Welcome to Monmouth Real Estate Investment Corporation's Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. It is now my pleasure to introduce your host, Ms. Susan Jordan, Vice President of Investor Relations. Thank you. Ms. Jordan, you may begin.

Thank you very much, operator. In addition to the 10-Q that we filed with the SEC yesterday, we have filed an unaudited quarterly supplemental information presentation. This supplemental information presentation along with the 10-Q are available on the Company's website at mreic.reit. I would like to remind everyone that certain statements made during this the conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements that we make on this call are based on our current expectations and involve various risks and uncertainties. Although the Company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can provide no assurance that its expectations will be achieved. The risks and uncertainties that could cause actual results to differ materially from expectations are detailed in the Company's second quarter 2017 earnings release and filings with the Securities and Exchange Commission. The Company disclaims any obligation to update its forward-looking statements. Having said that, I would like to introduce management with us today, Kevin Miller, Chief Financial Officer; and Michael Landy, President and Chief Executive Officer. Eugene Landy our Chairman is attending the Manufactured Housing Institute's conference this week, but he is participating on this call telephonically. It is now my pleasure to turn the call over to Monmouth's President and Chief Executive Officer, Michael Landy.

Thanks, Susan. Good morning, everyone, and thanks for joining us. We're pleased to discuss our results for the second quarter ended March 31. At quarter end, Monmouth's properties portfolio was 100% occupied, representing the highest occupancy rate in the industrial REIT sector. Our occupancy rate is up 40 basis points over the prior year. Our weighted average lease maturity at quarter end was 7.4 years, as compared with 7.0 years in the prior-year period, representing a 6% increase. In fiscal 2017, approximately 9% of the Company's gross leaseable area, consisting of 13 leases totaling 1.5 million square feet, was scheduled to expire. I'm pleased to report that thus far, 9 of the 13 leases have been renewed. As reported last quarter, our 87,500 square-foot building leased to FedEx in Fort Myers renewed for only eight months because they're in the process of moving their operations to our newly constructed 214,000 square foot building at the Southwest Florida International Airport. Excluding this eight months lease renewal, the eight leases that have renewed thus far represent approximately 1.2 million square feet or 80% of the expiring square footage. These eight leases have a weighted average lease term of 6.4 years. These renewed leases contain an average cap-lease rate of $5.53 per square foot and a cash lease rate of $5.42 per square foot. This represents a 1.1% decrease on a straight line GAAP basis and a 4.2% decrease on a cash basis. Of the four remaining leases that are said to expire, we have been informed by one small tenant that they will not be renewing. This tenant leases have 36,000 square foot facility in Urbandale Iowa, representing 2% of the space that was up for renewal this year. This tenant is currently leasing our space on a month-to-month basis. The remaining three leases that are still set to expire during fiscal 2017 are currently under discussion. While the weighted average leasing spreads achieved our fiscal 2017 renewals, thus far, are slightly negative on a GAAP basis, we are very pleased with achieving a weighted average lease maturity of 6.4 years on these renewals, given our strong tenant base. Additionally, we are very pleased with our 10-year renewable terms we have achieved this fiscal year on three FedEx facilities and one large facility leased to Western Container, a division of Coca-Cola. Moving to our balance sheet. Taking advantage of this protracted period of low interest rates has been a consistent theme here and this quarter was no exception. During the quarter, we issued an additional 3 million shares of our 6.125% Series C preferred stock at a public offering price of $24.50 per share, resulting in an effective yield of 6.25%. We intend to use a portion of the $71 million in net proceeds from this follow-on offering to redeem all 2.3 million outstanding shares of our 7.875% Series B preferred stock with a total part value of $57.5 million. This 163 