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Section 1: 10-K

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended September 30, 2016

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period ___________________ to ____________________

 

Commission File Number: 001-33177

 

MONMOUTH REAL ESTATE INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

Maryland   22-1897375
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

3499 Route 9 North, Suite 3-D, Freehold, NJ 07728

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s telephone number, including area code: (732)-577-9996

 

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $0.01 par value per share – New York Stock Exchange

7.875% Series B Cumulative Redeemable Preferred Stock, $0.01 par value per share, $25 liquidation value per share – New York Stock Exchange

6.125% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share, $25 liquidation value per share – New York Stock Exchange

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [  ] Yes [X] No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [  ] Yes [X] No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[X] Yes [  ] No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

  Large accelerated filer [X] Accelerated filer [  ]  
  Non-accelerated filer [  ] Smaller reporting company [  ]  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [  ] Yes [X] No

 

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates of the registrant at March 31, 2016 was approximately $715,934,000 (based on the $11.89 closing price per share of common stock on March 31, 2016).

 

There were 69,902,492 shares of Common Stock outstanding as of November 15, 2016.

 

 Documents Incorporated by Reference: None.

 

 

 

  
  

 

TABLE OF CONTENTS

 

Item No.

 

Page No.

  Part I  
1 Business. 3
1A Risk Factors. 8
1B Unresolved Staff Comments. 16
2 Properties. 17
3 Legal Proceedings. 25
4 Mine Safety Disclosures. 25
     
  Part II  
5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

26

6 Selected Financial Data. 29
7 Management’s Discussion and Analysis of Financial Condition and Results of Operations. 31
7A Quantitative and Qualitative Disclosures About Market Risk. 57
8 Financial Statements and Supplementary Data. 59
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 60
9A Controls and Procedures. 60
9B Other Information. 61
     
  Part III  
10 Directors, Executive Officers and Corporate Governance. 62
11 Executive Compensation. 66
12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 83
13 Certain Relationships and Related Transactions, and Director Independence. 85
14 Principal Accounting Fees and Services. 86
     
  Part IV  
15 Exhibits, Financial Statement Schedules. 88
     
  Signatures 148

 

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PART I

 

ITEM 1 – BUSINESS

 

General Development of the Business

 

In this 10-K, “we”, “us”, “our”, “MREIC” or “the Company”, refers to Monmouth Real Estate Investment Corporation, together with its predecessors and subsidiaries, unless the context requires otherwise.

 

The Company is a corporation operating as a qualified real estate investment trust (REIT) under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the Code). The Company has been a REIT since 1969 and intends to maintain its qualification as a REIT in the future. As a qualified REIT, with limited exceptions, the Company will not be taxed under Federal and certain state income tax laws at the corporate level on taxable income that it distributes to its shareholders. For special tax provisions applicable to REITs, refer to Sections 856-860 of the Code.

 

The Company was established in 1968 as a New Jersey Business Trust (NJBT). In 1990, the NJBT merged into a newly formed Delaware corporation. On May 15, 2003, the Company changed its state of incorporation from Delaware to Maryland by merging with and into a Maryland corporation (the Reincorporation).

 

Narrative Description of Business

 

The Company’s primary business is the ownership of real estate. Its investment focus is to own well-located, modern, single tenant, industrial buildings, leased primarily to investment-grade tenants or their subsidiaries on long-term net leases. In addition, the Company owns a portfolio of REIT investment securities which the Company generally limits to no more than approximately 10% of its undepreciated assets (which is the Company’s total assets excluding accumulated depreciation).

 

At September 30, 2016, the Company held investments in ninety-nine properties totaling approximately 16,010,000 square feet with an occupancy rate of 99.6% (See Item 2 for a detailed description of the properties). These properties are located in thirty states: Alabama, Arizona, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington and Wisconsin. All of these properties are wholly-owned with the exception of the two properties in New Jersey in which the Company owns a majority interest. All properties in which the Company has investments are leased on a net basis except an industrial park in Monaca (Pittsburgh), Pennsylvania and the shopping center located in Somerset, New Jersey.

 

During fiscal 2016, the Company purchased eight industrial properties totaling approximately 1,830,000 square feet with net-leased terms ranging from ten to fifteen years resulting in a weighted average lease maturity of 12.3 years. Approximately 1,567,000 square feet, or 86%, is leased to FedEx Ground Package System, Inc., a subsidiary of FedEx Corporation (FDX). The purchase price for the eight properties was approximately $210,747,000 and they are located in Colorado, Florida, Kansas, Kentucky, Louisiana, North Carolina, Pennsylvania and Washington. These eight properties generate annualized rental income over the life of their leases of approximately $14,076,000. The funds for these eight acquisitions were provided by eight property level mortgage loans totaling $141,586,000, draws on an unsecured line of credit facility and cash on hand. The eight mortgages have a weighted average interest rate of 3.85% and a weighted average maturity of 14.9 years.

 

Subsequent to the fiscal yearend, on October 17, 2016, the Company purchased a newly constructed 338,584 square foot industrial building located in Hamburg, NY, which is in the Buffalo Metropolitan Statistical Area (MSA). The building is 100% net-leased to FedEx Ground Package System, Inc. for fifteen years through March 2031. The purchase price was $35,100,000. The Company obtained a 15 year fully-amortizing mortgage loan of $23,500,000 at a fixed interest rate of 4.03%. Annual rental revenue over the remaining term of the lease averages approximately $2,308,000.

 

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In addition, subsequent to the fiscal yearend, on October 1, 2016, a 50,741 square foot expansion of a building leased to FedEx Ground Package System, Inc. located in Edinburg, TX was substantially completed for a cost of approximately $4,988,000, resulting in a new 10 year lease which extended the prior lease expiration date from September 2021 through September 2026. In addition, the expansion resulted in an increase in annual rent effective from the date of completion of approximately $499,000 from approximately $598,000, or $5.27 per square foot, to approximately $1,097,000, or $6.68 per square foot.

 

On October 27, 2016, the Company sold its only vacant building, (which increased our occupancy rate from 99.6% to 100.0%), consisting of a 59,425 square foot industrial building situated on 4.78 acres located in White Bear Lake, MN for approximately $4,272,000, which is the Company’s approximate U.S. GAAP net book carrying value.

 

The industrial properties purchased, expanded and sold during fiscal 2017 to date increased our current total leasable square feet to approximately 16,340,000 and increased our occupancy rate to 100.0%.

 

In addition to the property purchased subsequent to the fiscal yearend, we have entered into agreements to purchase eight new build-to-suit, industrial buildings that are currently being developed in Florida, Michigan, North Carolina, Ohio and South Carolina totaling approximately 2,099,000 square feet, each with net-leased terms ranging between ten to fifteen years with a weighted average lease maturity of 13.3 years. Approximately 1,267,000 square feet, or 60%, is leased to FDX and its subsidiaries. The purchase price for the eight properties is approximately $212,373,000. Subject to satisfactory due diligence and other customary closing conditions and requirements, we anticipate closing these eight transactions during fiscal 2017 and fiscal 2018. In connection with five of the eight properties, the Company has entered into commitments to obtain five mortgages totaling $101,204,000 at fixed rates ranging from 3.60% to 4.20%, with a weighted average interest rate of 3.83%. Each of these mortgages will be a fifteen year, fully-amortizing loan. The Company may make additional acquisitions in fiscal 2017 and fiscal 2018, and the funds for these acquisitions may come from mortgages, draws on our unsecured line of credit facility, cash on hand, sale of marketable securities, other bank borrowings, proceeds from the Dividend Reinvestment and Stock Purchase Plan (DRIP), private placements and public offerings of additional common or preferred stock or other securities. To the extent that funds or appropriate properties are not available, fewer acquisitions will be made.

 

Currently, the Company derives its income primarily from real estate rental operations. Rental and Reimbursement Revenue (excluding Lease Termination Income in fiscal 2016, 2015 and 2014 of $-0-, $238,625 and $1,182,890, respectively) was $94,916,110, $77,775,497 and $64,672,341 for the years ended September 30, 2016, 2015 and 2014, respectively. Total assets were $1,229,758,028 and $915,991,942 as of September 30, 2016 and 2015, respectively.

 

As of September 30, 2016, the Company had approximately 16,010,000 square feet of property, of which approximately 7,584,000 square feet, or 47%, consisting of fifty-three separate stand-alone leases, were leased to FDX and its subsidiaries, (6% to FDX and 41% to FDX subsidiaries). These properties are located in twenty-four different states. As of September 30, 2016, the only tenants that leased 5% or more of the Company’s total square footage were FDX and its subsidiaries and Milwaukee Electric Tool Corporation, which leased approximately 862,000 square feet, comprising approximately 5% of the Company’s rental space.

 

During fiscal 2016, the only tenant that accounted for 5% or more of the Company’s rental and reimbursement revenue was FDX (including its subsidiaries). The Company’s rental and reimbursement revenue from FDX and its subsidiaries for the fiscal years ended September 30, 2016, 2015 and 2014, respectively, totaled approximately $52,793,000, $41,954,000 and $35,007,000, or 56% (7% from FDX and 49% from FDX subsidiaries), 54% (8% from FDX and 46% from FDX subsidiaries) and 54% (10% from FDX and 44% from FDX subsidiaries), of total rent and reimbursement revenues.

 

In addition to real estate property holdings, the Company held $73,604,894 in marketable REIT securities at September 30, 2016, representing 5.3% of the Company’s undepreciated assets (which is the Company’s total assets excluding accumulated depreciation). These liquid real estate holdings are not included in calculating the tenant concentration ratios above and therefore further enhance the Company’s diversification. As a result, the securities portfolio provides the Company with additional liquidity, diversification, income and serves as a proxy for real estate when more favorable risk adjusted returns are not available.

 

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The Company’s weighted-average lease expiration was 7.4 and 7.2 years as of September 30, 2016 and 2015, respectively, and its average annualized rent per occupied square foot as of September 30, 2016 and 2015 was $5.72 and $5.48, respectively. The Company’s occupancy rate as of September 30, 2016 and 2015 was 99.6% and 97.7%, respectively. Subsequent to fiscal yearend, on October 27, 2016, the Company sold its only vacant building for $4,272,000 which increased our occupancy rate to 100.0%.

 

The Company competes with other investors in real estate for attractive investment opportunities. These investors include other equity real estate investment trusts, limited partnerships, syndications and private investors, among others. Competition in the market areas in which the Company operates is significant and affects the Company’s ability to acquire or expand properties, occupancy levels, rental rates, and operating expenses of certain properties. Management has built relationships with merchant builders which have historically provided the Company with investment opportunities that fit the Company’s investment policy. The amount of new construction of industrial properties on the national level has been increasing the past four years following several years of historically low levels of new supply. These levels of new supply, although increasing, continue to be below historical norms. Driven to a large extent by the rampant growth in ecommerce sales, demand for industrial space remains very strong, driving national occupancy rates to an all-time high of 95% currently. For further discussion of potential impact of competitive conditions on our business, see Item 1A: Risk Factors below.

 

The Company continues to invest in marketable securities of other REITs, which the Company generally limits to no more than approximately 10% of its undepreciated assets, (which is the Company’s total assets excluding accumulated depreciation). The Company from time to time may purchase these securities on margin when the dividend and interest yields exceed the cost of the funds. As of September 30, 2016 and 2015, there were no draws against the margin. The REIT securities portfolio, to the extent not pledged to secure borrowings, provides the Company with additional liquidity and additional income. Such securities are subject to risks arising from adverse changes in market rates and prices, primarily interest rate risk relating to debt securities and market price risk relating to equity securities. From time to time, the Company may use derivative instruments to mitigate interest rate risk, however, this has not occurred during any periods presented. At September 30, 2016 and 2015, the Company had $73,604,894 and $54,541,237, respectively, of securities available for sale. The unrealized net gain (loss) on securities available for sale at September 30, 2016 and 2015 was $12,942,267 and $(5,441,603), respectively, resulting in an increase for the fiscal year of $18,383,870. For the fiscal years ended September 30, 2016, 2015 and 2014, the Company’s net realized gains from the sale of securities were $4,398,599, $805,513 and $2,166,766, respectively.

 

On September 13, 2016, the Company issued 5,400,000 shares of a 6.125% Series C Cumulative Redeemable Preferred Stock (Series C Preferred Stock) at an offering price of $25.00 per share in an underwritten public offering. The Company received net proceeds from the offering, after deducting the underwriting discount and other estimated offering expenses, of approximately $130,543,000. On September 15, 2016, the Company used $45,000,000 of such net proceeds from the offering to reduce the amounts outstanding under its unsecured line of credit facility (the “Facility”) and on October 14, 2016, the Company used $53,493,750 of such net proceeds from the offering to redeem all of the 2,139,750 issued and outstanding shares of its 7.625% Series A Cumulative Redeemable Preferred Stock (7.625% Series A Preferred Stock). In addition, on October 14, 2016, the Company used $498,540 of such net proceeds from the offering to pay all dividends, accrued and unpaid, to and including the redemption date of the 7.625% Series A Preferred Stock. The Company intends to use the remaining proceeds to reduce the amounts outstanding under its Facility and to purchase properties and fund expansions of its existing properties in the ordinary course of business and for general corporate purposes.

 

On September 14, 2016, the Company announced that it intended to redeem all 2,139,750 issued and outstanding shares of its 7.625% Series A Preferred Stock. As discussed above, the Company redeemed the 7.625% Series A Preferred Stock on October 14, 2016 at a redemption price of $25.00 per share, plus all dividends accrued and unpaid to and including the redemption date, in an amount equal to $0.23299 per share. As of September 30, 2016, the outstanding 7.625% Series A Preferred Stock has been reclassified out of stockholder’s equity and is reflected as a liability at redemption value and has recognized a deemed dividend of $2,942,149 on the Company’s consolidated statement of income for the fiscal year ended September 30, 2016, which represents the difference between redemption value and carrying value net of original deferred issuance costs.

 

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Investment and Other Policies

 

The Company’s investment policy is to concentrate its investments in well-located, modern, single tenant, industrial buildings, leased primarily to investment-grade tenants or their subsidiaries on long-term net leases. The Company’s strategy is to obtain a favorable yield spread between the income from the net-leased industrial properties and interest costs. In addition, management believes that investments in well-located, modern industrial properties provide a potential for long-term capital appreciation. There is the risk that, upon expiration of leases, the properties will become vacant or will be re-leased at lower rents. The results obtained by the Company by re-leasing the properties will depend on the market for industrial properties at that time. The Company has renewed all three leases, or 100% of the gross leasable area that was scheduled to expire during fiscal 2016 at an increase in the weighted average lease rate of 5.3% on a U.S. GAAP straight-line basis and a decrease in the weighted average lease rate of 2.2% on a cash basis.

