Monmouth Real Estate Investment Corporation (NYSE:MNR) Q4 2020 Earnings Conference Call November 24, 2020 10:00 AM ET

Company Participants

Becky Coleridge – Vice President, Investor Relations

Michael Landy – President & Chief Executive Officer

Richard Molke – Vice President, Asset Management

Kevin Miller – Chief Financial Officer & Chief Administration Officer

Eugene Landy – Chairman

Conference Call Participants

Rob Stevenson – Janney

Frank Lee – BMO Capital Markets

Gaurav Mehta – National Securities

Michael Carroll – RBC Capital Markets

Mike Mueller – JPMorgan

Craig Kucera – B. Riley FBR

Barry Oxford – D.A. Davidson

Operator

Good morning and welcome to the Monmouth Real Estate Investment Corporation’s Fourth Quarter and Fiscal Year-End 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

It is now my pleasure to introduce your host, Ms. Becky Coleridge, Vice President of Investor Relations. Thank you. Ms. Coleridge, you may begin.

Becky Coleridge

Thank you very much, operator. In addition to the 10-K that we filed with the SEC yesterday, we have filed an unaudited annual and fourth quarter supplemental information presentation. This supplemental information presentation along with our 10-K are available on the company’s website at www.mreic.reit.

I would like to remind everyone that certain statements made during this conference call, which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements that we make on this call are based on our current expectations and involve various risks and uncertainties. Although, the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. The risks and uncertainties that could cause actual results to differ materially from expectations are detailed in the company’s annual 2020 earnings release and filings with the Securities and Exchange Commission. The company disclaims any obligation to update its forward-looking statements.

I would now like to introduce management with us today: Eugene Landy, Chairman; Michael Landy, President and Chief Executive Officer; Kevin Miller, Chief Financial Officer; and Richard Molke, Vice President of Asset Management.

It is now my pleasure to turn the call over to Monmouth’s President and Chief Executive Officer, Michael Landy.

Michael Landy

Thanks, Becky. Good morning, everyone, and thank you for joining us. We are pleased to report our results for the fiscal year ended September 30.

Fiscal 2020 was a successful year for Monmouth. During the year, we acquired five brand new, highly automated Class A built-to-suit industrial properties containing 1.2 million square feet for a total cost of $175.1 million. And keeping with our business model, all five properties are leased long-term to investment-grade tenants. These acquisitions will generate annualized rental revenue of $10.9 million and have a weighted average lease term of 13.9 years. During the fourth quarter, we acquired one property for $15.2 million consisting of a newly constructed 121,000 square foot distribution center. This distribution center is situated on 22 acres in Oklahoma City, Oklahoma and is leased to Amazon for 10 years. This 22-acre site has ample expansion capacity and is ideally located immediately north of the Will Rogers World Airport.

With regards to our current acquisition pipeline, our pipeline grew over the quarter, and we’ve now entered into agreements to purchase six properties for $338.4 million comprising 2.4 million square feet of new Class A build-to-suit industrial buildings situated on 416 acres. Upon closing these transactions, our large pipeline will represent a 10% increase in our gross leasable area. Four of these properties are leased to FedEx. Our largest deal is leased to Home Depot for 20 years, and one is leased to Mercedes-Benz. These future acquisitions will have a weighted average lease term of 15.3 years. Subject to our due diligence, we anticipate closing each of these transactions upon completion and occupancy. Five of these transactions are scheduled to close during fiscal 2021 and one is scheduled to close in early fiscal 2022.

In connection with three of these six properties, we have entered into commitments to obtain three fully amortizing mortgage loans totaling $139.5 million, with a weighted average term of 15.8 years, and with a weighted average interest rate of 2.99%. We continue to experience strong demand for our properties, as evidenced by our nearly full 99.4% occupancy rate at fiscal year-end. With 81% of our rental revenue generated from investment-grade tenants and the remaining 19% generated from strong unrated companies, our overall occupancy and tenant rent collections throughout the COVID-19 pandemic has been excellent. Our rent collections have averaged 99.7%, and we expect November and future months to be consistent with this trend. Since the start of the pandemic, we have agreed to a cumulative total of only $438 in deferred rent, which represents just 31 basis points of our total annual base rent. We have since collected $312,000 or 71% of this amount.

During fiscal 2020, we raised approximately $26.4 million in equity capital, having issued 2 million shares through our Dividend Reinvestment Plan. Of this amount, a total of $7.6 million in dividends were reinvested this year, representing an 11% participation rate among our shareholders. Throughout the year, we also raised $122.4 million in net proceeds from our Preferred Stock ATM Program with the sale of 5 million shares of our 6.125% [ph] Series C preferred stock at an average price of $25.04 per share. As this has been widely reported, the COVID-19 pandemic has greatly accelerated the strong e-commerce growth trajectory. E-commerce sales as a percentage of total retail sales nearly doubled from approximately 15% to 27% during the last two quarters. The COVID-19 pandemic has also created a need for supply chain reconfiguration.

Increased inventory stocking is currently taking place across many industries, as they seek to better prepare for future surges in demand. Additionally, US manufacturing, which had already been increasing in recent years has accelerated further, and this trend will likely continue, as supply chains now favor shorter travel distances and reduced reliance on foreign sources. These trends are expected to continue to drive demand for US industrial real estate for the foreseeable future.

With regards to the overall US industrial market, our property sector continues to perform exceptionally well. As per CBRE’s third quarter report, net absorption for the third quarter was 56.8 million square feet, marking the 42nd consecutive quarter of positive net absorption. This brings year-to-date net absorption to 128 million square feet and represents the 10th consecutive year of over 100 million square feet of positive net absorption. The US industrial vacancy rate remained unchanged during the quarter at a record low of 4.7%. Weighted average asking rents increased by 2% over the prior year period to $6.63 per square foot. Currently, there is approximately 341 million square feet of industrial product under construction, representing a 1% increase over the prior year period.

