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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
For the Quarter ended Commission File
March 31, 2004 No 2-29442
MONMOUTH REAL ESTATE INVESTMENT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Maryland 22-1897375
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3499 Route 9 North, Suite 3-C, Freehold, NJ 07728
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (732) 577-9997
- ----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 125-2 of the Exchange Act) Yes _X_ No ___
The number of shares or other units outstanding of each of the issuer's classes
of securities as of May 1, 2004 was 16,452,924.
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY
FOR THE QUARTER ENDED MARCH 31, 2004
C O N T E N T S
Page No
Part I - Financial Information
Item 1- Financial Statements (Unaudited):
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-16
Item 3- Quantitative and Qualitative Disclosures
About Market Risk
There have been no material changes to
information required regarding quantitative
and qualitative disclosures about market
risk from the end of the preceding year to
the date of this Form 10-Q.
Item 4- Controls and Procedures 16
Part II - Other Information 17
Signatures 18
Page 2
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2004 (UNAUDITED) AND SEPTEMBER 30, 2003
(Unaudited)
March 31, September 30,
2004 2003
ASSETS
Real Estate Investments:
Land $30,426,213 $25,426,213
Buildings, Improvements and Equipment,
Net of Accumulated Depreciation of
$19,376,718 and $17,429,990, 138,367,769 127,344,122
respectively
___________ ____________
Total Real Estate Investments 168,793,982 152,770,335
___________ ____________
Cash and Cash Equivalents 793,907 1,070,556
Securities Available for Sale at Fair Value 20,561,537 25,421,551
Interest and Other Receivables 1,610,166 1,364,885
Prepaid Expenses 164,673 117,450
Investment in Hollister '97, L.L.C. 900,399 900,399
Financing Costs, Net of Accumulated 1,374,891 1,193,157
Amortization
Lease Costs, Net of Accumulated 215,318 108,539
Amortization
Other Assets 149,543 227,002
___________ ____________
TOTAL ASSETS 194,564,416 183,173,874
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage Notes Payable $100,872,169 $ 90,909,299
Loans Payable 3,887,993 12,324,926
Other Liabilities 1,710,183 1,626,360
____________ ____________
Total Liabilities 106,470,345 104,860,585
____________ ____________
Shareholders' Equity:
Common Stock -$.01 Par Value, 20,000,000
Shares Authorized, 16,315,881 and
15,090,649 Shares Issued and
Outstanding, respectively 163,158 150,906
Excess Stock -$.01 Par Value, 5,000,000
Shares Authorized, No Shares Issued or
Outstanding -0- -0-
Additional Paid-In Capital 86,697,025 76,657,545
Accumulated Other Comprehensive Income 2,161,131 2,829,839
Loans to Officers, Directors & Key
Employees (1,230,938) (1,325,001)
Undistributed Income 303,695 -0-
____________ ____________
Total Shareholders' Equity 88,094,071 78,313,289
____________ ____________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $194,564,416 $183,173,874
============ ============
Unaudited
See Accompanying Notes to Consolidated Financial Statements
Page 3
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2004 AND 2003
Three Months Ended Six Months Ended
3/31/04 3/31/03 3/31/04 3/31/03
INCOME:
Rental and
Occupancy Charges $4,893,969 $4,254,732 $9,518,564 $8,270,767
_________ _________ _________ _________
EXPENSES:
Management Fees 76,449 61,368 149,897 122,738
Real Estate Taxes 280,125 237,385 616,362 268,189
Operating Expenses 283,468 220,489 439,280 371,555
Professional Fees 1,720 48,648 16,648 41,734
Office and General
Expense 615,043 406,623 1,060,459 797,876
Depreciation 984,988 868,330 1,946,728 1,699,189
_________ _________ _________ _________
TOTAL EXPENSES 2,241,793 1,842,843 4,229,374 3,301,281
_________ _________ _________ _________
OTHER INCOME (EXPENSE):
