||
| Mortgage Backed Securities | ||||||||||||||||
| Total Securities Available for Sale at Fair Value | $ | $ | $ | $ | ||||||||||||
| As of September 30, 2019: | ||||||||||||||||
| Equity Securities – Preferred Stock | $ | $ | $ | $ | ||||||||||||
| Equity Securities – Common Stock | ||||||||||||||||
| Mortgage Backed Securities | ||||||||||||||||
| Total Securities Available for Sale at Fair Value | $ | $ | $ | $ | ||||||||||||
In addition to our investments in Securities Available for Sale at Fair Value, we are required to disclose certain information about fair values of other financial instruments. Estimates of fair value are made at a specific point in time based upon, where available, relevant market prices and information about the financial instrument. Such estimates do not include any premium or discount that could result from offering for sale at one time our entire holdings of financial instruments. For a portion of our other financial instruments, no quoted market value exists. Therefore, estimates of fair value are necessarily based on a number of significant assumptions, many of which involve events outside the control of management. Such assumptions include assessments of current economic conditions, perceived risks associated with these financial instruments and their counterparties; future expected loss experience and other factors. Given the uncertainties surrounding these assumptions, the reported fair values represent estimates only, and therefore cannot be compared to the historical accounting model. The use of different assumptions or methodologies is likely to result in significantly different fair value estimates.
The
fair value of Cash and Cash Equivalents approximates their current carrying amounts since all such items are short term in nature.
The fair value of variable rate Loans Payable approximates their current carrying amounts, since such amounts payable are at approximately
a weighted-average current market rate of interest. The estimated fair value of Fixed Rate Mortgage Notes Payable is based on
discounting the future cash flows at a yearend risk adjusted borrowing rate currently available to us for issuance of debt with
similar terms and remaining maturities. These fair value measurements fall within level 2 of the fair value hierarchy. At June
30, 2020, the Fixed Rate Mortgage Notes Payable fair value (estimated based upon expected cash outflows discounted at current
market rates) amounted to $
| 21 |
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash
paid for interest during the nine months ended June 30, 2020 and 2019 was $
During
the nine months ended June 30, 2020 and 2019, we had dividend reinvestments of $
NOTE 9 – CONTINGENCIES AND COMMITMENTS
We
have entered into agreements to purchase four new build-to-suit, industrial buildings that are currently being developed in Georgia,
Ohio, Oklahoma and Tennessee. These four future acquisitions total
From time to time, we may be subject to claims and litigation in the ordinary course of business. We do not believe that any such claim or litigation will have a material adverse effect on the Consolidated Balance Sheets or results of operations.
NOTE 10 – SUBSEQUENT EVENTS
On July 1, 2020, our Board of Directors declared a dividend of $ per share to be paid to common shareholders of record as of the close of business on .
On July 1, 2020, our Board of Directors declared a dividend of $ per share to be paid to the % Series C Preferred shareholders of record as of the close of business on .
Subsequent
to the June 30, 2020 quarter end, we sold shares of our 6.125% Series C Preferred Stock under our Preferred Stock ATM
Program at a weighted average price of $ per share, and realized net proceeds, after offering expenses, of $
At
June 30, 2020, there was $
| 22 |
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements provide our current expectations or forecasts of future events. Forward-looking statements include statements about our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements that are not historical facts. Forward-looking statements can be identified by their use of forward-looking words, such as “may,” “will,” “anticipate,” “expect,” “believe,” “intend,” “plan,” “should,” “seek” or comparable terms, or the negative use of those words, but the absence of these words does not necessarily mean that a statement is not forward-looking.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described below and are described under the above heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above and the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 and our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020. These and other risks, uncertainties and factors could cause our actual results to differ materially from those included in any forward-looking statements we make. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that could cause actual results to differ materially from our expectations include, among others:
| ● | the ability of our tenants to make payments under their respective leases; | |
| ● | our reliance on certain major tenants; | |
| ● | our ability to re-lease properties that are currently vacant or that become vacant; | |
| ● | our ability to obtain suitable tenants for our properties; | |
| ● | changes in real estate market conditions, economic conditions in the industrial sector, the markets in which our properties are located and general economic conditions; | |
| ● | the inherent risks associated with owning real estate, including local real estate market conditions, governing laws and regulations and illiquidity of real estate investments; | |
| ● | the effect of COVID-19 on our business and general economic conditions; | |
| ● | our ability to acquire, finance and sell properties on attractive terms; | |
| ● | our ability to repay debt financing obligations; | |
| ● | our ability to refinance amounts outstanding under our debt obligations at maturity on terms favorable to us, or at all; | |
| ● | the loss of any member of our management team; | |
| ● | our ability to comply with debt covenants; | |
| ● | our ability to integrate acquired properties and operations into existing operations; | |
| ● | continued availability of proceeds from issuances of our debt or equity securities; | |
| ● | the availability of other debt and equity financing alternatives; | |
| ● | changes in interest rates, including the replacement of the LIBOR reference rate, under our current credit facility and under any additional variable rate debt arrangements that we may enter into in the future; | |
| ● | our ability to successfully implement our selective acquisition strategy; | |
| ● | our ability to maintain internal controls and procedures to ensure all transactions are accounted for properly, all relevant disclosures and filings are timely made in accordance with all rules and regulations, and any potential fraud or embezzlement is thwarted or detected; | |
| ● | changes in federal or state tax rules or regulations that could have adverse tax consequences; | |
| ● | declines in the market prices of our investment securities; and | |
| ● | our ability to qualify as a REIT for federal income tax purposes. |
| 23 |
You should not place undue reliance on these forward-looking statements, as events described or implied in such statements may not occur. We undertake no obligation to update or revise any forward-looking statements as a result of new information, future events or otherwise.
Overview and Recent Activity
The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and notes thereto provided elsewhere herein and our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
We operate as a real estate investment trust (REIT). We seek to invest in well-located, modern single-tenant industrial buildings leased primarily to investment-grade tenants or their subsidiaries on long-term net-leases. We were founded in 1968 and are one of the oldest public equity REITs in the world. During the nine months ended June 30, 2020, we purchased four new built-to-suit, net-leased, industrial properties, located in the Indianapolis, IN, Columbus, OH, Greensboro, NC and Salt Lake City, UT Metropolitan Statistical Areas (MSAs) totaling approximately 1.1 million square feet, for $159.9 million. In connection with the four properties acquired during the nine months ended June 30, 2020, we obtained an 18 year fully-amortizing mortgage loan, a 10 year fully-amortizing mortgage loan and two 15 year fully-amortizing mortgage loans, respectively. The four mortgage loans originally totaled $100.6 million with a weighted average maturity of 16.1 years and a weighted average interest rate of 3.75%. As of June 30, 2020, we owned 118 properties with total square footage of 23.4 million. These properties are located in 31 states. As of the quarter ended June 30, 2020, our weighted average lease maturity was 7.2 years, our occupancy rate was 99.4%, and our annualized weighted-average base rent per occupied square foot was $6.35. As of June 30, 2020, the weighted average building age, based on the square footage of our buildings, was 9.5 years. In addition, total gross real estate investments, excluding marketable REIT securities investments of $118.9 million, were $2.0 billion as of June 30, 2020.