The US economy is improving with third quarter real GDP growing at 33% after falling by 31% in the prior quarter due to the broad pandemic related economic shutdown. North American freight, rail traffic has come back from record low numbers in April to record high results in October. US railroads originated an average of just under 300,000 containers and trailers per week in October, representing the best month ever, and an increase of 34% over April.

The COVID-19 pandemic has resulted in companies like FedEx, Amazon and UPS all experiencing peak season like demand all year round. Demand for this holiday season is expected to eclipse total shipping capacity. Current total shipping capacity in the US allows for approximately 80 million packages per day. Anticipated demand is expected to exceed capacity by approximately 10%. This is despite operations now running 24/7. We are working closely with our tenants to increase their throughput and are planning several parking expansion projects for the New Year.

And now, let me turn it over to Rich Molke, so he can provide you with more property level detail, as well as our progress on the leasing front.

Richard Molke

Thanks, Mike. With respect to our total property portfolio, our occupancy rate stood at 99.4% at year-end, representing a 50 basis point increase from a year ago and unchanged sequentially. Subsequent to fiscal year end, we entered into a lease termination agreement with Cardinal Health for a 75,000 square foot facility located in the Albany, New York, MSA. We received a termination fee of $377,000, which represented approximately 50% of the — then remaining rent due under the lease, which was due to expire in November 2021. We simultaneously entered into a new 10.4 year lease agreement with United Parcel Service effective November 1, 2020.

The new lease provides for five months of free rent and an initial annual rent of $510,000 with 2% annual escalators thereafter. The new lease represents a straight line annualized rent of $541,000 or $7.21 per square foot over the life of the lease through the end of March, 2031.This compares to the former GAAP rent of $7.65 per square feet resulting in a decrease of 5.8% on a GAAP basis. After taking into account the $377,000 termination fee, the overall transaction resulted in a slightly positive GAAP leasing spread over the prior expiring lease, while providing us with an additional 9.3 years of lease term with this new investment-grade tenant. As of September 30, our weighted average lease maturity was 7.1 years compared to 7.6 years a year ago. We expect our weighted average lease term to increase, as we bring the new deals online from our acquisition pipeline, which has over 15 years of average lease term. Our weighted average rent per square foot increased 3% to $6.36 as of fiscal year end as compared to $6.20 at the end of fiscal 2019.

From a leasing standpoint, as previously reported, in fiscal 2020 five leases, representing approximately 410,000 square feet or 2% of our gross leasable area were scheduled to expire. Four of these five leases representing 355,000 square feet were renewed, representing a strong 87% tenant retention for the year, which is in line with our long-term average tenant retention rate of approximately 90%. These four lease renewals had a weighted average lease term of 4.2 years and represented a 12% increase in GAAP rent and a 4.4% increase in cash rent. We currently have only two small vacancies in our industrial portfolio, namely our 81,000 square foot facility located in the Pittsburgh PA MSA, and our 55,000 square foot facility located in the Hartford, Connecticut MSA representing only 60 basis points of our total gross leasable area. In fiscal 2021, 5% of our gross leasable area consisting of 10 leases, totaling 1.2 million square feet is scheduled to expire.

While it is still early in our new fiscal year, to-date, we have renewed 4 of these 10 leases, representing 532,000 square feet or 44% of the amount up for renewal. These renewed leases have a weighted average term of 3.2 years and have a GAAP lease rate of $4.46 per square foot. The initial cash rent is $4.38 per square foot. This results in an increase of 8% on a GAAP basis and an increase of 1.9% on a cash basis. There are no known move-outs at this time, and we are shooting for 100% tenant retention this year. With regards to our property expansion pipeline, we have six FedEx ground parking expansion projects in progress, and one recently completed with more under discussion. These six projects plus the recently completed projects are expected to cost approximately $21 million and are projected to be completed in fiscal 2021. These parking expansion projects will result in additional rent, as well as an extension of the lease terms.

We are in discussions to expand parking at 10 additional locations. The parking expansion project that was recently completed was at our property located in the Kansas City, Kansas MSA for a total project cost of $3.4 million. The expansion resulted in a $349,000 increase in annualized rent effective November 5th, 2020 increasing the annualized rent at this location from $2.2 million to $2.6 million. I look forward to reporting continued progress in the next few quarters.

And now, Kevin will provide you with greater detail on our financial results.

Kevin Miller

Thank you, Rich. I will start off by discussing some of our key financial indicators for the fourth quarter and then move into some of our key financial indicators for the full fiscal year.

Funds from operations or FFO, which excludes unrealized securities gains or losses for the three months ended September 30, 2020 were $19.2 million or $0.20 per diluted share, as compared to $20.3 million or $0.21 per diluted share for the same period a year ago, representing a decrease in FFO per share of $0.01. Adjusted funds from operations or AFFO were $18.2 million or $0.19 per diluted share for the recent quarter, as compared to $20.1 million or $0.21 per diluted share a year ago, representing a decrease in AFFO per share of $0.02. We expect the combination of our $338.4 million acquisition pipeline and our several ongoing parking expansions to positively contribute to our per share earnings and cash flow going forward.

Rental and reimbursement revenues for the quarter were $42.6 million compared to $39.7 million or an increase of 7.5% from the prior year. Net operating income increased $2.4 million to $36 million for the quarter, reflecting a 7.2% increase from the comparable period a year ago. This increase was due to the additional income related to the five properties purchased during fiscal 2020 and the three properties purchased on fiscal 2019. As mentioned earlier, during the quarter, we acquired one brand new property leased to Amazon for 10 years containing 121,000 square feet for $15.2 million. Same property NOI for the three months ended September 30, 2020 remained relatively unchanged with a slight decrease of 0.3% on a GAAP basis and a slight increase of 0.3% on a cash basis.

