ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking
Statements
This
quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements provide our current expectations
or forecasts of future events. 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. Forward-looking
statements can be identified by their use of forward-looking words, such as “may,” “will,” “anticipate,”
“expect,” “believe,” “intend,” “plan,” “should,” “seek” or comparable
terms, or the negative use of those words, but the absence of these words does not necessarily mean that a statement is not forward-looking.
The
forward-looking statements are based on 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 are described under the above heading “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” above and the headings “Business,” “Risk Factors” and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2020. 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 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:
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the
ability of our tenants to make payments under their respective leases;
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our
reliance on certain major tenants;
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our
ability to re-lease properties that are currently vacant or that become vacant;
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our
ability to obtain suitable tenants for our properties;
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changes
in real estate market conditions, economic conditions in the industrial sector, the markets in which our properties are located and
general economic conditions;
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the
inherent risks associated with owning real estate, including local real estate market conditions, governing laws and regulations
and illiquidity of real estate investments;
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our
ability to acquire, finance and sell properties on attractive terms;
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our
ability to repay debt financing obligations;
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our
ability to refinance amounts outstanding under our debt obligations at maturity on terms favorable to us, or at all;
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the
loss of any member of our management team;
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our
ability to comply with debt covenants;
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our
ability to integrate acquired properties and operations into existing operations;
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continued
availability of proceeds from issuances of our debt or equity securities;
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the
availability of other debt and equity financing alternatives;
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changes
in interest rates, including the replacement of the LIBOR reference rate, under our current credit facility and under any additional
variable rate debt arrangements that we may enter into in the future;
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our
ability to successfully implement our selective acquisition strategy;
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our
ability to maintain internal controls and procedures to ensure all transactions are accounted for properly, all relevant disclosures
and filings are timely made in accordance with all rules and regulations, and any potential fraud or embezzlement is thwarted or
detected;
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changes
in federal or state tax rules or regulations that could have adverse tax consequences;
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declines
in the market prices of our investment securities;
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the
effect of COVID-19 on our business and general economic conditions;
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our
ability to qualify as a REIT for federal income tax purposes;
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potential
adverse effects on our business as a result of a publicly announced proxy contest for the election of directors at our annual meeting
or other shareholder activism;
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inability
to complete the proposed transaction with Equity Commonwealth because, among other reasons, one or more conditions to the closing
of the proposed transaction may not be satisfied or waived;
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uncertainty
as to the timing of completion of the proposed transaction;
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potential
adverse effects or changes to relationships with Equity Commonwealth’s or Monmouth’s respective tenants, employees, service
providers or other parties resulting from the announcement or completion of the proposed transaction;
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the
outcome of any legal proceedings that may be instituted against the parties and others related to the merger agreement;
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possible
disruptions from the proposed transaction that could harm Equity Commonwealth’s or Monmouth’s respective business, including
current plans and operations;
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unexpected
costs, charges or expenses resulting from the proposed transaction; and
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uncertainty
of the expected financial performance of Equity Commonwealth following completion of the proposed transaction, including the possibility
that the benefits anticipated from the proposed transaction will not be realized or will not be realized within the expected time
period.
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You
should not place undue reliance on these forward-looking statements, as events described or implied in such statements may not occur.
Although we have entered into the merger agreement with Equity Commonwealth, there can be no assurance that the merger and other transactions
contemplated by the merger agreement will be completed.
Merger
with Equity Commonwealth
As
previously announced, in January 2021, our Board of Directors unanimously decided to explore strategic alternatives to maximize shareholder
value. Following a comprehensive strategic alternatives process, on May 4, 2021, we entered into a definitive merger agreement with Equity
Commonwealth (“EQC”), a New York Stock Exchange traded real estate investment trust, under which, on the terms and subject
to the conditions set forth in the merger agreement, we will merge with and into a new wholly-owned subsidiary of Equity Commonwealth,
resulting in Equity Commonwealth acquiring us in an all-stock transaction. The merger agreement provides that, upon closing of the merger,
our common stockholders will be entitled to receive 0.67 shares of Equity Commonwealth common stock for every share of our common stock
they own and the outstanding shares of our common stock will be extinguished. We plan to continue to pay our regular quarterly common
stock dividend and our quarterly Series C Cumulative Redeemable Preferred Stock dividend until closing of the transaction. Under the
terms of the definitive merger agreement, upon closing of the merger, each holder of our 6.125% Series C Preferred Stock, will be entitled
to receive an amount in cash equal to $25.00 per share plus accumulated and unpaid dividends and the outstanding shares of our 6.125%
Series C Preferred Stock will be extinguished. The merger transaction is expected to close during the second half of calendar 2021, subject
to customary closing conditions, including approval by common stockholders of both Equity Commonwealth and MREIC. Equity Commonwealth
and MREIC shareholders are expected to own approximately 65% and 35%, respectively, of the pro forma company following the close of the
transaction. On July 23, 2021, we filed with the SEC, and shortly thereafter began distributing to our stockholders, a definitive joint
proxy statement/prospectus of MREIC and EQC pursuant to which both MREIC and EQC are seeking approval of the merger from their
respective stockholders at special stockholder meetings that have been called for August 24, 2021.
This
proposed merger represents the culmination of the comprehensive strategic alternatives review conducted by our Board. As part of the
review, our Board of Directors, working with our legal and financial advisors, carefully considered a full range of strategic alternatives.
We and our advisors engaged with and solicited proposals from a broad range of highly reputable strategic and financial counterparties,
all with significant access to capital, comprising of more than 90 qualified potential interested parties, including financial sponsors,
real estate investment trusts, sovereign wealth funds, pension funds, real estate managers and other financial and strategic investors.
At the conclusion of this process, the Board unanimously concluded that the merger with Equity Commonwealth is the best outcome to maximize
long-term value for our stockholders. Our Board reaffirmed this conclusion and its support for the merger with Equity Commonwealth on
July 21, 2021 following receipt and consideration of an unsolicited acquisition proposal from Starwood, a private investment firm
which had previously participated in our strategic alternatives review process. Our Board, in consultation with our financial and legal
advisors, carefully considered Starwood’s unsolicited proposal of July 8, 2021, as amended on July 15, 2021, to purchase 100% of
our common stock for net cash consideration of $18.88 per common share and unanimously determined that the pending merger with EQC represents
the best opportunity to maximize value for our stockholders. As noted above, we are in the process of soliciting approval of the merger
with EQC from stockholders holding two-thirds of our outstanding common shares, as required by Maryland law. Starwood has filed definitive
proxy materials with the SEC for the purpose of soliciting proxies from our stockholders in opposition to the pending merger, and Blackwells
Capital LLC, one of our stockholders, has filed its own preliminary proxy materials with the SEC for the same purpose.
Overview
and Recent Activity
The
following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with
the Consolidated Financial Statements and notes thereto provided elsewhere herein and our Annual Report on Form 10-K for the fiscal year
ended September 30, 2020.
We
operate as a real estate investment trust (REIT). 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. We were founded in 1968 and are one of the oldest
public equity REITs in the world.
During
the nine months ended June 30, 2021, we purchased two new built-to-suit, net-leased, industrial properties, located in the Columbus,
OH, and Atlanta, GA Metropolitan Statistical Areas (MSAs) totaling approximately 1.2 million square feet, for $169.2 million. The two
properties are net-leased for terms that range from 15 to 20 years resulting in a weighted average lease term of 17.8 years and are expected
to generate annualized rental income over the life of their leases of $10.0 million. In connection with the two properties acquired during
the nine months ended June 30, 2021, we obtained a 15 year, fully-amortizing mortgage loan and a 17 year, fully-amortizing mortgage loan.
The two mortgage loans originally totaled $104.0 million with a weighted average maturity of 16.1 years and a weighted average fixed
interest rate of 3.11%. As of June 30, 2021, we owned 120 properties with total square footage of 24.5 million. These properties are
located in 31 states. During the quarter, on April 15, 2021, we sold our 60,400 square foot building located in Carlstadt, NJ, which
is in the New York, NY MSA. As of the quarter ended June 30, 2021, our weighted average lease term was 7.2 years, our occupancy rate
was 99.7%, and our annualized average base rent per occupied square foot was $6.50. As of June 30, 2021, the weighted average building
age, based on the square footage of our buildings, was 10.1 years. In addition, total gross real estate investments, excluding marketable
REIT securities investments of $148.4 million, were $2.2 billion as of June 30, 2021.