Interest and
Dividend Income 469,616 322,718 907,910 621,908
Gain on Securities
Available for Sale
Transactions, net 662,306 96,307 2,002,871 341,612
Income from Equity
Investment 27,500 27,500 55,000 55,000
Interest Expense (1,725,066) (1,716,285) (3,413,556) (3,407,449)
_________ _________ _________ _________
TOTAL OTHER INCOME
(EXPENSE) (565,644) (1,269,760) (447,775) (2,388,929)
_________ _________ _________ _________
NET INCOME 2,086,532 $1,142,129 4,841,415 $2,580,557
========= ========= ========= =========
NET INCOME - PER SHARE
Basic $ .13 $ .08 $ .31 $ .20
========= ========= ========= =========
Diluted $ .13 $ .08 $ .31 $ .20
========= ========= ========= =========
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic 15,963,782 13,499,221 15,578,303 12,956,950
========= ========= ========= =========
Diluted 16,072,721 13,517,277 15,678,293 12,972,087
========= ========= ========= =========
Unaudited
See Accompanying Notes to Consolidated Financial Statements
Page 4
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 2004 AND 2003
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $4,841,415 $2,580,557
Noncash Items Included in Net
Income:
Depreciation 1,946,728 1,699,189
Amortization 110,639 106,258
Stock Compensation Expense 2,274 -0-
Gain on Sales of Securities (2,002,871) (341,612)
Available for Sale
Changes In:
Interest and Other Receivables (245,281) 228,993
Prepaid Expenses (47,223) (95,815)
Other Assets and Lease Costs (59,224) 692,479
Other Liabilities 83,823 7,122
___________ ___________
NET CASH PROVIDED BY OPERATING
ACTIVITIES 4,630,280 4,877,171
___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Real Estate (17,694,000) (19,058,000)
Capital Improvements (276,375) (181,852)
Purchase of Securities Available for
Sale (4,018,605) (5,747,266)
Proceeds from Sale of Securities
Available for Sale 10,212,782 1,370,456
___________ ___________
NET CASH USED IN INVESTING
ACTIVITIES (11,776,198) (23,616,662)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Loans 11,404,856 4,815,000
Principal Payments on Loans (19,841,789) (8,545,591)
Proceeds from Mortgages 12,800,000 14,150,000
Principal Payments on Mortgages (2,837,130) (3,568,484)
Financing Costs on Debt (262,469) (234,203)
Payments on Loans to Officers,
Directors and Key Employees 94,063 -0-
Proceeds from Issuance of Common
Stock 7,956,559 14,070,271
Proceeds from Exercise of Stock
Options 366,255 39,750
Dividends Paid (2,811,076) (2,266,459)
___________ ___________
NET CASH PROVIDED BY FINANCING
ACTIVITIES 6,869,269 18,460,284
___________ ___________
NET DECREASE IN CASH AND
CASH EQUIVALENTS (276,649) (279,207)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 1,070,556 693,572
___________ ___________
END OF PERIOD $ 793,907 $ 414,365
=========== ===========
Unaudited
See Accompanying Notes to Consolidated Financial Statements
Page 5
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004
NOTE 1 - ORGANIZATION AND ACCOUNTING POLICY
The interim consolidated financial statements furnished herein include
Monmouth Real Estate Investment Corporation and its wholly-owned subsidiary, MRC
I LLC, (the Company) and reflect all adjustments which were, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows at March 31, 2004 and for all periods presented. All
adjustments made in the interim period were of a normal recurring nature. All
intercompany transactions and balances have been eliminated in consolidation.
Certain footnote disclosures which would substantially duplicate the disclosures
contained in the audited consolidated financial statements and notes thereto
included in the Annual Report of Monmouth Real Estate Investment Corporation for
the year ended September 30, 2003 have been omitted.
Certain reclassifications have been made to the consolidated financial
statements for the prior period to conform to the current period presentation.