Net loss attributable to common shareholders was $3.9 million for the quarter, as compared to net income attributable to common shareholders of $22.7 million in the previous year, representing a $26.6 million decrease. This decrease in our net loss attributable to common shareholders was mostly due to an accounting rule change in which, unrealized gains and losses on our securities investments are now reflected on our income statement. Prior to the adoption of this accounting rule change, unrealized gains and losses reflected as a change in shareholders’ equity. Excluding the effect of this accounting rule change related to the $10.3 million in unrealized losses on our securities portfolio during our fourth quarter, net income attributable to common shareholders would have been $6.4 million for the current quarter compared to $8.7 million for the prior year quarter, representing a 26.9% decrease.

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The 26.9% decrease was mostly due to a decrease in dividend income from our securities investments of $2.1 million and an increase in preferred dividend expense of $1.9 million. The increase in our preferred dividend expense relates to the 5 million shares we sold of our 6.125% [ph] Series C Preferred Stock under the Preferred Stock ATM Program during the fiscal year at a weighted average price of $25.04 per share, which generated net proceeds of $122.4 million. As we generate the full run rate of our recent acquisitions, coupled with our large $338.4 million acquisition pipeline, as well as our property expansions, we expect to see meaningful cash flow growth going forward.

I would now like to cover the financial results for the full fiscal year. FFO for the full fiscal year 2020 was $78.5 million or $0.80 per diluted share, as compared to $81.2 million or $0.87 per diluted share for the same period a year ago, representing a decrease in FFO per share of $0.07. AFFO was $0.78 per diluted share for fiscal 2020, as compared to $0.85 per diluted share a year ago, representing a year-over-year decrease of $0.07. Rental and reimbursement revenues for the year were $167.8 million compared to $154.8 million or an increase of 8.4% from the prior year.

Net operating income increased $9.5 million to $140.7 million for the year, reflecting a 7.3% increase from the comparable period a year ago. Same property NOI for the 12 months ended September 30, 2020 increased by 0.4% on a GAAP basis and 1% on a cash basis. The 40 basis point increase in GAAP same property NOI and the 100 basis point increase in same property cash NOI were primarily driven by a 50 basis point increase in same property occupancy. As at the end of the fiscal year, our capital structure consisted of approximately $875 million in debt, of which $800 million was property level fixed rate mortgage debt with the weighted average interest rate of 3.98%, as compared to 4.03% in the prior year period. Our weighted average debt maturity on our fixed rate mortgage debt is 11.1 years, representing one of the longest debt maturity schedules in the REIT sector.

Our loans payable consists of a $75 million term loan. The $75 million term loan has a corresponding interest rate swap agreement to fixed LIBOR at an all-in interest rate of 2.92%. We also had a total of $472 million in perpetual preferred equity at year end. The bond with an equity market capitalization of approximately $1.4 billion, our total market capitalization was approximately $2.7 billion at year end, representing a 5% increase from a year ago. From a credit standpoint, we continue to be conservatively capitalized with our net debt to total market capitalization at 31% and our net debt plus preferred equity to total market capitalization at 49% at year-end. For the fiscal year ended September 30, 2020, our fixed charge coverage was unchanged versus the prior year period at 2.3 times, and our net debt to adjusted EBITDA was also unchanged versus the prior year period at 6 times.

From a liquidity standpoint, we ended the year with $23.5 million in cash and cash equivalents, and the full availability on our credit facility. In addition, we have $108.8 million in marketable REIT [ph] securities representing 4.9% of our undepreciated assets. Subsequent to fiscal year end, the value of our securities portfolio has improved with recent positive vaccine news. As we have previously reported early on during our fiscal year, we amended our unsecured line of credit facility, increasing the maximum availability of our revolver from $200 million to $225 million, with an additional $100 million accordion feature, bringing the total potential availability up to $325 million.

In addition, the amended credit facility extended the maturity date of our revolver from September 2020 to January 2024 with options to extend further. Furthermore, the amended facility was enhanced with the $75 million term loan, which matures January 2025, resulting in the total potential availability on the both the revolver and the term loan of up to $300 million and up to $400 million, including the $100 million accordion feature. The amended line of credit and new term loan reduces our borrowing rates by a range of 5 basis points to 35 basis points. The revolver currently bears interest at a rate of 1.61%. We currently have the full $225 million available under our new revolver, as well as an additional $100 million potentially available from the accordion feature.

To reduce floating interest rate exposure on our term loan, we entered into an interest rate swap agreement to fixed LIBOR on the entire $75 million for the full duration of the term loan, which is at an all-in interest rate of 2.92%. In addition, this year we fully repaid two loans associated with two properties with a weighted average interest rate of 5.52%, which unencumbered approximately $19.7 million worth of real estate. The continued substantial growth of our unencumbered asset pool enhances our financial flexibility and further strengthens our already strong credit profile.

And now, let me turn it back to Michael before we open up the call for questions.

Michael Landy

Thanks, Kevin. Just to reiterate some key points. We have a substantial 2.4 million square foot acquisition pipeline in place with two large deal scheduled to close very soon. These acquisitions will help drive our performance going forward. We also have a sizable and growing amount of expansion projects taking place with our largest tenant, FedEx in order to accommodate the rapid growth in e-commerce. We have strengthened our already strong balance sheet and have ample capital to fund our future growth. Our resilient occupancy, tenant retention and rent collection results during these challenging times, highlights the mission critical nature of our portfolio and underscores the essential need for our tenants’ operations.