Subsequent to quarter end,
on July 29, 2021, we purchased a newly constructed 144,000 square foot industrial building, situated on 43.4 acres, located in the Burlington,
VT MSA. The building is 100% net-leased to FedEx Ground Package System, Inc. for 15 years through May
2036. The property was acquired for a purchase price of $54.8 million. Annual rental revenue over the remaining term of the lease averages
$3.2 million. With the addition of this new acquisition, we currently have 121 properties consisting of 24.7 million rentable square
feet which are located in 32 states with a weighted average lease term of 7.2 years and an annualized average base rent per occupied
square foot of $6.59.
See
PART I, Item 1 – Business in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 for a more complete discussion
of the economic and industry-wide factors relevant to us and the opportunities, challenges, and risks on which we are focused.
We
invest in modern single-tenant, industrial buildings, leased primarily to investment-grade tenants or their subsidiaries on long-term
net-leases. Our investments are exclusively situated in the continental United States, and are primarily located in strategic locations
that are mission-critical to our tenants’ needs. In many cases our buildings are highly automated in order to better serve the
omni-channel distribution networks that have become essential today. Approximately 83% of our revenue is derived from investment-grade
tenants, or their subsidiaries as defined by S&P Global Ratings (www.standardandpoors.com) and by Moody’s (www.moodys.com).
The references in this report to S&P Global Ratings and Moody’s are not intended to and do not include, or incorporate by reference
into this report, the information of S&P Global Ratings or Moody’s on such websites.
The
future effects of the COVID-19 Pandemic are uncertain, however, at this time COVID-19 has not had a material adverse effect on our financial
condition. For many years, ecommerce demand has increased, and it has now become an integral part of the retail landscape. The COVID-19
Pandemic created an even greater move towards on-line shopping. As a result of state and local government-mandated shutdowns, public
health guidance and changing consumer demand, ecommerce sales as a percentage of total retail sales has substantially increased during
the past year. The COVID-19 Pandemic also created a need for supply chain reconfiguration. It is estimated that ecommerce sales require
three times the warehouse space relative to brick and mortar retail sales. Increased inventory stocking is currently taking place across
many industries and it appears that this trend will continue in order to accommodate surges in demand.
We
evaluate our financial performance using Net Operating Income (NOI) from property operations, which we believe is a useful indicator
of our operating performance. NOI is a non-GAAP financial measure that we define as Net Income (Loss) Attributable to Common Shareholders
plus Net Income (Loss) Attributable to Non-Controlling Interest, Preferred Dividend Expense, General and Administrative Expenses, Non-recurring
Strategic Alternatives & Proxy Costs, Non-recurring Severance Expense, Depreciation, Amortization of Capitalized Lease Costs and
Intangible Assets, Interest Expense, including Amortization of Financing Costs, Unrealized Holding (Gains) Losses Arising During the
Periods, less Dividend Income, Realized Gain on Sale of Securities Transactions, Realized Gain on Sale of Real Estate Investment and
Lease Termination Income. The components of NOI are recurring Rental and Reimbursement Revenue, less Real Estate Taxes and Operating
Expenses, such as insurance, utilities, and repairs and maintenance. Other REITs may use different methodologies to calculate NOI and,
accordingly, our NOI may not be comparable to all other REITs.
The
following is a reconciliation of our Net Income (Loss) Attributable to Common Shareholders to our NOI for the three and nine months ended
June 30, 2021 and 2020 (in thousands):
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Three Months Ended
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Nine Months Ended
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6/30/2021
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6/30/2020
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6/30/2021
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6/30/2020
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Net Income (Loss) Attributable to Common Shareholders
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$
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17,292
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$
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26,851
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$
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68,950
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$
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(44,700
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)
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Plus: Net Income (Loss) Attributable to Non-Controlling Interest
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2,894
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(163
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)
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2,996
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(86
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)
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Plus: Preferred Dividend Expense
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8,416
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6,607
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25,003
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19,469
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Plus: General & Administrative Expenses
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2,246
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2,198
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6,363
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6,858
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Plus: Non-recurring Strategic Alternatives & Proxy Costs
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8,657
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-0-
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10,896
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-0-
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Plus: Non-recurring Severance Expense
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-0-
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-0-
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-0-
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786
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Plus: Depreciation
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13,016
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11,743
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38,158
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34,650
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Plus: Amortization of Capitalized Lease Costs and Intangible Assets
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1,031
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788
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2,718
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2,308
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Plus: Interest Expense, including Amortization of Financing Costs
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9,685
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8,975
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28,231
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27,235
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Less/Plus: Unrealized Holding (Gains) Losses Arising During the Periods
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(16,471
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)
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(19,610
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)
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(55,377
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)
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67,100
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Less: Dividend Income
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(1,486
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)
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(2,344
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)
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(4,681
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)
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(8,987
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)
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Less: Realized Gain on Sale of Securities Transactions
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-0-
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-0-
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(2,248
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)
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-0-
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Less: Realized Gain on Sale of Real Estate Investment
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(6,376
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)
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-0-
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(6,376
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)
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-0-
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Less: Lease Termination Income
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-0-
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-0-
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(377
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)
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-0-
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Net Operating Income- NOI
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$
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38,904
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$
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35,045
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$
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114,256
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$
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104,633
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The
components of our NOI for the three and nine months ended June 30, 2021 and 2020 are as follows (in thousands):
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Three Months Ended
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Nine Months Ended
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6/30/2021
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6/30/2020
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6/30/2021
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6/30/2020
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Rental Revenue
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$
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39,032
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$
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35,427
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$
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115,123
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$
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105,410
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Reimbursement Revenue
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6,962
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6,348
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20,818
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19,772
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Total Rental and Reimbursement Revenue
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45,994
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41,775
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135,941
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125,182
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Real Estate Taxes
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(5,402
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)
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(5,140
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)
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(16,324
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)
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(15,205
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)
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Operating Expenses
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(1,688
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)
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(1,590
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)
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(5,361
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)
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(5,344
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)
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Net Operating Income- NOI
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$
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38,904
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$
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35,045
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$
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114,256
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$
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104,633
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NOI
from property operations increased $3.9 million, or 11%, for the three months ended June 30, 2021 as compared to the three months ended
June 30, 2020. NOI from property operations increased $9.6 million, or 9%, for the nine months ended June 30, 2021 as compared to the
nine months ended June 30, 2020. This increase was due to the acquisition of two new built-to-suit, net-leased, industrial properties,
located in the Columbus, OH and Atlanta, GA totaling approximately 1.2 million square feet purchased during the nine-month period ended
June 30, 2021 and the fiscal 2020 acquisitions consisting of five new built-to-suit, net-leased, industrial properties, located in the
Indianapolis, IN, Columbus, OH, Greensboro, NC, Salt Lake City, UT and Oklahoma City, OK MSAs totaling approximately 1.2 million square
feet.
Acquisitions
On
December 17, 2020, we purchased a newly constructed 500,000 square foot industrial building, situated on 100.0 acres, located
in the Columbus, OH MSA. The building is 100% net-leased to FedEx Ground Package System, Inc. for 15 years through September 2035. The
purchase price was $73.3 million. We obtained a 15 year, fully-amortizing mortgage loan of $47.0 million at a fixed interest rate of
2.95%. Annual rental revenue over the remaining term of the lease averages $4.6 million.
On
December 24, 2020, we purchased a newly constructed 658,000 square foot industrial building, situated on 130.2 acres, located in the
Atlanta, GA MSA. The building is 100% net-leased to Home Depot U.S.A., Inc. for 20 years through November 2040. The purchase price was
$95.9 million. We obtained a 17 year, fully-amortizing mortgage loan of $57.0 million at a fixed interest rate of 3.25%. Annual rental
revenue over the remaining term of the lease averages $5.5 million.
