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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, 2018

 

[  ] 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

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

[X] Yes [  ] 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 every Interactive Data File required to be submitted 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 such files). [X] Yes [  ] No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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, 2018 was approximately $1,138,940,000 (based on the $15.04 closing price per share of common stock on March 29, 2018).

 

There were 91,587,713 shares of common stock outstanding as of November 15, 2018.

 

 

 

 
 

 

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. 28
7 Management’s Discussion and Analysis of Financial Condition and Results of Operations. 30
7A Quantitative and Qualitative Disclosures About Market Risk. 56
8 Financial Statements and Supplementary Data. 58
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 59
9A Controls and Procedures. 59
9B Other Information. 60
     
  Part III  
10 Directors, Executive Officers and Corporate Governance. 61
11 Executive Compensation. 66
12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 87
13 Certain Relationships and Related Transactions, and Director Independence. 89
14 Principal Accountant Fees and Services. 90
     
  Part IV  
15 Exhibits, Financial Statement Schedules. 91
     
  Signatures 152

 

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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.

 

We are a corporation that qualifies as a real estate investment trust (REIT) under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the Code). Our 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. We were founded in 1968 and are one of the oldest public equity REITs in the world. We intend to maintain our qualification as a REIT in the future. As a REIT, with limited exceptions, we will not be taxed under Federal and certain state income tax laws at the corporate level on taxable income that we distribute to our shareholders. For special tax provisions applicable to REITs, refer to Sections 856-860 of the Code. We are subject to franchise taxes in several of the states in which we own properties.

 

In December 2017, as part of the Tax Cuts and Jobs Act of 2017 (the TCJA), Code Section 199A, was added to the Code and became effective for tax years beginning after December 31, 2017 and before January 1, 2026. Under the TCJA, subject to certain income limitations, an individual taxpayer and estates and trusts may deduct 20% of the aggregate amount of qualified REIT dividends they receive from their taxable income. Qualified REIT dividends do not include any portion of a dividend received from a REIT that is classified as a capital gain dividend or qualified dividend income.

 

We were 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, we changed our state of incorporation from Delaware to Maryland by merging with and into a Maryland corporation.

 

Narrative Description of Business

 

Our primary business is the ownership of real estate. Our 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, we own a portfolio of REIT investment securities which we generally limit to no more than approximately 10% of our undepreciated assets (which is our total assets excluding accumulated depreciation).

 

As of September 30, 2018, we had 14 full-time employees and one part-time employee.

 

At September 30, 2018, we held investments in 111 properties totaling approximately 21,174,000 square feet with an occupancy rate of 99.6% (See Item 2 for a detailed description of the properties). These properties are located in 30 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 we own a majority interest. All properties which we have 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 2018, we purchased seven industrial properties totaling approximately 2,655,000 square feet with net-leased terms ranging from 10 to 15 years resulting in a weighted average lease maturity of 11.4 years. Approximately 2,255,000 square feet, or 85% of the properties purchased, are leased to investment-grade tenants or their subsidiaries, of which, approximately 761,000 square feet, or 29%, is leased to FedEx Corporation (FDX) or FedEx Ground Package System, Inc., a subsidiary of FDX. The aggregate purchase price for the seven properties was approximately $282,332,000. These properties are located in Alabama, Florida, Georgia, Oklahoma and South Carolina. These seven properties generate annualized rental income over the life of their leases of approximately $17,414,000. In connection with the seven properties acquired during the 2018 fiscal year, we entered into four 15 year fully-amortizing mortgage loans, two 14 year fully-amortizing mortgage loans and one 10 year loan amortizing over 18 years. The seven mortgage loans originally totaled $175,160,000 with an original weighted average mortgage loan maturity of 14.1 years and a weighted average interest rate of 3.91%.

 

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On October 1, 2018, our Board of Directors approved a cash dividend of $0.17 per share, to be paid on December 17, 2018, to common shareholders of record at the close of business on November 15, 2018, which represents an annualized common dividend rate of $0.68 per share. We intend to pay these distributions from cash flows from operations.

 

We have maintained or increased our common stock cash dividend for 27 consecutive years. On October 1, 2015, our Board of Directors approved an increase in our quarterly common stock cash dividend from $0.15 per share to $0.16 per share representing a 6.7% increase in our quarterly cash dividend. Then again, most recently, on October 2, 2017, our Board of Directors approved an increase in our quarterly common stock cash dividend and from $0.16 per share to $0.17 per share on October 2, 2017, representing a 6.3% increase in our quarterly cash dividend. These two dividend raises represent a total increase of 13%.

 

Our common stock dividend policy is dependent upon our earnings, capital requirements, financial condition, availability and cost of bank financing and other factors considered relevant by the Board of Directors. It is our intention to continue making comparable quarterly distributions in the future and to grow our distributions over time.

 

Subsequent to fiscal yearend, on October 19, 2018, we purchased a newly constructed 347,145 square foot industrial building, situated on 62.0 acres, located in Trenton, NJ. The building is 100% net-leased to FedEx Ground Package System, Inc. for 15 years through June 2032. The purchase price was $85,248,352. We obtained a 15 year, fully-amortizing mortgage loan of $55,000,000 at a fixed interest rate of 4.13%. Annual rental revenue over the remaining term of the lease averages approximately $5,328,000.

 

The industrial property purchased thus far during fiscal 2019 increased our current total leasable square feet to approximately 21,521,000.

 

In addition to the property purchased subsequent to our fiscal yearend, as described above, we have entered into agreements to purchase two new build-to-suit, industrial buildings that are currently being developed in Georgia and North Carolina, consisting of approximately 398,000 square feet, with net-leased terms ranging from 10 to 15 years, with a weighted average lease term of 13.4 years.  The purchase price for these properties is approximately $68,747,000 and both are leased to FedEx Ground Package System, Inc.  Subject to satisfactory due diligence and other customary closing conditions and requirements, we anticipate closing these transactions during the first quarter of fiscal 2019 and fiscal 2020.  In connection with one of these properties, we have entered into a commitment to obtain a 15 year, fully-amortizing mortgage loan of $17,500,000 with a fixed interest rate of 4.40%. We currently have one 154,800 square foot property expansion in progress at our property located in Monroe, OH which is expected to be completed in fiscal year 2019 for a total project cost of approximately $9,072,000. The expansion will result in a new 15 year lease which will extend the prior lease expiration date from February 2030 to January 2034. In addition, the expansion will result in an increase in initial annual rent effective from the date of completion by approximately $862,000 from approximately $961,000 to approximately $1,823,000. In addition, the annual rent will increase 2% per annum. We may have additional acquisitions and expansions in fiscal 2019 and fiscal 2020, and the funds for these acquisitions may come from funds generated from operations, 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), proceeds from the At-The-Market Preferred Equity Program (Preferred Stock ATM Program), and proceeds from 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, we derive our income primarily from real estate rental operations. Rental and Reimbursement Revenue (excluding Lease Termination Income in fiscal 2018, 2017 and 2016 of $210,261, $-0- and $-0-, respectively) was $139,161,849, $116,385,305 and $97,755,433 for the years ended September 30, 2018, 2017 and 2016, respectively. Total undepreciated assets (which is our total assets excluding accumulated depreciation) were $1,925,443,520 and $1,614,123,838 as of September 30, 2018 and 2017, respectively.

 

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As of September 30, 2018, we had approximately 21,174,000 square feet of property, of which approximately 10,083,000 square feet, or 48%, consisting of 60 separate stand-alone leases, were leased to FDX and its subsidiaries (7% to FDX and 41% to FDX subsidiaries). These properties are located in 24 different states. As of September 30, 2018, the 60 separate stand-alone leases that are leased to FDX and FDX subsidiaries had a weighted average lease maturity of 9.4 years. As of September 30, 2018, the only tenant that leased 5% or more of our total square footage was FDX (including its subsidiaries).

 

During fiscal 2018, the only tenant that accounted for 5% or more of our rental and reimbursement revenue was FDX (including its subsidiaries). Our rental and reimbursement revenue from FDX and its subsidiaries for the fiscal years ended September 30, 2018, 2017 and 2016, respectively, totaled approximately $80,726,000, $68,151,000 and $52,793,000, or 58% (7% from FDX and 51% from FDX subsidiaries), 59% (7% from FDX and 52% from FDX subsidiaries) and 55% (9% from FDX and 46% from FDX subsidiaries), of total rent and reimbursement revenues.

 

FDX is a publicly-owned company and financial information related to this entity is available at the SEC’s website, www.sec.gov. FDX is rated “BBB” by S&P Global Ratings (www.standardandpoors.com) and is rated “Baa2” by Moody’s (www.moodys.com), which are both considered “Investment Grade” ratings. The references in this report to the SEC’s website, S&P Global Ratings’ website and Moody’s website are not intended to and do not include or incorporate by reference into this report the information of FDX, S&P Global Ratings or Moody’s on such websites.

