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Monmouth Real Estate Investment Corporation (NYSE:MNR)

F4Q 2012 Earnings Call

December 13, 2012 10:00 am ET

Executives

Eugene Landy – Chairman, President & Chief Executive Officer

Kevin Miller – Chief Financial and Accounting Officer

Michael Landy – Chief Operating Officer

Susan Jordan – Director of Investor Relations

Analysts

Jeff Lau – Sidoti & Company

Operator

Good morning, and welcome to the Monmouth Real Estate Investment Corporation’s F4Q and year-end F2012 earnings conference call. (Operator instructions.) Please note this event is being recorded. It is now my pleasure to introduce your host, Ms. Susan Jordan, Director of Investor Relations. Thank you Ms. Jordan, you may begin.

Susan Jordan

Thank you very much, operator. 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 F4Q and year-end F2012 earnings release and filings with the Securities and Exchange Commission. The company disclaims any obligation to update its forward-looking statements.

Having said that, I’d like to introduce management with us today: Eugene Landy, Chairman and Chief Executive Officer; Kevin Miller, Chief Financial Officer; and Michael Landy, Chief Operating Officer. It is now my pleasure to turn the call over to Monmouth’s Chief Operating Officer, Mr. Michael Landy.

Michael Landy

Thank you very much, Susan. Good morning everyone and thanks for joining us. We are very pleased with our results for the fiscal year ended September 30, 2012, which saw continued growth in our portfolio and in the value of our company.

In F2012 we acquired approximately 1 million square feet of high-quality industrial space at an aggregate cost of $70.4 million, bringing our portfolio to a total of 72 properties and 8.5 million square feet. This represents a 13% increase in our gross leasable area and an 8% increase in rental revenues over the prior year. Moreover, going back three years we have successfully grown our portfolio GLA by approximately 40%.

All of this growth was achieved without sacrificing our high-quality standards. This growth was achieved by purchasing well-located, state of the art, new build-to-suit buildings leased to strong credit tenants, and represents some of the best quality assets in our portfolio. The weighted average age of our portfolio today is approximately ten years and is expected to continue to come down given our substantial pipeline of new construction deals currently under contract.

To fund this growth we have opportunistically accessed the public capital markets, raising a combination of common and preferred equity throughout the year. The occupancy rate on our portfolio was 95% at fiscal year-end. During F2012, we successfully released 11 of the 12 expiring leases as well as a building that was previously vacant, representing a total of 1.5 million square feet of new leases. Ten of these new leases or approximately 1.1 million square feet were renewals with existing tenants, representing an overall 86% retention rate. These renewals were done at a weighted average lease term of 3.5 years and an average leasing spread of negative 3%.

At fiscal year-end we had a weighted average lease maturity of 5.3 years with in-place leases going out as far as 2024. Our largest tenant continues to be FedEx which represented approximately 43% of our GLA and 53% of our F2012 rental revenue. In 2013, 11 leases totaling 900,000 square feet are expiring during the year, representing approximately 11% of our GLA. So far this fiscal year we are pleased to report that eight of these leases or 62% of the expiring square footage have been renewed. These renewals were done at a weighted average lease term of 3.6 years and at average leasing spreads of negative 7%.

The impact of these lower lease renewal rates is mitigated in part by our ability to refinance maturing mortgages at substantially lower rates. Our current average weight on our outstanding mortgage debt is approximately 5.9% compared to low 4.0% and high 3.0% rates achieved on our recent mortgage borrowings representing potential additional upside.

Of the three remaining leases, one lease expired on November 30 and will not be renewed. This property, located in White Bear Lake, Minnesota, represents 59,000 square feet and was leased to FedEx Express. During F4Q we acquired a 103,000 square foot industrial building in Waco, Texas, leased to FedEx Ground through May, 2022, for $8.7 million. Subsequent to year-end we acquired a 172,000 square foot industrial building in Lavonia, Michigan, leased to FedEx Ground through March, 2022, for $14.4 million. This latest acquisition brings our current portfolio to 8.7 million square feet consisting of 72 industrial properties and one shopping center located across 26 states.

Looking ahead, we are especially pleased with our robust pipeline of deals. We have entered into agreements to purchase eight new build-to-suit industrial buildings totaling 1.8 million square feet that are currently being developed, approximately a third of which will be leased to FedEx Ground. The total purchase price for these eight properties is approximately $109 million. Subject to satisfactory due diligence we anticipate closing these eight transactions during F2013 and F2014. In addition, we currently have three building expansions underway totaling 170,000 square feet. Each of these expansions will result in a new ten-year lease extension.

With regards to the overall US industrial market we have now observed nine consecutive quarters of positive net absorption with approximately 100 million square feet of positive absorption over the nine-month period ending September 30. The 10 billion square foot US industrial market is currently 91% occupied. We remain very optimistic about the outlook for the industrial real estate sector. The combination of very limited new construction and growing demand for space should strengthen occupancies and rates going forward.