FedEx
Ground Package System, Inc.’s ultimate parent, FedEx Corporation, and Home Depot U.S.A., Inc’s ultimate parent, Home Depot,
Inc. are publicly-listed companies and financial information related to these entities are available at the SEC’s website, www.sec.gov.
The references in this report to the SEC’s website are not intended to and do not include, or incorporate by reference into this
report, the information on the www.sec.gov website.
Subsequent
to quarter end, on July 29, 2021, we purchased a newly constructed 144,000 square foot industrial building, situated on 43.4 acres,
located in the Burlington, VT MSA. The building is 100% net-leased to FedEx Ground Package System, Inc. for 15 years through May 2036.
The property was acquired for a purchase price of $54.8 million. Annual rental revenue over the remaining term of the lease averages
$3.2 million.
Expansions
During
the nine months ended June 30, 2021, we completed the first phase of a two-phase parking expansion project for FedEx Ground Package System,
Inc. at our property located in Olathe (Kansas City), KS. The first phase of this parking expansion project was completed for a total
cost of $3.4 million, which resulted in a $340,000 increase in annualized rent effective November 5, 2020 increasing the annualized rent
from $2.2 million to $2.6 million. We recently began construction on the second phase of this parking expansion project at this location,
which will increase the rental rate further and extend the lease term. In addition, effective June 4, 2021, we completed a parking lot
expansion for UPS at our property located in Halfmoon (Albany), NY for a cost of approximately $835,000, resulting in an initial increase
in annual rent effective on the date of completion of approximately $52,000 from approximately $510,000, or $6.80 per square foot, to
approximately $562,000, or $7.50 per square foot. Furthermore, annual rent will continue to increase each year by 2.0% resulting in an
annualized rent from June 4, 2021 through the remaining term of the lease of approximately $622,000, or $8.29 per square foot.
Dispositions
On
April 15, 2021, we sold our 60,400 square foot building located in Carlstadt, NJ which is in the New York, NY MSA, for $13.0 million.
Prior to the sale, we owned a 51% interest in this property. Our 51% portion of the sale proceeds resulted in a U.S. GAAP net realized
gain of approximately $3.3 million, representing a 159% gain over the depreciated U.S. GAAP basis and a net realized gain over our historic
undepreciated cost basis of approximately $2.6 million, representing a 96% net gain over our historic undepreciated cost basis.
Commitments
In addition to the property
purchased subsequent to the quarter end in July 2021, we have entered into agreements to purchase five new build-to-suit, industrial
buildings that are currently being developed in Alabama (2), Georgia, Tennessee and Texas. These five future acquisitions total 1.6 million
square feet, with net-leased terms ranging from 10 to 15 years, resulting in a weighted average lease term of 13.4 years and are expected
to generate $10.5 million in annual rent. The aggregate purchase price for these five properties is $183.6 million. Four of these five
properties, consisting of approximately 1.1 million square feet, or 68%, are leased for 15 years to FedEx Ground Package System, Inc.,
with the remaining property, consisting of approximately 530,000 square feet or 32%, leased for 10 years to Mercedes Benz US International,
Inc. All properties are leased to companies, or subsidiaries of companies, that are considered Investment Grade by S&P Global Ratings
(www.standardandpoors.com) and by Moody’s (www.moodys.com). Subject to satisfactory due diligence and other customary closing
conditions and requirements, we anticipate closing two of these transactions during fiscal 2021, two in the first half of fiscal 2022
and one in the second half of fiscal 2022.
We
have several FedEx Ground parking expansion projects in progress with more under discussion. Currently there are eight parking expansion
projects underway which we expect to cost approximately $37.3 million. In addition, the first phase of a parking expansion project was
completed during the prior quarter at our property located in Olathe (Kansas City), KS for a total project cost of $3.4 million. This
first phase of the expansion resulted in a $340,000 increase in annualized rent effective November 5, 2020 increasing the annualized
rent from $2.2 million to $2.6 million. We recently began construction on a second phase on this parking expansion project at this location.
We expect this second phase to be completed in November 2021 and cost approximately $2.3 million which will increase the annual rental
rate by approximately $185,000 and extend the lease term approximately 14.6 years from the date of completion. These parking expansion
projects will enable us to capture additional rent while lengthening the terms of these leases. We are also in discussions to expand
the parking at nine additional locations bringing the total recently completed and potential parking lot expansion projects to 18 currently.
Significant
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which
have been prepared in accordance with Accounting Principles Generally Accepted in the United States of America (U.S. GAAP). The preparation
of these Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our Consolidated Financial
Statements. Actual results may differ from these estimates under different assumptions or conditions.
On
a regular basis, we evaluate our assumptions, judgments and estimates. We believe that there have been no material changes to the items
that we disclosed as our significant accounting policies and estimates under Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for fiscal year ended September 30, 2020.
Changes
in Results of Operations
As
of June 30, 2021, we owned 120 properties with total square footage of 24.5 million, as compared to 118 properties with total square
footage of 23.4 million, as of June 30, 2020, representing an increase in square footage of 4.9%. At quarter end, the Company’s
weighted average lease term was approximately 7.2 years, as compared to 7.2 years at the end of the prior year period. Our occupancy
rate was 99.7% as of June 30, 2021, as compared to 99.4% as of June 30, 2020, representing an increase of 30 basis points. Our weighted
average building age was 10.1 years as of June 30, 2021, as compared to 9.5 years as of June 30, 2020.
Fiscal
2021 Renewals
In
fiscal 2021, approximately 5% of our gross leasable area, representing ten leases totaling 1.2 million square feet, were set to expire.
All ten of these leases have been renewed, resulting in a 100% retention rate for a weighted average term of 4.2 years, at a rental rate
increase of 6.2% on a U.S. GAAP basis and an increase of 0.4% on a cash basis.
We
have incurred or we expect to incur leasing commission costs of $621,000 in connection with six of these lease renewals and we have incurred
or we expect to incur tenant improvement costs of $756,000 in connection with five of these lease renewals. The table below summarizes
the lease term of the leases that 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 terms.
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Griffin (Atlanta),
GA
|
|
Rinnai America Corporation
|
|
|
218,120
|
|
|
$
|
3.81
|
|
|
$
|
3.93
|
|
|
12/31/20
|
|
$
|
4.22
|
|
|
$
|
4.22
|
|
|
12/31/22
|
|
|
2.0
|
|
|
$
|
-0-
|
|
|
$
|
0.13
|
|
Fayetteville, NC
|
|
Victory Packaging, L.P.
|
|
|
148,000
|
|
|
|
3.33
|
|
|
|
3.50
|
|
|
2/28/21
|
|
|
3.40
|
|
|
|
3.25
|
|
|
2/28/25
|
|
|
4.0
|
|
|
|
-0-
|
|
|
|
0.20
|
|
Winston-Salem, NC
|
|
Style Crest, Inc.
