Earnings Call Transcript - MNR Q3 2020

Operator, Operator

Good morning, and welcome to the Monmouth Real Estate Investment Corporation's Third Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. It is now my pleasure to introduce your host, Ms. Becky Coleridge, Vice President of Investor Relations. Thank you, Ms. Coleridge, you may begin.

Becky Coleridge, Vice President of Investor Relations

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 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 third quarter 2020 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'd like to introduce management with us today. Eugene Landy, Chairman; Michael Landy, President and Chief Executive Officer; Kevin Miller, Chief Financial Officer; and Richard Molke, Vice President of Asset Management. It is now my pleasure to turn the call over to Monmouth's President and Chief Executive Officer, Michael Landy.

Michael Landy, President and CEO

Thanks Becky. Good morning, everyone, and thank you for joining us. Monmouth's fiscal third quarter was a very productive one and I am happy to report our results. During the quarter, we acquired two buildings comprising 356,000 square feet for $60.5 million. These assets are located in the Greensboro, North Carolina and Salt Lake City, Utah MSAs. Both of these brand new build-to-suit properties are leased for 15 years to FedEx. We financed these acquisitions with two 15-year fully amortizing mortgage loans totaling $38.7 million at a weighted average interest rate of 3.12%. This brings our total acquisitions thus far in fiscal 2020 to $160 million, comprising 1.1 million square feet. We have generated 5% growth in our gross leasable area this year and a 7% increase over the comparable prior year period. We also grew our acquisition pipeline during the quarter to a current total of $218.7 million. Our pipeline consists of four new buildings all leased to investment grade tenants totaling 1.5 million square feet, currently under construction. These properties have a weighted average lease term of 16.8 years. Approximately 49% of our 1.5 million square foot pipeline is leased to FedEx Ground for 15 years, 43% is leased to Home Depot for 20 years, and the remaining 8% is leased to Amazon for 10 years. The 120,000 square foot Amazon acquisition is expected to close before the end of this fiscal year with the remaining 1.4 million square feet leased to FedEx and Home Depot expected to close during fiscal 2021. We are currently working on additional deals and anticipate further growing our acquisition pipeline in the ensuing quarters. Tenant Rent Collections for Monmouth during the COVID-19 pandemic has been excellent. Broken down monthly they are as follows; for March, 100%; for April, 99.6%; for May, 97.9%; for June, 99.4%; and for July, 99.6%. For the month of August, we expect total rent collections to be consistent with July at 99.6%. Our resilient occupancy and rent collection results during these challenging times highlight the mission-critical nature of our portfolio and underscore the essential need for our tenants' operations. To date, we have agreed to a total of $438,000 in deferred rent, which represents just 31 basis points of our total annual base rent. We are also happy to report that we are now in the early stages of several parking expansion projects for our largest tenant FedEx. These expansions will result in increased rents and increased lease terms. While it is still early in the process, Rich will have more to share with you on the scope and timing of these parking expansion projects. Our portfolio is nearly fully occupied with the current occupancy rate of 99.4%. This rate was unchanged versus the prior quarter and represents a 50 basis point increase over the same prior year period. Monmouth's portfolio is now in its sixth consecutive year of being over 98% occupied. Our weighted-average lease term at quarter-end was 7.2 years, representing our 7th consecutive year of having a weighted average lease term in excess of seven years. Our gross leasable area now comprises 23.3 million square feet, consisting of 118 properties, geographically diversified across 31 states with strategic concentrations around the Gulf, Sunbelt, and East Coast port regions. Approximately 81% of our rental revenue is generated from investment grade tenants with the remaining 19% generated from strong unrated companies. Our weighted-average building age is 9.5 years, which represents one of the youngest portfolios in the industrial REIT sector. With regards to the overall market outlook, demand for industrial real estate remains robust as the COVID-19 pandemic has created a surge in online shopping. E-commerce sales, as a percentage of total retail sales, have nearly doubled during the quarter from 15% to 27%. While E-commerce should continue to be the biggest catalyst driving industrial space demand, the COVID-19 pandemic has also brought about a reconfiguration of supply chains, which should translate into increased demand for U.S. industrial real estate. There is a current trend towards de-globalization and less reliance on China that should result in increased domestic manufacturing. Additionally, following a multi-decade move towards leaner inventories and just-in-time supply chain strategies, inventory to sales ratios are trending back up due to the pandemic as companies now seek to keep more inventory on hand in order to guard against supply chain disruptions. This trend should also result in increased demand for our property type. As per Cushman & Wakefield's second quarter industrial report, net absorption for the quarter came in at 44 million square feet, bringing the mid-year total to just under 90 million square feet of positive net absorption. The national average vacancy rate increased by 40 basis points during the quarter to 5.3%, most of which is being driven by smaller tenants in older buildings. U.S. industrial asking rents are up 2.1% year-over-year to $6.58 per square foot at quarter-end. Currently, there is 314 million square feet of industrial space under construction, of which approximately two-thirds is speculative space and one-third is built to suit. And now, let me turn it over to Rich, so he can provide you with more property-level detail as well as our progress on the leasing front.