basis point reduction will result in over $900,000 in annual preferred dividend savings. The issuance of these 3 million shares, combined with the 5.4 million shares issued in the original 6.125% Series C preferred stock offering done in September, result in a combined effective yield of 6.17% and gross proceeds of $208.5 million. This long-term capital will also be utilized to fund our acquisition pipeline, which grew over the quarter, and I will speak to that momentarily. Subsequent to quarter end, we acquired a brand-new 343,000 square foot facility for $32.1 million, leased for 15 years to FedEx Ground in the Grand Rapids MSA. This property is situated on 61 acres, directly off of Interstate 96. Following last year's 15% increase in our gross leaseable area, thus far in fiscal 2017, we have increased our GLA by 887,000 square feet, representing a 6% increase. All of these increases have been achieved through the acquisition of brand-new built-to-suit properties. With regards to our substantial acquisition pipeline, which grew over the quarter, we currently have eight built-to-suit developing projects, valued at $219.2 million, representing 2 million square feet, currently under construction and scheduled to close over the next several quarters. In keeping with our business model, these deals consist of brand-new built-to-suit prospects with long-term leases, primarily to investment grade tenants. These properties are located near major airports, major transportation hubs, and manufacturing plants that are integral to our tenants' operations. The cap rates on these deals average approximately 6.6%, and the weighted average lease maturity is 13.3 years. Subject to satisfactory due diligence, we anticipate closing these transactions upon completion and occupancy. To take advantage of today's attractive interest rate environment, we've already locked in very favorable financing for all eight of these acquisitions. The combined financing terms for these eight acquisitions consist of $143.5 million in proceeds, representing 66% of the total cost. These financings have a weighted average interest rate of 3.89%. These mortgages are 15 years self-amortizing loans with the exception of one, which is a 12-year self-amortizing loan. These eight acquisitions will result in a weighted average leveraged return on equity of approximately 15%. A gross leasable area now stands at 16.9 million square feet and consists of 101 properties, geographically diversified across 30 states. Our weighted average building age as of the quarter end is 10 years, representing the youngest portfolio in the industrial REIT sector. Building age, as I've stated in past, is an increasingly important metric for our property type, as demand for modern industrial space, driven by the rapid growth in e-commerce, continues to be the primary driver of the sustained positive net absorption trends our sector has been experiencing. With regards to the overall U.S. industrial market outlook, following last year's strong performance, 2017 is off to a very good start, with approximately 35 million square feet of positive net absorption during the first quarter, marking the 28 consecutive quarter of expansion. The national average vacancy rate continues to improve and is currently 5.4%, representing a 30 basis point decline over the quarter and a 70 basis point decline from the prior year. This marks the lowest vacancy level in over 30 years. This increased demand is also driving rents higher to an average asking rent of $6.12 per square foot, representing a 7% increase over the prior-year period. New construction increased 13.5% over the prior-year period, with 214.7 million square feet currently under construction. Despite the persistently low GDP growth rate, which weighed in at an anemic 0.7% annual growth rate in the initial Q1 report, marking the weakest reading in three years, e-commerce sales continue to increase at a 15% annual growth rate. As a result, additional modern industrial space is very much needed. It is estimated that for every $1 billion increase in e-commerce sales, approximately 1.75 million square feet of new distribution space is required. Illustrating this point, at Monmouth, on the site that was once the largest enclosed mall in Texas, we have a large distribution center currently being completed. This substantial industrial project is indicative of the changing of the guard that is taking place in the world of consumer spending. And now Kevin will provide you with greater detail on our financial results for the second quarter of fiscal 2017.