|
|
|
106,507
|
|
|
|
3.39
|
|
|
|
3.77
|
|
|
3/31/21
|
|
|
4.10
|
|
|
|
3.90
|
|
|
3/31/26
|
|
|
5.0
|
|
|
|
0.30
|
|
|
|
-0-
|
|
Romulus, MI
|
|
FedEx Corporation
|
|
|
71,933
|
|
|
|
5.15
|
|
|
|
5.15
|
|
|
5/31/21
|
|
|
5.95
|
|
|
|
5.95
|
|
|
5/31/26
|
|
|
5.0
|
|
|
|
0.56
|
|
|
|
0.12
|
|
Augusta, GA
|
|
FedEx Ground
|
|
|
59,358
|
|
|
|
8.64
|
|
|
|
8.64
|
|
|
6/30/21
|
|
|
8.64
|
|
|
|
8.64
|
|
|
6/30/23
|
|
|
2.0
|
|
|
|
-0-
|
|
|
|
-0-
|
|
O’Fallon, MO
|
|
Pittsburgh Glass Works, LLC
|
|
|
102,135
|
|
|
|
4.37
|
|
|
|
4.44
|
|
|
6/30/21
|
|
|
5.05
|
|
|
|
4.88
|
|
|
6/30/26
|
|
|
5.0
|
|
|
|
0.20
|
|
|
|
-0-
|
|
Corpus Christi, TX
|
|
FedEx Ground
|
|
|
46,253
|
|
|
|
9.03
|
|
|
|
9.42
|
|
|
8/31/21
|
|
|
9.89
|
|
|
|
9.89
|
|
|
8/31/26
|
|
|
5.0
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Kansas City, MO
|
|
Bunzl Distribution
|
|
|
158,417
|
|
|
|
4.65
|
|
|
|
4.86
|
|
|
9/30/21
|
|
|
4.44
|
|
|
|
4.26
|
|
|
9/30/26
|
|
|
5.0
|
|
|
|
-0-
|
|
|
|
0.27
|
|
St. Joseph, MO
|
|
Woodstream Corporation
|
|
|
256,000
|
|
|
|
3.57
|
|
|
|
3.70
|
|
|
9/30/21
|
|
|
3.89
|
|
|
|
3.75
|
|
|
9/30/26
|
|
|
5.0
|
|
|
|
0.14
|
|
|
|
0.12
|
|
Topeka,
KS
|
|
Coca-Cola
Bottling Co., LLC
|
|
|
40,000
|
|
|
|
8.30
|
|
|
|
8.30
|
|
|
9/30/21
|
|
|
7.10
|
|
|
|
6.75
|
|
|
9/30/26
|
|
|
5.0
|
|
|
|
0.60
|
|
|
|
0.21
|
|
|
|
Total
|
|
|
1,206,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
$
|
4.49
|
|
|
$
|
4.64
|
|
|
|
|
$
|
4.77
|
|
|
$
|
4.66
|
|
|
|
|
|
4.2
|
|
|
$
|
0.15
|
|
|
$
|
0.12
|
|
|
(1)
|
Amount
calculated based on the total cost divided by the square feet, divided by the renewal term.
|
These
ten lease renewals have a U.S. GAAP straight-line lease rate of $4.77 per square foot. The renewed initial cash rent per square foot
is $4.66. This compares to the former rent of $4.49 per square foot on a U.S. GAAP straight-line basis and the former cash rent of $4.64
per square foot, resulting in an increase of 6.2% on a U.S. GAAP straight-line basis and an increase of 0.4% on a cash basis.
Effective
October 1, 2020, we entered into a lease termination agreement with RGH Enterprises, Inc. (Cardinal Health) for our 75,000 square foot
facility located in Halfmoon (Albany), NY whereby we received a termination fee in the amount of $377,000 representing approximately
50% of the then remaining rent due under the lease, which was set to expire in 1.2 years on November 30, 2021. We simultaneously entered
into a 10.4 year lease agreement with United Parcel Service, Inc. (UPS) which became effective November 1, 2020. The lease agreement
with UPS provides for five months of free rent, after which, on April 1, 2021, initial annual rent of $510,000, representing $6.80 per
square foot, will commence, with 2.0% annual increases thereafter, resulting in a straight-line annualized rent of $541,000, representing
$7.21 per square foot over the life of the lease, which expires March 31, 2031. This compares to the former U.S. GAAP straight-line rent
of $574,000, representing $7.65 per square foot, and former cash rent of $8.19 per square foot, resulting in a decrease of $33,000, representing
a 5.8% decrease on a U.S. GAAP straight-line basis and a decrease of 17.0% on a cash basis. The new 10.4 year lease agreement with UPS
provides for an additional 9.3 years of lease term versus the old lease with Cardinal Health. In addition, effective June 4, 2021, we
completed a parking lot expansion at this location for a cost of approximately $835,000 resulting in an initial increase in annual rent
effective on the date of completion of approximately $52,000 from approximately $510,000, or $6.80 per square foot, to approximately
$562,000, or $7.50 per square foot. Furthermore, annual rent will continue to increase each year by 2.0% resulting in an annualized rent
from June 4, 2021 through the remaining term of the lease of approximately $622,000, or $8.29 per square foot.
Effective
December 15, 2020, we entered into a 10.3 year lease with Hartford HealthCare Corporation for our previously vacant 55,000 square foot
facility located in Newington (Hartford), CT. The new lease has
free rent for the first four months, after which initial annual rent will be $288,000, representing $5.25 per square foot with 2.0% annual
increases thereafter, resulting in a U.S. GAAP straight-line annualized rent of $307,000, representing $5.60 per square foot over the
life of the lease. Hartford HealthCare Corporation is rated “investment-grade” as defined by S&P Global Ratings (www.standardandpoors.com)
and by Moody’s (www.moodys.com).
Rental
Revenue increased $3.6 million, or 10%, for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.
Rental Revenue increased $9.7 million, or 9%, for the nine months ended June 30, 2021 as compared to the nine months ended June 30, 2020.
These increases were due to the acquisition of two new built-to-suit, net-leased, industrial properties located in the Columbus, OH and
Atlanta, GA MSAs totaling approximately 1.2 million square feet during the nine months ended June 30, 2021 and the increase was due to
the fiscal 2020 acquisitions of five new built-to-suit, net-leased, industrial properties, located in the Indianapolis, IN, Columbus,
OH, Greensboro, NC, Salt Lake City, UT and Oklahoma City, OK MSAs totaling approximately 1.2 million square feet.
Our
single-tenant properties are subject to net-leases, which require the tenants to reimburse us for the cost of Real Estate Taxes as well
as certain Operating Expenses such as insurance and the majority of repairs and maintenance. Reimbursement Revenue increased $614,000,
or 10%, Real Estate Tax Expense increased $262,000, or 5%, and Operating Expenses increased $98,000, or 6% for the three months ended
June 30, 2021 as compared to the three months ended June 30, 2020. For the nine months ended June 30, 2021, Reimbursement Revenue increased
$1.0 million, or 5%, Real Estate Tax Expense increased $1.1 million, or 7%, and Operating Expenses increased $17,000, or 0.3% as compared
to the nine months ended June 30, 2020. Reimbursement Revenue as a percentage of Real Estate Taxes and Operating Expenses for the three
months ended June 30, 2021 was 98% compared to 94% for the three months ended June 30, 2020. Reimbursement Revenue as a percentage of
Real Estate Taxes and Operating Expenses for the nine months ended June 30, 2021 was 96% compared to 96% for the nine months ended June
30, 2020.
General
and Administrative Expenses increased $48,000, or 2%, for the three months ended June 30, 2021 as compared to the three months ended
June 30, 2020. General and Administrative Expenses decreased $495,000, or 7%, for the nine months ended June 30, 2021 as compared to
the nine months ended June 30, 2020. General and Administrative Expenses, as a percentage of gross revenue (which includes Rental Revenue,
Reimbursement Revenue and Dividend Income) was 4.7% for the three months ended June 30, 2021 as compared to 5.0% for the three months
ended June 30, 2020 and was 4.5% for the nine months ended June 30, 2021 as compared to 5.1% for the nine months ended June 30, 2020.
Annualized General and Administrative Expenses, as a percentage of undepreciated assets (which is our total assets excluding accumulated
depreciation) was 34 basis points for the nine months ended June 30, 2021 as compared to 41 basis points for the nine months ended June
30, 2020.
During
the three and nine months ended June 30, 2021, we incurred Non-recurring Strategic Alternatives & Proxy Costs of $8.7 million and
$10.9 million, respectively, related to the evaluation of strategic alternatives approved by our Board of Directors and the related proxy
process.
On
December 23, 2019, our former General Counsel, Allison Nagelberg, announced her retirement effective December 31, 2019. In accordance
with her severance package, during the first quarter of fiscal 2020, we incurred a one-time, Non-recurring Severance Expense of $786,000.