Richard Molke, Vice President of Asset Management

Thank you, Mike. With respect to our property portfolio, as stated, our occupancy rate stood at 99.4% at quarter-end, representing a 50 basis point increase from a year ago and unchanged sequentially. Our weighted average lease maturity decreased to 7.2 years compared to 7.8 years one year ago. Our large acquisition pipeline has a weighted-average lease term of 16.8 years. So that coupled with our multiple expansion projects will drive our weighted-average lease term higher. Our weighted average rent per square foot increased by 2% to $6.35 as compared to $6.23 a year ago. Our weighted-average rent is 3.5% below the national average asking rent of $6.58 per square foot, representing good embedded rent growth potential. From a leasing standpoint, as previously reported in fiscal 2020, five leases representing approximately 410,000 square feet or 2% of our gross leasable area were scheduled to expire. Four of the five expiring leases representing 355,000 square feet or 87% of the expiring gross leasable area have been renewed. These four leases result in a weighted average lease term of 4.2 years and a 12% increase in rental rates on a GAAP basis and a 4.4% increase on a cash basis. The one property that did not renew is a 55,000 square foot building in the Hartford, Connecticut MSA. This property has been vacant since March of this year. This small property is currently being marketed for sale or a lease and the interest thus far has been good. Our only other vacancy consists of an 81,000 square foot building at our industrial park in Monaca, PA. This property is situated in close proximity to a giant $7 billion cracker plant currently being built by Royal Dutch Shell. Upon completion, we expect the cracker plant will drive increased demand for our industrial park. With regards to our fiscal 2021 lease expirations; next year, we have 10 properties totaling 1.2 million square feet whose leases come due. There are currently no move-outs that we are aware of and discussions regarding lease renewals are proceeding favorably. With regards to the FedEx Ground parking expansion projects, we currently have five separate parking expansions underway. These five projects are expected to cost approximately $11 million. From a timing standpoint, we hope to have these five projects completed by November. These parking expansion projects will enable us to capture additional rents while lengthening the terms of our leases. We are also in discussions to expand the parking at approximately 12 additional locations, bringing the total expansion projects to 17. We expect to have more details to share with you in the ensuing quarters.

