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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 June 30, 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
June 30, 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 August 2, 2004 was
16,991,052.
Page 1
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY
FOR THE QUARTER ENDED JUNE 30, 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 11-16
Results of Operations and Analysis of
Financial Condition
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 JUNE 30, 2004 (UNAUDITED) AND SEPTEMBER 30, 2003
(Unaudited)
June 30, September 30,
2004 2003
___________ ___________
ASSETS
Real Estate Investments:
Land $ 30,426,213 $ 25,426,213
Buildings, Improvements and
Equipment,
Net of Accumulated Depreciation
Of $20,408,202 and $17,429,990,
respectively 137,360,738 127,344,122
___________ ___________
Total Real Estate Investments 167,786,951 152,770,335
___________ ___________
Cash and Cash Equivalents 1,140,067 1,070,556
Securities Available for Sale,
at Fair Value 21,456,491 25,421,551
Interest and Other Receivables 1,321,459 1,364,885
Prepaid Expenses 136,107 117,450
Investment in Hollister '97, L.L.C. 900,399 900,399
Financing Costs, Net of Accumulated
Amortization 1,330,883 1,193,157
Lease Costs, Net of Accumulated
Amortization 206,408 108,539
Other Assets 150,063 227,002
___________ ___________
TOTAL ASSETS $194,428,828 $183,173,874
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage Notes Payable $99,147,049 $ 90,909,299
Loans Payable 3,439,523 12,324,926
Other Liabilities 1,721,355 1,626,360
__________ ___________
Total Liabilities 104,307,927 104,860,585
___________ ___________
Shareholders' Equity:
Common Stock -$.01 Par Value,
20,000,000
Shares Authorized, 16,872,415 and
15,090,649 Shares Issued and
Outstanding, respectively 168,724 150,906
Excess Stock -$.01 Par Value,5,000,000
Shares Authorized, No Shares
Issued or Outstanding -0- -0-
Additional Paid-In Capital 90,416,595 76,657,545
Accumulated Other Comprehensive
Income 766,520 2,829,839
Loans to Officers, Directors & Key
Employees (1,230,938) (1,325,001)
Undistributed Income -0- -0-
___________ ___________
Total Shareholders' Equity 90,120,901 78,313,289
___________ ___________
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $194,428,828 $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 NINE MONTHS ENDED JUNE 30, 2004 AND 2003
Three Months Ended Nine Months Ended
6/30/04 6/30/03 6/30/04 6/30/03
_________ _________ __________ _________
INCOME:
Rental and Occupancy
Charges $5,453,966 $5,109,109 $15,819,187 $14,410,384
_________ _________ __________ _________
EXPENSES:
Management Fees 73,869 61,370 223,766 184,108
Real Estate Taxes 691,860 488,202 2,154,879 1,786,334
Operating Expenses 259,099 380,441 698,379 751,996
Professional Fees 8,945 223,390 25,593 265,124
Office and General
Expense 412,669 340,148 1,473,128 1,138,024
Depreciation 1,031,484 905,601 2,978,212 2,604,790
_________ _________ __________ _________
TOTAL EXPENSES 2,477,926 2,399,152 7,553,957 6,730,376
_________ _________ _________ _________
OTHER INCOME
(EXPENSE)
Interest and
Dividend Income 392,597 541,633 1,333,632 1,162,976
Gain on Securities
Available for
Sale
Transactions, 217,310 513,457 2,187,056 855,069
net
Income from Equity
Investment 27,500 27,500 82,500 82,500
Interest Expense (1,824,699) (1,761,636) (5,238,255) (5,169,085)
_________ __________ __________ __________
TOTAL OTHER INCOME
(EXPENSE) (1,187,292) (679,046) (1,635,067) (3,068,540)
_________ __________ __________ __________
NET INCOME $1,788,748 $2,030,911 $6,630,163 $4,611,468
========= ========== ========== ==========
NET INCOME - PER SHARE
Basic $ .11 $ .14 $ .42 $ .34
========== ========== ========== ==========
Diluted
$ .11 $ .14 $ .41 $ .34
========== ========== ========== ==========
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic 16,574,065 14,573,158 15,915,325 13,495,686
========== ========== ========== ==========
Diluted 16,625,483 14,640,413 16,002,184 13,516,920
========== ========== ========== ==========
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 NINE MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
