Monmouth Real Estate Investment Corp.

Transcription

1 5/31/2013 Sector: REIT-Industrial Monmouth Real Estate Investment Corp. Ticker: MNR Current Price: $10.24 Recommendation: HOLD Implied Price: $16.08 Key Statistics 52 Week Price Range $9.54-$ Day Moving Average $10.74 Estimated Beta 0.88 Dividend Yield 5.80% Market Capitalization Trading Statistics Diluted Shares Outstanding million million Average Volume (3-Month) 120,742 Institutional Ownership 43.90% Investment Thesis Management of Monmouth Real Estate Investment Corporation (MNR) has provided explicit plans for purchasing seven more industrial buildings during the next six quarters, providing two more impressive years of growth. After 46 years of operation, MNR has proven itself among the most reputable industrial Real Estate Investment Trusts (REIT) by maintaining a positive cash flow on a consistent basis. MNR is focused on maintaining strong customer relationships with reliable tenants. As a result, MNR issues long-term and low risk leases which ensures simultaneous business success for both MNR and their tenants. As e-commerce continues to grow while demand for industrial spaces outpaces supply, MNR is in a great position to grow and expand their and portfolio. 5-Year Stock Chart Insider Ownership 11.61% EV/Funds from Operations Margins and Ratios EBITDA Margin (LTM) 81.35% Net Margin (LTM) 34.65% Debt to Enterprise Value 0.35 Covering Analyst: Nicole Wilson $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Volume Adjusted Close 400,000, ,000, ,000, ,000, ,000, ,000, ,000,000 50,000,000 0 Nwilson7@uoregon.edu 1 University of Oregon Investment Group

2 Business Overview Monmouth Real Estate Investment Corporation (MNR) is a qualified real estate investment trust (REIT) founded by Eugene W. Landy in 1968 that specializes in long-term net-leased industrial properties. MNR is a self-managed real estate company, whose property portfolio consists of seventy-two industrial properties and one shopping center. Their properties are located in twenty-six states, the majority in the eastern region of the United States. Collectively, all properties total approximately 9.2 million square feet of gross leasable area. Additionally, MNR holds a portfolio of REIT securities. MNR is based in Freehold, New Jersey. Portfolio Summary Industrial Properties: 72 Shopping Center Property: 1 Total Square Footage: 9,165,000 States: 26 Average Lease Expiration (years): 6.1 Occupancy Rate: 0.95 Average rent per square foot $5.46 Equity, mortgage and hybrid are the three different categories of REITs. Specifically, MNR is an equity REIT that operates income-producing real estate. It is important to understand the concept of a REIT in an equity portfolio. The IRS has outlined very specific regulations for a REIT, the most recognizable being that a company must distribute 90% of their taxable income to shareholders annually. For this reason, REITs are well known for their dividend yield. A company that qualifies as a REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income. As a result, most REITs owe no corporate tax. Taxes are paid by shareholders on the dividends received and any capital gains. The SEC states, REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership without actually having to go out and buy commercial real estate. MNR s revenue consists primarily of rental and reimbursement revenue received from the ownership of industrial rental property. MNR relies on their tenants for rental payments. Currently, their average lease term is 6.1 years, with some of their leases extending as far as When making a new acquisition, MNR strives to enter contracts with tenants for at least 10 years. Rental reimbursement revenue is the only other substantial source of revenue to MNR. Under MNR s triple net lease structure, tenants are responsible for the majority of property expenses including real estate taxes, utilities and maintenance on existing properties. Examples of MNR s tenants include: FedEx, Kellogg, Coca Cola, Anheuser-Busch and Macy s. Strategic Positioning MNR has focused on the industrial segment for 46 years on the industrial segment. MNR s management team has emphasized that economic factors drive their investment decisions because demand for industrial spaces is highly correlated with GDP growth. Since 2008, the GDP growth has grown quickly, while a limited supply of industrial facilities have been built. As a result, there is a favorable demand for industrial spaces and industrial absorption rates have been positive for the past nine quarters. MNR recognizes the positive impact an increasing demand will have for their business. While the GDP growth and industrial demand is correlated, during economic downturns companies still rely on warehouses spaces to operate. MNR differentiates itself by practicing a build-to-suit model. In other words, MNR develops or purchases land based on a tenant s specific needs. This builds relationships with the tenant and insures that their properties will continue to suit the tenants growing needs. The build-to-suit strategy often results in long-term contracts. UOIG 2

3 Location is a key consideration for MNR s success. Their properties are dispersed among 26 states, the majority in the Eastern part of the United States. Management s knowledge and experience of real estate in this vicinity will continue to have a positive impact on decisions going forward. It is also important to acknowledge that MNR has strategically purchased properties outside of this vicinity, thereby spreading the risks of their operations. Business Growth Strategies After 46 years of operation, MNR understands the type of facilities their tenants need. As previously mentioned, MNR focuses on net-leasing to single tenants and prides itself in forming strong relationships with these tenants. Prior to purchasing a property, MNR will often secure a tenant. For example, MNR has recent acquisition agreements to purchase seven new properties. They are currently being developed and FedEx has committed to renting 55% of these new properties. The growth of e-commerce is also beneficial for MNR because FedEx is their largest tenant. Not all online shopping is shipped through FedEx, but they have a significant market share. MNR has confidently acknowledged that e-commerce will indirectly be a growth catalyst for their company. MNR has consistently demonstrated their ability to grow alongside their tenants. Specifically, MNR expands their current properties to cater their tenants needs. After 46 years of business, Monmouth recognizes that their company and their tenants succeed simultaneously. Historically, MNR has prearranged tenants prior to committing to a new investment. In the near future, MNR has made agreements to purchase seven new properties. Tenants for these properties have already been arranged. Finding a tenant before a purchase is a promising strategy because it builds customer relationships and eliminates losses from rental revenue if MNR were shopping around for a tenant. Industrial properties are expensive investments. Funds for MNR s acquisitions come from mortgages, cash on hand, other bank borrowing, or proceeds from the Dividend Reinvestment and Stock Purchase Plan (DRIP). DRIP is a reinvestment plan in which shareholders can reinvest all or part of their dividends in additional shares of MNR s common stock. The DRIP participants purchase shares at a price of approximately 95% of market value. In MNR s second quarter filings for 2013, they reported $251,352,627 mortgage notes payable. Industry Overview REITs are classified as equity, mortgage or hybrid REITs. Some companies operate as a hybrid of both equity and mortgage. REITs are often broken up into the following subcategories: diversified, industrial, healthcare facilities, office, residential and retail. REITs are especially popular among dividend investors. REITs provide a great opportunity to indirectly invest in real estate. In order to confidently invest in a REIT, one must understand the company s management and business model because they are responsible for property portfolios. UOIG 3