Kevin Miller, Chief Financial Officer

Thank you, Rich. Funds from operations, or FFO, which excludes unrealized securities gains or losses were $0.20 per diluted share for the recent quarter, representing a $0.01 decrease or 4.8% over the prior year period. Adjusted funds from operations, or AFFO, which exclude securities gains or losses were $0.20 per diluted share for the recent quarter, also representing a $0.01 decrease or 4.8% over the prior year period. The quarterly year-over-year $0.01 decline in FFO and AFFO is primarily attributable to a $1.9 million increase in preferred dividend expense as a result of an increase in preferred shares outstanding as well as a $1.3 million decrease in dividend income from our securities portfolio, partially offset by a $2.5 million increase in net operating income. Given our two recent acquisitions purchased in late May totaling $60.5 million, which will generate their full rental revenue run rate next quarter, coupled with our $218.7 million acquisition pipeline, our ongoing and future property expansions, and our 50 basis point increase in occupancy over last year's quarter, we expect to meaningfully grow our per-share earnings going forward. In addition, the dividend income in our securities portfolio was down by $1.3 million or 36% this quarter versus the prior year period as many REITs have either reduced or suspended their dividends in order to deal with the fallout from the COVID-related shutdowns. We continue to monitor our securities portfolio closely as the COVID pandemic continues to unfold. Rental and reimbursement revenues for the quarter were $41.8 million compared to $38.5 million, representing an increase of 8% from the prior year. Net operating income increased $2.5 million to $35.2 million for the quarter, also reflecting an 8% increase from the comparable period a year ago. This increase was due to the additional income related to one property purchased since the prior year period, during fiscal 2019, and the four properties purchased during the first three quarters of fiscal 2020. Net income attributable to common shareholders was $26.9 million for the third quarter as compared to a net loss attributable to common shareholders of $3.1 million in the previous year's third quarter, representing a $30 million increase. This increase in our net income was primarily driven by a $31.2 million variance from an unrealized loss on our securities portfolio of $11.6 million during the prior year quarter to an unrealized gain on our securities portfolio of $19.6 million during the current year quarter. As you know, a recent accounting change requires that our securities portfolio is marked to market quarterly, and that the changes are reflected in our net income. The securities markets have seen heightened volatility this year and that is what is driving the big increase in our net income this quarter. With regards to our same property metrics for the current three-month period, our same property NOI increased by 20 basis points on a GAAP basis and by 170 basis points on a cash basis. These increases were primarily due to a 50 basis point increase in our same-property occupancy from 98.9% in the prior year period to 99.4% currently. As mentioned, our acquisition pipeline now contains 1.5 million square feet, representing $218.7 million, consisting of four property acquisitions, leased on an average for 16.8 years to Amazon, FedEx, and Home Depot. These acquisitions are scheduled to close during fiscal 2020 and 2021. To take advantage of today's attractive interest rate environment, we have already locked in financing for three of our four acquisitions. The financing terms for these acquisitions are some of the most favorable we have ever achieved. The combined terms of these three financings are as follows: $113.8 million in proceeds, representing 62% of the total cost with the weighted average interest rate of 3.1%. These financings consist of two 15-year and one 17-year self-amortizing loans with a weighted average maturity of 16 years. We expect these acquisitions to generate a levered return of approximately 13%. We have continued to build up our unencumbered asset pool. Thus far, during fiscal 2020, we have fully repaid two mortgage loans with fixed interest rates ranging from 5.5% to 5.54% associated with these properties. These newly unencumbered properties generate over $1.1 million in net operating income annually. Our capital structure at quarter-end consists of approximately $884 million in debt, of which $804 million was property-level fixed-rate mortgage debt with the weighted-average interest rate of 4% as compared to 4.03% in the prior year period. Our weighted average debt maturity on our fixed-rate mortgage debt is 11.2 years, representing one of the longest debt maturity schedules in the REIT sector. Our loans payable consist of a $75 million term loan and a $5 million margin loan. The $75 million term loan has a corresponding interest rate swap agreement to fix LIBOR at an all-in interest rate of 2.92%. The margin line rate of interest on our securities portfolio is currently 0.75%. The $5 million in margin debt outstanding was paid off subsequent to the quarter end. We also had a total of $434 million in perpetual preferred equity at quarter end. Quarter end, our total debt plus preferred equity combined with an equity market capitalization of approximately $1.4 billion results in total market capitalization of approximately $2.7 billion. From a credit standpoint, we continue to be conservatively capitalized with our net debt to total market capitalization at 32% and our net debt plus preferred equity to total market capitalization at 48% at quarter end. For the three months ended June 30th, 2020, our fixed charge coverage was 2.3 times, our net debt to adjusted EBITDA was 6.2 times. From a liquidity standpoint, we ended the quarter with $12.1 million in cash and cash equivalents. In addition, we held $118.9 million in marketable REIT securities at quarter end, representing 5.4% of total undepreciated assets. Additionally, we had $225 million available from our credit facility as of the quarter-end as well as an additional $100 million potentially available from the accordion feature. And now, let me turn it back to Michael before we open up the call for questions.

