Be A FedEx Landlord And Hedge Retail REIT Risk

| About: Monmouth Real (MNR)

Summary

I am becoming increasingly more cognizant of the e-commerce threats and becoming more tactical in terms of my portfolio modeling strategies.

One natural hedge to reduce retail risk is to invest in facilities that can not only withstand the threat of e-commerce but also that embrace it.

While MNR does have significant exposure with FDX I am not concerned about the exposure based upon MNR’s well-laddered lease maturities.

I own a number of retail REITs including Kimco Realty (NYSE:KIM), Tanger Factory Outlet (NYSE:SKT), and Taubman Centers (NYSE:TCO). While I consider these REITs sound, based upon their very reliable earnings and dividend growth histories, it's important to always stay focused on risks that could impact the future performance of these stalwart enterprises.

There's no doubt that e-commerce has continued to weigh on retail landlords and while many have adapted to the multi-channel approach, others are still struggling to adjust to the ever-evolving universe ruled by Amazon (NASDAQ:AMZN).

Although General Growth's (NYSE:GGP) CEO mistakenly spoke on AMZN's new brick and mortar expansion plans last week (on the company's earnings call) - he suggested AMZN would open 300 to 400 stores - the facts are clear that retailers are being forced to continually evolve and address new ways to remain competitive in the face of increasing e-commerce competition. In Monmouth Real Estate's (NYSE:MNR) 2015 Annual Report the CEO, Mike Landy, explained,

As a result of the shift in consumer spending from traditional store sales to e-commerce, retailers have become much more concerned with the inventory levels in their distribution centers than in traditional brick-and-mortar stores.

While I am not completely steering away from retail-based REITs, I am becoming increasingly more cognizant of the e-commerce threats and becoming more tactical in terms of my portfolio modeling strategies.

It's imperative, in my opinion, to stay ahead of the risks and that means that in order for me to invest in a Retail REIT it must provide unique competitive advantages that can enable the company to defend against the disruptive waves sparked by the digital revolution.

Keep in mind, retail is not the only sector that should be considered. The Lodging REIT sector is beginning to feel pressure from Airbnb, while the Self-Storage sector has embraced technology as a means to build more powerful forms of repeatability.

One natural hedge to reduce retail risk is to invest in facilities that can not only withstand the threat of e-commerce but also that embrace it. As Mike Landy (CEO of MNR) explains,

Consumer spending has continued to migrate to Internet sites where one can purchase anything, anytime, anywhere. From a real estate standpoint, the direct beneficiary of this paradigm shift has been, and will continue to be, the Industrial Property sector.

Click to enlarge

Somewhat of a Hybrid REIT

MNR is an Industrial REIT with 93 properties and over 14.4 million square feet. Here's how the company compares in size (based on market cap) with the other Industrial REITs.

Click to enlarge

MNR is somewhat unique as compared with the Industrial peers since the small-cap REIT has longer duration leases (weighted average lease maturity is 7.1 years) making the revenue stream more predictable, and comparable to many of the Net Lease REITs. Consequently, I decided to compare MNR with both the Industrial REIT peers but also the Net Lease peers.

Click to enlarge

MNR has a geographically diversified portfolio across 29 states. Here's a snapshot of Monmouth's geographic diversification:

Click to enlarge

As you can see, MNR also has substantial exposure to the East Coast and that's another important characteristic since the company should benefit from the Panama Canal expansion that is expected to be completed in the first half of 2016.

Also, MNR has considerable exposure with investment grade rated tenants - around 85% of the company's rental revenue is from investment grade tenants. Here's a snapshot of some of Monmouth's high-quality companies:

Click to enlarge

The rental roster includes Anheuser Busch, Bunzl, Caterpillar, Coca-Cola, ConAgra, Dr Pepper Snapple Group, FedEx, International Paper, Jim Beam, Kellogg's, National Oilwell, Sherwin Williams, Siemens, ULTA, United Technologies and other high-quality companies.

Here's a snapshot of MNR's geographic diversification (by State) - based on rent:

Here's a snapshot of MNR's geographic diversification (by State) - based on square footage:

A Focus on FedEx

MNR is just a few years older than FedEx (Monmouth is in its 47th year as a public REIT) and the small-cap REIT has also enjoyed a long-standing real estate relationship with the global shipping giant (MNR began investing in properties leased to FedEx in 1992).

As noted above, MNR operates a property portfolio that consists of 93 industrial properties and around 54.8% of the portfolio (based on rent) is leased to FedEx. As you can see below, 46.2% is leased to FedEx Ground, 6.9% is leased to FedEx Express, and 1.7% is leased to FedEx Supply Chain.

Based on square footage, FedEx occupies around 45.1% of MNR's portfolio. Several recent FedEx Ground acquisitions are noted below:

Click to enlarge

MNR enjoys a strong acquisition and expansion pipeline comprising 2.5 million square feet with a purchase price of $267.0 million (with leases that commence throughout fiscal 2016 and 2017). Around 80% of the properties will be leased to FedEx.

MNR actively looks for new built-to-suit opportunities near already owned FedEx facilities. Three FedEx expansion projects were just completed with a total cost of $9.9 million, increasing the rent and lease term. Also three FedEx expansion projects underway with a total cost of $8.2 million.

Currently, thirteen total expansion projects recently completed or are underway, increasing the rent and lease terms of these FedEx facilities.

The entire retail industry has been shifting its focus from traditional brick and mortar stores to e-Commerce platforms which has led to significant demand for large, modern industrial distribution centers. U.S. e-Commerce sales are expected to increase to over $400 billion in 2017, representing a 68% increase from 2013. During this past holiday season, FedEx delivered over 20 million packages per day.