___________ __________
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $6,630,163 $4,611,468
Noncash Items Included in Net Income:
Depreciation 2,978,212 2,604,790
Amortization 169,599 161,558
Stock Compensation Expense 13,954 4,551
Gain on Securities Available for
Sale Transactions (2,187,056) (855,069)
Changes In:
Interest and Other Receivables 43,426 308,365
Prepaid Expenses (18,657) (17,197)
Other Assets and Lease Costs (65,786) 972,127
Other Liabilities 94,995 (64,270)
___________ __________
NET CASH PROVIDED BY OPERATING
ACTIVITIES 7,658,850 7,726,323
___________ __________
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Real Estate (17,694,000) (26,058,241)
Capital Improvements (300,828) (369,477)
Purchase of Securities Available for
Sale (6,963,617) (11,177,485)
Proceeds from Sale of Securities
Available for Sale 11,052,414 4,967,237
___________ __________
NET CASH USED IN INVESTING ACTIVITIES (13,906,031) (32,637,966)
___________ __________
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Loans 15,301,633 14,170,125
Principal Payments on Loans (24,187,036) (14,597,477)
Proceeds from Mortgages 12,800,000 19,100,000
Principal Payments on Mortgages (4,562,250) (5,055,213)
Financing Costs on Debt (262,469) (333,631)
Payments on Loans to Officers,
Directors and Key Employees 94,063 -0-
Proceeds from Issuance of Common 10,743,290 15,169,378
Stock
Proceeds from Exercise of Stock
Options 723,755 47,625
Dividends Paid (4,334,294) (3,474,866)
___________ __________
NET CASH PROVIDED BY FINANCING
ACTIVITIES 6,316,692 25,025,941
___________ ___________
NET INCREASE IN CASH AND
CASH EQUIVALENTS 69,511 114,298
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 1,070,556 693,572
___________ __________
END OF PERIOD $1,140,067 $ 807,870
========== ==========
Unaudited
See Accompanying Notes to Consolidated Financial Statements
Page 5
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 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 June 30, 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 Nine Nine
Months Months Months Months
6/30/04 6/30/03 6/30/04 6/30/03
________ ________ ________ ________
Net Income Prior
to Compensation Expense $1,800,428 $2,033,186 $6,644,117 $4,616,019
Stock Based
Compensation Expense (11,680) (2,275) (13,954) (4,551)
__________ __________ __________ ___________
Net Income as Reported 1,788,748 2,030,911 6,630,163 4,611,468
Compensation expenses
if the fair value
method had been
applied -0- (9,750) -0- (29,250)
__________ _________ __________ _________
Net Income Pro forma $1,788,748 $2,021,161 $6,630,163 $4,582,218
========= ========= ========= =========
Net Income per share -
Basic as reported $ .11 $ .14 $ .42 $ .34
Diluted as reported $ .11 $ .14 $ .41 $ .34
Net Income per share -
Basic Pro forma $ .11 $ .14 $ .42 $ .34
Diluted Pro forma $ .11 $ .14 $ .41 $ .34
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 $13,954 have been recognized
in the nine months ended June 30, 2004, as the Company granted
stock-based employee compensation during the three months ended
June 30, 2004 and the three months ended March 31, 2003.
During the three months ended June 30, 2004, the following
stock options were granted:
Date of Number of Number of Option Expiration
Grant Employees Shares Price Date
________ _________ _________ _________ _________
5/20/2004 12 175,000 $7.41 5/20/2012
During the three months ended June 30, 2004, one participant
exercised his stock options and purchased 65,000 shares for a
total of $357,500. During the nine months ended June 30, 2004,
three participants exercised their stock options and purchased
116,500 shares for a total of $723,755. As of June 30, 2004,
there were options outstanding to purchase 559,000 shares and
560,000 shares were available for grant under the Plan.
The fair value of each option grant is estimated on the
date of grant using the Black Scholes option pricing model with
the following assumptions used for grants in the following years:
2004 2003
____ ____
Dividend yield 7.8% 8.0 %
Expected volatility 17.5% 13.3%
Risk-free interest rate 4.3% 3.4%
Expected lives (years) 8 8
The fair value of options granted during 2004 and 2003 was $0.40
and $0.14, respectively.