Employee Stock Options
The Company followed APB Opinion No. 25 in accounting for its stock option
plan prior to October 1, 2002, and accordingly no compensation cost had been
recognized for grants made prior to October 1, 2002. Had compensation cost been
determined consistent with SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts as follows:
Three Three Six Six
Months Months Months Months
3/31/04 3/31/03 3/31/04 3/31/03
Net Income Prior to
Compensation Expense $2,086,532 $1,144,404 $4,843,689 $2,582,832
Compensation Expense -0- (2,275) (2,274) (2,275)
________ ________ ________ ________
Net Income as Reported 2,086,532 1,142,129 4,841,415 2,580,557
Compensation expenses
if the fair value method -0- (9,750) -0- (19,500)
had been applied
________ ________ ________ ________
Net Income Pro forma $2,086,532 $1,132,379 $4,841,415 $2,561,057
======== ======== ======== ========
Net Income per share -
Basic and Diluted as
reported $ .13 $ .08 $ .31 $ .20
Net Income per share -
Basic and Diluted
Pro forma $ .13 $ .08 $ .31 $ .20
Page 6
NOTE 1 - ORGANIZATION AND ACCOUNTING POLICY, (CONT'D.)
The Company adopted the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock Based Compensation" on October 1, 2002. Under the
prospective method of adoption selected by the Company under the provisions of
SFAS No. 148, "Accounting for Stock Based Compensation, Transition and
Disclosure", compensation costs of $2,274 have been recognized in the six months
ended March 31, 2004, as the Company granted stock-based employee compensation
during the second quarter ended March 31, 2003.
During the six months ended March 31, 2004, no stock options were granted.
Two participants exercised their stock options and purchased 51,500 shares for a
total of $366,255. As of March 31, 2004, there were options outstanding to
purchase 449,000 shares and 778,000 shares were available for grant under the
Plan.
Acquisitions
Upon acquisition of a property, the Company allocates the purchase price
of the property based upon the fair value of the assets acquired, which
generally consist of land, buildings, leasing commissions and intangible assets
including in-place leases and above market and below market leases. The Company
allocates the purchase price to the fair value of the tangible assets of an
acquired property determined by third party appraisal of the property obtained
in conjunction with the purchase. Acquired above and below market leases are
valued based on the present value of the difference between prevailing market
rates and the in-place rates over the remaining lease term.
The purchase price is further allocated to in-place lease values based on
management's evaluation of the specific characteristics of each tenant's lease
and the Company's overall relationship with the respective tenant. Acquired
above and below market leases are amortized over the remaining non-cancelable
terms of the respective leases. The value of in-place lease intangibles, which
is included as a component of Other Assets, is amortized to expense over the
remaining lease term and expected renewal periods of the respective lease. If a
tenant terminates its lease early, the unamortized portion of the tenant
improvements, leasing commissions above and below market leases and the in-place
lease value is immediately charged to expense.
NOTE 2 - NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
net income per share is calculated by dividing net income by the weighted-
average number of common shares outstanding plus the weighted-average number of
net shares that would be issued upon exercise of stock options pursuant to the
treasury stock method. Options in the amount of 108,939 shares and 18,056 shares
for the three months ended March 31, 2004 and 2003, respectively, are included
in the diluted weighted average shares outstanding. Options in the amount of
99,990 shares and 15,137 shares are included for the six months ended March 31,
2004 and 2003, respectively, are included in the diluted weighted average shares
outstanding.
Page 7
NOTE 3 - COMPREHENSIVE INCOME
The following table sets forth the components of the Company's
comprehensive income:
Three Months Six Months
3/31/04 3/31/03 3/31/04 3/31/03
Net Income $2,086,532 $1,142,129 $4,841,415 $2,580,557
Change in
unrealized gain
(loss) on
securities
available for
sale (194,870) (97,295) (668,708) (339,501)
__________ __________ __________ __________
Comprehensive
Income $1,891,662 $1,044,834 $4,172,707 $2,241,056
========== ========== ========== ==========
NOTE 4 - REAL ESTATE INVESTMENTS
On February 23, 2004, the Company purchased a 170,779 square foot
industrial building in Tampa, Florida. This building is 100% net-leased to
FedEx Ground Package System, Inc., a subsidiary of Federal Express Corporation
(FDX), for 15 years. The purchase price including closing costs was
approximately $17,700,000, the Company paid approximately $400,000 in cash,
obtained a mortgage of $12,800,000, and obtained $4,500,000 from its margin
loan. The mortgage payable is at a rate of 6% and matures on March 1, 2019.
The Company has a concentration of FDX and FDX subsidiary leased
properties. With the purchase of the Tampa property, the percentage of FDX
leased square footage as a total of our rental space increased from 29% to 33%.