 

In addition to real estate property holdings, we held $154,920,545 in marketable REIT securities at September 30, 2018, representing 8.0% of our undepreciated assets (which is our total assets excluding accumulated depreciation). These liquid real estate holdings are not included in calculating the tenant concentration ratios above and therefore further increase our diversification. The securities portfolio provides us with additional diversification, liquidity, and income, and serves as a proxy for real estate when more favorable risk adjusted returns are not available.

 

Our weighted-average lease expiration was 8.1 years and 7.9 years as of September 30, 2018 and 2017, respectively, and our average annualized rent per occupied square foot as of September 30, 2018 and 2017 was $6.01 and $5.93, respectively. Our occupancy rate as of September 30, 2018 and 2017 was 99.6% and 99.3%, respectively.

 

We compete 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 we operate is significant and affects our ability to acquire or expand properties, occupancy levels, rental rates, and operating expenses of certain properties. We have built long-term relationships within our tenant base as well as within the merchant builder community. These relationships have historically provided us with investment opportunities that fit our investment policy. The amount of new construction of industrial properties on the national level has been increasing the past six 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 continued 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.

 

Industrial space demand is very closely correlated to Gross Domestic Product (GDP) growth. Despite nine years of unprecedented monetary stimulus, real annual GDP growth averaged less than 2.0% over this period. Economic growth has been strong this past year further increasing demand for industrial space. 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 an average 16% annual growth rate. Today, excluding food, fuel, and autos, approximately 19% of total retail sales have migrated from traditional store sales to on-line sales and we expect this growth in market share to continue. We expect these favorable trends for the industrial real estate sector to be a leading demand driver for the foreseeable future, as consumers continue to embrace the added efficiencies of on-line consumption. The strong financial position of our tenants, together with the long duration of our leases, provides for high quality, reliable income streams throughout the business cycle.

 

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We continue to invest in 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). Our investments in equity securities of other REITs provide us with additional diversification, liquidity, and income, and serves as a proxy for real estate when more favorable risk adjusted returns are not available. From time to time, we may purchase these securities on margin when the interest and dividend yields exceed the cost of funds. In general, we may borrow up to 50% of the value of the marketable securities, which was $154,920,545 as of September 30, 2018. As of September 30, 2018, we had borrowings of $26,608,676 under our margin line, bearing interest at 2.75%. Subsequent to fiscal yearend, on October 9, 2018, we paid off the margin loan. As of September 30, 2017, we had borrowings of $10,091,417 under our margin line, bearing interest at 2.05%. The REIT securities portfolio provides us with additional income, and to the extent not pledged to secure borrowings, provides us with additional liquidity. Such securities are subject to risks arising from adverse changes in market rates and prices, primarily market price risk relating to equity securities and interest rate risk relating to debt securities. From time to time, we may use derivative instruments to mitigate interest rate risk, however, this has not occurred during any periods presented. At September 30, 2018 and 2017, we had $154,920,545 and $123,764,770, respectively, of securities available for sale. The unrealized net gain (loss) on securities available for sale at September 30, 2018 and 2017 was $(24,744,579) and $6,570,565, respectively, resulting in a decrease for the fiscal year of $31,315,144. For the fiscal years ended September 30, 2018, 2017 and 2016, our net realized gains from the sale of securities were $111,387, $2,311,714 and $4,398,599, respectively.

 

On June 29, 2017, we entered into a Preferred Stock At-The-Market Sales Agreement Program with B. Riley FBR, Inc., or B. Riley (formerly FBR Capital Markets & Co.), that provided for the offer and sale of shares of our 6.125% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share, with a liquidation preference of $25.00 per share, or our 6.125% Series C preferred stock, having an aggregate sales price of up to $100,000,000. On August 2, 2018, we replaced this program with a new Preferred Stock At-The-Market Sales Agreement Program (Preferred Stock ATM Program) with B. Riley that provides for the offer and sale from time to time of $125,000,000 of our 6.125% Series C preferred stock. We began selling shares through these programs on July 3, 2017. Since inception through September 30, 2018, we sold 3,088,001 shares under these programs at a weighted average price of $25.06 per share, and generated net proceeds, after offering expenses, of approximately $75,828,000, of which 1,648,556 shares were sold during the fiscal year ended 2018 at a weighted average price of $24.84 per share, and generated net proceeds, after offering expenses, of approximately $40,094,000. As of September 30, 2018, there is approximately $119,096,000 remaining that may be sold under the Preferred Stock ATM Program.

 

As of September 30, 2018, 11,488,001 shares of the 6.125% Series C Preferred Stock were issued and outstanding.

 

Subsequent to fiscal yearend, in October 2018, we completed a public offering of 9,200,000 shares of our Common Stock (including the underwriters’ option to purchase 1,200,000 additional shares) at a price of $15.00 per share, before underwriting discounts. We received net proceeds from the offering, after deducting underwriting discounts and all other transaction costs, of approximately $132,339,000.

 

Investment and Other Policies

 

Our investment policy is to concentrate our investments in well-located, modern, single-tenant, industrial buildings, leased primarily to investment-grade tenants or their subsidiaries on long-term net leases. Our strategy is to obtain a favorable yield spread between the income from the net-leased industrial properties and interest costs. In addition, we believe 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 from re-leasing the properties will depend on the market for industrial properties at that time.

 

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In fiscal 2018, approximately 8% of our gross leasable area, representing 16 leases totaling 1,546,637 square feet, was set to expire. We have renewed 11 of the 16 leases that were set to expire. One of the 11 leases, which is with FedEx Ground Package System, Inc. for a property located in Hanahan (Charleston), SC, renewed for only four months because the tenant moved its operations from our 91,776 square foot facility to a newly constructed, much larger, 265,318 square foot facility, which is also located in Charleston, SC. We purchased this new facility on August 15, 2018. Excluding this four month lease renewal, the ten leases that have renewed, represent 972,048 square feet, or 63% of the expiring square footage, and have a weighted average lease term of 6.8 years. These ten lease renewals result in a U.S. GAAP straight-line weighted average lease rate of $5.87 per square foot. The renewed weighted average initial cash rent per square foot also results in a weighted average lease rate of $5.87 per square foot. This represents an increase in the weighted average lease rate of 4.08% on a U.S. GAAP straight-line basis and an increase in the weighted average lease rate of 2.80% on a cash basis. Five of the sixteen leases, representing 482,813 square feet or 31% of the expiring square footage, did not renew. Three of these five buildings, representing 183,837 square feet or 12% of the expiring square footage, have been sold and one of the remaining five properties, representing 218,120 square or 14% of the expiring square footage, has been re-tenanted.

 

We seek 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 recently acquired facilities meet these criteria. We have a concentration of properties leased to FDX and FDX subsidiaries. This is a risk that shareholders should consider. FDX is a publicly-owned company and financial information related to this entity is available at the SEC’s website, www.sec.gov. FDX is rated “BBB” by S&P Global Ratings (www.standardandpoors.com) and is rated “Baa2” by Moody’s (www.moodys.com), which are both considered “Investment Grade” ratings. The references in this report to the SEC’s website, S&P Global Ratings’ website and Moody’s website are not intended to and do not include or incorporate by reference into this report the information of FDX, S&P Global Ratings or Moody’s on such websites.

 

We may issue securities for property; however, this has not occurred to date. We may repurchase or reacquire our shares from time to time if, in the opinion of the Board of Directors, such acquisition is in our best interest. No shares were repurchased or reacquired during fiscal 2018 and, as of September 30, 2018, we do not own any of our own shares.

 

Property Management

 

With the exception of three properties, all of our 111 properties are self-managed by us.

 

We paid fees directly to local property management subagents of approximately $437,000, $394,000 and $356,000 for fiscal years ended September 30, 2018, 2017 and 2016, respectively.

 

Our industrial properties in Stow, OH and Streetsboro, OH are managed by GEIS Companies (GEIS). Management fees we paid to GEIS for the fiscal years ended September 30, 2018, 2017 and 2016 were approximately $78,000, $52,000 and $50,000, respectively. These management fees were reimbursed to us by the tenants.

 

Our industrial property in Carlstadt, NJ is owned by Palmer Terrace Realty Associates, LLC. We own 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 approximately $17,000, $16,000 and $16,000 for the fiscal years ended September 30, 2018, 2017 and 2016, respectively.