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.
Page 7
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.
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
51,418 shares and 67,255 shares for the three months ended June
30, 2004 and 2003, respectively, are included in the diluted
weighted average shares outstanding. Options in the amount of
86,859 shares and 21,234 shares are included for the nine months
ended June 30, 2004 and 2003, respectively, are included in the
diluted weighted average shares outstanding.
NOTE 3 - COMPREHENSIVE INCOME
The following table sets forth the components of the
Company's comprehensive income:
Three Months Nine Months
6/30/04 6/30/03 6/30/04 6/30/03
_________ _________ _________ _________
Net Income $1,788,748 $2,030,911 $6,630,163 $4,611,468
Change in
unrealized gain
(loss) on
securities
available for
sale (1,394,611) 1,019,250 (2,063,319) 6 79,749
__________ __________ __________ __________
Comprehensive
Income $ 394,137 $3,050,161 $4,566,844 $5,291,217
========== ========== ========== ==========
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
$17,694,000, 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% as of June 30, 2004.
Page 8
NOTE 5 - SECURITIES AVAILABLE FOR SALE AND DERIVATIVE INSTRUMENTS
During the nine months ended June 30, 2004, the Company sold
or redeemed $8,991,313 in securities available for sale,
recognizing a gain on sale of $2,061,101. The Company made
additional purchases of $6,963,617 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 June 30, 2004, the Company
invested in futures contracts of ten-year treasury notes with a
notional amount of $6,000,000 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 gain on securities available for sale
transactions, net with corresponding amounts recorded in other
liabilities on the balance sheet. The fair value of the
derivatives at June 30, 2004 was a liability of $119,063. During
June 2004, the Company recorded a realized gain of $245,018 on
settled futures contracts, which is included in gain on
securities available for sale transactions, net.
NOTE 6 - SHAREHOLDERS' EQUITY
In January 2004, the Company issued 500,000 shares in a
private placement for consideration of $4,050,000 or $8.10 per
share. The proceeds of the private placement were used for
working capital and to pay down the Company's outstanding credit
facility and margin loan. The Company incurred approximately
$67,993 in offering costs related to this private placement which
were recorded as a reduction to Additional Paid-In Capital.
For the nine months ended June 30, 2004, the Company
received $9,377,493 from the Dividend Reinvestment and Stock
Purchase Plan (DRIP). This amount includes dividend
reinvestments of $2,616,210. There were 1,165,266 shares issued
under the Plan, resulting in 16,872,415 shares outstanding.
On June 15, 2004, the Company paid $2,403,361 as a dividend
of $.145 per share to shareholders of record May 17, 2004. Total
dividends paid for the nine months ended June 30, 2004 was
$6,950,504. On July 1, 2004, the Company declared a dividend of
$.145 per share to be paid on September 15, 2004 to shareholders
of record August 16, 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 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
Page 9
in the quarter ended March 31, 2004. Total accrued liabilities
related to this contract were $589,786 at June 30, 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 nine months ended June 30, 2004 and
2003 for interest was $5,558,088 and $5,119,230, respectively.
During the nine months ended June 30, 2004 and 2003, the
Company had dividend reinvestments of $2,616,210 and $2,352,386,
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 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 3,734,000 square feet.
Total real estate investments were $167,786,951 at June 30, 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 June 30,
2004, the Company's weighted average lease expiration term was
5.9 years and the Company's occupancy rate was 95%.
The Company expects to invest approximately $40,000,000 in
calendar 2004 in acquisitions of real property. In February
2004, the Company purchased a 170,779 square foot industrial
building in Tampa, Florida for approximately $17,694,000. 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 June 30,
2004, the percentage of FDX leased square footage as a total of
the Company's rental space is 33%, with 14% leased with Federal
Express Corporation and 19% with Federal Express subsidiaries.
This is a risk factor that shareholders should consider.
