Monmouth Real Estate Investment's (MNR) CEO Michael Landy on Q1 2016 Results - Earnings Call Transcript

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Monmouth Real Estate Investment Corporation (NYSE:MNR)

Q1 2016 Earnings Conference Call

February 4, 2016 10:00 ET

Executives

Susan Jordan - Vice President, Investor Relations

Michael Landy - President and Chief Executive Officer

Eugene Landy - Chairman

Kevin Miller - Chief Financial Officer

Analysts

Paul Adornato - BMO Capital Markets

Craig Kucera - Wunderlich

John Benda - National Securities Corp

Louis Feldman - Wells Capital Management

Michael Boulegeris - Boulegeris Investment

Operator

Good morning and welcome to Monmouth Real Estate Investment Corporation’s First Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. It is now my pleasure to introduce your host, Ms. Susan Jordan, Vice President 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 first quarter supplemental information presentation. This supplemental information presentation, along with our 10-Q are available on the company’s website at 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 first quarter 2016 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 would 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

Thanks, Susan. Good morning, everyone and thank you for joining us. We are pleased to report our results for the first quarter ended December 31, 2015. It was a record quarter for Monmouth and represents an excellent start for fiscal 2016. While Kevin will provide you with much more detail on our financial results for the quarter, cutting to the chase, our AFFO of $0.17 per diluted share represents a 21% increase year-over-year and a 13% increase over the prior quarter.

During the quarter, we acquired two new Class A built-to-suit properties. These acquisitions contain a total of 506,000 square feet and were purchased for an aggregate cost of $50.4 million. Both of these properties are leased for 10 years to FedEx Ground. The cap rates for these two acquisitions averaged 6.6%. From a run-rate standpoint, we expect these two properties to generate a combined total of approximately $3.3 million in annual rent. We financed these two acquisitions with a total of $33.7 million in fixed rate 15-year mortgage debt at an average interest rate of 3.95%. At the end of the first quarter, our gross leasable area was approximately 14.4 million square feet representing an increase of 16% over the prior year period.

Our portfolio now consists of 93 properties geographically diversified across 29 states. At quarter end, our property portfolio was 98.8% occupied representing a 250 basis point increase over the prior year period and a 110 basis point increase over the prior quarter. Our weighted average lease maturity at quarter end was 7.1 years, which remained unchanged from the prior year period. During the quarter, we leased up our facility in Winston Salem, North Carolina, which was previously vacant to Style Crest for a term of 5 years and 3 months. And as a result, our occupancy rate increased to 99.5% on January 1.

Following our 100% tenant retention rate achieved last year, we are shooting for full tenant retention this year as well. In fiscal 2016, 2% of our gross leasable area representing three leases totaling approximately 326,000 square feet is scheduled to expire. I am pleased to report that two of these leases representing 266,000 square feet or 82% of the total lease expirations have already been renewed. These renewed leases have a weighted average term of 4.4 years and an average GAAP lease rate of $3.95 per square foot and a cash lease rate of $3.77 per square foot. This represents an increase of 4.8% on a straight line GAAP basis and a decrease of 2.8% on a cash basis. The last remaining lease renewal representing 60,000 square feet is currently under discussion.

On October 1 following 24 consecutive years of maintaining or increasing our common stock dividend, we announced a 6.7% dividend increase. This long-term track record of dividends and profitability makes Monmouth not only one of the few REITs that maintained its cash dividend throughout the global financial crisis, but we are also one of the very few REITs that is paying out a higher cash dividend today than prior to the global financial crisis. This consistent long-term performance underscores the high quality of our business model, our tenant base and our property portfolio.

We are very excited about our best-in-class acquisition pipeline, which continued to grow over the quarter. We have entered into agreements to acquire a total of 9 new built-to-suit properties containing 2.2 million total square feet representing $249 million in acquisitions scheduled to close over the next six quarters. In keeping with our business model, all of these future acquisitions consist of well-located brand new built-to-suit projects currently under construction. These projects are all leads to investment grade tenants or their subsidiaries pursuant to long-term leases. These properties are situated near major airports, major transportation hubs and manufacturing plants that are integral to the tenant’s operations. The cap rates on these 9 deals average 6.6% and have the weighted average lease maturity of 13.4 years.