New construction levels continue to represent well below 1% of in-place inventory and have been at these historically low levels for the past four years. On the demand side, we have observed continued expansion in our nation’s imports and exports, growth in our manufacturing output, a gradual recovery in the housing sector, strong auto sales and rapidly growing ecommerce. Consequently, we anticipate the demand for industrial space should be strong in 2013 and beyond.

The past few years were transformative years for Monmouth and given our sizable pipeline of deals, our several properties expansion, our successful leasing activity as well as our successful capital raising efforts, F2013 should see us continuing to build upon the substantial growth that we have achieved. And now Kevin will provide you with greater detail on our results for the quarter and for F2012.

Kevin Miller

Thank you, Michael. Funds from operations for F4Q 2012 were $4.2 million or $0.10 per diluted share. This compares to FFO for the same period one year ago of $4.7 million or $0.13 per diluted share. Funds available for distribution, which excludes securities gains or losses, were $3.4 million or $0.08 per diluted share for the quarter compared to $4.5 million or $0.12 per diluted share a year ago.

FFO and FAD were impacted by approximately $1.1 million or $0.03 per diluted share of additional preferred dividends following our latest preferred stock offering and the subsequent deployment of our capital which is still ongoing.

As Michael mentioned earlier, we acquired one property for $8.7 million during F4Q and financed the transaction with $5.8 million in mortgage debt at a 4.75% interest rate and $2.9 million using our cash on hand. Subsequent to year-end we acquired one additional property for $14.4 million, financed with $9.5 million of mortgage debt with a rate of 4.5% and a balance of $4.9 million also with our cash on hand.

We expect these recently closed acquisitions, as well as the other deals scheduled to close throughout this year, to positively impact our results going forward particularly once we benefit from their full run rate effect. In addition to the large pipeline of deals that Michael discussed, we remain well positioned to continue to pursue additional acquisition opportunities.

Rental and reimbursement revenues for the quarter were $13 million compared to $12 million or an increase of 9% from the previous year. Income from property operations, which we define as revenues less property taxes and operating expenses, was $10.8 million for the quarter reflecting a 13% increase from the comparable period a year ago.

FFO for the full F2012 was $26.1 million versus $22.9 million in F2011. On a per share basis, FFO was $0.66 per diluted share in F2012 compared to $0.65 per diluted share in F2011. This represents a 2% increase in FFO per share. Adjusted FFO, which we define as FFO plus acquisition costs for the full F2012 was $26.8 million versus $23.3 million in F2011. On a per share basis, adjusted FFO was $0.67 per diluted share in F2012 versus $0.66 per diluted share in F2011. FFO and adjusted FFO for F2012 included $6.0 million in securities gains compared to F2011’s securities gains of $5.2 million.

Rental and reimbursement revenues for F2012 were $50.5 million compared to $48.1 million in F2011, or an increase of 5% from the prior year. Income from property operations was $44.8 million for F2012, reflecting a 17% increase from F2011.

With respect to our properties, end of period occupancy for F4Q decreased to 95% compared to 97% in our prior-year period. Our average lease maturity as of the end of the quarter was 5.3 years as compared to 5.1 years in the prior year. Our average annual rent per occupied square foot was $5.62 as of the quarter end as compared to $5.59 a year ago.

As mentioned, we extended the leases on ten properties totaling 1.1 million square feet that was scheduled to expire in F2012. With this 86% tenant retention rate our new rents average $4.66 per square foot versus expiring rents of $4.81 per square foot, representing a decrease of 3%. The weighted average term of these ten lease expansions was 3.5 years.

As Michael stated we have already extended eight of the 11 leases set to expire in F2013 representing a weighted average lease term of 3.6 years. These expansions were done at average rents of $4.81 per square foot compared to expiring rents of $5.16 per square foot, representing a decrease of 7%.

At the end of the quarter our capital structure consisted of approximately $252 million in debt of which $238 million was property-level mortgage debt, $8.6 million was convertible subordinated debt and $5.2 million were loans payable. 99% of our total debt is fixed rate with a weighted average interest rate of 5.9%. This compares to a weighted average interest rate of 6.2% in the prior-year period.

Subsequent to year-end we redeemed $5.1 million of our 8% outstanding convertible debentures at par. This helped to further reduce our weighted average interest rate of 5.8% currently. We also had $111 million in preferred equity at year-end. Combined with an equity market capitalization of $455 million and our $252 million in debt, our total market cap was approximately $818 million at year end.

