Monmouth Real Estate Investment Corporation (NYSE:MNR) Q1 2017 Earnings Conference Call February 9, 2017 10:00 AM ET
Susan Jordan - VP of Investor Relations
Michael Landy - President and Chief Executive Officer
Kevin Miller - Chief Financial Officer
Eugene Landy - Chairman
Robert Stevenson - Janney Montgomery Scott LLC.
Barry Oxford - D.A. Davidson & Co.
Paul Adornato - BMO Capital Markets
Craig Kucera - Wunderlich Securities
Michael Boulegeris - Boulegeris Investments, Inc.
Good morning and welcome to Monmouth Real Estate Investment Corporation’s First Quarter 2017 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-Q that we filed with the SEC yesterday, we have filed an unaudited first quarter supplemental information presentation. This supplemental information presentation along with our 10-Q are available on the Company's website at mreic.reit.
I would like to remind everyone that certain statements made during this conference call which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements that we make on this call are based on our current expectations and involve various risks and uncertainties.
Although the Company believes the expectations reflected in any forward-looking statements are based on reasonable 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 first quarter 2017 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. We are pleased to report our results for the first quarter ended December 31, 2016. Our property portfolio is 100% occupied representing a 120 basis point increase over the prior year period and a 40 basis point increase over the prior quarter. In terms of per share earnings, it was another record quarter for Monmouth and represents an excellent start for fiscal 2017. Kevin will have more to say on our financial results later.
During the quarter, we acquired two brand new Class A built-to-suit properties. These acquisitions contain a total of 552,000 square feet and were purchased for an aggregate cost of $56.1 million. Both properties are leased to FedEx Ground with a weighted average lease term of 13.1 years.
The cap rates for these two acquisitions averaged 6.6%. From a run rate standpoint, we expect these two properties to generate a combined total of approximately $3.7 million in annual rent. We financed these two acquisitions with a total of $38 million in fixed rate 15-year fully amortizing mortgage debt with an average interest rate of 4%.
Also during the quarter, we completed 51,000 square foot expansion at our FedEx building in Edinburg, Texas. This expansion was completed for a cost of approximately $4.8 million and resulted in a $500,000 increase in annual rent effective from the date of completion. This expansion also resulted in a new 10-year lease which extended the prior lease expiration date from September 2021 to September 2026.
At the end of the first quarter, our gross leasable area was approximately 16.6 million square feet representing 15% increase over the prior year period. Our portfolio now consists of 100 properties geographically diversified across 30 states. Our weighted average lease maturity at quarter end increased to 7.4 years from 7.1 years in the prior year period.
From a leasing standpoint in fiscal 2017 approximately 9% of our gross leasable area representing 13 leases totaling approximately 1.5 million square feet was scheduled to expire. I am pleased to report thus for six of the 13 leases have been renewed.
As reported last quarter our 87,500 square foot building lease to FedEx in Fort Myers, renewed for only eight months because they're in the process of moving their operations to our newly constructed 214,000 square foot building at the Southwest Florida International Airport.
Excluding the eight-month lease renewal, which we are already working on backfilling, the five leases that have renewed thus far represent approximately 719,000 square feet were 47% of the expiring square footage and have a weighted average lease term of 5.9 years. These five renewals have a weighted average lease rate, $5.34 per square foot on a GAAP basis and an initial rent of $5.16 per square foot on a cash basis.
This represents an increase in the weighted average lease rate of 2.7% on a GAAP basis and a decrease in the weighted average lease rate of 2.8% on a cash basis. The seven or remaining leases that are set to expire this fiscal year were currently under discussion and we expect to have more to share with you in ensuing quarters.
We are very excited about our exceptional acquisition pipeline, which continued to grow over the quarter. We have entered into agreements to quire a total of nine new build-to-suit properties containing 2.3 million total square feet representing $250.5 million in acquisitions scheduled to close over the next several quarters. In keeping with our business model, all of these future acquisitions consist of well-located brand new build-to-suit projects currently under construction.
