ITEM 1 - BUSINESS, (CONT'D.)
in which the Company operates is significant and affects acquisitions and/or development of properties, occupancy levels, rental rates, and operating expenses of certain properties. Management has built relationships with merchant builders which provide the Company with investment opportunities which fit the Company's investment policy.
Investment and Other Policies
The Company has a flexible investment policy concentrating its investments in the area of net-leased industrial properties. The Company's strategy is to obtain a favorable yield spread between the yield from the net-leased industrial properties and mortgage interest costs. The Company continues to purchase net- leased industrial properties, since management believes that there is a potential for long-term capital appreciation through investing in well-located industrial properties. There is the risk that, on expiration of current leases, the properties can become vacant or re-leased at lower rents. The results obtained by the Company by re-leasing the properties will depend on the market for industrial properties at that time.
In fiscal 2004, the Company purchased one net-leased industrial property, for a total cost of approximately $17,657,000. In fiscal 2005, the Company anticipates acquisitions of approximately $30,000,000. The funds for these acquisitions may come from the Company's available line of credit, other bank borrowings, proceeds from the Dividend Reinvestment and Stock Purchase Plan and private placements. To the extent that funds or appropriate properties are not available, fewer acquisitions will be made. Because of the contingent nature of contracts to purchase real property, the Company announces acquisitions only upon closing.
The Company seeks to invest in well-located, modern buildings leased to credit worthy tenants on long-term leases. In management's opinion, newly built facilities leased to FDX or FDX subsidiaries meet this criteria. The Company has a concentration of properties leased to FDX and FDX subsidiaries. This is a risk factor that shareholders should consider. FDX is a publicly- owned corporation and information on its financial business operations is readily available to the Company's shareholders.
The Company operates as part of a group of three public companies (all REITs) which includes United Mobile Homes, Inc., Monmouth Capital Corporation, and Monmouth Real Estate Investment Corporation (the affiliated companies). Some general and administrative expenses are allocated between the three affiliated companies based on use or services provided. The Company currently has eleven employees. Allocations of salaries and benefits are made between the affiliated companies based on the amount of the employees' time dedicated to each affiliated company.
The Company does not have an advisory contract; however, all of the properties are managed by Cronheim Management Services, a division of David Cronheim Company. In 1998, the Company entered into a new management contract with Cronheim Management Services,
ITEM 1 - BUSINESS, (CONT'D.)
a related party as defined in Note No. 9 to the Consolidated Financial Statements. Under this contract, Cronheim Management Services receives 3% of gross rental income on certain properties for management fees. Cronheim Management Services provides sub-agents as regional managers for the Company's properties and compensates them out of this management fee. Cronheim Management Services received $299,392, $258,626 and $245,597, in 2004, 2003 and 2002, respectively, for the management of the properties. David Cronheim Company received $132,185, $14,377 and $20,194 in lease commissions in 2004, 2003 and 2002, respectively.
	The Company is subject to various environmental regulatory requirements related to the ownership of real estate. Investments in real property have the potential for environmental liability on the part of the owner of such property. The Company is not aware of any environmental liabilities to the Company relating to the Company's investment properties which would have a material adverse effect on the Company's business, assets, or results of operations.
The Company continues to invest in both debt and equity securities of other REITs. The Company from time to time may purchase these securities on margin when the interest and dividend yields exceed the cost of the funds. The securities portfolio, to the extent not pledged to secure borrowing, provides the Company with liquidity and additional income. Such securities are subject to risk arising from adverse changes in market rates and prices, primarily interest rate risk relating to debt securities and equity price risk relating to equity securities. From time to time the Company may use derivative instruments to mitigate interest rate risk.
Additional information about the Company can be found on the Company's website which is located at www.mreic.com. The Company's filings with the Securities and Exchange Commission are made available through a link on the Company's website or by calling Investor Relations.
Risk Factors
Real Estate Industry Risks
The Company faces risks associated with local real estate conditions in areas where the Company owns properties. The Company may be affected adversely by general economic conditions and local real estate conditions. For example, an oversupply of industrial properties in a local area or a decline in the attractiveness of our properties to tenants would have a negative effect on the Company.
Other factors that may affect general economic conditions or local real estate conditions include:
. population and demographic trends;
ITEM 1 - BUSINESS, (CONT'D.)
. zoning, use and other regulatory restrictions;
. income tax laws;
. changes in interest rates and availability and costs of financing;
. competition from other available real estate;
. our ability to provide adequate maintenance and insurance; and
. increased operating costs, including insurance premiums and real estate taxes.
The Company may be unable to compete with its larger competitors and other alternatives available to tenants or potential tenants of our properties. The real estate business is highly competitive. The Company competes for properties with other real estate investors, including other real estate investment trusts, limited partnerships, syndications and private investors, many of whom have greater financial resources, revenues, and geographical diversity than the Company has. Furthermore, the Company competes for tenants with other property owners. All of the Company's industrial properties are subject to significant local competition. The Company also competes with a wide variety of institutions and other investors for capital funds necessary to support our investment activities and asset growth.
The Company is subject to significant regulation that inhibits our activities and increases our costs. Local zoning and use laws, environmental statutes and other governmental requirements may restrict expansion, rehabilitation and reconstruction activities. These regulations may prevent the Company from taking advantage of economic opportunities. Legislation such as the Americans with Disabilities Act may require management to modify the Company's properties. Future legislation may impose additional requirements. The Company cannot predict what requirements may be enacted or what changes may be implemented to existing legislation.
Risks Associated with Our Properties
The Company may be unable to renew leases or relet space as leases expire. While management seeks to invest in well-located, modern buildings leased to credit-worthy tenants on long term leases, a number of the Company's properties are subject to short-term leases. When a lease expires, a tenant may elect not to renew it. Management may not be able to relet the property on similar terms, if the property may be relet at all. Management has established an annual budget for renovation and reletting expenses that management believes is reasonable in light of each property's operating history and local market characteristics. This budget, however, may not be sufficient to cover these expenses.
