Monmouth Real Estate Investment's CEO Discusses F1Q 2014 Results - Earnings Call Transcript

Feb. 7.14 | About: Monmouth Real (MNR)

Monmouth Real Estate Investment Corporation (NYSE:MNR)

F1Q 2014 Earnings Conference Call

February 6, 2014 10:00 ET

Executives

Susan Jordan - Director, Investor Relations

Eugene Landy - Chairman

Michael Landy - President and Chief Executive Officer

Kevin Miller - Chief Financial Officer

Analysts

Paul Adornato - BMO Capital Markets

Craig Kucera - Wunderlich Securities

David Minkoff - DCM Asset Management

Michael Boulegeris - Boulegeris Investments

Jon Petersen - MLV & Company

Operator

Good morning, and welcome to Monmouth Real Estate Investment Corporation’s First Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (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. In addition to the 10-Q that we filed with the SEC yesterday, we have filed an unaudited quarterly supplemental information presentation. This supplemental information presentation, along with the 10-Q are available on the company’s website at mreic.com.

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 first quarter 2014 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; Kevin Miller, Chief Financial Officer, and Michael Landy, President and Chief Executive Officer.

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

Michael Landy

Thank you, Susan. Good morning everyone and thanks for joining us. We are pleased to report our results for the first quarter ended December 31, 2013. It was a very productive quarter for Monmouth and represents an excellent start for fiscal 2014. During the quarter, we acquired five new built-to-suit properties net leased to investment grade tenants. These acquisitions contained a total of 1.1 million square feet and were purchased at an aggregate cost of $73.9 million. These five single tenant Class A industrial properties are net leased to The American Bottling Company, which is a division of Dr Pepper Snapple Group; Ralcorp, which is a division of ConAgra Foods; International Paper Company, and FedEx Ground. The lease terms range from 10 to 20 years with a weighted average term of 15.2 years. Because these new acquisitions were negotiated well before these developments were completed, the returns we have been able to achieve are much more favorable than what is currently available in the industrial market today. The cap rates averaged in the mid 7% range versus low 6% range for comparable properties if priced today.

From a run rate standpoint, we expect these five properties to generate a combined total of approximately $5.5 million in annual rent. We finance these properties with a total of $48.9 million in mortgage financing at an average interest rate of 3.95%.

At the end of the first quarter, our gross leasable area was approximately 10.7 million square feet, representing an increase of 12% since our fiscal year end. Our portfolio now consists of 80 industrial properties and one shopping center located across 27 states. At quarter end, our property portfolio was 96.4% occupied, representing a 40 basis point increase over the prior quarter. Our weighted average lease maturity at quarter end was 6.8 years as compared with six years in the prior year period. We now have in place leases going out as far as fiscal year 2034.

In addition, we have recently completed $11 million in expansion work at four of our properties, which resulted in lease extensions and increased rents at each of these locations. The expansions consisted of three parking lot expansions and one building expansion at four FedEx Ground facilities. These expansions resulted in an additional 10 years of lease term from the date of completion for each property that was expanded. Prior to the amendments being executed these four leases had a remaining weighted average term of 3.8 years at the time of completion of the expansion work. By obtaining an additional 10 years of lease term from the date of completion of the expansion work, an additional 6.2 years of weighted average term was added to these four leases. Commencing during the first quarter of fiscal 2014, the lease amendments have resulted in an annual increase in rent totaling $1.1 million. This results in a weighted average rent of $8.51 per square foot as compared to $7.45 per square foot formerly representing an increase of 14.3%.

In fiscal 2014, 4% of our gross leasable area representing six leases totaling 438,000 square feet was scheduled to expire. As reported last quarter thus far three of these leases representing 44% of our expiring square footage have been renewed. These three leases have been renewed for a weighted average term of 5.7 years and had weighted average lease rate of $5.80 per square foot as compared to $6.41 per square foot formerly representing a weighted average reduction in the lease rate of 9.5%.

