Monmouth Real Estate Investment Corporation (NYSE:MNR)
Q4 2016 Earnings Conference Call
November 29, 2016 10:00 A.M. ET
Susan Jordan - VP of Investor Relations
Michael Landy - President and Chief Executive Officer
Kevin Miller - Chief Financial Officer
Eugene Landy - Chairman
Paul Adornato - BMO Capital Markets
Rob Stevenson - Janney
Craig Kucera - Wunderlich
Barry Oxford - DA Davidson
John Benda - National Securities
Michael Boulegeris - Boulegeris Investments, Inc.
Good morning and welcome to Monmouth Real Estate Investment Corporation’s Fourth Quarter and Fiscal Year-End 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 of Investor Relations. Thank you, Ms. Jordan, you may begin.
Thank you very much, operator. In addition to the 10-K that we filed with the SEC yesterday, we have filed an unaudited annual and fourth quarter supplemental information presentation. This supplemental information presentation along with our 10-K 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 assumption, 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 annual 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.
Thank you, Susan. Good morning, everyone, and thanks for joining us. We are very pleased to report our results for the fiscal year ended September 30. Fiscal 2016 was a very strong year for Monmouth. Core FFO per share for the full fiscal year was $0.77 per diluted share, as compared to $0.60 per diluted share last year, representing an increase of 28%.
During fiscal 2016, we acquired eight brand new Class A built-to-suit industrial properties with approximately 1.8 million square feet for $210.7 million. Over this past year, we have continued to see significant growth in e-commerce. Excluding food and fuel, e-commerce now represents 13% of total retail spending. E-commerce continues to be a major catalyst driving industrial space demand. As a result of this increased demand, we have benefited from ongoing expansion activity at many of our existing properties, as well as the addition of several new development properties in our acquisition pipeline.
During fiscal 2016, we completed three expansion projects for approximately $13 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 increased by approximately $1.2 million. The two FedEx leases were extended by 10 years and the Milwaukee Tool lease was extended by 12 years. A 1.8 million square feet of new acquisitions combined with our 261,000 square feet of expansions represents a 15% increase in our gross leasable area this year.
During the fourth quarter, we also acquired two new Class A built-to-suit distribution centers, containing approximately 625,000 total square feet at an aggregate cost of $69.5 million. One acquisition was a brand new 311,000 square foot distribution center leased to FedEx for 15 years located in Orlando, Florida. The other acquisition was a 314,000 square foot distribution center leased for 15 years to FedEx located in Kansas City.
Over the 12-month period, the occupancy rate on our portfolio increased 190 basis points from 97.7% at fiscal year-end in 2015 to a sector leading 99.6% at the end of fiscal 2016. Subsequent to year-end, our occupancy rate increased further to 100%.
With regards to leasing activity in fiscal 2016, 2% of our gross leasable area representing three leases totaling approximately 326,000 square feet was scheduled to expire. As previously reported, all three of these leases have been renewed, giving Monmouth a 100% tenant retention rate for the second consecutive year.
Our fiscal 2016 lease renewals 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, representing an increase of 5.3% on a straight line GAAP basis, and a decrease of 2.2% on a cash basis.
In fiscal 2017, approximately 10% of our gross leasable area consisting of 13 leases totaling 1.5 million square feet is scheduled to expire. To-date, we have renewed four of these 13 leases, representing 501,000 square feet, or 31% of the gross leasable area scheduled to expire in 2017 on a long-term basis.
In addition, we re-leased our FedEx facility located near downtown Fort Myers, Florida for an additional eight months as FedEx is planning to move their operations from our 88,000 square foot facility to a new lease constructed 214,000 square foot facility at the Fort Myers International Airport. This larger brand new facility currently under construction will be owned by Monmouth, as well.
These four renewed leases have an average GAAP lease rate of $5.33 per square foot and a cash lease rate of $5.07 per square foot. This represents an increase of 3.9% on a GAAP basis and a decrease of 4.2% on a cash basis. These renewed leases have a weighted average lease term of 8 years.
The 8 remaining leases scheduled to expire in fiscal 2017 are currently under discussion. We are also proactively working on re-leasing the smaller Fort Myers facility when it becomes available next year. Subsequent to year-end, we acquired one brand new built-to-suit property leased to FedEx containing 339,000 square feet at a cost of $35.1 million.
Additionally, we sold our only vacant building consisting of a 59,000 square foot building in White Bear Lake, Minnesota for approximately $4.3 million. In addition, subsequent to year-end a 51,000 square foot expansion of a building lease to FedEx located in Edinburg, Texas was completed for a cost of approximately $5 million, resulting in a new ten year lease, which extended the prior lease expiration date from September 2021 to September 2026.
In addition, the expansion resulted in an increase in annual rent effective from the date of completion from $600,000 or $5.27 per square foot to approximately $1.1 million or $6.68 per square foot. We are very excited about our best-in-class acquisition pipeline, which now comprises eight brand new Class A built-to-suit properties, containing 2.1 million total square feet, representing approximately $212 million in acquisitions scheduled to close over the next several quarters.
Once again in keeping with our business model, these future acquisitions consist of well located brand new built-to-suit projects currently under construction. These properties will be subject to long-term net leases and 6 of the 8 properties 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.