 

The Company seeks to invest in well-located, modern, single tenant, industrial buildings, leased primarily to investment-grade tenants or their subsidiaries on long-term net leases. In management’s opinion, the newly built facilities meet these criteria. The Company has a concentration of properties leased to FDX and FDX subsidiaries. This is a risk factor that shareholders should consider. FDX is a publicly-owned corporation and financial information related to FDX is available at the SEC’s website, www.sec.gov. The reference in this report to the SEC’s website is not intended to and does not include or incorporate by reference into this report the information on this website.

 

The Company may issue securities for property; however, this has not occurred to date. The Company may repurchase or reacquire its shares from time to time if, in the opinion of the Board of Directors, such acquisition is advantageous to the Company. No shares were repurchased or reacquired during fiscal 2016 and, as of September 30, 2016, the Company does not own any of its own shares.

 

Property Management

 

Currently, all ninety-nine properties owned by the Company, with the exception of two properties that are located in Streetsboro, Ohio and Carlstadt, New Jersey, are self-managed by the Company.

 

The Company paid fees directly to local property management subagents in the amount of $356,316, $306,487 and $264,811 for fiscal years ended September 30, 2016, 2015 and 2014, respectively.

 

Until October 31, 2014, the Company’s two industrial properties in Olive Branch, Mississippi, were managed by Industrial Developments International (IDI). Management fees paid to IDI for the fiscal years ended September 30, 2016, 2015 and 2014 were $-0-, $8,274 and $49,476, respectively. These management fees were reimbursed to the Company by the tenants. Effective November 1, 2014, the Company began to self-manage these properties.

 

The Company’s industrial property in Streetsboro, Ohio is managed by GEIS Companies (GEIS). Management fees paid to GEIS for the fiscal years ended September 30, 2016, 2015 and 2014 were $50,082, $50,112 and $50,138, respectively. These management fees were reimbursed to the Company by the tenants.

 

The Company’s industrial property in Carlstadt, New Jersey is owned by Palmer Terrace Realty Associates, LLC. The Company owns 51% of Palmer Terrace Realty Associates, LLC. This property is managed by Marcus Associates, an entity affiliated with the owner of the 49% non-controlling interest. Management fees paid by Palmer Terrace Realty Associates, LLC to Marcus Associates were $15,804 for each of the fiscal years ended September 30, 2016, 2015 and 2014.

 

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Environmental Matters

 

Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under such property as well as certain other potential costs relating to hazardous or toxic substances. These liabilities may include government fines and penalties and damages for injuries to persons and adjacent property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances. Although generally our tenants are primarily responsible for any environmental damages and claims related to the leased premises, in the event of the bankruptcy or inability of a tenant of such premises to satisfy any obligations with respect to such environmental liability, the Company may be required to satisfy such obligations. In addition, as the owner of such properties, the Company may be held directly liable for any such damages or claims irrespective of the provisions of any lease.

 

From time to time, in connection with managing the properties or upon acquisition of a property, the Company authorizes the preparation of Phase I and, when necessary, Phase II environmental reports with respect to its properties. Based upon such environmental reports and the Company’s ongoing review of its properties, as of the date of this Annual Report, the Company is not aware of any environmental condition with respect to any of its properties which it believes would be reasonably likely to have a material adverse effect on its financial condition and/or results of operations. There can be no assurance, however, that (1) the discovery of environmental conditions, the existence or severity of which were previously unknown; (2) changes in law; (3) the conduct of tenants; or (4) activities relating to properties in the vicinity of our properties, will not expose the Company to material liability in the future.

 

Contact Information

 

Additional information about the Company can be found on the Company’s website which is located at www.mreic.reit. Information contained on or hyperlinked from our Web site is not incorporated by reference into and should not be considered part of this Annual Report on Form 10-K or our other filings with the Securities and Exchange Commission (SEC). The Company makes available, free of charge, on or through its website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You can also read and copy any materials the Company files with the SEC at its Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

Segment Reporting & Financial Information

 

The Company’s primary business is the ownership and management of real estate properties. The Company invests in well-located, modern, single tenant, industrial buildings leased primarily to investment grade tenants or their subsidiaries on long-term net leases. The Company reviews operating and financial information for each property on an individual basis and, therefore, each property represents an individual operating segment. The Company evaluates financial performance using Net Operating Income (“NOI”) from property operations. NOI is defined as recurring Rental and Reimbursement Revenue, less Real Estate Taxes and Operating Expenses, such as insurance, utilities and repairs and maintenance. The Company has aggregated the properties into one reportable segment as the properties share similar long-term economic characteristics and have other similarities, including the fact that they are operated as industrial properties subject to long-term net leases primarily to investment grade tenants or their subsidiaries. For required financial information related to our operations and assets, please refer to our consolidated financial statements, including the notes thereto, included in Item 8 “Financial Statements and Supplementary Data” in this Annual Report.

 

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ITEM 1A – RISK FACTORS

 

The following risk factors address the material risks concerning our business. If any of the risks discussed in this report were to occur, our business, prospects, financial condition, results of operation and our ability to service our debt and make distributions to our shareholders could be materially and adversely affected and the market price per share of our stock could decline significantly. Some statements in this report, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Statement Regarding Forward-Looking Statements.”

 

Real Estate Industry Risks

 

Our business and financial results are affected by local real estate conditions in areas where we own properties. We may be affected adversely by general economic conditions and local real estate conditions. For example, an oversupply of industrial properties in a local area or a decline in the attractiveness of our properties to tenants and potential tenants could have a negative effect on us.

 

Other factors that may affect general economic conditions or local real estate conditions include but are not limited to:

 

  population and demographic trends;
     
  employment and personal income trends;
     
  zoning, use and other regulatory restrictions;
     
  income tax laws;
     
  ●  changes in interest rates and availability and costs of financing; and
     
  competition from other available real estate.

 

We may be unable to compete with our larger competitors and other alternatives available to tenants or potential tenants of our properties. The real estate business is highly competitive. We compete for properties with other real estate investors and purchasers, including other real estate investment trusts, limited partnerships, syndications and private investors, some of whom may have greater financial resources, revenues and geographical diversity than we have. Furthermore, we compete for tenants with other property owners. All of our industrial properties are subject to significant local competition. We also compete with a wide variety of institutions and other investors for capital funds necessary to support our investment activities and asset growth. To the extent that we are unable to effectively compete in the marketplace, our business may be adversely affected.

 

We are subject to significant regulation that inhibits our activities and may increase our costs. Local zoning and use laws, environmental statutes and other governmental requirements may restrict expansion, rehabilitation and reconstruction activities. These regulations may prevent us from taking advantage of economic opportunities. Legislation such as the Americans with Disabilities Act may require us to modify our properties at a substantial cost and noncompliance could result in the imposition of fines or an award of damages to private litigants. Future legislation may impose additional requirements. We may incur additional costs to comply with any future requirements.

 

Our investments are concentrated in the industrial distribution sector and our business would be adversely affected by an economic downturn in that sector. Our investments in real estate assets are primarily concentrated in the industrial distribution sector. This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities included a more significant portion of other sectors of the real estate industry.

 

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Risks Associated with Our Properties

 

We may be unable to renew or extend leases or re-let space as leases expire. While we seek to invest in well-located, modern, single tenant, industrial buildings, leased to investment-grade tenants or their subsidiaries on long-term net leases, a number of our properties are subject to short-term leases. When a lease expires, a tenant may elect not to renew or extend it. We may not be able to re-let the property on similar terms, if we are able to re-let the property at all. The terms of renewal, extension or re-lease (including the cost of required renovations and/or concessions to tenants) may be less favorable to us than the prior lease. If we are unable to re-let all or a substantial portion of our properties, or if the rental rates upon such re-letting are significantly lower than expected rates, our cash generated before debt repayments and capital expenditures and our ability to make expected distributions, may be adversely affected. We have established an annual budget for renovation and re-letting expenses that we believe is reasonable in light of each property’s operating history and local market characteristics. However, this budget may not be sufficient to cover these expenses.

 

Our business is substantially dependent on FedEx Corporation. FDX, together with its subsidiaries, is our largest tenant, consisting of fifty-three separate stand-alone leases located in twenty-four different states as of September 30, 2016. As of September 30, 2016, the Company had approximately 16,010,000 square feet of property, of which approximately 7,584,000 square feet, or 47%, were leased to FDX and its subsidiaries, (6% from FDX and 41% from FDX subsidiaries). Rental and reimbursement revenue from FDX and its subsidiaries is approximately 56% (7% from FDX and 49% from FDX subsidiaries) of total rental and reimbursement revenue for fiscal 2016. No other tenant accounted for 5% or more of the Company’s total Rental and Reimbursement revenue for fiscal 2016. As a result of this concentration, our business, financial condition and results of operations, including the amount of cash available for distribution to our stockholders, could be adversely affected if we are unable to do business with FDX or FDX reduces its business with us or FDX and its subsidiaries were to become unable to make lease payments because of a downturn in its business or otherwise.

 

We are subject to risks involved in single tenant leases. We focus our acquisition activities on real properties that are net-leased to single tenants. Therefore, the financial failure of, or other default by, a single tenant under its lease is likely to cause a significant reduction in the operating cash flow generated by the property leased to that tenant and might decrease the value of that property. In addition, we will be responsible for 100% of the operating costs following a vacancy at a single tenant building.

 

We may be affected negatively by tenant financial difficulties and leasing delays. At any time, a tenant may experience a downturn in its business that may weaken its financial condition. Similarly, a general decline in the economy may result in a decline in the demand for space at our industrial properties. As a result, our tenants may delay lease commencement, fail to make rental payments when due, or declare bankruptcy. Any such event could result in the termination of that tenant’s lease and losses to us.

 

We receive a substantial portion of our income as rents under long-term leases. If tenants are unable to comply with the terms of their leases because of rising costs or falling revenues, we, in our sole discretion, may deem it advisable to modify lease terms to allow tenants to pay a lower rental rate or a smaller share of operating costs, taxes and insurance. If a tenant becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to the tenant. We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises. If a tenant becomes bankrupt, the federal bankruptcy code will apply and, in some instances, may restrict the amount and recoverability of our claims against the tenant. A tenant’s default on its obligations to us for any reason could adversely affect our financial condition and the cash we have available for distribution.

 

We may be unable to sell properties when appropriate because real estate investments are illiquid. Real estate investments generally cannot be sold quickly and, therefore, will tend to limit our ability to vary our property portfolio promptly in response to changes in economic or other conditions. In addition, the Code may limit our ability to sell our properties. The inability to respond promptly to changes in the performance of our property portfolio could adversely affect our financial condition and ability to service debt and make distributions to our shareholders.

 

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Environmental liabilities could affect our profitability. We face possible environmental liabilities. Environmental laws today can impose liability on a previous owner or operator of a property that owned or operated the property at a time when hazardous or toxic substances were disposed on, or released from, the property. A conveyance of the property, therefore, does not relieve the owner or operator from liability. As a current or former owner and operator of real estate, we may be required by law to investigate and clean up hazardous substances released at or from the properties we currently own or operate or have in the past owned or operated. We may also be liable to the government or to third parties for property damage, investigation costs and cleanup costs. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs the government incurs in connection with the contamination. Contamination may adversely affect our ability to sell or lease real estate or to borrow using the real estate as collateral. We are not aware of any environmental liabilities relating to our investment properties which would have a material adverse effect on our business, assets, or results of operations. However, we cannot assure you that environmental liabilities will not arise in the future and that such liabilities will not have a material adverse effect on our business, assets or results of operation.

 

Actions by our competitors may decrease or prevent increases in the occupancy and rental rates of our properties. We compete with other owners and operators of real estate, some of which own properties similar to ours in the same submarkets in which our properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose potential tenants, and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants’ leases expire. As a result, our financial condition, cash flow and cash available for distribution, the market price of our preferred and common stock and our ability to satisfy our debt service obligations could be materially and adversely affected.

 

Coverage under our existing insurance policies may be inadequate to cover losses. Weather conditions and natural disasters such as hurricanes, tornados, earthquakes, floods, droughts, fires and other environmental conditions can harm our business operations. We generally maintain insurance policies related to our business, including casualty, general liability and other policies, covering our business operations, employees and assets. However, we would be required to bear all losses that are not adequately covered by insurance. In addition, there are certain losses that are not generally insured because it is not economically feasible to insure against them, including losses due to riots or acts of war. If an uninsured loss or a loss in excess of insured limits were to occur with respect to one or more of our properties, then we could lose the capital we invested in the properties, as well as the anticipated future revenue from the properties and, in the case of debt, which is with recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the properties. Although we believe that our insurance programs are adequate, we cannot assure you that we will not incur losses in excess of our insurance coverage, or that we will be able to obtain insurance in the future at acceptable levels and reasonable costs.

 

We may be unable to acquire properties on advantageous terms or acquisitions may not perform as we expect. We have acquired individual properties and intend to continue to do so. However, we may be unable to acquire any of the properties that we may identify as potential acquisition opportunities in the future. Our acquisition activities and their success are subject to the following risks:

 

    when we are able to locate a desired property, competition from other real estate investors may significantly increase the purchase price;
     
  acquired properties may fail to perform as expected;
     
  the actual costs of repositioning or redeveloping acquired properties may be higher than our estimates;
     
  acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures;
     
  we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations, and as a result, our results of operations and financial condition could be adversely affected; and
     
  we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, to the seller. As a result, if a claim were asserted against us based upon ownership of those properties, we might have to pay substantial sums to resolve it, which could adversely affect our cash flow and financial condition.

 

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Financing Risks

 

We face inherent risks associated with our debt incurrence. We finance a portion of our investments in properties and marketable securities through the incurrence of debt. We are subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. In addition, debt creates other risks, including:

 

  rising interest rates on our variable rate debt;
     
  inability to repay or refinance existing debt as it matures, which may result in forced disposition of assets on disadvantageous terms;
     
  one or more lenders under our $200 million unsecured line of credit could refuse to fund their financing commitment to us or could fail, and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all;
     
  refinancing terms that are less favorable than the terms of existing debt; and
     
  inability to meet required payments of principal and/or interest.

 

We mortgage our properties, which subjects us to the risk of foreclosure in the event of non-payment. We mortgage many of our properties to secure payment of indebtedness and, if we are unable to meet mortgage payments, the property could be foreclosed upon or transferred to the mortgagee with a consequent loss of income and asset value. A foreclosure of one or more of our properties could adversely affect our financial condition, results of operations, cash flow, and ability to service debt and make distributions and the market price of our preferred and common stock.

