Real Estate Investments

6 Months Ended

Mar. 31, 2019

Real Estate [Abstract]

Real Estate Investments

NOTE 3 – REAL ESTATE INVESTMENTS

On October 19, 2018, we purchased a newly constructed 347,000 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 $85.2 million. We obtained a 15 year, fully-amortizing mortgage loan of $55.0 million at a fixed interest rate of 4.13%. Annual rental revenue over the remaining term of the lease averages $5.3 million.

On November 30, 2018, we purchased a newly constructed 127,000 square foot industrial building, situated on 29.4 acres, located in Savannah, GA. The building is 100% net-leased to FedEx Ground Package System, Inc. for 10 years through October 2028. The purchase price was $27.8 million. We obtained a 15 year, fully-amortizing mortgage loan of $17.5 million at a fixed interest rate of 4.40%. Annual rental revenue over the remaining term of the lease averages $1.8 million.

FedEx Ground Package System, Inc.’s ultimate parent, FedEx Corporation is a publicly-owned company and financial information related to this entity is 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.

We evaluated the property acquisitions which took place during the six months ended March 31, 2019, to determine whether an integrated set of assets and activities meets the definition of a business, pursuant to ASU 2017-01. Acquisitions that do not meet the definition of a business are accounted for as asset acquisitions. Accordingly, we accounted for the two properties purchased during fiscal 2019 as asset acquisitions and allocated the total cash consideration, including transaction costs of approximately $324,000, to the individual assets acquired on a relative fair value basis. There were no liabilities assumed in these acquisitions. The financial information set forth below summarizes our purchase price allocation for these two properties acquired during the six months ended March 31, 2019 that are accounted for as asset acquisitions (in thousands):

Land	$	11,778
Building		99,741
In-Place Leases		1,886

The following table summarizes the operating results included in our consolidated statements of income for the three and six months ended March 31, 2019 for the two properties acquired during the six months ended March 31, 2019 (in thousands):

	Three Months Ended 3/31/2019		Six Months Ended 3/31/2019
Rental Revenues	$	1,775	$	3,096
Net Income Attributable to Common Shareholders		326		800

Expansions

During the quarter ended March 31, 2019, we completed a 155,000 square foot building expansion at our property located in Monroe (Cincinnati), OH for a total project cost of $8.6 million. The expansion resulted in a new 15 year lease which extended the prior lease expiration date from February 2030 to February 2034. The expansion also resulted in an increase in initial annual rent effective March 1, 2019 of $821,000 from $980,000, or $4.22 per square foot, to $1.8 million, or $4.65 per square foot. In addition, the annual rent will increase by 2% per annum, resulting in an average annualized rent of $2.1 million over the 15 years. We obtained a commitment to enter into a 10.8 year, fully-amortizing second mortgage loan of $7.0 million at a fixed interest rate of 3.85%. The maturity of the second mortgage loan will coincide with the maturity of the property’s first fully-amortizing mortgage loan which is at a fixed interest rate of 3.77% and has a principal balance of $6.9 million as of the quarter end.

Dispositions

We have not had any dispositions thus far in fiscal 2019. During fiscal 2018, there were two leases that were set to expire with Kellogg Sales Company (Kellogg) at our 65,000 square foot facility in Kansas City, MO through July 31, 2018 and at our 50,000 square foot facility 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 $4.9 million, with net sale proceeds of $4.6 million and, on December 22, 2017, we sold our property, located in Orangeburg, NY for $6.2 million, with net sale proceeds of $5.9 million. 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.

Additionally, Real Estate Held for Sale at March 31, 2018 consisted of two properties that sold during the third quarter of fiscal 2018. The two properties consisted of an 88,000 square foot facility located in Ft. Myers, FL and a 68,000 square foot facility located in Colorado Springs, CO.

Since the sale of these two properties during the first half of fiscal 2018 as well as the two properties that were classified as Real Estate Held for Sale did not represent a strategic shift that had a major effect on our operations and financial results, the operations generated from these properties were not included in Discontinued Operations.

The following table summarizes the operations of the two properties that were sold during the prior year, prior to their sales, and the two properties that were classified as Real Estate Held for Sale that are included in the accompanying Consolidated Statements of Income for the three and six months ended March 31, 2018 (in thousands).