Approximately 60% of our acquisition pipeline consists of deals with FedEx. The average cap rate on these future transactions is approximately 6.6% and the weighted average lease maturity is 13.3 years. Subject to satisfactory due diligence we anticipate closing these transactions upon completion and occupancy. We have been taking advantage of the highly favorable yield curve and extending our debt maturities as far out as possible.
Our weighted average debt maturity at fiscal year-end was 9.6 years as compared to 8.1 years a year ago. We believe perpetual preferred securities are one of the best instruments to utilize in this historically low interest rate, flat yield curve environment as they never mature.
During the quarter, we issued 5.4 million shares of perpetual preferred stock generating net proceeds of approximately $130.5 million. Our new Series C Preferred has a coupon of 6.125%. Subsequent to year-end, we used a portion of the net proceeds to redeem all of our 7.625% Series A Preferred stock. This transaction represents a substantial decrease in our cost to capital.
The 150 basis point reduction will result in approximately $800,000 in annual savings. In addition, during fiscal 2016 we raised approximately $72.2 million in equity capital through our dividend reinvestment plan, representing a 20% participation rate. With regards to the overall U.S. industrial market our property sector is performing stronger than ever before. Net absorption through the first three quarters is up 18% over the prior year with 213 million square feet of positive net absorption for the nine-month period.
U.S. industrial property sector has now registered 26 consecutive quarters of positive net absorption marking the longest winning streak in over 20 years. This has resulted in a continued decline in vacancy rates following by 90 basis points from the prior-year period to 5.6% currently. New construction has increased with 214 million square feet currently under construction with demand growth continues to outpace supply by a healthy margin.
National rental rates are up 5.1% year-over-year to an average asking rate of $5.57 per square foot. It is anticipated that industrial rent growth will continue in 2017. Many analysts who have followed the industrial property sector closely for quite some time have begun commenting on what we saw early on. And that is that there is something fundamentally different about today's market that is driving demand growth to these record levels.
The fundamental change is largely due to the structural changes in the supply chain brought about by e-commerce. We feel that we are still in the very early stages of this secular shift toward online consumption and that these favorable changes will persist for many years to come. The migration towards online shopping is once again the big story this holiday season.
We have carefully put together a portfolio that is benefiting from the rise of e-commerce. Our portfolio is currently 100% occupied and clearly our linkage to the digital economy is one of the big drivers of our success. And now Kevin will provide you with greater detail on our results for the quarter and for fiscal 2016.
Thank you, Michael. I will start off by discussing some of our key financial indicators for the fourth quarter and then move into some of our key financial indicators for the full fiscal year. Core Funds from Operations for the fourth quarter of fiscal 2016 were $15 million or $0.22 per diluted share. This compares to core FFO for the same period one year ago of $9.2 million or $0.15 per diluted share. This represents a 47% increase in core FFO per diluted share.
Adjusted Funds from Operations or AFFO, which excludes securities gains or losses and excludes lease termination income were $12 million or $0.18 per diluted share for the recent quarter as compared to $9.2 million or $0.15 per diluted share, a year ago, representing a 20% increase in AFFO per share. Rental and reimbursement revenues for the quarter were $25.6 million, compared to $20.6 million or an increase of 24% from the prior year.
Net operating income is increased $4.1 million to $21.8 million for the quarter, reflecting a 23% increase from the comparable period a year ago. This increase was due to the additional income related to 10 properties purchased during fiscal 2015 and eight properties purchased during fiscal 2016.
As Michael mentioned earlier, we acquired two brand new properties for a total of $69.5 million during the fourth quarter. One of the acquisitions, the 311,000 square foot FedEx facility in Orlando, Florida was $37.8 million and we financed this transaction with a 15-year self amortizing mortgage loan in the amount of $26.4 million at a fixed interest rate of 3.89%.
The other acquisition of 314,000 square foot distribution Centre in Kansas City also leased to FedEx was for $31.7 million and we financed this transaction with a 15-year self amortizing mortgage loan in the amount of $22.2 million at a fixed interest rate of 3.96%. Both of these properties contain 15 year lease terms. While most of our growth is attributable to our acquisitions and expansions, we have been able to grow organically as well. The NOI for the three months ended September 30, 2016 increased 3.5% on a U.S. GAAP basis and increased 4.1% on a cash basis.
Subsequent to year-end, we acquired one additional property, a brand-new 339,000 square foot facility and Buffalo New York for $35.1 million financed with a 15-year self amortizing mortgage loan in the amount of $23.5 million with a fixed interest rate of 4.03%. This facility is leased for 15 years to FedEx as well. We expect this recently closed acquisition and the other transactions scheduled to close later this year to positively impact our results going forward.
In addition to the pipeline of deals Michael discussed, we are very well positioned to continue to pursue additional acquisition opportunities. I would now like to discuss the financial results for the full fiscal year. Core FFO for the full fiscal year 2016 was $50.3 million versus $35.3 million in 2015. On a per share basis, Core FFO was $0.77 per diluted share in fiscal 2016, compared to $0.60 per diluted share in 2015, representing a 28% increase.