 

We face risks related to “balloon payments” and refinancings. Certain mortgages will have significant outstanding principal balances on their maturity dates, commonly known as “balloon payments.” There can be no assurance that we will have the funds available to fund the balloon payment or that we will be able to refinance the debt on favorable terms or at all. To the extent we cannot either pay off or refinance this debt on favorable terms or at all, we may be forced to dispose of properties on disadvantageous terms or pay higher interest rates, either of which could have an adverse impact on our financial performance and ability to service debt and make distributions.

 

We face risks associated with our dependence on external sources of capital. In order to qualify as a REIT, we are required each year to distribute to our shareholders at least 90% of our REIT taxable income, and we are subject to tax on our income to the extent it is not distributed. Because of this distribution requirement, we may not be able to fund all future capital needs from cash retained from operations. As a result, to fund capital needs, we rely on third-party sources of capital, which we may not be able to obtain on favorable terms, if at all. Our access to third-party sources of capital depends upon a number of factors, including (i) general market conditions; (ii) the market’s perception of our growth potential; (iii) our current and potential future earnings and cash distributions; and (iv) the market price of our capital stock. Additional debt financing may substantially increase our debt-to-total capitalization ratio. Additional equity issuances may dilute the holdings of our current shareholders.

 

We may become more highly leveraged, resulting in increased risk of default on our obligations and an increase in debt service requirements which could adversely affect our financial condition and results of operations and our ability to pay distributions. We have incurred, and may continue to incur, indebtedness in furtherance of our activities. Our governing documents do not limit the amount of indebtedness we may incur. Accordingly, our Board of Directors may authorize us to incur additional debt and would do so, for example, if it were necessary to maintain our status as a REIT. We could therefore become more highly leveraged, resulting in an increased risk of default on our obligations and an increase in debt service requirements which could adversely affect our financial condition and results of operations and our ability to pay distributions to shareholders.

 

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Fluctuations in interest rates could materially affect our financial results. Because a portion of our debt bears interest at variable rates, increases in interest rates could materially increase our interest expense. If the United States Federal Reserve increases short-term interest rates, this may have a significant upward impact on shorter-term interest rates, including the interest rates that our variable rate debt is based upon. Potential future increases in interest rates and credit spreads may increase our interest expense and therefore negatively affect our financial condition and results of operations, and reduce our access to the debt or equity capital markets.

 

Covenants in our loan documents could limit our flexibility and adversely affect our financial condition. The terms of our various credit agreements and other indebtedness require us to comply with a number of customary financial and other covenants, such as maintaining debt service coverage and leverage ratios and maintaining insurance coverage. These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we had satisfied our payment obligations. If we were to default under credit agreements or other debt instruments, our financial condition could be adversely affected.

 

Risks Related to our Status as a REIT

 

If our leases are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT. To qualify as a REIT, we must, among other things, satisfy two gross income tests, under which specified percentages of our gross income must be passive income, such as rent. For the rent paid pursuant to our leases to qualify for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. We believe that our leases will be respected as true leases for federal income tax purposes. However, there can be no assurance that the Internal Revenue Service (IRS) will agree with this view. If the leases are not respected as true leases for federal income tax purposes, we would not be able to satisfy either of the two gross income tests applicable to REITs, and we could lose our REIT status.

 

Failure to make required distributions would subject us to additional tax. In order to qualify as a REIT, we must, among other requirements, distribute, each year, to our shareholders at least 90 percent of our taxable income, excluding net capital gains. To the extent that we satisfy the 90 percent distribution requirement, but distribute less than 100 percent of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4 percent nondeductible excise tax on the amount, if any, by which our distributions (or deemed distributions) in any year are less than the sum of:

 

  85 percent of our ordinary income for that year;
     
  95 percent of our capital gain net earnings for that year; and
     
  100 percent of our undistributed taxable income from prior years.

 

To the extent we pay out in excess of 100 percent of our taxable income for any tax year, we may be able to carry forward such excess to subsequent years to reduce our required distributions for purposes of the 4 percent excise tax in such subsequent years. We intend to pay out our income to our shareholders in a manner intended to satisfy the 90 percent distribution requirement. Differences in timing between the recognition of income and the related cash receipts or the effect of required debt amortization payments could require us to borrow money or sell assets to pay out enough of our taxable income to satisfy the 90 percent distribution requirement and to avoid corporate income tax.

 

We may not have sufficient cash available from operations to pay distributions, and, therefore, distributions may be made from borrowings. The actual amount and timing of distributions will be determined by our Board of Directors in its discretion and typically will depend on the amount of cash available for distribution, which will depend on items such as current and projected cash requirements, limitations on distributions imposed by law or our financing arrangements and tax considerations. As a result, we may not have sufficient cash available from operations to pay distributions as required to maintain our status as a REIT. Therefore, we may need to borrow funds to make sufficient cash distributions in order to maintain our status as a REIT, which may cause us to incur additional interest expense as a result of an increase in borrowed funds for the purpose of paying distributions.

 

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We may be required to pay a penalty tax upon the sale of a property. The federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a “prohibited transaction” that is subject to a 100 percent penalty tax. Under current law, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of real estate or other property constitutes the sale of property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular transaction. It is our intent that we and our subsidiaries will hold the interests in the real estate for investment with a view to long-term appreciation, engage in the business of acquiring and owning real estate, and make occasional sales as are consistent with our investment objectives. We do not intend to engage in prohibited transactions. We cannot assure you, however, that we will only make sales that satisfy the requirements of the safe harbors or that the IRS will not successfully assert that one or more of such sales are prohibited transactions.

 

We may be adversely affected if we fail to qualify as a REIT. If we fail to qualify as a REIT, we will not be allowed to deduct distributions to shareholders in computing our taxable income and will be subject to federal income tax, including any applicable alternative minimum tax, at regular corporate rates. In addition, we might be barred from qualification as a REIT for the four years following disqualification. The additional tax incurred at regular corporate rates would reduce significantly the cash flow available for distribution to shareholders and for debt service. Furthermore, we would no longer be required to make any distributions to our shareholders as a condition to REIT qualification. Any distributions to shareholders would be taxable as ordinary income to the extent of our current and accumulated earnings and profits, although such dividend distributions would be subject to a top federal income tax rate of 20% (and potentially a Medicare tax of 3.8%). Corporate distributees, however, may be eligible for the dividends received deduction on the distributions, subject to limitations under the Code.

 

To qualify as a REIT, we must comply with certain highly technical and complex requirements. We cannot be certain we have complied, and will always be able to comply, with the requirements to qualify as a REIT because there are few judicial and administrative interpretations of these provisions. In addition, facts and circumstances that may be beyond our control may affect our ability to continue to qualify as a REIT. We cannot assure you that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to our qualification as a REIT or with respect to the federal income tax consequences of qualification. We believe that we have qualified as a REIT since our inception and intend to continue to qualify as a REIT. However, we cannot assure you that we are qualified or will remain qualified.

 

There is a risk of changes in the tax law applicable to real estate investment trusts. Because the IRS, the United States Treasury Department and Congress frequently review federal income tax legislation, we cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted. Any of such legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us and/or our investors.

 

We may be unable to comply with the strict income distribution requirement applicable to REITs. As noted above, to maintain qualification as a REIT under the Code, a REIT must annually distribute to its shareholders at least 90% of its REIT taxable income, excluding the dividends paid deduction and net capital gains. This requirement limits our ability to accumulate capital. We may not have sufficient cash or other liquid assets to meet the 90% distribution requirements. Difficulties in meeting the 90% distribution requirement might arise due to competing demands for our funds or to timing differences between tax reporting and cash receipts and disbursements, because income may have to be reported before cash is received, because expenses may have to be paid before a deduction is allowed, because deductions may be disallowed or limited or because the IRS may make a determination that adjusts reported income. In those situations, we might be required to borrow funds or sell properties on adverse terms in order to meet the 90% distribution requirement and interest and penalties could apply which could adversely affect our financial condition. If we fail to satisfy the 90% distribution requirement, we would cease to be taxed as a REIT.

 

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Notwithstanding our status as a REIT, we are subject to various federal, state and local taxes on our income and property. For example, we will be taxed at regular corporate rates on any undistributed taxable income, including undistributed net capital gains; provided, however, that properly designated undistributed capital gains will effectively avoid taxation at the shareholder level. We may be subject to other federal income taxes and may also have to pay some state income or franchise taxes because not all states treat REITs in the same manner as they are treated for federal income tax purposes.

 

Other Risks

 

We may not be able to access adequate cash to fund our business. Our business requires access to adequate cash to finance our operations, distributions, capital expenditures, debt service obligations, development and redevelopment costs and property acquisition costs, if any. We expect to generate the cash to be used for these purposes primarily with operating cash flow, borrowings under secured and unsecured term loans, proceeds from sales of strategically identified assets and, when market conditions permit, through the issuance of debt and equity securities from time to time. We may not be able to generate sufficient cash to fund our business, particularly if we are unable to renew or extend leases, lease vacant space or re-lease space as leases expire according to expectations.

 

We are dependent on key personnel. Our executive and other senior officers have a significant role in our success. Our ability to retain our management group or to attract suitable replacements should any members of the management group leave is dependent on the competitive nature of the employment market. The loss of services from key members of the management group or a limitation in their availability could adversely affect our financial condition and cash flow. Further, such a loss could be negatively perceived in the capital markets.

 

We may amend our business policies without shareholder approval. Our Board of Directors determines our growth, investment, financing, capitalization, borrowing, operations and distributions policies. In addition, our charter provides that our Board of Directors may revoke or otherwise terminate our REIT election, without the approval of our shareholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. Although our Board of Directors has no present intention to amend or reverse any of these policies, they may be amended or revised without notice to shareholders. Accordingly, shareholders may not have control over changes in our policies. We cannot assure you that changes in our policies will serve fully the interests of all shareholders.

 

The market value of our preferred and common stock could decrease based on our performance and market perception and conditions. The market value of our preferred and common stock may be based primarily upon the market’s perception of our growth potential and current and future cash dividends, and may be secondarily based upon the real estate market value of our underlying assets. The market price of our preferred and common stock is influenced by their respective distributions relative to market interest rates. Rising interest rates may lead potential buyers of our stock to expect a higher distribution rate, which could adversely affect the market price of our stock. In addition, rising interest rates could result in increased expense, thereby adversely affecting cash flow and our ability to service our indebtedness and pay distributions.

 

There are restrictions on the ownership and transfer of our capital stock. To maintain our qualification as a REIT under the Code, no more than 50% in value of our outstanding capital stock may be owned, actually or by attribution, by five or fewer individuals, as defined in the Code to also include certain entities, during the last half of a taxable year. Accordingly, our charter contains provisions restricting the ownership and transfer of our capital stock. These restrictions may discourage a tender offer or other transaction, or a change in management or of control of us that might involve a premium price for our common stock or preferred stock or that our shareholders otherwise believe to be in their best interests, and may result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.

 

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Our earnings are dependent, in part, upon the performance of our investment portfolio. As permitted by the Code, we invest in and own marketable securities of other REITs, which we generally limit to no more than approximately 10% of our undepreciated assets (which is our total assets excluding accumulated depreciation). To the extent that the value of those investments declines or those investments do not provide an attractive return, our earnings and cash flow could be adversely affected.

 

We are subject to restrictions that may impede our ability to effect a change in control. Certain provisions contained in our charter and bylaws and certain provisions of Maryland law may have the effect of discouraging a third party from making an acquisition proposal for us and thereby inhibit a change in control. These provisions include the following:

 

    Our charter provides for three classes of directors with the term of office of one class expiring each year, commonly referred to as a “staggered board.” By preventing common shareholders from voting on the election of more than one class of directors at any annual meeting of shareholders, this provision may have the effect of keeping the current members of our Board of Directors in control for a longer period of time than shareholders may desire.
     
  Our charter generally limits any stockholder from acquiring more than 9.8% (in value or in number of shares, whichever is more restrictive) of our outstanding equity stock (defined as all of our classes of capital stock, except our excess stock). While this provision is intended to assist us in qualifying as a REIT for federal income tax purposes, the ownership limit may also limit the opportunity for shareholders to receive a premium for their shares of common stock that might otherwise exist if an investor was attempting to assemble a block of shares in excess of 9.8% of the outstanding shares of equity stock or otherwise effect a change in control.
     
  The request of shareholders entitled to cast a majority of the votes entitled to be cast at such meeting is necessary for shareholders to call a special meeting. We also require advance notice from shareholders for the nomination of directors or proposals of business to be considered at a meeting of shareholders.
     
  Our Board of Directors may authorize and cause us to issue securities without shareholder approval. Under our charter, our Board of Directors has the power to classify and reclassify any of our unissued shares of capital stock into shares of capital stock with such preferences, rights, powers and restrictions as the Board of Directors may determine.
     
  “Business combination” provisions that provide that, unless exempted, a Maryland corporation may not engage in certain business combinations, including mergers, dispositions of 10 percent or more of its assets, certain issuances of shares of stock and other specified transactions, with an “interested shareholder” or an affiliate of an interested shareholder for five years after the most recent date on which the interested shareholder became an interested shareholder, and thereafter unless specified criteria are met. An interested shareholder is defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding voting stock at any time within the two-year period immediately prior to the date in question. In our charter, we have expressly elected that the Maryland Business Combination Act not govern or apply to any transaction with a related company, UMH Properties, Inc. (“UMH”), a Maryland corporation.
     
  The duties of directors of a Maryland corporation do not require them to, among other things (a) accept, recommend or respond to any proposal by a person seeking to acquire control of the corporation, (b) authorize the corporation to redeem any rights under, or modify or render inapplicable, any shareholders rights plan, (c) make a determination under the Maryland Business Combination Act or the Maryland Control Share Acquisition Act to exempt any person or transaction from the requirements of those provisions, or (d) act or fail to act solely because of the effect of the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the shareholders in an acquisition.

 

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We cannot assure you that we will be able to pay distributions regularly. Our ability to pay distributions in the future is dependent on our ability to operate profitably and to generate cash from our operations and the operations of our subsidiaries and is subject to limitations under our financing arrangements and Maryland law. Under the Maryland General Corporation Law, or the MGCL, a Maryland corporation generally may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its debts as the debts became due in the usual course of business, or the corporation’s total assets would be less than the sum of its total liabilities plus, unless the charter permits otherwise, the amount that would be needed if the corporation were to be dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution. Accordingly, we cannot guarantee that we will be able to pay distributions on a regular quarterly basis in the future.