See PART I, Item 1 – Business in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 for a more complete discussion of the economic and industry-wide factors relevant to us and the opportunities, challenges, and risks on which we are focused.
The future effects of the evolving impact of the COVID-19 pandemic are uncertain, however, at this time we believe that the fallout from COVID-19 will not have a material adverse effect on our financial condition. We invest in modern single-tenant, industrial buildings, leased primarily to investment-grade tenants or their subsidiaries on long-term net-leases. Our investments are exclusively situated in the continental United States, and are primarily located in strategic locations that are mission-critical to our tenants’ needs. In many cases our buildings are highly automated in order to serve the omni-channel distribution networks that have become essential today. Approximately 81% of our revenue is derived from investment grade tenants, or their subsidiaries as defined by S&P Global Ratings (www.standardandpoors.com) and by Moody’s (www.moodys.com). The references in this report to S&P Global Ratings and Moody’s are not intended to and do not include, or incorporate by reference into this report, the information of S&P Global Ratings or Moody’s on such websites. For many years, ecommerce demand has increased, and it has now become an integral part of the retail landscape. The COVID-19 pandemic has created an even greater move towards on-line shopping. As a result of state and local government shutdowns, ecommerce sales as a percentage of total retail sales increased from approximately 15% to 27% during the recent quarter. The COVID-19 pandemic has also created a need for supply chain reconfiguration. Increased inventory stocking is currently taking place across many industries and it appears that this trend will continue in order to accommodate surges in demand. Additionally, U.S. manufacturing has been increasing in recent years and the COVID-19 pandemic has accelerated this trend as supply chains now prefer shorter distances and less reliance on foreign sources. Our portfolio of modern, net-leased industrial properties, based solely in the continental U.S., continues to provide shareholders with reliable and predictable income streams. Our resilient rent collection results during these challenging times highlights the mission-critical nature of our assets and underscores the essential need for our tenants’ operations. Furthermore, because our weighted average lease maturity is 7.2 years and our weighted average fixed rate mortgage debt maturity is 11.2 years, we expect our cash flow to remain resilient over long periods of time. Our base rent collections during the COVID-19 pandemic were as follows:
| 24 |
| Month | Percentage of Base Rent Collected | |
| March | 100.0% | |
| April | 99.6% | |
| May | 97.9% | |
| June | 99.4% | |
| July | 99.6% |
We evaluate our financial performance using Net Operating Income (NOI) from property operations, which we believe is a useful indicator of our operating performance. NOI is a non-GAAP financial measure that we define as Net Income Attributable to Common Shareholders plus Preferred Dividends, General and Administrative Expenses, Non-recurring Severance Expense, Depreciation, Amortization of Capitalized Lease Costs and Intangible Assets, Interest Expense, including Amortization of Financing Costs, Unrealized Holding (Gains) Losses Arising During the Periods, less Dividend Income. The components of NOI are recurring Rental and Reimbursement Revenue, less Real Estate Taxes and Operating Expenses, such as insurance, utilities, and repairs and maintenance. Other REITs may use different methodologies to calculate NOI and, accordingly, our NOI may not be comparable to all other REITs.
The following is a reconciliation of our Net Income (Loss) Attributable to Common Shareholders to our NOI for the three and nine months ended June 30, 2020 and 2019 (in thousands):
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| 6/30/2020 | 6/30/2019 | 6/30/2020 | 6/30/2019 | |||||||||||||
| Net Income (Loss) Attributable to Common Shareholders | $ | 26,851 | $ | (3,121) | $ | (44,700) | $ | (11,664) | ||||||||
| Plus: Preferred Dividends | 6,607 | 4,749 | 19,469 | 13,650 | ||||||||||||
| Plus: General & Administrative Expenses | 2,198 | 2,351 | 6,858 | 6,420 | ||||||||||||
| Plus: Non-recurring Severance Expense | 0 | 0 | 786 | 0 | ||||||||||||
| Plus: Depreciation | 11,743 | 10,833 | 34,650 | 32,067 | ||||||||||||
| Plus: Amortization of Capitalized Lease Costs and Intangible Assets | 788 | 721 | 2,308 | 2,144 | ||||||||||||
| Plus: Interest Expense, including Amortization of Financing Costs | 8,975 | 9,275 | 27,235 | 27,879 | ||||||||||||
| Less/Plus: Unrealized Holding (Gains) Losses Arising During the Periods | (19,610) | 11,609 | 67,100 | 38,668 | ||||||||||||
| Less: Dividend Income | (2,344) | (3,686) | (8,987) | (11,569) | ||||||||||||
| Net Operating Income- NOI | $ | 35,208 | $ | 32,731 | $ | 104,719 | $ | 97,595 | ||||||||
| 25 |
The components of our NOI for the three and nine months ended June 30, 2020 and 2019 are as follows (in thousands):
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| 6/30/2020 | 6/30/2019 | 6/30/2020 | 6/30/2019 | |||||||||||||
| Rental Revenue | $ | 35,427 | $ | 33,127 | $ | 105,410 | $ | 98,678 | ||||||||
| Reimbursement Revenue | 6,348 | 5,421 | 19,772 | 16,473 | ||||||||||||
| Total Rental and Reimbursement Revenue | 41,775 | 38,548 | 125,182 | 115,151 | ||||||||||||
| Real Estate Taxes | (5,140) | (4,168) | (15,205) | (12,370) | ||||||||||||
| Operating Expenses | (1,427) | (1,649) | (5,258) | (5,186) | ||||||||||||
| Net Operating Income- NOI | $ | 35,208 | $ | 32,731 | $ | 104,719 | $ | 97,595 | ||||||||
NOI from property operations increased $2.5 million, or 8%, for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. NOI from property operations increased $7.1 million, or 7%, for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019. This increase was primarily due to the acquisition of four new built-to-suit, net-leased, industrial properties, located in the Indianapolis, IN, Columbus, OH, Greensboro, NC and Salt Lake City, UT MSAs totaling approximately 1.1 million square feet purchased during the nine-month period, and a 350,000 square foot industrial facility purchased during the last quarter of fiscal 2019 located in Lafayette, IN. In addition, we purchased two industrial facilities during the first quarter of fiscal 2019, which are now generating the full rental run rate. One of these acquisitions was a 347,000 square foot industrial facility located in Trenton, NJ and one was a 127,000 square foot industrial facility located in Savannah, GA. Furthermore, we completed a 155,000 square foot building expansion at our property located in the Cincinnati, OH MSA during the second quarter of fiscal 2019, which increased the rent upon completion of the expansion.
