Monmouth Real Estate Investment Corporation (NYSE:MNR)
Q3 2016 Earnings Conference Call
August 4, 2016 10:00 AM ET
Susan Jordan - Vice President of Investor Relations
Michael Landy - President and Chief Executive Officer
Kevin Miller - Chief Financial Officer and Chief Administrative Officer
Eugene Landy - Chairman
Rob Stevenson - Janney Montgomery Scott
Craig Kucera - Wunderlich Securities, Inc.
John Benda - National Securities Corporation
Michael Boulegeris - Boulegeris Investments, Inc.
Good morning and welcome to Monmouth Real Estate Investment Corporation’s Third Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
It is now my pleasure to introduce your host, Ms. Susan Jordan, Vice President of Investor Relations. Thank you. Ms. Jordan, you may begin.
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.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 third 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’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.
Thanks, Susan. Good morning, everyone, and thank you for joining us. Monmouth’s results this quarter represent one of our strongest on record. Our AFFO per diluted share of $0.19 this quarter represents a 27% increase over the prior-year period and a 12% increase sequentially. Our portfolio occupancy increased 200 basis points, from 97.6% in the prior-year period to a sector-leading 99.6% at quarter end.
Our gross leasable area at quarter end comprised 15.1 million square feet, consisting of 97 properties geographically diversified from coast-to-coast across 30 states. Our weighted average building age is only 10 years, providing Monmouth with one of the youngest and most state-of-the-art portfolios in the industrial REIT sector. Through the first three quarters, we have generated 9% portfolio growth by acquiring six industrial properties totaling approximately 1.2 million square feet at an aggregate cost of $141.2 million.
Our gross leasable area has increased by 11% over the prior-year period. Throughout our 48-year history, our investment focus has solely been on real estate located in the United States, and naturally that will continue to be our focus going forward. During the quarter, we acquired three brand-new Class A build-to-suit facilities. These acquisitions contained a total of 573,000 square feet at an aggregate cost of $70.8 million. These three acquisitions will generate annualized GAAP rent of $4.6 million.
Two of these acquisitions are leased to FedEx Ground, with terms ranging from 10 years and 15 years. The 10-year FedEx Ground property is a brand new, 225,362 square foot building near the Colorado Springs Airport. The 15-year FedEx Ground property is a brand-new 210,445 square foot building near the Boeing manufacturing plant in Everett, Washington. The third acquisition is a brand new, 137,500 square foot building leased for 10 years to Snap-on Tools. This property is located near the Louisville International Airport.
Having added GE to our tenant roster last quarter, we are very pleased to add A-rated Snap-on Incorporated to our high quality tenant roster this quarter. We continue to be very excited about our best-in-class acquisition pipeline, which grew over the quarter to eight properties consisting of 2.4 million square feet, representing an aggregate cost of $256.6 million. Approximately 40% of the pipeline is scheduled to close in fiscal 2016, with the remaining 60% scheduled to close during fiscal 2017.
In keeping with our business model, all of these future acquisitions comprise brand new, well-located build-to-suit projects currently under construction. These properties contain long-term net leases with a weighted average lease maturity of 14.6 years. In addition, seven of our eight pipeline acquisitions will be leased to investment-grade tenants. These properties are situated near major airports, major transportation hubs, and manufacturing plants that are integral to our tenants’ operations. The cap rates on these deals average 6.6%.
Subject to satisfactory due diligence, we anticipate closing these transactions upon completion and occupancy. In fiscal 2016, approximately 2% of the Company’s gross leasable area, consisting of three leases totaling 326,000 square feet, was scheduled to expire. As previously announced, all three of these leases have been renewed, giving Monmouth a 100% tenant retention rate for the second consecutive year.
These renewed leases have an average term of 4.1 years, and an average GAAP lease rate of $4.20 per square foot and a cash lease rate of $4.04 per square foot. This represents an increase of 5.3% on a straight-line GAAP basis and a decrease of 2.2% on a cash basis.
Subsequent to quarter end, we completed three expansion projects for approximately $13.4 million, consisting of two building expansions, adding additional rental space of approximately 261,000 square feet and one parking lot expansion. Two of these properties are leased to FedEx Ground in Florida and Alabama, and the third is leased to Milwaukee Tool in the Memphis market.