4 The last economic downturn represents the worst financial crisis and property decline since the Great Depression. As a whole, the REIT industry can expect their growth to be driven by economic recovery and a rebound in the real estate market. According to IBISworld.com, 2009 was the only year in which industry revenue growth rates were negative. Since 2009, there has been substantial growth. There are a variety of incentives to invest in a REIT including: diversification, dividends, liquidity and growth. An investment in a REIT is a more affordable, diverse real estate investment due to the diversification of property and geography. There is also dividend reassurance because REITs are required to pay out at least 90 percent of their taxable income to shareholders. According to REIT.com, the National Association of Real Estate Investment Trusts, in 2012 alone, $29 billion was paid out in dividends to REIT investors. It is also important to recognize the distinction between a REIT and a real estate mutual fund. Both REIT s and mutual funds are often considered passive investments. Investments in REIT s are traded in real estate stock and not invested in the stock of companies. Unlike REIT s, real estate mutual funds are reliant on the managing operations of multiple companies. On the other hand, investors in a REIT reap the benefits of professional property management services, relationships with tenants and oversight of purchases. Metrics Funds from operations (FFO) is used instead of EBITA for this report. Also, rather than using EPS, the FFO-per-share ratio is used for evaluating REITs. All REIT s use FFO and Adjusted Funds From Operations (AFFO) to define the cash flow from their operations. Depreciation should not be included in the net income for REITs because real estate assets appreciate over time. Therefore, depreciation is added back to the FFO equation. It is calculated by the following equation: FFO: net income + depreciation + amortization gains (losses) on sales of property AAFO: net income + depreciation + amortization gains (losses) on sales of property capital expenditures One way real estate is valued is based on the capitalization rate or cap rate. A cap rate measures the rate of return on a real estate investment based on the expected income the property will generate. In other words, it is an indirect measure of how fast an investment will pay for itself. The equation is as follows: Capitalization rate = yearly income/ total value MNR has planned seven acquisitions in the next six quarters. According to its president Michael Landy, the Cap rates on these deals typically range in the low-to-mid 7% range and are substantially higher than the 5% and 6% cap rates that we re seeing today for comparable assets in the market. Unfortunately, the cap rates are not taken into account in either the DCF or Comparables valuation. UOIG 4

5 Macro factors Real Estate Cycles All REIT s are exposed to both national and regional real estate cycles. The cycle consists of four stages: recession, gradual recovery, boom and downturn. A REIT can react strategically during each phase. During recession, an industrial REIT will face both high vacancy and low lease rates. During a boom phase, construction and property prices increase which allows REITs to further increase lease rates. MNR s management has discussed their strategy and awareness of property purchases throughout real estate cycles. E-commerce Industrial warehouses are in high-demand. E-commerce is a pivotal factor for industrial properties because companies are adding and shifting to their supply chain. As a result, larger and new warehouses are needed all over the country. E- commerce is especially important for MNR because FedEx is their largest tenant. Panama Canal According to management, the expansion of the Panama Canal will have a positive impact on MNR s business. Landy says, about 15% of the ships cannot currently make it through the canal. In 2015, upon completion, these ships will take about an 8,000 mile shortcut through the canal, significantly shifting the global supply chain. There will be more demand at the Gulf of Mexico and the Eastern Seaboard where Monmouth has high concentration of properties. Monmouth s current portfolio is favorable and management s familiarity with these regions suggests beneficial investments going forward. GDP Growth Demand for industrial space is highly correlated with growth domestic product. Since 2008, GDP has been growing quickly, while a limited supply of industrial facilities have been built. This results in favorable demand for industrial spaces and industrial absorption rates have been positive for the past nine quarters. MNR recognizes the positive impact the increasing demand will have for their business. While the GDP growth and industrial demand is correlated, during economic downturns, companies still need warehouse spaces to operate. MNR s management team has emphasized that economic factors drive their investment decisions. Competition There are approximately 123 companies in the REIT sector. Within the industrial REIT sector, there are about twenty-two companies who compete more directly with Monmouth. Factors of competition within these REITs include location, quality and rental rates. Looking at the long-term, some of the biggest competitors in the industry are the actual tenants who may express interest in purchasing industrial properties. Fortunately, many companies prefer to lease space due to flexibility and leasing generally improves cash flow. FedEx Corporation UOIG 5