Acquisitions
On October 10, 2019, we purchased a newly constructed 616,000 square foot industrial building, situated on 78.6 acres, located in the Indianapolis, IN MSA. The building is 100% net-leased to Amazon.com Services, Inc. for 15 years through August 2034. The lease is guaranteed by Amazon.com, Inc. The purchase price was $81.5 million. We obtained an 18 year, fully-amortizing mortgage loan of $52.5 million at a fixed interest rate of 4.27%. Annual rental revenue over the remaining term of the lease averages $5.0 million.
On March 30, 2020, we purchased a newly constructed 153,000 square foot industrial building, situated on 24.2 acres, located in the Columbus, OH MSA. The building is 100% net-leased to Magna Seating of America, Inc. for 10 years through January 2030. The purchase price was $17.9 million. We obtained a 10 year, fully-amortizing mortgage loan of $9.4 million at a fixed interest rate of 3.47%. Annual rental revenue over the remaining term of the lease averages $1.2 million.
On May 21, 2020, we purchased a newly constructed 286,000 square foot industrial building, situated on 39.3 acres, located in the Greensboro, NC MSA. The building is 100% net-leased to FedEx Ground Package System, Inc. for 15 years through April 2035. The purchase price was $47.6 million. We obtained a 15 year, fully-amortizing mortgage loan of $30.3 million at a fixed interest rate of 3.10%. Annual rental revenue over the remaining term of the lease averages $3.0 million.
On May 21, 2020, we also purchased a newly constructed 70,000 square foot industrial building, situated on 7.5 acres, located in the Salt Lake City, UT MSA. The building is 100% net-leased to FedEx Corporation for 15 years through March 2035. The purchase price was $12.9 million. We obtained a 15 year, fully-amortizing mortgage loan of $8.4 million at a fixed interest rate of 3.18%. Annual rental revenue over the remaining term of the lease averages $772,000.
Amazon.com, Inc., Magna Seating of America, Inc.’s ultimate parent, Magna International Inc. and FedEx Ground Package System, Inc.’s ultimate parent, FedEx Corporation are publicly-owned companies and financial information related to these entities are available at the SEC’s website, www.sec.gov. The references in this report to the SEC’s website are not intended to and do not include, or incorporate by reference into this report, the information on the www.sec.gov website.
| 26 |
Commitments
We have entered into agreements to purchase four new build-to-suit, industrial buildings that are currently being developed in Georgia, Ohio, Oklahoma and Tennessee. These four future acquisitions total 1.5 million square feet, with net-leased terms ranging from 10 to 20 years, and with a weighted average lease term of 16.8 years. The aggregate purchase price for these properties is $218.7 million. Two of these four properties, consisting of approximately 747,000 square feet, or 49%, are leased for 15 years to FedEx Ground Package System, Inc., one of these four properties, consisting of approximately 658,000 square feet or 43%, is leased for 20 years to Home Depot, Inc., and the other property, consisting of approximately 120,000 square feet, or 8%, is leased for 10 years to Amazon.com Services, Inc. All properties are leased to companies, or subsidiaries of companies, that are considered Investment Grade by S&P Global Ratings (www.standardandpoors.com) and by Moody’s (www.moodys.com). The references in this report to the S&P Global Ratings’ website and the Moody’s website are not intended to and do not include, or incorporate by reference into this report, the information of S&P Global Ratings or Moody’s on such websites. Subject to satisfactory due diligence and other customary closing conditions and requirements, we anticipate closing these transactions during fiscal 2020 and 2021. In connection with three of the four properties, we have entered into commitments to obtain three separate fully-amortizing mortgage loans totaling $113.8 million with fixed interest rates ranging from 2.95% to 3.25% with a weighted average fixed interest rate of 3.10%. The three loans have terms ranging from 15 to 17 years with a weighted average term of 16 years.
Significant Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with Accounting Principles Generally Accepted in the United States of America (U.S. GAAP). The preparation of these Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our Consolidated Financial Statements. Actual results may differ from these estimates under different assumptions or conditions.
On a regular basis, we evaluate our assumptions, judgments and estimates. We believe that there have been no material changes to the items that we disclosed as our significant accounting policies and estimates under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for fiscal year ended September 30, 2019.
Changes in Results of Operations
As of June 30, 2020, we owned 118 properties with total square footage of 23.4 million, as compared to 113 properties with total square footage of 21.8 million, as of June 30, 2019, representing an increase in square footage of 7.2%. At quarter end, the Company’s weighted average lease term was approximately 7.2 years, as compared to 7.8 years at the end of the prior year period. Our occupancy rate was 99.4% as of June 30, 2020, as compared to 98.9% as of June 30, 2019, representing an increase of 50 basis points. Our weighted average building age was 9.5 years as of June 30, 2020, as compared to 9.1 years as of June 30, 2019.
Fiscal 2020 Renewals
In fiscal 2020, approximately 2% of our gross leasable area, representing five leases totaling 410,000 square feet, was set to expire. Four of these five leases have been renewed and one of these properties consisting of 55,000 square feet, is currently being marketed. The four leases that have been renewed represent 355,000 square feet, or 87% of the expiring square footage and have a weighted average lease term of 4.2 years. These four lease renewals resulted in rent increases of 12.0% and 4.4% on a U.S. GAAP straight-line basis and cash basis, respectively.
| 27 |
We have incurred or we expect to incur tenant improvement costs of $423,000 and leasing commission costs of $217,000 in connection with these four lease renewals. The table below summarizes the lease terms of the four leases that were renewed. In addition, the table below includes both the tenant improvement costs and the leasing commission costs, which are presented on a per square foot (PSF) basis averaged annually over the renewal term.