Depreciation
increased $1.3 million, or 11%, for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020. Depreciation
increased $3.5 million, or 10%, for the nine months ended June 30, 2021 as compared to the nine months ended June 30, 2020. Amortization
of Capitalized Lease Costs and Intangible Assets increased $243,000, or 31%, for the three months ended June 30, 2021 as compared to
the three months ended June 30, 2020. Amortization of Capitalized Lease Costs and Intangible Assets increased $410,000, or 18%, for the
nine months ended June 30, 2021 as compared to the nine months ended June 30, 2020. These increases were primarily due to the acquisition
of two industrial properties purchased during the first nine months of fiscal 2021 and five industrial properties purchased during fiscal
2020. In addition, the increases in depreciation and amortization expenses were also the result of the capital improvements and leasing
costs incurred over the last four quarters.
The
recognition of Unrealized Holding Gains (Losses) Arising During the Periods was due to the adoption of ASU 2016-01, “Financial
Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which became effective
at the beginning of the prior fiscal year. With the adoption of ASU 2016-01, the changes in net unrealized holding gains and losses are
recognized through net income. Therefore, the implementation of this accounting rule has resulted in increased volatility in our reported
earnings and some of our key performance metrics. Unrealized Holding Gains arising during the three and nine months ended June 30, 2021
were $16.5 million and $55.4 million, respectively and Unrealized Holding Gains (Losses) arising during the three and nine months ended
June 30, 2020 were $19.6 million and $(67.1) million, respectively. The components of the Unrealized Holding Gains (Losses) Arising During
the Periods included in the accompanying Consolidated Statements of Income are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
6/30/2021
|
|
|
6/30/2020
|
|
|
6/30/2021
|
|
|
6/30/2020
|
|
Unrealized Holding Gains (Losses)
|
|
$
|
16,471
|
|
|
$
|
19,610
|
|
|
$
|
57,625
|
|
|
$
|
(67,100
|
)
|
Reclassification Adjustment for Net (Gains) Realized in Income
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
(2,248
|
)
|
|
|
-0-
|
|
Unrealized Holding Gains (Losses) Arising During the Period
|
|
$
|
16,471
|
|
|
$
|
19,610
|
|
|
$
|
55,377
|
|
|
$
|
(67,100
|
)
|
We
recognized dividend income on our investments in securities of $1.5 million and $2.3 million for the three months ended June 30, 2021
and 2020, respectively, representing an $858,000 decrease. We recognized dividend income on our investments in securities of $4.7 million
and $9.0 million for the nine months ended June 30, 2021 and 2020, respectively, representing a $4.3 million decrease. This decrease
is due to reduced dividends from our REIT securities portfolio. The REIT securities portfolio’s weighted average yield for the
nine months ended June 30, 2021 was approximately 4.6% as compared to 7.6% for the nine months ended June 30, 2020. We held $148.4 million
in marketable REIT securities as of June 30, 2021, representing 5.9% of our undepreciated assets.
Interest
Expense, including Amortization of Financing Costs, increased by $710,000, or 8%, for the three months ended June 30, 2021 as compared
to the three months ended June 30, 2020. Interest Expense, including Amortization of Financing Costs, increased by $996,000, or 4%, for
the nine months ended June 30, 2021 as compared to the nine months ended June 30, 2020. The increase in Interest Expense, including Amortization
of Financing Costs, was due to an increase in the Fixed Rate Mortgage Notes Payable balance, which increased by $44.4 million from June
30, 2020 to June 30, 2021. The increase in Fixed Rate Mortgage Notes Payable was offset by a decrease of 14 basis points in the weighted
average interest rate of the Fixed Rate Mortgage Notes Payable, which decreased from 4.00% at June 30, 2020 to 3.86% at June 30, 2021.
Preferred
Dividend Expense increased $1.8 million, or 27%, for the three months ended June 30, 2021 as compared to the three months ended June
30, 2020 and increased $5.5 million, or 28% for the nine months ended June 30, 2021 as compared to the nine months ended June 30, 2020.
These increases were due to the additional $115.8 million of 6.125% Series C Cumulative Redeemable Preferred Stock issued between June
30, 2020 and June 30, 2021.
Changes
in Financial Condition
We
generated Net Cash from Operating Activities of $76.8 million and $75.0 million for the nine months ended June 30, 2021 and 2020, respectively.
Real
Estate Investments increased by $129.1 million from September 30, 2020 to June 30, 2021. This increase was mainly due to the purchase
of two net-leased industrial properties, located in the Columbus, OH and Atlanta, GA MSAs, totaling approximately 1.2 million square
feet, for $169.2 million. The increase was partially offset by Depreciation Expense on Real Estate Investments for the nine months ended
June 30, 2021 of $38.2 million.
Securities
Available for Sale increased by $39.6 million from September 30, 2020 to June 30, 2021. The increase was primarily due to an Unrealized
Holding Gain of $55.4 million for the nine months ended June 30, 2021. There were also sales and redemptions of securities during the
nine month period totaling $18.8 million which resulted in a realized gain of $2.2 million.
Fixed
Rate Mortgage Notes Payable, net of Unamortized Debt Issuance Costs (Mortgage Notes Payable), increased by $49.5 million from September
30, 2020 to June 30, 2021. The increase was mostly due to the origination of two fully-amortizing mortgage loans for $104.0 million,
with a weighted average interest rate of 3.11%, obtained in connection with the two industrial properties purchased during the first
half of fiscal 2021. Details on these two fixed rate mortgages are as follows:
Property (MSA)
|
|
Mortgage amount
(in thousands)
|
|
|
Maturity Date
|
|
Interest Rate
|
|
Columbus, OH
|
|
$
|
47,000
|
|
|
1/1/2036
|
|
|
2.95
|
%
|
Atlanta, GA
|
|
$
|
57,000
|
|
|
1/1/2038
|
|
|
3.25
|
%
|
The
increase in Mortgage Notes Payable was also partially due to the amortization of financing costs associated with the Mortgage Notes Payable
of approximately $751,000. This increase was partially offset by scheduled payments of principal of $54.7 million and we fully prepaid
three Mortgage loans. One was a $6.2 million mortgage loan for our property located in Kansas City, MO that was originally set to mature
on December 1, 2021 and had an interest rate of 5.18%. The second was a $159,000 mortgage loan for our property located in Topeka, KS
that was originally set to mature on August 10, 2021 and had an interest rate of 6.50%. The third was a $1.1 million mortgage loan that
was fully repaid in connection with the sale of our property located in Carlstadt, NJ that was originally set to mature on May 15, 2026
and had an interest rate of 5.25%. Subsequent to the quarter end on July 15, 2021, we fully prepaid a $622,000 mortgage loan for our
property located in Houston, TX. The loan was originally set to mature on August 10, 2022 and had an interest rate of 6.875%. In addition,
the increase in Mortgage Notes Payable was partially offset by the addition of deferred financing costs of approximately $569,000, which
is associated with two mortgages obtained in connection with two industrial properties purchased during the first quarter of fiscal 2021.
Excluding
Debt Issuance Costs, the weighted average interest rate on the Fixed Rate Mortgage Notes Payable decreased by 14 basis points from the
prior year quarter, from 4.00% at June 30, 2020 to 3.86% at June 30, 2021.
We
are scheduled to repay a total of $78.9 million in mortgage principal payments over the next 12 months. We may make these principal payments
from the cash on hand, funds generated from Cash from Operations, the DRIP, the At-The-Market Sales Agreement Program (Preferred Stock
ATM Program), the Equity Distribution Agreement (Common Stock ATM Program), and draws from the unsecured line of credit facility.
Liquidity
and Capital Resources
Net
Cash Provided by Operating Activities was $76.8 million and $75.0 million for the nine months ended June 30, 2021 and 2020, respectively.
Dividends paid on common stock for the nine months ended June 30, 2021 and 2020 were $52.1 million and $49.8 million, respectively (of
which $1.0 million and $6.7 million, respectively, were reinvested). We pay dividends from cash generated from operations.
As
of June 30, 2021, we held $148.4 million in marketable REIT securities, representing 5.9% of our undepreciated assets, which we define
as total assets excluding accumulated depreciation. Total assets excluding accumulated depreciation were $2.5 billion as of June 30,
2021. In general, we may borrow up to 50% of the value of the marketable securities. The interest rate charged on the margin loan is
the bank’s margin rate and was 0.75% as of June 30, 2021. At June 30, 2021, there was no amount drawn down under the margin loan.