AFFO, which excludes securities gains or losses and excludes lease termination income was $0.70 per diluted share for fiscal 2016 as compared to $0.57 per diluted share a year ago, representing a year-over-year increase of 23%. Growing our AFFP per share has been the key focus of ours and in percentage terms this marks our third consecutive year of double digit AFFO per share growth.
Given our recent acquisition and leasing, coupled with our robust acquisition pipeline, we anticipate continuing to meaningfully grow our AFFO per share going forward.
Rental and reimbursement revenues for the year were $94.9 million, compared to $77.8 million, or an increase of 22% from the prior year. Net operating income increased $14.9 million to $80.2 million for the year, reflecting a 23% increase from the comparable period a year ago.
Same-property NOI for the 12 months ended September 30, 2016, increased 3.9% on a U.S. GAAP basis and increased 4.4% on a cash basis. With respect to our total property portfolio, end of year occupancy increased 190 basis points and was 99.6% at September 30, 2016, as compared to 97.7% at fiscal year-end 2015.
Subsequent to year-end, as a result of our sale of our White Bear Lake, Minnesota property for $4.3 million, which was our approximate net book carrying value, our occupancy rate increased to 100%.
Our weighted average lease maturity continues to increase, and as of year-end was 7.4 years, as compared to 7.2 years at the prior year end. Our weighted average rent per square foot increased to $5.72 as of the recent fiscal year end, as compared to $5.48 at the end of fiscal 2015.
As Michael mentioned, our acquisition pipeline now contains 2.1 million square feet, representing eight properties, with approximately $212 million in total costs. These brand new built-to-suit properties are all currently under construction and they are scheduled to close over the next several quarters.
To take advantage of today's attractive interest rate environment, we've already locked in very favorable financing for five of these acquisitions, which represent an aggregate cost of $153.7 million, and total 1.5 million square feet. The combined financing terms for these five acquisitions consists of $101.2 million in proceeds, representing 66% of total costs, and has a weighted average fixed interest rate of 3.83%, all five financings of a 15-year terms and our self amortizing loans. These five acquisitions result in a weighted average leverage return on equity of approximately 15%.
On September 30, 2016, we entered into a first amendment to our existing $130 million credit facility to exercise its existing $70 million accordion, increasing the facility to $200 million. The amendment also adds an additional $100 million accordion feature, bringing the total potential availability up to $300 million.
In addition, the amendment extended the maturity date, which was set to mature in August 2019 to now mature in September 2020, and has a one-year extension option at the discretion of the company.
As of the end of the fiscal year, our capital structure consisted of approximately $618 million in debt, of which $484 million was property level fixed rate mortgage debt, $81 million were loans payable, including $76 million in draws under our line and $53 million was preferred stock called for redemption. 86% of our mortgages and loans payable are fixed rate, with the weighted average interest rate of 4.5%, as compared to 4.9% in the prior year period.
We also had a total of $193 million in perpetual preferred equity year end. Combined with an equity market capitalization of approximately $984 million, our total market capitalization was approximately $1.8 billion at year end, representing a 53% increase from a year ago.
From a credit standpoint, we continue to be conservatively capitalized with our net debt to total market capitalization at 29%, and our net debt plus preferred equity to total market capitalization at 40% at year end. For the fiscal year ended September 30, 2016, our fixed charge coverage was 2.5 times, and our net debt to EBITDA was 6.7 times.
From a liquidity standpoint, we ended the year with $95.7 million in cash and cash equivalents. We also had $124 million available under our recently expanded credit facility, as well as an additional $100 million potentially available from the accordion feature. At fiscal year end, we held $73.6 million in marketable REIT securities, representing 5.3% of our undepreciated assets.
Our securities portfolio delivered outstanding results this year with net realized gains of $4.4 million, as compared to $806,000 in fiscal 2015. At year end, our REIT securities investments held an additional $12.9 million in unrealized gains.
During the fiscal year, we earned dividend and interest income from our securities portfolio of $5.6 million, as compared to $3.7 million in fiscal 2015. This fiscal year, we fully repaid a total of six loans, associated with five properties, with unamortized balances totaling $14.7 million, which unencumbered approximately $83 million worth of properties to enhance our financial flexibility and further strengthen our already strong credit profile.
And now let me turn it back to Michael before we open up the call for questions.
Thanks, Kevin. To summarize, fiscal 2016 was a very productive year for Monmouth. The year began with a 6.7% dividend increase and culminated with our recent $135 million preferred equity offering.
During the year, we grew our portfolio to over 16 million square feet, comprising 99 properties geographically diversified across 30 states. This growth was generated without sacrificing our high standards. The quality of our asset base is evidenced by our 100% tenant retention rate, as well as our 100% occupancy rate.
We have achieved a 100% tenant retention rate in four of the past seven years. As our long-term investors have experienced throughout many business cycles owning mission critical facilities leased long-term to investment grade tenants provides for very reliable and predictable income streams. We have strengthened our already strong position this year by increasing our weighted average lease maturity to 7.4 years, extending our weighted average debt maturity to 9.6 years, reducing our weighted average interest rate on our fixed rate debt to 4.5%, and reducing the weighted average age of our portfolio to 9.5 years.
During fiscal 2016, we have grown our total market capitalization by 53% to over $1.8 billion, and we continue to maintain a very strong balance sheet with a net debt to total market capitalization of 29%. Our recent acquisition activity has contributed to a 23% improvement in our AFFO per share earnings this past fiscal year. And with our $212 million acquisition pipeline, we anticipate additional growth going forward.