Subject to satisfactory due diligence, we anticipate closing these transactions upon completion and occupancy. To-date, we have already secured $126.8 million in financing for 7 of the properties representing approximately $187.6 million of the total purchase price. This new debt will have a weighted average interest rate of 3.81% and a weighted average maturity of approximately 15 years. Based on the average cap rates, we will generate a levered return on equity of approximately 16% for these 7 acquisitions.

We are pleased to announce that we currently have a large expansion in progress at our Milwaukee Tool facility in the Memphis market. This expansion will provide approximately 246,000 additional square feet and will result in a new 12-year lease extension from the date of completion. The expansion costs for this project are expected to be approximately $10.2 million and annual rent will be increased by approximately $883,000. Continuing to build on the numerous property expansions that we have done for FedEx over the past several years, we currently have three FedEx property expansions in progress consisting of two building expansions and one parking lot expansion. Total expansion costs are expected to be approximately $8.2 million. Upon completion of the three expansions, annual rent will be increased by approximately $822,000. The two building expansions will provide 66,000 additional square feet and each of the three expansions will result in a new 10-year lease extension from the date of completion for each property being expanded. The total increased annual rent from these four expansions will be $1.7 million.

Approximately 80% of the additional square feet from our nine purchase commitments and our three building expansion commitments are from properties leased to FedEx Ground, while the remaining 20% consists of leases with General Electric and Snap-On Tools as well as the large building expansion for Milwaukee Tool. With regards to the U.S. industrial property market, 2015 marked one of the strongest years ever. Fourth quarter net absorption came in at 64 million square feet representing a 10% increase over the prior quarter. In total, the industrial sector absorbed 240 million square feet in 2015. The national average vacancy rate continues to come down and is currently 7.2% marking a 15-year low.

Average asking rents have continued to increase and are now at $5.45 per square foot representing a 4.2% increase from one year ago. Following 6 years of very muted levels of new construction, new industrial development has been increasing with 149 million square feet delivered in 2015 marking the strongest year since 2008. Fourth quarter U.S. GDP grew at an anemic 0.7% annual rate. Global GDP growth has also slowed. There are areas of strength in the U.S. economy including housing, automotive and consumer spending. As we previously discussed e-commerce was the big story this past holiday season with online sales increasing 20% over the prior year period. This positive trend is expected to continue for the foreseeable future and it has been a key factor in our strong results.

And now Kevin will provide you with greater detail on our results for the first quarter of fiscal 2016.

Kevin Miller

Thank you, Michael. Core funds from operations for the first quarter of fiscal 2016 were $11 million or $0.17 per diluted share. This compares to core FFO for the same period one year ago of $8.6 million or $0.15 per diluted share represents an increase. Excluding securities gains and lease termination income realized during the prior year quarter, core FFO was $11 million or $0.17 per diluted share as compared to $8 million or $0.14 per diluted share one year ago representing a 21% increase.

Adjusted funds from operations or AFFO which excludes securities gains and losses and lease termination income were $0.17 per diluted share for the quarter compared to $0.14 per diluted share in the prior year period representing a 21% increase. On a sequential basis, AFFO per share increased 13% over the prior quarter. As a result of our recent acquisition activity, our increased occupancy as well as our large acquisition and expansion pipeline, we anticipate continuing to meaningfully grow our per share earnings going forward. Rental and reimbursement revenues for the quarter were $22.3 million compared to $17.7 million or an increase of 26% 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 $18.7 million for the quarter reflecting a 27% increase from the comparable period a year ago. Net income was $6.9 million for the first quarter compared to $5.4 million in the previous year’s first quarter representing a 28% increase. Same property NOI increased 3.9% on a GAAP basis over the prior year period and increased 5.5% on a cash basis.

With respect to our properties, end of period occupancy for the first quarter increased to 98.8% as compared to 96.3% in the prior year period representing a 250 basis point increase. Our average lease maturity as of the end of the quarter remain unchanged at 7.1 years as compared to the prior year period. Our average annual rent per square foot increased 1.5% to $5.53 as of the quarter end as compared to $5.45 one year ago.

As Michael mentioned, as a result of leasing up the Winston Salem property which took effect subsequent to quarter end, our current occupancy rate has increased to 99.5%. As of the end of the quarter, our capital structure consisted of approximately $501 million in debt, of which $401 million was property level fixed rate mortgage debt and $100 million were loans payable. 81% of our debt is fixed rate with the weighted average interest rate of 4.8% as compared to 5.2% in the prior year period.