ITEM 1 - BUSINESS, (CONT'D.)
The Company has been and may continue to be affected negatively by tenant financial difficulties and leasing delays. A general decline in the economy may result in a decline in the demand for industrial space. As a result, the Company's tenants may delay lease commencement, fail to make rental payments when due, or declare bankruptcy. Any such event could result in the termination of that tenant's lease and losses to the Company. The Company receives a substantial portion of our income as rents under long-term leases. If tenants are unable to comply with the terms of their leases because of rising costs or falling sales, management, in its sole discretion, may deem it advisable to modify lease terms to allow tenants to pay a lower rental or a smaller share of operating costs, taxes and insurance.
The Company may be unable to sell properties when appropriate because real estate investments are illiquid. Real estate investments generally cannot be sold quickly and, therefore, will tend to limit management's ability to vary the property portfolio promptly in response to changes in economic or other conditions. The inability to respond promptly to changes in the performance of the Company's property portfolio could adversely affect the Company's financial condition and ability to service debt and make distributions to our stockholders.
Environmental liabilities could affect the Company's profitability. The Company faces possible environmental liabilities. Current and former real estate owners and operators may be required by law to investigate and clean up hazardous substances released at the properties they own or operate. They may also be liable to the government or to third parties for property damage, investigation costs and cleanup costs. Contamination may affect adversely the owner's ability to sell or lease real estate or to borrow using the real estate as collateral.
Environmental laws today can impose liability on a previous owner or operator of a property that owned or operated the property at a time when hazardous or toxic substances were disposed on, or released from, the property. A conveyance of the property, therefore, does not relieve the owner or operator from liability.
Management is not aware of any environmental liabilities relating to the Company's investment properties which would have a material adverse effect on the business, assets, or results of operations. However, management cannot assure you that environmental liability claims will not arise in the future.
If our insurance coverage is inadequate or management cannot obtain acceptable insurance coverage, the Company operations could be materially adversely affected. Management generally maintains insurance policies related to the Company's business, including casualty, general liability and other policies covering business operations, employees and assets. The Company may be required to bear all losses that are not adequately covered by insurance. Although management believes that our insurance programs are adequate, no assurance can be given that we will not incur losses in excess of the Company's insurance coverage, or that the Company will be able to obtain insurance in the future at acceptable levels and reasonable cost.
ITEM 1 - BUSINESS, (CONT'D.)
Financing Risks
The Company faces risks generally associated with its debt. The Company finances a portion of its investments in properties and marketable securities through debt. This debt creates risks, including:
. rising interest rates on the floating rate debt;
. failure to repay or refinance existing debt as it matures, which may result in forced disposition of assets on disadvantageous terms;
. refinancing terms less favorable than the terms of existing debt; and
. failure to meet required payments of principal and/or interest.
The Company faces risks associated with the use of debt to fund acquisitions, including refinancing risk. The Company is subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. Management anticipates that a portion of the principal of the Company's debt will not be repaid prior to maturity. Therefore, the Company will likely need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of the existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as new equity capital or sales of properties, the Company's cash flow will not be sufficient to repay all maturing debt in years when significant "balloon" payments come due. As a result, we may be forced to dispose of properties on disadvantageous terms.
Other Risks
Management may amend our business policies without the stockholders' approval. Our board of directors determines our growth, investment, financing, capitalization, borrowing, REIT status, operations and distributions policies. Although the board of directors has no present intention to amend or reverse any of these policies, they may be amended or revised without notice to stockholders.
Accordingly, stockholders may not have control over changes in our policies. Management cannot assure stockholders that changes in our policies will serve fully the interests of all stockholders.
ITEM 1 - BUSINESS, (CONT'D.)
The market value of the Common Stock could decrease based on the Company's performance and market perception and conditions. The market value of the Company's Common Stock may be based primarily upon the market's perception of the Company's growth potential and current and future cash dividends, and may be secondarily based upon the real estate market value of the Company's underlying assets. The market price of the Company's Common Stock is influenced by, among other things, the dividend on the Company's Common Stock relative to market interest rates. Rising interest rates may lead potential buyers of the Company's Common Stock to expect a higher dividend rate, which would adversely affect the market price of the Common Stock. In addition, rising interest rates would result in increased expense, thereby adversely affecting cash flow and the Company's ability to service our indebtedness and pay dividends.
There are restrictions on the transfer of the Company's Common Stock. To maintain the Company's qualification as a REIT under the Internal Revenue Code of 1986 (the Code), no more than 50% in value of the Company's outstanding capital stock may be owned, actually or by attribution, by five or fewer individuals, as defined in the Code to also include certain entities, during the last half of a taxable year. Accordingly, the Company's charter and bylaws contain provisions restricting the transfer of the Company's Common Stock.
The Company's earnings are dependent, in part, upon the performance of our investment portfolio. As permitted by the Code, management invests in and owns securities of other real estate investment trusts. To the extent that the value of those investments declines or those investments do not provide a return, the Company's earnings could be adversely affected.
The Company is subject to restrictions that may impede management's ability to effect a change in control. Certain provisions contained in the Company's charter and bylaws, and certain provisions of Maryland law may have the effect of discouraging a third party from making an acquisition proposal for us and thereby inhibit a change in control.
The Company may fail to qualify as a REIT. If the Company fails to qualify as a REIT, the Company will not be allowed to deduct distributions to stockholders in computing our taxable income and will be subject to Federal income tax, including any applicable alternative minimum tax, at regular corporate rates. In addition, the Company might be barred from qualification as a REIT for the four years following disqualification. The additional tax incurred at regular corporate rates would reduce significantly the cash flow available for distribution to stockholders and for debt service.