| Property | Tenant | Square Feet | Former U.S. GAAP Straight- Line Rent PSF | Former Cash Rent PSF | Former Lease Expiration | Renewal U.S GAAP Straight- Line Rent PSF | Renewal Initial Cash Rent PSF | Renewal Lease Expiration | Renewal Term (years) | Tenant Improvement Cost PSF over Renewal Term (1) | Leasing Commission Cost PSF over Renewal Term (1) | |||||||||||||||||||||||||||
| Elgin (Chicago), IL | Joseph T. Ryerson & Son, Inc. | 89,052 | $ | 5.68 | $ | 5.68 | 1/31/20 | $ | 5.78 | $ | 5.50 | 1/31/25 | 5.0 | $ | 0.50 | $ | 0.17 | |||||||||||||||||||||
| Montgomery (Chicago), IL | Home Depot USA, Inc. | 171,200 | 5.70 | 5.93 | 6/30/20 | 6.30 | 6.30 | 12/31/22 | 2.5 | 0 | 0.28 | |||||||||||||||||||||||||||
| Ridgeland (Jackson), MS | Graybar Electric Company | 26,340 | 4.36 | 4.36 | 7/31/20 | 4.62 | 4.44 | 7/31/25 | 5.0 | 0 | 0.14 | |||||||||||||||||||||||||||
| Tampa, FL | Tampa Bay Grand Prix | 68,385 | 3.83 | 4.48 | 9/30/20 | 5.39 | 5.00 | 9/30/27 | 7.0 | 0.42 | 0 | |||||||||||||||||||||||||||
| Total | 354,977 | |||||||||||||||||||||||||||||||||||||
| Weighted Average | $ | 5.24 | $ | 5.47 | $ | 5.87 | $ | 5.71 | 4.2 | $ | 0.28 | $ | 0.15 | |||||||||||||||||||||||||
| (1) | Amount calculated based on the total cost divided by the square feet, divided by the renewal term. |
These four lease renewals resulted in a U.S. GAAP straight-line weighted average lease rate of $5.87 per square foot. The renewed weighted average initial cash rent per square foot is $5.71. This compares to the former weighted average rent of $5.24 per square foot on a U.S. GAAP straight-line basis and the former weighted average cash rent of $5.47 per square foot, resulting in an increase in the weighted average lease rate of 12.0% on a U.S. GAAP straight-line basis and an increase in the weighted average lease rate of 4.4% on a cash basis.
One of our tenants, Kellogg Sales Company, which leased our 55,000 square foot facility located in Newington, CT through February 29, 2020, did not renew their lease. As reported in the prior quarter, this property was under contract to be sold for $4.0 million, however, given the recent uncertain market conditions created by COVID-19, the purchaser terminated the contract during the due diligence period. This property is currently being marketed.
Effective January 7, 2020, we entered into a new two-year lease agreement with Sonwil Distribution Center, Inc. through January 31, 2022 for our 105,000 square foot facility located in Cheektowaga (Buffalo), NY. Annual rent is $630,000, representing $6.00 per square foot over the life of the lease.
Rental Revenue increased $2.3 million, or 7%, for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. Rental Revenue increased $6.7 million, or 7%, for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019. These increases were primarily due to the acquisition of four new built-to-suit, net-leased, industrial properties, located in the Indianapolis, IN, Columbus, OH, Greensboro, NC and Salt Lake City, UT MSAs totaling approximately 1.1 million square feet and a 350,000 square foot industrial facility purchased during the last quarter of fiscal 2019 located in Lafayette, IN. In addition, we purchased two industrial facilities during the first quarter of fiscal 2019, which are now generating the full rental run rate. One of these acquisitions was a 347,000 square foot industrial facility located in Trenton, NJ and one was a 127,000 square foot industrial facility located in Savannah, GA. Furthermore, we completed a 155,000 square foot building expansion at our property located in the Cincinnati, OH MSA during the second quarter of fiscal 2019, which increased the rent upon completion of the expansion.
Our single-tenant properties are subject to net-leases, which require the tenants to reimburse us for the cost of Real Estate Taxes as well as certain Operating Expenses such as insurance and the majority of repairs and maintenance. Reimbursement Revenue increased $927,000, or 17%, Real Estate Tax Expense increased $972,000, or 23%, and Operating Expenses decreased $222,000, or 13% for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. For the nine months ended June 30, 2020, Reimbursement Revenue increased $3.3 million, or 20%, Real Estate Tax Expense increased $2.8 million, or 23%, and Operating Expenses increased $72,000, or 1%, as compared to the nine months ended June 30, 2019. These increases in Reimbursement Revenue, Real Estate Taxes and Operating Expenses for the nine months ended June 30, 2020 and these increases in Reimbursement Revenue and Real Estate Taxes for the three months ended June 30, 2020 were primarily due to our newly acquired properties. Reimbursement Revenue as a percentage of Real Estate Taxes and Operating Expenses for the three months ended June 30, 2020 was 97% compared to 93% for the three months ended June 30, 2019. Reimbursement Revenue as a percentage of Real Estate Taxes and Operating Expenses for the nine months ended June 30, 2020 was 97% compared to 94% for the nine months ended June 30, 2019.
| 28 |
General and Administrative Expenses decreased $153,000, or 7%, for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. This decrease is mainly due to the timing of the payment of Board of Director fees, as the prior year quarter includes fees for two meetings within the quarter and the current year quarter includes fees for only one meeting within the quarter. General and Administrative Expenses increased $438,000, or 7%, for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019. This increase was primarily due to an increase in salaries, corporate office rent and professional fees. General and Administrative Expenses, as a percentage of gross revenue (which includes Rental Revenue, Reimbursement Revenue and Dividend Income) was 5.0% for the three months ended June 30, 2020 as compared to 5.6% for the three months ended June 30, 2019 and was 5.1% for the nine months ended June 30, 2020 as compared to 5.1% for the nine months ended June 30, 2019. Annualized General and Administrative Expenses, as a percentage of undepreciated assets (which is our total assets excluding accumulated depreciation) was 41 basis points for the nine months ended June 30, 2020 as compared to 41 basis points for the nine months ended June 30, 2019.
On December 23, 2019, our General Counsel, Allison Nagelberg, announced her retirement effective December 31, 2019. In accordance with her severance package, during the first quarter of fiscal 2020, we incurred a one-time, Non-recurring Severance Expense of $786,000.
Depreciation increased $910,000, or 8%, for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. Depreciation increased $2.6 million, or 8%, for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019. Amortization of Capitalized Lease Costs and Intangible Assets increased $67,000, or 9%, for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. Amortization of Capitalized Lease Costs and Intangible Assets increased $164,000, or 8%, for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019. These increases were primarily due to the acquisition of two industrial properties purchased during the first quarter of fiscal 2019, one industrial property purchased during the last quarter of fiscal 2019 and four industrial properties purchased during fiscal 2020. In addition, the increases in depreciation and amortization expenses were also the result of the building expansion completed during the second quarter of fiscal 2019 and the capital improvements and leasing costs incurred over the last four quarters.