 

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, we may be required to satisfy such obligations. In addition, as the owner of such properties, we 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, we authorize the preparation of Phase I and, when necessary, Phase II environmental reports with respect to our properties. Based upon such environmental reports and our ongoing review of our properties, as of the date of this Annual Report, we are not aware of any environmental condition with respect to any of our properties which we believe would be reasonably likely to have a material adverse effect on our 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 us to material liability in the future.

 

Contact Information

 

Additional information about us can be found on our website which is located at www.mreic.reit. Information contained on or hyperlinked from our Website 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). We make available, free of charge, on or through our 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. 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.

 

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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 60 separate stand-alone leases located in 24 different states as of September 30, 2018. As of September 30, 2018, we had approximately 21,174,000 square feet of property, of which approximately 10,083,000 square feet, or 48%, were leased to FDX and its subsidiaries (7% from FDX and 41% from FDX subsidiaries). Rental and reimbursement revenue from FDX and its subsidiaries is approximately 58% (7% from FDX and 51% from FDX subsidiaries) of total rental and reimbursement revenue for fiscal 2018. No other tenant accounted for 5% or more of our total Rental and Reimbursement revenue for fiscal 2018. 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.

 

FDX is a publicly-owned company and financial information related to this entity is available at the SEC’s website, www.sec.gov. FDX is rated “BBB” by S&P Global Ratings (www.standardandpoors.com) and is rated “Baa2” by Moody’s (www.moodys.com), which are both considered “Investment Grade” ratings. The references in this report to the SEC’s website, S&P Global Ratings’ website and Moody’s website are not intended to and do not include or incorporate by reference into this report the information of FDX, S&P Global Ratings or Moody’s on such websites.

 

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.

 

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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.

 

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, tornadoes, 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;

 

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  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.

 

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.

 

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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.

 

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 affect our ability to obtain fixed rate debt at favorable interest rates 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. The determination of whether a lease is a true lease depends upon an analysis of all the surrounding facts and circumstances. 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) and the amounts of income retained on which we have paid corporate income tax 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, the effects of non-deductible capital expenditures, the creation of reserves or the effect of required debt amortization payments could require us to borrow money or sell assets (potentially during unfavorable market conditions) to pay out enough of our taxable income to satisfy the 90 percent distribution requirement and to avoid corporate income tax.

 

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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.

 

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, other than foreclosure 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. The 100% tax will not apply to gains from the sale of property that is held through a taxable REIT subsidiary or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular U.S. federal income tax rates.

 

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 actions may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us and/or our investors.

 

The recently enacted Tax Cuts and Jobs Act of 2017, or the TCJA, has significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their shareholders. Changes made by the TCJA that could affect us and our shareholders include:

 

  temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate has been reduced from 39.6% to 37% for taxable years beginning after December 31, 2017 and before January 1, 2026;
     
  permanently eliminating the progressive corporate tax rate structure, with a maximum corporate tax rate of 35%, and replacing it with a flat corporate tax rate of 21%;
     
  permitting a deduction for certain pass-through business income, including dividends received by our shareholders from us that are not designated by us as capital gain dividends or qualified dividend income, which will generally allow individuals, trusts, and estates to deduct up to 20% of such amounts for taxable years beginning after December 31, 2017 and before January 1, 2026;
     
  reducing the highest rate of withholding with respect to our distributions to non-U.S. stockholders that are treated as attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;
     
  limiting our deduction for net operating losses to 80% of REIT taxable income (prior to the application of the dividends paid deduction);
     
  generally limiting the deduction for net business interest expense in excess of 30% of a business’s adjusted taxable income except for taxpayers that engage in certain real estate businesses and elect out of this rule (provided that such electing taxpayers must use an alternative depreciation system for certain property); and
     
  eliminating the corporate alternative minimum tax.

 

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You are urged to consult with your tax advisor with respect to the status of legislative, regulatory, judicial or administrative developments and proposals and their potential effect on an investment in our securities.

 

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.

 

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.

 

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. In addition, any taxable REIT subsidiary that we may form will be subject to regular corporate federal, state and local taxes. Any of these taxes would decrease cash available for distributions to stockholders.

 

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.

 

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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.

 

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 fair value of those investments declines or those investments do not provide an attractive return, our earnings and cash flow could be adversely affected. Beginning with our fiscal year ending September 30, 2019, all changes in the fair value of the equity securities of other REITs that we own, whether realized or unrealized, will be recognized as gains or losses in our consolidated statement of income. As a result, fluctuations in the fair value of those investments will, in the future, impact our earnings even if we have not sold the underlying investments.

 

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.

 

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  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.

 

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. 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

 

We operate 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 our real estate investments as of September 30, 2018:

 

                Mortgage 
      Fiscal Year     Square   Balance 
State  City (MSA)  Acquisition  Type  Footage   9/30/2018 
AL  Huntsville  2005  Industrial   88,653   $370,903 
AL  Mobile  2018  Industrial   362,942    18,832,395 
AZ  Tolleson (Phoenix)  2003  Industrial   283,358    3,719,709 
CO  Colorado Springs  2016  Industrial   225,362    16,651,710 
CO  Denver  2005  Industrial   69,865    414,049 
CT  Newington (Hartford)  2001  Industrial   54,812    -0- 
FL  Cocoa  2008  Industrial   144,138    -0- 
FL  Davenport (Orlando)  2016  Industrial   310,922    23,702,918 
FL  Daytona Beach  2018  Industrial   399,440    19,187,819 
FL  Ft. Myers  2017  Industrial   213,672    13,280,803 
FL  Homestead (Miami)  2017  Industrial   237,756    23,313,676 
FL  Jacksonville (FDX)  1999  Industrial   95,883    -0- 
FL  Jacksonville (FDX Ground)  2015  Industrial   297,579    16,243,754 
FL  Lakeland  2006  Industrial   32,105    -0- 
FL  Orlando  2008  Industrial   110,638    -0- 
FL  Punta Gorda  2007  Industrial   34,624    -0- 
FL  Tampa (FDX Ground)  2004  Industrial   170,779    5,144,319 
FL  Tampa (FDX)  2006  Industrial   95,662    -0- 
FL  Tampa (Tampa Bay Grand Prix)  2005  Industrial   68,385    -0- 
GA  Augusta (FDX Ground)  2005  Industrial   59,358    338,789 
GA  Augusta (FDX)  2006  Industrial   30,184    -0- 
GA  Braselton (Atlanta)  2018  Industrial   373,750    39,700,000 
GA  Griffin (Atlanta)  2006  Industrial   218,120    -0- 
GA  Savannah  2018  Industrial   831,764    32,215,696 
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    -0- 
IL  Granite City (St. Louis, MO)  2001  Industrial   184,800    -0- 
IL  Montgomery (Chicago)  2004  Industrial   171,200    -0- 
IL  Rockford (Collins Aerospace Systems)  2015  Industrial   38,833    -0- 
IL  Rockford (Sherwin-Williams Co.)  2011  Industrial   66,387    -0- 
IL  Sauget (St. Louis, MO)  2015  Industrial   198,773    8,563,797 
IL  Schaumburg (Chicago)  1997  Industrial   73,500    -0- 
IL  Wheeling (Chicago)  2003  Industrial   123,000    -0- 
IN  Greenwood (Indianapolis)  2015  Industrial   671,354    20,159,025 
IN  Indianapolis  2014  Industrial   327,822    10,437,151 
KS  Edwardsville (Kansas City) (Carlisle Tire)  2003  Industrial   179,280    -0- 
KS  Edwardsville (Kansas City) (International Paper)  2014  Industrial   280,000    9,189,343 
KS  Olathe (Kansas City)  2016  Industrial   313,763    19,956,867 
KS  Topeka  2009  Industrial   40,000    860,364 
KY  Buckner (Louisville)  2014  Industrial   558,600    15,305,669 
KY  Frankfort (Lexington)  2015  Industrial   599,840    16,639,132 
KY  Louisville  2016  Industrial   137,500    6,525,135 
LA  Covington (New Orleans)  2016  Industrial   175,315    11,133,990 
MD  Beltsville (Washington, DC)  2001  Industrial   148,881    -0- 
MI  Livonia (Detroit)  2013  Industrial   172,005    6,294,503 
MI  Orion  2007  Industrial   245,633    -0- 
MI  Romulus (Detroit)  1998  Industrial   71,933    -0- 
MI  Walker (Grand Rapids)  2017  Industrial   343,483    19,468,554 
MN  Stewartville (Rochester) (1)  2013  Industrial   60,398    2,115,962 
MO  Kansas City  2015  Industrial   158,417    6,633,001 
MO  Liberty (Kansas City)  1998  Industrial   95,898    -0- 
MO  O’Fallon (St. Louis)  1994  Industrial   102,135    -0- 

 