Michael Landy, President and CEO

Thanks, Kevin. Monmouth went into the global pandemic very well positioned with a strong balance sheet, a high-quality tenant roster, nearly full occupancy, and a well-covered dividend. As a result of the government shutdowns, e-commerce sales surged dramatically during the quarter and the consumer is now more reliant than ever on the Internet for shopping. This has created tremendous demand for many of our properties with operations increasing to seven-day work weeks and multiple property expansions scheduled in order to accommodate this strong demand. As Kevin mentioned, the COVID-19 pandemic has had a materially negative impact on certain REIT sectors, particularly in retail, and that is reflected in the 36% reduction in the dividend income generated during the recent quarter. While it is impossible to know how long the current situation will last, we expect that the diminishment in cash flow from our securities portfolio will be largely offset by continuing improvements in our core industrial portfolio. The performance of our best-in-class industrial property portfolio during this downturn has been exceptional, and we expect that to continue to be the case going forward. We'd now be happy to take your questions.

Operator, Operator

We will now begin the question-and-answer session. And our first question will come from Frank Lee of BMO. Please go ahead.

Frank Lee, Analyst

Good morning. Hi, Mike. Can you talk about what you're seeing in terms of competition in the acquisitions market now versus pre-COVID? You mentioned on the last call that the buyer pool has substantially diminished, and just wondering if buyers have returned now and are you seeing any new entrants into the buyer pool as well?

Michael Landy, President and CEO

Yes, that's correct. Things are very fluid out there. And while last quarter, the buyer pool did diminish, it's come back and the lanes have narrowed. There is a lot of capital out there allocated for commercial real estate and it's reluctant to invest in office, retail, and hotels, and it's very interested in embracing industrial. Clearly, the spotlight has been on industrial and continues to be on industrial. But I guess what's changed post-pandemic is, it's more discriminating capital whereas prior to the pandemic, cap rates really compressed regardless of building age or credit quality of the tenancy. And today, what we've always done, single-tenant net leased properties on long-term leases to investment grade tenants is exactly the sort of assets everybody is looking for. So while we were hoping the trend would continue that we'd be able to get more favorable spreads, interest rates post-pandemic are lower than ever before and cap rates are actually lower than pre-pandemic. So for the product we do, the long-term leases to investment grade tenants. So the buyer pool has actually increased as of now.

Frank Lee, Analyst

Okay, thanks. And then, second question I have, as you're working on your 2021 expirations now, can you talk a little bit more about how those conversations are going? Are tenants continuing to move forward or are some considering delaying some decision-making? And then also, it looks like the expiring rents are lower than the rents that expired in 2020, are you expecting a similar roll-up on rents or potentially higher than what you achieved on your 2020 renewals? Thanks.

Michael Landy, President and CEO

Very good. Frank, I'll turn it over to Rich on that. But before I do, let me just mention that our tenants have a weighted average maturity of over seven years, with a decrease from 7.8 years last year to 7.2 years now. However, as Rich pointed out, we have a pipeline that features a weighted average lease term of 16.8 years, along with multiple expansion projects that will extend the leases, particularly with Monmouth, ensuring cash flow beyond 7.2 years. Our retention rate has been very high, primarily driven by our largest tenant, FedEx, and all our tenants are investment grade. The leases tend to renew; while FedEx has occasionally moved out, they have maintained a long-term presence. They are still occupying the first building we purchased with them in 1993. With Monmouth, you can be assured that when companies report weighted average lease terms, they are reliable, and you should expect to see numbers that exceed what we report, with leases renewing and properties expanding, which leads to lease extensions. That said, Rich, do you have any insights on the rents for 2021 compared to 2020 and any other points Frank was asking about?