I'm very pleased to report that Monmouth recently launched our new and improved website. Our new website affords the visitor a visual tour of our state-of-the-art industrial portfolio and contains a vast database of useful information to best serve the investment community. I encourage you to visit our new site, so you can see for yourself.
Monmouth will soon be celebrating our 50th anniversary as a public REIT, and we look forward to continuing to deliver strong results and building enduring value for our long-term shareholders for many years to come.
We’d now be happy to take your questions.
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Paul Adornato of BMO Capital Markets. Please go ahead.
Hi, good morning.
Hey, Mike, I was wondering if you could talk about how investment spreads hold up in periods of rising interest rates, and what we're seeing during this cycle?
Yes, sure, Paul. Cap rate compression continues. Industrial average cap rate recently published by Green Street was 5.5%, in certain markets it's below 4%. We closed on our pipeline in 2016 at an average cap rate of 6.7%. The pipeline currently in place for fiscal 2017 has a cap rate just 10 bps below that, 6.6% average cap rate. So because we are locking in forward to be built Class A built-to-suit properties we are able to lock in higher than on the spot cap rates as we have stated in prior calls. But cap rates continue to come down, largely driven by foreign capital that wants to be in dollar denominated assets, industrial property is the best performing food group in the real estate sector and so you have a lot of capital coming in from overseas looking to invest in industrial real estate. Rising interest rates should result in leveling off, if not an increase in cap rates, but to date we have not seen that.
Okay, thanks. And if it is still a landlord's market, was wondering if you could talk about the transferability, if you will, of build-to-suit versus the spec market. What I'm getting at is would a tenant that would normally lease space in the spec market be more likely to do a build-to-suit given the tight market conditions?
Well, there is such a insatiable, voracious demand for industrial space that the developers, some of our peers in the REIT sector are doing very well building spec. They are getting construction yields in the low 7’s. They are having 70% pre-leasing success. So there is such demand that there is a lot of spec going on. I think that most of the new construction going on today is spec building, but the tenants we have in our portfolio require very specific built-to-suit product. So they are not interested in spec. They make huge investments in the automation inside the building, it requires very state of the art facility and they cannot only in rarest circumstances in certain markets when there is just nothing available will they go into a spec building, but for the most part the tenants we do business with are looking for custom product and so we have been in the built-to-suit market, but the spec markets are very good market and like I said, the 180 million square feet currently under construction is predominantly spec based.
Okay, great. And finally, was wondering if you could tell us what proportion of your portfolio has contractual rent increases?
The FedEx leases tend not to have contractual rent increases. They are pre-dominantly 15 year leases these days and what they do have increases they are not that meaningful slight increase in your six, slight increase in your 11. And that is about half of our portfolio. Now the other half of our portfolio, all of those leases, predominantly all have increases, annual increases and those can range from 1% to 3%.
Okay. So, net, net portfolio wide if it is one and change would you say is the contractual rent increase?
Kevin you want to drill down on that?
I mean, I would say it is probably a little higher than that and you could see from our same store comparison in our supp on page 7 & 8 of 23 that for the current year for the 12 month we actually had an increase in rents of 3.9% on a GAAP basis and about 35% of that was generated from increase in rents and then the other 65% of that was generated from filling up some vacant properties. So, I would say any way, so I would say about 1.5% to 2% if you took the - if you want to average in the flat ones.
One thing, Paul in your analysis to factor in is we’ve been getting a lot of expansions too. So, the expansions result in substantial rent increases, albeit at the cost of us putting up capital to fund the expansion, but in addition to forecasting, modeling what our rent growth in the future is going to look like, I think it helps to look at the expansion from rents which took low $5 range into the high $6 range as a result of all those expansions.
Great, thank you.
Our next question comes from Rob Stevenson of Janney. Please go ahead.
Good morning guys. Michael, can you talk a little bit about the acquisitions that you have got, the eight that are in the pipeline today, timing of those? I mean is there any sort of lumpiness or back-end weighting or front-end weighting towards the next sort of four or five quarters with that? Or is it all sort of ratably sort of likely to flow in evenly over the next year plus?
Great, sure. I’m happy to drill down on that. So, we have you know about 2.1 million square feet $212 million spread out where about 1.5 million square feet will be hopefully consummated in fiscal 2017 and the remaining 650,000 square feet flowing into fiscal 2018. The portfolio has several 15 year leases and that results in a weighted average lease term for the eight built-to-suit constructions that are currently under development having 13.3 years of weighted average lease terms. So, good visibility of earnings.
The portfolio is about 60% FedEx, 40% non-FedEx; we logged the locations of the pipeline, we have a new construction going up in Miami and the Port of Charleston and so as a result of the Panama Canal those are highly coveted markets and we are happy to have new Class A product being developed in those locations. So, yes, it is a great pipeline, 60% FedEx, 40% non-FedEx, over 13 years of weighted average lease maturity and I guess three quarters in, roughly three quarters in 2017 and 25% flowing into 2018, and our portfolio is growing quarter-after-quarter and we hope it will continue to do so.