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     Fiscal Year     Square   Mortgage
Balance
 
State  City (MSA)  Acquisition  Type  Footage   9/30/2018 
MO  St. Joseph  2001  Industrial   382,880   $-0- 
MS  Olive Branch (Memphis, TN) (Anda Pharmaceuticals, Inc.)  2012  Industrial   234,660    7,564,186 
MS  Olive Branch (Memphis, TN) (Milwaukee Tool)  2013  Industrial   861,889    21,722,567 
MS  Richland (Jackson)  1994  Industrial   36,000    -0- 
MS  Ridgeland (Jackson)  1993  Industrial   26,340    -0- 
NC  Concord (Charlotte)  2016  Industrial   330,717    17,813,451 
NC  Concord (Charlotte)  2017  Industrial   354,482    24,863,355 
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    1,580,181 
NJ  Somerset (3)  1970  Shopping Center   64,220    -0- 
NY  Cheektowaga (Buffalo)  2002  Industrial   104,981    -0- 
NY  Halfmoon (Albany)  2012  Industrial   75,000    -0- 
NY  Hamburg (Buffalo)  2017  Industrial   338,584    21,328,714 
OH  Bedford Heights (Cleveland)  2007  Industrial   82,269    -0- 
OH  Cincinnati  2015  Industrial   63,840    -0- 
OH  Kenton  2017  Industrial   298,472    11,473,387 
OH  Lebanon (Cincinnati)  2012  Industrial   51,130    -0- 
OH  Monroe (Cincinnati)  2015  Industrial   232,200    7,126,384 
OH  Richfield (Cleveland)  2006  Industrial   131,152    -0- 
OH  Stow  2017  Industrial   219,765    12,130,343 
OH  Streetsboro (Cleveland)  2012  Industrial   368,060    9,300,481 
OH  West Chester Twp. (Cincinnati)  2000  Industrial   103,818    -0- 
OK  Oklahoma City (Amazon)  2018  Industrial   300,000    19,013,593 
OK  Oklahoma City (Bunzl)  2017  Industrial   110,361    5,537,962 
OK  Oklahoma City (FDX Ground)  2012  Industrial   158,340    3,416,097 
OK  Tulsa  2014  Industrial   46,240    1,685,288 
PA  Altoona (1)  2014  Industrial   122,522    3,253,281 
PA  Imperial (Pittsburgh)  2016  Industrial   125,860    11,199,661 
PA  Monaca (Pittsburgh)  1977  Industrial   255,658    -0- 
SC  Aiken (Augusta, GA)  2017  Industrial   315,560    14,471,117 
SC  Charleston (FDX)  2018  Industrial   121,683    13,683,131 
SC  Charleston (FDX Ground)  2018  Industrial   265,318    29,860,000 
SC  Ft. Mill (Charlotte, NC)  2010  Industrial   176,939    724,766 
SC  Hanahan (Charleston) (SAIC)  2005  Industrial   302,400    -0- 
SC  Hanahan (Charleston) (FDX Ground)  2005  Industrial   91,776    465,749 
TN  Chattanooga  2007  Industrial   60,637    -0- 
TN  Lebanon (Nashville)  2011  Industrial   381,240    7,217,469 
TN  Memphis  2010  Industrial   449,900    5,061,376 
TN  Shelby County  2007  Land   N/A    -0- 
TX  Carrollton (Dallas)  2010  Industrial   184,317    6,455,552 
TX  Corpus Christi  2012  Industrial   46,253    -0- 
TX  Edinburg  2011  Industrial   164,207    -0- 
TX  El Paso  2006  Industrial   144,149    -0- 
TX  Ft. Worth (Dallas)  2015  Industrial   304,608    20,753,864 
TX  Houston  2010  Industrial   91,295    2,148,201 
TX  Lindale (Tyler)  2015  Industrial   163,378    5,638,258 
TX  Mesquite (Dallas)  2017  Industrial   351,874    30,928,224 
TX  Spring (Houston)  2014  Industrial   181,176    7,924,865 
TX  Waco  2012  Industrial   150,710    4,234,777 
VA  Charlottesville  1999  Industrial   48,064    -0- 
VA  Mechanicsville (Richmond)  2001  Industrial   112,799    -0- 
VA  Richmond  2004  Industrial   60,000    -0- 
VA  Roanoke (CHEP USA)  2007  Industrial   83,000    -0- 
VA  Roanoke (FDX Ground)  2013  Industrial   103,402    4,395,246 
WA  Burlington (Seattle/Everett)  2016  Industrial   210,445    17,757,364 
WI  Cudahy (Milwaukee)  2001  Industrial   139,564    -0- 
WI  Green Bay (1)  2013  Industrial   99,102    2,640,432 
             21,173,581   $719,768,355 

 

  (1) One loan is secured by the properties located in Green Bay, WI, Stewartville, MN and Altoona, PA.
  (2) We own a 51% controlling equity interest.
  (3) We own a 67% controlling equity interest.

 

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The following table sets forth certain information concerning the principal tenants and leases for our properties shown above as of September 30, 2018:

 

State  City (MSA)  Tenant  Annualized Rent   Lease Expiration   
AL  Huntsville  FedEx Ground Package System, Inc.  $605,000   07/31/26   
AL  Mobile  Amazon.com Services, Inc. (Amazon.com. Inc.)   2,020,000   11/30/28   
AZ  Tolleson (Phoenix)  Western Container Corp. (Coca-Cola)   1,361,000   04/30/27   
CO  Colorado Springs  FedEx Ground Package System, Inc.   1,832,000   01/31/26   
CO  Denver  FedEx Ground Package System, Inc.   605,000   10/31/25  (1)
CT  Newington (Hartford)  Kellogg Sales Company   329,000   02/29/20   
FL  Cocoa  FedEx Ground Package System, Inc.   1,112,000   09/30/24   
FL  Davenport (Orlando)  FedEx Ground Package System, Inc.   2,609,000   04/30/31   
FL  Daytona Beach  B. Braun Medical Inc.   2,130,000   04/01/28   
FL  Ft. Myers  FedEx Ground Package System, Inc.   1,418,000   08/31/27   
FL  Homestead (Miami)  FedEx Ground Package System, Inc.   2,282,000   03/31/32   
FL  Jacksonville  FedEx Corporation   533,000   05/31/29  (1)
FL  Jacksonville  FedEx Ground Package System, Inc.   1,998,000   12/31/29   
FL  Lakeland  FedEx Corporation   155,000   11/30/27  (1)
FL  Orlando  FedEx Corporation   666,000   11/30/27  (1)
FL  Punta Gorda  FedEx Corporation   284,000   06/30/27   
FL  Tampa  FedEx Corporation   603,000   11/30/27   
FL  Tampa  FedEx Ground Package System, Inc.   1,624,000   07/31/26   
FL  Tampa  Tampa Bay Grand Prix   297,000   09/30/20   
GA  Augusta  FedEx Ground Package System, Inc.   501,000   06/30/21  (1)
GA  Augusta  FedEx Corporation   121,000   11/30/22   
GA  Braselton (Atlanta)  FedEx Ground Package System, Inc.   3,801,000   02/28/33   
GA  Griffin (Atlanta)  Rinnai America Corporation   831,000   12/31/20   
GA  Savannah  Shaw Industries, Inc.   3,551,000   09/30/27   
IA  Urbandale (Des Moines)  Foundation Building Materials, LLC   172,000   12/31/27  (2)
IL  Burr Ridge (Chicago)  Sherwin-Williams Company   162,000   10/31/21   
IL  Elgin (Chicago)  Joseph T. Ryerson and Son, Inc.   506,000   01/31/20   
IL  Granite City (St. Louis, MO)  Anheuser-Busch, Inc.   821,000   11/30/21   
IL  Montgomery (Chicago)  Home Depot USA, Inc.   997,000   06/30/20   
IL  Rockford  Collins Aerospace Systems (United Technologies)   364,000   06/30/27  (3)
IL  Rockford  Sherwin-Williams Company   481,000   12/31/23   
IL  Sauget (St. Louis, MO)  FedEx Ground Package System, Inc.   1,036,000   05/31/29   
IL  Schaumburg (Chicago)  FedEx Corporation   478,000   03/31/27   
IL  Wheeling (Chicago)  FedEx Ground Package System, Inc.   1,272,000   05/31/27   
IN  Greenwood (Indianapolis)  ULTA, Inc.   2,702,000   07/31/25   
IN  Indianapolis  FedEx Ground Package System, Inc.   1,715,000   10/31/27   
KS  Edwardsville (Kansas City)  Carlisle Tire & Wheel Company   739,000   07/31/23  (1)
KS  Edwardsville (Kansas City)  International Paper Company   1,348,000   08/31/23   
KS  Olathe (Kansas City)  FedEx Ground Package System, Inc.   2,200,000   05/31/31   
KS  Topeka  Heartland Coca-Cola Bottling Co., LLC (Coca-Cola)   332,000   09/30/21   
KY  Buckner (Louisville)  TreeHouse Private Brands, Inc.   2,206,000   10/31/33   
KY  Frankfort (Lexington)  Jim Beam Brands Company (Beam Suntory)   2,051,000   01/31/25   
KY  Louisville  Challenger Lifts, Inc. (Snap-on Inc.)   838,000   06/07/26   
LA  Covington (New Orleans)  FedEx Ground Package System, Inc.   1,262,000   06/30/25   
MD  Beltsville (Washington, DC)  FedEx Ground Package System, Inc.   1,452,000   07/31/28  (1)
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   
MI  Walker (Grand Rapids)  FedEx Ground Package System, Inc.   2,102,000   01/31/32   
MN  Stewartville (Rochester)  FedEx Ground Package System, Inc.   372,000   05/30/23   
MO  Kansas City  Bunzl Distribution Midcentral, Inc.   752,000   09/30/21   
MO  Liberty (Kansas City)  Holland 1916 Inc.   349,000   06/30/19   
MO  O’Fallon (St. Louis)  Pittsburgh Glass Works, LLC   442,000   06/30/21  (1)
MO  St. Joseph  Woodstream Corporation   914,000   09/30/21  (4)
MO  St. Joseph  Altec Industries, Inc.   371,000   02/28/23  (1)(4)
MS  Olive Branch (Memphis, TN)  Anda Pharmaceuticals, Inc.   1,205,000   07/31/22   