Six of the nine properties released to investment grade tenants, representing approximately 72% of the total $250.5 million current pipeline. These nine properties are situated near major airports, major transportation hubs and manufacturing plants that are integral to the tenants operations.
The cap rates on these nine new build-to-suit deals averaged 6.6% and have a weighted average lease maturity of 13.5 years. Subject to satisfactory due diligence, we anticipate closing these transactions upon completion and occupancy. To-date, we have already secured $100 million in financing for five of the properties. This new mortgage debt will have a weighted average interest rate of 3.86% and a maturity of 15 years and are all fully amortizing loans.
Based on the average cap rates and the debt financing that we've already locked in, these five acquisitions are expected to generate a levered return on equity of approximately 15%. In this protracted low interest rate environment, we've continuously enhanced our strong balance sheet. Our weighted average debt maturity on our fixed rate debt at quarter end is a very healthy 10.7 years as compared to 9.3 years in the prior year period. Our weighted average interest rate on our fixed rate debt at quarter end is at a record low of 4.4%.
Additionally, during the quarter we used approximately $54 million in net proceeds from our recent $135 million, 6.125% Series C Preferred offering to redeem all of our 7.625% Series A Preferred Stock. This 150 basis point cost reduction results in approximately $800,000 in annual savings going forward. The substantial improvements in our capital structure will benefit Monmouth for many years to come regardless of what interest rates may do in the future.
With regards to the U.S. industrial property market, 2016 was one of the strongest years ever. Fourth quarter net absorption came in at 46 million square feet, marking the 27 consecutive quarter of positive net absorption and continuing to longest winning streak on record. In total the industrial sector absorbed 283 million square feet in 2016. The national average vacancy rate continues to come down and is currently 4.9% representing in all-time low.
National average asking rents were now $5.75 per square foot, which is up 5.5% year-over-year. New industrial development has been increasing the past three years with 180 million square feet delivered in 2016 marking the largest amount since 2008. However, demand continues to outpace supply by a healthy margin.
With the rise of e-commerce which once again achieved new all-time records this past holiday season. Each of our FedEx locations has become a highly coveted foothold for large businesses. Major retailers are drawn to our FedEx locations. So they can get their goods delivered to their customers as fast as possible.
Our FedEx Ground locations have become the nucleus of today's logistics clusters that are so vital in supplying our mind consumption which is projected to reach $2.4 trillion worldwide by 2018. We have focused our investments on assets that we feel our mission-critical to our strong tenant base. Our modern industrial property portfolio is 100% occupied because of buildings integral to our tenants operations.
And now Kevin will provide you with greater detail on our results for the first quarter of fiscal 2017.
Thank you, Michael. Core Funds from Operations for the first quarter of fiscal 2017 were $13.9 million or $0.20 per diluted share. This compares to core FFO for the same period one-year ago of $11 million or $0.17 per diluted share representing an 18% increase. Adjusted Funds from Operations or AFFO, which excludes net realized gains on our securities investments was $12.9 million or $0.19 per diluted share for the quarter, compared to $10.7 million or $0.17 per diluted share in the prior year period representing a 12% increase.
On a sequential basis AFFO per share increase 6% over the prior quarter. As a result of our recent acquisition and expansion activity and our large acquisition pipeline. We anticipate continuing to meaningfully grow our per share earnings going forward. Rental and reimbursement revenues for the quarter were $27.2 million, compared to $22.3 million or an increase of 22% from the previous year’s quarter.
Net Operating Income or NOI which we define as recurring rental and reimbursement revenues less property taxes and operating expenses were $23 million for the quarter reflecting a 23% increase from the comparable period a year ago. Net income was $9.9 million for the first quarter compared to $6.9 million in the previous year's first quarter representing a 42% increase.