Our weighted average interest rate on the total debt was 4.3% as compared to 5% in the prior year period. We also had $111 million in perpetual preferred equity at quarter end. Combined with an equity market capitalization of $667 million, our total market capitalization was approximately $1.3 billion at quarter end. From a credit standpoint, we continued to be conservatively capitalized with net debt on total market capitalization at 38%, fixed charge coverage at 2.6 times and our net debt to EBITDA at 6.6 times for the quarter.

From a liquidity standpoint, we ended the quarter with $12.9 million in cash and cash equivalents. We also had $35 million available from our credit facility as well as an additional $70 million potentially available from the accordion feature. In addition, we held $61 million in marketable REIT securities, representing 5.5% of our un-depreciated assets with an unrealized loss of $3.7 million at quarter end.

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

Michael Landy

Thanks, Kevin. To summarize, following the substantial growth achieved in fiscal 2015, our first quarter represents an excellent start to the New Year. Our recently increased dividend is well covered by recurring earnings. Our occupancy rate is now virtually full at 99.5%, our robust acquisition and expansion pipeline coupled with our increased occupancy rate leaves Monmouth well-positioned to deliver additional per share earnings growth in ensuing quarters.

We have generated double-digit per share AFFO growth in each of the prior two years. And with our first quarter per share AFFO up 13% sequentially, fiscal 2016 is poised to be another excellent year. We have put together a high-quality industrial property portfolio that has and will continue to benefit from the opportunities presented by e-commerce and the evolving global supply chain. While there is strong showing this quarter bares this out, we remained very confident that the best is yet to come.

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] Our first question comes from Paul Adornato at BMO Capital Markets.

Paul Adornato

Thanks. Good morning. Mike, on your lease renewals, on the expansions, where you are putting in money to do additional work, are those leases would you characterize them as at market or above market?

Michael Landy

Generally speaking, I would categorize those as above market.

Paul Adornato

And is there a reference to market in the negotiation or that’s not even part of the negotiation, because of the work that you are doing?

Michael Landy

That’s right. Most of these expansions are a result of the tremendous demand for online consumer spending. FedEx has been ramping up the ground pipeline with over $2 billion investments annually and they need the space, they need it by peak season. So, it’s a question of pricing out the expansion as far as the construction costs. Our terms are pretty much standard terms and we have done numerous expansions for FedEx. And as far as what the in-place rents are relative to market rents, it’s really not that relevant, because the rents are flat over the 10 years, so it’s a question of what will the rents be 10 years from now. And really their primary concern is getting the space for the upcoming peak season.

Paul Adornato

Okay. And I was wondering if you have had any kind of real-time conversations with FedEx how are they feeling about the world economy and if that might impact activity at home?

Michael Landy

Well, sure. You can listen to FedEx’s calls and they give excellent color on the global economy in various regions and what they are seeing. I can tell you as a result of this low interest rate environment that’s been for years now, there has been a shift in demand from the express division to the ground division. And Monmouth focuses on the ground division. So the ground division has been growing double-digit rates annually. We have been doing a lot of new constructions with FedEx in the ground division. It’s clearly their growth engine. But as far as commenting on FedEx’s take on the global economy, the best I could do is refer for you their earnings calls.

Paul Adornato

Sure, great. Thanks very much.

Michael Landy

You’re welcome.

Operator

The next question is from Craig Kucera of Wunderlich.

Craig Kucera

Hi, good morning guys.

Michael Landy

Good morning Craig.

Craig Kucera

Kevin, we have a pretty straight movement in 10 year like we have year-to-date, can you – is there any possibility to go back to some of the banks that you have worked with and maybe renegotiate or are those effectively locked in for until construction?

Kevin Miller

As far as the secured debt on the acquisitions, no those were locked in. They were locked in on an unusually low rates traditionally, historically, I should say. And that’s one of the things that makes Monmouth be able to get these deals is where is our bond and when we agree to lock in on a loan, we stick with it and it’s worked out favorably in the last few years because we have locked in these great rates. I means just on our pipeline now, we would be ready locked in – the cap rates on these deals. And we have locked in seven of the nine loans in our pipeline at a weighted average interest rate of 3.81%. So our spreads are locked in and our revenues is locked in on those. I think they could probably generate over 16% levered returns. So we don’t see a need to go back and try to renegotiate those.