As a result of these expansions, effective in the fourth quarter annual rent will increase by approximately $1.2 million. These two FedEx leases will be extended by 10 years, and the Milwaukee Tool lease will be extended by 12 years, resulting in a weighted average lease extension for these three expansions of 11.5 years.
We currently have one more FedEx Ground expansion in progress that will add 50,741 square feet of additional rental space. This property is located in Southern Texas. Expansion costs for this project are expected to be approximately $5 million. Upon completion of this expansion, annual rent for the property will increase by approximately $500,000 and the lease term will be extended for 10 years from the date of completion.
As we announced last quarter, we entered into a sale agreement to sell our only vacant building, consisting of 59,425 square feet situated on 4.8 acres located in White Bear Lake, Minnesota, for approximately $4.3 million, which is our approximate carrying value. The sale is subject to the purchaser’s satisfactory due diligence.
Our investments in marketable REIT securities are having an excellent year as well. Our securities portfolio, which we limit to no more than 10% of our undepreciated assets, has grown from $54.5 million at fiscal year-end to $82.6 million at quarter-end, and currently represents 6.7% of our undepreciated assets. The marketable REIT securities provide us with additional liquidity, diversification, and additional income.
Our unrealized gains were $11.9 million at quarter-end, representing a $17.3 million improvement over the nine-month period. Factoring in the $1.2 million in realized gains generated thus far this fiscal year results in an $18.5 million improvement over the nine-month period. Our securities portfolio has continued to deliver outstanding performance subsequent to quarter end. The strong performance generated by our REIT securities portfolio highlights our ability to take advantage of the valuation arbitrage between the public and private market.
With regards to the overall U.S. industrial market, the secular shift to e-commerce continues to drive strong demand for modern industrial real estate. Many retailers are continuing to invest in their omnichannel capabilities and this has been a big driver of positive net absorption, which is now in its 25th consecutive quarter of expansion. Through the first six months of this year, net absorption has totaled 122 million square feet, representing an increase of 40% over the prior-year period and 19% over the prior quarter.
U.S. industrial vacancy now stands at a cyclical low of 6%, representing a 10 basis point improvement over the prior quarter. Following the first quarter’s weak GDP reading, recently revised downward to 0.8%, Q2’s initial reading was a lackluster 1.2%. Meanwhile, the shift in consumer spending toward e-commerce has been ongoing since before the turn of the century and shows no signs of abating with growth in e-commerce sales averaging 15% annually.
Going forward, we’ve positioned our portfolio to benefit from three long-term catalysts. First and foremost is the increased market share that continues to migrate toward e-commerce. Second, strategically positioning our assets near major transportation hubs; and third, strategically positioning our assets in anticipation of the shift in the global supply chain due to the recently completed Panama Canal expansion. Monmouth is reporting excellent profitability today as the result of our seeing these developments well in advance of their occurrence.
Now Kevin will provide you with greater detail on our results for the third quarter of fiscal 2016.
Thank you, Michael. Core funds from operations for the third quarter of fiscal 2016 were $12.8 million or $0.19 per diluted share. This compares to Core FFO for the same period one-year ago of $9 million or $0.15 per diluted share, representing an increase of 27%. Adjusted funds from operations, or AFFO, which excludes securities gains or losses and excludes lease termination income, were $0.19 per diluted share for the recent quarter as compared to $0.15 per diluted share a year ago, also representing an increase of 27%.
Growing our AFFO per share has been a key focus of ours, and this marks our fifth consecutive quarter of over 20% year-over-year growth in our AFFO per share. Our AFFO dividend payout ratio is now 84%, which we feel is conservative given the high quality of our tenants and the long duration of our net leases. Rental and reimbursement revenues for the quarter were $24.1 million compared to $20.7 million, or an increase of 17% from the prior year.
Net operating income increased $3.5 million to $20.5 million for the quarter, representing a 21% increase from the comparable period a year ago. This increase was due to the additional income related to the 10 properties purchased during fiscal 2015 and the six properties purchased during the first three quarters of fiscal 2016. Net income, excluding depreciation, was $14.3 million for the third quarter compared to $10.3 million in the prior-year period, representing an increase of 39%.
Again, this improvement was driven largely by the substantial acquisition activity that has occurred over the past year. Although most of our earnings growth is attributable to our acquisitions and expansions, we have been able to generate organic growth as well. Same-property NOI for the three months ended June 30, 2016, increased 2.4% on a U.S. GAAP basis and increased 2.7% on a cash basis over the prior year period.