 

Future terrorist attacks and military conflicts could have a material adverse effect on general economic conditions, consumer confidence and market liquidity. Among other things, it is possible that interest rates may be affected by these events. An increase in interest rates may increase our costs of borrowing, leading to a reduction in our earnings. Terrorist acts could also result in significant damages to, or loss of, our properties.

 

We and our tenants may be unable to obtain adequate insurance coverage on acceptable economic terms for losses resulting from acts of terrorism. Our lenders may require that we carry terrorism insurance even if we do not believe this insurance is necessary or cost effective. We may also be prohibited under the applicable lease from passing all or a portion of the cost of such insurance through to the tenant. Should an act of terrorism result in an uninsured loss or a loss in excess of insured limits, we could lose capital invested in a property, as well as the anticipated future revenues from a property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property. Any loss of these types could adversely affect our financial condition.

 

Disruptions in the financial markets could affect our ability to obtain financing on reasonable terms and have other adverse effects on us and the market price of our capital stock. Over the last several years, the United States stock and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks and debt securities to fluctuate substantially and the spreads on prospective debt financing to widen considerably. More recently, the financial crisis in Europe (including financial difficulties at several large European banks) has had a similar, although less pronounced, effect. Adding to the European credit crisis, in June 2016, voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union and has continued to have a material adverse effect on global economic conditions and the stability of global financial markets and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing at reasonable terms, which may negatively affect our ability to acquire properties and otherwise pursue our investment strategy. A prolonged downturn in the stock or credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our investment strategy accordingly. These types of events in the stock and credit markets may make it more difficult or costly for us to raise capital through the issuance of the common stock, preferred stock or debt securities. The potential disruptions in the financial markets may have a material adverse effect on the market value of the common stock and preferred stock and the return we receive on our properties and investments, as well as other unknown adverse effects on us or the economy in general.

 

We are subject to risks arising from litigation. We may become involved in litigation. Litigation can be costly, and the results of litigation are often difficult to predict. We may not have adequate insurance coverage or contractual protection to cover costs and liability in the event we are sued, and to the extent we resort to litigation to enforce our rights, we may incur significant costs and ultimately be unsuccessful or unable to recover amounts we believe are owed to us. We may have little or no control of the timing of litigation, which presents challenges to our strategic planning.

 

Dividends on our capital stock do not qualify for the reduced tax rates available for some dividends. Income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Although these rules do not adversely affect our taxation or the dividends payable by us, to the extent that the preferential rates continue to apply to regular corporate qualified dividends, investors who are individuals, trusts and estates may perceive an investment in us to be relatively less attractive than an investment in the stock of a non-REIT corporation that pays dividends, which could materially and adversely affect the value of the shares of, and per share trading price of, our capital stock.

 

ITEM 1B – UNRESOLVED STAFF COMMENTS

 

None.

 

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ITEM 2 - PROPERTIES

 

The Company operates as a REIT. Our portfolio is primarily comprised of real estate holdings, some of which have been long-term holdings carried on our financial statements at depreciated cost. We believe that their current market values exceed both the original cost and the depreciated cost.

 

The following table sets forth certain information concerning the Company’s real estate investments as of September 30, 2016:

 

                   Mortgage 
       Fiscal Year       Square   Balance 
State   City (MSA)  Acquisition   Type   Footage   9/30/2016 
                     
AL   Huntsville   2005    Industrial    88,653   $795,594 
AZ   Tolleson (Phoenix)   2003    Industrial    283,358    5,299,383 
CO   Colorado Springs   2006    Industrial    68,370    1,329,709 
CO   Colorado Springs   2016    Industrial    225,362    18,576,282 
CO   Denver   2005    Industrial    69,865    1,059,646 
CT   Newington (Hartford)   2001    Industrial    54,812    -0- 
FL   Cocoa   2008    Industrial    144,138    5,063,864 
FL   Davenport (Orlando)   2016    Industrial    310,922    26,400,000 
FL   Ft. Myers   2003    Industrial    87,500    -0- 
FL   Jacksonville (FDX)   1999    Industrial    95,883    1,384,194 
FL   Jacksonville (FDX Ground)   2015    Industrial    297,579    18,453,112 
FL   Lakeland   2006    Industrial    32,105    -0- 
FL   Orlando   2008    Industrial    110,638    4,342,604 
FL   Punta Gorda   2007    Industrial    34,624    1,990,764 
FL   Tampa (FDX Ground)   2004    Industrial    170,779    6,633,049 
FL   Tampa (FDX)   2006    Industrial    95,662    3,900,447 
FL   Tampa (Tampa Bay Grand Prix)   2005    Industrial    68,385    -0- 
GA   Augusta (FDX Ground)   2005    Industrial    59,358    774,093 
GA   Augusta (FDX)   2006    Industrial    30,184    -0- 
GA   Griffin (Atlanta)   2006    Industrial    218,120    -0- 
IA   Urbandale (Des Moines)   1994    Industrial    36,270    -0- 
IL   Burr Ridge (Chicago)   1997    Industrial    12,500    -0- 
IL   Elgin (Chicago)   2002    Industrial    89,052    349,658 
IL   Granite City (St. Louis, MO)   2001    Industrial    184,800    -0- 
IL   Montgomery (Chicago)   2004    Industrial    171,200    -0- 
IL   Rockford (B/E Aerospace, Inc.)   2015    Industrial    38,833    -0- 
IL   Rockford (Sherwin-Williams Company)   2011    Industrial    66,387    -0- 
IL   Sauget (St. Louis, MO)   2015    Industrial    198,773    9,701,419 
IL   Schaumburg (Chicago)   1997    Industrial    73,500    -0- 
IL   Wheeling (Chicago)   2003    Industrial    123,000    -0- 
IN   Greenwood (Indianapolis)   2015    Industrial    671,354    22,760,488 
IN   Indianapolis   2014    Industrial    327,822    12,289,676 
KS   Edwardsville (Kansas City) (Carlisle Tire)   2003    Industrial    179,280    397,513 
KS   Edwardsville (Kansas City) (International Paper)   2014    Industrial    280,000    10,648,115 
KS   Olathe (Kansas City)   2016    Industrial    313,763    22,215,000 
KS   Topeka   2009    Industrial    40,000    1,363,023 
KY   Buckner (Louisville)   2014    Industrial    558,600    16,694,846 
KY   Frankfort (Lexington)   2015    Industrial    599,840    18,352,289 
KY   Louisville   2016    Industrial    137,500    7,288,891 
LA   Covington (New Orleans)   2016    Industrial    175,315    12,468,713 
MD   Beltsville (Washington, DC)   2001    Industrial    144,523    -0- 
MI   Livonia (Detroit)   2013    Industrial    172,005    7,503,400 
MI   Orion   2007    Industrial    245,633    8,580,058 
MI   Romulus (Detroit)   1998    Industrial    71,933    -0- 
MN   Stewartville (Rochester) (1)   2013    Industrial    60,398    2,612,978 
MN   White Bear Lake (Minneapolis/St. Paul) (4)   2001    Industrial    59,425    -0- 
MO   Kansas City (Bunzl Distribution Midcentral, Inc.)   2015    Industrial    158,417    6,958,091 

 

 17 
Table of Contents

 

      Fiscal Year     Square  Mortgage
Balance
 
State   City (MSA)  Acquisition   Type Footage  9/30/2016 
                  
MO   Kansas City (Kellogg Sales Company)    2007   Industrial  65,067  $2,241,680 
MO   Liberty (Kansas City)   1998   Industrial  95,898   -0- 
MO   O’Fallon (St. Louis)   1994   Industrial  102,135   -0- 
MO   St. Joseph   2001   Industrial  382,880   -0- 
MS   Olive Branch (Memphis, TN) (Anda)   2012   Industrial  234,660   8,750,368 
MS   Olive Branch (Memphis, TN) (Milwaukee Tool)   2013   Industrial  861,889   25,000,000 
MS   Richland (Jackson)   1994   Industrial  36,000   -0- 
MS   Ridgeland (Jackson)   1993   Industrial  26,340   -0- 
NC   Concord (Charlotte)   2016   Industrial  330,717   20,001,944 
NC   Fayetteville   1997   Industrial  148,000   -0- 
NC   Winston-Salem   2002   Industrial  106,507   -0- 
NE   Omaha   1999   Industrial  89,115   -0- 
NJ   Carlstadt (New York, NY) (2)   2001   Industrial  60,400   1,898,198 
NJ   Somerset (3)   1970   Shopping Center  64,138   -0- 
NY   Cheektowaga (Buffalo)   2000   Industrial  104,981   343,548 
NY   Halfmoon (Albany)   2012   Industrial  75,000   3,786,098 
NY   Orangeburg (New York)   1993   Industrial  50,400   -0- 
OH   Bedford Heights (Cleveland)   2007   Industrial  82,269   2,685,791 
OH   Cincinnati   2015   Industrial  63,840   -0- 
OH   Lebanon (Cincinnati)   2012   Industrial  51,130   2,592,182 
OH   Monroe (Cincinnati)   2015   Industrial  232,200   8,071,987 
OH   Richfield (Cleveland)   2006   Industrial  131,152   3,078,731 
OH   Streetsboro (Cleveland)   2012   Industrial  368,060   10,446,469 
OH   West Chester Twp. (Cincinnati)   1999   Industrial  103,818   2,071,107 
OK   Oklahoma City   2012   Industrial  158,340   4,401,832 
OK   Tulsa   2014   Industrial  46,240   1,934,175 
PA   Altoona (1)   2014   Industrial  122,522   4,017,147 
PA   Imperial (Pittsburgh)   2016   Industrial  125,860   12,700,739 
PA   Monaca (Pittsburgh)   1988   Industrial  255,658   -0- 
SC   Ft. Mill (Charlotte, NC)   2010   Industrial  176,939   1,926,986 
SC   Hanahan (Charleston) (SAIC)   2005   Industrial  302,400   5,605,514 
SC   Hanahan (Charleston) (FDX Ground)   2005   Industrial  91,776   1,064,185 
TN   Chattanooga   2007   Industrial  60,637   1,551,081 
TN   Lebanon (Nashville)   2011   Industrial  381,240   7,659,116 
TN   Memphis   2010   Industrial  449,900   6,667,886 
TN   Shelby County   2007   Land  N/A   -0- 
TX   Carrollton (Dallas)   2010   Industrial  184,317   7,960,781 
TX   Corpus Christi   2012   Industrial  46,253   -0- 
TX   Edinburg   2011   Industrial  113,582   -0- 
TX   El Paso   2006   Industrial  144,149   3,259,726 
TX   Fort Worth (Dallas)   2015   Industrial  304,608   23,431,093 
TX   Houston   2010   Industrial  91,295   3,124,904 
TX   Lindale (Tyler)   2015   Industrial  163,378   6,378,382 
TX   Spring (Houston)   2014   Industrial  181,176   9,126,834 
TX   Waco   2012   Industrial  150,710   4,799,919 
VA   Charlottesville   1999   Industrial  48,064   -0- 
VA   Mechanicsville (Richmond) (FDX)   2001   Industrial  112,799   -0- 
VA   Richmond (United Technologies)   2004   Industrial  60,000   -0- 
VA   Roanoke (CHEP)   2007   Industrial  83,000   2,519,243 
VA   Roanoke (FDX Ground)   2013   Industrial  103,402   5,321,390 
WA   Burlington (Seattle/Everett)   2016   Industrial  210,445   19,881,817 
WI   Cudahy (Milwaukee)   2001   Industrial  139,564   -0- 
WI   Green Bay (1)   2013   Industrial  99,102   3,260,401 
               16,010,372  $483,748,153 

 

  (1) One loan is secured by the properties located in Green Bay, WI, Stewartville, MN and Altoona, PA.
  (2) The Company owns a 51% controlling equity interest.
  (3) The Company has a 67% controlling equity interest.
  (4) The property was sold on October 27, 2016.

 

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Table of Contents

 

The following table sets forth certain information concerning the principal tenants and leases for the Company’s properties shown above as of September 30, 2016:

 