As of June 30, 2021, we had net Unrealized Holding Losses on our portfolio of $71.4 million as compared to net Unrealized Holding Losses
of $126.8 million as of September 30, 2020, representing an Unrealized Holding Gain of $55.4 million for the nine months ended June 30,
2021. There have been no open market purchases of securities during the nine months ended June 30, 2021. We recognized dividend income
on our investments in securities of $1.5 million and $4.7 million for the three and nine months ended June 30, 2021, respectively.
During the nine months ended June 30, 2021, UMH Properties, Inc. (UMH), a related REIT, redeemed all of its outstanding 8.00% Series
B Cumulative Redeemable Preferred Stock at a cash redemption price of $25.00 per share, plus accrued and unpaid dividends, of which we
owned 100,000 shares at a total cost of $2.5 million. In addition to the $2.5 million of UMH 8.00% Series B Cumulative Redeemable Preferred
Stock that was redeemed during the nine months ended June 30, 2021, we also sold marketable REIT securities for gross proceeds totaling
$16.3 million with an original cost basis of $14.1 million, resulting in a realized gain of $2.2 million.
On
November 15, 2019, we entered into a new line of credit facility (the “New Facility”) consisting of a $225.0 million unsecured
line of credit facility (the “Revolver”) and a new $75.0 million unsecured term loan (the “Term Loan”), resulting
in the total potential availability under both the Revolver and the Term Loan of $300.0 million, which is an additional $100.0 million
over the former line of credit facility. In addition, the Revolver includes an accordion feature that will allow the total potential
availability under the New Facility to further increase to $400.0 million, under certain conditions. The $225.0 million Revolver matures
in January 2024 with two options to extend for additional six-month periods. Availability under the New Facility is limited to 60% of
the value of the borrowing base properties. The value of the borrowing base properties is determined by applying a capitalization rate
to the NOI generated by our unencumbered, wholly-owned industrial properties. Under the New Facility, the capitalization rate applied
to our NOI generated by our unencumbered, wholly-owned industrial properties was lowered from 6.5% under the former line of credit facility
to 6.25%, thus increasing the value of the borrowing base properties under the terms of the New Facility. In addition, the interest rate
for borrowings under the Revolver was lowered by a range of 5 basis points to 35 basis points, depending on our leverage ratio, and will,
at our election, either i) bear interest at LIBOR plus 135 basis points to 205 basis points, depending on our leverage ratio, or ii)
bear interest at Bank of Montreal’s (BMO) prime lending rate plus 35 basis points to 105 basis points, depending on our leverage
ratio. Currently, our borrowings bear interest under the Revolver at LIBOR plus 145 basis points, which results in an interest rate of
1.53%. As of the quarter end, we have $90.0 million drawn down under our Revolver, resulting in $135.0 million being currently available.
The $75.0 million Term Loan matures January 2025. The interest rate for borrowings under the Term Loan will at our election, either i)
bear interest at LIBOR plus 130 basis points to 200 basis points, depending on our leverage ratio, or ii) bear interest at BMO’s
prime lending rate plus 30 basis points to 100 basis points, depending on our leverage ratio. To reduce floating interest rate exposure
under the Term Loan, we also entered into an interest rate swap agreement to fix LIBOR on the entire $75.0 million for the full duration
of the Term Loan resulting in an all-in rate of 2.92%.
As
of June 30, 2021, we owned 120 properties, of which 61 carried mortgage loans with outstanding principal balances totaling $856.7 million.
The 59 unencumbered properties could be refinanced to raise additional funds, although covenants in our New Facility limit the amount
of unencumbered properties that can be mortgaged. As of June 30, 2021, Loans Payable represented $90.0 million drawn down on our $225.0
million Revolver and $75.0 million outstanding under our Term Loan.
As
of June 30, 2021, we had total assets of $2.2 billion and liabilities of $1.0 billion. Our net debt (net of unamortized debt issuance
costs and net of cash and cash equivalents) to total market capitalization as of June 30, 2021 was approximately 27% and our net debt,
less marketable securities (net of unamortized debt issuance costs, net of cash and cash equivalents and net of marketable securities)
to total market capitalization as of June 30, 2021 was approximately 23%. Our debt consists of 84% amortizing fixed rate debt with a
weighted average interest rate of 3.86% and a weighted average loan maturity of 11.1 years. We believe that we have the ability to meet
our obligations and to generate funds for new investments.
As
previously announced, in January 2021, our Board of Directors unanimously decided to explore strategic alternatives to maximize shareholder
value. Following a comprehensive strategic alternatives process, on May 4, 2021, we entered into a definitive merger agreement with Equity
Commonwealth (“EQC”), a New York Stock Exchange traded real estate investment trust, under which, on the terms and subject
to the conditions set forth in the merger agreement, we will merge with and into a new wholly-owned subsidiary of Equity Commonwealth,
resulting in Equity Commonwealth acquiring us in an all-stock transaction. The merger agreement provides that, upon closing of the merger,
our common stockholders will be entitled to receive 0.67 shares of Equity Commonwealth common stock for every share of our common stock
they own and the outstanding shares of our common stock will be extinguished. Under the terms of the definitive merger agreement, upon
closing of the merger, each holder of our 6.125% Series C Preferred Stock, will be entitled to receive an amount in cash equal
to $25.00 per share plus accumulated and unpaid dividends and the outstanding shares of our 6.125% Series C Cumulative Redeemable Preferred
Stock will be extinguished. The merger transaction is expected to close during the second half of calendar 2021, subject to customary
closing conditions, including approval by common stockholders of both Equity Commonwealth and MREIC. On July 23, 2021, we filed with
the SEC, and shortly thereafter began distributing to our stockholders, a definitive joint proxy statement/prospectus of MREIC and EQC
pursuant to which both MREIC and EQC are seeking approval of the merger from their respective stockholders at special stockholder
meetings that have been called for August 24, 2021.
On
February 6, 2020, we entered into a Common Stock ATM Program with BMO Capital Markets Corp., B. Riley FBR, Inc., D.A. Davidson &
Co., Janney Montgomery Scott LLC, J.P. Morgan Securities LLC and RBC Capital Markets, LLC (together the “Distribution Agents”)
under which we may offer and sell shares of our common stock, $0.01 par value per share, having an aggregate sales price of up to $150.0
million from time to time through the Distribution Agents. Sales of the shares of Common Stock under the Agreement, if any, will be in
“at the market offerings” as defined in Rule 415 under the Securities Act, including, without limitation, sales made directly
on or through the NYSE, or on any other existing trading market for the Common Stock, or to or through a market maker or any other method
permitted by law, including, without limitation, negotiated transactions and block trades. We established the Common Stock ATM program
for the flexibility that it provides to opportunistically access the capital markets and to best time our equity capital needs as we
close on acquisitions. To date, we have elected to not raise any equity though our Common Stock Equity Program.
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 Preferred Stock, having an aggregate
sales price of up to $100.0 million.
On
August 2, 2018, we replaced this program with a new Preferred Stock At-The-Market Sales Agreement Program that provides for the offer
and sale from time to time of $125.0 million of our 6.125% Series C Preferred Stock, representing an additional $96.5 million, with $28.5
million being carried over from the Preferred Stock At-The-Market Sales Agreement Program entered into on June 29, 2017.
On
December 4, 2019, we replaced the Preferred Stock At-The-Market Sales Agreement Program entered into on August 2, 2018 with another Preferred
Stock At-The-Market Sales Agreement Program that provides for the offer and sale from time to time of $125.0 million of our 6.125% Series
C Preferred Stock, representing an additional $101.0 million, with $24.0 million being carried over from the Preferred Stock At-The-Market
Sales Agreement Program entered into on August 2, 2018.
On
November 25, 2020, we replaced the Preferred Stock At-The-Market Sales Agreement Program entered into on December 4, 2019 with another
new Preferred Stock At-The-Market Sales Agreement Program (Preferred Stock ATM Program) that provides for the offer and sale from time
to time of up to $150.0 million of our 6.125% Series C Preferred Stock, representing an additional $149.3 million, with $747,000 being
carried over from the Preferred Stock At-The-Market Sales Agreement Program entered into on December 4, 2019.