Richard Molke, Vice President of Asset Management

So, of the 10 buildings, I'd say a lot of those discussions have been in earnest. Now, it took a little while for them to come out of the woodwork during the pandemic, I would say it's still a landlord’s market, so you could expect that these roll-ups are going to happen and we don't have any known move-outs at this time. So shooting for a 100% retention and that's how '21 is shaping up today.

Michael Landy, President and CEO

If I could just add to that. You know they slice and dice real estate rents per square foot. And so, Rich reported the national average rent is $6.58 and our in-place rents are below that, sort of 3.5% I think was the number you quoted of embedded rent growth potential. But not everything is equal and our real estate has way more acreage. Our pipeline is over an eight-to-one land-to-building ratio and that's our acquisition pipeline. Our in-place portfolio, the FedEx properties have a six-to-one land-to-building ratio and the portfolio as a whole has five-to-one. So per square foot, if our rents are lower than market and our coverage is greater than market, our rents are even that much lower than markets. So the potential to roll our lease is higher. It's even greater than comparing things is through all else is equal because they have to pay rent for this additional parking and this additional land.

Frank Lee, Analyst

Okay, great. Thank you.

Michael Landy, President and CEO

You're welcome.

Operator, Operator

Our next question comes from Rob Stevenson of Janney. Please go ahead.

Rob Stevenson, Analyst

Good morning. Mike, I wanted to follow up on the acquisition question. You mentioned the current pricing and cap rates compared to a year or two ago. Is the increased interest leading to a noticeable decrease in cap rates and an increase in pricing, or is it just marginal? How are the yields on your core assets like FedEx and Amazon trending at this time?

Michael Landy, President and CEO

Yes, as Kevin mentioned, the financing we just locked in is some of the most favorable financing terms we've ever achieved. We are locking in around 3% and in some cases below 15-year fully amortizing loans, and industrial and e-commerce and digitally aligned properties are in favor. So the acquisitions we closed on this quarter, the cap rates were in the low 6s because they were consummated deals over 12 months ago and you get a premium for forward commitments on new build-to-suit product. But today, those cap rates would be well inside 5.5. So that should give you an indication of how demonstrably things have moved.

Rob Stevenson, Analyst

Okay. And so that 5.5 is roughly where the incremental deals that you signed this quarter are going to wind up falling out 12 months from now or later on this year when you close them?

Michael Landy, President and CEO

No, I didn't say all that because they're not on the spot. They're not income producing at the moment. And if they were, I would agree with that statement, but because they're new constructions and some of them aren't coming on until 12 months from now, there is a lot of uncertainty between now and then. So you get a yield premium for taking on that uncertainty. So, to answer your question, yes, our pipeline does not have a weighted average cap rate with a six in front of it, but, no, it is not sub 5.5.

Rob Stevenson, Analyst

Are there any new large-scale FedEx facilities being developed in your area that could potentially replace your facility when the lease expires?

Michael Landy, President and CEO

Not that I know of, but they are, you know, expanding the ground network. So there will be big FedEx ground distribution centers going up with 15-year lease terms and we hope to acquire those that are in great locations.

Rob Stevenson, Analyst

Okay. And then Kevin, what's your incremental appetite for preferred stock here given where the 10-year yield is and where your common stock is? And can you remind us what the upper limit for preferred is as a percentage of your capital stack?

Kevin Miller, Chief Financial Officer

We believe that preferred stock is perpetual equity and doesn't come due. Even though the current rate is 6.125%, which may seem high in today's market, we prefer not to let it rise significantly beyond this. Currently, it’s around $430 million and we would consider reaching a maximum of about $500 million. It is callable in a year, around September 2021, and we will evaluate the rates at that time, which presents a significant opportunity for potential cost savings depending on the rate situation then.