Lastly, as illustrated on slide 10 of our investor presentation, which can be found on our website, our annual dividend yield as a multiple, the yield on the 10 year treasury note is now at historic highs of over 7 times. Normally, this multiple is approximately 2.5 times. Achieving over 7 years of income from the T note in one year of dividend income from our common stock, represents compelling relative value.

High-quality real estate also provides inflation protection, while fixed income debt instruments do not. The strong financial position of our tenants, together with the long duration of our leases has provided for a high-quality, reliable income streams throughout many business cycles. Our dividend was maintained throughout the global financial crisis, and it has increased by 13% since then. As a 53-year-old public REIT, our resilience is self-evident.

We would now be happy to take your questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Rob Stevenson of Janney. Please go ahead.

Rob Stevenson

Good morning, guys. [Indiscernible] little bit when you guys were talking about the timing of the Cardinal Health move-out and the UPS move-in. What is — my understanding that Cardinal Health is now out that 377,000 termination fee was in the fiscal fourth quarter, you’re going to have some vacancy for the next three months and then essentially UPS moves in at the beginning of the year, so your second fiscal quarter. Is that the way to be thinking about this?

Richard Molke

Yes. Hi Rob, so yes — so, it was the — the lease termination for Cardinal Health was effective October 1st. So that — that termination fee has to be recognized in our fiscal first quarter. So it will be October fee. So it’s — it’s not reflected in our earnings that — that we just posted. And then the new tenant UPS, their lease is effective November 1st. So there is one month, where I guess, there is no rent. But — but the lease termination fee more than makes up for that.

Rob Stevenson

Okay. And essentially there is, at that point, I mean, on almost 100 million shares, it’s not a meaningful impact to first quarter FFO. Okay, great. And then Kevin, while I’ve got you then on a question for you with the various dividend cuts, now reinstatements and then the UMH preferred call et cetera, what’s the current securities portfolio quarterly run rate. I mean it was like 1.46 for the fourth quarter, but that included some — some stocks that weren’t paying a dividend, they are now, I think paying a dividend, some that would cut, some that are no longer around, how should we be thinking about the run rate of the securities portfolio on a quarterly or annual basis now?

Kevin Miller

Yes. I’ll take that one. Quarterly run rates 1.4 million per quarter, 5.6 million annually and that’s net of UMH redeeming their — their preferred.

Rob Stevenson

Okay, 1.4 a quarter. All right. And then Mike, the 3.2 years on recent renewals seem short even if tenants just exercise five year options. Do you have guys that are just kicking — trying to kick the can out 12 months, 18 months, while they build something else and move-in, is that a FedEx type of situation there that you normally wind up seeing. How would you characterize some of these lease renewals and the sort of term on them?

Michael Landy

Well, broad picture, our WAULT was 7.2 years a year ago, at 7.1 now, but it’s really pro forma much more than 7.1. We have a portfolio that’s about 15% of our size and the portfolio is going to — has a WAULT of 15.3 years. So some of those acquisitions are 20 year leases and many are 15. So as we close on our acquisition pipeline, the WAULT will increase. We have 17 parking expansions and that number is going to grow. It’s hard to say what the total FedEx parking expansions will plateau at, but it will definitely be more than the 17 going on right now. So each one of those extensively — so those are the drivers of the WAULT being much longer than the 7.1 years. So — and then as far as the renewals, Rich, specifically, our renewal weighted average lease term was 3.2 years. What was driving that?

Richard Molke

So, we had two tenants that did two — two year renewals just kind of kicking the can down the road. The others for the rest of the year. I don’t anticipate many coming back under five years. So that’s — that — those two kind of stand out, as the short terms for this fiscal year.

Rob Stevenson

And I mean, where are those two that are only two year leases, where are they in terms of utilization of their space, so they are growing their space and are likely to need something bigger built, whether or not it’s something that you guys would own in the future or somebody else. Are they — are they in areas that aren’t — that are part of the weaker parts of the economy, how do you characterize that?

Richard Molke

No, I’d say. But — both of those buildings are strong buildings and those tenants, you never know, they could — in two years, a lot can happen. So I wouldn’t read too much into those two year renewals.

Rob Stevenson

Okay. Thanks, guys. I appreciate it.

Michael Landy

Thank you.

Operator

The next question comes from Frank Lee of BMO. Please go ahead.

Frank Lee

Hi. Good morning, everyone. Just wanted to touch on the parking expansion projects. How are these projects typically source or identified. Are you proactively approaching FedEx. And are there opportunities for a similar type of parking expansions that you’re actively working on beyond FedEx?

Michael Landy

Well, first of all, our portfolio average building age is under 10 years, and our FedEx portfolio, which roughly represents half of our 24 million square foot portfolio is even younger, and these are digital buildings. They are built to specifically serve the digital economy, and therefore, they have much more land than what we’ll call the old analog wholesale type distribution buildings that just took racks and forklifts for the extent of a technology because they serve the brick and mortar retail distribution, supply chain. Now, we’re doing home delivery, omnichannel distribution, and so the — the pandemic created a parabolic shift in the amount of goods moving online. It was already growing at a 15% CAGR. Now it’s growing at 30%. We’re heading peak season, and FedEx, UPS, Amazon they can’t even deliver all the goods needed for the holiday season. So we’re — has the capacity of shipments. The US can ship 80 million packages a day, and demand is over 90 million packages for the holiday season.