	Three Months Ended					Six Months Ended
		3/31/2019		3/31/2018			3/31/2019		3/31/2018
Rental and Reimbursement Revenue	$	-0-	$	278		$	-0-	$	857
Lease Termination Income		-0-		-0-			-0-		210
Real Estate Taxes		-0-		(17	)		-0-		(228	)
Operating Expenses		-0-		(36	)		-0-		(85	)
Depreciation & Amortization		-0-		(5	)		-0-		(63	)
Interest Expense, including Amortization of Financing Costs		-0-		(12	)		-0-		(26	)
Income from Operations		-0-		208			-0-		665
Gain on Sale of Real Estate Investments		-0-		-0-			-0-		5,388
Net Income	$	-0-	$	208		$	-0-	$	6,053

Pro forma information

The following unaudited pro forma condensed financial information has been prepared utilizing our historical financial statements and the effect of additional revenue and expenses generated from property acquired and expanded during fiscal 2019 to date, and during fiscal 2018, assuming that the acquisitions and completed expansions had occurred as of October 1, 2017, after giving effect to certain adjustments including: (a) Rental Revenue adjustments resulting from the straight-lining of scheduled rent increases, (b) Interest Expense resulting from the assumed increase in Fixed Rate Mortgage Notes Payable and Loans Payable related to the new acquisitions, and (c) Depreciation Expense related to the new acquisitions. In addition, Net Income (Loss) Attributable to Common Shareholders excludes the operations, including the exclusion of the related realized gain, of the four properties sold during fiscal 2018. Furthermore, the net proceeds raised from our public offering of 9.2 million shares of our Common Stock in October 2018 and from our Dividend Reinvestment and Stock Purchase Plan (the DRIP) were used to fund property acquisitions and expansions and therefore, the weighted average shares outstanding used in calculating the pro forma Basic and Diluted Net Income (Loss) per Share Attributable to Common Shareholders has been adjusted to account for the increase in shares raised through the public offering and the DRIP, as if all the shares raised had occurred on October 1, 2017. Additionally, the net proceeds raised from the issuance of our 6.125% Series C Cumulative Redeemable Preferred Stock through our At-The-Market Sales Agreement Program were used to help fund property acquisitions and, therefore, the pro forma preferred dividend has been adjusted to account for its effect on pro forma Net Income (Loss) Attributable to Common Shareholders as if all the preferred stock issuances had occurred on October 1, 2017. The unaudited pro forma condensed financial information is not indicative of the results of operations that would have been achieved had the acquisitions and expansions reflected herein been consummated on the dates indicated or that will be achieved in the future.

	Three Months Ended (in thousands, except per share amounts)
		3/31/2019				3/31/2018
		As Reported		Pro-forma		As Reported		Pro-forma
Rental Revenue	$	32,934	$	33,074	$	28,610	$	33,347
Net Income (Loss) Attributable to Common Shareholders	$	23,821	$	23,927	$	7,397	$	8,075
Basic and Diluted Net Income (Loss) per Share Attributable to Common Shareholders	$	0.26	$	0.25	$	0.10	$	0.09

	Six Months Ended (in thousands, except per share amounts)
		3/31/2019						3/31/2018
		As Reported			Pro-forma			As Reported		Pro-forma
Rental Revenue	$	65,551		$	66,297		$	56,302	$	66,739
Net Income (Loss) Attributable to Common Shareholders	$	(8,543	)	$	(9,450	)	$	20,710	$	14,729
Basic and Diluted Net Income (Loss) per Share Attributable to Common Shareholders	$	(0.09	)	$	(0.10	)	$	0.27	$	0.16

Tenant Concentration

We have a concentration of FedEx Corporation (FDX) and FDX subsidiary-leased properties, consisting of 61 separate stand-alone leases covering 10.5 million square feet as of March 31, 2019 and 59 separate stand-alone leases covering 9.5 million square feet as of March 31, 2018. As of March 31, 2019, the 61 separate stand-alone leases that are leased to FDX and FDX subsidiaries are located in 25 different states and have a weighted average lease maturity of 9.1 years. The percentage of FDX and its subsidiaries leased square footage to the total of our rental space was 49% (5% to FDX and 44% to FDX subsidiaries) as of March 31, 2019 and 48% (8% to FDX and 40% to FDX subsidiaries) as of March 31, 2018. As of March 31, 2019, no other tenant accounted for 5% or more of our total rental space.

Annualized Rental and Reimbursement Revenue from FDX and its subsidiaries is estimated to be approximately 60% (5% to FDX and 55% to FDX subsidiaries) of total Rental and Reimbursement Revenue for fiscal 2019, and was 60% (7% to FDX and 53% to 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 the six months ended March 31, 2019 and 2018.

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 $177.4 million in marketable REIT securities at March 31, 2019, representing 8.5% 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 enhance our diversification. The securities portfolio provides us with additional liquidity, diversification and income and serves as a proxy for real estate when more favorable risk adjusted returns are not available.