The recognition of Unrealized Holding Gains (Losses) Arising During the Periods was due to the adoption of ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which became effective at the beginning of the prior fiscal year. With the adoption of ASU 2016-01, the changes in net unrealized holding gains and losses are recognized through net income. Therefore, the implementation of this accounting rule has resulted in increased volatility in our reported earnings and some of our key performance metrics. Unrealized Holding Gain Arising During the three months ended June 30, 2020 was $19.6 million and Unrealized Holding Loss for the three months ended June 30, 2019 was $11.6 million. Unrealized Holding Loss Arising During the nine months ended June 30, 2020 was $67.1 million and Unrealized Holding Loss for the nine months ended June 30, 2019 was $38.7 million. We recognized dividend income on our investments in securities of $2.3 million and $3.7 million for the three months ended June 30, 2020 and 2019, respectively, representing a $1.3 million decrease. We recognized dividend income on our investments in securities of $9.0 million and $11.6 million for the nine months ended June 30, 2020 and 2019, respectively, representing a $2.6 million decrease. This decrease is due to reduced dividends from our REIT securities portfolio. The REIT securities portfolio’s weighted average yield for the nine months ended June 30, 2020 was approximately 7.6% as compared to 8.8% for the nine months ended June 30, 2019. We held $118.9 million in marketable REIT securities as of June 30, 2020, representing 5.4% of our undepreciated assets.
| 29 |
Interest Expense, including Amortization of Financing Costs, decreased by $300,000, or 3%, for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. Interest Expense, including Amortization of Financing Costs, decreased by $644,000, or 2%, for the nine months ended June 30, 2020, as compared to the nine months ended June 30, 2019. This decrease is primarily due to the decrease of both the outstanding balance and the interest rate of our Loans Payable balance. From June 30, 2019 to June 30, 2020, our Loans Payable balance was reduced by $46.2 million and our weighted average interest rate was reduced by 118 basis points. In addition, we had a decrease of 3 basis points in the weighted average interest rate of the Fixed Rate Mortgage Notes Payable, which decreased from 4.03% at June 30, 2019 to 4.00% at June 30, 2020. The decrease in Interest Expense, including Amortization of Financing Costs, was partially offset by an increase in the Fixed Rate Mortgage Notes Payable balance, which increased by $70.2 million from June 30, 2019 to June 30, 2020.
Preferred Dividends increased by $1.9 million, or 39%, for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 and increased by $5.8 million, or 43% for the nine months ended June 30, 2020, as compared to the nine months ended June 30, 2019. These increases are due to the additional $121.2 million of 6.125% Series C Cumulative Redeemable Preferred Stock issued between June 30, 2019 and June 30, 2020.
Changes in Financial Condition
We generated Net Cash from Operating Activities of $74.9 million and $74.8 million for the nine months ended June 30, 2020 and 2019, respectively.
Real Estate Investments increased by $126.2 million from September 30, 2019 to June 30, 2020. This increase was mainly due to the purchase of four net-leased industrial properties, located in the Indianapolis, IN MSA, the Columbus, OH MSA, the Greensboro, NC MSA and the Salt Lake City MSA, totaling approximately 1.1 million square feet, for $159.9 million. The increase was partially offset by Depreciation Expense on Real Estate Investments for the nine months ended June 30, 2020 of $34.7 million.
Securities Available for Sale decreased by $66.4 million from September 30, 2019 to June 30, 2020. The decrease was primarily due to a net increase in Unrealized Holding Losses of $67.1 million.
Fixed Rate Mortgage Notes Payable, net of Unamortized Debt Issuance Costs (Mortgage Notes Payable), increased by $59.4 million from September 30, 2019 to June 30, 2020. The increase was mostly due to the origination of four fully-amortizing mortgage loans for $100.6 million, with a weighted average interest rate of 3.75%, obtained in connection with the four industrial properties purchased during the first three quarters of fiscal 2020. Details on these four fixed rate mortgages are as follows:
| Property | Mortgage amount (in thousands) | Maturity Date | Interest Rate | |||||||
| Indianapolis, IN | $ | 52,500 | 11/1/2037 | 4.27% | ||||||
| Columbus, OH | 9,400 | 1/1/2030 | 3.47% | |||||||
| Greensboro, NC | 30,300 | 6/1/2035 | 3.10% | |||||||
| Salt Lake City, UT | 8,360 | 6/1/2035 | 3.18% | |||||||
The increase in Mortgage Notes Payable was also partially due to the amortization of financing costs associated with the Mortgage Notes Payable of approximately $681,000. This increase was partially offset by scheduled payments of principal of $41.2 million. In addition, the increase in Mortgage Notes Payable was partially offset by the addition of deferred financing costs of approximately $661,000, which is associated with four mortgages obtained in connection with four industrial properties purchased during the first three quarters of fiscal 2020.
| 30 |
Excluding Debt Issuance Costs, the weighted average interest rate on the Fixed Rate Mortgage Notes Payable decreased slightly by 3 basis points from the prior year quarter, from 4.03% at June 30, 2019 to 4.00% at June 30, 2020.
We are scheduled to repay a total of $59.7 million in mortgage principal payments over the next 12 months. We intend to make these principal payments from the cash on hand, funds generated from Cash from Operations, the DRIP, the At-The-Market Sales Agreement Program (Preferred Stock ATM Program), the Equity Distribution Agreement (Common Stock ATM Program), and draws from the unsecured line of credit facility.
Liquidity and Capital Resources
Net Cash Provided by Operating Activities was $74.9 million and $74.8 million for the nine months ended June 30, 2020 and 2019, respectively. Dividends paid on common stock for the nine months ended June 30, 2020 and 2019 were $49.8 million and $47.5 million, respectively (of which $6.7 million and $12.8 million, respectively, were reinvested). We pay dividends from cash generated from operations.
As of June 30, 2020, we held $118.9 million in marketable REIT securities, representing 5.4% of our undepreciated assets, which we define as total assets excluding accumulated depreciation. Total assets excluding accumulated depreciation were $2.2 billion as of June 30, 2020. In general, we may borrow up to 50% of the value of the marketable securities. The interest rate charged on the margin loan is the bank’s margin rate and was 0.75% as of June 30, 2020. At June 30, 2020, there was $5.0 million drawn down under the margin loan. Subsequent to the June 30, 2020 quarter end, on July 22, 2020, we paid off the margin loan. As of June 30, 2020, we had net Unrealized Holding Losses on our portfolio of $116.5 million as compared to net Unrealized Holding Losses of $49.4 million as of September 30, 2019, representing an increase of $67.1 million. There have been no open market purchases or sales of securities during the nine months ended June 30, 2020. We recognized dividend income on our investments in securities of $2.3 million and $9.0 million for the three and nine months ended June 30, 2020.