In addition, same-property NOI for the nine months ended June 30, 2016, increased 3.2% on a U.S. GAAP basis and increased 3.7% on a cash basis over the prior-year period. With respect to our properties, as Michael mentioned, end-of-period occupancy increased 200 basis points from 97.6% in the prior-year period to 99.6% at quarter-end. Sequentially, our 99.6% occupancy rate was unchanged.
Our weighted average lease maturity as of the quarter end was 7.1 years, which is unchanged from the prior-year period. Our weighted average rent per square foot increased 5% to $5.66 as of the quarter end, as compared to $5.38 a year ago. Our acquisition pipeline now contains 2.4 million square feet, representing $256.6 million in total acquisitions scheduled to close over the next several quarters.
To take advantage of today’s attractive interest rate environment, we have already locked in very favorable financing for seven of these acquisitions, which represent an aggregate cost of $218 million and total 2.2 million square feet. The combined financing terms for these seven acquisitions consists of $147 million in proceeds, representing 68% of total cost, and has a weighted average interest rate of 3.9%.
Each of these seven financings are 15-year self-amortizing loans. These seven acquisitions will result in a weighted average levered return on equity of 16.2%. As of the end of the quarter, our capital structure consisted of approximately $566 million in debt, of which $440 million was property-level fixed-rate mortgage debt and $126 million were loans payable. 78% of our total debt is fixed rate, with a weighted average interest rate of 4.6% as compared to 5% in the prior-year period.
We also had a total of $111 million in perpetual preferred equity at quarter-end. Combined with an equity market capitalization of approximately $891 million, our total market capitalization was approximately $1.6 billion at quarter-end. From a credit standpoint, we continued to be conservatively capitalized, with our net debt to total market capitalization at 36% and our net debt plus preferred equity to total market capitalization at 43% at quarter-end.
In addition, our net debt less securities to total market capitalization was 30%, and our net debt less securities plus preferred equity to total market capitalization was 38% at quarter-end. For the three months ended June 30, 2016, our fixed-charge coverage was 2.7 times and our net debt to EBITDA was 6.8 times. Our net debt less securities to EBITDA was 5.8 times.
From a liquidity standpoint, we ended the quarter with $6.9 million in cash and cash equivalents. In addition, we held $82.6 million in marketable REIT securities, with $11.9 million in unrealized gains in addition to the $1.2 million in gains realized over the nine-month period.
At quarter-end, our $82.6 million REIT securities portfolio represented 6.7% of our undepreciated assets. As of the quarter-end, we had $9 million available from our credit facility as well as an additional $70 million potentially available from the accordion feature.
Now let me turn it back to Michael before we open up the call for questions.
Thank you, Kevin. I’m very proud of the progress that has been ongoing at Monmouth. Our 99.6% current occupancy rate represents the best in the industrial REIT sector. Delivering five consecutive quarters of over 20% year-over-year growth in our AFFO per share has resulted in a conservative AFFO dividend payout ratio of 84%.
Our high-quality $256.6 million acquisition pipeline, combined with our building expansions recently completed and currently underway, all highlight the substantial progress that Monmouth continues to achieve.
We’d now be happy to take your questions.
We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Rob Stevenson of Janney.
Good morning, guys.
Mike, any conversations that you guys have been having with the 2017 lease expirations that would suggest that you’re not going to get 100% renewal in 2017 as well?
Yes, sure, Rob. 2017 has quite a few expirations, totaling 1.5 million square feet. It’s 11 properties coming off lease next year, which begins October 1, and it’s 1.5 million square feet. The largest one coming off lease is our Coca-Cola facility in Phoenix, and I’m happy to report that’s been renewed for 10 years at an increase of 4%. So that’s about 20% - that’s 300,000 square feet, so 20% of expirations has renewed for - in the Coke building for 10 years at plus 4%.
We also have a large FedEx in the Chicago market that renewed for 10 years, that’s about 6% of GLA expiring. The only bad news I have to report is a small FedEx building in the Fort Myers market, we’re building a new large FedEx building in Fort Myers, and that’s going to be a 15-year project that’s in our pipeline. And once that’s complete they’ll be moving out of the 87,000 square foot building they are in now. It’s a strong market, so I think we’ll have success re-tenanting that building.
Do you plan at this point to re-tenant rather than sell?