Of the remaining three leases set to expire in fiscal 2014 the company has been informed that two leases representing 47% of the space coming up for renewal in fiscal 2014 will not be renewed. One of the properties as reported last quarter is our 59,400 square foot building located in Carlstadt, New Jersey that is leased to Macy’s through March 31, 2014. The company owns this property through a 51% controlling equity interest.

The second property where our tenant has informed us that they will not be renewing their lease is our 148,000 square foot building located in Fayetteville, North Carolina. This property was leased to Maidenform through December 31, 2013. Maidenform is currently occupying the space on a month-to-month basis and is paying holdover rent equal to 150% of base rent per the lease. Maidenform has indicated that they intend to stay in our space until March 31, 2014. Maidenform was recently purchased by Hanesbrands and they are consolidating their distribution channels.

With regards to our one remaining lease that is scheduled to expire this year, we anticipate renewing this lease with FedEx for our 36,000 square foot property located in Richland, Mississippi.

The company was recently notified by one of our few non-investment grade tenants HEP Direct which leases our 107,000 square foot building located in Winston-Salem, North Carolina through December 31, 2017 that they have filed for Chapter 11 bankruptcy and will be vacating the building in the near future. Therefore the company does not expect to receive any rental payments from the date the tenant vacates the space through the remaining lease term. The annual rental rate that HEP had been paying was approximately $300,000.

On a more positive note, we recently entered into a 15.5 year lease agreement, which will become effective in July 2014 with Planet Fitness for 23,000 square feet located at our 64,000 square foot shopping center in Somerset, New Jersey. Initial rent will commence in December 2014 at an annualized rate of $240,000.

As for our acquisition pipeline we are pleased to report that we have entered into separate agreements to purchase five new Class A built-to-suit industrial buildings for a total purchase price of approximately $113.5 million that are currently being developed. These properties represent a total of approximately 1.6 million square feet and are located in Indiana, Illinois, Kentucky and Texas. Leases for these well-located properties are 10 years or longer and are all leased to investment grade tenants. Approximately 996,000 square feet or 62% of our current acquisition pipeline will be leased to subsidiaries of FedEx. Subject to satisfactory due diligence, we anticipate closing these transactions upon completion and occupancy, which is scheduled for the second half of fiscal 2014 and the first half of fiscal 2015.

In addition, we have entered into agreements with FedEx Ground to expand three of our existing properties by approximately 107,000 square feet as well as providing additional parking. The total cost for these three new expansions will be approximately $8.2 million. Upon completion, the expansions will result in total increased rent of approximately $820,000 annually. These expansions will result in new 10-year lease extensions for each building being expanded.

With regards to the U.S. industrial property market, demand continues to be strong. In total, the industrial sector absorbed 121.3 million square feet in 2013, which marks the strongest amount of net absorption since 1998. It is estimated that e-commerce related demand accounted for nearly 40% of all net absorption in 2013. This is a trend that is expected to continue going forward. The national average vacancy rate came down 50 basis points in 2013 and is currently 8.2%. New industrial construction although increasing to 71.1 million square feet in 2013 remains very muted over the past five-year period as compared to historic norms of approximately 200 million square feet in new construction annually.

Average asking rents have increased to $5.20 per square foot, which represents a 3.3% increase from one year ago. With most economists calling for stronger GDP growth this year averaging in the 3% range as compared to the 2% annual growth rate we have witnessed throughout most of the recovery, demand for industrial space is expected to continue to strengthen.

And now Kevin will provide you with greater detail on our results for the first quarter of fiscal 2014.

Kevin Miller

Thank you, Michael. Core funds from operations for the first quarter of fiscal 2014 were $6.7 million or $0.15 per diluted share. This compares to core FFO for the same period one year ago of $7.5 million or $0.18 per diluted share. Excluding securities gains realized during the quarter, core FFO was $6.6 million or $0.15 per diluted share as compared to $5.3 million or $0.13 per diluted share one year ago.