Furthermore, the Company would no longer be required to make any distributions to the Company's stockholders as a condition to REIT qualification. Any distributions to stockholders that otherwise would have been subject to tax as capital gain dividends would be taxable as ordinary income to the extent of the Company's current and accumulated earnings and profits. Corporate distributees, however, may be eligible for the dividends received deduction on the distributions, subject to limitations under the Code.
ITEM 1 - BUSINESS, (CONT'D.)
To qualify as a REIT, and to continue to qualify as a REIT, the Company must comply with certain highly technical and complex requirements. The Company cannot be certain it has complied, and will always be able to comply, with these requirements. In addition, facts and circumstances that may be beyond the Company's control may affect the Company's ability to continue to qualify as a REIT. The Company cannot assure stockholders that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to the Company's qualification as a REIT or with respect to the Federal income tax consequences of qualification. The Company believes that it has qualified as a REIT since its inception and intends to continue to qualify as a REIT. However, the Company cannot assure you that the Company is qualified or will remain qualified.
The Company may be unable to comply with the strict income distribution requirements applicable to REITs. To obtain the favorable tax treatment associated with qualifying as a REIT, among other requirements, the Company is required each year to distribute to its stockholders at least 90% of its REIT taxable income. The Company will be subject to corporate income tax on any undistributed REIT taxable income. In addition, we will incur a 4% nondeductible excise tax on the amount by which our distributions in any calendar year are less than the sum of (i) 85% of our ordinary income for the year, (ii) 95% of our capital gain net income for the year, and (iii) any undistributed taxable income from prior years. The Company could be required to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT (and to avoid corporate income tax and the 4% excise tax), even if conditions were not favorable for borrowing.
Notwithstanding the Company's status as a REIT, the Company is subject to various Federal, state and local taxes on our income and property. For example, the Company will be taxed at regular corporate rates on any undistributed taxable income, including undistributed net capital gains, provided, however, that properly designated undistributed capital gains will effectively avoid taxation at the stockholder level. The Company may also have to pay some state income or franchise taxes because not all states treat REITs in the same manner as they are treated for Federal income tax purposes.
ITEM 2
ITEM 2 - DETAILED DESCRIPTION OF PROPERTIES
The Company operates as a real estate investment trust. Its portfolio is primarily in real estate holdings, some of which have been long-term holdings carried on the financial statements of the Company at depreciated cost. It is believed that their current market values exceed both the original cost and the depreciated cost.
The following table sets forth certain information concerning the Company's real estate investments as of September 30, 2004:
(1) The Company has an undivided 2/3 interest in the property. Estimated annual rent reflects the Company's proportionate share of the total rent on this property. (2) Subleased to USC Solutions. (3) Subleased to Leer Corporation. (4) Tenant has vacated but honors lease.
Page 11A
(1) The Company has an undivided 2/3 interest in the property. Estimated annual rent reflects the Company's proportionate share of the total rent on this property. (2) Subleased to USC Solutions. (3) Subleased to Leer Corporation. (4) Tenant has vacated but honors lease.
Page 11B
(1) The Company has an undivided 2/3 interest in the property. Estimated annual rent reflects the Company's proportionate share of the total rent on this property. (2) Subleased to USC Solutions. (3) Subleased to Leer Corporation. (4) Tenant has vacated but honors lease.
Page 11C
(1) The Company has an undivided 2/3 interest in the property. Estimated annual rent 	 reflects the Company's proportionate Share 	 of the total rent on this property. (2) Subleased to USC Solutions. (3) Subleased to Leer Corporation. (4) Tenant has vacated but honors lease.
Page 11D
ITEM 2 - DETAILED DESCRIPTION OF PROPERTIES, (CONT'D)
The Company's weighted-average lease expiration was 5.7 years at September 30, 2004 and the Company's occupancy rate was 95%. All properties were occupied 100% at September 30, 2004 except for Monaca, PA (56% occupied) and Wichita, KS (vacant but Keebler continues to honor lease).
The Company is a partner in a limited liability company, Hollister `97, LLC, representing a 25% ownership interest. The sole business of this LLC is the ownership and operation of the Hollister Corporate Park in Teterboro, New Jersey. Under the agreement, the Company is to receive a cumulative preferred 11% annual return on its investment.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
None.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fiscal fourth quarter of 2004.
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ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Overview
The Company is a real estate investment trust (REIT). The Company's primary business is the ownership and management of industrial buildings subject to long-term leases to credit tenants. The Company owns thirty-three industrial properties and one shopping center with a total of 3,734,000 square feet. Total real estate investments were $166,879,808 at September 30, 2004. These properties are located in New Jersey, New York, Pennsylvania, North Carolina, Mississippi, Massachusetts, Kansas, Iowa, Missouri, Illinois, Michigan, Nebraska, Florida, Virginia, Ohio, Connecticut, Wisconsin, Maryland, and Arizona. At September 30, 2004, the Company's weighted average lease expiration term was 5.7 years and the Company's occupancy rate was 95%.
In February 2004, the Company purchased a 170,779 square foot industrial building in Tampa, Florida for approximately $17,657,000. The building is 100% net leased to FedEx Ground Package Systems, Inc. a subsidiary of Federal Express Corporation, for 15 years. The Company obtained a mortgage of $12,800,000 at a rate of 6% which matures on March 1, 2019.
The Company has a concentration of Federal Express Corporation and subsidiary (FDX) leased properties. At September 30, 2004, the percentage of FDX leased square footage as a total of the Company's rental space is 33%, with 14% leased with Federal Express Corporation and 19% with Federal Express subsidiaries. This is a risk factor that shareholders should consider.
The Company intends to increase its real estate investments and expects to invest approximately $30,000,000 in acquisitions of real property in fiscal year 2005. The growth of the real estate portfolio depends on the availability of suitable properties which meet the Company's investment criteria. Competition in the market areas in which the Company operates is significant and affects acquisitions, occupancy levels, rental rates and operating expenses of certain properties.
