REITs come in all shapes, sizes and flavors. Just take e.g. Monmouth Real Estate Investment Corp. (NYSE:MNR). Although its market cap is quite small at $1.82 billion, the company has an extensive real estate footprint. It controls millions of square feet and focuses exclusively on leased industrial properties with single tenants. It is particularly interested in those located in major seaports, major intermodal ports and near major airports. This is truly a niche business and one that has the potential to generate attractive returns for investors. Currently, the company’s shares appear to be quite expensive. And most likely, the upside is limited at best. But for those who want a fast-growing REIT and don’t mind paying a price for it, it might not be a bad prospect to consider.
A view of Monmouth
At the time of writing, Monmouth owns 121 lots covering an impressive 24.5 million square feet. Its average lot is around 203,000 square feet. Given the size, it should come as no surprise to investors that the tenants are largely players in the logistics market. At the end of fiscal 2020, the top nine tenants accounted for 74.9% of the annualized base rent. It is by far the largest, FedEx Ground (NYSE:FDX) at 50.4%. FedEx Express accounts for another 4.7%. The second largest tenant is now Amazon (NASDAQ:AMZN) at 6.7%. Given this composition, investors shouldn’t be shocked to learn that 82% of rental income comes from investment-grade tenants.
Geographically, Monmouth is quite diverse. 10.1% of the company’s annualized ground rent comes from the state of Georgia. Another 10% are from Florida. And 9.9% are from Ohio. That means it has properties split between 31 different states. And what’s really impressive is that the utilization during this time is around 99.7%. In fact, the occupancy rate has been over 99% throughout the COVID-19 pandemic.
From Monmouth Real Estate Investment Corp.
In fact, the company’s business is so strong that management has remained focused on growth. After all, the company a long history of strong growth. In 2015, consider the fact that this roughly simple area is 13.9 million square feet. By the end of this year it should be at least 25.2 million. During 2020, the Company completed five separate real estate acquisitions totaling $175.1 million. So far this year, the company has acquired two additional properties valued at $170 million. And it has five more properties in its pipeline totaling 1.4 million square feet that will cost it $199.1 million. And between the new terms for these properties upon acquisition and the average 7.5-year lease terms on current leases, the company appears to be mitigating uncertainty going forward.
From Monmouth Real Estate Investment Corp.
This growth-oriented mindset has paid off very well for the company. To see how, we only have to go back a few years. In 2016, the company had sales of $94.96 million. It has grown every year since then, totaling $167.81 million in 2020. Most likely, growth will continue this year as well. As sales have increased, so has the company’s bottom line. In the same five-year window, NOI, or net operating income, increased from $80.19 million to $140.74 million. During that time, this metric also grew every year. That doesn’t mean every metric works the same. In fact, the company had a bit of a slump in 2020, with operating cash flow, FFO (or funds from operations), and AFFO (or adjusted funds from operations) all down slightly compared to 2019. Even so, operating cash flow has nearly doubled since 2016, rising to $98.83 million from $55.38 million. Ditto for FFO, which increased from $46.60 million to $78.48 million, and AFFO, which increased from $45.87 million to $76.94 million. However, each year the EBITDA performed better, eventually increasing from $72.25 million to $131.80 million.
Based on the way the company reports its quarterly and annual periods, we already know its results for the first quarter of its fiscal 2021. Revenue increased slightly to $43.96 million from $41.70 million. Meanwhile, the bottom line numbers are a bit mixed. For example, NOI is up 6% year over year. Operating cash flow increased by 57.3%. And EBITDA is up 7.5%. On the other hand, FFO is down 2.3% while AFFO is down 8.8%.
It might be tempting to try and use first-quarter results to predict what the rest of the year will be like, but that’s too speculative for me. Based on the figures from 2020, we can rate the company. Currently the price for the NOI multiple is 12.7. Wow, that looks pretty attractive, it’s also the only metric that looks like it. Based on my estimates, the company’s price-to-operating cash flow ratio is 24.8. Its price FFO multiple is 22.9. And its price for a multiple of AFFO is 23.3. Meanwhile, its EV-to-EBITDA multiple is slightly lower at 25.7.
To put these numbers in perspective, I compared the companies’ prices to the top five comparable companies listed on Seeking Alpha Quant platform. When I found out that the price-to-operating cash flow multiple of these companies goes from a low of 17.6 to a high of 33.9. Four of these five companies have a higher price than Monmouth, while the other has a lower price. The same discrepancy was evident when looking at their EV-to-EBITDA multiples, which ranged from 14.9 to 46.6.
Putting all this data together, I realize that management has done a great job in running this company. Yes, the concentration on top tenants is a little worrying. However, the company continues to grow its revenue and earnings, and recent investments suggest that trend will continue. In the long term, Monmouth will likely do well, and it seems fairly priced compared to its rivals. At the same time, its multiples are high on an absolute basis and may require patience from investors to achieve desirable returns. Still, that might be attractive to these types of investors, but not so much to me.