State   City (MSA)  Tenant  Annualized Rent   Lease Expiration   
                  
AL   Huntsville  FedEx Ground Package System, Inc.  $590,000   07/31/26   (1)
AZ   Tolleson (Phoenix)  Western Container Corp. (Coca-Cola)   1,346,000   04/30/27   (2)
CO   Colorado Springs  FedEx Ground Package System, Inc.   644,000   09/30/18    
CO   Colorado Springs  FedEx Ground Package System, Inc.   1,832,000   01/31/26    
CO   Denver  FedEx Ground Package System, Inc.   564,000   07/31/18    
CT   Newington (Hartford)  Kellogg Sales Company   329,000   02/29/20   (2)
FL   Cocoa  FedEx Ground Package System, Inc.   1,112,000   09/30/24    
FL   Davenport (Orlando)  FedEx Ground Package System, Inc.   2,604,000   04/30/31    
FL   Ft. Myers  FedEx Ground Package System, Inc.   433,000   06/30/17   (2)
FL   Jacksonville  FedEx Corporation   518,000   05/31/19    
FL   Jacksonville  FedEx Ground Package System, Inc.   1,992,000   12/31/29    
FL   Lakeland  FedEx Corporation   155,000   11/30/17    
FL   Orlando  FedEx Corporation   666,000   11/30/17    
FL   Punta Gorda  FedEx Corporation   304,000   06/30/17   (3)
FL   Tampa  FedEx Ground Package System, Inc.   1,614,000   07/31/26   (4)
FL   Tampa  FedEx Corporation   603,000   09/30/17   (3)
FL   Tampa  Tampa Bay Grand Prix   289,000   09/30/20    
GA   Augusta  FedEx Ground Package System, Inc.   453,000   06/30/18    
GA   Augusta  FedEx Corporation   121,000   11/30/22    
GA   Griffin (Atlanta)  Caterpillar Logistics Services, Inc.   1,169,000   11/30/16   (3)
IA   Urbandale (Des Moines)  Keystone Automotive Industries MN, Inc.   140,000   03/31/17   (3)
IL   Burr Ridge (Chicago)  Sherwin-Williams Company   160,000   10/31/21    
IL   Elgin (Chicago)  Joseph T. Ryerson and Son, Inc.   506,000   01/31/20   (2)
IL   Granite City (St. Louis, MO)  Anheuser-Busch, Inc.   806,000   11/30/21   (2)
IL   Montgomery (Chicago)  Home Depot USA, Inc.   978,000   06/30/20    
IL   Rockford  B/E Aerospace, Inc.   360,000   06/30/27    
IL   Rockford  Sherwin-Williams Company   477,000   12/31/23    
IL   Sauget (St. Louis, MO)  FedEx Ground Package System, Inc.   1,036,000   05/31/29    
IL   Schaumburg (Chicago)  FedEx Corporation   483,000   03/31/27   (2)
IL   Wheeling (Chicago)  FedEx Ground Package System, Inc.   1,386,000   05/31/17   (3)
IN   Greenwood (Indianapolis)  ULTA, Inc.   2,651,000   07/31/25    
IN   Indianapolis  FedEx Ground Package System, Inc.   1,533,000   04/30/24    
KS   Edwardsville (Kansas City)  Carlisle Tire & Wheel Company   787,000   05/31/18    
KS   Edwardsville (Kansas City)  International Paper Company   1,326,000   08/31/23    
KS   Olathe (Kansas City)  FedEx Ground Package System, Inc.   2,196,000   05/31/31    
KS   Topeka  The Coca-Cola Company   332,000   09/30/21    
KY   Buckner (Louisville)  TreeHouse Private Brands, Inc.   2,166,000   10/31/33    
KY   Frankfort (Lexington)  Jim Beam Brands Company   2,013,000   01/31/25    
KY   Louisville  Challenger Lifts, Inc. (Snap-on Inc.)   835,000   06/07/26    
LA   Covington (New Orleans)  FedEx Ground Package System, Inc.   1,258,000   06/30/25    
MD   Beltsville (Washington, DC)  FedEx Ground Package System, Inc.   1,426,000   07/31/18    
MI   Livonia (Detroit)  FedEx Ground Package System, Inc.   1,194,000   03/31/22    
MI   Orion  FedEx Ground Package System, Inc.   1,908,000   06/30/23    
MI   Romulus (Detroit)  FedEx Corporation   370,000   05/31/21    
MN   Stewartville (Rochester)  FedEx Ground Package System, Inc.   372,000   05/30/23    
MN   White Bear Lake (Minneapolis/St. Paul)  Vacant   -0-   N/A   (6)
MO   Kansas City  Bunzl Distribution Midcentral, Inc.   741,000   09/30/21    
MO   Kansas City  Kellogg Sales Company   325,000   07/31/18    
MO   Liberty (Kansas City)  Holland 1916 Inc.   341,000   06/30/19    
MO   O’Fallon (St. Louis)  Pittsburgh Glass Works LLC   427,000   06/30/18   (7)
MO   St. Joseph  Woodstream Corporation   896,000   09/30/17   (3)(5)
MO   St. Joseph  Altec Industries, Inc.   349,000   02/28/18   (5)
MS   Olive Branch (Memphis, TN)  Anda Pharmaceuticals, Inc.   1,196,000   07/31/22    
MS   Olive Branch (Memphis, TN)  Milwaukee Electric Tool Corporation   2,934,000   07/31/28   (8)
MS   Richland (Jackson)  FedEx Corporation   120,000   03/31/24    
MS   Ridgeland (Jackson)  Graybar Electric Company   109,000   07/31/19   (9)
NC   Concord (Charlotte)  FedEx Ground Package System, Inc.   2,078,000   07/31/25    
NC   Fayetteville  Victory Packaging L.P.   470,000   02/28/21    

 

 19 
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State   City (MSA)  Tenant  Annualized Rent   Lease Expiration   
                  
NC   Winston-Salem  Style Crest, Inc.  $361,000   03/31/21    
NE   Omaha  FedEx Corporation   446,000   10/31/23    
NJ   Carlstadt (New York, NY)  SOFIVE, Inc.   537,000   01/31/25   (10)
NJ   Somerset  Various Tenants at Retail Shopping Center   780,000   Various   (11)
NY   Cheektowaga (Buffalo)  FedEx Ground Package System, Inc.   966,000   08/31/19    
NY   Halfmoon (Albany)  RGH Enterprises, Inc. (Cardinal Health)   596,000   11/30/21    
NY   Orangeburg (New York)  Kellogg Sales Company   328,000   02/28/18    
OH   Bedford Heights (Cleveland)  FedEx Corporation   408,000   08/31/18    
OH   Cincinnati  The American Bottling Company (Dr Pepper Snapple)   477,000   09/30/29    
OH   Lebanon (Cincinnati)  Siemens Real Estate   473,000   04/30/19    
OH   Monroe (Cincinnati)  UGN, Inc.   1,050,000   02/28/30    
OH   Richfield (Cleveland)  FedEx Ground Package System, Inc.   1,493,000   09/30/24    
OH   Streetsboro (Cleveland)  Best Buy Warehousing Logistics, Inc.   1,641,000   01/31/22    
OH   West Chester Twp. (Cincinnati)  FedEx Ground Package System, Inc.   532,000   08/31/23    
OK   Oklahoma City  FedEx Ground Package System, Inc.   1,048,000   06/30/25    
OK   Tulsa  The American Bottling Company (Dr Pepper Snapple)   257,000   02/28/24    
PA   Altoona  FedEx Ground Package System, Inc.   651,000   08/31/23    
PA   Imperial (Pittsburgh)  General Electric Company   1,311,000   12/31/25    
PA   Monaca (Pittsburgh)  NF&M International, Inc.   832,000   12/31/24   (5)
PA   Monaca (Pittsburgh)  Datatel Resources Corporation   242,000   11/30/17   (2)(5)
SC   Ft. Mill (Charlotte, NC)  FedEx Ground Package System, Inc.   1,415,000   10/31/23    
SC   Hanahan (Charleston)  Science Applications International Corporation   1,462,000   04/30/19    
SC   Hanahan (Charleston)  FedEx Ground Package System, Inc.   675,000   07/31/18    
TN   Chattanooga  FedEx Corporation   311,000   10/31/17    
TN   Lebanon (Nashville)  CBOCS Distribution, Inc. (Cracker Barrel)   1,420,000   06/30/24    
TN   Memphis  FedEx Supply Chain Services, Inc.   1,327,000   05/31/19    
TN   Shelby County  N/A- Land   -0-   N/A    
TX   Carrollton (Dallas)  United Technologies Corporation   1,576,000   01/11/19    
TX   Corpus Christi  FedEx Ground Package System, Inc.   463,000   08/31/21    
TX   Edinburg  FedEx Ground Package System, Inc.   598,000   09/30/21   (12)
TX   El Paso  FedEx Ground Package System, Inc.   1,345,000   09/30/23    
TX   Fort Worth (Dallas)  FedEx Ground Package System, Inc.   2,362,000   04/30/30    
TX   Houston  National Oilwell Varco, Inc.   746,000   09/30/22    
TX   Lindale (Tyler)  FedEx Ground Package System, Inc.   725,000   06/30/24    
TX   Spring (Houston)  FedEx Ground Package System, Inc.   1,581,000   09/30/24    
TX   Waco  FedEx Ground Package System, Inc.   1,078,000   08/31/25    
VA   Charlottesville  FedEx Corporation   329,000   08/31/17   (3)
VA   Mechanicsville (Richmond)  FedEx Corporation   541,000   04/30/23    
VA   Richmond  United Technologies Corporation   319,000   11/30/18   (2)
VA   Roanoke  CHEP USA, Inc.   494,000   02/28/25   (13)
VA   Roanoke  FedEx Ground Package System, Inc.   755,000   04/30/23    
WA   Burlington (Seattle/Everett)  FedEx Ground Package System, Inc.   1,962,000   08/31/30    
WI   Cudahy (Milwaukee)  FedEx Ground Package System, Inc.   901,000   06/30/17   (3)
WI   Green Bay  FedEx Ground Package System, Inc.   468,000   05/30/23    
          $91,305,000        

 

  (1) On August 1, 2016, a 14,941 square foot expansion of the building was completed for a cost of approximately $1,925,000, resulting in a new 10 year lease which extended the prior lease expiration date from August 2022 through July 2026. In addition, the expansion resulted in an increase in annual rent effective from the date of completion of approximately $193,000 from approximately $412,000, or $5.59 per square foot, to approximately $605,000, or $6.82 per square foot.
     
  (2) Extension has been executed. See fiscal 2016 and fiscal 2017 renewal and extension chart.
     
  (3) Renewal is in discussion for leases expiring in fiscal 2017.
     
  (4) On August 1, 2016, a parking lot expansion for the property was completed for a cost of approximately $1,303,000, resulting in a new 10 year lease which extended the prior lease expiration from June 2024 through July 2026. In addition, the expansion resulted in an increase in annual rent effective from date of completion of approximately $131,000 from approximately $1,493,000, or $8.74 per square foot to approximately $1,624,000, or $9.51 per square foot.
     
  (5) Property is leased to two tenants.
     
  (6) The property was sold on October 27, 2016.

 

 20 
Table of Contents

 

  (7) Lease has an early termination option which may be exercised after January 1, 2016 but before December 31, 2016, on the condition that the Company is provided with six months of notice and the tenant pays the Company a $213,462 termination fee. Additionally, the lease has an early termination option which may be exercised after January 1, 2017, on the condition that the Company is provided with six months of notice and the tenant pays the Company a $106,731 termination fee.
     
  (8) On July 29, 2016, a 246,434 square foot expansion was completed for a cost of approximately $9,785,000 resulting in a new 12 year lease which extended the original lease expiration date from April 2023 through July 2028 and increased the building size from 615,455 to 861,889 square feet. In addition, the expansion resulted in an initial increase in annual rent effective on the date of completion of approximately $847,000 from approximately $1,943,000, or $3.16 per square foot to approximately $2,790,000, or $3.24 per square foot. Furthermore, annual rent will increase each year by 1.5%.
     
  (9) Lease has an early termination option which may be exercised if tenant gives six months of notice at any time.
     
  (10) Estimated annual rent is the full annual rent per the lease. The Company consolidates the results of this property due to its 51% controlling equity interest.
     
  (11) The Company owns a 67% controlling equity interest. Estimated annual rent reflects the Company’s proportionate share of the total rent.
     
  (12) Not reflected above - On October 1, 2016, a 50,741 square foot expansion of the building was completed for a cost of approximately $4,988,000, resulting in a new 10 year lease which extended the prior lease expiration date from September 2021 through September 2026 and increased the building size from 113,582 to 164,323 square feet. In addition, the expansion resulted in an increase in annual rent effective from the date of completion of approximately $499,000 from approximately $598,000, or $5.27 per square foot, to approximately $1,097,000, or $6.68 per square foot.
     
  (13) Lease has an early termination option which may be exercised after August 2021, on the condition that the Company is provided with six months of notice and the tenant pays the Company a $500,000 termination fee.

 

All improved properties were 100% occupied at September 30, 2016 except for one property consisting of a 59,425 square feet building situated on 4.78 acres located in White Bear Lake, MN. Subsequent to fiscal yearend, on October 27, 2016, the Company sold this property for $4,272,000 which increased our occupancy rate from 99.6% to 100.0%.

 

The Company’s weighted-average lease expiration was 7.4 and 7.2 years as of September 30, 2016 and 2015, respectively.

 

Our average occupancy rates as of the years ended September 30, 2016, 2015, 2014, 2013 and 2012 were 99.6%, 97.7%, 95.9%, 96.0% and 95.2%, respectively. The average effective annualized rent per square foot for the years ended September 30, 2016, 2015, 2014, 2013 and 2012 was $5.72, $5.48, $5.51, $5.53 and $5.62, respectively.

 

Completed expansions that have resulted in increased rents over the fiscal years ended September 30, 2015 and 2016

 

Ecommerce has been a major catalyst driving increased demand for the industrial property type, causing an ongoing shift from traditional brick and mortar retail shopping to shopping on-line. Due to the increased demand for industrial space, we have been experiencing an increase in expansion activity at our existing properties.

 

During December 2014, a 62,260 square foot expansion of a building leased to NF&M International, Inc. located in Monaca (Pittsburgh), PA was completed for a cost of approximately $4,503,000, resulting in a new 10 year lease which extended the prior lease expiration date from September 2018 through December 2024. In addition, the expansion resulted in an initial increase in annual rent effective January 1, 2015 from $381,805, or $3.39 per square foot, to $820,000, or $4.69 per square foot. Furthermore, annual rent will increase in year five of the lease effective January 1, 2020 to $841,600, or $4.81 per square foot, resulting in an annualized rent over the new ten year period of $830,800, or $4.75 per square foot.

 

During June 2015, a parking lot expansion of a building leased to FedEx Ground Package System, Inc. located in El Paso, TX was completed for a cost of approximately $2,472,000 resulting in an increase in annual rent effective July 1, 2015 from $1,045,610, or $7.25 per square foot to $1,345,289, or $9.33 per square foot. Prior to this parking lot expansion, during September 2013, a 51,765 square foot expansion of the building located at the same property was completed for a cost of approximately $3,800,000 resulting in an increase in annual rent effective October 1, 2013 from $667,584, or $7.27 per square foot, to $1,045,610, or $7.25 per square foot. In addition, the expansion resulted in a new 10 year lease which extended the prior lease expiration date from September 2015 through September 2023.

 

 21 
Table of Contents

 

During June 2015, a 38,428 square foot expansion of a building leased to FedEx Ground Package System, Inc. located in Oklahoma City, OK was completed for a cost of approximately $3,332,000, resulting in a new 10 year lease which extended the prior lease expiration date from March 2022 through June 2025. In addition, the expansion resulted in an increase in annual rent effective August 1, 2015 from $712,532, or $5.94 per square foot, to $1,048,250, or $6.62 per square foot.

 

During August 2015, a 48,116 square foot expansion of a building leased to FedEx Ground Package System, Inc. located in Waco, TX was completed for a cost of approximately $4,125,000, resulting in a new 10 year lease which extended the prior lease expiration date from May 2022 through August 2025. In addition, the expansion resulted in an increase in annual rent effective August 15, 2015 from $659,324, or $6.43 per square foot, to $1,078,383, or $7.16 per square foot.

 

On July 29, 2016, a 246,434 square foot expansion of a building leased to Milwaukee Electric Tool Corporation (“Milwaukee Tool”) located in Olive Branch, MS, which is located in the Memphis, TN MSA, was completed for a cost of approximately $9,785,000. This resulted in a new 12 year lease which extended the original lease expiration date from April 2023 through July 2028 and increased the building size from 615,455 to 861,889 square feet. In addition, the expansion resulted in an initial increase in annual rent effective on the date of completion of approximately $847,000 from approximately $1,943,000, or $3.16 per square foot, to approximately $2,790,000, or $3.24 per square foot. Furthermore, annual rent will increase each year by 1.5% resulting in an annualized rent over the new twelve year period of approximately $3,020,000, or $3.50 per square foot. In September 2016, in connection with the expansion, the Company refinanced its prior 3.76% interest rate mortgage with its existing lender of this property. At the time of the refinancing, the prior amortizing loan was approximately $13,158,000 and was set to mature in January 2023. The new loan is a 12 year fully-amortizing mortgage of $25,000,000 and will mature in October 2028. The interest rate of the new loan remained the same as the prior loan at a fixed interest rate of 3.76%.