The Company also holds a portfolio of securities of other REITs with a balance of $23,084,270 at September 30, 2004. The Company invests in REIT securities on margin from time to time when the Company can achieve an adequate yield spread and when suitable acquisitions of real property cannot be found. At September 30, 2004, the Company's portfolio consisted of 63% preferred stocks, 26% common stocks and 11% debentures. The REIT securities portfolio provides the Company with liquidity and additional income until suitable acquisitions of real property are found.
The Company's revenue primarily consists of rental and reimbursement income from the ownership of industrial rental property. Revenues also include interest and dividend income, gain (loss) on sales of securities transactions and income from an equity investment. Total rental and occupancy revenue increased 9% for the year ended September 30, 2004 as compared to the year ended September 30, 2003. Net income per share increased 7% for the year ended
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D)
September 30, 2004 as compared to the year ended September 30, 2003. The increase in revenue and net income per share was due mainly to property acquisitions and increased gain on securities available for sale partially offset by an increase of average shares outstanding.
See PART I, Item 1 - Business for a more complete discussion of the economic and industry-wide factors relevant to the Company and the opportunities and challenges, and risks on which the Company is focused.
Significant Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of operation are based upon the Company's consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company's consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Significant accounting policies are defined as those that involve significant judgment and potentially could result in materially different results under different assumptions and conditions. Management believes the following significant accounting policies are affected by our more significant judgments and estimates used in the preparation of the Company's consolidated financial statements. For a detailed description of these and other accounting policies, see Note 1 in the notes to the Company's consolidated financial statements included in this Form 10-K.
Real Estate Investments
The Company applies Financial Accounting Standards Board Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", (Statement 144) to measure impairment in real estate investments. Rental properties are individually evaluated for impairment when conditions exist which may indicate that it is probable that the sum of expected future cash flows (on an undiscounted basis without interest) from a rental property is less than its historical net cost basis. These expected future cash flows consider factors such as future operating income, trends and prospects as well as the effects of leasing demand, competition and other factors. Upon determination that a permanent impairment has occurred, rental properties are reduced to their fair value. For properties to be disposed of, an impairment loss is recognized when the fair value of the property, less the estimated cost to sell, is less than the carrying amount of the property measured at the time there is a commitment to sell the property and/or it is actively being marketed for sale. A property to be disposed of is reported at the lower of its carrying amount or its estimated fair value, less its cost to sell. Subsequent to the date that a property is held for disposition, depreciation expense is not recorded.
Page19
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D)
Upon acquisition of a property, the Company allocates the purchase price of the property based upon the fair value of the assets acquired, which generally consist of land, buildings, leasing commissions and intangible assets, including in-place leases and above and below market leases. The Company allocates the purchase price to the fair value of the tangible assets of an acquired property determined by third party appraisal of the property obtained in conjunction with the purchase. Acquired above and below market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates over the remaining lease term.
The purchase price is further allocated to in-place lease values based on management's evaluation of the specific characteristics of each tenant's lease and the Company's overall relationship with the respective tenant. Acquired above and below market leases are amortized over the remaining non- cancelable terms of the respective leases. The value of in-place lease intangibles, which is included as a component of Other Assets, is amortized to expense over the remaining lease term. If a tenant terminates its lease early, the unamortized portion of the tenant improvements, leasing commissions above and below market leases and the in-place lease value is immediately charged to expense.
Securities Available for Sale
Investments in non-real estate assets consist primarily of marketable securities. Management individually reviews and evaluates our marketable securities for impairment on an annual basis, or when events or circumstances occur. Management considers, among other things, credit aspects of the issuer, amount of decline in fair value over cost and length of time in a continuous loss position. If a decline in fair value is determined to be other than temporary, an impairment charge is recognized in earnings and the cost basis of the individual security shall be written down to fair value as the new cost basis.
Estimates and Revenue Recognition
Estimates are used to establish amounts receivable and revenue from tenants for such things as annualized rents, real estate taxes and other cost recoveries. In addition, an estimate is made with respect to whether a provision for allowance for doubtful accounts receivable is necessary. The allowance for doubtful accounts reflects management's estimate of the amounts of the recorded accounts receivable at the balance sheet date that will not be realized from cash receipts in subsequent periods. If cash receipts in subsequent periods vary from our estimates, or if the Company's tenants' financial condition deteriorates as a result of operating difficulties, additional changes to the allowance may be required.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D)
Results of Operation
The Company's activities primarily generate rental income. Net income for the fiscal year ended September 30, 2004 was $7,672,635 as compared to $6,120,343 in 2003 and $4,478,145 in 2002. Net rental income, defined as rental and occupancy charges reduced by direct operating expenses, management fees, interest and depreciation, for the fiscal year ended September 30, 2004 was $6,595,407 as compared to $5,888,135 in 2003 and $4,599,324 in 2002.
Net rental income increased $707,272 in 2004 as compared to 2003. The increase is due mainly to the addition of the net rental income related to the Tampa, Florida property, the full year of ownership of the properties purchased in 2003 (see below) and increased rent from the expansion of the Union Twp, Ohio property. The increase is also due to decreased interest expense on the Wichita, Kansas, and St. Joseph, Missouri properties due to loan payoffs in 2004. The increase was partially offset by decreased rent at the Greensboro, North Carolina property due to a 2-year lease extension at a decreased rental rate and an increase in depreciation on the Tolleson, Arizona property due to a full year of ownership.
Net rental income increased $1,288,811 in 2003 as compared to 2002. The increase is due mainly to the addition of the net rental income related to the acquisitions of properties made in 2003 at Tolleson, Arizona, Ft. Myers, Florida and Edwardsville, Kansas and the selling of the property at Virginia Beach, Virginia in 2002 which had produced a net rental loss in 2002. The Company also paid off the mortgage on the Wichita, Kansas property during 2003 resulting in an interest savings in 2003 as compared to 2002. These increases were partially offset by a decrease in the net rental income at the Granite City, Illinois property due to a full year of depreciation in 2003 as compared with partial year depreciation in 2002.