Sales
of shares of our 6.125% Series C Preferred Stock under the Preferred Stock ATM Program are in “at the market offerings” as
defined in Rule 415 under the Securities Act, including, without limitation, sales made directly on or through the NYSE, or on any other
existing trading market for the 6.125% Series C Preferred Stock, or to or through a market maker, or any other method permitted by law,
including, without limitation, negotiated transactions and block trades. We began selling shares through these programs on July 3, 2017.
Since inception through June 30, 2021, we sold 13.6 million shares of our 6.125% Series C Preferred Stock under these programs at a weighted
average price of $24.91 per share, and generated net proceeds, after offering expenses, of $332.4 million, of which 3.1 million shares
were sold during the nine months ended June 30, 2021 at a weighted average price of $24.88 per share, generating net proceeds after offering
expenses of $76.0 million. As of June 30, 2021, there is $108.3 million remaining that may be sold under the Preferred Stock ATM Program.
No shares have been sold pursuant to the Preferred Stock ATM Program since December 2020.
As
of June 30, 2021, 22.0 million shares of our 6.125% Series C Preferred Stock were outstanding.
We
raised $1.4 million (including dividend reinvestments of $1.0 million) from the issuance of 87,000 shares of common stock under our DRIP
during the nine months ended June 30, 2021. Of this amount, UMH made total purchases of 13,000 common shares under our DRIP for a total
cost of $205,000, or a weighted average cost of $15.68 per share.
During
the nine months ended June 30, 2021, we paid $52.1 million in total cash dividends, or $0.53 per share to common shareholders, of which
$1.0 million was reinvested in the DRIP.
On
January 14, 2021, our Board of Directors approved a 5.9% increase in our quarterly common stock dividend, raising it to $0.18 per share
from $0.17 per share representing an annualized dividend rate of $0.72 per share. This increase is the third dividend increase in the
past five years, representing a total increase of 20%. We have maintained or increased our common stock cash dividend for 30 consecutive
years. We are one of the few REITs that maintained our dividend throughout the Global Financial Crisis.
On
July 1, 2021, our Board of Directors declared a cash dividend on our Common Stock of $0.18 per share. The common stock dividend will
be payable to shareholders of record at the close of business on August 16, 2021 and will be paid on September 15, 2021, except that
if our pending merger with Equity Commonwealth is completed prior to September 15, 2021, the dividend payment will be accelerated and
paid immediately prior to the effective time of the merger.
During
the nine months ended June 30, 2021, we paid $24.6 million in Preferred Dividends, or $1.1484375 per share, on our outstanding 6.125%
Series C Preferred Stock for the period September 1, 2020 through May 31, 2021. As of June 30, 2021, we had accrued Preferred Dividends
of $2.8 million covering the period June 1, 2021 to June 30, 2021. Dividends on the 6.125% Series C Preferred Stock are cumulative and
payable quarterly at an annual rate of $1.53125 per share.
On
July 1, 2021, our Board of Directors declared a cash dividend on our 6.125% Series C Cumulative Redeemable Preferred Stock. The preferred
stock dividend will cover the period from June 1, 2021 to August 31, 2021 unless the pending merger with Equity Commonwealth closes prior
to August 31, 2021. If the merger is completed prior to August 31, 2021, then the preferred stock dividend period will end on, but not
include, the closing date of the merger and the dividend will be paid immediately prior to the effective time of the merger. If the merger
is not completed prior to August 31, 2021, the preferred dividend will be paid on August 31, 2021. The quarterly preferred stock dividend
payment of $0.3828125 per share will be prorated if the merger is completed prior to August 31, 2021. Regardless of whether the merger
closes prior to August 31, 2021, the preferred stock dividend will be payable to shareholders of record as of the close of business on
August 16, 2021. Also, under the terms of the definitive merger agreement, upon closing of the merger, each holder of our 6.125% Series
C Preferred Stock, will be entitled to receive an amount in cash equal to $25.00 per share plus accumulated and unpaid dividends and
the outstanding shares of our 6.125% Series C Preferred Stock will be extinguished.
We
have used a variety of sources to fund our cash needs in addition to cash generated from operations. In the past, we considered selling
marketable securities from our investment portfolio, borrowing on our unsecured line of credit facility or securities margin loans, finance
or refinance debt, or raising capital through registered direct placements, public offerings of common and preferred stock and through
our Common Stock ATM Program.
We
have a concentration of properties leased to FedEx Corporation (FDX) and FDX subsidiaries, consisting of 63 separate stand-alone leases
covering 11.2 million square feet as of June 30, 2021 and 62 separate stand-alone leases covering 10.7 million square feet as of June
30, 2020. FDX is experiencing record demand due to the continued strong growth in ecommerce. Additionally, in periods of unprecedented
turbulence, the services of FedEx are essential in keeping supply chains moving and in delivering critically needed supplies throughout
the world. As of June 30, 2021, the 63 separate stand-alone leases we have with FDX and FDX subsidiaries are located in 26 different
states and have a weighted average lease maturity of 7.5 years. The percentage of FDX and its subsidiaries leased square footage to the
total of our rental space was 46% (5% to FDX and 41% to FDX subsidiaries) as of June 30, 2021 and 46% (5% to FDX and 41% to FDX subsidiaries)
as of June 30, 2020.
As
of June 30, 2021, the only tenants, other than FDX and its subsidiaries, that leased 5% or more of our total square footage were subsidiaries
of Amazon.com, Inc (Amazon), which consists of five separate stand-alone leases for properties located in four different states, containing
1.5 million total square feet, comprising 6% of our total leasable square feet. None of our properties are subject to a master lease
or any cross-collateralization agreements.
Annualized
Rental and Reimbursement Revenue from FDX and its subsidiaries is estimated to be approximately 55% (5% to FDX and 50% to FDX subsidiaries)
of total Rental and Reimbursement Revenue for fiscal 2021, and was 58% (5% to FDX and 53% to FDX subsidiaries) of total Rental and Reimbursement
Revenue for fiscal 2020. The only tenants, other than FDX and its subsidiaries, that we estimate will comprise 5% or more of our total
Rental and Reimbursement Revenue for fiscal 2021 are subsidiaries of Amazon, which is estimated to be 7% of our Annualized Rental and
Reimbursement Revenue for fiscal 2021 and was 6% for of our Annualized Rental and Reimbursement Revenue for fiscal 2020. For the nine
months ended June 30, 2021, no other tenant accounted for 5% or more of our total Rental and Reimbursement Revenue.
FDX
and Amazon are publicly-listed companies and financial information related to these entities are available at the SEC’s website,
www.sec.gov. FDX and Amazon are rated “BBB” and “AA-”, respectively by S&P Global Ratings (www.standardandpoors.com)
and are rated “Baa2” and “A2”, respectively by Moody’s (www.moodys.com), which are both considered
“Investment Grade” ratings.
During
the nine months ended June 30, 2021, we completed the first phase of a two-phase parking expansion project for FedEx Ground Package System,
Inc. at our property located in Olathe (Kansas City), KS. The first phase of this parking expansion project was completed for a total
cost of $3.4 million which resulted in a $340,000 increase in annualized rent effective November 5, 2020 increasing the annualized rent
from $2.2 million to $2.6 million. We recently began construction on a second phase of this parking expansion project at this location,
which will increase the rental rate further and extend the lease term. In addition, effective June 4, 2021, we completed a parking lot
expansion for UPS at our property located in Halfmoon (Albany), NY for a cost of approximately $835,000, resulting in an initial increase
in annual rent effective on the date of completion of approximately $52,000 from approximately $510,000, or $6.80 per square foot, to
approximately $562,000, or $7.50 per square foot. Furthermore, annual rent will continue to increase each year by 2.0% resulting in an
annualized rent from June 4, 2021 through the remaining term of the lease of approximately $622,000, or $8.29 per square foot.