 

On August 1, 2016, a parking lot expansion for a property leased to FedEx Ground Package System, Inc. located in Tampa, FL was completed for a cost of approximately $1,303,000, resulting in a new 10 year lease which extended the prior lease expiration date from June 2024 through July 2026. In addition, the expansion resulted in an increase in annual rent effective from the date of completion of approximately $131,000 from approximately $1,493,000, or $8.74 per square foot to approximately $1,624,000, or $9.51 per square foot.

 

On August 1, 2016, a 14,941 square foot expansion of a building leased to FedEx Ground Package System, Inc. located in Huntsville, AL was completed for a cost of approximately $1,925,000, resulting in a new 10 year lease which extended the prior lease expiration date from August 2022 through July 2026. In addition, the expansion resulted in an increase in annual rent effective from the date of completion of approximately $193,000 from approximately $412,000, or $5.59 per square foot, to approximately $605,000 or $6.82 per square foot.

 

On October 1, 2016, a 50,741 square foot expansion of the building leased to FedEx Ground Package System, Inc. located in Edinburg, TX was completed for a cost of approximately $4,988,000, resulting in a new 10 year lease which extended the prior lease expiration date from September 2021 through September 2026. In addition, the expansion resulted in an increase in annual rent effective from the date of completion of approximately $499,000 from approximately $598,000, or $5.27 per square foot, to approximately $1,097,000, or $6.68 per square foot.

 

Fiscal 2016 renewals

 

Approximately 2% of the Company’s gross leasable area, consisting of three leases totaling 325,656 square feet, was scheduled to expire during fiscal 2016. The Company has renewed all three leases, resulting in a 100% tenant retention rate for fiscal 2016. The Company’s tenant retention rate in fiscal 2015 was also 100%. For two of the three leases that were scheduled to expire during fiscal 2016, the Company did not incur any tenant improvement costs or any leasing costs. For the other lease renewal, the Company incurred or expects to incur tenant improvement costs of approximately $210,000 and leasing costs of approximately $133,000. The table below summarizes the lease terms of the three leases which were renewed and includes both the tenant improvement costs and the leasing costs, which are presented on a per square foot (PSF) basis averaged over the renewal term.

 

 22 
Table of Contents

 

Property  Tenant  Square Feet  

Former U.S. GAAP Straight- Line Rent

PSF

  

Former Cash Rent

PSF

  

Former Lease

Expiration

  Renewal U.S GAAP Straight- Line Rent PSF  

Renewal Initial

Cash Rent PSF

   Renewal Lease Expiration  Renewal Term (years)  

Tenant Improvement Cost

PSF over Renewal Term (1)

  

Leasing Commissions Cost

PSF over Renewal Term (1)

 
                                          
Monaca, PA  Datatel Resources   80,856   $2.87   $2.87   11/30/15  $3.00   $3.00   11/30/17   2.0   $-0-   $-0- 
Granite City , IL  Anheuser- Busch, Inc.   184,800    4.16    4.32   5/31/16   4.36    4.10   11/30/21   5.5    0.21    0.13 
Richmond, VA  United Technologies   60,000    4.99    5.24   5/31/16   5.33    5.24   11/30/18   2.5    -0-    -0- 
   Total   325,656                                          
                                                  
Weighted Average          $3.99   $4.13      $4.20   $4.04       4.1   $0.16   $0.10 

 

  (1) Amount calculated based on the total cost divided by the square feet, divided by the renewal term.

 

The three lease renewals resulted in a weighted average term of 4.1 years and a U.S. GAAP straight-line weighted average lease rate of $4.20 per square foot. The renewed weighted average initial cash rent per square foot is $4.04. This compares to the former weighted average rent of $3.99 per square foot on a U.S. GAAP straight-line basis and the former weighted average cash rent of $4.13 per square foot, representing an increase in the weighted average lease rate of 5.3% on a U.S. GAAP straight-line basis and a decrease in the weighted average lease rate of 2.2% on a cash basis.

 

During September 2015, the Company entered into a 5.25 year lease agreement for its previously vacant 148,000 square foot building located in Fayetteville, NC through February 28, 2021. The lease commenced December 1, 2015 and is with Victory Packaging, L.P., a wholly-owned subsidiary of KapStone Paper and Packaging Corporation, a publicly-owned company. The initial annual rent of $469,160, representing $3.17 per square foot, commenced on March 1, 2016 with 2.5% annual increases thereafter.

 

During October 2015, the Company entered into a 5.25 year lease agreement for its previously vacant 106,507 square foot building located in Winston-Salem, NC through March 31, 2021. The lease is with Style Crest, Inc. and commenced on January 1, 2016. Initial annual rent of $356,798, representing $3.35 per square foot, commenced on April 1, 2016 with 3.0% annual increases thereafter.

 

Fiscal 2017 renewals

 

In fiscal 2017, approximately 10% of our gross leasable area, representing thirteen leases totaling 1,539,526 square feet, is set to expire. As of the date of this Annual Report, five of the thirteen leases have renewed. One of the five leases, (which is with FedEx Ground Package System, Inc. for a property located in Ft. Myers, FL), has renewed for only eight months because the tenant plans to move its operations from our 87,500 square foot facility to a newly constructed facility, which is also located in Ft. Myers, FL. Once the construction is complete, the Company is under contract to purchase this new facility, consisting of approximately 213,500 square feet, subject to satisfactory completion of due diligence and other customary closing conditions and requirements. In addition, once the construction is complete, this brand new facility will be leased for 10 years. Excluding the eight month lease renewal at the Ft. Myers, FL location, the four leases that have renewed thus far represent 500,722 square feet, or 33% of the expiring square footage, and have a weighted average lease term of 8.0 years.

 

The Company has incurred or expects to incur tenant improvement costs of approximately $1,928,000 and leasing costs of approximately $587,000 in connection with four of the five lease renewals. The table below summarizes the lease terms of the five leases which were renewed and includes both the tenant improvement costs and the leasing costs, which are presented on a per square foot (PSF) basis averaged over the renewal term.

 

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Property

 

 

 

Tenant

 

 

 

Square

Feet

  

Forme

U.S. GAAP Straight- Line Rent

PSF

  

Former

Cash Rent

PSF

  

Former

Lease

Expiration

 

Renewal

U.S GAAP Straight- Line Rent

PSF

  

Renewal

Initial

Cash Rent

PSF

  

Renewal

Lease

Expiration

  Renewal Term (years)

 

Tenant

Improvement

Cost

PSF over

Renewal

Term (1)

  

Leasing

Commissions Cost

PSF over

Renewal

Term (1)

 
                                          
Ft. Myers, FL  FedEx Ground  87,500   $4.95   $4.95   10/31/16  $4.95   $4.95   6/30/17  0.7   $0.00   $0.00 
                                          
Elgin, IL  Joseph T. Ryerson   89,052   $5.68   $5.68   1/31/17  $5.68   $5.68   1/31/20   3.0   $0.17   $0.17 
Newington, CT  Kellogg Sales Co.   54,812   $6.00   $6.00   2/28/17  $6.00   $6.00   2/29/20   3.0   $0.30   $0.24 
Schaumburg, IL  FedEx Express   73,500   $6.88   $7.00   3/31/17  $6.50   $6.50   3/31/27   10.0   $0.24   $0.13 
Tolleson, AZ  Western Container   283,358   $4.33   $4.59   4/30/17  $4.78   $4.33   4/30/27   10.0   $0.58   $0.14 
   Total (2)   500,722                                          
                                                  
Weighted Average (2)          $5.13   $5.29      $5.33   $5.07       8.0   $0.48   $0.15 

 

  (1) Amount calculated based on the total cost divided by the square feet, divided by the renewal term.
  (2) Total and Weighted Average amounts exclude the Ft. Myers, FL property.

 

Excluding the eight-month lease renewal at the Ft. Myers, FL location, the remaining four lease renewals results in a weighted average term of 8.0 years and a U.S. GAAP straight-line weighted average lease rate of $5.33 per square foot. The renewed weighted average initial cash rent per square foot is $5.07. This compares to the former weighted average rent of $5.13 per square foot on a U.S. GAAP straight-line basis and the former weighted average cash rent of $5.29 per square foot, representing an increase in the weighted average lease rate of 3.9% on a U.S. GAAP straight-line basis and a decrease in the weighted average lease rate of 4.2% on a cash basis. The eight remaining leases that are set to expire during fiscal 2017 are under discussion.

 

On September 30, 2016, the Company had a weighted average lease maturity of 7.4 years with weighted average gross annualized rent scheduled to expire each year of 8.0%.

 

The following table presents certain information as of September 30, 2016, with respect to the Company’s leases expiring over the future fiscal years ended September 30th:

 

Expiration of Fiscal Year Ended September 30th   Property Count  

Total Area

Expiring

(square feet)

  

Annualized

Rent

$

  

Percent of Gross Annualized Rent

%

 
                  
Vacant (1)    1    59,425   $-0-    0%
Shopping Center (2)    1    64,138    780,000    1%
2017    9    1,038,804    6,161,000    7%
2018    15    1,324,159    7,760,000    8%
2019    9    1,370,849    7,091,000    8%
2020    4    383,449    2,102,000    2%
2021    7    684,692    3,335,000    4%
2022    7    1,138,320    6,339,000    7%
2023    10    1,302,007    8,019,000    9%
2024    11    1,743,587    10,579,000    12%
2025    9    2,404,478    11,989,000    13%
2026    5    748,154    6,182,000    7%
2027    3    395,691    2,189,000    2%
2028    1    861,889    2,934,000    3%
2029    2    262,613    1,513,000    2%
2030    4    1,044,832    7,366,000    8%
2031    2    624,685    4,800,000    5%
2033    1    558,600    2,166,000    2%
Total (3)    99    16,010,372   $91,305,000    100%

 

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  (1) “Vacant” represents one property consisting of a 59,425 square foot building situated on 4.78 acres located in White Bear Lake, MN. Subsequent to fiscal yearend, on October 27, 2016, the Company sold its only vacant building for $4,272,000 which increased the occupancy rate to 100.0%.
  (2) Shopping Center” represents a multi-tenanted property which has lease expirations ranging from month-to-month to 2029.
  (3) Included in 2018 is Datatel Resources and included in 2025 is NF&M International, which both occupy one property and therefore are counted as one property in the property count total. Included in 2017 is Woodstream Corporation and included in 2018 is Altec Industries, Inc., which both occupy one property and therefore are counted as one property in the property count total.

 

ITEM 3 – LEGAL PROCEEDINGS

 

None.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

None.

 

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PART II

 

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Since June 1, 2010, the common stock of Monmouth Real Estate Investment Corporation has been traded on the New York Stock Exchange (NYSE), under the symbol “MNR”. Previously, the common stock was traded on the NASDAQ Global Select Market. The per share range of high and low market prices and distributions paid to common shareholders during each fiscal quarter of the last two fiscal years ended September 30th were as follows:

 

Fiscal 2016   Fiscal 2015
Market Price   Market Price
Fiscal Qtr.  High   Low   Distrib.    Fiscal Qtr.  High   Low   Distrib. 
                             
First  $10.72   $9.50   $0.16    First  $11.62   $10.10   $0.15 
Second   12.03    9.63    0.16    Second   12.07    10.64    0.15 
Third   13.26    11.22    0.16    Third   11.30    9.30    0.15 
Fourth   14.92    13.15    0.16    Fourth   10.09    9.02    0.15 
             $0.64                 $0.60 

 

On November 15, 2016, the closing price of our common stock was $13.24.

 

Shareholder Information

 

As of November 15, 2016, there were 1,359 shareholders of record who held shares of common stock of the Company.

 

Distributions and Dividends

 

On October 1, 2015, the Company’s Board of Directors approved a 6.7% increase in the Company’s quarterly common stock dividend, raising it to $0.16 per share from $0.15 per share. On October 3, 2016, the Company’s Board of Directors declared a cash dividend of $0.16 per share to be paid on December 15, 2016, to shareholders of record at the close of business on November 15, 2016. This represents an annualized dividend rate of $0.64 per share. The Company has maintained or increased its cash dividend for twenty-five consecutive years. The Company paid the distributions from cash flows from operations. The Company’s common stock dividend policy is dependent upon the Company’s earnings, capital requirements, financial condition, availability and cost of bank financing and other factors considered relevant by the Board of Directors. It is the Company’s intention to continue making comparable quarterly distributions in the future and to grow its distributions over time.

 

Recent Sales of Unregistered Securities

 

None.

 

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Table of Contents

 

Purchases of Equity Securities

 

On January 19, 2016, the Board of Directors reaffirmed its Share Repurchase Program (the Repurchase Program) that authorizes the Company to purchase up to $10,000,000 in the aggregate of the Company’s common stock. The Repurchase Program was originally created on March 3, 2009 and is intended to be implemented through purchases made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions or block trades, or by any combination of such methods, in accordance with applicable insider trading and other securities laws and regulations. The size, scope and timing of any purchases will be based on business, market and other conditions and factors, including price, regulatory and contractual requirements or consents, and capital availability. The Repurchase Program does not require the Company to acquire any particular amount of common stock, and the program may be suspended, modified or discontinued at any time at the Company’s discretion without prior notice. As of September 30, 2016, the Company did not reacquire any of its shares of Common Stock. The maximum dollar value that may be purchased under the Repurchase Program as of September 30, 2016 is $10,000,000.

 

Equity Compensation Plan Information

 

The Company has a Stock Option and Stock Award Plan, adopted in 2007 and amended and restated in 2010 (the 2007 Plan) authorizing the grant to officers and key employees of options to purchase up to 1,500,000 shares of common stock, including up to 100,000 shares of restricted stock awards in any one fiscal year. As of September 30, 2016, there were 444,878 shares available for grant as stock options or restricted stock under the 2007 Plan. During fiscal 2016, options to purchase 65,000 shares were granted with an exercise price of $10.37 and options to purchase 245,000 shares were exercised at a weighted average exercise price of $7.69 per share for total proceeds of $1,883,300. In addition, during fiscal 2016, 40,000 shares of restricted common stock were granted with a fair value on the grant date of $13.64 per share. See Note 9 in the Notes to the Consolidated Financial Statements included in this Form 10-K for a description of the plan. See Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for a table of beneficial ownership of the Company’s common stock.