Adjusted funds from operations, or AFFO, which excludes securities gains and losses, were $0.15 per diluted share for the quarter compared to $0.13 per diluted share in the prior year period.

Excluding lease termination income, AFFO was $0.15 per diluted share for the most recent quarter as compared to $0.12 per diluted share one year ago. The increase in AFFO is attributable to the positive impact of our accretive acquisition activity. We also note that the recently reported $0.15 of AFFO per share is in line with our quarterly dividend run rate. Rental and reimbursement revenues for the quarter were $15.7 million compared to $12.8 million or an increase of 22% from the previous year.

Net operating income, or NOI, which we define as recurring rental and reimbursement revenues, less property taxes and operating expenses was $13.1 million for the quarter, reflecting an 18% increase from the comparable period a year ago. Net income was $4.3 million for the first quarter compared to $5.7 million in the previous year’s first quarter, representing a $1.4 million decrease. Comparing the two quarters and the most recent quarter, there was a $2 million decrease in non-recurring realized gains on sales of securities, which is offset by a $2 million increase in recurring NOI. Therefore, the remaining $1.4 million decrease in net income is made up of an increase in non-cash depreciation expense of $692,000 and a decrease in non-recurring lease termination income of $691,000.

With respect to our properties, end of period occupancy for the first quarter increased 240 basis points to 96.4% as compared to 94% in the prior year period. As Michael mentioned, our average lease maturity as of the end of the quarter was 6.8 years as compared to 6 years a year ago representing an increase of 13%. Our average annual rent per square foot was relatively unchanged at $5.43 as of the quarter end as compared to $5.44 one year ago.

As of the end of the quarter, our capital structure consisted of approximately $344 million in debt of which $292 million was property level fixed rate mortgage debt and $51 million were loans payable. 86% of our debt is fixed rate with the weighted average interest rate of 5.3% compared to 5.7% in the prior year period. We also had $111 million in perpetual preferred equity at quarter end. Combined with an equity market capitalization of $419 million, our total market capitalization was approximately $874 million at quarter end.

From a credit standpoint we continued to be conservatively capitalized with the net debt to total market capitalization at 38%. Fixed charge coverage at 2.1 times and our total debt to EBITDA at 6.7 times for the quarter.

From a liquidity standpoint we ended the quarter with $8.5 million in cash and cash equivalents. While we have fully drawn down our $40 million unsecured line of credit, we are currently in discussions to exercise an additional $20 million accordion feature which will bring total unsecured line of credit up to $60 million. In addition, we have $53.6 million in marketable REIT securities representing 6.8% of un-depreciated assets. At the end of the quarter we had $439,000 in unrealized gains on our securities investments in addition to the $151,000 in gains realized during the first quarter.

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

Michael Landy

Thanks Kevin. Following the substantial growth achieved in fiscal 2013, our first quarter represents continued progress on several fronts. From an acquisition standpoint over the past five quarters we have now added 2.2 million square feet of new Class A industrial properties all leased long-term to investment grade tenants. As Kevin mentioned, the positive yield spreads we have generated on these transactions has now resulted in full AFFO dividend coverage. While our recent acquisitions have resulted in a more diversified tenant roster, our major tenant FedEx Ground has been performing exceptionally well and we are very pleased that they continue to expand at our existing locations.

Looking forward, in keeping with our business model we have a high-quality 1.6 million square foot acquisition pipeline of new Class A build-to-suit buildings currently being developed in strong locations all leased long-term to investment-grade tenants for a total cost of $113.5 million. We anticipate that these acquisitions will be coming online in the second half of fiscal 2014 and the first half of fiscal 2015. The company remains very focused on continuing to deliver positive results and we look forward to building upon the substantial growth that has been achieved.

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) And our first question will come from Paul Adornato of BMO Capital Markets.

Paul Adornato - BMO Capital Markets

Thanks. Good morning. Hey Mike on the new $113 million new activity, should we expect cap rates as you said in the low-6s were they all negotiated after the cap rates moved?