6 FedEx Growth Expectations % Revenue Growth 2013E 5.09% % Revenue Growth 2014E 6.20% % EBITDA Growth 2013E 15.30% % EBITDA Growth 2014E 16.00% % EPS Growth 2013E 22.80% % EPS Growth 2014E 22.50% FedEx Corporation (FDX) provides a broad portfolio of transportation, e- commerce and business services. FedEx Express, FedEx Ground, FedEx Freight and FedEx Services are the four companies that operate under the FedEx brand. According to their 10-K, FedEx believes the following four trends have driven world commerce and shaped the global marketplace: globalization, supply chain acceleration, increase in high-tech and high-value-added business, and growth of e-commerce. In Monmouth s 2012 Letter to Shareholders, they acknowledged that e-commerce will be a significant catalyst for the company s profitability going forward. FactSet s forward estimates on FedEx are included on the left. In regards to Monmouth, these FactSet estimates are reassuring. As long as FedEx maintains its current net income trends, it can be inferred that FDX will continue to meet their rental payments. MNR is able to negotiate higher-than-market value rates for FedEx because the location of the buildings are integral to FedEx s supply chain. Management and Employee Relations One of the most important components in evaluating a REIT is the quality of the management team. MNR is led by two impressive, experienced individuals. MNR Management is a reputable group with distinct property management philosophies. Michael P. Landy President and Chief Executive Officer Michael was appointed as President and CEO in April of He has been with the company since He has openly praised a conservative business philosophy and emphasizes that he will maintain a similar business model. Michael previously served as Director, Chief Operating Officer and Chairman of the Executive Committee. His broad experiences within the company illustrate his thorough understanding of MNR s expectations and operations. Michael is also Vice President and Director of UMH Properties. UMH is a diversified REIT engaging in the ownership and operation of manufactured home communities. Clearly, his strong understanding of both the real estate market and the operations of MNR makes Michael a worthy President and CEO. He is the son of Eugene Landy, the founder of both MNR and UMH. Eugene W. Landy Chairman Landy is the founder of Monmouth Real Estate and has been with the company since In April of 2013, he reduced his leadership roles and no longer serves as the CEO and President. Under Eugene s leadership, Monmouth has delivered returns of 50%, 103%, 95%, and 200% over the past one, three, five and ten years respectively. Monmouth s stability during the recession is a result of his conservative business philosophy. Eugene has served on the Board of a Governors of the National Association of Real Estate Investment Trusts. As for the future, Eugene was excited to pass on his leaderships to his son and said, I look forward to working alongside him for many years to come -mreic.com. UOIG 6

7 Management Guidance Management has provided specific details about their acquisition and development pipeline as well. As mentioned above, Monmouth has made deals to purchase 1.4 million square feet (seven properties) representing $9.6 million in total acquisitions. These acquisitions are scheduled to close over the next six quarters. The buildings are currently being developed in Kentucky, Minnesota, Pennsylvania, Texas, Virginia and Wisconsin. Leases for these properties are 10 years or longer and specifically 55% of this pipeline will be leased to FedEx Ground. Management has consistently emphasized the company s dividend position. They withheld their dividend payment throughout the economic downturn. One of the strengths of the company is the ability to predict earnings. While earnings cannot be predicted with absolute certainty, as demonstrated by MNR s lease termination income in Q1 of 2013, MNR does currently have 6.3 years of lease visibility. Portfolio Strategy or History (if applicable) MNR is currently held in both the Tall Firs and Svigals portfolio, both of which are underweight in financials. We bought 240 shares of MNR in the Svigals portfolio on 10/09/2012. The shares were purchased at $11.33 per share for a total cost basis of $2, We purchased 1,000 shares on 10/16/2012 for the Tall Firs portfolio at a cost basis of $11, MNR is the only REIT we hold. Catalysts Upside The explosive growth in e-commerce is undoubtedly a positive factor for MNR s business because it requires more warehouse distribution centers. MNR is in perfect place for a consumer driven economy. Both the current GDP growth and real estate cycle are driving MNR s business. It is also reassuring to look at MNR s performance during the recession in 2008 as an indicator that their business is sustainable. Demand for industrial buildings is outpacing the supply. MNR s relationships with their tenants and net-lease philosophy will continue to provide a prosperous business in the future. It is important to recognize that MNR has leased properties to FedEx for more than twenty years, illustrating their compatibility and relationship strength. Downside Monmouth is highly dependable on their biggest tenant, FedEx Corporation. FedEx collectively rents about 47% of their properties and is responsible for approximately 55% of annual revenue. Single tenant net-leases also provide substantial risk. The failure of rental payment by a single tenant is likely to cause a significant reduction in the operating cash flow. In addition, they are responsible UOIG 7

8 for 100% of the operating costs following a vacancy at a single tenant building. The real estate industry is highly competitive. Asides from location, it is often difficult to distinguish industrial properties from each other. Therefore, rental price is pivotal for tenants. A landlord s ability to maintain competitive prices for tenants can be a challenge especially during tough economic times. Comparable Analysis Comparable companies were found based on type of REIT, geographic location of properties and market capitalization. It is very important to only consider companies who operate as industrial REIT s and there is limited competition within this sector. Industrial REIT s have large capital expenditure requirements for acquiring only one building. Both Funds from Operations and Adjusted Funds from Operations were used in the comparable analysis. These metrics most accurately represent the cash flow from operations. Both of these metrics are more measurable for a REIT than EBITA, net income or gross profit. STAG Industrial- 35% STAG Industrial also targets single tenant industrial properties throughout the United States. STAG s properties include warehouse distribution centers, manufacturing and office buildings. Their portfolio consists of 179 properties in 33 states. Collectively, these buildings approximate 31.2 million rentable square feet. STAG went IPO in 2011 and have maintained an aggressive growth profile. Since January of 2012, STAG has acquired 70 properties. Despite their rapid growth, STAG is an important comparable to MNR. Like MNR, STAG is an industrial REIT focused on domestic acquisitions. The majority of their properties are also located on the East Coast. Terreno Realty Corporation- 10% Terreno has a slightly different investment strategy. According to Terreno.com, Terreno invests in six major coastal markets. Each has a highly developed airport, seaport and highway infrastructure for rapid distribution of goods. All six markets have significant physical and regulatory barriers to development of competing properties. Specifically, these six market areas are as follows: Los Angeles, Northern New Jersey and New York City, San Francisco, Seattle, Miami and Washington D.C. Although TRNO is more dispersed in different geographic regions on the West Coast than MNR, they are the closest industrial REIT in size compared to MNR. Terreno currently has 71 properties compromising 5.3 million square feet. TRNO is a relatively new company and will be a significant competitor for MNR going forward. UOIG 8