The Company also generated net investment income from its investments in securities available for sale and Hollister '97 LLC. These securities had an average dividend yield of approximately 7.56% and 8.6% during 2004 and 2003, respectively. Net investment and other income, which includes interest and dividend income, realized gains (losses) on securities available for sale, net reduced by margin loan interest expense increased $899,774 in 2004 as compared to 2003 due primarily to an increase in interest and dividend income and an increase in the gain on securities available for sale transactions, net. Net investment and other income increased $621,355 in 2003 as compared to 2002 due primarily to an increase in dividend and interest income and a increase in the gain on securities transactions net. Gain on securities available for sale transactions, net amounted to $1,714,395, $1,018,862, and 909,704 for 2004, 2003, and 2002, respectively.
Interest expense increased $72,929 in 2004 as compared to 2003 and $846,663 in 2003 compared to 2002. The increases are primarily due to the mortgages related to the acquisitions of one industrial property in 2004 and three industrial properties in 2003.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D)
Real estate taxes increased $301,072 in 2004 as compared to 2003 and $759,707 in 2003 as compared to 2002 due to the property acquisitions. The tenants related to the acquisitions in 2004 and 2003 are subject to net leases which require the tenants to absorb the real estate taxes as well as insurance and the majority of the repairs and maintenance. As such, the Company is reimbursed by the tenants for these real estate taxes.
Professional fees decreased $187,972 in 2004 as compared to 2003. The decrease is due to legal fees incurred in 2003 relating to the reincorporation of the Company from Delaware to Maryland and the related shareholder lawsuit which was settled in fiscal 2003. Professional fees increased $76,507 in 2003 as compared to 2002. Legal fees in 2002 related to various SEC filings and research on the reincorporation.
Operating expenses in 2004 were consistent with 2003. Operating expenses increased $135,537 in 2003 as compared to 2002. The increase in 2003 is due mainly to un-reimbursed insurance costs related to the new acquisitions and increased repairs and maintenance.
Office and general expenses increased $209,254 in 2004 as compared to 2003 and increased $352,496 in 2003 as compared to 2002. The increase relates mainly to increases in personnel costs due to additional employees and increases in franchise taxes as the Company enters new states (Arizona and Kansas in 2003). The Company has been active in acquisitions and is expanding its operations. Total assets increased from approximately $119,000,000 as of September 30, 2001 to approximately $195,000,000 as of September 30, 2004.
During 2002, the Company sold the warehouse facility in Virginia Beach, VA for a net loss of $175,376.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company has not executed any off-balance sheet arrangements.
The following is a summary of the Company's contractual obligations as of September 30, 2004:
Less than 1 More than Contractual Total year 1-3 years 3-5 years 5 years Obligations Mortgage Notes Payable $97,530,963 $5,484,926 $14,432,847 $12,973,896 $64,639,294 Retirement Benefits 605,293 -0- -0- -0- 605,293 Purchase of Property 19,125,000 19,125,000 -0- -0- -0- ___________ __________ __________ __________ __________ Total $117,261,256 $24,609,926 $14,432,847 $12,973,896 $65,244,587 	 =========== ========== ========== ========== ==========
Mortgage notes payable represents the principal amounts outstanding by scheduled maturity. The interest rates on these mortgages are fixed rates ranging from 5.8% to 8.5%. The
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D)
above table does not include the Company's obligation under its line of credit and margin loan as described in Note 6 of the Notes to Consolidated Financial Statements.
Retirement benefits represent post-retirement benefits that are not funded and therefore will be paid from the assets of the Company.
Purchase of property represents the purchase price of industrial buildings in Denver, Colorado and Hanahan, South Carolina. These purchases were completed on October 28, 2004 and December 6, 2004, respectively. (see Note 15 of the Notes to Consolidated Financial Statements).
Liquidity and Capital Resources
The Company operates as a real estate investment trust deriving its income primarily from real estate rental operations. At September 30, 2004, the Company's shareholders' equity increased to $92,907,840 as compared to $78,313,289 at September 30, 2003, principally due to proceeds from the dividend reinvestment and stock purchase plan, and the proceeds from a private placement partially offset by dividends and decreases in unrealized gains on securities available for sale. See further discussion below.
The Company's ability to generate cash adequate to meet its needs is dependent primarily on income from its real estate investments and securities portfolio, the sale of real estate investments and securities, refinancing of mortgage debt, leveraging of real estate investments, availability of bank borrowings, proceeds from the Dividend Reinvestment and Stock Purchase Plan (DRIP), proceeds from private placements, and access to the capital markets. Purchases of new properties, payments of expenses related to real estate operations, capital improvements programs, debt service, management and professional fees, and dividend requirements place demands on the Company's liquidity.
The Company intends to operate its existing properties from the cash flows generated by the properties. However, the Company's expenses are affected by various factors, including inflation. Increases in operating expenses raise the breakeven point for a property and, to the extent that they cannot be passed on through higher rents, reduce the amount of available cash flow which can adversely affect the market value of the property.
Management does not see an indication that material factors are present that may negatively impact cash flows. The Company is not aware of adverse trends, demands, commitments, events or uncertainties that are reasonably likely to have an impact on the Company's liquidity. The Company owns securities available for sale of $23,084,270 subject to margin loans of $1,261,901 at September 30, 2004. At September 30, 2004, the Company owned thirty-four properties of which 10 have no mortgages. These marketable securities and non-mortgaged properties provide the Company with additional liquidity. The Company has been raising capital through its DRIP and private placements and investing in net leased
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D)
industrial properties. The Company believes that funds generated from operations and the DRIP, the funds available on the line of credit, together with the ability to finance and refinance its properties and sell marketable securities will provide sufficient funds to adequately meet its obligations over the next several years.