Michael Landy

Yes, certainly the first quarter acquisitions with average cap rate of 7.4%, borrowing rounding up at 4% generating spreads in excess of 300 basis points was as we mentioned very unusual, cap rates have definitely come down. The pipeline, we are happy with it, but we can expect 17% levered returns that we achieved in the first quarter. The average cap rates are about 6.8% and we anticipate borrowing in the mid-4s. So you are talking about over 200 basis points in spread which is more in line with historic norms. Did I answer your question Paul?

Operator

Mr. Adornato’s line has actually disconnected. And we will go on to next question it is from Craig Kucera of Wunderlich Securities.

Craig Kucera - Wunderlich Securities

Yes, hi. Good morning guys.

Michael Landy

Good morning Craig.

Craig Kucera - Wunderlich Securities

I had a question about your G&A for the quarter, I know in previous quarters, I think it was maybe third quarter, there was a – it was a bit of a tick up, because there were couple of extra, I think there were two Board meetings. Was there any timing this quarter with kind of the falloff in G&A year-over-year and relative to the last couple of quarters?

Kevin Miller

The G&A is pretty much in line with it’s about $1.1 million this quarter compared to about $1.2 million, $1.3 million last quarter. The main decrease was last year we just had a couple of one-time legal fees related to converting of debentures, but it’s pretty much in line barring that one little one-time thing last year.

Craig Kucera - Wunderlich Securities

Got it. And your revenue was in line with what we had expected, but I did see a bit of a better bead on expenses, with real estate taxes you added lot of properties this quarter, but taxes were basically flat with fourth quarter is sort of the tax rate, let’s call it, run rate this quarter, was that kind of what we would expect for the rest of the year or should we see a pickup in the second quarter given those new acquisitions?

Kevin Miller

Yes. You will see a little bit of a pickup, because it doesn’t show the full run rate effect of those new acquisitions, lot of those acquisitions were done in the middle of the quarter. So you will see a slight pickup for those five acquisitions that we have done, but just don’t forget that, our real estate taxes are the net leases. So the slight increase that you will see, you will also see a slight increase in the reimbursement revenues. So they will offset and they really have no effect.

Craig Kucera - Wunderlich Securities

Right. And does the same go for operating expense, I think they had been running closer to maybe $900,000 to $1 million a quarter and this quarter was down about $700,000?

Kevin Miller

Right. Operating expenses also for the most part, I would say about 80% of our operating expenses are [billed] [ph] back and so most of that will also be offset by the reimbursement revenues. And the operating expenses, the first quarter is a pretty good indicator of how it’s going to go for the rest of the year.

Craig Kucera - Wunderlich Securities

Great. And you guys are in the process of pursuing an investment grade balance sheet, how do you look at kind of the expansion of the acquisition pipeline? How do you look at sort of a ceiling for leverage as you pursue that? Is it 50%? Is it higher than 50% or where do you see that kind of coming in?

Michael Landy

Well, historically, we have operated no more than 50% leverage. Right now, we are in the low 30% and then debt plus preferred takes us into the high 40% range. What the rating agencies look for, our metrics are in line, but they want to see more unsecured debt, more unencumbered assets. So our assets were – all our debt was secured mortgages in the past and now we are building up an unencumbered asset pool and as we build that up, that will help our ability to achieve an investment grade rating. We also have to grow the size of the company, which we have - I mentioned in the prepared remarks, done 2.2 million square feet in acquisitions over the last five quarters. So we are growing without sacrificing our standards. We are not going to rush achieving an investment grade rating, but everything is lining up in order to do so in the next couple of years.

Craig Kucera - Wunderlich Securities

Okay, great. Thanks a lot guys.

Michael Landy

Thank you.

Operator

And our next question comes from Paul Adornato who has rejoined the call.

Michael Landy

Hi, Paul.

Paul Adornato - BMO Capital Markets

Hi, thanks. Sorry about that. I was wondering if you could talk about financing plans for the forward activity.