Michael Landy, President and CEO

So, if I could add to Kevin's comments, it's currently 16% of our capital stack. As Kevin noted, the threshold is around 20% to 25%. However, we are long-term investors. We acquire assets with the intention of holding them indefinitely, and perpetual preferred equity provides us with permanent capital since the principal payment is never due and never matures. Building a portfolio with long-term capital is, in our view, very beneficial. Although it is more expensive than shorter-term capital, it is permanent, and the principal never matures. Additionally, the debt capital on our balance sheet has a long-term maturity extending beyond 11 years. Regarding debt ratios, some people maintain a rigid belief that a 6-to-1 net debt-to-EBITDA ratio signifies higher leverage than a 4-to-1 ratio, suggesting they are equally risky. However, that is not the case, as we have long-term leases with investment-grade tenants. The pandemic was an unforeseen event. This isn't merely a theoretical discussion; we are currently experiencing a real-life situation. We have nearly full occupancy and 100% rent collection. Our structure allows us to manage higher leverage effectively. If you have short-term leases with smaller businesses, a 4-to-1 ratio may appear to offer lower leverage and a more secure balance sheet. But what is the advantage of a 4-to-1 ratio if you aren't maintaining occupancy levels and aren't collecting rent? In that case, a 4-to-1 ratio could be less secure than a 6-to-1 ratio. Therefore, not all situations are comparable. We demonstrated this during the financial crisis, and the same argument applies to dividend payout ratios. Many firms with what seemed like a safe margin have temporarily suspended their dividends, going down to zero. In contrast, Monmouth's payout ratio is around 80% to 85%, which is very secure, and we believe our dividend will remain strong.

Rob Stevenson, Analyst

My last question is a follow-up on that. For companies that have either significantly reduced their dividends or suspended them entirely, how much tolerance do you have for holding those stocks that aren't generating income and are unlikely to do so in the near future? Are those investments considered for purchasing as income-producing assets? How are you approaching the buy, sell, or hold decisions for those stocks now that the dividends have been affected and are expected to remain that way for the foreseeable future?

Michael Landy, President and CEO

Well, it reminds me of 2008, 2009, we went through it. The securities portfolio is a small percentage of the overall company, and so, while it's the best of times for our core business and the worst of times for our securities portfolio, it's not a tale of two cities. It's a small factor and to sell the securities now when REITs are required to pay out taxable income and there is a lot of progress being made on both the vaccine front and the therapeutic front. So, we won't be in this lockdown environment forever. And companies will be required to reinstate dividends. So there is really no need. We've seen that our earnings are stable without the income from the securities portfolio. And in time, the income will come back.

Rob Stevenson, Analyst

Okay, thanks guys. Appreciate it.

Operator, Operator

Our next question comes from Sarah Tan of J.P. Morgan. Please go ahead.

Sarah Tan, Analyst

Hi, this is Sarah Tan filling in for Mike Mueller. I have a question regarding the securities portfolio run rate. Can you discuss the run rate that we should incorporate into our model for the upcoming quarters?

Michael Landy, President and CEO

Sure. I think a conservative run rate would be $2 million a quarter, $8 million annually and hopefully it will grow from there as companies need to reinstate their dividends, but a good conservative run rate would be $2 million a quarter.

Sarah Tan, Analyst

Okay, thank you.

Michael Landy, President and CEO

You're welcome.

Operator, Operator

Our next question comes from Michael Carroll of RBC Capital Markets. Please go ahead.

Michael Carroll, Analyst

Yes, thanks. Mike, can you explain how you plan to fund your near-term investments? I know you have $220 million secured, which is a significant amount. If you're planning to maintain the preferred shares at their current levels without much addition, do you need to issue common equity to finance some of those deals? What's the plan in that regard?