 

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State  City (MSA)  Tenant  Annualized Rent   Lease Expiration   
MS  Olive Branch (Memphis, TN)  Milwaukee Electric Tool Corporation  $3,032,000   07/31/28   
MS  Richland (Jackson)  FedEx Corporation   120,000   03/31/24   
MS  Ridgeland (Jackson)  Graybar Electric Company   109,000   07/31/19  (5)
NC  Concord (Charlotte)  FedEx Ground Package System, Inc.   2,237,000   07/31/25   
NC  Concord (Charlotte)  FedEx Ground Package System, Inc.   2,537,000   05/31/32   
NC  Fayetteville  Victory Packaging, L.P.   502,000   02/28/21   
NC  Winston-Salem  Style Crest, Inc.   387,000   03/31/21   
NE  Omaha  FedEx Corporation   446,000   10/31/23   
NJ  Carlstadt (New York, NY)  SOFIVE, Inc.   558,000   01/31/25  (6)
NJ  Somerset  Various Tenants at Retail Shopping Center   807,000   Various  (7)
NY  Cheektowaga (Buffalo)  FedEx Ground Package System, Inc.   966,000   08/31/19   
NY  Halfmoon (Albany)  RGH Enterprises, Inc. (Cardinal Health)   607,000   11/30/21   
NY  Hamburg (Buffalo)  FedEx Ground Package System, Inc.   2,313,000   03/31/31   
OH  Bedford Heights (Cleveland)  FedEx Corporation   436,000   08/31/28  (1)
OH  Cincinnati  The American Bottling Company (Keurig Dr Pepper)   481,000   09/30/29   
OH  Kenton  International Paper Company   1,244,000   08/31/27   
OH  Lebanon (Cincinnati)  Siemens Real Estate   464,000   04/30/24  (1)(8)
OH  Monroe (Cincinnati)  UGN, Inc.   1,070,000   02/28/30   
OH  Richfield (Cleveland)  FedEx Ground Package System, Inc.   1,493,000   09/30/24   
OH  Stow  Mickey Thompson (Cooper Tire)   1,501,000   08/31/27   
OH  Streetsboro (Cleveland)  Best Buy Warehousing Logistics, Inc.   1,676,000   01/31/22   
OH  West Chester Twp. (Cincinnati)  FedEx Ground Package System, Inc.   543,000   08/31/23   
OK  Oklahoma City  Amazon.com Services, Inc. (Amazon.com. Inc.)   1,884,000   10/31/27   
OK  Oklahoma City  Bunzl Distribution Oklahoma, Inc.   722,000   08/31/24   
OK  Oklahoma City  FedEx Ground Package System, Inc.   1,048,000   06/30/25   
OK  Tulsa  The American Bottling Company (Keurig Dr Pepper)   262,000   02/28/24   
PA  Altoona  FedEx Ground Package System, Inc.   651,000   08/31/23   
PA  Imperial (Pittsburgh)  General Electric Company   1,321,000   12/31/25   
PA  Monaca (Pittsburgh)  NF&M International, Inc.   835,000   12/31/24   
SC  Aiken (Augusta, GA)  Autoneum North America, Inc.   1,703,000   04/30/32   
SC  Charleston  FedEx Corporation   1,315,000   08/31/32   
SC  Charleston  FedEx Ground Package System, Inc.   2,713,000   06/30/33   
SC  Ft. Mill (Charlotte, NC)  FedEx Ground Package System, Inc.   1,581,000   08/31/28   
SC  Hanahan (Charleston)  FedEx Ground Package System, Inc.   675,000   11/30/18  (1)(9)
SC  Hanahan (Charleston)  Science Applications International Corporation   1,491,000   04/30/19   
TN  Chattanooga  FedEx Corporation   319,000   10/31/22  (1)
TN  Lebanon (Nashville)  CBOCS Distribution, Inc. (Cracker Barrel)   1,447,000   06/30/24   
TN  Memphis  FedEx Corporation   1,384,000   05/31/29  (8)
TN  Shelby County  N/A- Land   -0-   N/A   
TX  Carrollton (Dallas)  Carrier Enterprise, LLC (United Technologies)   1,241,000   01/31/24  (1)
TX  Corpus Christi  FedEx Ground Package System, Inc.   436,000   08/31/21   
TX  Edinburg  FedEx Ground Package System, Inc.   1,097,000   09/30/26   
TX  El Paso  FedEx Ground Package System, Inc.   1,345,000   09/30/23   
TX  Ft. Worth (Dallas)  FedEx Ground Package System, Inc.   2,373,000   04/30/30   
TX  Houston  National Oilwell Varco, Inc.   754,000   09/30/22   
TX  Lindale (Tyler)  FedEx Ground Package System, Inc.   725,000   06/30/24   
TX  Mesquite (Dallas)  FedEx Ground Package System, Inc.   3,195,000   03/31/32   
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   08/31/27   
VA  Mechanicsville (Richmond)  FedEx Corporation   541,000   04/30/23   
VA  Richmond  Carrier Enterprise, LLC (United Technologies)   324,000   11/30/18  (9)
VA  Roanoke  CHEP USA, Inc.   500,000   02/28/25  (10)
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.   827,000   06/30/27   
WI  Green Bay  FedEx Ground Package System, Inc.   468,000   05/30/23   
         $126,792,000       

 

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  (1) Extension has been executed. See fiscal 2018 and fiscal 2019 renewal and extension chart.
  (2) The lease has an early termination option which may be exercised after December 2025, on the condition that we are provided with six months notice and the tenant pays us a $92,000 termination fee.
  (3) Lease has an early termination option which may be exercised after June 2022, on the condition that we are provided with six months notice and the tenant pays us a $1,102,097 termination fee.
  (4) Property is leased to two tenants.
  (5) Lease has an early termination option which may be exercised if tenant gives six months notice at any time.
  (6) Estimated annual rent is the full annual rent per the lease. We consolidate the results of this property due to our 51% controlling equity interest.
  (7) We own a 67% controlling equity interest. Estimated annual rent reflects our proportionate share of the total rent.
  (8) We have agreed to the renewal terms with the tenant and the finalized signed lease is forthcoming.
  (9) Tenant will not be renewing, property is currently being marketed.
  (10) Lease has an early termination option which may be exercised after August 2021, on the condition that we are provided with six months notice and the tenant pays us a $500,000 termination fee.

 

As of September 30, 2018, all improved properties were 100% occupied, except for one property located in Monaca (Pittsburgh), PA consisting of 255,658 rentable square feet of which 68% or 174,802 square feet is occupied, resulting in a 99.6% overall occupancy percentage for our whole portfolio of properties.

 

Our weighted-average lease expiration was 8.1 years and 7.9 years as of September 30, 2018 and 2017, respectively.

 

Our average occupancy rates as of the years ended September 30, 2018, 2017, 2016, 2015 and 2014 were 99.6%, 99.3%, 99.6%, 97.7% and 95.9%, respectively. The average effective annualized rent per square foot for the years ended September 30, 2018, 2017, 2016, 2015 and 2014 was $6.01, $5.93, $5.72, $5.48 and $5.51, respectively.