So FedEx is ramping up the van parkings to do increased home delivery at 18 properties of ours, which is 15% of our portfolio is now undergoing parking expansions. And like I said, that number is going to increase. So — so the driver is the tenant. The inordinate demand for the tenant, the ability for the tenant to try to serve the digital economy and the fact that our assets have ample land, where we could expand. In the cases, where — where land is constraint, we’ll preemptively go out and purchase land that’s contiguous to our properties because we’ve done many property expansions for our tenants over the years. And you never know when the expansion request are going to come in. And there was a big period of expansions, where we did about 80 million expansions in two years about — about four or five years ago, and then it was quiet, and now they’re coming in over the transom.

Richard Molke

And I’ll just add one thing to that for our new UPS lease, we — they have already approached us on expanding their parking too. So it’s just a case in point for home delivery, how much parking these — these tenants need.

Frank Lee

Okay, great. And then you mentioned the vacant Hartford property, is this property is still being marketed for sale. So how is activity so far. And are there any other potential sale candidate — candidates within your portfolio?

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Michael Landy

That one is most likely not going to be sold. There is — it’s out for signature with an investment-grade tenant. And we’re hopeful, we’ll have good news on that front soon.

Frank Lee

Okay, great. And then, last one for me. Mike, you mentioned kind of two larger acquisitions are expect to close in the near term. Are you able to provide a breakdown by quarter on when you expect the rest — the rest of the acquisition in the pipeline to close over the next year?

Michael Landy

Sure, Frank. Our two largest deals, which is FedEx in Columbus and Home Depot in Atlanta representing about 50% of our $338.4 million pipeline are supposed to close before the end of the calendar year. So that’s 50% of the pipeline, right. They are closing in December ideally. And that’s $10 million in revenue and that will really move the needle of earnings and put us in a really good position with regards to our AFFO dividend payout ratio. So we’re looking forward to announcements, as those deals close. Then the other 15% nothing slated for the second quarter about 16% and this is in dollar volume is supposed to close in Q3, and then 19% in Q4, and then the remaining 50% sometime in the first half of fiscal ’22.

Frank Lee

Okay, great. Thank you.

Michael Landy

You’re welcome.

Operator

The next question comes from Gaurav Mehta of National Securities. Please go ahead.

Gaurav Mehta

So you guys have secured financing for three of the six acquisitions. Maybe comment on what your expectation is for the remainder of the financing. Are you expecting to use the Preferred Stock ATM to fund the remainder?

Michael Landy

Okay. Kevin, it’s hard to hear you Gaurav, but I think, I got it. Did you get that Kevin?

Kevin Miller

Yes. I think he is asking how that we’ve locked in financing on some of the deals in the pipeline and he wanted some color on that?

Gaurav Mehta

And about — on the remaining three, you’ve locked in three, and how do you plan to finance the other three?

Kevin Miller

Okay. Yes. So — just so — so everybody knows that we’ve locked in three of the six deals in the pipeline, and we’ve locked it in with a long-term mortgage rate debt. The three deals have a weighted average maturity of 15.8 years, weighted average interest rate of slightly under 3%, 2.99% with about 62% LTV. And for the remaining three deals, we expect to just continue that — that way. That’s the way we’ve always funded our pipeline and that’s the way — that’s just the method that works for us. These are all fully amortizing loans. We match our — we match the lease term with the debt term matching our revenue with our expenses and our debt maturities and that’s just the way we do it. And the remaining other 30% — 35% that’s not funded with long-term debt. We have many sources of capital. We could be — we could use the ATM. We could raise money through the DRIP. We have a common ATM. We have a fully — we have a line of credit of that’s not drawn down at all. So we have the full capacity on that. So yes, just several different ways.

Michael Landy

Yes. And what Monmouth does, these are Monmouth deals. They are long-term leases to investment-grade tenants. They are brand new built-to-suit automated digital buildings for the digital economy. So that the financing terms that we’ve been successfully executing on the three deals, thus far in the pipeline will be similar. It will be the same lenders. It will be similar terms, and it’s easy to model.

Gaurav Mehta

Okay. Second question, I was hoping if you could provide some color on what you guys are seeing in the acquisition market outside of the six properties that you have under contract. Maybe some comments on the product flow and the cap rates that you’re seeing?

Michael Landy

Well, it’s really competitive out there, as it’s been. And the lanes, as I said last quarter have narrowed and all the capital earmarked for commercial real estate wants exposure to our sector. It’s an unquestionably the hottest sector. And so you see specs being formed, and I’m told there is specs and specs [ph]. So there is a lot of capital out there now. As a 53-year old company, we have relationships with the merchant builder community. And I’m very pleased, we are able to increase our pipeline over the quarter substantially with quality deals and that’s all we focus on. So we’re not going to grow for growth sake. But I think I’m confident we’ll be able to continue to land the type of deals that we’ve built this portfolio, one high-quality acquisition at the time and the people we’ve done transactions with or have been partners for decades, and so they come to us with deals, and are — from a FedEx and Amazon standpoint, the prospects — future prospects have never been better.

They are record revenue, record shipments, and they need more distribution centers, more fulfillment centers and the same could be said for some of our other relationships. So it’s competitive, and we’re going to have to keep bidding ever decreasing cap rates. But it’s still accretive and the lending rates have come down, so the spreads remain good, but more people are embracing exactly what we do. And some of our other new entrants into the sector, their PowerPoint presentations look like they were cut and paste right from ours. So we take that as a compliment, but it’s definitely getting crowded out there.

Gaurav Mehta

Okay. Thank you.

Operator

Our next question comes from Michael Carroll of RBC Capital Markets. Please go ahead.

Michael Carroll

Yes. And I’m sorry, I’m not sure if you guys mentioned this or not, but can we talk a little bit about the Cardinal lease and the UPS lease. It seems like Cardinal was paying about $7 [ph] a square foot previously. Did you say what UPS plans on paying. And if so, is there any other capital costs related to that new lease with UPS coming in?