Michael Landy

Craig, just you know, we often comment that any day you are locking in ’15 your money sub-4% is a good day and we are not providing the construction funding, we are not doing the construction funding. So that’s on the merchant builder. So like Kevin is saying we are locking in long-term money sub-4% and spreads over our cap rates are in excess of 250 basis points. The returns on equity are – have been phenomenal and continue to be phenomenal. So that’s the catalyst for a double digit per share AFFO growth going on our third year now. So quite the contrary, renegotiate the rates. The rates are excellent.

Craig Kucera

No, I would agree the rates are excellent, but just when you have 40 basis point move in the 10 year and 30 days, I didn’t know if it’s possible to kind of revisit that, I guess that leads me to my next question then. Can you – the amount of debt that you have locked in today, I think you mentioned it was about $188 million of total purchase price, can you lock-in the rest or is it just too far out in the future to hamper that and is that more of a rolling situation?

Michael Landy

Well, there is two left to lock-in. I believe one we will be locking in pretty quickly, so definitely by the next quarter you will see that one locked in. And the final one it’s a little too far out, but we may be able to lock-in. I have locked in loans up to 12 months in advance. So it is possible. And I just – I will see how it goes. But I think probably what’s in the pipeline now will probably be locked in by the next earnings call.

Craig Kucera

Okay. You mentioned – I appreciate the color on the redevelopments that you guys were able to get this quarter, it sounds like that FedEx’s will be complete I am guessing by the holiday season this year, is that a fair assessment and also how long do you think Milwaukee Tool expansion will take to be…?

Michael Landy

Craig that is a fair assessment and Milwaukee Tool should be done sometime this summer as well.

Craig Kucera

Okay. And I may have missed this, but can you give a little bit of color, you got the nine properties that are under built-to-suit contracts, what is the tenant mix on those?

Michael Landy

Yes. So the tenant mix on the nine in the pipeline it’s a breakdown of 79% with FedEx, 21% other than FedEx. The other than FedEx is facility leased to GE and the remaining one is leased to Snap-On-Tools, both of those are near airports. The GE one is near the Pittsburg International Airport and the Snap-On is near the Louisville International Airport.

Craig Kucera

Got it. And this again is a Kevin question. You got some debt rolling over, not a lot of it, $35 million I think of mortgages, how are you considering that in light of kind of the goal of looking towards investment grade rating? Will those go into the unsecured line or kind of how do you think about managing the balance sheet to get to that investment credit rating in the future?

Kevin Miller

Yes, that’s absolutely correct. Our plan is as the mortgages mature we pay them off. We leave the properties unencumbered and that increases our availability under the line. Right now, we have $95 million drawn down on the line and we expect to have by the end of this fiscal year the availability of about $160 million probably available based on what mortgages are being paid off. And then by the end of fiscal ‘17, we will probably be able to max out the line at $200 million if we so desire. And so that is the main thing that we need to do is to increase our NOI generated from unencumbered properties and that’s the goal that we are working towards in order to get the investment grade rating.

Michael Landy

One thing, I will just jump in to add and maybe it goes without saying, but again getting 15-year money sub-4%, the life lenders are giving us investment grade financing terms. The tenants are investment grade credits and so the financing we are obtaining is investment grade financing. From a flexibility standpoint, we want to be able to borrow unsecured as well and so that’s why Kevin is pointing out building up our unencumbered asset pool.

Craig Kucera

Got it. I am sure investors appreciated the increase in the dividends on the past few months, but just kind of going forward that you did cover the dividend from AFFO this quarter kind of in the 90% plus payout ratio, how do you think about it going forward, should investors consider the dividends going to grow more or less in line with earnings or would you anticipate that there would be a little bit more coverage going forward as you guys continue to close on these properties and drive higher earnings growth?

Michael Landy

Well, couple of thoughts there, Craig. When you have long-term leases to investment grade tenants, low levered balance sheet and averaging over 90% tenant retention historically, last year was 100%. This year is looking like another 100% tenant retention year, all that bodes well for having a high payout ratio as opposed to a REIT with volatile cash flows. So, all cash flows aren’t equal, all payout ratios aren’t equal. And Monmouth had a high payout ratio and we were one of the few REITs that maintained our dividend throughout the financial crisis. And a lot of REITs with much lower payout ratios couldn’t sustain their payouts. So, we are not adverse to having a 90% payout ratio. However, the rating agencies want to see a cushion and when we go to them we plan to go them in 2017 and then achieve an investment grade rating, we are going to need a cushion. We are very proud of having been able to raise our dividend on October 1. We are one of the few REITs paying out a higher dividend today than prior to the global financial crisis. A lot of REITs have raised their dividend multiple times, but they are still playing catch up to get to where they were when their dividends were eliminated, but raising it once a year would be something we would strive to do, but that remains to be seen as earnings growth.