As Michael mentioned earlier, during the quarter we acquired two newly constructed industrial properties for a total of $56.1 million. One of the acquisitions a 339,000 square foot distribution center lease the FedEx Ground for 15 years in the Buffalo New York MSA was for $35.1 million. We financed this transaction with a 15-year fully amortizing mortgage loan in the amount of $23.5 million at a fixed interest rate of 4.03%.
The other acquisition a 214,000 square foot distribution center lease the FedEx Ground in Fort Myers Florida for 10 years was for $21 million. We financed this transaction with a 15-year fully amortizing mortgage loan in the amount of $14.5 million at a fixed interest rate of 3.97%. While most of our growth is attributable to our acquisitions and expansions. We've been able to grow organically as well.
Same property NOI increased 2.4% on a GAAP basis over the prior year period and increased 3.1% on a cash basis. Our average lease maturity as of the end of the quarter increased to 7.4 years as compared to 7.1 years in the prior year period. Our average annual rent per square foot increased 4.9% to $5.80 as of the quarter as compared to $5.53 one-year ago.
As of the end of the quarter our capital structure consisted of approximately $582 million in debt, of which $506 million was property level fixed rate mortgage debt and $76 million were loans payable. 87% of our debt is fixed rate with a weighted average interest rate of 4.4% as compared to 4.8% in the prior year period. We also had $193 million in perpetual preferred equity at quarter end.
Combined with an equity market capitalization of $1.1 billion dollars our total market capitalization was approximately $1.8 billion at quarter end. From a credit standpoint we continue to be conservatively capitalized with net debt the total market capitalization at 29.8%. Fixed charge coverage at 2.3 times and our net debt-to-EBITDA at six times for the quarter.
From a liquidity standpoint we ended the quarter with $30.7 million in cash and cash equivalents. We also had $124 million available from our credit facility as well as an additional $100 million potentially available from the accordion feature. In addition, we have $74.3 million in marketable REIT securities, representing 5.4% of our underappreciated assets. With an unrealized gain of $10.2 million at quarter and in addition to the $806,000 in net realized gains generated during the quarter.
And now let me turn it back to Michael before we open up the call for questions.
Thanks Kevin. To quickly summarize. Following the substantial growth achieved in fiscal 2016 our first quarter represents an excellent start to the New Year. We've generated double-digit AFFO per share growth in each of the prior three years and with our first quarter AFFO per share up 12% from the prior year fiscal 2017 is on track to continue this very favorable trend. Our new annual report is something that we're very proud of and it is now available on our website or if you prefer to receive a hard copy. Please contact us directly and we'll be more than happy to FedEx it out.
We now be happy to open up the call for questions.
We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Rob Stevenson of Janney.
Good morning, guys. Mike, the seven remaining lease expirations in 2017. How many of those are FedEx?
Let’s see here Rob, we have four.
And I mean do they have other locations close by or other sort of options because it seems like FedEx for them to move is a multi-year sort of planning strategy. I mean what's really their option other than if they decided to abandon that specific market?
Right. Well actually there is five. Sorry, there's five, correct Kevin?
Yes, that’s correct.
No, I'm very confident to cut to the chase that all five of those FedEx's will be renewing. The terms have been agreed to we're just waiting on signed leases before we announce the specific terms, but we've come to agreement and they're pretty much signed and sealed just not delivered.
Okay. And then the other two, are there major any - to either those have any major tenant paid for improvements that they would be sort of lows to leave behind?
So the other two looking like there won't be - there likely going to renew, I think what it's looking like right now for 2017 renewals. We announced 47% retention. We know the Fort Myers facility they're moving into - they moved into our larger facility at the airport. So that one is just an eight-month renewal. We know what tiny building in Urbandale, Iowa won't be renewing that's Keystone Automotive.
So we’re probably get 92% retention is what it's looking like to probably answer your questions on what 2017 expirations are shaping up like. I'll share more as the leases get signed, but those are the only two, the eight-month renewal and the non-renewal on Keystone are the only two that we know won't be renewing and the others are pretty much just waiting for signature.
Okay. And then when you look at the $250 million of pipeline today plus the shadow pipeline whatever you're working on behind that, is it still 55%, 60% FedEx or you bringing some new tenants in there? I assume that the three non-investment grade are not FedEx in the current pipeline, but just wanted to sort of get a feel for as we look down the road, whether or not the FedEx exposure increases decreases or basically stays the same when we fast forward a year, year and a half from now?
Right, so the pipeline is 2.3 million square feet, in square footage terms FedEx is a good percentage. I would say FedEx is 60% in square footage terms, 40% tenants, other than FedEx including International Paper and some smaller non-investment grade deals, as far as that $250.5 million total purchase price, 80% is investment grade.
FedEx has been ramping up their network, because the demand from e-commerce has been growing, exponentially. So the FedEx exposure in Monmouth’s portfolio is going to go up. We'll continue to do non-FedEx deals, but we're not going to trend down these great FedEx deals.
I mean our pipeline as you heard in the prepared remarks is an average cap rate of 6.6%. These are brand new Class A facilities with the average lease term with 13.5 years and just this week a large portfolio transacted at a cap rate of 6.5% older buildings, shorter leases, multi-tenant, and that wasn't a bad deal. I'm sure the buyer will do quite well over the long-term with it, but it's a good indication of the investments we're making. I feel really good about this pipeline.
Okay. And then just last question. You guys have been very proactive in terms of lining up your debt financing well in advance of the close of some of these transactions at some very favorable terms. I mean given where the stock price has been, how do you guys think about funding, the equity portion in advance?
I mean does the DRIP provide you enough? Do you think about if the stock gets - if a stock gets it like 15-ish that pre-funding your equity requirements for the rest of the year or at least a part of it through on operating and sort of lowering debt in the near-term? How you guys sort of balancing that sort of ball as you think about 2017?
Well, we don't forget we raised $135 million recently in perpetual preferred at 6.125%. Our DRIP run rate, last year we raised about $72 million to the dividend reinvestment plan and first quarter came in at $21 million. So the run rate is about $84 million in equity coming into our dividend reinvestment plan.
So we feel that’s fine. We have the Series B Preferred at - I cringe every time, I see it on our balance sheet or say it, but at 7.625% and that comes due in May and will be able to clean that up. So ideally we’ll replace that with preferred equity, but the pipeline will be funded at the equity portion at this point through our DRIP and the proceeds from our recent preferred offering. Kevin, you want to add to that.
Just a comment about how we’re funding our pipeline and how we've been successful and I just wanted to point out that we've locked in financing of those nine deals, five of them already on 15-year fully amortizing loans with the weighted average interest rate of 3.86%. And there's a few left to be locked in and I know rates have gone up lately, the last few weeks, last month or two. But we still - maybe we're not seeing deals with rates and the threes anymore now they're in like the low fours maybe like four in a quarter in that type of rate, which is still giving us great double-digit levered returns on the deals that we have in the pipeline.
Okay, and then I guess one more. Are you seeing any - at this point any upward movement in cap rates on the deals that you're doing or looking out for that has been consummated yet?
Yes, but the spreads are clearly tightening. As Kevin just said, the spreads based on our pipeline of 6.6% and borrowings at 3.86% that's 274 basis point spread right there. And today given interest rates have gone up 40, 50 bps and cap rates have maybe gone up 10, 15 bps. So the spreads are in the low 200 as opposed to the high 200 basis points spreads.
I do think cap rates are going to need to trend higher, but so far not in a meaningful way because industrial is the favored property type and a lot of foreign capital continues to come in seeking industrial assets, and that foreign capital has a lower cost of capital and a deteriorating currency that wants to be in a stable currency.
Okay. Thanks very much guys.
Thank you, Robert.
And the next question comes from Barry Oxford of D.A. Davidson.
Great. Hey guys. Great numbers. Also I guess I can't complain about your occupancy rate, but just to piggyback on Rob's question, how many bidders are you kind of getting when you guys are going after these acquisition properties, the number of bids you're getting versus maybe six months ago?
Are you talking about on the acquisition side or the financing side?
The acquisition side. So in other words when you guys kind of come in, how many other people are coming into bid?
Yes. How great is the competition. Numerically I’m hard pressed to answer that. I will tell you this. Our pipelines nine acquisitions with seven different merchant builders and those merchant builders we have long-term relationships with them and so the relationship is tried and true. And the amount of competition continues to increase, we continue to be able to source deals, but how much competition, numerically I can’t answer it.
I will tell you competition is fierce. I will tell you we go back with FedEx to 1992 and FedEx did about 10 million to 11 million square feet in growth, FedEx Ground in 2016 and we did about 15%, 20% expansion of the FedEx Ground network. So I'm very happy with the deals we're getting and I think we're in a good position to continue to grow 15% to 25% growth in GLA year-over-year, but yes, it's a very competitive environment.
Right. Thanks for that color. Second question, on the leasing I think we've beaten 2017 and gotten that clear. But is it too early for you to have conversations about 2018 or have you had some conversations or do you know of any major move out in 2018?
Yes. At the top of my head I don’t know any major move outs in 2018. I know some renewals in 2018 and yes, it's not too early for our team to start proactively looking at 2018.
Where you got to give them something to do, Mike. Right? All right, guys. I’ll leave the floor. Thank you.
Thank you, Barry.
And the next question comes from Paul Adornato of BMO Capital Markets.
Yes, hi. I was wondering if you foresaw any implications to the - or spillover, 1031 disappears in a tax reform?
Well, yes. The repercussions would be vast and detrimental. So much capital that comes in through the 1031 vehicle, so we’ll have to wait and see if that happens, but it would be a game changer, no question.
And still on the same topic of the new administration. I see Trump is talking right now about infrastructure. If there are changes in infrastructure could that change the distribution patterns and how do you think your positions over the long-term?
Well, I think you're referring to the stimulus of investing and modernizing the U.S. infrastructure, I know that Fred Smith has been in front of. Capitol Hill several times and it's much needed and that would be stimulative for the economy, so a long time coming and we have a new transportation secretary and so many goods are being shipped B to C, direct to your house that there's a lot of things that need to be changed because the current infrastructure didn't contemplate e-commerce. So that's very good for industrial and it's pretty encouraging as far as demand for industrial and growth for the broader economy at large the letter I've been reading and hearing.
Okay. And finally, the marketable securities portfolio I think you mention was about 5% of total assets. When you cap it at a certain number was at 10% or did you look at it on an absolute basis?
No you absolutely we have a self-imposed ceiling of approximately 10% of assets and we have a self-imposed floor of approximately 5% of assets because we want to have some of the good real estate on our balance sheet. So we are in the low range of the bandwidth right now about 5% of assets are in liquid real estate, but a year-ago there was a great arbitrage situation invest in the good real estate the tenure is 1.9% and many REITs were yielding 8% or greater.
Today, the tenures hovering around 2.5% and it's hard to find really largely discounted REIT. So we increase our portfolio when there's compelling opportunity to do so and there is today only on the case by case basis. But REITs are largely correlated and you will find opportunities to buy real estate cheaper on Wall Street and we will increase our portfolio when those opportunities arise.
Okay. Great. Thanks so much.
And the next question comes from Craig Kucera of Wunderlich.
Hey, good morning, guys. I want to start first on your balance sheet. I think you've got about $50 million of debt maturing this year. Can you talk about your plans to handle this year whether you're going to refinance that is fixed rate that or maybe you know pay it down and put it on the line and kind of what your thoughts are there?