 

Completed expansions that have resulted in increased rents over the fiscal years ended September 30, 2017 and 2018

 

Ecommerce has been a major catalyst driving increased demand for the industrial property type. The shift from traditional brick and mortar retail shopping to ordering goods on-line has resulted in record occupancy rates for industrial real estate throughout the U.S. Due to the increased demand for industrial space, we have been experiencing an increase in expansion activity at our existing properties.

 

On October 1, 2016, a 50,625 square foot expansion of the building leased to FedEx Ground Package System, Inc. located in Edinburg, TX was completed for a cost of approximately $4,762,000, resulting in a new 10 year lease which extended the prior lease expiration date from September 2021 to September 2026. In addition, the expansion resulted in an increase in annual rent effective from the date of completion of approximately $499,000 from approximately $598,000, or $5.26 per square foot, to approximately $1,097,000, or $6.68 per square foot.

 

On September 1, 2017, a parking lot expansion for a property leased to FedEx Ground Package System, Inc. located in Ft. Myers, FL was completed for a cost of approximately $862,000, resulting in a new 10 year lease which extended the prior lease expiration date from September 2026 to August 2027. In addition, the expansion resulted in an increase in annual rent effective from the date of completion of approximately $53,000 from approximately $1,365,000, or $6.39 per square foot to approximately $1,418,000, or $6.64 per square foot.

 

On November 1, 2017, a parking lot expansion for a property leased to FedEx Ground Package System, Inc., located in Indianapolis, IN was completed for a total project cost of approximately $1,683,000, resulting in a new 10 year lease which extended the prior lease expiration date from April 2024 to October 2027. In addition, the expansion resulted in an increase in annual rent effective from the date of completion of approximately $184,000 from approximately $1,533,000, or $4.67 per square foot, to approximately $1,715,000, or $5.23 per square foot.

 

On September 27, 2018, a parking lot expansion for a property leased to FedEx Ground Package System, Inc., located in Ft. Mill, SC was completed for a total project cost of approximately $1,834,000, resulting in a new 10 year lease which extended the prior lease expiration date from October 2023 to August 2028. In addition, the expansion resulted in an increase in annual rent effective from the date of completion of approximately $183,000 from approximately $1,415,000, or $8.00 per square foot, to approximately $1,598,000, or $9.03 per square foot.

 

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Fiscal 2018 Renewals

 

In fiscal 2018, approximately 8% of our gross leasable area, representing 16 leases totaling 1,546,637 square feet, was set to expire. We have renewed 11 of the 16 leases that were set to expire during fiscal 2018, representing 1,063,824 square feet, or 69% of the expiring square footage. One of the 11 leases, which is with FedEx Ground Package System, Inc., for a property located in Hanahan (Charleston), SC, renewed for only four months, until November 30, 2018, because the tenant moved their operations from our 91,776 square foot facility to our newly constructed, much larger, 265,318 square foot facility, which is also located in Charleston, SC and is leased to FedEx Ground Package System, Inc. for 15 years through June 2033. We closed on this new facility on August 15, 2018. Excluding the four month lease renewal at the 91,776 square foot location, the 10 leases that have renewed represent 972,048 square feet, or 63% of the expiring square footage. We have incurred, or we expect to incur, tenant improvement costs of approximately $844,000 and leasing commission costs of approximately $898,000 in connection with these 10 lease renewals. The table below summarizes the lease terms of the 11 leases which were renewed. In addition, the table below includes both the tenant improvement costs and the leasing commission costs, which are presented on a per square foot (PSF) basis averaged annually over the renewal term.

 

 

 

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

Commission Cost

PSF over

Renewal

Term (1)

 
Hanahan (Charleston), SC (3) 

 

FedEx Ground

   91,776   $7.35   $7.35   07/31/18  $7.35   $7.35   11/30/18   0.3   $-0-   $-0- 
                                                  
Chattanooga, TN  FedEx Express   60,637   $5.13   $5.13   10/31/17  $5.26   $5.26   10/31/22   5.0   $0.44   $0.10 
Lakeland, FL  FedEx Express   32,105    4.83    4.83   11/30/17   4.83    4.83   11/30/27   10.0    0.19    0.10 
Orlando, FL  FedEx Express   110,638    5.69    6.02   11/30/17   6.02    6.02   11/30/27   10.0    0.20    0.12 
St. Joseph, MO  Altec Industries   126,880    2.75    2.75   02/28/18   2.94    2.87   02/28/23   5.0    -0-    0.13 
Edwardsville, KS  Carlisle Tire   179,280    4.23    4.39   05/31/18   4.10    4.15   07/31/23   5.2    0.05    0.16 
Augusta, GA  FedEx Ground   59,358    7.64    7.64   06/30/18   8.64    8.64   06/30/21   3.0    -0-    -0- 
O’Fallon, MO  Pittsburgh Glass Works   102,135    4.18    4.18   06/30/18   4.37    4.31   06/30/21   3.0    0.08    -0- 
Denver, CO  FedEx Ground   69,865    8.08    8.08   07/31/18   8.72    8.72   10/31/25   7.3    -0-    0.17 
Beltsville, MD  FedEx Ground   148,881    9.58    9.58   07/31/18   9.77    9.77   07/31/28   10.0    -0-    0.20 
Bedford Heights, OH  FedEx Express   82,269    4.96    4.96   08/31/18   5.33    5.33   08/31/28   10.0    0.43    0.11 
   Total (2)   972,048                                          
                                                  
Weighted Average (2)          $5.64   $5.71      $5.87   $5.87       6.8   $0.13   $0.14 

 

  (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 short-term renewal of the Hanahan (Charleston), SC property.
  (3) Renewed for only four months because the tenant moved its operations from our 91,776 square foot facility located in Hanahan (Charleston), SC to a brand new, build-to-suit, 265,318 square foot facility, which is also located in Charleston, SC. We purchased the new facility on August 15, 2018.

 

Excluding the four-month lease renewal at the Hanahan (Charleston), SC location, the remaining 10 lease renewals result in a weighted average term of 6.8 years and a renewed U.S. GAAP straight-line weighted average lease rate of $5.87 per square foot. The renewed weighted average initial cash rent is also $5.87 per square foot. This compares to the former weighted average rent of $5.64 per square foot on a U.S. GAAP straight-line basis and the former weighted average cash rent of $5.71 per square foot, representing an increase in the weighted average lease rate of 4.1% on a U.S. GAAP straight-line basis and an increase of 2.8% on a cash basis.

 

As further described in the three paragraphs below, of the five remaining leases originally set to expire during fiscal 2018 that did not renew, three of the properties were sold and one of the properties was re-tenanted. The three properties that were sold represent 12% of the expiring square footage for fiscal 2018, and one property, representing 14% of the expiring square footage for fiscal 2018, was re-tenanted for 3 years. The remaining lease that did not renew, expired on December 31, 2017 and represents 5% of the expiring square footage for fiscal 2018. This tenant leased 80,856 square feet at our 255,658 square foot industrial park located in Monaca (Pittsburgh), PA. This partially vacant property currently represents our only property with vacancy.

 

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Two leases were set to expire during fiscal 2018 with Kellogg Sales Company (Kellogg) for our 65,067 square foot facility located in Kansas City, MO through July 31, 2018 and our 50,400 square foot facility located in Orangeburg, NY through February 28, 2018. Kellogg informed us that they would not be renewing these leases. On December 18, 2017, we sold our property located in Kansas City, MO for $4,900,000, with net sale proceeds of approximately $4,602,000 and on December 22, 2017, we sold our property located in Orangeburg, NY for $6,170,000, with net sale proceeds of approximately $5,898,000. The sale of these two properties resulted in a realized gain of approximately $5,388,000, representing a 105% gain over the depreciated U.S. GAAP basis and a realized net gain of approximately $1,804,000, representing a 21% net gain over our historic undepreciated cost basis. In conjunction with the sale of these two properties, we simultaneously entered into a lease termination agreement for each property whereby we received a termination fee from Kellogg totaling approximately $210,000 which represents a weighted average of 80% of the then remaining rent due under each respective lease.

 

On June 1, 2018, we sold a 68,370 square foot building located in Colorado Springs, CO for $5,800,000, with net sale proceeds of approximately $5,465,000, which was our approximate U.S. GAAP net book carrying value. Prior to the sale of this property, it was leased to FedEx Ground Package System, Inc. through September 2018. The tenant informed us that they would not be renewing this lease because they have moved their operations from our former 68,370 square foot facility to our newly constructed 225,362 square foot facility, which is also located in Colorado Springs, CO. On June 9, 2016, we purchased this newly constructed 225,362 square foot industrial building, which is leased to FedEx Ground Package System, Inc. for 10 years through January 2026.