Of the 40% that is non-FedEx, are there any new tenants in there that aren't currently in your portfolio somewhere else?
Yes, there - one, so there is three non-FedEx, International Paper is one and that is already a tenant in our roster and Autoneum is another and they are already in our roster, and Cooper Tire is a new tire tenant for us. So we have a building going up in the automotive area of Charleston, South Carolina for Cooper Tire. Actually Cooper Tire that’s Ohio. So Autoneum is in the Charleston market and Cooper Tire’s in the Cleveland market.
Okay. And then as you look out, I mean how challenging right now is it to backfill the year end - fiscal year end 2017 pipeline into 2018 and 2019 at this point? Is it - you have got $212 million under contract; I mean sitting here from a year from now is that - with the deals that you are seeing coming across your desk now are you confident it’s going to be at least $200 million plus? And sort of what are you seeing out there in terms of opportunity set for you guys?
Well the first metric I will say in answering that is we are now 26 consecutive quarters of positive net absorption, its unprecedented, new supply is increasing but it just cannot keep up with demand. And demand this year has been growing even in the face of slowdown in manufacturing slowdown in global trade, so e-commerce has been the big catalyst, I anticipate manufacturing and global trade to increase going forward and so there’s going to be a lot of new construction to keep up with demand and while we have bids out on more built-to-suits, the pipeline is what it is today and there is a lot of aggressive bidders out there and I hope to grow the pipeline, I can't really speculate on your 18 and 19, but we have substantial relationships, our pipeline right now, the eight constructions are with six different merchants merchant builders and so we have broad range of relationships out there bringing us quality constructions. We've great relationships with our tenants and given the growth you’ve seen over the last several years 15% to 25% growth in GLA year-over-year I anticipate that continuing to be the case going forward.
Any expansions that you guys are likely to kick off in the next quarter or two?
You know expansions. The first thing I’d mention with expansions is land to building ratio in our portfolios 5.1 to 1. So we have ample land to grow our portfolio and we have certainly done about 13 expansions in the last two years. You never know when you're going to get those calls from tenants asking you to expand the buildings. We’ve got numerous calls from FedEx, calls from non-FedEx tenants as well. We recently completed a quarter million square foot expansion from Milwaukee tool in Memphis and well tenants have expressed interest in growing with us. I can't really announce anything until we get a signed lease, but I do anticipate continuing to grow with the expansions. We certainly have the land to accommodate that.
Okay. And then just last question from me. You talked earlier in your comments about four of the 13 upcoming leases have been put to bed already, eight that you’re still working on. Is there anything in that eight that you know at this point is likely to move out and that you are going to have to re-tenant? Or when you look at the early fiscal 2018 leases, anything there as well that you know that is likely to move out and that you are going to have to re-tenant?
Well with the 2017 - in our prepared remarks we mentioned Fort Myers we're putting FedEx into a larger facility at the airport, what will happen to the 90,000 rounding up square foot facility outside of downtown Fort Myers likely we’re going to have to find a new tenant in that facility and we were currently marketing that facility. Coca-Cola renewed for 10 years in the Phoenix market, we're very happy with that. I don't have a definitive move out of the 13 properties expiring in fiscal 2017 with the exception of the other of FedEx Fort Myers.
We will continue to update you quarter-to-quarter. We have a lot of interest in long term renewals. I mean where fiscal 2016 renewals average 4.1 years or 17 renewals are now at eight years and in addition to the eight years we’ve already signed we have indication that several others are going to be for even longer than eight years. So, the good news with our fiscal 2017 renewals is the term is substantial.
The downside is where our average rent in 2016 was about $4.10 a square foot and we got substantial rent increases even though the 2017 renewals are being signed at higher rents they’re rolling from an average of $6, so I don’t anticipate the positive leasing spreads we generated last year, but hopefully we have another year of 100% tenant retention, but I guess having to said that that’s going to be really hard with Fort Myers.
But we are shooting for low 90% tenant retention in 2017 and there is nothing definitive that FedEx is absolutely moving out. It’s probable, but given the growth in e-commerce and what’s going on in this holiday season we have several markets where FedEx is in more than one building and that may be the case in Fort Myers, but right now we’re assuming that they’ll be moving out.
Okay, thanks, guys.
The next question comes from Craig Kucera of Wunderlich. Please go ahead.
Hi good morning guys.
Good morning Greg.
I wanted to ask about your G&A. I think your cash G&A was up maybe about 20% year-over-year and you had a big pickup in the fourth quarter on the non-cash side. Can you give us some thoughts maybe on how we should think about fiscal year 2017 and going forward both on the cash and non-cash side?
Sure. I’m going to go first and then I’m sure Kevin is going to drill down back even further, but we watched G&A we are very happy that we can manage hundred properties going on 18 million square feet with G&A lower to $110 million annually, many of our peers are north of that quarterly. G&A was up 26% in fiscal 2016 from $6.3 million to $7.9 million. However, gross assets were up over 30% and therefore G&A as a percentage of gross assets went from 61 basis points to 57 basis points. So the company is more efficient, we're growing the company at a higher rate than G&A is growing, but G&A is going to continue to grow because when you grow a company 15% to 25% in square footage annually, you're going to have to increase manpower. So, we’re trying to run the company as efficiently as possible, but - and it is getting more efficient because the growth is outpacing the G&A growth. Kevin, you want to add to that?