Kevin Miller

Sure, Paul. I will take that. We have locked in on one of the deals in the pipeline. We have locked in $14 million loan, 60% LTV at 3.95%. So on that one the cap rate is about 6.4%. So we will have about 250 basis points spread on that one. And we are in the process - we are just about to lock in on two more of those. And I expect to get rates probably like Michael said in the mid 4s for those which will also give us, though the next two they actually have a little bit of higher cap rates. So we will still get about the 250 basis points spread. So we expect that basically for the whole pipeline about that type of spread.

Paul Adornato - BMO Capital Markets

Okay. Any need for equity in the foreseeable future?

Michael Landy

Well, our pipeline is growing dramatically, Paul. I think last quarter we talked about three deals in the pipeline totaling 600,000 square feet. It was about – it was a much smaller amount, I think $70 million. So two large deals, we have now gotten under contract taking the pipeline up to $113.5 million and 1.6 million square feet plus FedEx’s, so lot of expansions on the drawing board. So we need lot of capital to finance that growth. So as the pipeline continues to grow, we’ll have to look at the capital markets accordingly. We have $55 million in securities free and clear. We have the $20 million accordion feature and we have the DRIP and SIP money coming ratably at a rate of about $30 million a year. So that’s adequate but as the pipeline grows we need to monitor things.

Paul Adornato - BMO Capital Markets

Okay. And Mike, you mentioned that one of the goals is to grow the company. I was wondering if you could, first of all just kind of characterize the new activity, is it repeat business with the same merchant builders or is it kind of new relationships?

Michael Landy

When you say new relationships, relatively new relationships in some cases and repeat business with others. We have strong relationships in the merchant builder community. They don’t widely market the deals. They come directly to us. And it’s a great source of deals. So I think just working with them has shown the ability to generate substantial growth and we’re kind of going to honor those relationships and continue growing along with these merchant builders.

Paul Adornato - BMO Capital Markets

And as part of the growth strategy, would you consider a portfolio deal or kind of existing properties as opposed to the kind of merchant building model that you have been using mostly?

Michael Landy

It’s difficult. I see portfolios and all of the portfolios have deals that don’t meet our stringent requirements. We are really picky. We turned down way more deals than we accept, probably accept less than 10% of the deals that come across our desk. They have to be single tenant, long-term leases to investment grade tenants. And when you see a portfolio being shopped around, it’s rare you will see even 10% of the portfolio meeting our criteria, usually it’s a much lower percentage. So it’s hard to grow by portfolio acquisitions and we are not going to sacrifice our standards just for growth sake. And I think we have generated meaningful growth while adhering to our standards and acquiring brand new built-to-suits. So, if somebody had a portfolio such as ours, I doubt they would be shopping it. There is a reason people are shopping portfolios and it’s always contingent, you can’t cherry-pick, you have to buy the hairy deals along with the good deals, so very low probability that we will see a portfolio that meets our stringent criteria.

Paul Adornato - BMO Capital Markets

Okay, great. Thanks very much.

Michael Landy

You’re welcome.

Operator

And the next question will be from David Minkoff of DCM Asset Management.

David Minkoff - DCM Asset Management

Good morning, gents. How are you today?

Michael Landy

Good, Dave. How are you?

David Minkoff - DCM Asset Management

Good, thanks. I noticed that the net real estate investments at December 31 in the balance sheet are about $609 million versus $537 million at September and that large increase of course is due to the acquisitions made during the quarter, but some of those buildings you have owned for a long time. Do you have a number in mind or have you done an appraisal as to what the fair value of that number would be, that $609 million? I suspect it be much higher, because conservative accounting dictates you take it on the books at conservative cost less depreciation, but in fact what might be going on is they are appreciating that is the older buildings. What’s the real number, it might be near $700 million, I have no idea, you know better than me?

Michael Landy

Well it’s certainly north of that, it’s $70 a foot, it’s $750 million. I could see with inflation replacement costs going to $100 a foot, but I think Gene wants to get in on this. So I will turn it over to him.