 

The following table summarizes information, as of September 30, 2016, relating to the equity compensation plan of the Company (including individual compensation arrangements) pursuant to which equity securities of the Company are authorized for issuance:

 

   Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights   Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights   Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plan (excluding Securities reflected in column (a)) 
Plan Category  (a)   (b)   (c) 
             
Equity Compensation Plan Approved by Security Holders   455,000   $9.46    444,878 
                
Equity Compensation Plan not Approved by Security Holders   

N/A

  

N/A

    

N/A

 
                
Total   455,000   $9.46    444,878 

 

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Table of Contents

 

Comparative Stock Performance

 

The following line graph compares the total return of the Company’s common stock for the last five fiscal years to the FTSE NAREIT Composite Index (US), published by the National Association of Real Estate Investment Trusts (NAREIT), and the S&P 500 Index for the same period. The graph assumes a $100 investment in our common stock and in each of the indexes listed below on September 30, 2011 and the reinvestment of all dividends. The total return reflects stock price appreciation and dividend reinvestment for all three comparative indices. The information has been obtained from sources believed to be reliable, but neither its accuracy nor its completeness is guaranteed. Our stock performance shown in the graph below is not indicative of future stock performance.

 

 

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Table of Contents

 

ITEM 6 – SELECTED FINANCIAL DATA

 

The following table sets forth selected financial and other information for the Company for the periods and as of the dates indicated. This table should be read in conjunction with management’s discussion and analysis of financial condition and results of operations and all of the financial statements and notes thereto included elsewhere herein.

 

   September 30, 
   2016   2015   2014   2013   2012 
OPERATING DATA:                         
Rental and Reimbursement Revenue  $94,916,110   $77,775,497   $64,672,341   $54,607,086   $50,368,931 
Real Estate Taxes and Operating Expenses   (14,729,300)   (12,490,019)   (11,317,479)   (9,228,610)   (8,832,027)
Net Operating Income - NOI   80,186,810    65,285,478    53,354,862    45,378,476    41,536,904 
Lease Termination Income   -0-    238,625    1,182,890    690,730    3,222,283 
Gain on Sale of Securities Transactions, net   4,398,599    805,513    2,166,766    7,133,252    6,044,065 
Dividend and Interest Income   5,616,392    3,723,867    3,882,597    3,885,920    3,358,674 
General & Administrative Expenses   (7,936,124)   (6,305,928)   (5,709,937)   (4,982,945)   (5,609,558)
Acquisition Costs   (730,441)   (1,546,088)   (481,880)   (514,699)   (667,799)
Interest Expense   (21,836,811)   (18,558,150)   (16,104,678)   (14,956,954)   (15,352,499)
Depreciation & Amortization Expense   (27,203,918)   (23,058,744)   (18,445,326)   (15,530,094)   (13,832,305)
Income from Continuing Operations   32,494,507    20,584,573    19,845,294    21,103,686    18,699,765 
Gain on Sale of Real Estate Investment   -0-    5,021,242    -0-    -0-    -0- 
Income (loss) from Discontinued Operations   -0-    -0-    -0-    291,560    (15,270)
Net Income   32,494,507    25,605,815    19,845,294    21,395,246    18,684,495 
Preferred Dividends   (9,020,470)   (8,607,032)   (8,607,032)   (8,607,032)   (5,513,126)
Redemption of Preferred Stock   (2,942,149)   -0-    -0-    -0-    -0- 
Net Income Attributable
to Common Shareholders
  $20,531,888   $16,998,783   $11,238,262   $12,788,214   $13,171,369 
Income from Continuing Operations Per Share                         
Basic  $0.50   $0.43   $0.40   $0.49   $0.47 
Diluted   0.50    0.43    0.40    0.49    0.47 
Net Income Attributable to Common
Shareholders Per Share
                         
Basic   0.31    0.29    0.23    0.30    0.33 
Diluted   0.31    0.29    0.23    0.30    0.33 
                          
BALANCE SHEET DATA:                         
Total Assets  $1,229,758,028   $915,991,942   $743,756,700   $617,240,866   $574,507,702 
Real Estate Investments, Net   1,022,483,326    816,111,266    636,710,590    536,770,636    467,865,198 
Mortgage Notes Payable   483,748,153    373,991,174    287,796,006    250,093,382    237,943,911 
Loans Payable   80,790,684    85,041,386    25,200,000    22,200,000    5,200,000 
Preferred Stock Called for Redemption   53,493,750    -0-    -0-    -0-    -0- 
8% Subordinated Convertible Debentures   -0-    -0-    -0-    -0-    8,615,000 
7.625% Series A Cumulative
Redeemable Preferred Stock
   -0-    53,493,750    53,493,750    53,493,750    53,493,750 
7.875% Series B Cumulative
Redeemable Preferred Stock
   57,500,000    57,500,000    57,500,000    57,500,000    57,500,000 
6.125% Series C Cumulative
Redeemable Preferred Stock
   135,000,000    -0-    -0-    -0-    -0- 
Total Shareholders’ Equity   597,858,098    446,010,640    420,631,082    335,914,971    315,687,139 
                          
CASH FLOW DATA:                         
Net Cash Provided (Used) By:                         
Operating Activities  $54,699,500   $38,062,285   $34,856,285   $27,463,529   $26,808,821 
Investing Activities   (227,845,089)   (194,469,735)   (131,809,697)   (60,373,084)   (80,640,038)
Financing Activities   256,821,188    148,006,698    105,023,561    20,663,209    72,105,267 

 

   September 30, 
OTHER INFORMATION:  2016   2015   2014   2013   2012 
                     
Average Number of Common Shares Outstanding                         
Basic   65,468,564    59,085,888    49,829,924    42,275,555    39,660,692 
Diluted   65,558,284    59,201,296    49,925,036    42,432,354    39,819,621 
Funds From Operations*  $46,598,043   $33,730,447   $29,000,443   $27,338,245   $26,459,005 
Core Funds From Operations*  $50,270,633   $35,276,535   $29,482,323   $27,852,944   $27,126,804 
Adjusted Funds From Operations*  $45,865,343   $33,976,958   $25,843,710   $19,521,972   $17,685,624 
Cash Dividends per Common Share  $0.64   $0.60   $0.60   $0.60   $0.60 

 

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* We assess and measure our overall operating results based upon an industry performance measure referred to as Funds From Operations (FFO), which management believes is a useful indicator of our operating performance. FFO is used by industry analysts and investors as a supplemental operating performance measure of a REIT. FFO, as defined by the National Association of Real Estate Investment Trusts (NAREIT), represents net income (loss) attributable to common shareholders, as defined by accounting principles generally accepted in the United States of America (U.S. GAAP), excluding extraordinary items, as defined under U.S. GAAP, gains or losses from sales of previously depreciated real estate assets, impairment charges related to depreciable real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization. NAREIT created FFO as a non-U.S. GAAP supplemental measure of REIT operating performance. We define Core Funds From Operations (Core FFO) as FFO, excluding acquisition costs and costs associated with the Redemption of Preferred Stock. We define Adjusted Funds from Operations (AFFO) as Core FFO, excluding stock compensation expense, depreciation of corporate office tenant improvements, amortization of financing costs, lease termination income, net gain or loss on sale of securities transactions, U.S. GAAP straight-line rent adjustments, non-recurring other expenses and less recurring capital expenditures. We define recurring capital expenditures as all capital expenditures, excluding capital expenditures related to expansions at our current locations or capital expenditures that are incurred in conjunction with obtaining a new lease or a lease renewal. We believe that, as widely recognized measures of performance used by other REITs, FFO, Core FFO and AFFO may be considered by investors as supplemental measures to compare our operating performance to those of other REITs. FFO, Core FFO and AFFO exclude historical cost depreciation as an expense and may facilitate the comparison of REITs which have a different cost basis. However, other REITs may use different methodologies to calculate FFO, Core FFO and AFFO and, accordingly, our FFO, Core FFO and AFFO may not be comparable to all other REITs. The items excluded from FFO, Core FFO and AFFO are significant components in understanding the Company’s financial performance.

 

FFO, Core FFO and AFFO (i) do not represent Cash Flow from Operations as defined by U.S. GAAP; (ii) should not be considered as an alternative to Net Income as a measure of operating performance or to Cash Flows from Operating, Investing and Financing Activities; and (iii) are not an alternative to cash flow as a measure of liquidity. FFO, Core FFO and AFFO, as calculated by the Company, may not be comparable to similarly titled measures reported by other REITs.

 

The following is a reconciliation of the Company’s U.S. GAAP Net Income to the Company’s FFO, Core FFO and AFFO for the fiscal years ended September 30th :

 

    2016     2015     2014     2013     2012  
Net Income Attributable to Common Shareholders   $ 20,531,888     $ 16,998,783     $ 11,238,262     $ 12,788,214     $ 13,171,369  
Plus: Depreciation Expense (including Discontinued Operations & excluding Corporate Office)     23,931,530       19,625,748       15,908,769       12,877,385       11,471,070  
Plus: Amortization of Intangible Assets     1,178,744       1,370,654       1,347,936       1,543,298       1,477,356  
Plus: Amortization of Capitalized Lease Costs     955,881       756,504       505,476       475,142       330,990  
(Gain) Loss on Sale of Depreciable Assets     -0-       (5,021,242 )     -0-       (345,794 )     8,220  
FFO Attributable to Common Shareholders     46,598,043       33,730,447       29,000,443       27,338,245       26,459,005  
Plus: Acquisition Costs     730,441       1,546,088       481,880       514,699       667,799  
Plus: Redemption of Preferred Stock     2,942,149       -0-       -0-       -0-       -0-  
Core FFO Attributable to Common Shareholders     50,270,633       35,276,535       29,482,323       27,852,944       27,126,804  
Plus: Stock Compensation Expense     926,465       448,895       347,002       329,148       593,811  
Plus: Depreciation of Corporate Office Tenant Improvements     123,492       79,572       -0-       -0-       -0-  
Plus: Amortization of Financing Costs     1,116,238       1,286,016       725,745       647,112       630,969  
Plus: Non-recurring Other Expense (1)     500,000       -0-       -0-       -0-       -0-  
Less: Lease Termination Income     -0-       (238,625 )     (1,182,890 )     (690,730 )     (3,222,283 )
Less: Gain on Sale of Securities Transactions, net     (4,398,599 )     (805,513 )     (2,166,766 )     (7,133,252 )     (6,044,065 )
Less: U.S. GAAP Straight-line Rent Adjustment     (1,709,821 )     (1,446,264 )     (600,745 )     (943,785 )     (553,474 )
Less: Recurring Capital Expenditures     (963,065 )     (623,658 )     (760,959 )     (539,465 )     (846,138 )
AFFO Attributable to Common Shareholders   $ 45,865,343     $ 33,976,958     $ 25,843,710     $ 19,521,972     $ 17,685,624  

 

  (1) Consists of one-time payroll expenditures

.

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ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

Cautionary Statement Regarding Forward-Looking Statements

 

Statements contained in this Form 10-K that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements provide the Company’s current expectations or forecasts of future events. Forward-looking statements include statements about the Company’s expectations, beliefs, intentions, plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements that are not historical facts. Forward-looking statements can be identified by their use of forward-looking words, such as “may,” “will,” “anticipate,” “expect,” “believe,” “intend,” “plan,” “should,” “seek” or comparable terms, or the negative use of those words, but the absence of these words does not necessarily mean that a statement is not forward-looking.

 

The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to the Company. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. Some of these factors are described below and under the headings “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. These and other risks, uncertainties and factors could cause the Company’s actual results to differ materially from those included in any forward-looking statements the Company makes. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for the Company to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that could cause actual results to differ materially from the Company’s expectations include, among others:

 

  the ability of the Company’s tenants to make payments under their respective leases, its reliance on certain major tenants and the Company’s ability to re-lease properties that are currently vacant or that become vacant;
     
  the Company’s ability to obtain suitable tenants for its properties;
     
  changes in real estate market conditions, economic conditions in the industrial sector and the market in which the Company’s properties are located and general economic conditions;
     
  the inherent risks associated with owning real estate, including local real estate market conditions, governing laws and regulations and illiquidity of real estate investments;
     
  the Company’s ability to acquire, finance and sell properties on attractive terms;
     
  the Company’s ability to repay debt financing obligations;
     
  the Company’s ability to refinance amounts outstanding under its mortgages and credit facilities at maturity on terms favorable to us, or at all;
     
  the loss of any member of the Company’s management team;
     
  the Company’s ability to comply with debt covenants;
     
  the Company’s ability to integrate acquired properties and operations into existing operations;
     
  continued availability of proceeds from issuances of the Company’s debt or equity securities;
     
  the availability of other debt and equity financing alternatives;
     
  market conditions affecting the Company’s investment in marketable securities of other REIT’s;
     
  changes in interest rates under the Company’s current credit facility and under any additional variable rate debt arrangements that the Company may enter into in the future;
     
  the Company’s ability to successfully implement the Company’s selective acquisition strategy;
     
  the Company’s ability to maintain internal controls and procedures to ensure all transactions are accounted for properly, all relevant disclosures and filings are timely made in accordance with all rules and regulations, and any potential fraud or embezzlement is thwarted or detected;
     
  changes in federal or state tax rules or regulations that could have adverse tax consequences;
     
  declines in the market prices of the Company’s investment securities; and
     
  the Company’s ability to qualify as a REIT for federal income tax purposes.

 

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You should not place undue reliance on these forward-looking statements, as events described or implied in such statements may not occur. The Company undertakes no obligation to update or revise any forward-looking statements as a result of new information, future events or otherwise.

 

The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere herein.

 

Overview

 

The Company is a self-administered and self-managed REIT. The Company seeks to invest in well-located, modern, single tenant, industrial buildings, leased primarily to investment-grade tenants or their subsidiaries on long-term net leases. At September 30, 2016, the Company held investments in ninety-nine properties totaling approximately 16,010,000 square feet. Total real estate investments were $1,171,313,495 at September 30, 2016. These properties are located in thirty states: Alabama, Arizona, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington and Wisconsin. All of these properties are wholly-owned, with the exception of an industrial property in New Jersey, in which the Company owns a 51% controlling equity interest, and the shopping center in New Jersey, in which the Company holds a 67% controlling equity interest.