The Company's focus is on real estate investments. During the past ten years, the Company purchased thirty-two net-leased warehouse facilities at an aggregate cost of approximately $183,894,000. The Company financed these purchases primarily through mortgages on its acquisitions. The Company also has a secured $15,000,000 line of credit of which approximately $13,700,000 was available at September 30, 2004. Interest is at the bank's floating prime (4.50% at September 30, 2004) and is due monthly. The line expires in May, 2006.
During 2004, the Company made one acquisition totaling approximately $17,657,000. The Company expects to make additional real estate investments from time to time. In fiscal 2005, the Company plans to acquire approximately $30,000,000 of net-leased industrial properties. The funds for these acquisitions may come from the Company's available line of credit, other bank borrowings and proceeds from the Dividend Reinvestment and Stock Purchase Plan or private placements. To the extent that funds or appropriate properties are not available, fewer acquisitions will be made.
The Company also invests in debt and equity securities of other REITs as a proxy for real estate when suitable acquisitions are not available, for liquidity, and for additional income. The Company from time to time may purchase these securities on margin when there is an adequate yield spread. During fiscal 2004, the Company's securities portfolio decreased by $2,337,281 primarily due to sales of approximately $9,229,076 and a decrease in the unrealized gain of approximately $1,141,835 partially offset by purchases of $8,033,630.
Cash flows provided from operating activities were $10,385,410, $9,725,898 and $6,792,043 for fiscal year 2004, 2003 and 2002, respectively. The increases in cash provided from operating activities resulted primarily from the operations of the property acquisitions of approximately $17,657,000 in 2004 and $26,200,000 in 2003.
Cash flows used in investing activities were $15,215,218, $35,417,062 and $30,564,641 for fiscal year 2004, 2003 and 2002, respectively. Cash flows used in investing activities decreased in 2004 as compared to 2003 due mainly to the decreases in securities purchases, capital improvements and acquisitions and increased in 2003 as compared to 2002 due mainly to the increase in securities purchases.
Cash flows provided from financing activities were $4,684,267, $26,068,148, and $24,318,591 for fiscal year 2004, 2003 and 2002, respectively. Cash flows from financing activities decreased in 2004 as compared to 2003 due mainly to decreased proceeds from
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D)
mortgages, an increase in payments on loans, and a decrease in issuance of common stock through private placements. The Company sold $4,050,000 and $8,324,901 during 2004 and 2003, respectively, of common stock through private placements. Cash flows provided from financing activities increased in 2003 as compared to 2002 due mainly to an increase in cash from the issuance of common stock. The Company sold common stock in a private placement as noted above in addition to common stock sold through the Dividend Reinvestment and Stock Purchase Plan. See further explanation below.
At September 30, 2004, the Company had total liabilities of $102,314,329 and total assets of $195,222,169. The Company believes that it has the ability to meet its obligations and to generate funds for new investments.
During 2004, the Company paid $9,426,915 as a dividend of $0.58 per share. Management anticipates maintaining the annual dividend rate of $0.58 per share although no assurances can be given since various economic factors can reduce the amount of cash flow available to the Company for dividends. Of the $9,426,915 in dividends paid, $3,531,838 was reinvested in the Dividend Reinvestment and Stock Purchase Plan.
The Company has a DRIP, in which participants purchase stock from the Company at a price at approximately 95% of market. During 2004, a total of $12,532,541 in additional capital was raised through the DRIP. It is anticipated, although no assurances can be given, that a comparable level of participation will continue in the DRIP in fiscal 2005. Therefore, the Company anticipates that the DRIP will result in further increased liquidity and capital resources in fiscal 2005.
In January 2004, the Company issued 500,000 shares in a private placement for consideration of $4,050,000 or $8.10 per share. The proceeds of the private placement were used for working capital and to pay down the Company's outstanding line of credit and margin loan. The Company incurred approximately $67,993 in offering costs related to this private placement which were recorded as a reduction to Additional Paid-In Capital.
During the year ended September 30, 2004, four directors and employees exercised their stock options and purchased 131,500 shares for a total of $830,705. During the year ended September 30, 2003, two directors exercised their stock options and purchased 9,500 shares for a total of $52,875. During the year ended September 30, 2002, nine officers, directors and key employees exercised their stock options and purchased 255,000 shares for a total of $1,617,488. Of this amount, 225,000 shares, for a total of $1,617,488, were exercised through the issuance of notes receivable from officers. These notes receivable are at an interest rate of 5%, mature on April 30, 2012 and are collateralized by the underlying common shares. As of September 30, 2004, the balance of these notes receivable was $1,215,938.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONT'D)
New Accounting Pronouncements
FASB Interpretation No. 46, Consolidation of Variable Interest Entities "FIN 46" was issued in January 2003 and was reissued as FASB Interpretation No. 46 (revised December 2003) (FIN 46R). For public entities, FIN 46 or FIN 46R is applicable to all special-purpose entities (SPEs) in which the entity holds a variable interest no later than the end of the first reporting period ending after December 15, 2003, and immediately to all entities created after January 31, 2003. The effective dates of FIN 46R vary depending on the type of reporting enterprise and the type of entity that the enterprise is involved with. FIN 46 and FIN 46R may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46 and FIN 46R provides guidance on the identification of entities controlled through means other than voting rights. FIN 46 and FIN 46R specifies how a business enterprise should evaluate its involvement in a variable interest entity to determine whether to consolidate that entity. A variable interest entity must be consolidated by its primary beneficiary if the entity does not effectively disperse risks among the parties involved. Conversely, effective dispersion of risks among the parties involved requires that a company that previously consolidated a special purpose entity, upon adoption of FIN 46 or FIN 46R, to deconsolidate such entity. This interpretation did not have a material impact on the Company's consolidated financial statements.