David Minkoff - DCM Asset Management

Well, sure.

Eugene Landy

We do prepare, but only for internal use, the value of our properties at current cap rates. If we did deals three, four years ago at 8% and the tenant has renewed the lease at the same rent, we do compute what the property would be worth at 6.5, 7, 7.5, 8, 8.5 cap rates. And of course when you make those computations, you come out with very, very substantial increases in value, but they are cap rate compression and we do it just to see where we are. We don’t appraise the properties - REITs 20, 30 years ago used to get MAI appraisals and nobody ever put much weight on those either. So, we are well aware that the properties we own are probably worth in excess of what we have paid for them, but that should also be reflected in the income from the properties, which we do report. So, we are very pleased with the portfolio and how the properties have performed. It really shows up in the fact that the properties when they go off lease we are able to re-lease them and renew leases with strong tenants.

David Minkoff - DCM Asset Management

Right. I agree with everything you said, Gene, some companies used to put or still do I believe put that number that I am referring to as a footnote in the statement in evaluating the company that’s an added value to the company that’s really we are in the dark and looking at the numbers. If the numbers are much higher at real value, then it shows historical costs. I think that’s an important evaluation tool which adds to your salability?

Eugene Landy

We report the information in the supplement on each property and people can make their own judgment what the current cap rates. Cap rates does change dramatically. If we bought a property at 8 and CapEx rates at 6.5 now, we could tell people that we have very substantial gains, but over the next two years, cap rates may go back to 7%, 7.5%, 8%. So it’s something people should look at, but I wouldn’t put too much weight on it. And we have disclosed an awful lot of detail now and I don’t want to get into appraising our properties quarterly and yearly, because we don’t think that number is meaningful to investors.

David Minkoff - DCM Asset Management

Okay, fair enough on that. Thank you, Gene.

Michael Landy

The only thing I’ll add as far as salability, the average REIT AFFO forward multiple now is 19 times. We are earning $0.60 that comes out to $11.40. We are yielding more than most REITs by far. So anyway and we have a revenue stream secured by investment grade tenants that no other REIT has. So I think all the metrics relative to our peers standout and as you are pointing out discount to replacement cost, discount to NAV, anyway you slice it, the shares are cheap relative to our REIT peers.

David Minkoff - DCM Asset Management

Very good.

Operator

And our next question comes from Michael Boulegeris of Boulegeris Investments.

Michael Boulegeris - Boulegeris Investments

Good morning and congratulations on strong execution and continued qualitative growth.

Michael Landy

Thanks Mike. On behalf of the team, we greatly appreciate that.

Michael Boulegeris - Boulegeris Investments

Of the five properties in your pipeline, one was a non-FedEx property, it looks like about 600,000 square feet, might you share with us what industry that potential tenant participates in?

Michael Landy

Yes, I will go ahead and share everything on that. The tenants, Jim Beam, they have been in business for 220 years. The facility is located to the oldest bourbon distillery in the world. They shipped record amounts last year out of this distillery. It’s the Whisky Magazine number one distillery in the world, award winner many times over, and they need more capacity and so they are building a large distribution center and we are happy to have won that deal. They have been there forever. And based on the way lease reads I anticipate that they are going to continue to be there forever.

Michael Boulegeris - Boulegeris Investments

Wow, what a great addition to your portfolio. Of the four FedEx properties in the pipeline, you mentioned that three were for the FedEx Ground and one was the FedEx SmartPost that the division that specializes in business to consumer, delivery to residential customers. Historically you have had great success with the FedEx organization, especially particularly FedEx Ground. Do you foresee potential partnership as FedEx increases this distribution channel?