Thank you, Michael. Core funds from operations for the second quarter fiscal 2017 were $12.4 million, or $0.17 per diluted share. This compares to core FFO for the same period one year ago of $11.5 million or $0.18 per diluted share, representing a 6% decrease from the previous year. The decrease is mainly due to the $879,000 in securities gains realized during the prior-year period. More funds from operations, excluding the gains on securities transactions, were $0.17 per diluted share this quarter, as compared to $0.16 per diluted share for the same period one year ago, representing a 6% increase. Adjusted funds from operations or AFFO were $0.18 per diluted share for the recent quarter, as compared to $0.17 per diluted share a year ago, representing a 6% increase from the previous year. As a result of our recent follow-on offering, we had additional preferred dividend costs this quarter. As the proceeds from this recent offering are fully put to work, we expect our income to offset these costs. Rental and reimbursement revenues for the quarter were $27.3 million compared to $23 million, representing an increase of 19% from the previous year. Net operating income was $23.2 million for the quarter, reflecting a 21% increase from the comparable period a year ago. This increase was due to the additional income related to the seven industrial properties purchased since the prior-year period. As Michael mentioned, occupancy at quarter end was 100%, compared to 99.6% one year ago, representing a 40 basis point improvement over the prior-year period. Our average lease maturity, as of the end of the quarter, was 7.4 years as compared to 7.0 years a year ago. Our average annual rent per square foot was $5.79 as of the quarter end as compared to $5.57 a year ago, representing an increase of 3.9%. This average rent is 5% below the current national average asking rent of $6.12 per square foot. With regards to our same property metrics for the current six-month period, our same property occupancy increased 40 basis points to 100% and our same property NOI increased 1% on a GAAP basis and 2.3% on a cash basis. As of the end of the quarter, our capital structure consisted of approximately $504 million in debt, of which $478 million was property level fixed rate mortgage debt and $26 million were loans payable. 95% of our total debt is fixed rate, with a weighted-average interest rate of 4.4%, as compared to 4.6% in the prior year period. We also had $267.5 million in perpetual preferred equity at quarter end, including the $57.5 million in our Series B preferred outstanding at 7.875% that we are planning to redeem in June. As Michael mentioned, this will result in annual preferred dividend savings of over $900,000. Our total debt plus preferred equity, combined with an equity market capitalization of $1 billion, results in a total market capitalization of approximately $1.8 billion at quarter end. From a credit standpoint, we continue to be conservatively capitalized. Our strong balance sheet was further fortified over the quarter with our net debt to total market capitalization reduced to 27%, our net debt plus preferred equity to total market capitalization at 42%, our fixed charge coverage at 2.2 times and our net debt to adjusted EBITDA at a very strong 5.3 times. From a liquidity standpoint, we ended the quarter with $23 million in cash and cash equivalents. We also had $174 million available from our credit facility, as well as an additional $100 million potentially available from the accordion feature. In addition, we held $99.4 million in marketable REIT securities at quarter end, representing 7.2% of our total undepreciated assets. At the end of the quarter, we had $12.4 million in unrealized gains on our securities investments in addition to the $806,000 in gains realized thus far in fiscal 2017, and the $4.4 million in gains realized in fiscal 2016. And now, let me turn it back to Michael before we open up the call for questions.

Thanks, Kevin. In summary, Monmouth's strong performance has continued through this most recent quarter. Our AFFO per share of $0.18 represents a 6% improvement over the prior-year period. And is the result of our large acquisition, subsequent to quarter end and our substantial $219 million acquisition pipeline, we expect to see continued growth in our per-share earnings going forward. Our 100% occupancy rate at quarter end illustrates the mission-critical nature of our properties and our high quality tenant base. At Monmouth, we think and plan for the long-term and therefore we view our recently issued $210 million in series C perpetual preferred stock at 6.125% as a very favorable development. Lastly, we recently celebrated our 50th anniversary as a public REIT at the New York Stock Exchange. It was a great event and a great honor to ring the closing bell. In today's world, investment horizons are becoming increasingly shorter and shorter. Monmouth's 50 prosperous years as a public REIT. This is amazing track record and something we're very proud of. We now would be happy to take your questions.

[Operator Instructions] And our first question will come from Barry Oxford of D.A. Davidson.

Great, thanks so much, Mike. Real quick one, I look at your portfolio in the leases, the rest in 2017 and 2018, what might be the embedded mark-to-market in those leases right now?