In addition to the property
purchased subsequent to the quarter end in July 2021, we have entered into agreements to purchase five new build-to-suit, industrial
buildings that are currently being developed in Alabama (2), Georgia, Tennessee and Texas. These five future acquisitions total 1.6 million
square feet, with net-leased terms ranging from 10 to 15 years, resulting in a weighted average lease term of 13.4 years and are expected
to generate $10.5 million in annual rent. The aggregate purchase price for these five properties is $183.6 million. Four of these five
properties, consisting of approximately 1.1 million square feet, or 68%, are leased for 15 years to FedEx Ground Package System, Inc.,
with the remaining property, consisting of approximately 530,000 square feet or 32%, leased for 10 years to Mercedes Benz US International,
Inc. All properties are leased to companies, or subsidiaries of companies, that are considered Investment Grade by S&P Global Ratings
(www.standardandpoors.com) and by Moody’s (www.moodys.com). Subject to satisfactory due diligence and other customary closing
conditions and requirements, we anticipate closing two of these transactions during fiscal 2021, two in the first half of fiscal 2022
and one in the second half of fiscal 2022.
We
have several FedEx Ground parking expansion projects in progress with more under discussion. Currently there are eight parking expansion
projects underway which we expect to cost approximately $37.3 million. In addition, the first phase of a parking expansion project was
completed during the prior quarter at our property located in Olathe (Kansas City), KS for a total project cost of $3.4 million. This
first phase of the expansion resulted in a $340,000 increase in annualized rent effective November 5, 2020 increasing the annualized
rent from $2.2 million to $2.6 million. We recently began construction on a second phase on this parking expansion project at this location.
We expect this second phase to be completed in November 2021 and cost approximately $2.3 million which will increase the annual rental
rate by approximately $185,000 and extend the lease term approximately 14.6 years from the date of completion. These parking expansion
projects will enable us to capture additional rent while lengthening the terms of these leases. We are also in discussions to expand
the parking at nine additional locations bringing the total recently completed and potential parking lot expansion projects to 18 currently.
We
intend to acquire additional net-leased industrial properties on long-term leases, primarily to investment grade tenants or their subsidiaries,
and, when needed, expand our current properties. To the extent that funds or appropriate properties are not available, fewer acquisitions
will be made.
Off-Balance
Sheet Arrangements
We
do not have any material off-balance sheet arrangements.
Funds
From Operations and Adjusted Funds From Operations
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 gains or losses from sales of previously depreciated real estate assets, impairment charges related to depreciable
real estate assets, certain non-cash items such as real estate asset depreciation and amortization, plus our portion of these items related
to our consolidated investment that we have a non-controlling interest in. Included in the Nareit FFO White Paper - 2018 Restatement,
is an option pertaining to assets incidental to our main business in the calculation of Nareit FFO to make an election to include or
exclude mark-to-market changes in the value recognized on these marketable equity securities. In conjunction with the adoption of the
FFO White Paper - 2018 Restatement, for all periods presented, we have elected to exclude unrealized gains and losses from our investments
in marketable equity securities from our FFO calculation. Nareit created FFO as a non-GAAP supplemental measure of REIT operating performance.
Our calculation of Adjusted Funds From Operations (AFFO) differs from Nareit’s definition of FFO because we exclude certain items
that we view as nonrecurring or impacting comparability from period to period. We define AFFO as FFO, excluding stock based compensation
expense, depreciation of corporate office tenant improvements, amortization of deferred financing costs, realized gain on sale of securities,
lease termination income, non-recurring strategic alternatives & proxy costs, non-recurring severance expense, effect of non-cash
U.S. GAAP straight-line rent adjustments and subtracting recurring capital expenditures, plus our portion of these items related to our
consolidated investment that we have a non-controlling interest in. 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 and AFFO may be considered by investors as supplemental measures to compare our operating performance to those
of other REITs. 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 and AFFO and, accordingly, our FFO and
AFFO may not be comparable to all other REITs. The items excluded from FFO and AFFO are significant components in understanding our financial
performance.
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 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 (Loss) Attributable to Common Shareholders to our FFO and AFFO for the three
and nine months ended June 30, 2021 and 2020 (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
6/30/2021
|
|
|
6/30/2020
|
|
|
6/30/2021
|
|
|
6/30/2020
|
|
Net Income (Loss) Attributable to Common Shareholders
|
|
$
|
17,292
|
|
|
$
|
26,851
|
|
|
$
|
68,950
|
|
|
$
|
(44,700
|
)
|
Less/Plus: Unrealized Holding (Gains) Losses Arising During the Periods
|
|
|
(16,471
|
)
|
|
|
(19,610
|
)
|
|
|
(55,377
|
)
|
|
|
67,100
|
|
Plus: Depreciation Expense (excluding Corporate Office Capitalized Costs)
|
|
|
12,960
|
|
|
|
11,672
|
|
|
|
37,959
|
|
|
|
34,436
|
|
Plus: Amortization of Intangible Assets
|
|
|
599
|
|
|
|
524
|
|
|
|
1,731
|
|
|
|
1,539
|
|
Plus: Amortization of Capitalized Lease Costs
|
|
|
374
|
|
|
|
284
|
|
|
|
971
|
|
|
|
830
|
|
Less: Realized Gain on Sale of Real Estate Investment (1)
|
|
|
(3,252
|
)
|
|
|
-0-
|
|
|
|
(3,252
|
)
|
|
|
-0-
|
|
FFO Attributable to Common Shareholders (2)
|
|
|
11,502
|
|
|
|
19,721
|
|
|
|
50,982
|
|
|
|
59,205
|
|
Plus: Depreciation of Corporate Office Capitalized Costs
|
|
|
57
|
|
|
|
57
|
|
|
|
172
|
|
|
|
176
|
|
Plus: Stock Compensation Expense
|
|
|
77
|
|
|
|
98
|
|
|
|
210
|
|
|
|
368
|
|
Plus: Amortization of Financing Costs
|
|
|
350
|
|
|
|
326
|
|
|
|
1,026
|
|
|
|
1,082
|
|
Plus: Non-recurring Strategic Alternatives & Proxy Costs
|
|
|
8,657
|
|
|
|
-0-
|
|
|
|
10,896
|
|
|
|
-0-
|
|
Plus: Non-recurring Severance Expense
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
786
|
|
Less: Realized Gain on Sale of Securities Transactions
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
(2,248
|
)
|
|
|
-0-
|
|
Less: Lease Termination Income
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
(377
|
)
|
|
|
-0-
|
|
Less: Recurring Capital Expenditures
|
|
|
(229
|
)
|
|
|
(508
|
)
|
|
|
(791
|
)
|
|
|
(1,443
|
)
|
Less: Effect of Non-cash U.S. GAAP Straight-line Rent Adjustment
|
|
|
(713
|
)
|
|
|
(231
|
)
|
|
|
(2,363
|
)
|
|
|
(1,469
|
)
|
AFFO Attributable to Common Shareholders
|
|
$
|
19,701
|
|
|
$
|
19,463
|
|
|
$
|
57,507
|
|
|
$
|
58,705
|
|
|
(1)
|
Represents
our portion of the net realized gain from the sale of our property that we owned a 51% interest in.
|
|
(2)
|
FFO
Attributable to Common Shareholders for the three and nine months ended June 30, 2021 includes Non-recurring Strategic Alternatives
& Proxy Costs of $8.7 million and $10.9 million, respectively. FFO Attributable to Common Shareholders for the three and nine
months ended June 30, 2021 excluding these Non-recurring Strategic Alternatives & Proxy Costs is $20.2 million and $61.9 million,
respectively.
|
The
following are the Cash Flows provided (used) by Operating, Investing and Financing Activities for the nine months ended June 30, 2021
and 2020 (in thousands):
|
|
Nine Months Ended
|
|
|
|
6/30/2021
|
|
|
6/30/2020
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$
|
76,768
|
|
|
$
|
74,964
|
|
Investing Activities
|
|
|
(145,246
|
)
|
|
|
(163,049
|
)
|
Financing Activities
|
|
|
135,857
|
|
|
|
80,010
|
|