9 First Potomac Realty Trust- 30% Formed in 1997, First Potomac Realty Trust (FPO) operates in the industrial and office REIT sector. The majority of their properties are located in the greater Washington, DC area. At the end of the 2012 fiscal year, FPO owned 13.7 million square feet of property. Like MNR, FPO strives to make acquisitions that can be converted into a higher use. In other words, they look to purchase properties that can be expanded into either more office space or warehouse capacity after an initial purchase. FPO leases the majority of its properties on triple-net leases. First Industrial Realty Trust- 25% Formed on August 10, 1993 First Industrial Realty Trust (FR) operates as an industrial REIT with headquarters in Chicago, Illinois. FR s property portfolio consists of facilities under the following classifications: national and regional distribution centers, light industrial, R&D/flex and manufacturing facilities. FR has land that is ready for development and works alongside customers to ensure their real estate facilities meet their overall business objectives. FR also has sites available for purchase. FR s property portfolio is substantially bigger than MNR s, but they operate under similar business models. Discounted Cash Flow Analysis Revenue Model Monmouth breaks their revenue into three sections: rental revenue, reimbursement revenue, and lease termination income. The revenue projections were calculated by the following formula: square feet owned*occupancy rate*average price per square foot For the years , Monmouth disclosed both their occupancy rate and the average price per square foot. For the years , projections in all three years are based off previous performance and future growth expectations. The table used for calculations is provided below as well. MNR s management has disclosed their property acquisition plans for the next six quarters. Starting in 2015, all the revenue projections are my own. MNR has discussed their intentions to continue to grow, but without better guidance I did not feel comfortable making bullish revenue projections. Looking at their company in 2009, 2010 and 2011, MNR averaged less than three property purchases per year. I believe my projections are very conservative and it is likely that MNR will purchase more than two properties a year. Despite the conservative projections, MNR remains undervalued. I used the percentage of revenue method when forecasting items in the Discounted Cash Flows Analysis. UOIG 9

10 General and Administrative Expense General and administrative expenses consist of employee wages, legal service fees and public relations fees. MNR s executive and employee compensation plan is competitive with other publically-traded REITs and a portion of executive pay is linked to the achievement of MNR s business plan. They believe that a pay-for-performance system is an important incentive for a successful team environment. Management provided no guidance on their payfor-performance plan but I have increased it slightly due to my expectations of a prosperous and growing business. Depreciation and Amortization MNR s depreciation is computed based on the straight-line over the estimated useful lives of the assets. The property s useful lives range from 5-40 years. Historically, the depreciation and amortization has been very consistent as a percent of revenue and therefore was projected as a percent of revenue on the DCF. The projected percentages increase slightly due to the anticipation of a growing property portfolio. Acquisition Costs Upon purchasing a property, it is common for MNR to incur transaction costs related to the acquisition. Such costs might entail: broker fees, transfer taxes, legal and accounting, valuation, and other professional and consulting fees. These costs represent a very small percentage of revenue. MNR is typically responsible for covering acquisition costs. Unfortunately, there was not a direct correlation between acquisition costs and properties purchased. Operating Expenses The operating expenses line consists of the following: same store properties, acquired properties, vacant properties and disposed properties. Within these four segments, operating expenses include utilities, maintenance fees, facility management and other fees associated with maintaining a property. Because there are five different types of property expenses, it was difficult to project the operating expenses without guidance although it makes sense for the operating expenses to increase as more properties are purchased. Unless specifically noted in the lease, the tenants are responsible for paying operating expenses. Real Estate Taxes Real estate taxes are owed to the local and state governments for each property. The tenants of MNR s net-leases are responsible for absorbing the real estate taxes. Over the past year, MNR was able to reduce real estate taxes due to jurisdictions. MNR s 10-k was not specific about whether or not these decreases in real estate taxes will continue forward or not. Therefore, I trended real estate taxes at the historical rate of 15% of revenue. Severance Expenses Severance expense was introduced as a separate line item in The major cost of $965,000 in 2012 primarily consisted of a one-time $832,000 severance expense to the Estate of Maureen E. Vecere. Maureen served as the Chief Financial Officer and passed away on May 21, Eugene Landy, MNR s Chairman, won a Outstanding Leadership Achievement Award for $300,000 for three years, totaling $900,000, at the close of the fiscal year This cost is included in 2013, but the severance expenses going forward are projected as a percent of revenue because without guidance it is impossible to predict one-time severance expenses. UOIG 10