Well, I think we have good embedded mark-to-market, whether we capture it immediately or go like we've been doing with several leases. We've already done four 10 year renewals, when all said and done for fiscal 2017, we will have achieve five to six 10 year renewals, and there we're trading embedded rank growth for lease term. We're a little different than the other REITS in that we are focused as primarily a qualitative focus. Our cash flow is derived from investor grade tenants. We did three 10 year renewals with FedEx, one 10 year renewal with Coca-Cola, and while a shorter-term lease might have gotten more embedded rent growth, we went for duration. We derive high-quality cash flows, predictable cash flows and I think you've seen during the business cycle, the benefits of that. But to answer your question more specifically, the national average rent's about $6.12, the leases rolling have an average rent of $5.79 a square foot. So there is potential for embedded rent gains, but there's not a lot more to do in fiscal 2017. The three remaining leases I have LOIs signed on two for 10 year renewals, one outstanding, which will be either a five year or 10 year renewal. So we pretty much know what fiscal 2017's going to look like. As far as 2018, again, the rents are - in 2018 are in the high $5 range and national average asking rents are in the low $6 range. That's the broad picture. You have to drill down market-by-market, but we're not above market. We have the ability to gain rent increases through renewals. We will monetize the difference between in place rents and market rents. It's just a question of how we choose to do so. By locking in 10 year leases, we feel - that renders the asset highly financeable and we can extract capital to grow the portfolio. And we've been successful doing that. The last thing I'll say is, while our leasing spreads haven't been widely positive, they're slightly negative, our trajectory of per-share earnings growth has been very strong and that's the result of our acquisition pipeline and our expansions. And so by locking in FedEx and Coca-Cola for 10 years, trading that for large rent gains has proven to be beneficial and that was our focus for these renewables.

Great, thanks. Mike, one more quick question. When you're looking at acquisitions and cap rates, and I know it's hard to look out too far in the future, but over the next six to nine months, are you anticipating any type of movement in the cap rates or are you anticipating your cap rate are going to maintain a fairly steady number over the next six to nine months, and where they are today?

Right, the North Star in answering that question is risk free 10 year treasury rate, "risk-free rate." And it's been moving around, moving towards three and then back down to two. We're conservative. We've been assuming rising cap rates, but while we've been assuming that, more and more capital's been coming into the space. Compressing cap rates lower, so we're being conservative. We're able to build our pipeline, but I think the safe assumption is that interest rates are rising and cap rates need to rise, our spreads in our pipeline are substantial and we feel good that we will be able to continue to grow the company with decent spreads albeit contracting spreads. But our assumption is that cap rates need to do about face and the yield curve is flat as a pancake today, but will not always be the case.

Great, thanks on a personal. I will agree with those comments. Thanks.

Thank you, Barry.

And the next question comes from Rob Stevenson of Janney.

Good morning, guys. Mike, it sounds like some of those comments that you're expecting at this point no problem in renewing those last three leases for 2017, is that accurate?

It's very accurate, Robert. There's three leases; they're all with FedEx. We have signed letters of terms on two for 10 years and the remaining one is under discussion for five to 10 years. I have my Vice President of Asset Management, Rich Molke, with us. Anything new on the remaining lease?

No, the FedEx is still reviewing it and I'll get back to you shortly.

Okay. So those three are pretty much baked in the cake and that will result in 92% tenant retention for fiscal 2017, following 100% retention in 2016, which was preceded by 100% tenant retention at fiscal 2015. So it can't be 100% forever, but we're happy with 92% retention this year.

Okay, and then when you think about either the time it's going to take to find an additional tenant for the Iowa asset or sell it and then what you wind up doing in terms of rental rate on these three FedEx leases, are you guys still expecting the full-year NOI to be positive on both the GAAP and cash basis?

You're talking the same-store NOI, and we're expecting to be positive on both the GAAP and a net cash basis. Rich was just in Iowa, do you want to shed some light on - that's a small building, it wasn't generating a lot of NOI. But there's interest in the building. Rich, anything to add on, on Urbandale?

Yes, Des Moines as a MSA has been strong and we're responding to an RFP now on that building. So there's good activity and we're pretty positive on the prospects going forward with that one.