Yes the only thing I would like to add is, in addition to it being only 57 basis points of gross asset, it’s also in line year-to-year with gross revenue it is about 8% G&A is about 8% of gross revenue for the last two years. So, as Michael mentioned as we increased the portfolio and increased revenue G&A is staying in line and for the future we plan to continue those ratios, keeping it at 8% and keeping it at in the 50 basis points range of total assets. And if you want to see the detail of what makes up G&A you can look on page 45 of the K. We gave a detail of why we had an increase this year.
Okay, great. Kevin, since your fiscal fourth quarter we’ve had a pretty meaningful move in the 10-year, it may be on average just call it 70, 75 basis points. Can you comment on when you might be thinking or be able to lock in financing on the remaining three buildings in the pipeline? And is it fair to assume that it might be somewhere in the 70 to 80 basis points above where you locked in during the quarter? Or have you gotten any sort of quotes or feel for things at this point in time?
Yes, as I mentioned we have locked in five of the eight deals so far, $153 million in properties with $101 million in loans. They are all 15 year fully amortizing loans at a fixed weighted average interest rate of 3.83%. So the three remaining deals those are further out in the future. They are just a little too far out to lock in right now and the feeling I’m getting even though in all of these five deals that I have locked in that was before the spike in interest rates a couple of weeks ago. I have been waiting I wanted to just wait a little longer so that I can lock them in and try to lock them in as soon as possible because it is uncertain where interest rates will go, but the feeling I’m getting is though, even though rates are going up, the spreads are reducing, it maybe not as much. But we still feel that, we’ll get significant leverage returns on these three remaining deals.
Yes, just to add to that, Craig yes, the treasury going up 90 bps. The interest rates probably went up 40 bps, if that 30 to 40 bps on the 15-year fully amortizing loans. So where Kevin locked in at 3.9, it will be 4 in a quarter or less.
Okay. You mentioned that two of the eight tenants I think in the pipeline are non-investment-grade. Do you find any meaningfully different terms in those transactions whether on the acquisition cap rate side or maybe what the bank is willing to finance that at or are they fairly similar?
No. No, they're different. They're absolutely on both, the cap rate and the financing, and that's why we stick to our model. We only do long-term leases to investment grade tenants. The times we make exception are for various reasons, such as their investment grade quality, but non-rated. It's a smaller property and it's going to be a real quality construction in a market we want to be in and we're happy with the tenant, where we have a relationship with the tenant.
So in this case, the developer is based in Cleveland. We've done many deals with them. They're building for Cooper Tire. They've been in that market for over 25 years. They need a bigger building. And so, the cap rate on that will be, oh, on average 100 basis points higher than our normal cap rate. So, well, the financing won't be one 100 basis points greater than our average 15-year fully amortizing loan to investment grade credit, the cap rate is.
So the leverage return kind of mitigates the risk. You'll get a much higher leverage return. On the investment grade deals, we've been getting 15% returns on equity. On the non-investment grade deals about 20% returns on equity. But again, we only do them for special circumstances, they're not big buildings. They're in great markets, quality construction, and there's a story. There's a manufacturing plant for Cooper Tire right there. They've been in the market for quite some time. And so, we'll go ahead and do a non-investment grade deal. But for the most part, we stick to an innings.
Okay. And one more for me. You’ve got a healthy amount of mortgages maturing over the next year or two. Are there any quarters where those maturations are a little more lumpy? How should we think about it from a modeling perspective?
Yes. So, this year we paid off six loans for five properties, about $14 million in loans. It created about $83 million of freeing up properties worth about that. And in the future, we do have a lot of loans coming up. I feel that in the - right now, we have 64 loans, there’s 35 free and clear properties. And by the end of next year, we’ll free up - right now we have about $60 million of NOI from the unencumbered properties. And by paying off of the loans for next year, we’ll probably increase the unencumbered NOI to about $26 million and then by September 18, we’ll probably go to about a little over $30 million.
So, yes, I mean, we definitely have some mortgage loans maturing that are at higher interest rates. And they’ll be able to free up our unencumbered properties and - for NOI generated from those properties.
Okay, thanks, guys.
Our next question comes from Barry Oxford of DA Davidson. Please go ahead.
Great, thanks. Great numbers, guys, as usual. Mike, when you think about driving same-store NOI in 2017, given the fact that you are a 100% leased and maybe your mark-to-market isn't going to be as great. Are we going to see that number may be slow just because you're a victim of your own success so to speak?
Yes, I agree with what you said, Barry. We’re 100% occupied. The mark-to-market is not going to be as steep as it was in 2016. But another aspect of same-store that’s unique to Monmouth relative to our peers is, we have substantial amount of building expansions. And whenever a tenant requests a building expansion, it’s economically a home run for us, but it comes out of the same store pool. We have to pull out of the pool, because we're funding the expansion, but the numbers are phenomenal.
So, yes, our same-store growth lags our peers and we're happy to give up growth for quality. Were happy to lock in FedEx, Coca-Cola, Anheuser-Busch, et cetera for 10 years rather than play the zero sum game of who's going to pay the highest rent, they'll get the space in the other guys out the door.