On November 15, 2019, we entered into a new line of credit facility (the “New Facility”) consisting of a $225.0 million unsecured line of credit facility (the “Revolver”) and a new $75.0 million unsecured term loan (the “Term Loan”), resulting in the total potential availability under both the Revolver and the Term Loan of $300.0 million, which is an additional $100.0 million over the former line of credit facility. In addition, the Revolver includes an accordion feature that will allow the total potential availability under the New Facility to further increase to $400.0 million, under certain conditions. The $225.0 million Revolver matures in January 2024 with two options to extend for additional six-month periods. Availability under the New Facility is limited to 60% of the value of the borrowing base properties. The value of the borrowing base properties is determined by applying a capitalization rate to the NOI generated by our unencumbered, wholly-owned industrial properties. Under the New Facility, the capitalization rate applied to our NOI generated by our unencumbered, wholly-owned industrial properties was lowered from 6.5% under the former line of credit facility to 6.25%, thus increasing the value of the borrowing base properties under the terms of the New Facility. In addition, the interest rate for borrowings under the Revolver was lowered by a range of 5 basis points to 35 basis points, depending on our leverage ratio, and will, at our election, either i) bear interest at LIBOR plus 135 basis points to 205 basis points, depending on our leverage ratio, or ii) bear interest at Bank of Montreal’s (BMO) prime lending rate plus 35 basis points to 105 basis points, depending on our leverage ratio. Currently, our borrowings bear interest under the Revolver at LIBOR plus 145 basis points, which results in an interest rate of 1.61%. As of the quarter end and currently, we do not have any amount drawn down under our Revolver, resulting in the full $225.0 million being currently available. The $75.0 million Term Loan matures January 2025. The interest rate for borrowings under the Term Loan will at our election, either i) bear interest at LIBOR plus 130 basis points to 200 basis points, depending on our leverage ratio, or ii) bear interest at BMO’s prime lending rate plus 30 basis points to 100 basis points, depending on our leverage ratio. To reduce floating interest rate exposure under the Term Loan, we also entered into an interest rate swap agreement to fix LIBOR on the entire $75.0 million for the full duration of the Term Loan resulting in an all-in rate of 2.92%.
| 31 |
As of June 30, 2020, we owned 118 properties, of which 61 carried mortgage loans with outstanding principal balances totaling $812.3 million. The 57 unencumbered properties could be refinanced to raise additional funds, although covenants in our New Facility limit the amount of unencumbered properties that can be mortgaged. As of June 30, 2020, Loans Payable represented $75.0 million outstanding under our Term Loan and $5.0 million drawn down under our margin debt. Subsequent to the June 30, 2020 quarter end, on July 22, 2020, we paid off the margin loan.
As of June 30, 2020, we had total assets of $1.9 billion and liabilities of $907.6 million. Our net debt (net of unamortized debt issuance costs and net of cash and cash equivalents) to total market capitalization as of June 30, 2020 was approximately 32% and our net debt, less marketable securities (net of unamortized debt issuance costs, net of cash and cash equivalents and net of marketable securities) to total market capitalization as of June 30, 2020 was approximately 28%. Our debt consists of 91% amortizing fixed rate debt with a weighted average interest rate of 4.00% and a weighted average loan maturity of 11.2 years. We believe that we have the ability to meet our obligations and to generate funds for new investments.
On February 6, 2020, we entered into a Common Stock ATM Program with BMO Capital Markets Corp., B. Riley FBR, Inc., D.A. Davidson & Co., Janney Montgomery Scott LLC, J.P. Morgan Securities LLC and RBC Capital Markets, LLC (together the “Distribution Agents”) under which we may offer and sell shares of our common stock, $0.01 par value per share, having an aggregate sales price of up to $150.0 million from time to time through the Distribution Agents. Sales of the shares of Common Stock under the Agreement, if any, will be in “at the market offerings” as defined in Rule 415 under the Securities Act, including, without limitation, sales made directly on or through the NYSE, or on any other existing trading market for the 6.125% Series C Preferred Stock, or to or through a market maker or any other method permitted by law, including, without limitation, negotiated transactions and block trades. We implemented the Common Stock ATM program for the flexibility that it provides to opportunistically access the capital markets and to best time our equity capital needs as we close on acquisitions. To date, we have not raised any equity though our Common Stock Equity Program. Based on current prevailing prices, we do not expect to utilize the Common Stock ATM program extensively at this time.
On June 29, 2017, we entered into a Preferred Stock At-The-Market Sales Agreement Program with B. Riley FBR, Inc., or B. Riley (formerly FBR Capital Markets & Co.), that provided for the offer and sale of shares of our 6.125% Series C Preferred Stock, having an aggregate sales price of up to $100.0 million. On August 2, 2018, we replaced this program with a new Preferred Stock At-The-Market Sales Agreement Program that provides for the offer and sale from time to time of $125.0 million of our 6.125% Series C Preferred Stock, representing an additional $96.5 million, with $28.5 million being carried over from the Preferred Stock At-The-Market Sales Agreement Program entered into on June 29, 2017. On December 4, 2019, we replaced the Preferred Stock At-The-Market Sales Agreement Program entered into on August 2, 2018 with another new Preferred Stock At-The-Market Sales Agreement Program (Preferred Stock ATM Program) that provides for the offer and sale from time to time of $125.0 million of our 6.125% Series C Preferred Stock, representing an additional $101.0 million, with $24.0 million being carried over from the Preferred Stock At-The-Market Sales Agreement Program entered into on August 2, 2018. Sales of shares of our 6.125% Series C Preferred Stock under the Preferred Stock ATM Program are in “at the market offerings”. We began selling shares through these programs on July 3, 2017. Since inception through June 30, 2020, we sold 9.0 million shares of our 6.125% Series C Preferred Stock under these programs at a weighted average price of $24.90 per share, and generated net proceeds, after offering expenses, of $218.8 million, of which 3.4 million shares were sold during the nine months ended June 30, 2020 at a weighted average price of $25.05 per share, generating net proceeds after offering expenses of $84.8 million. Of that amount, we sold 185,000 shares during the three months ended June 30, 2020 at a weighted average price of $24.93 per share, generating net proceeds after offering expenses of $4.5 million. As of June 30, 2020, there is $74.5 million remaining that may be sold under the Preferred Stock ATM Program.
As of June 30, 2020, 17.4 million shares of the 6.125% Series C Preferred Stock were issued and outstanding.
| 32 |
Subsequent to the June 30, 2020 quarter end, we sold 228,000 shares of our 6.125% Series C Preferred Stock under our Preferred Stock ATM Program at a weighted average price of $24.91 per share, and realized net proceeds, after offering expenses, of $5.6 million.
We raised $25.3 million (including dividend reinvestments of $6.7 million) from the issuance of 1.9 million shares of common stock under our DRIP during the nine months ended June 30, 2020. Of this amount, UMH Properties, Inc. (UMH), a related REIT, made total purchases of 85,000 common shares under our DRIP for a total cost of $1.1 million, or a weighted average cost of $12.61 per share. Of the amount raised during the three months ended June 30, 2020, we raised $1.2 million (including dividend reinvestments of $1.0 million) from the issuance of 91,000 shares of common stock under our DRIP during the three months ended June 30, 2020.
During the nine months ended June 30, 2020, we paid $49.8 million in total cash dividends, or $0.51 per share to common shareholders, of which $6.7 million was reinvested in the DRIP, representing a 13% participation rate. On July 1, 2020, our Board of Directors declared a dividend of $0.17 per common share to be paid on September 15, 2020 to common shareholders of record as of the close of business on August 17, 2020.