11 Interest Expense Generally, interest expense is not projected on our DCF s. However, interest expense is a substantial percentage of MNR s revenue and it is imperative for accurate valuation going forward. Interest expense is projected to decrease slightly to stay aligned with its historical trends. Capital Expenditures MNR funds capital expenditures primarily to maintain structure and other maintenance needs depending on the lease. Expansions on properties as well as tenant improvements are covered under capital expenditures. As a result of capital expenditures, tenants will often extend their lease and pay higher rental prices. Historically, MNR s capital expenditures fluctuate on a year-to-year basis. In order to avoid the inconsistent payments, capital expenditures were projected at 11% of revenue going forward. As their property portfolio expands, it is likely that MNR s capital expenditures will also increase. MNR Beta SD Weighting Three Year Daily % Five Year Monthly % One Year Daily % Hamada Three Year Daily % One Year Weekly % 0.00% Additionally, depreciation outpaces CapEx. Like other REITs, depreciation increases at a higher rate because MNR only spends a portion of cash on on capital expenditures, and the remaining is financed through long-term loans. It would be unreasonable to include purchases made with long-term loans on the DCF. Tax Rate REITs are exempt from corporate tax rates and therefore have no tax rate in the DCF assumptions. Beta After running regressions, I incorporated three different betas. The three year daily and Hamada three year daily came out to be the same number. I also weighed the one year daily. All three betas are marginally close together. Recommendation Final Implied Price Price Target Weight Forward Comparables % DCF % Price Target $16.08 Current Price Overvalued/Undervalued 57.03% Based on my DCF analysis model and my comparable model both weighted at 50%, I arrived at a final price of $16.08, which represents a current undervaluation of 57.03%. MNR s growth in the upcoming six quarters coupled with the current demand for industrial facilities and explosive e-commerce growth, will drive MNR s business. MNR has been a top performer in the industrial REIT sector and will continue to prosper by strengthening tenant relationships and expanding their property portfolio. Given MNR s undervaluation, I suggest a HOLD for both the Tall Firs and Svigals portfolio.. UOIG 11

12 Appendix 1 Comparables Analysis Multiple Implied Price Weight EV/Revenue % EV/Funds from Operations % EV/Adj Funds from Operations % Price Target $14.55 Current Price Undervalued 42.11% Comparables Analysis Monmouth MNR TRNO FPO STAG FR Realestate Terreno Realty First Potomac First Industrial ($ in thousands) Investment Corporation Realty Trust Stag Industrial Realty Trust Stock Characteristics Max Min Median Weight Avg % 30.00% 35.00% 25.00% Current Price $21.85 $10.24 $17.95 $17.89 $10.24 $18.99 $13.73 $21.85 $16.91 Beta Size Short-Term Debt Appendix Long-Term Debt 2 Discounted 1,234,365 Cash 119,465 Flows Analysis 689, , , , , ,844 1,234,365 Cash and Cash Equivalent 23,319 11,980 16,753 16,932 20,130 15,712 17,794 11,980 23,319 Non-Controlling Interest 67, ,851 35, ,723 67,555 43,978 Diluted Basic Shares 107,485 19,225 46,747 58,953 41,641 19,225 51,268 42, ,485 Market Capitalization 1,817, , ,263 1,024, , , , ,616 1,817,571 Enterprise Value 3,072, ,836 1,523,382 1,799, , ,836 1,644,729 1,402,035 3,072,595 Growth Expectations % Revenue Growth 2013E 49.8% -7.2% 6.2% 17.3% 6.2% 22.2% -7.2% 49.8% -0.7% % Revenue Growth 2014E 25.6% -2.2% 7.7% 7.1% 17.3% 25.6% -2.2% 13.3% 2.1% % FFO Growth 2013E 28.4% -4.2% 15.4% 13.0% -4.2% 28.4% 15.4% 4.6% 15.9% % FFO Growth 2014E 34.6% -4.8% 12.3% 8.8% 19.8% 34.6% -4.8% 12.3% 9.8% Profitability Margins EBITDA Margin 75.60% 58.97% 63.57% 66.88% Net Margin 29.95% (3.05%) (2.18%) (1.91%) Credit Metrics Interest Expense $93,248 $5,981 $29,601 $42,500 $15,415 $5,981 $42,613 $16,588 $93,248 Debt/EV Leverage Ratio Operating Results Revenue $311,700 $41,450 $150,100 $178,135 $57,023 $41,450 $180,100 $120,100 $311,700 Funds From Operations $113,000 $7,400 $80,513 $80,799 $32,166 $7,400 $113,000 $59,025 $102,000 Adjusted Funds From Operations $76,000 $5,000 $64,594 $62,016 $25,851 $5,000 $76,000 $64,188 $65,000 Multiples EV/Revenue 12.10x 9.13x 10.58x 10.42x 12.1x 11.3x 9.1x 11.7x 9.9x EV/Funds from Operations 63.36x 14.56x 26.94x 26.55x 21.5x 63.4x 14.6x 23.8x 30.1x EV/Adj Funds From Operations 93.77x 21.64x 34.56x 35.33x 26.7x 93.8x 21.6x 21.8x 47.3x UOIG 12