So, we give up growth for quality just the nature of our model. We're a little bit different, it's not a zero sum game. And so, yes, same-store growth is not going to be as eye opening as perhaps some of our peers.
Right. No, I mean, nothing wrong with that clearly with the way you guys are doing things, can argue with 100% occupancy. Mike, when you look at the security gains in 2017, I mean, can you give us any type of window into what that number might look like, or is this just one of the things, Barry, look, it will be what it will be and it will happen when it happens?
I'm going to go first and the team's topping at the bit to go on record on that one. But let me go first, because it's interesting what's going on with the whole public equity arena. Most of the liquidity in the market is driven by ETFs. And the ETFs are, you wonder what's the world going to look like when computers take over from what up until now it’s been controlled by human beings. While if you look at the securities market, you get a window into what the world's going to look like. And what it looks like is, these robo investors buy high, sell low, they don't know what they’re owning, and they create real opportunities to invest especially in the REIT sector, where the public REIT arena is only 15% of the total market, so you get some real opportunities.
Having said that, there's - right now, there's not like screaming bargains, but we've been able. If you look in our K, our weighted average yield on our portfolio in 2016 was 8%. And right now it's a little over 7% and we generate substantial gains $4.4 million of realized gains in the end of the year with over $12 million unrealized.
When - right now, we're kind of in the bandwidth between buying and selling, I'm not doing either at the moment. But it is amazing that the robo investing is, reminds me of, I think active investing will be the story in 2017. It reminds me of CDOs. You had CDOs and then after the subprime market collapse, they talked about synthetic CDOs and CDO squared, very few people were talking about that until the bubble burst.
Right now, you have the ETFs to ETFs and by virtue of stability be getting instability, I think, passive investing will be get active investing and it’s just too much the markets being driven by algorithmic investing. And so you can find real estate cheaper on Wall Street if you watch closely. Eugene, you want to add to that?
Well, I want to repeat what you said, because it's absolutely correct. You've heard us detail the rising values of properties. You’ve heard us detail that the cap rates continue to go down, and this is true for the entire REIT sector. So, we believe in the REIT concept. We believe that REITs are liquid real estate, and that it makes a lot of sense to invest in liquid real estate. And at times real estate is cheaper on Wall Street than it is on Main Street, and this is one of those times.
So we have a lot of confidence in the portfolio we hold, and we’ve had very sizable gains. We've been doing this for more than a decade and the results continue to be excellent. And looking forward to 2017, we expect good results again from our securities portfolio.
Great, thanks, guys. One last question, on the - you have another preferred that can be recalled, I think, in 2017, is that right?
I think, may, end of May, yes.
Right, yes. Mike, when I look at where your stock price is right now, would you be tempted to replace that with equity, where you like, Barry, I'd like to have a certain amount of preferred of my capital structure. So I'm going to stick with replacing that with another preferred?
Well, just backing up to those C that we just issued to redeem the A, we're always in vision meeting an investment grade rating to do a six in A’s preferred. And after Brexit happened, the 10- year treasury note went to the lowest it's ever been, I think, is 1.32% and we were able to do perpetual capital at six in A’s. And we’ve been extending all our debt maturities as far out as possible lowering our weighted average cost to capital and this was just a big step in that continuum.
The series B is at seven and 7% and 7.875% we’d absolutely love to replace it with perpetual capital in the low sixes. So, hopefully the yield curve will not be dramatically different next May and June and we could do another preferred. We are taking a long-term view, we fund our assets with long-term capital and we are big believers in having a good tranche of perpetual preferred on our balance sheet. We’re glad we cleaned up the A and we look forward to cleaning up the B in fiscal 2017. Eugene you want to had to that?
You're leaving me Michael I have to [indiscernible], but it is important. We study other REITs, we find that REITs that have lower tranches of preferred in the balance sheet over the decades outperform other REITs. And we're going to follow that model and we're going to have large tranches of capital in that balance sheet, being preferred stock. When you do that there is no risk of maturities you are only required to pay the preferred dividend and if the real estate grows in value, all of that growth is attributable to the equity, the common shares. So, we're very interested in issuing preferred shares in 2017 and for years and years on. We want to have a large percentage of our capital in preferred shares. We think that’s much more important by the way. Yes, yes we’ve run sharp pencils here and we are very conscious of whether we can save a percent or percent and a half, but it’s more important that we have preferred equity as part of our permanent capital.
Got it, thanks. Thanks for the insight, guys.
Our next question comes from John Benda of National Securities. Please go ahead.
Hi good morning guys, how are you today?
Just a question for you. Thinking about the constrained environment out there with new construction and the demand picture, is there a willingness at all for MNR to get into some of the rehab opportunities or even perhaps some merchant building sort of space?
Okay. And then also, thinking about the type of environment that we are in with rental rates per square - slated to rise the next couple years, how do you guys think about balancing your average lease maturity? I know that it was somewhat down in the 6s in 2014 and now it is kind of inching back up into the 7s. How do you think about where that number should be in terms of a rising rent per square foot environment?