During the nine months ended June 30, 2020, we paid $19.0 million in Preferred Dividends, or $1.1484375 per share, on our outstanding 6.125% Series C Preferred Stock for the period September 1, 2019 through May 31, 2020. As of June 30, 2020, we have accrued Preferred Dividends of $2.2 million covering the period June 1, 2020 to June 30, 2020. Dividends on the 6.125% Series C Preferred Stock are cumulative and payable quarterly at an annual rate of $1.53125 per share. On July 1, 2020, our Board of Directors declared a dividend of $0.3828125 per share to be paid September 15, 2020 to the 6.125% Series C Preferred shareholders of record as of the close of business on August 17, 2020.
We use a variety of sources to fund our cash needs in addition to cash generated from operations. We may sell marketable securities from our investment portfolio, borrow on our unsecured line of credit facility or securities margin loans, finance or refinance debt, or raise capital through the DRIP, the Preferred Stock ATM Program, the Common Stock ATM Program or capital markets.
We have been raising capital through our DRIP, the Preferred Stock ATM Program, mortgage loans, draws on our unsecured line of credit, sale of marketable securities and funds generated from our investments in net-leased industrial properties. We may raise capital through registered direct placements, public offerings of common and preferred stock and through our Common Stock ATM Program. We believe that funds generated from operations, from the DRIP, from the Preferred Stock ATM Program, as well as our ability raise funds from our Common Stock ATM Program, and our ability to finance and refinance our properties, and our availability under our unsecured line of credit, will provide sufficient funds to adequately meet our obligations over the next year.
We have a concentration of FedEx Corporation (FDX) and FDX subsidiary-leased properties, consisting of 62 separate stand-alone leases covering 10.7 million square feet as of June 30, 2020 and 61 separate stand-alone leases covering 10.5 million square feet as of June 30, 2019. In periods of unprecedented turbulence, the services of FedEx are essential in keeping supply chains moving and in delivering critically needed supplies throughout the world. As of June 30, 2020, the 62 separate stand-alone leases that are leased to FDX and FDX subsidiaries are located in 26 different states and have a weighted average lease maturity of 8.2 years. The percentage of FDX and its subsidiaries leased square footage to the total of our rental space was 46% (5% to FDX and 41% to FDX subsidiaries) as of June 30, 2020 and 48% (5% to FDX and 43% to FDX subsidiaries) as of June 30, 2019. As of June 30, 2020, the only tenants that leased 5% or more of our total square footage were FDX and its subsidiaries and Amazon.com Services, Inc., which consists of four separate stand-alone leases for properties located in four different states, containing 1.4 million total square feet, comprising approximately 6% of our total rental square feet. None of our properties are subject to a master lease or any cross-collateralization agreements.
| 33 |
Annualized Rental and Reimbursement Revenue from FDX and its subsidiaries is estimated to be approximately 56% (5% to FDX and 51% to FDX subsidiaries) of total Rental and Reimbursement Revenue for fiscal 2020, and was 60% (5% to FDX and 55% to FDX subsidiaries) of total Rental and Reimbursement Revenue for fiscal 2019. The only tenants estimated to comprise 5% or more of our total Rental Reimbursement Revenue during the nine months ended June 30, 2020 were FDX and its subsidiaries and Amazon.com Services, Inc., which is estimated to be 7% of our Annualized Rental and Reimbursement Revenue. For the nine months ended June 30, 2019, no tenant, other than FDX and its subsidiaries, accounted for 5% or more of our total Rental and Reimbursement Revenue.
FDX and Amazon.com, Inc. are publicly-owned companies and financial information related to these entities are available at the SEC’s website, www.sec.gov. FDX and Amazon.com, Inc. are rated “BBB” and “AA-”, respectively by S&P Global Ratings (www.standardandpoors.com) and are rated “Baa2” and “A2”, respectively by Moody’s (www.moodys.com), which are both considered “Investment Grade” ratings. The references in this report to the SEC’s website, S&P Global Ratings’ website and Moody’s website are not intended to and do not include, or incorporate by reference into this report, the information of FDX, Amazon.com, Inc., S&P Global Ratings or Moody’s on such websites.
We have entered into agreements to purchase four new build-to-suit, industrial buildings that are currently being developed in Georgia, Ohio, Oklahoma and Tennessee. These four future acquisitions total 1.5 million square feet, with net-leased terms ranging from 10 to 20 years, and with a weighted average lease term of 16.8 years. The aggregate purchase price for these properties is $218.7 million. Two of these four properties, consisting of approximately 747,000 square feet, or 49%, are leased for 15 years to FedEx Ground Package System, Inc., one of these four properties, consisting of approximately 658,000 square feet or 43%, is leased for 20 years to Home Depot, Inc., and the other property, consisting of approximately 120,000 square feet, or 8%, is leased for 10 years to Amazon.com Services, Inc. All properties are leased to companies, or subsidiaries of companies, that are considered Investment Grade by S&P Global Ratings (www.standardandpoors.com) and by Moody’s (www.moodys.com). The references in this report to the S&P Global Ratings’ website and the Moody’s website are not intended to and do not include, or incorporate by reference into this report, the information of S&P Global Ratings or Moody’s on such websites. Subject to satisfactory due diligence and other customary closing conditions and requirements, we anticipate closing these transactions during fiscal 2020 and 2021. In connection with three of the four properties, we have entered into commitments to obtain three separate fully-amortizing mortgage loans totaling $113.8 million with fixed interest rates ranging from 2.95% to 3.25% with a weighted average fixed interest rate of 3.10%. The three loans have terms ranging from 15 to 17 years with a weighted average term of 16 years.
We intend to acquire additional net-leased industrial properties on long-term leases, primarily to investment grade tenants or their subsidiaries, and, when needed, expand our current properties. The funds may come from free cash flow from operations, mortgage loans, draws on our unsecured line of credit, cash on hand, sale of marketable securities, other bank borrowings, proceeds from the DRIP, proceeds from the Preferred Stock ATM Program, proceeds from the Common Stock ATM program, private placements and public offerings of additional common or preferred stock or other securities. To the extent that funds or appropriate properties are not available, fewer acquisitions will be made.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
| 34 |
Funds From Operations and Adjusted Funds From Operations
We assess and measure our overall operating results based upon an industry performance measure referred to as Funds From Operations (FFO), which we believe is a useful indicator of our operating performance. FFO is used by industry analysts and investors as a supplemental operating performance measure of a REIT. FFO, as defined by the National Association of Real Estate Investment Trusts (Nareit), represents net income attributable to common shareholders, as defined by accounting principles generally accepted in the United States of America (U.S. GAAP), excluding extraordinary items, as defined under U.S. GAAP, gains or losses from sales of previously depreciated real estate assets, impairment charges related to depreciable real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization. Included in the Nareit FFO White Paper - 2018 Restatement, is an option pertaining to assets incidental to our main business in the calculation of Nareit FFO to make an election to include or exclude mark-to-market changes in the value recognized on these marketable equity securities. In conjunction with the adoption of the FFO White Paper - 2018 Restatement, for all periods presented, we have elected to exclude unrealized gains and losses from our investments in marketable equity securities from our FFO calculation. Nareit created FFO as a non-GAAP supplemental measure of REIT operating performance. We define Adjusted Funds From Operations (AFFO) as FFO, excluding stock based compensation expense, depreciation of corporate office tenant improvements, amortization of deferred financing costs, non-recurring severance expense, effect of non-cash U.S. GAAP straight-line rent adjustments and subtracting recurring capital expenditures. We define recurring capital expenditures as all capital expenditures that are recurring in nature, excluding capital expenditures related to expansions at our current locations or capital expenditures that are incurred in conjunction with obtaining a new lease or a lease renewal. We believe that, as widely recognized measures of performance used by other REITs, FFO and AFFO may be considered by investors as supplemental measures to compare our operating performance to those of other REITs. FFO and AFFO exclude historical cost depreciation as an expense and may facilitate the comparison of REITs which have a different cost basis. However, other REITs may use different methodologies to calculate FFO and AFFO and, accordingly, our FFO and AFFO may not be comparable to all other REITs. The items excluded from FFO and AFFO are significant components in understanding our financial performance.
