Can Monmouth Earnings Ride FedEx's Success to Support Its Dividend?

Monmouth Real Estate Investment (MNR) will release its quarterly report on Thursday, and investors have been nervous lately about the real estate investment trust's prospects in a rising interest rate environment. Yet what sets Monmouth apart from both leveraged mortgage REIT Annaly Capital Management (NLY 0.59%) and traditional industrial REITs is the fact that Monmouth gets about half of its rental revenue from a single customer, FedEx (FDX -0.21%). Does that add an unacceptable level of risk to the investment, or is it actually a positive for Monmouth?

On its face, Monmouth is well diversified, with 80 different properties spread out across 27 different states. But having so much of its fortunes tied to FedEx introduces sensitivity to the delivery business that most REITs that have a broader-based tenant list don't have to deal with. The question is whether Monmouth's yield adequately reflects the risks involved with FedEx, and whether the delivery company actually has the financial strength to keep growing and maintaining its lease obligations. Let's take an early look at what's been happening with Monmouth Real Estate Investment over the past quarter and what we're likely to see in its report.

Stats on Monmouth Real Estate Investment

Source: Yahoo! Finance.

Can Monmouth earnings keep investors happy?
In recent months, analysts have raised their views on Monmouth earnings, increasing their September-quarter estimates by a penny per share and their full-year fiscal 2014 projections by about 15%. The stock has held up reasonably well during the general REIT malaise recently, gaining 2% since early September.

Monmouth came into the quarter on a fairly positive note, with its June-quarter report showing growth in adjusted core funds from operations of more than 10%. Rental revenue climbed by nearly 10%, and the company kept expenses in check, increasing less than 2%. Gains on securities transactions also boosted earnings substantially.

But Monmouth faces the uncertainty of being linked so closely with FedEx. For years, FedEx has seen substantial growth due in large part to the rise in popularity of online commerce. Amazon.com is working hard to avoid becoming reliant on any single carrier, including its efforts to enlist the U.S. Postal Service for Sunday delivery and its most recent aspirational Amazon Prime Air service to circumvent outside delivery services entirely.

In addition, Monmouth has to deal with the same interest rate sensitivity that plagues Annaly and countless other REITs. Essentially, when rates rise, the income streams that Monmouth earns from FedEx and its other tenants look less attractive to investors. That tends to drive share prices down, which is what Monmouth has seen in recent months -- albeit with its dividend distributions helping keep investors in the black. Admittedly, Monmouth's level of leverage is nothing close to Annaly's, leaving it with a greater margin of safety compared to mortgage REITs generally.

Perhaps in response to its risks, though, Monmouth has gone on a huge acquisition binge, announcing no fewer than seven new property acquisitions between September and November. Although four of the acquisitions have FedEx Ground as the net-lease tenant, Monmouth also did deals with International Paper, Dr Pepper Snapple, and ConAgra, showing its efforts to keep its tenant list diversified.

In the Monmouth earnings report, watch to see how the company plans to deal with higher interest rates. So far, interest expense hasn't been a major problem for a long time, but if Monmouth's financing costs climb, then it could eat into funds from operations and potentially jeopardize the size of the dividend in the long run.

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