NOTE 5 - SECURITIES AVAILABLE FOR SALE AND DERIVATIVE INSTRUMENTS
During the six months ended March 31, 2004, the Company sold or redeemed
$10,212,782 in securities available for sale, recognizing a gain on sale of
$2,002,871. The Company made additional purchases of $4,018,605 in securities
available for sale. Included in those purchases was $500,000 of the Convertible
Subordinated Debentures of Monmouth Capital Corporation, a related company.
During the three months ended March 31, 2004, the Company invested in
futures contracts of ten-year treasury notes with a notional amount of
$3,400,000, with the objective of reducing the exposure of the debt securities
portfolio to market rate fluctuations. Changes in the market value of these
derivatives have been recorded in interest and dividend income with
corresponding amounts recorded in other liabilities on the balance sheet. The
fair value of the derivatives at March 31, 2004 was a liability of $33,125.
NOTE 6 - SHAREHOLDERS' EQUITY
In January 2004, the Company issued 500,000 shares in a private placement
with Teachers Insurance & Annuity Association-College Retirement Equities Fund
for consideration of $4,050,000 or $8.10 per share. The proceeds of the private
placement will be used for working capital and will initially be used to pay
down the Company's outstanding credit facility. The Company incurred
approximately $68,000 in offering costs related to this private placement which
were recorded as a reduction to Additional Paid-In Capital.
Page 8
NOTE 6 - SHAREHOLDERS' EQUITY (CONT"D.)
For the six months ended March 31, 2004, the Company received $5,701,055
from the Dividend Reinvestment and Stock Purchase Plan (DRIP). This amount
includes dividend reinvestments of $1,726,644. There were 673,732 shares issued
under the Plan, resulting in 16,315,881 shares outstanding.
On March 15, 2004, the Company paid $2,331,098 as a dividend of $.145 per
share to shareholders of record February 17, 2004. Total dividends paid for the
six months ended March 31, 2004 was $4,537,720. On April 1, 2004, the Company
declared a dividend of $.145 per share to be paid on June 15, 2004 to
shareholders of record May 17, 2004.
NOTE 7 - EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Mr. Eugene W. Landy, Chairman
of the Board and President. On January 1, 2004, Mr. Landy's Employment
Agreement with the Company was amended to extend the term for five years to
December 31, 2009. The amended Employment Agreement provides for (1) an
increase in his annual base compensation from $150,000 to $175,000; (2) an
increase in his severance payment from $300,000 payable $100,000 a year for
three years to $500,000 payable $100,000 a year for five years; and (3) an
increase from $40,000 a year to $50,000 a year of his pension benefits; and
(4) an extension of three years of his pension payments for a ten-year period
commencing January 1, 2004. Mr. Landy receives bonuses and customary fringe
benefits, including health insurance and five weeks vacation. Additionally,
there will be bonuses voted by the Board of Directors. The Employment
Agreement is terminable by either party at any time subject to certain notice
requirements. The Company accrued additional compensation expense related to
the pension benefits of $141,000 in the quarter ended March 31, 2004.
Effective January 15, 2004, the Company and Cynthia J. Morgenstern,
Executive Vice President, entered into a three-year employment agreement under
which Ms. Morgenstern receives an annual base salary of $160,000, increasing to
$176,000 in 2005 and to $194,000 in 2006, plus bonuses and customary
fringe benefits. In the event of disability, her salary shall continue for a
period of two years. No accruals were recorded in connection with this
employment agreement.
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the six months ended March 31, 2004 and 2003 for interest
was $3,812,404 and $3,407,449, respectively.
During the six months ended March 31, 2004 and 2003, the Company had
dividend reinvestments of $1,726,644 and $1,447,769, respectively, which
required no cash transfers.
