Many individual investors lack the resources to own and operate large commercial properties. As a result, they are unable to enjoy the financial benefits of the commercial real estate market.
Real Estate Investment Trusts (REITs) were developed to level the playing field, so that more people can participate in property investment.
The Basics of REITs
As with Exchange-Traded Funds (ETFs) and Mutual Funds, equity REITs allow individual investors to pool their money for the purpose of investing in real estate.
Fund shares are available for purchase, and fund management handles the logistics of selecting, buying, and managing a portfolio of properties. REITs generate profit by renting assets to tenants.
Note that these funds are not the same as mortgage REITs, which invest in mortgage-backed securities. Mortgage REITs are considered a much higher risk investments compared to equity REITs.
Some funds specialize in a particular sector of the industry, while others develop a diverse list of assets that spans the entire market. Examples of commercial assets popular among REITs include retail centers, data centers, warehouses, health care facilities, apartment complexes, office buildings, and hotels.
In some cases, REITs invest in infrastructure, such as cell towers (e.g. American Tower: AMT), energy pipelines, and fiber cables.
REITs enjoy a special tax status, which ensures they aren’t paying corporate rates. However, there are a number of criteria that REITs must meet to qualify for tax savings.
Funds that don’t meet the following requirements lose their status as an REIT:
- 90% of income must be paid out in dividends
- At minimum, 75% of assets must be invested in real estate, treasuries, or cash
- At least 75% of gross income must come from real estate investments
- The REIT must have a minimum of 100 shareholders
- Of those shareholders, no five individuals can own more than 50% of available shares
Monmouth Real Estate Investment Corporation
Though Monmouth Real Estate Investment Corporation isn’t the largest REIT, it is one of the oldest REITS in the world – and one of the most successful.
The fund’s underlying strategy is one of profit over growth, so each project is thoroughly vetted before joining the Monmouth [NYSE: MNR] collection of assets. That means high occupancy rates and reliable tenants who have committed to long-term leases.
For example, in the fourth quarter of 2018, Monmouth acquired two new properties. One is a 62-acre parcel located in Trenton, NJ, which is convenient to both New York City and Philadelphia. FedEx [NYSE: FDX] Ground has leased the building for 15 years for use as a distribution center. The second is a 29-acre parcel in Savannah, GA, which FedEx Ground [NYSE: FDX] has leased for 10 years.
As a result of this strategy, shareholders have enjoyed reliable income year after year. While this is no guarantee of future profits, it does give new investors a certain amount of confidence.
Monmouth by the Numbers
Monmouth [NYSE: MNR] has developed a portfolio of Class A industrial properties in carefully selected locations throughout the United States.
As of May 2019, Monmouth owns 113 buildings in 30 US states. That adds up to a gross leasable area of 21.8 million square feet, and the weighted average age of the buildings is 8.8 years.
Current occupancy rates are at 98.9%, which is higher than most competing funds, and 80% of revenue comes from investment grade tenants, many of whom have long-term leases.
Monmouth’s total market capitalization growth is 339% – a figure that has quadrupled since 2011. The 10-year total return is 313%, placing Monmouth on the top 15 performers list for all REITs – and the number one performing industrial REIT for the 10-year period ending September 30, 2018.
For the 2018 fiscal year, AFFO per share grew 14.5%. In the quarter ending December 31, 2018, the fund’s first quarter for fiscal 2019, AFFO increased 4.5%.
This is particularly impressive considering the fund issued 9.2 million common shares in October 2018, as this sort of issuance typically has a dilutive effect in the short-term.
The core FFO was $0.24 per share, and the AFFO was $0.23 per share, making these quarterly earnings the highest in the fund’s history.
What are the Risks of Investing In Monmouth Real Estate Investment Corporation?
High-quality equity REITs like Monmouth have a long history of generating stable income for investors. In fact, when balancing portfolios, some investors treat REITs like bonds. However, as with any investment, there are risks when purchasing REIT shares in general, and Monmouth shares in particular.
Real estate values fluctuate, which can change the value of an REIT portfolio at any time. Though they tend to recover eventually, this can be an issue for investors who need access to cash during a real estate slump.
Other economic fluctuations can impact the profitability of an REIT. For example, those with a large stake in retail centers suffer when consumers cut back on purchases, sales slow, and businesses/tenants fail.
Monmouth has chosen a diverse mix of properties located in historically reliable markets, so this risk has been mitigated to the extent possible.
Is Monmouth Real Estate Investment Corporation Stock a Buy?
The bottom line is that Monmouth Real Estate Investment Corporation [NYSE: MNR] is a good choice for investors who want to enter the real estate market.
In general, REITs are worth considering, because many of the standard risks of real estate are mitigated by the fund approach versus purchase of individual properties.
Monmouth’s long history of strong returns, and its thoughtful approach to portfolio growth makes it one of the best REITs available at this time.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.