Well, I wouldn't call it an inching back up it is about 7.5 years now and with our new pipeline or 15 year leases, our expansions at tenure renewals and our lease renewals averaging eight years is going to continue to grow up and that’s our model. Our man model is done high-quality income streams that are reliable and predictable for the long-term. So the greater that number the better and that goes back to a conversations about having preferred equity on the balance sheet. You want predictable visible income streams from investment grade credits as far as the eye can see and very little debt maturity risk and a strong balance sheet. It is a very conservative business model. I know other people prefer shorter team term leases and there is other property types that will provide that and there is other industrial reads that will provide that and you get a higher return, but on a risk-adjusted basis they prefer our model.
Just wanted to add one more thing on the lease term of seven years, on the 99 properties 64 from that have loans we have a weighted average of fixed rate mortgage of about 10.5 [indiscernible]
Okay. I’m sorry your line is too noisy, can we go to the next caller please.
Our next question is Michael Boulegeris of Boulegeris Investments, Inc. Please go ahead.
Thank you for squeezing me in and congratulations on an outstanding fiscal year. Mike, does the prospect of rising interest rates perhaps maybe modulate your thinking in terms of the timeline in achieving an investment grade credit rating? And are the credit agencies mindful of the, let’s say appreciating portfolio, particularly like Orlando like being sandwiched in between FedEx and also your value add in terms of the embedded growth? Really I would praise it in terms of the property that you acquire initially when you secure an acquisition.
Great, great. So the property Mike's reference to is our FedEx in Orlando adjacent to Interstate 4 where Wal-Mart recently built 2,4 million square feet, two giant e-commerce fulfillment centers one on each side of a FedEx facility. So we go to our investor presentation, I think it’s on slide 18 you will see a picture of a FedEx building sandwiched in between e-commerce fulfillment centers that Wal-Mart developed. Anyhow that speaks to the mission-critical locations that our portfolio entails. Our FedEx assets are magnets where retailers need to set up as close as possible in order to get the goods delivered to the consumers as fast as possible.
So, all our FedEx locations represent really highly coveted locations. As far as the timetable on achieving an investment grade rating, we’re not going to rush it if that’s your question. I think an investment grade rating benefits an issuer when they reach a certain critical mass and the mass is subject to debate. 3 billion in assets, 4 billion in assets and having the ability to issue unsecured debt and investment grade rating starts to be beneficial. Now, we're not there we're growing at a certain rate, but there is no reason to rush that.
Investment grade rating today, while we could probably get one soon would mean forward going the secured financing terms that the life lenders have provided, which are superior to unsecured investment grade parameters. So we’d rather continue borrowing on a secured basis focus our priority on AFFO per share growth rather than accessing the unsecured debt market. There will be a time and place for that. We’re just not there yet and again borrowing secured on a long-term lease to investment-grade tenant entails a lower cost to capital than the unsecured market at this time.
Right. And then quickly the market seems to have braced the potential for pro growth economic policies going forward. Mike, have you seen any pick up or acceleration of let's say strategic decision making that may be putting more potential deals across your desk? And maybe for Gene, can you give us your maybe historical perspective of real estate as a hedge against inflation? Should we be entering a phase with greater let's say fiscal stimulus? Thank you.
It’s a real open-ended question where the markets have been up, I think 15 consecutive days and it certainly this long period of monetary activism held back the economy and the market seems to be rendering a verdict, if the free markets truly can be free again it certainly is a positive, having smart people advise the President-elect is encouraging. I see they met with Fred Smith. No wiser person on global trade than FedEx’s founder. So, we are optimistic I don't like the protectionist isolationist mercantilism. I think that’s just rhetoric to tactical positioning to get fairer trade deals rather than retreatment and play the zero sum game and be a net exporter, imports are great for the industrial property sector, a return of domestic manufacturing would be great for the industrial property sector.
We are now a net exporter of liquid natural gas, which is the first time in 50 years, it took us a year once they lifted the regulation we came in our net exporter of liquid natural gas. So, the prospects if you let the free markets be free are very encouraging for meaningful economic growth. We are in the right place though. I mean you’ve had sub 2% economic growth, but e-commerce has been growing at 15% to 20% and our company has been growing at 23% per share earnings growth. For the last three years now. So, we’ve been in the right place and I am encouraged by the end of monetary activism. Gene.
Two things. First it is amazing we tenderly are getting on equity now. As spent equal two with the best in the history, we are earning 12%, 13%, 14%, 15% on equity. As our stock price rises the unique thing that happens is the thing called equity leverage. We actually earn more on the equity on the new stock. If you issue stock at 15% and can earn 12% that’s a dollar 80 a share.
Now in addition to that what Mike has pointed out as are large term investor we think the FFO is a good measure, but we think total return is a better measure and we believe that over the next 5, 1, 15 years that these properties have grown value and that the return is even greater in the long term, but we believe there will be 3% inflation and 3% growth and that’s not measured in current income. So because of that we are going through our best to keep our pipeline growing to raise equity at these current prices and therefore be able to grow our FFO per share at a very good level.
This concludes our question-and-answer session. I would like to turn the conference back over to Michael Landy for any closing remarks.
Thank you, Carrie. I would like to thank the participants on this call for their continued support and interest in our company. As always Kevin, Gene and I are available for any follow-up questions. On behalf of Monmouth I’d like to wish everyone a happy healthy holiday season and a very prosperous New Year. We look forward to reporting back to you after our first quarter. Thank you.
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