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
FASB Interpretation No. 46, Consolidation of Variable Interest
Entities "FIN 46" was issued in January 2003 and was reissued as FASB
Interpretation No. 46 (revised December 2003) (FIN 46R). For public entities,
FIN 46 or FIN 46R is applicable to all special-purpose entities (SPEs) in which
the entity holds a variable interest no later than the end of the
Page 9
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS (CONT'D.)
first reporting period ending after December 15, 2003, and immediately to
all entities created after January 31, 2003. The effective dates of FIN 46R
vary depending on the type of reporting enterprise and the type of entity that
the enterprise is involved with. FIN 46 and FIN 46R may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated. FIN 46 and FIN 46R provides guidance on the identification of
entities controlled through means other than voting rights. FIN 46 and FIN 46R
specifies how a business enterprise should evaluate its involvement in a
variable interest entity to determine whether to consolidate that entity. A
variable interest entity must be consolidated by its primary beneficiary
if the entity does not effectively disperse risks among the parties
involved. Conversely, effective dispersion of risks among the parties involved
requires that a company that previously consolidated a special purpose entity,
upon adoption of FIN 46 or FIN 46R, to deconsolidate such entity. Management
believes that this interpretation will not have a material impact on the
Company's consolidated financial statements
Page 10
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Overview
The following discussion and analysis of the consolidated results of
operation and financial condition should be read in conjunction with the
Consolidated Financial Statements and notes thereto elsewhere herein and the
Company's September 30, 2003 annual report on Form 10-K.
The Company is a real estate investment trust (REIT). The Company's
primary business is the ownership and management of industrial buildings subject
to long term leases to credit tenants. The Company owns thirty-three
industrial properties and one shopping center with a total of 3,700,000 square
feet. Total real estate investments were $168,794,000 at March 31, 2004. These
properties are located in New Jersey, New York, Pennsylvania, North Carolina,
Mississippi, Massachusetts, Kansas, Iowa, Missouri, Illinois, Michigan,
Nebraska, Florida, Virginia, Ohio, Connecticut, Wisconsin, Maryland, and
Arizona. At March 31, 2004, the Company's weighted average lease expiration
term was six years and the Company's occupancy rate was 95%.
The Company expects to invest approximately $40,000,000 in 2004 in
acquisitions of real property. In February 2004, the Company purchased a
170,779 square foot industrial building in Tampa, Florida for approximately
$17,700,000. The building is 100% net leased to FedEx Ground Package Systems,
Inc. a subsidiary of Federal Express Corporation, for 15 years. The Company
obtained a mortgage of $12,800,000 at a rate of 6% and matures on March 1, 2019.
The Company has a concentration of Federal Express Corporation and
subsidiary (FDX) leased properties. At March 31, 2004, the percentage of FDX
leased square footage as a total of the Company's rental space is 33%. This is
a risk factor that shareholders should consider.
The Company also holds a portfolio of securities of other REITs of
$20,561,537 at March 31, 2004. The Company invests in REIT securities on margin
from time to time when the Company can achieve an adequate yield spread and when
suitable acquisitions of real property cannot be found. At March 31, 2004, the
Company's portfolio consisted of 68% preferred stocks, 20% common stocks and 12%
debentures. The REIT securities portfolio provides the Company with liquidity
and additional income until suitable acquisitions of real property are found.
The Company's revenue primarily consists of rental and reimbursement income
from the ownership of industrial rental property. Revenues also include
interest and dividend income and gain on sales of securities available for sale
and income from an equity investment. Total revenue increased 29% for the
three months ended March 31, 2004 as compared to the three months ended March
31, 2003 and 34% for the six months ended March 31, 2004 as compared to the six
months ended March 31, 2003. The increase was due to property acquisitions and
increased gain on securities available for sale.
Page 11
See PART I, Item 1 - Business in the Company's September 30, 2003 annual
report on Form 10-K for a more complete discussion of the economic and industry-
wide factors relevant to the Company and the opportunities and challenges, and
risks on which the Company is focused.
CHANGES IN RESULTS OF OPERATIONS
At March 31, 2004, the Company owned thirty-four properties with total
square footage of approximately 3,700,000 compared to thirty-two properties with
approximately 3,300,000 square feet at March 31, 2003. At March 31, 2004, The
Company's weighted average lease expiration term was six years and the Company's
occupancy rate was 95%.
Rental and occupancy charges increased $639,237 or 15% for the three months
ended March 31, 2004 as compared to the three months ended March 31, 2003.