 

Another remaining lease that was set to expire during fiscal 2018 was leased to Caterpillar Logistics Services, Inc. (Caterpillar) at our 218,120 square foot facility located in Griffin, GA through December 31, 2017. In September 2017, we entered into a three year lease agreement with Rinnai America Corporation through December 31, 2020 for this location. The new lease commenced on January 1, 2018, with initial annual rent of $807,044, representing $3.70 per square foot, with 3.0% annual increases thereafter, resulting in a straight-line annualized rent of $831,000, representing $3.81 per square foot over the life of the lease. This compares to the former U.S. GAAP straight-line and the former cash rent of $5.36 per square foot, resulting in a decrease in the average lease rate of 28.9% on a U.S. GAAP straight-line basis and a decrease of 31.0% on a cash basis.

 

Other Fiscal 2018 Leasing Activity

 

Effective November 1, 2017, we entered into a 10.2 year lease agreement with FBM Gypsum Supply of Illinois, LLC for our 36,270 square foot facility located in Urbandale (Des Moines), IA. The lease agreement provided for two months of free rent, after which, on January 1, 2018, initial annual rent of $159,588, representing $4.40 per square foot commenced, with 2.0% annual increases thereafter, resulting in a straight-line annualized rent of approximately $172,000, representing $4.74 per square foot through the expiration date of the lease, which is December 31, 2027. This new rent compares to the former average rent of $3.56 per square foot on a U.S. GAAP straight-line basis and the former cash rent of $3.88 per square foot, resulting in an increase in the average lease rate of 33.1% on a U.S. GAAP straight-line basis and an increase of 13.4% on a cash basis.

 

Fiscal 2019 Renewals

 

In fiscal 2019, approximately 7% of our gross leasable area, representing 12 leases totaling 1,485,770 square feet, is set to expire. As of the date of this Annual Report, 5 of the 12 leases have renewed. The five leases that have renewed thus far represent 802,595 square feet, or 54% of the expiring square footage, and have a weighted average lease term of 8.4 years.

 

We have incurred or we expect to incur tenant improvement costs of approximately $1,786,000 and leasing commission costs of approximately $991,000 in connection with these five lease renewals. The table below summarizes the lease terms of the five leases which were renewed. In addition, the table below includes both the tenant improvement costs and the leasing commission costs, which are presented on a per square foot (PSF) basis averaged annually over the renewal term.

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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
Commission Cost
PSF over
Renewal
Term (1)
 
                                          
Somerset, NJ  Taco Bell   21,365   $4.68   $4.68   10/14/18  $5.15   $5.15   10/14/23   5.0   $-0-   $-0- 
Carrollton (Dallas), TX  Carrier Enterprise   184,317    8.20    8.55   01/11/19   6.24    6.00   01/31/24   5.0    0.20    0.39 
Lebanon (Cincinnati), OH (2)  Siemens Real Estate   51,130    8.82    9.67   04/30/19   8.94    8.50   04/30/24   5.0    0.40    0.40 
Memphis, TN (2)  FedEx Express   449,900    2.84    2.95   05/31/19   3.10    3.10   05/31/29   10.0    0.30    0.09 
Jacksonville, FL  FedEx Express   95,883    5.40    5.40   05/31/19   5.59    5.59   05/31/29   10.0    0.16    0.11 
   Total   802,595                                          
                                                  
Weighted Average          $4.81   $5.00      $4.55   $4.46       8.4   $0.26   $0.15 

 

  (1) Amount calculated based on the total cost divided by the square feet, divided by the renewal term.
  (2) We have agreed to the renewal terms with the tenant and the finalized signed lease is forthcoming.

 

These five lease renewals result in a weighted average term of 8.4 years and a U.S. GAAP straight-line weighted average lease rate of $4.55 per square foot. The renewed weighted average initial cash rent per square foot is $4.46. This compares to the former weighted average rent of $4.81 per square foot on a U.S. GAAP straight-line basis and the former weighted average cash rent of $5.00 per square foot, resulting in a decrease in the weighted average lease rate of 5.4% on a U.S. GAAP straight-line basis and a decrease in the weighted average lease rate of 10.8% on a cash basis.

 

As discussed above, in the Fiscal 2018 Renewal section, our 91,776 square foot facility located in Hanahan (Charleston), SC, was leased to FedEx Ground Package System, Inc. and renewed for only four months, until November 30, 2018 because the tenant moved their operations from our 91,776 square foot facility to our newly constructed, much larger, 265,318 square foot facility, which is also located in Charleston, SC. The new 265,318 square foot facility is leased to FedEx Ground Package System, Inc. for 15 years through June 2033. In addition, Carrier Enterprise, LLC (United Technologies) informed us that they will not be renewing their lease for our 60,000 square foot facility located in Richmond, VA which expires on November 30, 2018. Both our 91,776 square foot facility located in Hanahan (Charleston), SC and our 60,000 square foot facility located in Richmond, VA are currently being marketed.

 

On September 30, 2018, we had a weighted average lease maturity of 8.1 years with 7.5% of the weighted average gross annualized rent scheduled to expire each year.

 

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The following table presents certain information as of September 30, 2018, with respect to our 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   80,856   $-0-    0%
Shopping Center (2)  1   64,220    807,000    1%
2019  6   681,395    3,914,000    3%
2020  4   383,449    2,129,000    2%
2021  10   1,206,723    5,467,000    4%
2022  7   1,138,320    6,419,000    5%
2023  13   1,668,804    9,481,000    7%
2024  12   1,584,634    10,094,000    8%
2025  9   2,404,478    12,271,000    10%
2026  7   982,226    7,922,000    6%
2027  11   2,304,616    12,629,000    10%
2028  11   2,571,915    13,826,000    11%
2029  5   1,171,338    5,454,000    4%
2030  4   1,044,832    7,403,000    6%
2031  3   963,269    7,122,000    6%
2032  6   1,724,838    13,134,000    10%
2033  2   639,068    6,514,000    5%
2034  1   558,600    2,206,000    2%
Total (3)  111   21,173,581   $126,792,000    100%

  

  (1) “Vacant” represents 80,856 square feet at our 255,658 square foot industrial park located in Monaca (Pittsburgh), PA.
  (2) “Shopping Center” represents a multi-tenanted property which has lease expirations ranging from month-to-month to 2030.
  (3) The property located in Monaca (Pittsburg), PA is included in “Vacant” and is included in “2025” for its lease with NF&M International and therefore is counted as one property in the property count total. Included in “2021” is Woodstream Corporation and included in “2023” is Altec Industries, Inc., both of which occupy one property and therefore is 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, $0.01 par value per share (common stock), 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.

 

Shareholder Information

 

As of November 15, 2018, 1,278 shareholders of record held shares of our common stock.

 

Recent Sales of Unregistered Securities

 

None.

 

Purchases of Equity Securities

 

On January 16, 2018, the Board of Directors reaffirmed our Share Repurchase Program (Repurchase Program) that authorizes us to purchase up to $10,000,000 in the aggregate of our 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 us to acquire any particular amount of common stock, and the program may be suspended, modified or discontinued at any time at our discretion without prior notice. During the fiscal year ended September 30, 2018, we did not reacquire any of our own shares of common stock. The maximum dollar value that may be purchased under the Repurchase Program as of September 30, 2018 is $10,000,000.

 

Equity Compensation Plan Information

 

At our Annual Meeting held on May 18, 2017, our common shareholders approved our Amended and Restated 2007 Incentive Award Plan (the Plan) which extended the term of our 2007 Incentive Award Plan for an additional 10 years, until March 13, 2027, added 1,600,000 shares of common stock to the share reserve, expanded the types of awards available for grant under the Plan and made other improvements to the 2007 Plan. As of September 30, 2018, there were 1,671,872 shares available for grant as stock options, restricted stock and other equity-based awards under the Plan. During fiscal 2018, options to purchase 65,000 shares were granted with an exercise price of $17.80 and options to purchase 40,000 shares were exercised at an exercise price of $14.24 per share for total proceeds of $569,600. In addition, during fiscal 2018, 12,500 shares of restricted common stock were granted with a fair value on the grant date of $16.47 per share. In addition, during fiscal 2018, 3,670 unrestricted shares of common stock were granted with a weighted average fair value on the grant date of $16.10 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 our common stock.