Safe Harbor Statement
This Form 10-K contains various "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. The words "may", "will", "expect", "believe", "anticipate", "should", "estimate", and similar expressions identify forward- looking statements. The forward-looking statements reflect the Company's current views with respect to future events and finance performance, but are based upon current assumptions regarding the Company's operations, future results and prospects, and are subject to many uncertainties and factors relating to the Company's operations and business environment which may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements.
Such factors include, but are not limited to, the following: (i) changes in the general economic climate; (ii) increased competition in the geographic areas in which the Company operates; (iii) changes in government laws and regulations; and (iv) the ability of the Company to continue to identify, negotiate and acquire properties on terms favorable to the Company. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate changes primarily as a result of its line of credit and long-term debt used to maintain liquidity and fund capital expenditures and acquisitions of the Company's real estate investment portfolio. The Company's interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows primarily at fixed rates.
The following table sets forth information as of September 30, 2004, concerning the Company's debt obligations, including principal cash flow by scheduled maturity, weighted average interest rates and estimated fair value:
Long -Term Debt: Average Fixed Rate Fiscal Carrying Interest Fair Value Value Rate
2005 $ -0- -0- 2006 -0- -0- 2007 2,668,864 7.80% 2008 1,169,179 8.5% 2009 -0- -0- Thereafter 93,692,920 6.99%
___________ ________
Total $ 97,530,963 7.03% $100,508,994 ==========
The Company also has $1,361,198 in variable rate debt maturing in May, 2006. This debt is a line of credit. The interest is at the bank's floating prime rate and is due monthly. The interest rate was 4.50% at September 30, 2004. Additionally, the Company has $1,261,901 in variable rate debt due on demand. This debt is primarily margin loans secured by marketable securities. The interest rate on these loans was 3.5% at September 30, 2004. The Company has $13,638,802 available on this $15,000,000 line. The carrying value of the Company's variable rate debt approximates fair value at September 30, 2004.
The Company also invests in both debt and equity securities of other REITs and is primarily exposed to equity price risk from adverse changes in market rates and conditions. All securities are classified as available for sale and are carried at fair value.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in Part VI, Item 15 (a) (1) are incorporated herein by reference and filed as part of this report.
The following is the Unaudited Selected Quarterly Financial Data:
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) THREE MONTHS ENDED
FISCAL 2004 12/31/03 3/31/04 6/30/04 9/30/04
Rental and Occupancy Charges $5,047,924 $5,317,297 $5,453,966 $5,510,313 Total Expenses 2,410,910 2,665,121 2,477,926 2,749,403 Other Income (Expense) (1) 117,869 (565,644) (1,187,292) (1,718,438) Net Income 2,754,883 2,086,532 1,788,748 1,042,472 Net Income per Share .18 .13 .11 .05
FISCAL 2003 12/31/02 3/31/03 6/30/03 9/30/03
Rental and Occupancy Charges $4,653,072 $4,648,203 $5,109,109 $5,230,727 Total Expenses 2,094,910 2,236,314 2,399,152 2,701,624 Other income (Expense) (1,119,734) (1,269,760) (679,046) (1,020,228) Net Income 1,438,428 1,142,129 2,030,911 1,508,875 Net Income Per Share .12 .08 .14 .10
(1) Fluctuations are due to level of gains on securities transactions recognized in the respective quarters.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES
The Company's President and Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Company's management, have evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, the Company's President and Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective.
The Company's President and Chief Executive Officer and Chief Financial Officer have also concluded that there have not been any changes in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B
ITEM 9B - OTHER INFORMATION
None
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the Directors and Executive Officers of the Company as of September 30, 2004:
Present Position with the Company; Business Experience During Past Director Name Age Five Years; Other Since Directorships ____ ___ _____________ ________
Anna T. Chew 46 Chief Financial Officer (1991 to N/A present) Certified Public Accountant. Director (1991-2004). Vice President (1995 to present) and Director (1994 to present) of United Mobile Homes, Inc., an affiliated company. Chief Financial Officer (1991 to present of Monmouth Capital Corporation, an affiliated company.
Daniel D. 50 Director. Attorney at Law (1982 to 1989 Cronheim present); Executive Vice President (1989 to present) and General Counsel (1983 to present) of David Cronheim Company. President (1997 to present) of David Cronheim Mortgage Company; President (2000 to present) of Cronheim Management Services, Inc. and Director (2000 to present) of Hilltop Community Bank.
Neal Herstik 45 Attorney at Law, Gross, Truss & 2004 Herstik, PC (1997 to present); Director of Monmouth Capital Corporation (2002 to present); First Vice President, Marlboro Community Players, Inc., a non- profit corporation (2000 to 2002); Co-founder and former President, Manalapan-Englishtown Education Foundation, Inc., a non-profit corporation (1995 to 2001).
Matthew I. 45 Director. Attorney at law (1985 2000 Hirsch to present); Adjunct Professor of Law (1993 to present) Widener University School of Law.
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONT'D)
Present Position with the Company; Business Experience During Past Director Name Age Five Years; Other Since Directorships ____ ___ _____________ _______
Eugene W. Landy 70 President (1968 to present) and 1968 Director. Attorney at Law; President and Director (1961 to present) of Monmouth Capital Corporation, an affiliated company; Chairman of the Board (1995 to present), President (1969 to present) of United Mobile Homes, Inc., an affiliated company.
Michael P. Landy 42 Vice President - Investments. N/A Executive Vice President (2001 to present) of Monmouth Capital Corporation, an affiliated company; Vice President - Investments (2001 to present) of United Mobile Homes, Inc., an affiliated company, President (1998 to 2001) of Siam Records, LLC; Chief Engineer and Technical Director (1987 to 1998) of GRP Recording Company.