Craig Kucera

Okay, great. I will hop back in queue.

Michael Landy

Thank you, Craig.

Operator

The next question is from John Benda, National Securities Corp.

John Benda

Hey, good morning guys. How are you doing today?

Michael Landy

Good, John.

John Benda

Just a quick question for you and as you look to – as you think of some of the lease renewals etcetera and you look at the gross leasable area maturing in ‘16 and ‘17. How do you guys think about your composition in view of your outlook for the retail sector? I mean, when you see some moves are coming due, I mean are you looking for all the opportunities to get different tenders that’s more in line with retail and e-commerce or how do you think about that?

Michael Landy

Well, couple of thoughts there. By virtue of having a high FedEx Ground concentration, our location is technically magnet. The retailers seek out locations to be near FedEx, because online shopping requires fast delivery. And you can achieve fast delivery by being near FedEx Ground hubs. So already, we are ahead of the game by having strong locations vis-à-vis our FedEx exposure. As far as a lease coming due, we marketed for sale or a lease. We have very few vacancies. Right now, we have one. And while new deals are strictly to investment grade tenants when you have a vacant property, you evaluate the offers and you are willing to take a non-investment grade credit. So, our lease is rolling we assume given the substantial investments our tenants have made in the buildings, in some cases, their infrastructure investment is greater than the cost of the building itself. In most cases, it’s in the double-digits as far as millions of dollars. And there in lies our high tenant retention rate. So we assume we will be achieving it as we have historically over 90% tenant retention. But if we have a vacancy there we will have a non-investment grade credit if they are the first ones to come with a decent lease proposal.

John Benda

Okay. And then as you guys continue to grow and you look at your debt on the properties etcetera and would there be an opportunity to maybe issue a larger note, a 7-year or 10-year note and take out some of the property level debt for a corporate debenture?

Michael Landy

Sure. As we have the ability to build up on our unencumbered asset pool and achieve an investment grade rating doing low rate notes is an opportunity. We have high rate preferred outstanding. And with Series A is at 7.58 or Series B preferred is at 7.78 and that’s a $111 million at par value. We could – today we could refinance that but only one trench is redeemable at the moment. But we are waiting, that’s low hanging fruit. When we have an investment grade rating we could achieve $1.1 million to $2.2 million in interest rate savings just by issuing a lower cost preferred. So those are all the reasons why we are working towards investment grade rating. And it’s just financial engineering that will go right to the bottom line and our 2017 is a realistic timetable for that.

John Benda

Great. It seems like with the growth that happened in ‘15 you guys have done a very good job of managing the outstanding share count, so can you guys give us a little color on future acquisitions, it seems like there is going to be DRIP and then fixed rate debt and that’s going to be the majority of what’s going cover the properties base, is that correct?

Michael Landy

Yes. That’s correct. We have many sources of funds. We have the DRIP which has been very successful in helping us from the pipeline. We have the line of credit. We have the secured debt on each property and these are the low rates. So given all those and plus we have marketable securities portfolio which could be sold or could be borrowed against at a low interest rate 2% margin. So given all those sources of funds, we feel confident that we are able to continue and fund the pipeline going forward.

John Benda

Great. Thank you very much.

Michael Landy

You’re welcome.

Operator

Next question is from Craig Kucera of Wunderlich.

Craig Kucera

Hi guys. I had a couple more I thought I would ask as well. It seems like cap rates on the built-to-suit which you guys have been contracting have stabilized kind of in the 6.6 to 6.7 range, can you – is that a fair assessment and can you comment on the types of cap rates you are seeing in the market for similarly tenanted buildings that are being traded?

Michael Landy

Sure, Craig. The Fed actually tightened in I think it was like December 16, 25 bps and that created a situation where merchant builders because it is a forward commitment we aren’t looking for ever decreasing cap rates. There is no question, they stabilized. In fact if the yield curve didn’t flatten to the degree it’s flattened they probably would have had it even higher. There has been a tremendous demand for industrial. I mean you are seeing that the supply of space given 20%, 30% growth year-over-year in online spending has resulted in tremendous demand for more industrial space. So we are seeing a lot of deals and we are being very picky as to which deals we choose. We have always been very picky. But the pipeline is growing over the quarter and we anticipate it continuing to grow. The same with the expansions, we are getting requests for expansions all the time. And so we have the ability to keep growing our gross leasable area at a double digit year-over-year rate without sacrificing our high quality standards.