Michael Landy

Well, SmartPost is a division of FedEx Ground and it’s their e-commerce, less-time sensitive delivery component to ground. And what we like about the ground buildings is the investment FedEx makes in the infrastructure of the building. They make multimillion dollar investments, which ties them to the property long-term. SmartPost doesn’t have as much of a capital intensive investment infrastructure inside the building. However, this SmartPost building is at the Indianapolis Airport. So we were happy with that and it’s great real estate and we anticipate them being there for a long time. And then our other addition to our pipeline is also a large FedEx building at the airport in the Dallas/Fort Worth cargo airport, so which is the busiest cargo airport in the world. So these locations are fantastic locations with very strong tenants. So we are really pleased with this pipeline.

Michael Boulegeris - Boulegeris Investments

I see. And thank you for that color and perhaps either you or Gene maybe I am interested in getting a sense as to how you are looking at the next decade your e-commerce growth initiatives through the industrial warehouse segment. And might you just comment on the FedEx relationship and then share with us your thoughts on you have had a great success in the past, but regarding the future relationship with FedEx?

Michael Landy

All right. Well I don’t want to hog the airwaves, but I could go on and on about that. And I want Gene to have a chance to chime in, so I will be brief. The backdrop is we have had five years of limited new supply, way below replacement of obsolescence. So the industrial sector has a lot of favorable attributes. The stars are lining up perfectly. There has been lower obsolescence in new construction for five years, so you have an inordinate amount of undersupplied markets. You have e-commerce which globally is up to $1.5 trillion and continues to grow at double-digit growth rates. And the young people that’s how they shop, that’s the traditional shopping method for young people is to buy on their mobile phones or at home on their computer. And this is just going to continue to grow and help FedEx and the industrial sector as a whole.

You have tremendous energy resources domestically and now you are seeing U.S. becoming a net exporter because of all the natural gas resources, so we will see lots of manufacturing plants. Boeing is building a plant in South Carolina and Airbus is expanding in Mobile, Alabama and other manufacturers. So you are going to see domestic on-shoring of manufacturing jobs. You have the Panama Canal coming online in 2015. Panama has got the world’s largest GDP growth rate with the exception of China. And this is all driven by the anticipation of the Panama Canal coming online. I wouldn't minimize the impact this is going to have on the global supply chain and the industrial sectors. So I know it ties into the U.S. manufacturing is the reason they are building Boeing plants in South Carolina and Airbus plants in Alabama. And our portfolio is situated to really benefit from all that. So I don’t want to continue, I will let Gene chime in, but there is a lot to be said for the favorable attributes for industrial going forward and for FedEx in particular.

Eugene Landy

We see the industrial picking up already, the merchant builders that we do business with, they work with us when they bid to build the building. And we are getting more calls and we are getting new names. And we’re rather confident that the $110 million, $112 million pipeline we have now in 2014, 2015 that 2015, 2016 we can at least do another $100 million. So we are gearing the company up to exceed $1 billion in assets and $500 million in capital. And we will have a portfolio of net leased properties on long-term leases to investment-grade tenants. So things are going very, very well for Monmouth REIT.

Michael Boulegeris - Boulegeris Investments

Well, thank you for that color. Finally, it appears that in the last quarter you paid or repaid the mortgage on the Rockford property for that $1.8 million, I guess this is taking it closer towards the investment-grade rating, do you foresee any additional payments complete, so you have unencumbered properties in the remaining balance of the year?

Kevin Miller

Yes, sure. That’s been our game plan. As the mortgages come due, we pay them off and throw them in our unencumbered asset pool so that we have more availability on our line and increase the line based on that. We have a schedule laid out of all that, you can actually look at our K and you can you see all the maturity dates and when they become due. And when it makes sense we will actually prepay one or two if the prepayment penalty is – if it makes sense to do so given how much availability and how much NOI those properties are throwing off. And we do have a few scheduled to prepay over the next few months.

Michael Boulegeris - Boulegeris Investments

Thank you.

Operator

Next we have a question from Jon Petersen of MLV & Company.

Jon Petersen - MLV & Company

Great, thanks. In terms of the FedEx expansion developments, can you remind us how large that portfolio, how large that pipeline is right now and when it will be expected to come online?

Michael Landy

Sure. So in current expansions, we have about 500,000 square feet going on. The expansion space is 200 on top of existing 500,000.