Richard Molke

So that on a GAAP and a cash basis went down, but we did pick up 9.3 years of additional term with an investment-grade tenant. So that’s a win for us. And yes, like I said, they do want to do a parking expansion and that will be on our normal terms on how we do all of our parking expansions. So you can — rents are going to increase at that location.

Michael Carroll

Okay. So how much did rents drop?

Michael Landy

There will be a return to capital for that investment above and beyond the figures, Rich, just gave you.

Richard Molke

Also if you factor [indiscernible].

Michael Carroll

Okay. So what was…

Richard Molke

Yes. As you can say if you factor in the lease termination fee to it, then it’s — it is slightly positive on a GAAP basis.

Michael Carroll

Yes. So where — where is the new rent for the UPS leases versus the Cardinal rent, the 7.23 [ph] in the sup, is that a GAAP rate or is that a cash rate?

Richard Molke

That’s a GAAP rate.

Michael Carroll

And then, what’s the new GAAP rate for UPS?

Michael Landy

The new what?

Richard Molke

GAAP rate for UPS.

Michael Landy

That’s the 7.21 [ph] on a GAAP basis.

Michael Carroll

Okay. And then there is no other TIs or LTEs related to that. The only other capital cost that you have the parking lot, which you’re going to get was it — like is it a 10% yield on those?

Michael Landy

We haven’t structured that yet. There will hopefully be a 10% return and an additional lease term, but that’s — and again to be confident.

Michael Carroll

Okay. So is there any other TIs or LTEs outside of that parking lot?

Michael Landy

We had to put in new lights for them. There was a few just tenant improvements that we did. But those were with rebates and pretty light on the TIs.

Michael Carroll

Okay. And then Mike, can you talk a little bit about the acquisition cap rates, I guess, with the new competition coming in. I know you’ve been able to complete some deals in the low six cap range. I mean, should we expect those cap rates to drift below six over the next 12 plus months or so, given the competition for industrial product?

Michael Landy

No question. No question. I am not bidding 6s [ph] on anything these days and in some cases south of 5. But the next deal, we’re going to close is a FedEx ground in Columbus, and we can do agreement on that deal over two years ago. So we lock that in before a lot of this continued cap rate compression and — and that’s a healthy cap rate north of 6. So — but — supply and demand and demand is great for industrial assets and cap rates have continued to come down. So hopefully, our pipeline average cap rate will be in the mid-5s. It’s currently 5.96. And next time we speak, it will drift lower. It’s just a question of how much lower. And the important thing is, interest rates continue to come down. So the spreads are there, and it’s still very accretive for our common shareholders on a per share level for us to close these deals.

And then, with these tenants; like I said, suddenly FedEx has so many expansions, which will be lucrative returns and take our WAULT much higher than the 7.1 years, we’re showing you. And it’s just a very healthy business model that smooths out the rough economic cycles because there is a lot of distress and dire circumstances going on out there, and I don’t know anybody else is talking about 15% of their portfolio being expanded currently.

Kevin Miller

If I may add something, as everyone is interested in cap rates and returns for the last quarter, and I keep looking ahead is seven years from now, these — would these leases will be renewed, seven years from now you’re going to have different value of the dollar, you may have considerable inflation, and the actual return on our leverage investment maybe substantially more than you have figuring on these calculations you’re making now. So, the reason I’m not sure about the cap rates are going down, as Michael pointed out, the spreads are still there. But I think your real return is much greater than anyone figures because with the deficits we have, with the need — needs for low interest rates for the foreseeable future, I think inflation is on the horizon. And the total return, we’re going to get from these investments is substantially more than the numbers that we’re talking about. Thank you.

Michael Carroll

Okay. And then Mike, I just wanted to touch on, you said that you’re bidding on some deals sub-5. Can you talk about those deals, are those transactions that you’re looking at completing and would you be willing to go that well?

Michael Landy

I would, if the lease term was long enough and the escalations — I’m talking about the going in year one cap rate. And if it’s a long lease with healthy bumps, the average cap rate will be substantially higher than that. So yes, that’s what it takes to win a quality asset with the quality tenant. And I’m confident we could get financing well inside of 200 basis points below that. I will try to win those deals.

Michael Carroll

And then, what type of bumps would you look at — get onto that 5%-cap. If you have go after some with the 5%-cap, what type of bumps would be — you consider healthy?

Michael Landy

Well, 2% is the average these days, and Rich did Amazon renewal with 3% bumps for 10 years; so 3% is better than 2%. In some cases, they are slightly under 2%, but it’s not meaningfully under 2%. Kevin, do you want to add something?

Kevin Miller

Yes. I just wanted to add something earlier when I was talking about the deals we’ve locked in with the weighted average interest rate of 2.99% it’s a — some of those deals were locked in a long time ago before interest rates dropped. So they range between 3.25% down to 2.6%. So the 2.6% is the latest one. So I feel confident that we’ll be getting sub-3%, in that 2.6% range going forward. So that will help with the drop in cap rate, as Mike mentioned, the drop in interest rate as well.

Michael Carroll

Okay. And then, can you guys talk a little bit about your leverage metrics right now. I know you talked about the LTVs on the secured financing on the upcoming deals, but what are you going to — how are you going to fund the rest of it. Are you willing to issue equity at these levels or should we continue to expect more preferred equity and leverage to continue to creep higher?

Michael Landy

Well, at year end, we had $472 million in our Series C preferred, and there has been really strong demand for our Preferred ATM. I think we did another $35 million subsequent to year-end. So it’s about $507 million currently outstanding and the call protection on that is another 10 months. So that tells me that investors on a new preferred issue would be substantially lower than our Series C 6.125% [ph]. Our Series C was issued to redeem high coupon preferred that we had on our balance sheet in the high-7s. And so as we get closer to the maturity date of the Series C, we ideally would do a new issue and have some financial savings, I — it’s a big issue. There is $500 million outstanding and probably by that time even more because the answer is yes, we’ll use preferred to fund the pipeline.