Yes, in that market we should have no trouble re-tenanting it. It is a sellers’ market, but it’s a great asset. It’s near downtown Fort Myers. We love Florida. We have a high concentration in Florida, and we’re trying to grow the Company with quality assets. So I’d rather not recycle that capital.
Okay. Given the strong preferred market, what’s your thoughts these days about doing a deal at this point to take out the Series A preferreds and pre-fund the Bs, and maybe give yourself some additional capital for financing some of these acquisitions?
Well, there’s no question it’s something we talk about every other day, if not daily. We look at the yield curve; it’s very favorable. The preferred market was pretty closed up until the beginning of this calendar year, and it’s been wide open; and the indication is we could save, conservatively, 125, maybe even 150 basis points off of the our outstanding preferred, which is priced at 7 5/8% on the A and 7 7/8% on the B.
It would be a no-brainer if all $111 million were redeemable today. Half of it’s redeemable today. The Series B is not redeemable until May of 2017. So to take out half of it, save 100 to 150 bps, it helps. It’s not that compelling, it’s not going to be as accretive as our pipeline and our expansions. So we haven’t executed anything today.
Our portfolio, our securities portfolio, great arbitrage in allocating capital on to discounted REIT securities. If that arbitrage - REIT securities have really run up. They’re up, as you heard in our prepared remarks, 30%, 40% over the nine months. So should that continue, there could be an arbitrage to realize some gains in our securities portfolio and take out the high-coupon preferred. It’s low-hanging fruit. It’s something we want to clean up, but with only half of it redeemable today, not that compelling an opportunity.
I understand the yield curve is as favorable as it’s going to get. But hopefully in May it will still be highly accretive to issue a Series C and take care of all $111 million. It’s only 6% of our capital structure, so not that big a deal. Gene, you want to add to that at all?
Well, we’re watching that situation closely and we really do believe in the preferreds, issuance of preferred stocks. We think REITs that issue preferred stocks, that it’s a good deal for the REIT and it’s a good deal for the buyer of the preferred. So REIT preferreds will be a permanent part of our capital. But the mechanics of doing it and when we do it, that’s still a subject of discussion.
Okay, and then one last one for Kevin. How much DRIP issuance did you guys have in the quarter?
We issued about - I’m sorry, I don’t have it handy - about $30 million in just the SIP and then - with a 25% participation rate. I’m sorry.
Yes, over the nine months, Robert, we’ve raised $51.5 million. And of that $51 million over nine months, you can just ratably figure out what we did on a monthly basis. In addition to that, inclusive of that we raised $6.3 million in dividends reinvested out of $31.1 million in dividends paid. So it’s a 20% participation rate. We’re estimating we’ll raise $70 million to $80 million this year through the DRIP and SIP.
Okay. Thanks, guys.
You are welcome.
And the next question comes from Craig Kucera of Wunderlich.
Good morning, guys. Appreciate the color on the acquisition pipeline and timing. But do you see any lumpiness in 2017 in closings? Or pretty much should we assume that things are going to close fairly ratably throughout the year?
It’s best to assume they’ll close ratably in 2017. We’re hopeful that this last quarter of 2016 we’ll see lumpiness in closings, because we have several that are queued up and should be closing before year-end. But I believe three acquisitions should be closing before year-end, and they are fairly large, each of them.
But then in 2017, we have $152 million in acquisitions under contract in 2017, and that will likely be ratably over the year. And the pipeline has grown over the 90-day period and hopefully it will continue to grow.
Got it. Looking at your Q, it looks like most of your line capacity was taken up during the quarter. Can you comment on your sources of liquidity going forward? And have you had discussions regarding maybe exercising the accordion feature?
Kevin, do you want to take that?
Yes, sure. As of the quarter-end we had $121 million drawn down on the $130 million facility. So you’re right, there’s only $9 million of capacity left. But we have started in discussions to exercise the accordion. We have gotten positive feedback that all people should be onboard. But right now, we just drew that down towards the very end of the quarter, so we don’t think we need to draw it down again for a little while.
And based on - the line availability is based on NOI, and we actually have more capacity than the $130 million based on our NOI. We have about $14.5 million NOI generated from unencumbered assets, which gives us about $150 million of availability. And by the end of the year, I predict about $17 million of NOI from unencumbered assets, which would give us about $170 million availability based on the terms of our line.