But would you consider that downtime in terms of vacancy even if you lease it at sometime this year, there's only two quarters left in the fiscal year. Would you consider any downtime there? And whatever type of mark-to-market there is on the three remaining FedEx leases, you're plus one in terms of same-store NOI growth on a GAAP basis year-to-date and 2.3% on a cash. Do those numbers still stay positive when those four properties are factored in at the end of the year, do you think?

Well, the Urbandale is such a small factor, I think it will be de minimis. Fort Myers is the other asset that FedEx will move out of to our new building at Southwest International Airport, so that will take our occupancy from 100% to 99.2% or 99.3% roughly in that range, and same-store NOI, on both the GAAP and cash basis. Kevin, you want to drill down on that?

Yes, I just wanted to add, also included in same-store NOI are all the properties and while the FedEx properties tend to be flat with some of them have some step ups, the other half of the tenants do usually have step-ups ranging between 1% and 3%, so that embedded growth that's in the leases already will continue to result in a positive same-store NOI growth on both the cash and GAAP basis.

Okay, I'm just trying to figure out, I mean, you assume that everything that is in the existing portfolio winds up being flat to positive for the remainder of the year, so the only chance of negative hits to NOI would wind up being is if the three FedEx leases roll down in terms of rental rates and/or the vacancy at the Iowa thing. Because the FedEx at Fort Myers extends to the rest of the fiscal year, right?

It's about right.

All right. In terms of the $1.5 million of 2018 lease expirations, are you still mostly focused on 2017 at this point or how are conversations gone on the 2018?

They're going well. We've renewed some of the 2018's already. I usually don't report about on them this early, but Rich, since you're here, do you want to comment on fiscal 2018 renewals?

Yes. We have been working on our Chattanooga, Lakewind and Orlando, which are the first three, and we have LOIs outstanding for all those and just waiting for amendments to come in on them. So a good start for the...

Any known move-outs in fiscal 2018?

So we do know that Caterpillar renewed for one year in 2017; they are moving out for 2018, so that's going to be a vacancy. Kellogg has also announced a few move-outs, which are hitting two of our buildings in 2018, albeit they are smaller, around 50,000 square feet each, and that's it for now as far as what we have clarity on for move-outs.

Okay, and then in terms of today, any expansions you expect to kick off on the remainder of the calendar 2017?

Well, we have a parking expansion going on right now but nothing else that's been - there's been things discussed but nothing firm. Kevin, you want to add to that at all?

Yes, there's a bunch of expansions that are in discussion. Nothing's been signed. And the one parking lot that Mike has mentioned, it's not really mentioned in our queue because it just hasn't been done yet, but yes, we'll probably be reporting on that on the next quarter.

Okay, and then just last from me. How many of the eight built-to-suits in your pipeline are FedEx?

So the 53% of the pipeline is FedEx and 68% is investment-grade tenants. One, two, three, four of them are FedEx, four out of the eight.

Okay, any of the other four new tenants for you, or are they existing tenants elsewhere?

Well, International Paper's existing, Cooper Tire's new, Bonsall's existing, Auto Neam's existing.

Okay. Perfect. Appreciated guys. Thanks. Have a great day.

Thanks Robert.

And next we have a question from Craig Kucera of Wunderlich.

Hi. Good morning, guys. Wanted to circle back to your security portfolio. I think it increased by third since last quarter and was that because there were no acquisitions during the quarter and the pipeline was going to close going forward and you might harvest value from that as an equity source? Or should we assume that those were good preferred and common stocks that you're likely to hang to for the rest of the year going forward?