And then, we’ll start taking it down in — in about $100 million tranches with lower cost of capital. With the securities portfolio is yielding about 4.5% currently, it’s up about 20% since fiscal year end, it’s about $130 million in value. So that would be logical candidate to use that capital to take out some of the preferred. So, those are the plans as far as issuing common equity not at these prices. NAV is well north of where we’re currently trading. And so while we’ve had a common ATM up and running since for two years now, we haven’t issued a single shares and nor do we — nor do we intend to at these levels.

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Michael Carroll

Okay. And then just real quick on, I guess, on that securities book, are you planning on selling any securities here in the near term. I guess, what would make you sell that? And what’s the timing on that?

Richard Molke

Well, it’s improved dramatically just on the vaccine news and as COVID becomes something in our rear view mirror, I’m sure it will be even more valuable. One of our largest holdings is in UMH, manufactured housing and industrial are the only two property types have appreciated in value post-COVID. So I’d be hesitant to sell the UMH. But yes, we certainly would harvest gains in some of our holdings. But I think as we get closer to the redemption date of the preferred that will be the — more of a catalyst than doing anything at this particular moment.

Michael Carroll

Okay, great. Thanks.

Operator

The next question comes from Fred [ph] of Boston University. Please go ahead.

Unidentified Analyst

Hi, thank you, and congratulations again on — on outstanding performance. My question is going to follow the last question, but I was wondering long term, where do you sort of see that securities portfolio because you — we’re using the cash to buy these securities, whether you like Warren Buffett was telling the crazy mark to market is kind of a crazy thing, but you have to do that. So I got the feeling that you were going to kind of over time sort of reduce that just so you don’t have these sort of adjustments to the quarter. So where is that going long-term?

Michael Landy

Okay. I’m going to turn over to Gene because REITs investing in other REITs is Gene Landy’s brainchild. I do agree that new accounting has definitely made it problematic, and we haven’t bought any REIT securities in going on two years. So we haven’t been allocating capital. The securities portfolio we’ve been winding it down slowly. It used to be 10% of gross assets. It’s now rounding up 5% of gross assets. But Gene, please answer this question in more detail.

Eugene Landy

You have to understand that the balance sheet, we have has been planned and has worked out very well over many decades that we’ve maintained liquidity — and liquidity at all cost. And the liquidity we have now is — we have about $119 million in securities that I can pick up the phone, I can borrow $50 million tomorrow at 1%. I can sell the securities. I have that liquidity. The other thing you have to understand that it’s part of the overall financial plan for the company. The beauty of what’s happening is, we are paying down these mortgages, the amortizing mortgages over 10 years, 15 years, and we’ve been around for 50 years. And as the officers announced to you that we’re renewing — renewing the leases, then the leases have been renewed and the mortgages are down and balance, so that we have a substantial number of properties being clear. But the properties that we have mortgage, I believe, we gave an example, we paid off a few million dollars and freed up $12 million in properties. Well, the big numbers are, we’re going to pay off the $50 million and free up $150 million in properties. And those $150 million in properties, if they have leases on them with credit tenants we can borrow against them $100 million.

Now, you have to picture the amount of liquidity we’re going to have. So I hear some questions that when we have this pipeline of $300 million, $400 million people are worried where we’re going to get the money. Well, we worried about that in advance and we have the money, and we are very liquid. And one of the things we have — put the securities program in for is the liquidity. And I have always wanted to have two, three, four sources of liquidity; we have lines we haven’t used, we have securities, we have ATMs. But even for me, we seem to have ample liquidity right now. And if we have $50 million or $60 million in mortgages amortizing that will free up $150 million in assets, which will free up $100 million in credit, I have no objection to selling some of the securities and paying down those mortgages and actually generating $100 million in cash, which the next year you might use to redeem some of the preferred.

And so — and the amounts involved, we have a capital stack close to $500 million at 6.125% [ph]. And if you can save two points or three points in refinancing it, you’re talking about a lot of money, you’re talking about $10 million, $15 million. So we think the capital stock — capital stack will eventually be refinanced and the mortgages will be refinanced and it will — as long as these leases are big, and we do it and the basic economy is going well, this company is going to do very, very well.

Unidentified Analyst

Okay, thank you. Excellent response. Appreciate it.

Michael Landy

You’re welcome.

Operator

The next question comes from Mike Mueller of JPMorgan. Please go ahead.

Mike Mueller

Just a quick one. I was wondering, can you talk about the remaining six 2021 expirations and just what you’re expecting there in terms of timing to knock those out. And what you think spreads could look like?

Michael Landy

Sure, sure. So all of those are in discussion now. Some of them are further along than others. And I would expect that all of our metrics will go up from our WAULT to our GAAP and our cash spread. So that’s kind of what it’s looking like now. Three of the big ones are back half weighted to the end of this year. So timing wise, hopefully in the next two quarters, we have most of those locked in.

Richard Molke

I’ll just add something, and I know Kevin wants to get in on this as well. Historically, we’ve had 90% tenant retention and that’s important because they are credit tenants and you want to keep the cash flow secured by investment-grade tenants. And last year, we had 87% tenant retention, and I know, Rich is shooting for 100% tenant retention this year. And we’ve had no known move-outs and the tenants make big investments in the buildings. So it’s not easy for them to move once they have made tens of millions of dollars in automation inside of these buildings. We’re working on a new annual report, and we’re featuring a lot of the infrastructure inside of the buildings, so you could see that even though industrial is one big bucket of everything, there’s really digital assets that are so different than the analog assets, and we’ll be illustrating that point in our new annual report. It comes out in a couple of months. Kevin, what did you want to say?