Jon Petersen - MLV & Company

Okay.

Michael Landy

I think it’s $8.5 million in remaining costs, but I do want to backup and talk about the expansions, because we had 47% more square footage in FedEx expansions than we had in expiring leases. So a lot of times we talk about the leasing spreads and what happened on renewals, but we only had 4% of leases expiring this year and we had 50%, roughly 50% more space in extensions as a result of expansions this year. So in other words, we had 646,000 square feet in expansion space, that’s the old space plus the new versus 438,000 square feet in expiring leases and the expansions resulted in 14.25% rent increases versus the renewals, which rolled down 9.5%. And when you blend the two together, you get positive leasing spreads of 9.5%. So the expansions are a key strength with the FedEx tenancy. It takes the rents higher by 14.25%. It takes the average term out 6.2 years, whereas the renewals were out 5.7 years. So you get a blended average renewal term of 6 years. And so I do want to bake that into everybody’s analysis.

Jon Petersen - MLV & Company

Yes, definitely.

Eugene Landy

As everybody knows, FedEx is a public company. They handle 22 million packages in one day and now they have to build their facilities to do in 2014 what 25 million in packages and in 2015 it’s just amazing how much they have to expand to handle this growth in Internet commerce.

Jon Petersen - MLV & Company

So are you still expecting 10% yields, is that what you guys have been achieving on these expansions?

Eugene Landy

Let me just answer that. The reason there’s a 10% yield on the expansions is we have to use pure equity capital for that. These buildings were mortgaged when we did the original deal, the mortgages were in place. We can’t prepay them. So that if we do $10 million of expansions that has to come right out of our equity capital. And on our equity capital, we do want a 10% return.

Jon Petersen - MLV & Company

Okay, that makes sense. And then if I look at – so your total exposure to FedEx today is little under 4.5 million square feet. Do you guys have any sense of what that can grow to with current expansions? I mean, I am sure you know building by building you can add X number of square feet, what can that number grow to if you were to expand every building?

Michael Landy

Well, in the order of magnitude, our acquisitions is way greater than expansion capabilities. So I wouldn’t look just at expansion capability as where FedEx is going to shake out in our portfolio concentration.

Jon Petersen - MLV & Company

No, I understand. I am just trying to get a sense for that piece of the pie where it could be looking five years down the road?

Michael Landy

Okay. So we have about 4 million square feet of FedEx exposure and they have expanded by over 10% now just this year. It’s a result of e-commerce. We work with FedEx. We acquired land adjacent to our properties. And everybody who tries to extrapolate the growth of Internet commerce always underestimates it’s parabolic. So long-term, we will continue to grow with FedEx. I will tell you, our pipeline last quarter was 79% non-FedEx and our current pipeline is 62% FedEx. So we are trying to offset FedEx square footage with non-FedEx properties. I am pretty confident that when we report next quarter, it will be closer to 50-50 in our pipeline, FedEx versus non-FedEx, but we have been with FedEx since the early 90s way before the Internet and it’s been a strength not a weakness to our portfolio. Diversification is highly overrated and we are going to continue to grow with FedEx.

Jon Petersen - MLV & Company

Yes. Well, I mean I understand the growth in the company overall and the meanings, I am just asking in terms of the portfolio you have today like maybe the vacant land you have next door to a current FedEx building, do you have any sense of how much you have like currently entitled for expansion or when they do expansions does it almost always require you to buy adjacent land?

Michael Landy

No, usually it doesn’t, but sometimes it does. And a precise answer to your question, I don’t have at the moment.

Jon Petersen - MLV & Company

Okay. That’s fine. Okay, thanks.

Michael Landy

You’re welcome.

Operator

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

Michael Landy

Well, thank you Laura. I’d like to thank everyone for joining us on this call and for their continued support and interest in our company. As always, Gene and I and Kevin are available for any follow-up questions and we look forward to reporting back to you after our second quarter. Thank you.

Operator

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