FFO and AFFO are non-GAAP performance measures and (i) do not represent Cash Flow from Operations as defined by U.S. GAAP; (ii) should not be considered as an alternative to Net Income or Net Income Attributable to Common Shareholders as a measure of operating performance or to Cash Flows from Operating, Investing and Financing Activities; and (iii) are not an alternative to Cash Flows from Operating, Investing and Financing Activities as a measure of liquidity. FFO and AFFO, as calculated by us, may not be comparable to similarly titled measures reported by other REITs.
The following is a reconciliation of our U.S. GAAP Net Income (Loss) Attributable to Common Shareholders to our FFO and AFFO for the three and nine months ended June 30, 2020 and 2019 (in thousands):
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| 6/30/2020 | 6/30/2019 | 6/30/2020 | 6/30/2019 | |||||||||||||
| Net Income (Loss) Attributable to Common Shareholders | $ | 26,851 | $ | (3,121) | $ | (44,700) | $ | (11,664) | ||||||||
| Less/Plus: Unrealized Holding (Gains) Losses Arising During the Periods | (19,610) | 11,609 | 67,100 | 38,668 | ||||||||||||
| Plus: Depreciation Expense (excluding Corporate Office Capitalized Costs) | 11,685 | 10,665 | 34,474 | 31,692 | ||||||||||||
| Plus: Amortization of Intangible Assets | 524 | 490 | 1,539 | 1,495 | ||||||||||||
| Plus: Amortization of Capitalized Lease Costs | 290 | 256 | 846 | 726 | ||||||||||||
| FFO Attributable to Common Shareholders | 19,740 | 19,899 | 59,259 | 60,917 | ||||||||||||
| Plus: Depreciation of Corporate Office Capitalized Costs | 57 | 168 | 176 | 376 | ||||||||||||
| Plus: Stock Compensation Expense | 98 | 231 | 368 | 574 | ||||||||||||
| Plus: Amortization of Financing Costs | 327 | 319 | 1,084 | 956 | ||||||||||||
| Plus: Non-recurring Severance Expense | 0 | -0- | 786 | 0 | ||||||||||||
| Less: Recurring Capital Expenditures | (508) | (702) | (1,443) | (1,888) | ||||||||||||
| Less: Effect of Non-cash U.S. GAAP Straight-line Rent Adjustment | (226) | (527) | (1,459) | (1,352) | ||||||||||||
| AFFO Attributable to Common Shareholders | $ | 19,488 | $ | 19,388 | $ | 58,771 | $ | 59,583 | ||||||||
| 35 |
The following are the Cash Flows provided (used) by Operating, Investing and Financing Activities for the nine months ended June 30, 2020 and 2019 (in thousands):
| Nine Months Ended | Nine Months Ended | |||||||
| 6/30/2020 | 6/30/2019 | |||||||
| Operating Activities | $ | 74,932 | $ | 74,753 | ||||
| Investing Activities | (163,049) | (185,336) | ||||||
| Financing Activities | 80,042 | 114,890 | ||||||
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
There have been no material changes to information required regarding quantitative and qualitative disclosures about market risk from the end of the preceding fiscal year to June 30, 2020 (the date of this Quarterly Report on Form 10-Q).
ITEM 4. Controls and Procedures.
Our President and Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial and accounting officer) with the assistance of other members of our management, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our President and Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of such period.
Changes in Internal Control over Financial Reporting
There has not been any change in our internal controls over financial reporting during the quarter ended June 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 36 |
PART II: OTHER INFORMATION
| |
| Item 1. | Legal Proceedings. – None |
| Item 1A. | Risk Factors.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Item 1A – “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019 (the “10-K”) and the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020 (the “10-Q”) which could materially affect the Company’s business, financial condition or future results. The risks described in the 10-K and the 10-Q are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
On January 16, 2020, our Board of Directors reaffirmed our Common Stock Repurchase Program (the “Program”) that authorizes us to purchase up to $50.0 million of shares of our common stock. The timing, manner, price and amount of any repurchase will be determined by us at our discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The Program does not have a termination date and may be suspended or discontinued at our discretion without prior notice. To date we have repurchased 400,000 shares of our common stock for $4.3 million at an average price of $10.69 per share. These are the only repurchases made under the Program to date. Repurchases executed under the Program were as follows: |
| Total Number of Common Stock Shares Purchased | Average Price Paid Per Share of Common Stock | Total Number of Common Stock Shares Purchased as Part of Our Common Stock Repurchase Program | Maximum Dollar Value of Shares of Common Stock that May Yet be Purchased Under Our Common Stock Repurchase Program (in thousands) | |||||||||||||
| January 2020 | - | - | - | $ | 50,000 | |||||||||||
| February 2020 | - | - | - | $ | 50,000 | |||||||||||
| March 2020 | 300,000 | $ | 10.70 | 300,000 | $ | 46,791 | ||||||||||
| April 2020 | 100,000 | $ | 10.66 | 100,000 | $ | 45,724 | ||||||||||
| May 2020 | - | - | - | $ | 45,724 | |||||||||||
| June 2020 | - | - | - | $ | 45,724 | |||||||||||
| July 2020 | - | - | - | $ | 45,724 | |||||||||||
| 37 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MONMOUTH REAL ESTATE INVESTMENT CORPORATION | |||
| Date: | August 4, 2020 | By: | /s/ Michael P. Landy |
| Michael P. Landy, President and Chief Executive Officer, | |||
| its principal executive officer | |||
| Date: | August 4, 2020 | By: | /s/ Kevin S. Miller |
| Kevin S. Miller, Chief Financial Officer, its principal | |||
| financial officer and principal accounting officer | |||
| 38 |