13 Discounted Cash Flow Analysis Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ($ in thousands) 2009A 2010A 2011A 2012A 12/31/2012A 03/31/2013A 06/30/2013E 09/30/2013E 2013E 12/31/2013E 03/31/2014E 06/30/2014E 09/30/2014E 2014E 2015E 2016E 2017E 2018E Total Revenue $41,318 $45,213 $48,141 $53,711 $13,518 $13,306 $14,888 $15,311 $57,023 $16,080 $16,512 $16,944 $17,377 $66,913 $74,138 $77,485 $80,212 $82,962 % YoY Growth 9.43% 6.48% 11.57% -1.57% 11.89% 2.84% 6.17% 5.02% 2.69% 2.62% 2.55% 17.34% 10.80% 4.52% 3.52% 3.43% General and Administrative Expense % Revenue 6.73% 8.26% 8.06% 8.65% 9.58% 7.09% 9.00% 9.50% 8.83% 8.80% 8.80% 8.80% 8.80% 8.75% 8.80% 8.85% 8.90% 9.00% Depreciation and Amortization % Revenue 24.50% 24.16% 25.28% 25.90% 28.07% 28.15% 25.00% 25.00% 26.46% 26.00% 26.00% 26.00% 26.00% 26.00% 26.10% 26.40% 26.70% 27.00% Acquisition Costs % Revenue 0.00% 1.02% 0.88% 1.24% 2.85% 0.00% 1.00% 1.00% 1.20% 1.23% 1.23% 1.23% 1.23% 1.23% 1.30% 1.30% 1.30% 1.30% Operating Expense % Revenue 4.47% 4.29% 5.13% 5.83% 3.89% 7.27% 7.00% 6.00% 6.06% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.75% 7.00% 7.25% Real Estate Taxes % Revenue 15.94% 15.70% 15.04% 10.75% 8.60% 8.39% 15.00% 15.00% 11.94% 14.00% 14.00% 14.00% 14.00% 14.00% 15.00% 15.00% 15.00% 15.00% Severance Expenses % Revenue 0.00% 0.00%.57% 1.80% 0.00% 0.00% 0.00% 1.96%.53% 1.00% 1.00% 1.00% 1.00%.96%.95%.90%.85%.80% Operating Income $19,980 $21,057 $21,960 $25,583 $6,355 $6,532 $6,402 $6,660 $25,949 $6,990 $7,178 $7,366 $7,554 $29,087 $31,360 $32,311 $32,967 $33,558 % Revenue 48.36% 46.57% 45.62% 47.63% 47.01% 49.09% 43.00% 43.50% 45.51% 43.47% 43.47% 43.47% 43.47% 43.47% 42.30% 41.70% 41.10% 40.45% Interest Expense % Revenue 33.63% 32.78% 30.89% 28.58% 28.67% 28.58% 28.00% 28.00% 28.30% 27.00% 27.00% 27.00% 27.00% 27.00% 26.50% 26.00% 25.50% 25.00% Other Expenses (Income) 4099 (5120) (8399) (9402) (1315) (813) (2531) (2603) (7262) (2492) (2477) (2542) (2606) (10117) (11862) (12398) (12834) (13274) % Revenue 9.92% (11.32%) (17.45%) (17.50%) (9.73%) (6.11%) (17.00%) (17.00%) (12.73%) (15.50%) (15.00%) (15.00%) (15.00%) (15.12%) (16.00%) (16.00%) (16.00%) (16.00%) Income from Continuing Operations $1,984 $11,354 $15,488 $19,633 $3,794 $3,542 $4,764 $4,976 $17,076 $5,141 $5,196 $5,332 $5,468 $21,138 $23,576 $24,563 $25,347 $26,091 % Revenue 4.80% 25.11% 32.17% 36.55% 28.07% 26.62% 32.00% 32.50% 29.95% 31.97% 31.47% 31.47% 31.47% 31.59% 31.80% 31.70% 31.60% 31.45% Impairments & Income (loss) from Discontinued Operations (176) (138) (4) 300 % Revenue (.43%) (.31%).55%.04% (.03%) 2.25% Net Income $1,808 $11,216 $15,754 $19,653 $3,790 $3,842 $17,076 $5,141 $5,196 $5,332 $5,468 $21,138 $23,576 $24,563 $25,347 $26,091 Net Margin 4.38% 24.81% 32.72% 36.59% 28.04% 28.87% 29.95% 31.97% 31.47% 31.47% 31.47% 31.59% 31.80% 31.70% 31.60% 31.45% Add Back: Depreciation and Amortization 10,122 10,922 12,168 13,910 3,794 3,746 3,722 3,828 15,090 4,181 4,293 4,406 4,518 17,397 19,350 20,456 21,417 22,400 Add Back: Interest Expense*(1-Tax Rate) 13,897 14,823 14,871 15,352 3,876 3,803 4,169 4,287 16,135 4,342 4,458 4,575 4,692 18,067 19,646 20,146 20,454 20,740 Operating Cash Flow $26,003 $37,099 $42,527 $48,895 $11,464 $11,091 $12,655 $13,091 $48,301 $13,663 $13,948 $14,313 $14,678 $56,602 $62,572 $65,165 $67,217 $69,232 % Revenue 62.93% 82.05% 88.34% 91.03% 84.81% 83.35% 85.00% 85.50% 84.70% 84.59% 84.40% 84.10% 83.80% 83.45% Current Assets 2,551 3,105 3,325 4,947 8,343 9,532 7,392 6,538 6,538 6,705 6,886 7,066 7,246 7,246 7,873 8,074 8,198 8,313 % Revenue 6.17% 6.87% 6.91% 9.21% 61.72% 71.64% 49.65% 42.70% 11.47% 41.70% 41.70% 41.70% 41.70% 10.83% 10.62% 10.42% 10.22% 10.02% Current Liabilities 2,084 2,089 2,130 3,882 3,514 3,590 3,640 3,828 3,828 4,020 4,128 4,236 4,344 4,344 5,486 5,734 5,936 6,139 % Revenue 5.04% 4.62% 4.42% 7.23% 25.99% 26.98% 24.45% 25.00% 6.71% 25.00% 25.00% 25.00% 25.00% 6.49% 7.40% 7.40% 7.40% 7.40% Net Working Capital $467 $1,016 $1,195 $1,065 $4,829 $5,942 $3,752 $2,710 $2,710 $2,685 $2,758 $2,830 $2,902 $2,902 $2,387 $2,340 $2,262 $2,174 % Revenue 1.13% 2.25% 2.48% 1.98% 35.72% 44.66% 25.20% 17.70% 4.75% 16.70% 16.70% 16.70% 16.70% 4.34% 3.22% 3.02% 2.82% 2.62% Change in Working Capital (130.00) $3, $1, ($2,190.04) ($1,041.91) $1, ($24.68) $72.18 $72.18 $72.18 $ ($514.67) ($47.18) ($78.08) ($88.37) Capital Expenditures % Revenue 10.04% 1.96% 2.98% 8.29% 5.64% 28.12% 6.00% 6.00% 11.07% 7.00% 7.00% 7.00% 7.00% 11.00% 11.00% 11.00% 11.00% 11.00% Net, Cash Paid for Acquisitions % Revenue 3.39% 9.07% 7.89% 8.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% Unlevered Free Cash Flow $20,454 $31,564 $37,111 $40,276 $5,451 $4,773 $12,314 $11,530 $34,068 $10,793 $10,904 $11,191 $11,478 $44,366 $46,777 $48,165 $49,649 $51,068 Discounted Free Cash Flow 12,096 11,125 10,230 10,152 10,235 10,312 39,125 37,509 35,999 34, % 3.1% 2.9% EBITDA $30, $31, $34, $39, $10, $10, $10, $10, $41, $11, $11, $11, $12, $46, $50, $52, $54, $55, EBITDA Margin 72.9% 70.7% 70.9% 73.5% 75.1% 77.2% 68.0% 68.5% 72.0% 69.5% 69.5% 69.5% 69.5% 69.5% 68.4% 68.1% 67.8% 67.5% UOIG 13