And then other sources of capital, as Mike had mentioned we have over $80 million in marketable REIT securities that, if the arbitrage looks good, that it’s a good idea to sell, we could sell that. Or if not, we could borrow 50% of that, generally at 2% interest rate. But generally 50%, I should say, we could borrow to that.
And like we had the question before, we have the DRIP, SIP money coming in, about $6 million every month in the SIP. That’s been giving us liquidity. Plus we’ve locked in financing on the acquisition pipeline of seven of the eight deals. So we feel we have plenty of available liquidity to move forward and keep generating these high levered returns.
Got it. We’ve been hearing that construction costs are maybe up 5% year-over-year. Are you finding that merchant builders are putting a little bit more downward pressure on cap rates to cover their costs? Or are they exerting any more influence now than maybe they were maybe nine to 12 months ago?
Well, the downward pressure on cap rates is just driven by the demand for the property type. There’s no new shopping centers, no new malls being built, and U.S. assets are in high demand globally. Industrial from a top-down standpoint is the sector to be in. So it’s strictly supply-and-demand driving down cap rates more than construction cost inflation.
But there is inflation in land values and construction costs. And as these builders get tied up, their costs will go up as well. There’s about 180 million square feet of new construction going on at this moment, and about 60% of that is spec. So much of the demand is e-commerce driven that people are having - if you listen to the industrial REIT conference calls, they are having great success pre-leasing spec development.
So this is going to continue. It’s the new retail, and that’s what’s driving down cap rates. While they are having so much success in pre-leasing, if you hear the cap rates on the spec deals, they are high 6%, low 7%, which makes me feel great about our pipeline in the high 6%s at 15-year leases to investment-grade tenants. I think on a risk-adjusted return basis I feel great about our pipeline.
Okay. And one last one for me. You guys have done a great job of getting your AFFO per share, you go back four or five quarters ago, you were doing $0.14, $0.15. Now here today we’re at $0.19. When you think about the dividend from a payout ratio, what do you think about as probably a reasonable floor from a payout perspective, or maybe a range going forward?
Well, a 20% cushion is a nice cushion, so an 80% floor. Given that we didn’t have 90 days of income on the acquisitions, the three acquisitions we closed this quarter, and we have those large expansions that just came online, I think you could conservatively say our run rate on AFFO is $0.20, if not greater. The $0.20 versus the $0.16 dividend is an 80% payout ratio. So I feel really good about that cushion.
Of course, you also look at vacancy factor. And at 100% occupancy, the probability of changes are to the downside not the upside. So that’s a factor as well. But like you said, we had over 100% payout not that long ago, with a 20% cushion; it is very helpful going forward. With long-term leases to investment-grade tenants, that’s a very healthy cushion.
Our average lease maturity is over seven years. Our pipeline is almost 15 years of weighted average lease maturity. We’ve been on a real initiative to extend our debt maturities as far out as possible. We have 10 years of weighted average debt maturity, and Kevin has locked in $140 million of money, 15-year money; so that maturity is going to go up, our lease maturity is going to get extended. So all that’s very favorable. And we look at the preferred as well, getting back to the preferred. That is a good way to extend our maturities with this flat yield curve, and we will take care of that by issuing a C when both the A and B are redeemable.
Okay. Thanks, guys.
You are welcome.
And our next question will come from John Benda of National Securities Corp.
Hey, good morning, guys. How are you doing today?
Just quickly on the acquisition portfolio, can you add some geographic color to what markets you are targeting on that?
I’m sorry, I didn’t hear it. Color on what?
Could you add some geographic color on the acquisition pipeline?
Okay. So from a geographic standpoint, strategically we’ve done a great job placing our assets. The inland ports are the place to be. If you look at our portfolio, we have high concentrations near all the areas that are benefiting from the outflow of commerce from the West Coast to the Gulf of Mexico and up the Eastern seaboard. We have concentrations in addition to Florida, in the Kansas City inland port, the Chicago inland port, Dallas-Fort Worth, Memphis. So obviously we’re very location-centric. That’s been a key focus, and it’s really worked out well for us.
I think you had shipping containers averaging 57% on the West Coast, 43% on the East Coast. It’s starting to become equal. And who knows? The way it’s going you could see more shipping containers using the global supply chain advantage that the Panama Canal has now enabled for ships to save a lot of money and bring goods to the East Coast. A ship can take three trains’ worth of cargo, so it’s very expensive to bring it from California all over to the East Coast.