Craig Kucera

Got it. And I appreciate the big picture color on the marketplace in industrial supply, in particular. Are there any markets you are seeing right now that are seeing a lift in stack that makes you a bit concerned or are you – I know everything you do is pre-leased, but are you seeing much of that out there?

Michael Landy

Well, I listen to all of the industry or REIT conference calls and they are having great success with spec. They are having great success pre-leasing the building prior to the completion. They like the yields better on spec then the built-to-suits which is great, that means they are not so much stepping on our toes. But there is demand for industrial space and it’s going to continue to be strong demand for industrial space. Some of the retailers who are becoming e-tailers are seeing 50%, 60% year-over-year growth in their online consumption. And while Amazon is 100% e-commerce, the next biggest guys, Apple, Wal-Mart, Target, those companies are only 4%, 5% online spending and they are trying to – they are seeing demand to take that much higher. And to take that much higher, they are going to need more warehouse space, because it doesn’t make sense to pay brick-and-mortar retail rates to warehouse and ship for online consumption.

Craig Kucera

Okay. The final question, your G&A was a little lighter than what we expected this quarter and I understand there are some fluctuations quarter-to-quarter, but I think overall G&A last year was up about 10%. Is that how we should think about it this year or do you have a good feel for the way your G&A will be for this year?

Michael Landy

I think that’s good to model our G&A increasing 10% to 15% year-over-year is a good range. Don’t forget from an efficiency standpoint, G&A as a percentage of total assets has come from 67 bps down to 60 bps. G&A as a percentage of gross revenue has gone from 8.2% to 7.7%. NOI year-over-year is going up 27%. So, even though G&A will be increasing 10%, 15% year-over-year, the efficiency is getting better and better. So, that’s a good run-rate. And relative to our peers, this company is very, very efficiently run.

Craig Kucera

Okay, thanks guys.

Michael Landy

You are welcome.

Operator

The next question is from John Benda, National Securities Corp.

John Benda

Hey, guys. Just a quick follow-up with you. So, when you talk about the tenant expansions that are in the portfolio, I believe you mentioned earlier that you had built financial expansions. Is there an opportunity for you guys to do that and maybe capture some interest income as you [indiscernible] off your balance sheet and you kind of do that for them?

Michael Landy

I am not sure what you mean by capturing interest income, but yes, there isn’t a…..

John Benda

Okay.

Michael Landy

Yes, there is definitely ability to finance the expansions. We are looking at doing that on the Milwaukee Tool, because it is such a large expansion. And they were just taking roughly 700,000 square foot building and taking it up to almost 1 million square feet and you got a 12-year lease extension. So, there because it is such a large expansion, we have been quoted very attractive rates and we are just trying to decide, but historically, we have financed all our expansions 100% through equity. At this point, I would like to see if Gene wants to chime in on this question or any of the questions, because it’s always good to get his color on? Thanks.

Eugene Landy

Well, the only thing I want to add to that, I have listened to the conference calls as Michael does. And my admiration for analysts is very great and the ability is to get your arms around another company is very difficult. And to get your arms around that industry is difficult. And my only real comment on all these conference calls is that too much emphasis is placed on FFO and not enough on total return. We believe that the Federal Reserve will hit its target of 2% of flagship. They may exceed it. We think the country will grow with 2% to 4% over the next decade. And so you don’t look just at UFFO, but you look at what the total return is going to be. And if you assume any reasonable inflation at any reasonable growth, you can see that REITs are a tremendous buy in this market and that includes Monmouth REIT.

John Benda

And the recurring CapEx from the supplemental, if you would like the 2Q and the year-over-year increase was a little bit larger than what the GLA was doing? So, was there a one-time expense in there that we should be taken to consideration as we look at that in the next couple of quarters?

Eugene Landy

I mean, the recurring CapEx, it can be lumpy from quarter-to-quarter. And I am sure it will even out over the year, but yes, it was a little unusually high. There was really nothing major that really need to factor in. I would just maybe take last year as a year and maybe book that up by 10%, 15% just because as our portfolio grows, but yes, this is a little lumpy quarter.