Michael Landy, President and CEO

The plan primarily involves preferred equity. We have secured debt financing for three of the four deals, as Kevin mentioned, and this, along with preferred equity, will be our funding source. We established a common ATM in February, but the current pricing is not conducive for execution. Historically, Monmouth Real Estate has traded at 1.5 times the risk-free Treasury note rate. Two years ago, the Treasury rate was around 300 basis points, and we were trading at 1.5 times that rate. A year ago, it was 2%. Today, however, the Treasury note sits at 50 basis points, creating a spread that is over nine times greater. Our dividend is equivalent to nine years of Treasury income and one year of our dividend. Consequently, this is not an opportune time to tap into the common equity market. Trading at current levels is unsustainable; 1.5 times is standard, yet we are at 9.4 times, which is far from normal.

Michael Carroll, Analyst

So you would add another $80 million to $100 million on your preferred capital stack to be able to fund that $220 million of investments you have planned then?

Michael Landy, President and CEO

Let's say potentially yes, never say never. As the company grows, keeping it at 25% of the capital stock is not out of the question. There are other REITs that are completely financed with perpetual preferred equity and they're some of the best performers. Gene seems to want to get in on the action, is that...?

Eugene Landy, Chairman

Yes. You're concentrating on one part of the capital stack, but it's important to remember that we have numerous FedEx properties that are being expanded. As they expand, we secure a new 10-year lease, which allows us to finance those properties. Our primary financing strategy involves obtaining a substantial 10-year lease and then borrowing approximately 60% to 65% of the property's value from insurance companies. If property values increase, lease terms are extended. We have many properties that are either fully owned or have minimal mortgages. By paying off $50 million in mortgages on certain properties, we can unlock $100 million to $200 million in value that can be refinanced at advantageous rates below 3%. Our business plan revolves around securing deals above 5% and refinancing at around 3%, ensuring a healthy current margin. Looking ahead, we are contemplating rental values for the year 2028, which is just eight years away. We are monitoring inflation trends while making deals at rates below 6%, such as 5.5% or even 5%. For some investors, these may seem low returns for real estate, but the total return consists of current income plus the property's expected value at the end of the lease. Given substantial government spending, it's plausible that by 2028, the value of these properties will be significantly higher than today. Considering Monmouth REIT's capital structure and potential is crucial in this context.

Michael Carroll, Analyst

Okay. And then I guess to fund that equity portion, if you're not happy with your common equity price. I mean, would you consider or have you considered doing some type of joint venture or asset sales to fund that remaining, I guess 40%-plus so you don't have to access the preferred market?

Michael Landy, President and CEO

Well, the answer is that I'd prefer not to. But perhaps Gene has another view.

Eugene Landy, Chairman

Yes. We're well aware that some large holders of properties, similar to ours, have done joint ventures and there are a lot of pluses in doing those joint ventures; you know, the cost of capital short term goes down. But when you're taking a partner at 4%, you're still taking the partner at 4% and the values that I just talked about, which can be a 100% over 10 years, you are now sharing with that so-called 4% partner. So, doing joint ventures is a way of raising capital, it's a way of improving your current income in the short or medium term. But we are looking at total returns that are substantially above 5%, 5.5% the return we do on a current lease. And so we don't want to share that with our partner. We think our partner gets a very, very good deal and you make your choice with what you do, but we don't have to do joint ventures. Again, we have investment grade tenants and as we pay down the mortgages and as we renew certain leases, we believe that we can get ample financing to finance the $250 million a year in our pipeline.

Michael Landy, President and CEO

If I could just add to that, past is prologue for the future and I know you've been saying we need to raise equity ever since I've known you which is only a couple of years. But the past is, we raised common equity in 2010, in 2014, in 2018, so perhaps in 2022. But we have no trouble raising equity or raising preferred or raising capital. Kevin?

Kevin Miller, Chief Financial Officer

I just wanted to mention that we have numerous resources available. We have a line of credit with $225 million at our disposal, and there’s a $100 million accordion feature we can utilize if needed. We also generate funds from our operations. To emphasize, of the $218.7 million pipeline, approximately 62% is secured with financing at record-low interest rates. The three loans have a weighted average interest rate of 3.1%, with a weighted average term of 16 years. This represents long-term funding at a very attractive rate.

Michael Carroll, Analyst

Alright, thanks.

Operator, Operator

Our next question comes from Craig Kucera of B. Riley FBR. Please go ahead.

Craig Kucera, Analyst

Hi, good morning. Mike, I think traditionally when you complete an expansion, you earn about a 10% return on the incremental capital through a higher rent at the building. Is that ballpark for sort of what you're thinking about this first round you're completing by November?

Michael Landy, President and CEO

Yes, Rich is spearheading all of these expansion projects and he is doing a great job. So, Rich, you want to add to that.

Richard Molke, Vice President of Asset Management

Yes, I'd say that's what we're shooting for, is a 10 with a 10-year extension on all of them. And to the extent that some of these happen at our 15-year lease properties, we're going to try to kick them out 15 years from the date of completion. So, those discussions are going well and it looks like just from what we've seen so far, about $2.5 million per expansion, some are bigger, some are less. And so that's kind of how it's shaking out for now.

Michael Landy, President and CEO

Yes, that's a key point Rich just made. So the big ones, I think we certainly have a lot of negotiating flexibility. The smaller ones, less so. But the plan will come out around where you said.

Craig Kucera, Analyst

Got it. A few quarters ago, you had a deal with Komatsu that didn't go through because it couldn't be negotiated at the parent level. Is that deal unlikely to return, or is there still a possibility for it to come back in the pipeline?

Michael Landy, President and CEO

No, I don't think it's highly unlikely that it will come back in a format Monmouth would want to acquire. It may come to market and someone else may want to buy it. Without a parent guarantee and with a weaker tenant in the lease, we're not interested. However, we're finding no difficulty sourcing deals. The number of deals we win remains to be seen, but we're seeing and bidding on many deals, and hopefully, we will have a larger pipeline to report when we next report to you.

Craig Kucera, Analyst

Got it. And I think you mentioned that the Amazon building you're looking to close here in your fiscal fourth quarter was 8% of your square footage. Can you put a dollar value on that?

Michael Landy, President and CEO

Sure, sure. So let me give you the breakdown of our pipeline in dollar terms. The total pipeline is $218.7 million; 7% of which is the Amazon deal and that will close this year in our fiscal fourth quarter; 33% will be closing ideally, you know everything is under construction, so things could slide, but 33% as of now is scheduled to close in the first quarter of fiscal '21; 44% is scheduled to close in the second quarter of fiscal '21; and then the remaining 16% not until the last quarter of 2021.

Craig Kucera, Analyst

Great. Finally, you mentioned your shadow pipeline. Are you noticing any changes in what merchant builders are presenting to you, or is it still primarily the same cyclical group of tenants you've encountered before?

Michael Landy, President and CEO

There are a lot of Amazon deals currently available. Every day, I receive numerous emails about vast mile and cold storage facilities, and Amazon plays a significant role in the market at this time. Additionally, there are many FedEx deals. Large companies are beginning to understand the need to shift towards an omnichannel supply chain, which requires modern, automated buildings. The large retailers are starting to realize that brick and mortar won't account for 85% of consumer spending; instead, we will continue to see market share move from traditional shopping to digital. As a result, big retailers are looking to expand their presence, and many of them have relationships with us, allowing us to work on growing the pipeline.

Craig Kucera, Analyst

Okay, great, thanks.

Michael Landy, President and CEO

You're welcome.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Becky Coleridge for any closing remarks.

Becky Coleridge, Vice President of Investor Relations

Thank you, operator. I would like to thank everyone for joining us on this call and for their continued support and interest in Monmouth. As always, we are available for any follow-up questions. We look forward to reporting back to you after our fourth quarter. Thank you.

Operator, Operator

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