From a credit standpoint, our net debt to total market capitalization was 28%. Our fixed charge coverage was 1.7x and our total debt to EBITDA was 6.3x for the quarter. From a liquidity standpoint, we ended the year with $24.7 million in cash and cash equivalents reflecting yet to be spent proceeds from our latest preferred stock offering. As of year-end we also had $20 million in additional liquidity available from our undrawn credit facility. In addition we had $61.7 million in marketable REIT securities representing approximately 10% of our total assets.

At the end of the quarter we had $5.4 million on unrealized gains in securities investments in addition to the $6 million in total gains realized during F2012. And now let me turn it back to Michael before we open up the call for questions.

Michael Landy

Thanks, Kevin. We made significant progress in F2012 through a combination of opportunistic capital raises including debt, preferred and common equity, as well as executing highly selective property acquisitions that represent some of the best assets in the portfolio. Given the current low interest rate environment combined with our strong capital position we have been able to refinance maturing mortgage debt at more attractive rates and lower our overall interest costs considerably.

As a result of our sizable acquisition pipeline combined with our strong financial position we plan to opportunistically deploy capital in F2013. The company remains very focused on continuing to deliver positive results and we look forward to building upon the substantial growth that was achieved in F2012. We’d now be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions.) And our first question comes from Jeff Lau of Sidoti.

Jeff Lau – Sidoti & Company

Hey, good morning. I just had a quick question on some of the expenses, G&A and the real estate taxes. Was the G&A, were there some one-time things that seemed to tick up a bit? And the real estate taxes, can you talk a little bit about that?

Kevin Miller

Well the real estate taxes were reduced because we made efforts – this is Kevin Miller by the way. We made efforts to get our real estate taxes reduced and we did filings to have the [search area] proceedings to have them reduced. So we did incur professional fees in connection with getting those real estate taxes reduced, which were one-time things, but we’ll see the benefits of that going forward through reduced real estate taxes going forward. And the G&A, so that’s why in the G&A there’s also some one-time expenses in there for some salary expenses for options that were issued for certain employees, that due to their retirement it had to be taken as a one-time shot which we haven’t had in the past.

Jeff Lau – Sidoti & Company

Okay, so they are more of a one-time thing?

Kevin Miller

Yes.

Jeff Lau – Sidoti & Company

Okay, and then in terms of the convertibles, were all of those… How much is left or were all those retired?

Kevin Miller

The debentures you’re referring to?

Jeff Lau – Sidoti & Company

Yeah, sorry.

Kevin Miller

Yeah, after year-end we called all the debentures and almost all the 2013’s were converted and the 2015’s, a few of those were converted but most of those were just redeemed, and that was the $5 million that we mentioned. So the $8 million that was outstanding as of year-end, about $5 million we had to repay and the remaining were converted to stock.

Jeff Lau – Sidoti & Company

Okay, so there’s really not anything left on that or is there still some?

Kevin Miller

No, everything was called so there’s no debentures going forward. So you’ll see next quarter there won’t be any more debenture debt at that [80% rate].

Jeff Lau – Sidoti & Company

Okay, and then Mike, I don’t know if you can talk a little bit about the types of yields you’re seeing on the acquisitions, if you can elaborate at all?

Michael Landy

Sure, Jeff. So we have $1.8 million in the pipeline; about 1.1 million square feet should close in F2013 and then another 700,000 square feet and change in F2014. Average cap rates on those acquisitions is 7.4% approximately.

Jeff Lau – Sidoti & Company

Okay, great. And I guess lastly just if you could speak to the strength of the dividend – if you still feel it’s still pretty stable there.

Eugene Landy

We’re very confident in the dividend. The dividend’s been covered for several years. We’ve covered it this year and as for the year ending September 30, 2013, it’s a further dividend that will be covered. The main factors are very positive. Michael’s pointed out the size of our pipeline and to the extent we borrow to fund the pipeline our interest costs are sub 4%, and Michael stated it’s 7.4% on the cap rate. So we’ve developed nice margins and we have substantial cash, proceeds from securities offerings that took a while to put to work and will take a little while in F2013; but as we go and complete the transactions we put the money out. And so we’re very confident that the dividend is well covered.

Jeff Lau – Sidoti & Company

Thank you.

Operator

(Operator instructions.) And showing no further questions we will conclude the question-and-answer session, and I would like to turn the conference back over to Michael Landy for any closing remarks.

Michael Landy

Well thank you, operator. I’d like to thank the participants on this call for their continued support and interest in our company. As always, Kevin, Gene and I are available for any follow-up calls and we look forward to reporting back to you after our F1Q 2013. Thank you.

Operator

The conference is now concluded. Thank you for attending today’s presentation. The teleconference replay will be available in approximately one hour. To access this replay please dial US toll-free 1-877-344-7529 or international 1-412-317-0088. The conference ID number is 10019790. Thank you and please disconnect your lines at this time.

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