So I think our portfolio is very well positioned. We’re in the Port of Charleston, we’re in the Port of Jacksonville, one of our pipeline deals is a large FedEx in Miami. So very excited about the location of our assets.
Then you just highlight my next question. What are you guys seeing from the effects of the Panama Canal expansion already, if anything?
Well, even before it came online, we were seeing effects. Like I said, the shipping container growth has been on the East Coast, so that’s going to continue and the Panama Canal is just going to exacerbate that advantage. It just came online. The first ship went through the locks on June 27, I believe, and it’s just going to continue.
So you’re seeing manufacturers set up shop along the Gulf. We’re going to be exporting liquid natural gas from the Gulf ports. So long-term, our portfolio has really been positioned to benefit and even before the canal came online we saw the benefit.
In addition, with e-commerce you need to be near a FedEx hub in order to take advantage of all the goods migrating from brick-and-mortar to online shopping. We have Walmart building 2.3 million square feet next to one of our FedEx buildings in Florida. That’s two buildings; one is over 1 million square feet, one is just under, but the total is 2.3 million square feet immediately adjacent to our FedEx building. So by virtue of having 7% of the FedEx Ground network, we have great located buildings to benefit from the shift to omnichannel retail.
Okay. And then lastly, could you just add some color on the Minnesota assets you guys are disposing of, the vintage, what the back story is there? Because it seems like it’s quite converse to what we’re seeing for the rest of the portfolio, with very high occupancy and high renewals. So why was that vacant? And then what really pushed the decision to sell it versus seeing it leased up?
Sure. It’s an old FedEx Express building, small building, 59,000 square feet. FedEx is moving into larger buildings. We acquired that in 2001. It’s been vacant since 2013. Minneapolis is not one of the stronger markets. There’s about an 8% to 9% vacancy rate in the market. We’ve been marketing it since 2013 for sale or lease, and right now it’s under contract to be sold. It’s only on our books for $4.3 million, and we’re selling at a rate assuming market rents, it’s about a stabilized low 6% cap rate. So we’re happy to sell it at our carrying cost and redeploy that capital into more modern omnichannel-capable buildings.
All right. Great. Thanks very much.
And our next question comes from Michael Boulegeris of Boulegeris Investments.
Thank you for taking my questions, and congratulations on the Company’s crisp execution and organic growth. Mike, I mean given the growing AFFO and improvement of the dividend payout ratio, could you maybe extend a little on Craig’s question and discuss your strategic thinking in terms of dividend growth, funding the pipeline, securing investment-grade credit rating? I don’t know if you prioritize these, or maybe you could just give us a little more texture in your strategic thinking.
Sure, Mike, and the key word there is prioritizing your goals, because there’s trade-offs. We have a lot of ownership in the stock, and when we raised the dividend on October 1, it was a long time coming and we’d like nothing more than to keep raising the dividend, because it’s the best way to share the earnings with our shareholders. The Company has one of the strongest long-term dividend track records; one of the few companies paying out a higher dividend today than prior to the recession.
And now with a 20% cushion we could certainly contemplate that scenario. The trade-off is, do we want to become an investment-grade Company? Yes. 85% of our rental revenue is secured by investment-grade tenants. No other REIT, not just industrial, any property type, no other REIT comes close to generating that quality of cash flow from investment-grade tenants. So we always viewed ourself as the investment-grade REIT even though we don’t have an investment-grade rating.
Our balance sheet has investment-grade credit metrics, so it’s just a question of, do you want to prioritize taking your secured debt, lowering that ratio, and going unsecured? It’s hard to make that decision to speed up that decision because Kevin has been so successful in getting 65% financing secured, sub-4%. So any day we lock in 15-year money at sub-4% is a good day. It gives us the ability to get high teen levered returns, but it slows down our ability to build up our unencumbered asset pool and go get the investment-grade rating.
The same sort of analysis goes into raising the dividend. The investment-grade rating agencies want to see a big cushion. However, we’re not prioritizing that as much as generating earnings per share growth. And what we do with that cushion remains to be seen. It’s nice to have the ability to raise the dividend if we so desire. But there is a trade-off because there are certain things, certain limitations that will hamper us if we go get the investment-grade sooner rather than later.
And I think it’s going to be an evolution rather than something we’re going to force as fast as possible. Because, look, our assets in the secured market are financeable with investment-grade terms. The life lenders give us 15-year money, 3.75%, sometimes 3.5%; and it’s hard for us to forgo that. It seems in our shareholders’ long-term interest to generate the 20% AFFO per share growth year-over-year that we’ve been generating, rather than go reach for the investment-grade rating.