 

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The following table summarizes information, as of September 30, 2018, relating to our equity compensation plan (including individual compensation arrangements) pursuant to which our equity securities 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   695,000   $12.17    1,671,872 
                
Equity Compensation Plans Not Approved by Security Holders   -    -    - 
                
Total   695,000   $12.17    1,671,872 

 

Comparative Stock Performance

 

The following line graph compares the total return of our 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, 2013 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 on us 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, 
   2018   2017   2016   2015   2014 
OPERATING DATA:                         
Rental and Reimbursement Revenue  $139,161,849   $116,385,305   $97,755,433   $77,775,497   $64,672,341 
Real Estate Taxes and Operating Expenses   (24,390,117)   (20,154,556)   (17,568,623)   (12,490,019)   (11,317,479)
Net Operating Income - NOI   114,771,732    96,230,749    80,186,810    65,285,478    53,354,862 
Lease Termination Income   210,261    -0-    -0-    238,625    1,182,890 
Gain on Sale of Securities Transactions   111,387    2,311,714    4,398,599    805,513    2,166,766 
Dividend and Interest Income   13,120,465    6,930,564    5,616,392    3,723,867    3,882,597 
General and Administrative Expenses   (8,776,579)   (7,809,546)   (7,936,124)   (6,305,928)   (5,709,937)
Acquisition Costs   -0-    (178,526)   (730,441)   (1,546,088)   (481,880)
Interest Expense (1)   (32,349,705)   (25,754,121)   (22,953,049)   (19,844,166)   (16,830,423)
Depreciation & Amortization Expense   (38,567,027)   (31,459,749)   (26,087,680)   (21,772,728)   (17,719,581)
Income from Continuing Operations   48,520,534    40,271,085    32,494,507    20,584,573    19,845,294 
Gain on Sale of Real Estate Investments   7,485,266    -0-    -0-    5,021,242    -0- 
Net Income   56,005,800    40,271,085    32,494,507    25,605,815    19,845,294 
Preferred Dividends   (17,190,456)   (14,861,686)   (9,020,470)   (8,607,032)   (8,607,032)
Redemption of Preferred Stock   -0-    (2,467,165)   (2,942,149)   -0-    -0- 

Net Income Attributable to Common Shareholders

  $38,815,344   $22,942,234   $20,531,888   $16,998,783   $11,238,262 
Net Income Per Share                         

     Basic

  $0.71   $0.56   $0.50   $0.43   $0.40 
Diluted   0.71    0.56    0.50    0.43    0.40 

Net Income Attributable to Common

Shareholders Per Share

                         
Basic   0.49    0.32    0.31    0.29    0.23 
Diluted   0.49    0.32    0.31    0.29    0.23 

  

  (1) Amortization expense related to Financing Costs are included in “Interest Expense”.

  

BALANCE SHEET DATA:                    
Total Assets  $1,718,377,886   $1,443,037,755   $1,223,485,885   $910,905,721   $739,843,222 
Real Estate Investments, net   1,512,512,785    1,260,830,451    1,013,103,314    806,465,906    627,068,988 
Fixed Rate Mortgage Notes Payable, net   711,545,649    591,364,371    477,476,010    368,904,953    283,882,528 
Loans Payable   186,608,676    120,091,417    80,790,684    85,041,386    25,200,000 
Preferred Stock Called for Redemption   -0-    -0-    53,493,750    -0-    -0- 
7.625% Series A Cumulative Redeemable Preferred Stock   -0-    -0-    -0-    53,493,750    53,493,750 
7.875% Series B Cumulative Redeemable Preferred Stock   -0-    -0-    57,500,000    57,500,000    57,500,000 
6.125% Series C Cumulative Redeemable Preferred Stock   287,200,025    245,986,125    135,000,000    -0-    -0- 
Total Shareholders’ Equity   797,905,767    712,865,696    597,858,098    446,010,640    420,631,082 
                          
CASH FLOW DATA:                         
Net Cash Provided (Used) By:                         
Operating Activities  $85,529,162   $73,867,866   $54,699,500   $38,062,285   $34,856,285 
Investing Activities   (332,513,200)   (339,071,013)   (227,845,089)   (194,469,735)   (131,809,697)
Financing Activities   246,082,577    179,679,685    256,821,188    148,006,698    105,023,561 

  

   September 30, 
  2018   2017   2016   2015   2014 
OTHER INFORMATION:                    
Average Number of Common Shares Outstanding                    
Basic   78,619,440    72,114,078    65,468,564    59,085,888    49,829,924 
Diluted   78,802,208    72,249,691    65,558,284    59,201,296    49,925,036 
Funds From Operations*  $69,841,849   $54,442,611   $46,598,043   $33,730,447   $29,000,443 
Core Funds From Operations*  $69,841,849   $57,088,302   $50,270,633   $35,276,535   $29,482,323 
Adjusted Funds From Operations*  $68,375,031   $54,880,438   $45,865,343   $33,976,958   $25,843,710 
Cash Dividends per Common Share  $0.68   $0.64   $0.64   $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 we believe 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 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. FFO includes gains and losses realized on sale of securities investments. NAREIT created FFO as a non-GAAP supplemental measure of REIT operating performance. We define Core Funds From Operations (Core FFO) as FFO, plus acquisition costs and costs associated with the Redemption of Preferred Stock. We define Adjusted Funds From Operations (AFFO) as Core FFO, excluding stock based compensation expense, depreciation of corporate office tenant improvements, amortization of deferred financing costs, lease termination income, net gain or loss on sale of securities transactions, effect of non-cash U.S. GAAP straight-line rent adjustments, non-recurring other expenses and subtracting recurring capital expenditures. We define recurring capital expenditures as all capital expenditures that are recurring in nature, 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 our financial performance.

 

FFO, Core FFO and AFFO are non-GAAP performance measures and (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 or Net Income Attributable to Common Shareholders as a measure of operating performance or to Cash Flows from Operating, Investing and Financing Activities; and (iii) are not an alternative to Cash Flows from Operating, Investing and Financing Activities as a measure of liquidity. FFO, Core FFO and AFFO, as calculated by us, may not be comparable to similarly titled measures reported by other REITs.

 

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

 

   2018   2017   2016   2015   2014 
Net Income Attributable to Common Shareholders  $38,815,344   $22,942,234   $20,531,888   $16,998,783   $11,238,262 
Plus: Depreciation Expense (Excluding Corporate Office)   36,017,959    29,478,322    23,931,530    19,625,748    15,908,769 
Plus: Amortization of Intangible Assets   1,613,368    1,071,719    1,178,744    1,370,654    1,347,936 
Plus: Amortization of Capitalized Lease Costs   880,444    855,000    955,881    756,504    505,476 
Less: (Gain) / Plus: Loss on Sale of Real Estate Investments   (7,485,266)   95,336    -0-    (5,021,242)   -0- 
FFO Attributable to Common Shareholders   69,841,849    54,442,611    46,598,043    33,730,447    29,000,443 
Plus: Acquisition Costs   -0-    178,526    730,441    1,546,088    481,880 
Plus: Redemption of Preferred Stock   -0-    2,467,165    2,942,149    -0-    -0- 
Core FFO Attributable to Common Shareholders   69,841,849    57,088,302    50,270,633    35,276,535    29,482,323 
Plus: Stock Compensation Expense   433,895    624,706    926,465    448,895    347,002 
Plus: Depreciation of Corporate Office Capitalized Costs   157,964    156,676    123,492    79,572    -0- 
Plus: Amortization of Financing Costs   1,220,983    1,234,259    1,116,238    1,286,016    725,745 
Plus: Non-recurring Other Expense (1)   -0-    -0-    500,000    -0-    -0- 
Less: Lease Termination Income   (210,261)   -0-    -0-    (238,625)   (1,182,890)
Less: Gain on Sale of Securities Transactions   (111,387)   (2,311,714)   (4,398,599)   (805,513)   (2,166,766)
Less: Effect of non-cash U.S. GAAP Straight-line Rent Adjustment   (1,972,588)   (1,027,927)   (1,709,821)   (1,446,264)   (600,745)
Less: Recurring Capital Expenditures   (985,424)   (883,864)   (963,065)   (623,658)   (760,959)
AFFO Attributable to Common Shareholders  $68,375,031   $54,880,438   $45,865,343   $33,976,958   $25,843,710 

 

(1)Consists of one-time payroll expenditures in fiscal 2016.

 

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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 (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). Forward-looking statements provide our current expectations or forecasts of future events. In particular, statements relating to our liquidity and capital resources, portfolio performance and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial performance are forward-looking statements. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Securities Act and Exchange Act for any such forward-looking statements. We caution investors that any forward-looking statements presented in this Form 10-K are based on management’s belief and assumptions made by, and information currently available to, management. 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. Forward-looking statements include statements about our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements that are not historical facts.

 

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. 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 us. 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 our actual results to differ materially from those included in any forward-looking statements we make. 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 us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and we do 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 our expectations include, among others: