Description

Monmouth Realty shareholders recently rejected the cash/stock acquisition of the company by EQC at $19. Since EQC made their offer in May 2021, cap rates for industrial REITs have declined from 4.6% to 3.1% as a result of booming demand for industrial space, scarcity of viable development sites, low rates and the implicit inflation hedge. Also since the EQC offer, there’s been 60M shares traded at a VWAP of $19 relative to 92M shares outstanding.

Were MNR to be valued in line with Starwood’s private market transaction for comparable industrial assets, the price would be $26 per share. At a 4% cap rate on 2022E NOI, the value is $28 per share. At a 3.3% cap rate, the value is $38 per share.  All of these suggest an upside of 37% to 100%. While you wait for value to be realized, the company pays a 3.8% dividend.

There were numerous bids for the company at $19 aside from the EQC offer, including an $18.88 bid from Starwood ($19.51 less a $0.63 proposed termination fee). The fact that there are numerous bids for the entire company at the current price provides a margin of safety against loss as well as pressure on management to maintain or increase the public value of the company from here.

Monmouth has always traded at a discount to the industrial REITs due to poor management, operating underperformance, a sub-scale portfolio and high tenant concentration risk (Fedex is 55% of the rent). Management tacitly acknowledged the company’s shortcomings in their pitch for merging with EQC, which appears to have been driven in large part by the advantageous tax structure offered by a cash/stock deal with EQC.

Outside directors own 0.34% of the total shares outstanding, in comparison with the leading activist Blackwell which owns 4% ($77M) and initiated the bidding process by offering $18 per share in December 2020.

In order to remedy the mismanagement of the MNR, Blackwell will be proposing new directors in the next shareholder meeting. Given that they were successful in derailing the EQC merger, it seems likely that Blackwell will also be successful in getting their representatives on the board to agitate for change. As this has been a perennial, family controlled underperformer, there are likely significant opportunities for operational upside.

This is a liquid, leveraged way to participate in an inflation hedge and pending shareholder activism, with downside protection as the current market price is supported by multiple private market bidders and a discount to the comps.

For valuable insight into the situation, I highly recommend reviewing the public documents provided by Blackwells Capital at maximizemnr.com.

Catalyst

Pending activist campaign which will seek to remedy the persistent undervaluation of the company