Sure, I'll take that. That's true of we're about $50 million of amortization next year. That's pretty much that every year going forward and of that is probably about 10 more loans that we are well actually about 13 more loans that we plan on paying off for the remainder of the fiscal year. Three of those loans we actually paid you know recently a subsequent to the quarter.
And our plan is to just keep those properties on in cumbered which increases our availability on our line. So thus far through today we've paid off four loans in this fiscal year about $10.8 million of loans that generate about $2.6 million in NOI and a free of about $41 million of properties.
And if for the remainder of the year will probably about 10 more properties or properties with loans that generate about $7 million in NOI and that a free of about $105 million in property. So our plan is use fixed rate debt on the new acquisitions and then continue to pay off the amortizing debt on the legacy acquisitions which freeze up our in cumbered assets and helps us have more liquidity.
Got and when you think about you know spreads on investment. Maybe being a little tied and then they have it cap rates aren't necessarily backing up in tandem or certainly as much as were in straight that moved does that make you think you might want to maybe do a little bit of floating rate tax or you still dedicated to having a longer-term amortizing fixed rate debt on the acquisitions even beyond those as you look forward in the future.
Now don't get us wrong Craig the spreads are still very wide. 200 basis points is our rule of thumb over 50 year history and the average is 6% interest rate, 8% cap rate and we've gone lower than that and we're still getting well in excess of that. So they're just not historically widespread.
So I think the high watermark was you know in the mid 300 basis point range we were doing deals 343 and 350 basis points spreads those are anomalies and we did a lot of deals in the high 280 basis points spread. Kevin’s locked in 274 basis point spreads which is very accretive 15% levered returns on equity. But you know even with rising rates we're still getting it well in excess of 200 basis points spreads.
Okay. And one more for me just under redevelopment pipeline I know you announced one this quarter and I didn't see any in the disclosure but as you're talking to your tenants do you anticipate that you'll see some incremental expansion opportunities this year or that sort of taken a bit of a breather?
No, in an exciting part of our portfolio is that we've planned a full amount of land or pipeline has land to building ratio of nearly seven to one our portfolio at large as nearly six to one land to building. So in our new annual report which you know in my prepared remarks I reference that we encourage all our investors to take a look at it, we show this year three case studies and all three case studies, there's ample land for expansion and these tenants likely over the midterm will need additional space and we can accommodate that their businesses are strong and getting stronger and growing. So I would look at those three case studies in our annual report as just an illustration of our portfolio at large and the expansion capacity that we have.
Okay, thank you.
[Operator Instructions] Our next question will come from Michael Boulegeris of Boulegeris Investments.
Thank you and congratulations on the continued sustain qualitative growth at Monmouth. Michael, you noted that as of the new FedEx ground deals Monmouth is securing a greater percentage of those new acquisition in recent years. I think you said in the 20% range, what do you attribute that to?
A long-term relationship, our first deal with FedEx was in 1992. They're still in the building. They certainly know that we're a great landlord and one of their preferred landlords and we work well together. We view them as a partner. We view our shareholders as partners, our banking relationship as partners, all down the line.
So it's just a matter of treating them looking at the long-term, looking for mutually satisfactory outcome and we've always been willing whether it's FedEx or Coca-Cola or any of our strong tenant base to give up growth for quality and one of the things I think the market maybe doesn't value to a correct extent is the stability that our cash flows derive.
The very stable predictable income streams and so in our new letter to shareholders, we talk about how our $5 per square foot rent could actually be greater than a $6 rent grand and I think part of that is who's paying the rent and the longevity durability, predictability of the cash flows that that Monmouth generates.
Thank you for that clarity. May I ask Gene, during a recent interview talked about expecting the unexpected and what might be some of the unexpected as you look into the next decade that maybe impactful to the Monmouth business for example, I think you discuss inflation? Is it kind of comes up on your real quick before you know it. But in general what are some of the unexpected is that Monmouth is preparing for in the coming years?
Look, Gene is with us telephonically. So while Susan gears up his phone to come on line, the thing about the world, nobody knows what the world will look like ten years from now and the trick is to build a business model that performs well throughout the economic cycle.
So I think part of what Gene saying is that in these black - the whole definition of a black swan is something that was unforeseen. But when you have long-term leases to strong investment grade tenants that are mission critical to their business that you tend to really put some space on your competition during the week economic cycles because while they're on their heels playing defense your business is still very stable.
But Susan, you want to bring Gene on? Okay, so let’s turn it over to Gene. So he can answer that more fully.
Yes, Mike, it’s always glad to come online. I hope everyone can hear me. The future is very, very bright. The economy is strong. We are not advocates of inflation. We think inflation is bad, but we don't control that and it looks to us that we are going to have inflation that the labor market is tightening and there were lot about our indications.
And the way you have a portfolio of leverage real estate then you take a long-term view, the value of your properties go up dramatically and we see our portfolio values 10, 15 years from now to be substantially higher. We started buying buildings at much lower prices per foot, and now well over $100 per foot.
And we have a portfolio of over $1 billion, so that in terms of inflated dollars, we see that Monmouth REIT there can be an excellent investment. And when we make these so-called long-term investments, we think 10 or 15 years is short-term and if you look forward 10, 15 years and you look at inflation at 3%, 4% for that period those increases in values will be very positive for our shareholders.
So we're going to have a terrific portfolio of valuable buildings in a good business needed by our tenants and the values for them will not only be in the current return. The important point is that everybody looks at FFO and current dividend, but you really have to look at appreciation, when you buy real estate there are two components. The first component is your current return, but the second component is your long-term return which includes appreciation and we think that Monmouth REIT has terrific future in terms of potential appreciation.
Well, thank you for those comments Gene. Michael, if I could ask you one question and one for Kevin. Last quarter seems that you took some incremental profits in your outstanding REIT portfolio, is you are biased to continue to lean in that direction in support of the fledgling pipeline that you have. And just an administrative question for Kevin on the - it seems like reimbursements takes up almost $1 million, is there anything that was driving that this last quarter? Thank you.
Yes. So on the gains, we have $10.2 million unrealized gains at the end of the quarter. So there's a lot of fruit on the vine so to speak. Over the last seven years, we've generated approximately $28 million in net realized gains on our portfolio. I don't have big plans to buy or sell at the moment. The portfolio is only 5% of gross assets as we said earlier and it's generating good income, but yes, it's good to have liquid real estate because the money is there, it's an unencumbered portfolio, we could borrow at a very low rate approximately $40 million against the portfolio.
So no big plans to harvest that fruit, but we'll keep a watchful eye, but again, a year ago there was a great arbitrage situation and we took advantage of it and that's why in fiscal 2016 you saw us realized $4.4 million and that's why in the first quarter you saw us realized another 800,000. But right now, we're kind of in watch and wait mode. Kevin, do you want to take the other half.
Sure. The other question about the bump in the reimbursement revenues this quarter, if you look at it on a percentage basis it's not that much of an increase. We were reimbursed about 92% of our operating expenses versus last year about 89%, but yes, there was a slight bump this quarter. I believe there was a pretty big major, not major, but there was a parking lot repair that this particular quarter we were able to build back towards. It could be lumpy depending on what the tenants need and what kind of repairs are needed that that we build back, but in general our leases are net leases and the only thing that usually we have to cover our roofing structure and usually the other type of expenses are born by tenant that have built back. So that's just the reason for the slight increase this particular quarter.
Great. Thank you.
And this concludes our question-and-answer session. I would like to turn the conference back over to Michael Landy for any closing remarks.
Well, thank you, Laura. I like to thank everyone for joining us on this calling and for the continued support and interest in Monmouth. As always Kevin, Gene and I are available for any follow-up questions. We look forward to reporting back to you after our second quarter. Thank you.
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