The Company also holds a portfolio of securities of other
REITs of $21,456,491 at June 30, 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 June 30, 2004, the
Company's portfolio consisted of 63% preferred stocks, 25% 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 7% for the three
months ended June 30, 2004 as compared to the three months ended
June 30, 2003 and increased 10% for the nine months ended June
30, 2004 as compared to the nine months ended June 30, 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 June 30, 2004, the Company owned thirty-four properties
with total square footage of approximately 3,734,000 compared to
thirty-two properties with approximately 3,479,000 square feet at
June 30, 2003. At June 30, 2004, the Company's weighted average
lease expiration term was 5.9 years and the Company's occupancy
rate was 95%.
Rental and occupancy charges increased $344,857 or 7% for
the three months ended June 30, 2004 as compared to the three
months ended June 30, 2003. Rental and occupancy charges
increased $1,408,803 or 10 % for the nine months ended June 30,
2004 as compared to the nine months ended June 30, 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 $ 203,658 or 42% for the three
months ended June 30, 2004 as compared to the three months ended
June 20, 2003. Real estate taxes increased $ 368,545 or 21% for
the nine months ended June 30, 2004 as compared to the nine
months ended June 30, 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 decreased $ 121,342 or 32% for the three
months ended June 30, 2004 as compared to the three months ended
June 30, 2003. Operating expenses decreased
$53,617 or 7% for the nine months ended June 30, 2004 as compared
to the nine months ended June 30, 2003. The decrease is due
primarily to less repairs and maintenance costs incurred in 2004
as compared to 2003.
Professional fees decreased $214,445 or 96 % for the three
months ended June 30, 2004 as compared to the three months ended
June 30, 2003. Professional fees decreased $ 239,531 or 90% for
the nine months ended June 30, 2004 as compared to the nine
months ended June 30, 2003. The decrease is due primarily to
decreases in legal fees. During 2003, the Company incurred
increased legal fees in connection with its reincorporation from
Delaware to Maryland.
Office and general expense increased $72,521 or 21% for the
three months ended June 30, 2004 as compared to the three months
ended June 30, 2003. Office and general expense increased
$335,104 or 29% for the nine months ended June 30, 2004 as
compared to the nine months ended June 30, 2003. The increase in
the three months results is due primarily to higher personnel
costs related to increased number of employees. Additional
employees as well as additional accruals of $141,000 related to
retirement benefits under the amended employment agreement for
the President and Chairman, resulted in the nine month increase.
Depreciation expense increased $125,883 or 14% for the three
months ended June 30, 2004 as compared to the three months ended
June 30, 2003. Depreciation expense increased $373,422 or 14%
for the nine months ended June 30, 2004 as compared to the nine
months ended June 30, 2003. The increase is due to the
acquisitions noted above.
Page 12
CHANGES IN RESULTS OF OPERATIONS (CONT'D.)
Interest and dividend income decreased $149,036 or 28% for
the three months ended June 30, 2004 as compared to the three
months ended June 30, 2003. Interest and dividend
income increased $170,656 or 15% for the nine months ended June
30, 2004 as compared to the nine months ended June 30, 2003. The
decrease for the three months is due primarily to a lower average
balance of securities for the quarter ended June 30, 2004
(approximately $20,420,000) as compared to the quarter ended June
30, 2003 (approximately $21,825,000). The increase for the nine
months is due primarily to a higher average balance of securities
available for sale during the nine months ended June 30, 2004 as
compared to the nine months ended June 30, 2003. The average
balance of securities available for sale was approximately
$21,722,000 and $18,110,000 for the nine months ended June 30,
2004 and 2003, respectively.
Gain on securities available for sales transactions
decreased $296,147 for the three months ended June 30, 2004 as
compared to the three months ended June 30, 2003. Gain on sale
of securities available for sale increased $1,331,987 for the
nine months ended June 30, 2004 as compared to the nine months
ended June 30, 2003. This increase was the result of the
Company's decision to take advantage of the rise in price of the
securities portfolio in the fourth quarter of calendar 2003 and
the first quarter of calendar 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 calendar quarter
of 2004. Please refer to the Safe Harbor statement on page 16.
Interest expense increased slightly for the three and nine
months ended June 30, 2004 as compared to the three and nine
months ended June 30, 2003. The increase in interest expense is
due primarily to the new acquisition in Tampa, Florida in
February 2004 was partially offset by a decrease in margin loan
interest expenses due to a decrease in the margin loan balance in
the current year as compared to prior year.