Kevin Miller

I just wanted to ask Rich, I think something came in this morning actually so there was four got renewed in our K and one came in this morning.

Richard Molke

Yes. This morning we did have one of our FedEx leases renewed for five years. So that’s another one out, a small one, but positive spreads.

Mike Mueller

Got it. Okay, thank you.

Operator

The next question comes from Craig Kucera of B. Riley FBR. Please go ahead.

Craig Kucera

Hey, good morning, guys. I know you mentioned that you had 6 expansions currently in progress and maybe an additional 10 you might announce. If those move forward, would you expect those to be completed inside of 12 months or they — can they be negotiated in — in to a longer-term?

Michael Landy

Yes. So I’m going to have Rich answer that, but it’s very fluid. So we have 6 ongoing, 1 completed and the 10 became 11. So it’s very fluid. And like I said, it’s going to be more. We don’t know what the total number is going to be. But this is going to be a multiyear process.

Richard Molke

Yes. Mike, you pretty much hit it. I mean this — we got to take down land in some instances and those approvals and that time frame to do it, but FedEx needs this yesterday. So they are moving as fast as they can and so are we. So hopefully next year, we get a bunch of them done.

Michael Landy

But peak season is extraordinary. FedEx distribution center will go from 50 employees to 550, and all construction will come to a standstill from October to mid-January and then start up again. And ideally, they will have additional parking capacity for next peak season, but some will go into the following year, and it will just be a multiyear process as I said.

Craig Kucera

Got it. And Mike you tripled the size of the company over the last seven years, and you’ve got nearly $340 million in your acquisition pipeline. Just given the growth of the company and the long-term relationships you have with a lot of your tenants, do you ever consider bringing more of a development component in-house?

Michael Landy

There is pros and cons to that you know, and we know some great developers that would love to fit that bill. But the problem is, you have to bank land and that’s non-income producing. And when it comes to bidding on the RFPs that are out there for these digital buildings on long-term leases to investment-grade tenants, it’s a multistage process. And if we have in-house development capacity, we’re competing against our legacy merchant builders. And we feel for a company our size, the better mousetrap is to have multiple relationships with the merchant builder community. That’s exactly why we were able to triple the size of the company. And if we had in-house development, the growth would have been much slower.

Craig Kucera

Okay, thanks.

Michael Landy

You’re welcome.

Operator

The next question comes from Barry Oxford of D. A. Davidson. Please go ahead.

Barry Oxford

Hey, Mike. Quick question on the securities portfolio, would you entertain maybe switching out some of the securities to get into some more stable dividends that wouldn’t be up for being cut?

Michael Landy

So you’re talking about just reallocating…

Barry Oxford

Yes.

Michael Landy

Liquid real estate into…

Barry Oxford

Right, reallocation. Correct.

Michael Landy

Yes. We were thinking about rotating into preferred out of the common when the preferred market sold off and really we’re just waiting for things to come back to — to fair value. It’s been guesstimated the market is very short term oriented, just take Monmouth, for instance. I know some institutions came in and took very big positions in March only to sell in the summer months, and that’s how people invest. It’s really trading. It’s not investing. And so we’re the opposite. We’re long-term investors. We have our holdings. They have gone up and down, mostly down of late. And we’re just going to hold them until we get to a post pandemic environment and then rotate out of the securities portfolio for all the reasons we’ve stated. As far as moving from one instrument to another, I’m not precluding that, but — but it’s not going to be a very active situation if at all.

Barry Oxford

Okay. And then just kind of switching gears a little bit, how much would you let the preferred become part of your capital stack?

Michael Landy

We’ve said, we’ll take it as high as 25%. I think it’s 16% currently, and getting back to that theme of being long-term investors. We like long-term leases on the asset side, and on the balance sheet side, we like long-term debt maturities. We have the longest debt maturity schedule in the REIT sector with over 11 years. And then we have a big tranche about 16% of our capital structure is in perpetual, permanent capital that never comes due.. So we’ll always have big tranches of preferred, but it won’t necessarily all be in 6.125% Series C. We’re in a very low interest rate environment. I think there is $17 trillion [ph] in debt instruments yielding less than zero. And like I said, the orders from our ATM on our Series C are very strong. So we’ll probably do a new issue at some point at a lower cost of capital. But — but we are big believers in permanent preferred equity even though it’s relatively expensive compared to short-term capital for all the reasons Gene said about remaining liquid, you never have refinancing risk.

And if you look at the long 5,000 year history of interest rates, people never even contemplated negative interest rate. So I know public storage, it is the big component. And then the first REIT to ever issue perpetual preferred, and their first issue was at 10% and now they are setting record lows, not just in the REIT industry, but for the whole preferred market with sub 4% permanent capital. So our initial preferred were 7.75% and now 6.125% [ph] and that evolution will continue at an ever decreasing cost, as the company gets bigger and we continue to grow.

Barry Oxford

Perfect. I appreciate the color, Mike.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Becky Coleridge for any closing remarks.

Becky Coleridge

Thank you, operator. I’d like to thank the participants on this call for their continued support and interest in our company. As always we are available for any follow-up questions. On behalf of Monmouth, I’d like to wish everyone a healthy and happy holiday season and a very prosperous New Year. We look forward to reporting back to you after our first quarter.

Operator

The conference has now concluded. Thank you for attending today’s presentation. The teleconference replay will be available shortly after the call ends. To access this replay, please dial US toll free 877-344-7529 or international toll 1-412-317-0088. The conference ID number is 10147191. Thank you, and please disconnect your lines.



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