Rental and occupancy charges increased $1,247,797 or 15% for the six months
ended March 31, 2004 as compared to the six months ended March 31, 2003. The
increase is related to rent and occupancy charges of the Kansas property
purchased in April 2003 and the Tampa property purchased in February 2004.
Real estate taxes increased $42,740 or 18% for the three months ended March
31, 2004 as compared to the three months ended March 31, 2003. Real estate
taxes increased $348,173 or 130% for the six months ended March 31, 2004 as
compared to the six months ended March 31, 2003. The increase in real estate
taxes is due to the full year of real estate taxes for the properties acquired
in Tolleson, Arizona, Ft. Myers, Florida, and Edwardsville, Kansas and the
acquisition of the Tampa, Florida property in February 2004.
Operating expenses increased $62,979 or 29% for the three months ended
March 31, 2004 as compared to the three months ended March 31, 2003. Operating
expenses increased $67,725 or 18% for the six months ended March 31, 2004 as
compared to the six months ended March 31, 2003. The increase is due to the
acquisitions noted above.
Professional fees decreased $46,928 or 96% for the three months ended March
31, 2004 as compared to the three months ended March 31, 2003. Professional
fees decreased $25,086 or 60% for the six months ended March 31, 2004 as
compared to the six months ended March 31, 2003. The decrease is due to
decreases in legal fees. During 2003, the Company incurred legal fees in
connection with its reincorporation from Delaware to Maryland.
Office and general expense increased $208,420 or 51% for the three months
ended March 31, 2004 as compared to the three months ended March 31, 2003.
Office and general expense increased $262,583 or 33% for the six months ended
March 31, 2004 as compared to March 31, 2003. The increase is due to higher
personnel costs related to increased number of employees and additional accruals
of $141,000 related to retirement benefits under the amended employment
agreement for the President and Chairman.
Depreciation expense increased $116,658 or 13% for the three months ended
March 31, 2004 as compared to the three months ended March 31, 2003.
Depreciation expense increased $247,539 or 15% for the six months ended March
31, 2004 as compared to the six months ended March 31, 2003. The increase is
due to the acquisitions noted above.
Page 12
CHANGES IN RESULTS OF OPERATIONS (CONT'D.)
Interest and dividend income increased $146,898 or 46% for the three months
ended March 31, 2004 as compared to the three months ended March 31, 2003.
Interest and dividend
income increased $286,002 or 46% for the six months ended March 31, 2004 as
compared to the six months ended March 31, 2003. The increase is due to a
higher average balance of securities available for sale during the six months
ended March 31, 2004 as compared to the six months ended March 31, 2003. The
average balance of securities available for sale was approximately $22,299,000
and $16,203,000 for the six months ended March 31, 2004 and 2003, respectively.
Gain on sale of securities increased $565,999 for the three months ended
March 31, 2004 as compared to the three months ended March 31, 2003. Gain on
sale of securities available for sale increased $1,661,259 for the six months
ended March 31, 2004 and compared to the six months ended March 31, 2003. The
Company sold more securities available for sale than in prior year due to the
unrealized gains existing in the portfolio in the fourth quarter of 2003 and the
first and second quarters of 2004. Management does not expect to recognize the
same level of realized gains on sale of securities in future quarters due to the
decrease in market value of REITs securities occurring after the second quarter
of 2004. Please refer to the Safe Harbor statement on page 16.
Interest expense remained relatively stable for the three and six months
ended March 31, 2004 as compared to the three and six months ended March 31,
2003. The increase in interest expense is due to the new acquisition in
Tampa, Florida in February 2004 which was partially offset by the decrease in
the interest rates on the Company's margin loan. The interest rate on the
Company's margin loan was 2.75% and 3.0% at March 31, 2004 and 2003,
respectively.
CHANGES IN FINANCIAL CONDITION
The Company generated net cash provided by operating activities of
$4,630,280 for the six months ended March 31, 2004 as compared to $4,877,171 for
the six months ended March 31, 2003.