John Benda

Alright, great. Thank you.

Eugene Landy

You are welcome.

Operator

The next question is from Louis Feldman at Wells Capital Management.

Louis Feldman

Good morning, gentlemen.

Eugene Landy

Good morning, Lou.

Louis Feldman

Gene, you kind of touched on it, but I thought I would ask you what your thoughts on your investment portfolio were? It had been sitting on an unrealized gain it’s now sitting on little bit of an unrealized loss. Where do you see your opportunities here and just what are your thoughts on the overall portfolio and where you would see it going?

Eugene Landy

We are absolutely amazed at the opportunities in the market. As you probably know, we have read Mike Kirby’s wonderful article about dual markets. He wrote a great article that real estate is priced in the private market and real estate is priced in the public market. And the pricing in the public market is much more attractive than in the private market. And it’s getting more attractive. As Warren Buffett likes to say if you are buying hamburgers, you like the fact that the price is going down. So I have never been more impressed with our portfolio. And the first thing I do almost every morning now is e-mail everybody and tell them wonderful conference calls – earnings calls we are getting from everything in the portfolio. We have a situation where we have gone from gains to losses, but the REITs themselves are reporting increased FFO and strong dividends and great results. So I am very happy with the portfolio. And I am very happy with the returns you can get in the securities markets, it’s amazing.

Michael Landy

Well and I will just add to that. I agree with everything Gene said. There is people who own stocks as long-term investments and in this yield starved environment people have been renting REIT securities just for the income. And you saw in August when they thought the Fed was going to tighten in September. I am fundamental analyst. I am not a technical analyst, but look at the chart in August and you just see the tourists in droves flowing out of the REIT vehicle driving yields up. And then the Fed did not tighten and they came back in. And then in November you see the chart do the same thing that tourists leaving. And most of that short-term money was in the high yielding low multiple REITs. And by virtue of it heading mass exodus to the exit, those high yielding low multiple REITs are trading at higher as Gene said, higher yields and lower multiples. So there is a real disconnect and the Green Street article talked about the spoils to those that are conversant in both the public and private equity real estate arena. And we have always been conversant in both arenas. And the market is incredibly inefficient at the moment. And there is way more opportunity in the public arena.

Louis Feldman

Great. Thanks.

Michael Landy

You’re welcome.

Operator

The next question is from Michael Boulegeris at Boulegeris Investment. I might be saying that wrong?

Michael Boulegeris

Thank you. Thank you for taking my questions. Congratulations on the continuance of consistent and high quality growth. Mike, you came in at the possibility of expanding the relationship with National Oilwell Varco in the last conference call, given their recent announcements, can you just give us an update on any developments here. And more broadly, as Monmouth does have considerable exposure in the Texas geography, can you share with us your thoughts on the operations of Monmouth in that region?

Michael Landy

Well, yes. Mike to the extent I can. The National Oilwell lease has several years remaining. They have had announcements of scaling back divisions, growing other divisions. We are very confident that they will be in our building for the long-term. I don’t want to take it any further than that. At this point we don’t announce things till contracts were signed. But I am very confident that that asset and our other asset in Texas leased to an energy related company the Exxon – the FedEx next to the Exxon Mobil global headquarters are just great assets. Now, we are in Texas as you say with a high concentration, because we invest conceptually. And one of the concepts is to invest in business friendly climates. And Texas year-over-year – year-after-year comes out in the top one, two, three states as far as business friendly attitude. So we have a high concentration there, that’s going to benefit when the Panama Canal comes on line. You are already seeing an increase in shipments through the canal. Even though the expand of the canal isn’t even open yet, you are already seeing increased shipping container growth on the Gulf ports and East Coast ports relative to the West Coast ports. So we are bullish on Texas. We have great assets in Texas. Our assets are located near the Gulf region and we have no vacancy in Texas. We have expansions going on in Texas. We have completed expansions in Texas. So, we are very bullish on the prospects for that state.

Michael Boulegeris

Turning to your FedEx relationship, you indicated in the release, there is three FedEx expansions given just a historic holiday season for FedEx, is there any possibility they might initiate some discussions with you this fiscal year for additional expansions or is your plate kind of full with the three that you have on the table now?

Michael Landy

No, the former, we have other FedEx expansions on the drawing board which anticipate announcing in ensuing quarters.

Michael Boulegeris

Okay. Does the Genco acquisition by FedEx provide any long-term opportunities for Monmouth growing down into the supply chain?

