One of the most popular categories of REITs that investors have been flocking to in recent years are those dedicated to the ownership and leasing out of industrial properties. The continued growth in e-commerce, in what has already become a globalized economy, has resulted in attractive growth in the industry. One of the most solid performers, on both the top and bottom lines, in recent years has been a company called Monmouth Real Estate Investment Corporation (MNR). That attractive performance continues even in the current fiscal year. But despite the fact that the fundamental condition of the company is exquisite, shares do still appear rather pricey. All things considered, it is a difficult prospect to recommend for all but the most patient investors.
The last time I wrote about Monmouth was in an article published in March of this year. In that article, I rated the company a neutral prospect. At the end of the day, I concluded that it is a quality operator that would likely fare well in the long run. However, I also said that shares of the business were expensive at that point in time. So far, my assessment seems to have been correct. While the S&P 500 has posted a return of 16.1% since then, shares of Monmouth have generated a return for investors of just 6.5%. As you will see, my overall assessment of the company has remained virtually unchanged since then. But that does not mean that the firm is not making attractive progress.
Truly, Monmouth is an attractive company from a fundamental perspective. According to management, the firm owns 122 properties across 32 states that work out to 24.9 million square feet. The company currently boasts a 99.7% occupancy rate, due in part to the areas of concentration management emphasizes. On the whole, the company tries to acquire properties located near major seaports, major intermodal ports, and major airports. This guarantees demand for its services. What's more, because the company is focused on single-tenant, net-leased arrangements, it can do well by partnering up with just the best large operators. Case in point, its top 9 tenants account for 76.1% of its annualized base rent, with FedEx (FDX) alone representing 56.8%.
To demonstrate the quality of its assets, we need only consider the following: Throughout the entire pandemic, the company has averaged rent collections of 99.9%. This means that substantially all of its customers made payments for the amounts due to the business despite the pain associated with the pandemic. This is truly exceptional.
Though it may be hard to believe that there exist a lot of properties for the company to acquire, it has so far succeeded in expanding its footprint at a rapid pace. Between 2015 and the end of the third quarter of this year, the company saw the gross leasable area of its assets increased by 79%. This has been driven by significant acquisitions by the firm. In 2020, for instance, the company purchased five different properties for a combined 1.2 million square feet of space, costing shareholders $175.1 million. This year alone, the company has already made purchases of 1.6 million square feet, comprised of four properties for $258.4 million. It also has another four properties in his pipeline, representing 1.4 million square feet, that will cost the company $148.9 million.
The quality of these assets is so high and the company's profitability and revenue figures so consistent, that they have been subject to buyout offers. Earlier this year, following the publication of my initial article on the company, management struck a deal to be acquired by Equity Commonwealth (EQC) in a cash or stock deal valuing it at $19 per share. Investors had the option to take the form of cash or to take 0.713 shares of Equity Commonwealth instead. The company was subject to competing bids by Starwood Capital Group, which eventually brought its bid out to $19.20 per share in cash.
Despite the higher price, management preferred the Equity Commonwealth deal, citing the stock component of this as a feature that made it superior to the Starwood transaction. Ultimately, however, the deal was voted down by shareholders, forcing management to go back to the drawing board in evaluating alternatives for the future. It is unclear at this time what will happen, but it does appear as though investors will want a higher price for the company's stock.
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In my prior article on the business, I detailed the robust historical performance of the enterprise. I do not believe it would be valuable to go in detail about that again. But I do think covering new information would be useful. So far this year, through the third quarter of the year, the company has done remarkably well. Total revenue during this time frame is up 8.9%, having risen from $125.18 million to $136.32 million. Operating cash flow is up 2.4%, having risen from $74.96 million to $76.77 million. If, however, we adjust for preferred distributions, then the figure did decrease slightly, falling 6.7% from $55.50 million to $51.77 million. Even so, NOI, or net operating income, increased from $104.63 million to $114.26 million, even as adjusted FFO, or funds from operations, dropped 2% from $58.71 million to $57.51 million.
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One thing that often gets overlooked in a company is the cash paid out for preferred distributions. To see its adjusted operating cash flow figure decline because of this is disconcerting. Even so, the overall financial performance of the enterprise is favorable. Having said that, shares are still rather pricey. If we apply results achieved in the first three quarters of the current fiscal year to the fourth quarter, then we should expect adjusted operating cash flow for 2021 of $67.5 million. Adjusted FFO should be around $75.4 million and NOI should be around $153.3 million. Lastly, EBITDA will probably end up around $132.1 million.
|Company||Price / Operating Cash Flow||EV / EBITDA|
|Innovative Industrial Properties (IIPR)||40.1||46.6|
|STAG Industrial (STAG)||22.1||19.3|
|Industrial Logistics Properties Trust (NASDAQ:ILPT)||15.9||14.3|
|Lexington Realty Trust (LXP)||18.6||16.9|
|Prologis Inc (PLD)||36.1||34.3|
Applying these figures to the company's current pricing gives us a business that is rather pricey. The company is trading at a forward price to adjusted operating cash flow multiple of 27.9. Its price to adjusted FFO go multiple is 24.9, while the price to NOI multiple is lower at 12.3. Finally, the EV to EBITDA multiple of the company stands at 24.3. To put this all in perspective, I decided to compare the company to the five highest rated of its peers as defined by Seeking Alpha’s Quant platform. On a price to operating cash flow basis, our prospect was more expensive than three of the five companies. And using the EV to EBITDA approach, the findings were identical.
There is no doubt in my mind that Monmouth is an excellent company from a fundamental perspective. I think the future for the business will prove to be positive. Having said that, I am a bit concerned about the preferred stock and the impact it is having on cash flow. On the whole, shares of the business appeared to be priced more or less in the fair value range relative to the competition. But in an industry that is in high demand, marked by high trading multiples, shares look expensive on an absolute basis. Frankly, I have a hard time believing the company could experience much more upside in the near term. And because of this, I would make the case that while the business is a solid prospect for the long run, it's not the greatest opportunity that investors could find.
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This article was written by
Daniel is an avid and active professional investor. He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.