Real estate investments increased $16,023,647 from September 30, 2003 to
March 31, 2004 due to the purchase of the Tampa, Florida industrial building for
approximately $17,694,000 and capital projects on existing properties of
$276,375 less depreciation for the six months ended March 31, 2004. The Company
intends to acquire additional properties of approximately $22,000,000 during the
remainder of fiscal year 2004. Please refer to the Safe Harbor statement on
page16.
Securities available for sale decreased $4,860,014 from September 30, 2003
to March 31, 2004 due mainly to sales of securities of $10,212,782 resulting in
a net gain on sale of securities available for sale of $2,002,871. This
decrease was partially offset by purchases of securities available for sale of
$4,018,605. The Company may purchase additional securities on margin from
time to time if the Company can earn an adequate yield spread on the securities.
Page 13
CHANGES IN FINANCIAL CONDITION, (CONT'D.)
During the three months ended March 31, 2004, the Company invested in
futures contracts of ten-year treasury notes with a notional amount of
$3,400,000, with the objective of reducing the exposure of the debt securities
portfolio to market rate fluctuations. Changes in the market value of these
derivatives have been recorded in interest and dividend income with
corresponding amounts recorded in other liabilities on the balance sheet. The
fair value of the derivatives at March 31, 2004 was a liability of $33,125.
Deferred financing costs, net of accumulated amortization and mortgages
payable increased $181,734 and $9,962,870, respectively, from September 30, 2003
to March 31, 2004. The increase in deferred financing costs is due to the loan
costs related to the purchase of the Tampa, Florida acquisition, less
amortization for the six months. The increase in the mortgages payable balance
is due to the mortgage related to the Tampa, Florida acquisition less mortgage
payments on existing properties.
Loans payable decreased $8,436,933 from September 30, 2003 to March 31,
2004. The decrease is due to payments on the Company's line of credit and net
payments on the Company's margin loans.
The Company raised $5,701,055 from the issuance of shares in its Dividend
Reinvestment and Stock Purchase Plan (the DRIP) during the six months ended
March 31, 2004.
Gross dividends paid for the six months ended March 31, 2004 was $4,537,720, of
which $1,726,644 was reinvested in the DRIP. On April 1, 2004, the Company
declared its regular quarterly dividend of $0.145 per share payable June 15,
2004 to shareholders of record May 17, 2004.
In January, 2004, the Company issued 500,000 shares of common stock in a
private placement to Teachers Insurance & Annuity Association-College Retirement
Equities Fund (TIAA-CREF) for cash of $4,050,000 or $8.10 per share. The
proceeds of the private placement will be used for working capital and will be
used to pay down the Company's outstanding credit facility and margin loan. The
balance of the line of credit was $1,361,198 at March 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $4,630,280 and $4,877,171 for
the six months ended March 31, 2004 and 2003, respectively. In addition, the
Company owns securities available for sale of $20,561,537 with margin loans of
$2,526,795 at March 31, 2004. These marketable securities provide the Company
with additional liquidity. At March 31, 2004, the
Company owns thirty-four properties of which twenty-eight carried mortgage loans
totaling $100,872,169. The Company has been raising capital through its DRIP
and private placements and investing in net leased industrial properties. The
Company believes that funds generated from operations, the DRIP, together with
the ability to finance and refinance its properties will provide sufficient
funds to adequately meet its obligations over the next several years. Please
refer to the Safe Harbor Statement on Page 16.
Page 14
LIQUIDITY AND CAPITAL RESOURCES, (CONT'D)
The Company seeks to invest in well-located, modern buildings leased to
credit worthy tenants on long-term leases. In management's opinion, newly built
facilities leased to The Federal Express Corporation (FDX) and its subsidiaries
meet this criteria. The Company has a concentration of FDX and FDX subsidiary
leased properties. With the purchase of the Tampa, Florida property in February
2004, the percentage of FDX leased square footage as a total of our rental space
is 33%. This is a risk factor that shareholders should consider. FDX is a
publicly-owned corporation and information on its financial business operations
is readily available to the Company's shareholders.
FUNDS FROM OPERATIONS
Funds from operations (FFO), is defined as net income, excluding gains (or
losses) from sales of depreciable assets, plus depreciation. FFO should be
considered as a supplemental measure of operating performance used by real
estate investment trusts (REITs). FFO excludes historical cost depreciation as
an expense and may facilitate the comparison of REITs which have different cost
bases. The items excluded from FFO are significant components in understanding
the Company's financial performance.
FFO (1) does not represent cash flow from operations as defined by
generally accepted accounting principles; (2) should not be considered as an
alternative to net income as a measure of operating performance or to cash flows
from operating, investing and financing activities; and (3) is not an
alternative to cash flow as a measure of liquidity. FFO, as calculated by the
Company, may not be comparable to similarly entitled measures reported by other
REITs.
The Company's FFO for the three and six months ended March 31, 2004 and
2003 is calculated as follows:
Three Months Six Months
3/31/04 3/31/03 3/31/04 3/31/03
Net Income $2,086,532 $1,142,129 $4,841,415 $2,580,557
Depreciation
Expense 984,988 868,330 1,946,728 1,699,189
_________ _________ _________ _________
FFO $3,071,520 $2,010,459 $6,788,143 $4,279,746
========= ========= ========= =========
The following are the cash flows provided (used) by operating investing and
financing activities for the six months ended March 31, 2004 and 2003:
2004 2003
Operating Activities $4,630,280 $4,877,171
Investing Activities (11,776,198) (23,616,662)
Financing Activities 6,869,269 18,460,284
Page 15
SAFE HARBOR STATEMENT
This Form 10-Q contains various "forward-looking statements" within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934,
and the Company intends that such forward-looking statements be subject to the
safe harbors created thereby. The words "may", "will", "expect", "believe",
"anticipate", "should", "estimate", and similar expressions identify forward-
looking statements. These forward-looking statements reflect the Company's
current views with respect to future events and finance performance, but are
based upon current assumptions regarding the Company's operations, future
results and prospects, and are subject to many uncertainties and factors
relating to the Company's operations and business environment which may cause
the actual results of the Company to be materially different from any future
results expressed or implied by such forward-looking statements.
Such factors include, but are not limited to, the following: (i) changes
in the general economic climate; (ii) increased competition in the geographic
areas in which the Company operates; (iii) changes in government laws and
regulations; and (iv) the ability of the Company to continue to identify,
negotiate and acquire properties on terms favorable to the Company. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements whether as a result of new information, future events, or otherwise.
CONTROLS AND PROCEDURES
The Company's President and Chief Executive Officer and Chief Financial
Officer, with the assistance of other members of the Company's management, have
evaluated the effectiveness of the Company's disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on such evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are effective.
The Company's President and Chief Executive Officer and Chief Financial
Officer have also concluded that there have not been any changes in the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Page 16
MONMOUTH REAL ESTATE INVESTMENT CORPORATION
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS - None
ITEM 2: CHANGES IN SECURITIES - None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS - None
ITEM 5: OTHER INFORMATION - None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS -
31.1
CERTIFICATION OF EUGENE W. LANDY, PRESIDENT AND CHIEF
EXECUTIVE OFFICER OF THE COMPANY, PURSUANT TO SECURITIES
EXCHANGE ACT RULE 13a-14(a).
31.2
CERTIFICATION OF ANNA T. CHEW, CHIEF FINANCIAL OFFICER OF
THE COMPANY, PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-
14(a).
32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002,
SIGNED BY EUGENE W. LANDY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER AND ANNA T. CHEW, CHIEF FINANCIAL OFFICER
(b) REPORTS ON FORM 8-K -
The Company filed the following reports on Form 8-K
during the quarter for which this report on Form 10-Q is
filed:
1) Form 8-K dated January 21, 2004 was filed to report
the private placement of 500,000 shares of common stock
with Teachers Insurance & Annuity Association - College
Retirement Equities Fund in exchange for $4,050,000 in
cash.
2) Form 8-K dated February 25, 2003 was filed to report
the purchase of an industrial building in Tampa,
Florida.
Page 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
MONMOUTH REAL ESTATE INVESTMENT CORPORATION
Date: May 12, 2004 By: /s/ Eugene W. Landy
Eugene W. Landy
President and Chief Executive Officer
Date: May 12, 2004 By: /s/ Anna T. Chew
Anna T. Chew
Chief Financial Officer
Page 18