Michael Landy

The Genco acquisition for FedEx makes a lot of sense, because when people shop online, unlike brick-and-mortar where the returns are in the single-digits, online consumption results in double-digit returns. People order way more than they want intentionally and ship back once they try things on and compare things they ship a lot back. And the FedEx distribution hubs are not really equipped for reverse logistics and Genco is an expert at reverse logistics. And that’s why FedEx acquired them, because this is a real benign GDP environment. Annual rates of sub 2%, as far as the hike has seen for years after year and yet e-commerce is growing at double-digits year-after-year and the retailers are seeing 30%, 40%, 50% year-over-year growth. And Amazon is talking about investing in brick-and-mortar to some extent, it remains to see what extent, but one of the primary rationales behind that is to handle returns. So, it’s very difficult for a e-commerce fulfillment center or a FedEx distribution center, where time is of the essence to handle restocking and repackaging and testing goods for defects. And so you really need a reverse logistics part of your network and FedEx is way ahead of the game in growing the network for e-commerce. And while they have the best network, it’s going to need to grow and we are going to grow right alongside them.

Michael Boulegeris

In the release, Kevin, you indicated the average lease term was 13.4 years, can you expand and share with us how many 15 or 20 year leases are included in this pipeline? And Michael, would you believe that this investment in automation technology in these fulfillment centers is driving longer term duration for your net leases?

Michael Landy

Kevin, you want to go first?

Kevin Miller

Sure. For the 13.4 weighted average leases in the pipeline, there are mix between 10 and 15, they are either about half of them are 10 and half of 15 and that averages out to about 13.4. I am sorry, yes 13.4.

Michael Landy

And as far as the investments absolutely, I mean, the name of the game is packages per hour, you want to be able to do 15,000, 20,000 packages per hour and in order to do that, FedEx needs to make a multimillion dollar investment and they have to have substantial acreage for employee parking during the peak season. What happens during the peak season, 80% of goods are consumed over the holiday season and you will go from 50 employees to 550 employees. So, you need to be near an area where you can access the temporary labor pool. You have to have large truck cohorts. You have to have the ample acreage to handle the tremendous exponential growth that happens over the holiday season. And once they have those hubs, they tend to stay there forever has been our experience.

Michael Boulegeris

Okay. Lastly if I might to the Chairman, Gene, you have been a pioneer in the REIT industry and recently we saw there was some additional firm to reform, make you share with us your perspective on the latest reform in terms of poor investment and how that might impact Monmouth?

Eugene Landy

So, one thing I had to take the opportunity to thank NAREIT, the National Association of Real Estate Trust. I have been with them for over 40 years. They have made me an honorary director, very pleased with that honor. And NAREIT does a wonderful job for the industry and the passage of the new law this year is an example of the excellent work they have done. They have removed the impairments of foreign investment. I think they have gone from 5% to 10%. And they were expecting a significant increase in foreign investment in U.S. REITs. As a result of that change and as you know I think it’s they are going to go to do indexes for REITs which will also result increased investment. So there were lot of things coming up in ’16, ’17 and ’18 that will be very good for the industry.

Michael Landy

If I could just jump in real quick, that goes to Louis’ question, the disconnect in pricing between the public and private market. And as Gene just mentioned there is two huge catalysts on the horizon. The fact that foreign investment is in capped at 5%, double that at 10% now before it incurs the FIRPTA taxation. And then you have the GICS code, the S&P 500 we have been lumped into the financial sector. And in August real estate will have its own sector. And long-term that will be a catalyst for additional capital flow into the REIT vehicle. And so while spreads between the public and private market are normally wide margins, you have these two huge catalysts on the horizon that will result in net inflow for capital for the REIT vehicle.

Michael Boulegeris

Thank you.

Operator

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

Michael Landy

Sure. Thank you, Amy. I would like to thank everyone for joining us on this call, for the continued support and interest in our company. I should point out that our new annual report is now available and I encourage all investors to read it. We are very proud of this year’s report. So if you would like a copy, please contact Susan Jordan here at Monmouth and we will be happy to FedEx you out a copy. As always, Gene and I are available for any follow-up questions as is Kevin. And we look forward to reporting back to you after our second quarter. 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 U.S. toll free 1-877-344-7529 or international 1-412-317-0088. The conference ID number is 10077955. Thank you. And please disconnect your lines.

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