Yes, certainly the latter. We don't use the securities portfolio as a warehouse for capital. We watch it closely and as I said earlier, as the 10-year was approaching 3%, you saw a good window of opportunity. It didn't last very long, but we were able to allocate capital into the securities market. The markets change, the public REIT market or the public market as a whole is very much ETF-driven. The ETFs were supposed to mimic the market; they've grown in size and become the market and it's creating real inefficiencies. It's creating artificial supply-and-demand pressures. The last two days, REITS sold off in a highly correlated manner and that's largely ETF driven. So we're watching, we're keeping powder dry, and I think there will be some opportunistic situations to allocate capital to the securities market. But we're being very cautious. And I think active investing needs to come back because for the ETFs to be 40% of the market is not sustainable and so I'm being very cautious on the public equity market as a whole.

Got it. No, it's not like you've locked up all your financing for the acquisition pipeline. I feel like in the past that's indicated that you haven't been able to have financing out beyond a year, so should we take from that, that the entire pipeline should close in the next four quarters, or is it - could it be faster than that? Can you give us some color there?

Well, it's a good deduction. It's a good inference. We locked in all eight and so therefore you are correct; they will close within the next four quarters. You want to add anything to that, Kevin?

Sure, yes, the last one that we have in the pipeline we expect to close will be by the end of this year, maybe early next year, early January if it slips more than we expect. But yes, that's a good point. We've already locked in all eight deals with about $143.5 million and they're all 15-year self-amortizing loans, with the exception of one is a 12-year self-amortizing loan. They have a weighted average interest rate of 3.89%. So since those are locked in and our cap rate's locked in, we know they're going to be generating better returns in the 15% range. So we're very excited about that, that we have that clarity and surety of what our pipeline's going to be generating.

Got it. And I may have missed this but I feel like in the past set that pipeline has had an average cap rate of maybe 6.6% or 6.7%. Is that still correct?

Yes, and it moves. When you say in the past, I remember when it had an average in the mid-sevens and over time it got lower and lower and today the average cap rate is 6.6% and that's where it's been, you're right, Craig, for a bit. The good thing about forward built-to-suits is you get a premium over on the spot cap rates and the fortunate thing over the last many years is that by the time the building is constructed, you have already capital gains, because cap rates have compressed below the cap rate you acquired it for. That could go the other way and so we're being cautious in making sure we get good risk premium in our bidding. These are primarily 15-year deals, the eight deals. They have a weighted averagely lease term of over 13 years. So we're real happy with our pipeline. These are Omni-Channel-capable buildings for the most part with about six acres, six square feet of the land to one square foot of building. So a good ratio to make them Omni-Channel-capable and for several years now we've grown the portfolio with brand-new built-to-suits and that's why we have the youngest portfolio in the sector.

Got it. And going to the preferred redemption. Will there be any - there shouldn't be any pro-rated dividend with a full dividend on what's callable be paid and then you'll just have the series C to pay going forward? In starting in your fiscal fourth quarter?

Yes, that's correct. So for the Series B for record holders as of May 15, they'll be receiving their full dividend on June 15. And then, they're not callable until June 7, so if there's - if we were able to call it on that day which we intend to do, there'll be a small 7-day of extra interest that those preferred B shareholders would get. And then once that's all settled, then going forward will just be the series C preferred with a 6.125% on $210 million.

Got it. All right. Thanks guys. Appreciated.

You are welcome. Thank you.

[Operator Instructions] And this will conclude our question-and-answer session. I would like to turn the conference back over to Michael Landy for any closing remarks.

Well, thank you, Laura. I just wanted to mention as I did last quarter that our new annual report is available. We spent a lot of time and thought producing our annual report and we're especially proud of this year's edition, so please contact Susan Jordan and we will be happy to FedEx you out a copy. I'd like to thank everyone for joining us on this call and for their continued support and interest in our Company. Kevin, Gene and I are available for any follow-up questions. And as always, we will presenting at NAREIT's REITWeek conference in June, and we hope to see you there. We look forward to reporting back to you after our third quarter earnings. Thank you.

The conference is now concluded. Thank you for attending today's presentation. The teleconference replay will be available in approximately one hour. To access this replay, please dial U.S. toll-free 877-344-7529 or international toll 412-317-0088. The conference ID number is 10102329. Thank you, and please disconnect your lines at this time.