CHANGES IN FINANCIAL CONDITION
The Company generated net cash from operating activities of
$7,658,850 for the nine months ended June 30, 2004 as compared to
$7,726,323 for the nine months ended June 30, 2003.
Real estate investments increased $15,016,616 from September
30, 2003 to June 30, 2004 due to the purchase of the Tampa,
Florida industrial building for approximately $17,694,000 and
capital projects on existing properties of $300,828 less
depreciation for the nine months ended June 30, 2004. The
Company intends to acquire additional properties of approximately
$22,000,000 during the remainder of 2004. Please refer to the
Safe Harbor statement on page 16.
Securities available for sale decreased $3,965,060 from September
30, 2003 to June 30, 2004 due mainly to sales of securities of
$8,991,313 resulting in a net gain on securities available for
sale of $2,061,101. This decrease was partially offset by
purchases of securities available for sale of $6,963,617. 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 June 30, 2004, the Company
invested in futures contracts of ten-year treasury notes with a
notional amount of $6,000,000, 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 gain on securities available for sale
transactions, net with corresponding amounts recorded in other
liabilities on the balance sheet. The fair value of the
derivatives at June 30, 2004 was a liability of $119,063. During
June 2004, the Company realized a gain of $245,018 on settled
futures contracts, which is included in gain on sale of
securities available for sale, net.
Deferred financing costs, net of accumulated amortization
and mortgages payable increased $137,726 and $8,237,750,
respectively, from September 30, 2003 to June 30, 2004. The
increase in deferred financing costs is due to the loan costs
related to the purchase of the Tampa, Florida acquisition,
partially offset by amortization for the nine 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 $8,885,403 from September 30, 2003
to June 30, 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 $9,377,493 from the issuance of shares in
its Dividend Reinvestment and Stock Purchase Plan (the DRIP)
during the nine months ended June 30, 2004.
Gross dividends paid for the nine months ended June 30, 2004 was
$6,950,504, of which $2,616,210 was reinvested in the DRIP. On
July 1, 2004, the Company declared its regular quarterly dividend
of $0.145 per share payable September 15, 2004 to shareholders of
record August 16, 2004.
In January, 2004, the Company issued 500,000 shares of
common stock in a private placement for cash of $3,982,007 (net
of $67,993 in offering costs) or $8.10 per share. The proceeds
of the private placement was used for working capital and to pay
down the Company's outstanding credit facility and margin loan.
The balance of the line of credit was $1,361,198 at June 30,
2004.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $7,658,850 and
$7,726,323 for the nine months ended June 30, 2004 and 2003,
respectively. In addition, the Company owns securities available
for sale of $21,456,491 with margin loans of $2,078,354 at June
30, 2004. These marketable securities provide the Company with
additional liquidity. At June 30, 2004, the
Company owns thirty-four properties of which twenty-seven carried
mortgage loans totaling $99,147,049. 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%, with 14%
leased with Federal Express Corporation and 19% with Federal
Express subsidiaries. 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 basis. 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 nine months ended June
30, 2004 and 2003 is calculated as follows:
Three Months Nine Months
6/30/04 6/30/03 6/30/04 6/30/03
_________ _________ _________ _________
Net Income $1,788,748 $2,030,911 $6,630,163 $4,611,468
_________ _________ _________ _________
Depreciation
Expense 1,031,484 905,601 2,978,212 2,604,790
FFO $2,820,232 $2,936,512 $9,608,375 $7,216,258
========== ========== ========== ==========
The following are the cash flows provided (used) by
operating, investing and financing activities for the nine months
ended June 30, 2004 and 2003:
2004 2003
_________ _________
Operating Activities $ 7,658,850 $ 7,726,323
Investing Activities (13,906,031) (32,637,966)
Financing Activities 6,316,692 25,025,941
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 during the quarter ended June 30, 2004 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, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES - None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on April 29,
2004 to elect members of the Board of Directors and to
approve the selection of Independent Auditors.
Proxies were solicited pursuant to Regulation 14 under
the Securities and Exchange Act of 1934.
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 - None
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 August 11, 2004 By: /s/ Eugene W. Landy
Eugene W. Landy
President and Chief Executive Oficer
Date: August 11, 2004 By: /s/ Anna T. Chew
Anna T. Chew
Chief Financial Officer
Page 18