14 Appendix 3 Revenue Model Revenue Model Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ($ in thousands) 2009A 2010A 2011A 2012A 12/31/2012A 03/31/2013A 06/30/2013E 09/30/2013E 2013E 12/31/2013E 03/31/2014E 06/30/2014E 09/30/2014E 2014E 2015E 2016E 2017E 2018E Rental Revenue $ 41, $ 37, $ 40, $ 43, $ 11, $ 11, $ 13, $ 13, $ 49, $ 14, $ 14, $ 14, $ 15, $ 58, $63, $65, $68, $70, % Growth (9.7%) 7.8% 7.9% 3.8% 12.2% 2.8% 14.7% 2.7% 2.6% 2.6% 17.2% 8.9% 3.6% 3.5% 3.4% % of Total Revenue 85.1% 82.6% 83.6% 80.8% 83.7% 88.2% 88.5% 88.5% 87.3% 87.2% 87.2% 87.2% 87.2% 87.2% 85.7% 84.9% 84.9% 84.9% Reimbursement Revenue $7,233 $7,889 $7,906 $7,094 $1,518 $1,568 $1,713 $1,761 $6,560 $1,823 $1,872 $1,921 $1,970 $7,584 $9,527 $10,530 $10,900 $11,274 % Growth 9.1%.2% (10.3%) (7.5%) 15.6% 25.6% 10.5% 3.5% 3.4% % of Total Revenue 14.9% 17.4% 16.4% 13.2% 11.2% 11.8% 11.5% 11.5% 11.5% 11.3% 11.3% 11.3% 11.3% 11.3% 12.9% 13.6% 13.6% 13.6% Lease Termination Income $0 $0 $0 $3,222 $690 $0 $0 $0 $690 $238 $244 $250 $257 $989 $1,096 $1,145 $1,185 $1,226 % Growth 21.4% 43.3% 10.8% 4.5% 3.5% 3.4% % of Total Revenue 0.0% 0.0% 0.0% 6.0% 5.1% 0.0% 0.0% 0.0% 1.2% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Total Revenue $48,551 $45,212 $48,140 $53,709 $13,517 $13,306 $14,888 $15,311 $57,022 $16,080 $16,512 $16,944 $17,377 $66,913 $74,138 $77,485 $80,212 $82,962 % Growth (6.9%) 6.5% 11.6% (1.6%) 11.9% 2.8% 6.2% 5.0% 2.7% 2.6% 2.6% 17.3% 10.8% 4.5% 3.5% 3.4% Revenue Model Calculations Revenue Model Calculations Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E Square Feet Owned 6,132 6,971 7,532 8,506 9,293 9,293 9,565 9,836 9,836 10,108 10,380 10,651 10,923 10,923 11,271 11,619 11,967 12,315 # of properties purchased size of average industrial (thousands) actual increase in square foot occupency rate 96% 96% 97% 95% 95% 95% 95% 95% 95% 95% 95% 95% 95% 95% 96% 96% 96% 96% amount occupied 5,887 6,692 7,306 8,081 8,828 8,828 9,086 9,345 9,345 9,603 9,861 10,119 10,377 10,377 10,820 11,154 11,488 11,822 average price per square foot $ 5.64 $ 5.81 $ 5.59 $ 5.62 $ 1.45 $ 1.43 $ 1.45 $ 1.45 $ 5.79 $ 1.46 $ 1.46 $ 1.46 $ 1.46 $ 5.84 $ 5.87 $ 5.90 $ 5.93 $ 5.96 rental revenue $41,318 $37,323 $40,234 $43,393 $11,309 $11,738 $13,175 $13,550 $49,772 $14,020 $14,397 $14,773 $15,150 $58,340 $63,515 $65,810 $68,126 $70,462 reimbursement revenue $7,233 $7,889 $7,906 $7,094 $1,518 $1,568 $1,713 $1,761 $6, $1,823 $1,872 $1,921 $1,970 $7,584 $9,527 $10,530 $10,900 $11,274 % of rental revenue 18% 21% 20% 16% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 15% 16% 16% 16% lease termination income $3,222 $690 $0 $0 $0 $690 $238 $244 $250 $257 $989 $1,096 $1,145 $1,185 $1,226 % of total revenue 0% 0% 0% 6% 5% 0% 0% 0% 1% 1.50% 1.50% 1.50% 1.50% 2% 2% 2% 2% 2% total revenue $48,551 $45,212 $48,140 $53,709 $13,517 $13,306 $14,888 $15,311 $57,022 $16,080 $16,512 $16,944 $17,377 $66,913 $74,138 $77,485 $80,212 $82,962 UOIG 14