 

The Company’s weighted-average lease expiration was 7.4 and 7.2 years as of September 30, 2016 and 2015, respectively, and its average annualized rent per occupied square foot as of September 30, 2016 and 2015 was $5.72 and $5.48, respectively. At September 30, 2016 and 2015, the Company’s occupancy was 99.6% and 97.7%, respectively. Subsequent to fiscal yearend, on October 27, 2016, the Company sold its only vacant building for $4,272,000 which increased our occupancy rate to 100.0%. During fiscal 2016, the Company acquired eight industrial properties totaling approximately 1,830,000 square feet for approximately $210,747,000.

 

The Company has a concentration of properties leased to FedEx Corporation (FDX). As of September 30, 2016, the Company had approximately 16,010,000 square feet of property, of which approximately 7,584,000 square feet, or 47%, consisting of fifty-three separate stand-alone leases, were leased to FDX and its subsidiaries, (6% to FDX and 41% to FDX subsidiaries). These properties are located in twenty-four different states. The percentage of rental and reimbursement revenue from FDX and its subsidiaries was 56% for the year ended September 30, 2016, consisting of 7% leased to FDX and 49% leased to FDX subsidiaries. No other tenant accounted for 5% or more of the Company’s total Rental and Reimbursement revenue for fiscal 2016.

 

In addition to real estate property holdings, the Company held $73,604,894 in marketable REIT securities at September 30, 2016, representing 5.3% of the Company’s undepreciated assets (which is the Company’s total assets excluding accumulated depreciation). These liquid real estate holdings are not included in calculating the tenant concentration ratios above and therefore further enhance the Company’s diversification. As a result, the securities portfolio provides the Company with additional liquidity, diversification, income and serves as a proxy for real estate when more favorable risk adjusted returns are not available.

 

The Company’s revenue primarily consists of rental and reimbursement revenue from the ownership of industrial rental property. Rental and Reimbursement Revenue increased $17,140,613, or 22%, for the year ended September 30, 2016 as compared to the year ended September 30, 2015. Total expenses (excluding other income and expense) increased $7,368,782, or 17%, for the year ended September 30, 2016 as compared to the year ended September 30, 2015. The increases were due mainly to the revenue and expenses relating to the property acquisitions made during fiscal 2015 and 2016.

 

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Net Operating Income from property operations (NOI) is defined as recurring Rental and Reimbursement Revenue, less Real Estate Taxes and Operating Expenses, such as insurance, utilities and repairs and maintenance. NOI increased $14,901,332, or 23%, for the fiscal year ended September 30, 2016 as compared to the fiscal year ended September 30, 2015 and increased $11,930,616, or 22%, for the fiscal year ended September 30, 2015 as compared to the fiscal year ended September 30, 2014. The increase from fiscal year 2015 to 2016 was due to the additional income related to eight industrial properties purchased during fiscal 2016 and the purchase of ten industrial properties during fiscal 2015. The increase from fiscal year 2014 to 2015 was due to the additional income related to ten industrial properties purchased during fiscal 2015.

 

The Company’s NOI for the fiscal years ended September 30, 2016, 2015 and 2014 is calculated as follows:

 

    2016     2015     2014  
                   
Rental Revenue   $ 81,592,429     $ 67,059,385     $ 55,512,165  
Reimbursement Revenue     13,323,681       10,716,112       9,160,176  
Total Rental and Reimbursement Revenue     94,916,110       77,775,497       64,672,341  
Real Estate Taxes     (10,455,401 )     (8,362,135 )     (7,605,611 )
Operating Expense     (4,273,899 )     (4,127,884 )     (3,711,868 )
NOI   $ 80,186,810     $ 65,285,478     $ 53,354,862  

 

For the fiscal years ended September 30, 2016, 2015 and 2014, gross revenue, which includes Rental Revenue, Reimbursement Revenue and Dividend and Interest Income totaled $100,532,502, $81,499,364 and $68,554,938, respectively.

 

Subsequent to the fiscal yearend, on October 17, 2016, the Company purchased a newly constructed 338,584 square foot industrial building located in Hamburg, NY, which is in the Buffalo MSA. The building is 100% net-leased to FedEx Ground Package System, Inc. for fifteen years through March 2031. The purchase price was $35,100,000. The Company obtained a 15 year fully-amortizing mortgage loan of $23,500,000 at a fixed interest rate of 4.03%. Annual rental revenue over the remaining term of the lease averages approximately $2,308,000.

 

In addition, subsequent to the fiscal yearend, on October 1, 2016, a 50,741 square foot expansion of a building leased to FedEx Ground Package System, Inc. located in Edinburg, TX was substantially completed for a cost of approximately $4,988,000, resulting in a new 10 year lease which extended the prior lease expiration date from September 2021 through September 2026. In addition, the expansion resulted in an increase in annual rent effective from the date of completion of approximately $499,000 from approximately $598,000, or $5.27 per square foot, to approximately $1,097,000, or $6.68 per square foot.

 

On October 27, 2016, the Company sold its only vacant building, (which increased our occupancy rate from 99.6% to 100.0%), consisting of a 59,425 square foot industrial building situated on 4.78 acres located in White Bear Lake, MN for approximately $4,272,000, which is the Company’s approximate U.S. GAAP net book carrying value.

 

The industrial properties purchased, expanded and sold during fiscal 2017 to date, increased our current total leasable square feet to approximately 16,340,000 and increased our occupancy rate to 100.0%.

 

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In addition to the property purchased subsequent to the fiscal yearend, we have entered into agreements to purchase eight new build-to-suit, industrial buildings that are currently being developed in Florida, Michigan, North Carolina, Ohio and South Carolina totaling approximately 2,099,000 square feet each with net-leased terms ranging between ten to fifteen years with a weighted average lease maturity of 13.3 years. Approximately 1,267,000 square feet, or 60%, is leased to FDX and its subsidiaries. The purchase price for the eight properties is approximately $212,373,000. Subject to satisfactory due diligence and other customary closing conditions and requirements, we anticipate closing these eight transactions during fiscal 2017 and fiscal 2018. In connection with five of the eight properties, the Company has entered into commitments to obtain five mortgages totaling $101,204,000 at fixed rates ranging from 3.60% to 4.20%, with a weighted average interest rate of 3.83%. Each of these mortgages will be a fifteen year, fully-amortizing loan. The Company may make additional acquisitions in fiscal 2017 and fiscal 2018 and the funds for these acquisitions may come from mortgages, draws on our unsecured line of credit facility, cash on hand, sale of marketable securities, other bank borrowings, proceeds from the Dividend Reinvestment and Stock Purchase Plan (DRIP), private placements and public offerings of additional common or preferred stock or other securities. To the extent that funds or appropriate properties are not available, fewer acquisitions will be made.

 

During the fiscal years ended September 30, 2016, 2015 and 2014, the Company completed fifteen expansions at thirteen of its locations, consisting of ten building expansions and five parking lot expansions. Two of the parking lot expansions included the purchase of additional land. The ten building expansions resulted in approximately 699,000 additional square feet. Total costs for all fifteen property expansions were approximately $52,474,000 and resulted in total increased annual rent of approximately $5,180,000. Fourteen completed expansions resulted in a new ten year lease extension for each property that was expanded and one completed expansion resulted in a new twelve year lease extension.

 

Revenues also include dividend and interest income and net realized gain on securities transactions. The Company holds a portfolio of marketable securities of other REITs with a fair value of $73,604,894 as of September 30, 2016, representing 5.3% of the Company’s undepreciated assets (which is the Company’s total assets excluding accumulated depreciation). The Company generally limits its marketable securities investments to no more than approximately 10% of its undepreciated assets. The Company invests in REIT securities and, from time to time, may use margin debt when an adequate yield spread can be obtained. As of September 30, 2016 and 2015, there were no draws against the margin. The REIT securities portfolio provides the Company with additional liquidity and additional income and serves as a proxy for real estate when more favorable risk adjusted returns are not available. As of September 30, 2016, the Company’s portfolio consisted primarily of 81% REIT common stocks and 19% REIT preferred stocks, all of which are listed on a national securities exchange. The Company’s weighted-average yield on the securities portfolio for fiscal 2016 was approximately 8.0%. Dividend and Interest income for fiscal 2016 was $5,616,392, and was $3,723,867 for fiscal 2015. During fiscal 2016, the Company realized $4,398,599 in gains on sales of securities transactions. The Company has unrealized gains of $12,942,267 in its REIT securities portfolio as of September 30, 2016. The dividends received from our securities investments continue to meet our expectations. The Company intends to hold these securities for investment on a long-term basis.

 

The Company had $95,749,508 in cash and cash equivalents and $73,604,894 in REIT securities as of September 30, 2016. The Company believes that funds generated from operations, the DRIP, the unsecured line of credit facility, together with the ability to finance and refinance its properties, will provide sufficient funds to adequately meet its obligations over the next several years.

 

The Company has a Dividend Reinvestment and Stock Purchase Plan (DRIP), in which participants can purchase stock from the Company at a price of approximately 95% of market value. Amounts received in connection with the DRIP, (including dividend reinvestments of $8,369,146, $8,489,169 and $7,624,528 for fiscal years ended 2016, 2015 and 2014, respectively), were $72,175,797, $48,404,556 and $38,090,334 for fiscal years ended 2016, 2015 and 2014, respectively.

 

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Industrial space demand is very closely correlated to Gross Domestic Product (GDP) growth. Despite seven years of unprecedented monetary stimulus, real annual GDP growth has averaged less than 2.0% over this period. However, there has been significant demand for industrial space and national occupancy rates have continued to increase. The most significant demand driver for modern industrial real estate continues to be ecommerce. Every year, since the turn of the century, the percentage of goods purchased on-line has increased at a 15% annual growth rate. Today, approximately 10% of retail sales have migrated from traditional store sales to on-line sales. This favorable trend for the industrial real estate sector is expected to be a leading demand driver for the foreseeable future, as consumers continue to embrace the added efficiencies of on-line consumption. New home construction and sales of existing homes has also continued to strengthen. Housing demand typically translates into greater demand for warehouse space. Additionally, automotive sales remain at historic highs and low energy costs have resulted in increased domestic manufacturing. These catalysts have resulted in rising rental rates in most major industrial markets. The strong financial position of our tenants, together with the long duration of our leases, should enable the Company to continue to perform well despite the slow growth macro-economic environment.

 

The Company intends to continue to increase its real estate investments in fiscal 2017 and 2018 through acquisitions and expansions of properties. The growth of the real estate portfolio depends on the availability of suitable properties which meet the Company’s investment criteria and appropriate financing. Competition in the market areas in which the Company operates is significant and affects acquisitions, occupancy levels, rental rates and operating expenses of certain properties. Transaction costs, such as broker fees, transfer taxes, legal, valuation, and other professional fees related to acquisitions are expensed as incurred.

 

See PART I, Item 1 – Business and Item 1A – Risk Factors for a more complete discussion of the economic and industry-wide factors relevant to the Company and the opportunities and challenges, and risks on which the Company is focused.

 

Significant Accounting Policies and Estimates

 

The discussion and analysis of the Company’s financial condition and results of operation are based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company’s consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.

 

Significant accounting policies are defined as those that involve significant judgment and potentially could result in materially different results under different assumptions and conditions. Management believes the following significant accounting policies are affected by our more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. For a detailed description of these and other accounting policies, see Note 1 in the Notes to the Company’s Consolidated Financial Statements included in this Form 10-K.

 

Real Estate Investments

 

The Company applies Financial Accounting Standards Board Accounting Standards Codification (ASC) 360-10, Property, Plant & Equipment (ASC 360-10) to measure impairment in real estate investments. Rental properties are individually evaluated for impairment when conditions exist which may indicate that it is probable that the sum of expected future cash flows (on an undiscounted basis without interest) from a rental property is less than its historical net cost basis. These expected future cash flows consider factors such as future operating income, trends and prospects as well as the effects of leasing demand, competition and other factors. Upon determination that an other than temporary impairment has occurred, rental properties are reduced to their fair value. For properties to be disposed of, an impairment loss is recognized when the fair value of the property, less the estimated cost to sell, is less than the carrying amount of the property measured at the time there is a commitment to sell the property and/or it is actively being marketed for sale. A property to be disposed of is reported at the lower of its carrying amount or its estimated fair value, less its cost to sell. Subsequent to the date that a property is held for disposition, depreciation expense is not recorded.

 

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Upon acquisition of a property, the Company allocates the purchase price of the property based upon the fair value of the assets acquired, which generally consist of land, buildings and intangible assets, including above and below market leases and in-place leases. The Company allocates the purchase price to the fair value of the tangible assets of an acquired property generally determined by third party appraisal of the property obtained in conjunction with the purchase. Transaction costs, such as broker fees, transfer taxes, legal, accounting, valuation, and other professional and consulting fees, related to acquisitions are expensed as incurred.

 

The purchase price is further allocated to acquired above and below market leases based on the present value of the difference between prevailing market rates and the in-place lease rates over the remaining term. In addition, any remaining amounts of the purchase price are applied to in-place lease values based on management’s evaluation of the specific characteristics of each tenant’s lease. In-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenant, the tenant’s credit quality and expectations of lease renewals are also considered. Acquired above and below market leases are amortized to rental revenue over the remaining non-cancelable terms of the respective leases. The value of in-place lease intangibles is amortized to amortization expense over the remaining lease term. If a tenant terminates its lease early, the unamortized portion of the tenant improvements, leasing commissions, deferred rent, and the in-place lease value is charged to expense when there is a signed termination agreement, all of the conditions of the termination agreement are met, the tenant is no longer occupying the property and the termination consideration, if any, is probable of collection.

 

The Company conducted a comprehensive review of all real estate asset classes in accordance with ASC Topic 360, which indicates that asset values should be analyzed whenever events or changes in circumstances indicate that the carrying value of a property may not be fully recoverable.

 

The following are examples of such events or changes in circumstances that would indicate to management that there may be an impairment of a property:

 

  A non-renewal of a lease and subsequent move out by the tenant;
     
  A renewal of a lease at a significantly lower rent than a previous lease;
     
  A significant decrease in the market value of a property;
     
  A significant adverse change in the extent or manner in which a property is being used or in its physical condition;
     
  A significant adverse change in legal factors or in the business climate that could affect the value of a property, including an adverse action or assessment by a regulator;
     
  An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a property;
     
  A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a property; or
     
  A current expectation that, more likely than not, a property will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

 

The process entails the analysis of property for instances where the net book value exceeds the estimated fair value. In accordance with ASC Topic 360, an impairment loss shall be recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The Company utilizes the experience and knowledge of its internal valuation team to derive certain assumptions used to determine an operating property’s cash flow. Such assumptions include re-leasing and renewal probabilities upon future lease expirations, vacancy factors, rental growth rates, and capital expenditures.