Monmouth REIT: Backdoor Play on FedEx

NEW YORK ( TheStreet) -- Shipping giant FedEx Corp. ( FDX) boasts a market capitalization of more than $27 billion and revenue of more than $42 billion. It's second only to UPS ( UPS) in market capitalization.

The downside of this consistent performer is its 0.60% dividend yield -- not quite the material of income investors.

Enter Monmouth Real Estate Investment Corp. ( MNR). Organized in 1968, this is a publicly owned real estate investment trust specializing in net-leased industrial properties subject to long-term leases primarily to investment grade tenants.

Monmouth Real Estate Investment's current tenants include FedEx, Anda Pharmaceuticals, Anheuser-Busch Inbev SA ( BUD), Best Buy ( BBY), Caterpillar Logistics Systems, Coca-Cola ( KO), Kellogg ( K), Mead Paper, Sherwin-Williams ( SHW) and Siemens ( SI).

So what does this triple-net-lease industrial REIT have to do with FedEx? A concentration of the company's properties are leased to FedEx.

As of March 31, 2012, approximately 3.5 million square feet, or approximately 42% of the company's property, was leased to FedEx or one of its subsidiaries.

In other words, FedEx supports this REIT with both its creditworthiness and its contractual leases. This, to a degree, makes Monmouth a backdoor play on FedEx.

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Monmouth has also recently given income investors another way to play the industrial triple-net-lease space and a cheap exposure to FedEx.

Monmouth REIT issued a preferred stock this past week at a very attractive yield. It's cheap compared to preferred stock of Monmouth's triple-net competitors.

Opinion Summary

I view the Monmouth Series B 7.875% preferred as cheap relative to the REIT's triple-net peers (even though MNR is not rated).

The deal contains standard preferred stock language, and the document does not contain any language that raises concerns.

As I said earlier, the company has a relatively huge exposure to FedEx and can, to a degree, be seen as a "backdoor play" on FedEx.

The company's financial profile is moderately conservative at about 45% of book capitalization and 4.8 times EBITDA, which gives the REIT financial flexibility while growing its asset base and maintaining both the preferred stock and common stock dividends.

Occupancy is very healthy for an industrial-focused REIT at 95%, and lease terms are average for the sector at approximately five years.

Opinion bottom line: The REIT is well-placed in its space, and the preferred stock has relative value vs. its peers and is cheap to their outstanding preferred stock.

Owners of the existing preferred stock of the company can trade out of their holding into the new preferred stock and pick up yield and call protection. The preferred also offers REIT preferred stock investors an attractive yield vs. other sectors (buy on swap) or as an additional position.

The Offering

The offering is, essentially, a plain vanilla preferred stock offering containing the new conversion language. The is nothing fancy or different about the offering and nothing exotic or complex either.

Peer Relative Value

The peers I have chosen to compare the preferred against are Realty Income ( O) and National Retail Properties ( NNN) as they are within the peer group. Given their positions within the sector, they should be considered benchmark issues for a point of comparison.

As the above chart shows, the new Monmouth preferred stock trades more than 1% higher than its triple-net peers, which I believe compensates an investor for its smaller size and nonrated status.

The Company

Funds from operations have increased at a very healthy rate as the company increases its portfolio and optimize its properties. Although this rate of growth is somewhat unsustainable, it indicates that there are strong growth opportunities.

The company has reduced its leverage, and coverage ratios are very healthy. This gives the company financial flexibility to further grow its portfolio in a healthy and financially prudent way.

The result of Monmoth's ability to grow FFO and prudently reduce leverage has been increased profitability.

All of the above factors have led to a well-performing equity that is also attractive.

Ultimately, the preferred stock is attractive relative to Monmouth's outstanding issue as well as its peers, and the equity is equally attractive on capital appreciation and yield bases.

Research conducted by Rubicon Associates. Mr. Michael M. Terry, CFA is the Founder/Principal of Rubicon Associates LLC and has nearly 20 years of experience in the investment management industry focused on the analysis, investment and management of fixed income and preferred stock portfolios.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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