15 Appendix 4 Working Capital Model Working Capital Model Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ($ in thousands) 2009A 2010A 2011A 2012A 12/31/2012A 03/31/2013A 06/30/2013E 09/30/2013E 2013E 12/31/2013E 03/31/2014E 06/30/2014E 09/30/2014E 2014E 2015E 2016E 2017E 2018E Total Revenue $48,551 $45,212 $48,140 $53,709 $13,517 $13,306 $14,888 $15,311 $57,022 $16,080 $16,512 $16,944 $17,377 $66,913 $74,138 $77,485 $80,212 $82,962 Current Assets Tenant and Other Recievables Days Sales Outstanding A/R % of Revenue 0.8% 1.4% 2.1% 2.1% 19.6% 23.1% 10.0% 8.0% 2.1% 11.0% 11.0% 11.0% 11.0% 2.9% 3.0% 3.0% 3.0% 3.0% Deferred Rent Receivable Days Inventory Outstanding % of Revenue 2.5% 3.5% 3.5% 4.1% 17.5% 22.1% 19.0% 18.0% 4.8% 18.0% 18.0% 18.0% 18.0% 4.7% 4.4% 4.2% 4.0% 3.8% Loans Receivable, net Days Outstanding % of Revenue 0.8% 0.6% 0.2% 0.3% 0.6% 0.6% 0.7% 0.7% 0.2% 0.7% 0.7% 0.7% 0.7% 0.2% 0.5% 0.5% 0.5% 0.5% Prepaid Expenses Days Outstanding % of Revenue 1.2% 1.4% 1.2% 2.7% 24.1% 25.9% 20.0% 16.0% 2.7% 12.0% 12.0% 12.0% 12.0% 3.1% 2.7% 2.7% 2.7% 2.7% Total Current Assets $2,551 $3,105 $3,325 $4,947 $8,343 $9,532 $7,392 $6,538 $6,538 $6,705 $6,886 $7,066 $7,246 $7,246 $7,873 $8,074 $8,198 $8,313 % of Revenue 5.3% 6.9% 6.9% 9.2% 61.7% 71.6% 49.7% 42.7% 11.5% 41.7% 41.7% 41.7% 41.7% 10.8% 10.6% 10.4% 10.2% 10.0% Current Liabilities Accounts Payable & Accrued Expenses $ 2,084 $ 2,089 $ 2,130 $ 3,882 $ 3,514 $ 3,590 $ 3,640 $ 3,828 $ 3,828 $ 4,020 $ 4,128 $ 4,236 $ 4,344 $ 4,344 $ 5,486 $ 5,734 $ 5,936 $ 6,139 % of Revenue 4.3% 4.6% 4.4% 7.2% 26.0% 27.0% 25.0% 25.0% 6.7% 25.0% 25.0% 25.0% 25.0% 6.5% 7.4% 7.4% 7.4% 7.4% Total Current Liabilities % of Revenue 4.3% 4.6% 4.4% 7.2% 26.0% 27.0% 24.4% 25.0% 6.7% 25.0% 25.0% 25.0% 25.0% 6.5% 7.4% 7.4% 7.4% 7.4% Appendix 5 Discounted Cash Flows Analysis Assumptions Discounted Free Cash Flow Assumptions Tax Rate 0.00% Terminal Growth Rate 3.00% Risk Free Rate 3.30% Terminal Value 1,193,885 Beta 0.88 PV of Terminal Value 805,952 Market Risk Premium 5.71% Sum of PV Free Cash Flows 211,257 % Equity 60.02% Firm Value 1,017,210 % Debt 39.98% Total Debt 283,990 Cost of Debt 6.00% Cash & Cash Equivalents 20,130 CAPM 8.34% Market Capitalization 733,220 WACC 7.41% Fully Diluted Shares 41,641 Implied Price Current Price Undervalued 71.95% Conside MNR Beta SD Weighting Three Year Daily % Five Year Monthly % One Year Daily % Hamada Three Year Daily % One Year Weekly % 0.00% UOIG 15

16 Risk Free Rate WACC Adjusted Beta University of Oregon Investment Group Appendix 6- Sensitivity Tables Additional Sensitivity Tables Terminal Growth Rate % 2.3% 3.0% 3.8% 4.5% Additional Senstivity Tables Terminal Growth Ra Additional Senstivity Tables Terminal Growth Rate % 2.3% 3.0% 3.8% 4.5% 5.41% % % % % Additional Senstivity Tables Terminal Growth Rate % 2.3% 3.0% 3.8% 4.5% 2.30% % % % % Appendix 7 Sources Suggested Sources SEC Filings FactSet Yahoo! Finance IBIS World Google Images Monmouth Real Estate Investment Corporation Earnings Calls Mreic.com Terreno.com Stagindustrial.com Firstindustrial.com First-potomac.com Reit.com Nick Hubert UOIG 16