So the companies that do that often do that because their assets aren’t as financeable as ours are. Ours are highly financeable. So looking at growing our earnings and raising the dividend are certainly paramount in our long-term thinking. Gene, do you want to add to that?
Yes, well we’re in a very sweet spot right now. We’re engaged in what we used to call equity leverage. We’re earning a tremendous amount on any new capital we issue, and we do that precisely because of the factors Michael mentioned. We’re able to do deals at a cap rate that on a leverage basis the equity is earning 12%, 14%. So if we’re issuing stock at $12 we’re earning $1.20, $1.40, $1.50 on new shares.
So it’s a good position to be in, and no one can call the market. We don’t know where the bottom of the cap rates are. We started out doing deals 8.5%, 9% cap rates and we’re down to cap rates that may be sub-6%. But the overall cap rate is sub-6%, but the leveraged cap rate is excellent because of Kevin’s ability to get 3.5%, 3.75%, 15-year money. So it’s a good situation to be in. And we’re dealing only with investment-grade tenants on long-term leases, so we’re very optimistic about the future of the Company.
Thank you for that color. Michael or Kevin, can you discuss pipeline activity with respect to expansions in, let’s say, fiscal years 2017 and 2018? In other words, looking out two calendar years, do you have any thoughts as to what level of activity you’ll have on that front?
Yes. Well, just backing up, we’ve been very successful in generating earnings growth with expanding properties. We’ve done 15 expansions over the last three and a half years. The expansions cost about $53 million and they increased our rents about $5.3 million annually; they resulted in 10-year lease extensions. So it’s been very advantageous having a relationship with FedEx, because most of these expansions have been with FedEx.
We just did a large expansion in the Memphis market for Milwaukee Tool, that was a quarter million square foot expansion resulting in a 12-year lease extension. So you’re absolutely right. The expansions have been a real driver of per share growth and extending our lease maturities.
We only have one expansion going on at the moment, it’s in Southern Texas. It’s a FedEx property, and the lease will get extended 10 years upon completion of that expansion. I feel really good that our pipeline has high land-to-building ratios. Our pipeline has about 8-to-1 land-to-building ratio. So that means the buildings are highly expandable. Our whole portfolio is about 5-to-1 land-to-building ratio, so we have a lot of land adjacent to our buildings to expand our properties. But at the moment, I only have one expansion ongoing.
You never know when the phone is going to ring. We have some large, non-FedEx buildings that are highly expandable that I anticipate will be expanded before the leases fully mature, but I can’t say when that’s going to happen. But I’m pretty confident that we’re going to get some big expansions down the road.
Okay. And finally, with the progress made towards the completion of the Panama Canal expansion in June, Gene, can you share with us your current thinking on how transformative this development will be for, let’s say, East Coast industrial warehouse activity? I know there’s been some range of thoughts on this, but we appreciate your vision.
Well, we think it’s going to be more important than others do. It provides competition for the West Coast. And to the extent that the West Coast becomes noncompetitive for various reasons, then the other areas will benefit. For example, I’ll give a concrete example. Monmouth REIT is really open to doing deals in the Houston area. Some REITs feel that Houston has oversupply or some problems, but we take a long-term view. We think Houston is going to benefit from the Canal.
And if anyone has an investment-grade tenant on a long-term lease in the Houston area, Monmouth REIT is more than willing to buy that property. We think that Houston will benefit greatly from the Canal. And as Michael pointed out, we think Florida will benefit, and we’re into Charleston and we’re into Georgia, North Carolina, South Carolina. So we think it’s very important we build up our portfolio in those areas.
And as the economy grows, and there is a shift to these areas, our properties. REITs are liquid real estate, and we’re in the real estate business, and we have a portfolio that you can’t replace. And the country is growing and the prospects are excellent. So we’re very bullish about the future.
This concludes our question-and-answer session. I would like to turn the conference back over to Michael Landy for any closing remarks.
Well. Thanks, Laura. I’d like to thank everyone for joining us on this call, for their continued support and interest in Monmouth. I’d like to thank the great team at Monmouth for helping to deliver these excellent results. As always, Kevin, Gene and I are available for any follow-up questions and we look forward to reporting back to you in late November with our fiscal year end results. Thank you.
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