M22Global consumer habits continue to change resulting in ever greater market share taking place online.

Click to enlarge

The Capital Structure

As of the end of the latest quarter, MNR's 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. Around 81% of the company's debt is fixed rate with the weighted average interest rate of 4.8% as compared to 5.2% in the prior year period.

MNR's weighted average interest rate on the total debt was 4.3% as compared to 5% in the prior year period. MNR also had $111 million in perpetual preferred equity at quarter end.

Combined with an equity market capitalization of $667 million, MNR's total market capitalization was approximately $1.3 billion at quarter end. From a credit standpoint, the company continued to be conservatively capitalized with net debt on total market capitalization at 38%, fixed charge coverage at 2.6x and our net debt to EBITDA at 6.6x.

From a liquidity standpoint, MNR ended the latest quarter with $12.9 million in cash and cash equivalents. The company has around $35 million available from its credit facility as well as an additional $70 million potentially available from the accordion feature. In addition, MNR has around $61 million in marketable REIT securities, representing 5.5% of un-depreciated assets with an unrealized loss of $3.7 million at quarter end.

Finally Moving The (Dividend) Needle

It seems that MNR is finally begin to move the needle, or perhaps the dividend. First, let me examine the latest earnings results…

MNR has generated double-digit per share AFFO growth in each of the prior two years. And with its first quarter per share AFFO up 13% sequentially, fiscal 2016 is poised to be another excellent year.

Click to enlarge

Core FFO for the first quarter of fiscal 2016 was $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, representing 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.

Click to enlarge

AFFO (which excludes securities gains and losses and lease termination income) was $0.17 per diluted share for the quarter compared to $0.14 per diluted share in the prior year period, representing a 21% increase. As noted, AFFO per share increased 13% over the prior quarter. Also as a result of recent acquisition activity, MNR increased occupancy to 99.5%.

Following MNR's100% tenant retention rate achieved last year, the company is shooting for full tenant retention this year as well.

On October 1st (2015) following 24 consecutive years of maintaining or increasing its common stock dividend, MNR announced a 6.7% dividend increase.

Click to enlarge

MNR's payout ratio is 95.5%.

Is It Time To Buy Monmouth?

I have been waiting on MNR to grow its dividend, and that day is here. I was impressed with the latest results and the company is continuing to execute its simple strategy of acquiring long-term triple net leases with high-quality tenants.

The next goal for MNR is to achieve investment grade status but I'm not waiting on that before initiating a position. I'm glad to see the dividend increase but given the current payout ratio (95.5%) I'm not expecting a lot more growth in the near-term. MMR remains attractive based on its 2016 AFFO multiple of 15.1x vs 19.8x for the (Industrial) Peers (24% discount).

Here's a closer look:

Click to enlarge

Now let's compare with the Net Lease peers:

Click to enlarge

Now let's compare MNR based upon its dividend yield:

Click to enlarge

Now let's compare the dividend yield with the Net Lease REITs:

Click to enlarge

Now let's consider past performance - based on 1-year Total Return:

Click to enlarge

Now let's compare to 3-year Total Return performance:

Click to enlarge

Now let's compare to 10-year Total Return performance:

Click to enlarge

Now let's compare YTD Total Return performance:

Click to enlarge

While MNR does have significant exposure with FDX I am not concerned about the exposure based upon MNR's well-laddered lease maturities. In Fiscal 2015, 780,000 square feet was set to expire of which 100% renewed with a 6.3% increase in the weighted average U.S. GAAP lease rate. Also as you can see below, there is minimal rent roll down risk observed on lease renewals.

Click to enlarge

I am recommending MNR at the current price point ($10.31) as I consider the REIT to be sound based upon its disciplined risk management profile. The last quarter was especially strong as evidenced by the 99.5% occupancy rate and 100% tenant retention. As I said, I am not expecting outsized dividend growth but I believe the dividend is safer and the continued focus on investing in logistics facilities offer appealing hedge-like opportunities (when considering the other Retail REITs that I own).

Click to enlarge

Author's Note: I'm a Wall Street writer, and that means that I am not always right with my predictions or recommendations. That also applies to my grammar. Please excuse any typos, and I assure you that I will do my best to correct any errors if they are overlooked.

Finally, this article is free, and my sole purpose for writing it is to assist with my research (I am the editor of a newsletter, Forbes Real Estate Investor), while also providing a forum for second-level thinking. If you have not followed me, please take 5 seconds and click my name above (top of the page).

The only guarantee that I will give you is that I will uncover each and every rock I can in an effort to find satisfactory investments that "upon thorough analysis promises safety of principal and satisfactory return. Operations not meeting these requirements are speculative." (Ben Graham)

Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: SNL Financial and FastGraphs.

REITs mentioned: (NYSE:STAG), (NYSE:EGP), (NYSE:PLD), (NYSE:DRE), (NYSE:TRNO), (NYSE:DCT), (NYSE:PSB), (NASDAQ:GOOD), (NYSE:GPT), (NYSE:LXP), (NYSE:O), (NYSE:VER), (NYSE:WPC), (NYSE:SRC), (NYSE:EPR), (NYSE:STOR), (NYSE:GNL), (NYSE:DEA), (NYSE:GOV), and (NYSE:OLP).

Disclosure: I am/we are long O, DLR, VTR, HTA , STAG, GPT, ROIC, HCN, OHI, LXP, KIM, WPC, DOC, EXR, MYCC, BX, TCO, SKT, UBA, STWD, CONE, BRX, CLDT, HST, APTS, FPI, CORR, NHI, CCP, WSR, CTRE, WPG, KRG, SNR, LADR, HCN, HCP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.