Samuel A. Landy 44 Director. Attorney at Law (1985 1989 to present); President (1995 to present), Vice President (1991 to 1995) and Director (1992 to present) of United Mobile Homes, Inc., an affiliated company; Director (1994 to 2004) of Monmouth Capital Corporation, an affiliated company.
Cynthia J. 35 Executive Vice President and 2002 Morgenstern Director. Vice President (1996 to 2001) Summit Bank, Commercial Real Estate Division.
John R. Sampson 50 Director. Managing Director and 1001 co-founder, Kalorama Partners, LLC, a strategic consulting company (2003 to present); Senior Portfolio Manager (1998 to 2002) at Fox Asset Management, LLC, a registered investment advisor that manages equity, fixed income and balanced portfolios; Principal (1995 to 1998) at Pharos Management and Principia Partners LLC, which specialize in fixed income consulting and research for the securities industry.
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONT'D)
Present Position with the Company; Business Experience During Past Director Name Age Five Years; Other Since Directorships ____ ___ _____________ ________
Maureen E. 35 Controller (2003 to present) and N/A Vecere Treasurer (2004 to present). Certified Public Accountant; Audit Manager (1996-2003), KPMG LLP. Controller (2003 to present) and Treasurer (2004 to present) of Monmouth Capital Corporation, an affiliated company
Peter J. 57 Director. Investor; Director 2001 Weidhorn (2000-2003) of real estate acquisitions at Kushner Companies; Chairman of the Board, President/CEO (1998-2000) WNY Group, Inc. a real estate investment trust that owned and operated 8,000 apartments prior to its sale to the Kushner Companies; Director BNP Residential Properties, Inc. (2001 to present) Director of The Community Development Trust, Inc. (2003 to present); Trustee of the CentraState Healthcare Foundation, Inc. and Vice Chairman and Trustee of the Union for Reform Judaism.
Stephen B. 50 Director. Principal of U.S. Real 2003 Wolgin Estate Advisors, Inc. (2000 to present), a real estate advisory services group based in New York; Principal of the Wolgin Group (2000-2003); prior affiliations with J.P. Morgan, Odyssey Associates, The Prudential Realty Group, Standard & Poor's Corporation, and Grubb and Ellis.
Family Relationships
There are no family relationships between any of the Directors or executive officers, except that Samuel A. Landy and Michael P. Landy are the sons of Eugene W. Landy, the President and a Director of the Company.
Audit Committee
The Company's Board of Directors has determined that at least one member of the Audit Committee is a financial expert.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION (CONT'D)
Stock Option Plan
The following table sets forth, for the executive officers named in the Summary Compensation Table, information regarding individual grants of stock options made during the year ended September 30, 2004:
Potential Realized Percent Price Value at Assumed Annual Options Granted Per Expiration Rates for to Option Terms Name Granted Employees Share Date 5% 10% ____		_______ _________ _____ ____ __ ___
Eugene W. Landy 65,000 27% $7.89 8/3/12 $234,300 $571,200
Cynthia J. Morgenstern 50,000 21% 7.41 5/20/12 230,000 550,800
The following table sets forth for the executive officers named in the Summary Compensation Table, information regarding stock options outstanding at September 30, 2004:
Number of Value of Unexercised Unexercised Options at Year- Options Shares Value End At Year-End Name Exercised Realized Exercisable/ Exercisable/ Unexercisable Unexercisable ____	 _________ ________ _____________ _____________
Eugene W. Landy 65,000 357,500 195,000/65,000 $274,625/$29,250
Cynthia Morgenstern 50,000 356,500 -0-/50,000 $-0-/$46,500
Employment Agreements
On January 1, 2004, Eugene W. Landy's Employment Agreement with the Company was amended to extend for five years to December 31, 2009. Mr. Landy's amended Employment Agreement provides for (1) an increase in his annual base compensation from $150,000 to $175,000; (2) an increase in his severance payment from $300,000 payable $100,000 a year for three years to $500,000 payable $100,000 a year for five years; and (3) an increase from $40,000 a year to $50,000 a year of his pension benefits; and (4) an extension of three years of his pension payments commencing January 1, 2004. Mr. Landy receives bonuses and customary fringe benefits, including health insurance and five weeks vacation. Additionally, there will be bonuses voted by the Board of Directors. The Employment Agreement is terminable by either party at any time subject to certain notice requirements.
ITEM 11 - EXECUTIVE COMPENSATION (CONT'D)
Effective January 15, 2004, the Company and Cynthia J. Morgenstern entered into a three-year employment agreement under which Ms. Morgenstern receives an annual base salary of $160,000, increasing to $176,000 in 2005 and to $194,000 in 2006, plus bonuses and customary fringe benefits, including health insurance, four weeks vacation and the use of an automobile. If there is a voluntary or involuntary termination of employment, due to merger or change in control, Ms. Morgenstern, shall be entitled to receive one year's compensation at the date of termination. In the event of her disability, her salary will continue for a period of two years. The agreement was amended on September 16, 2004 to purchase disability insurance for Ms. Morgenstern. In the event of a disability exceeding 90 days Ms. Morgenstern will receive lost wages from the disability policy, not her salary for two years.
Other Information
Effective April 1, 2002, the Directors receive a fee of $1,500 for each Board Meeting attended, and an additional fixed annual fee of $10,000 payable quarterly. Directors appointed to house committees receive $150 for each meeting attended. Those specific committees are Nominating Committee, Compensation Committee, Audit Committee and Stock Option Committee.
Except as provided in the specific agreements described above, the Company has no pension or other post-retirement plans in effect for Officers, Directors or employees and, at present, has no intention of instituting such plans.
Daniel D. Cronheim is a Director of the Company and Executive Vice President of David Cronheim Company. The David Cronheim Company received $132,185, $14,377 and $20,194 in lease commissions in 2004, 2003 and 2002, respectively. Cronheim Management Services, a division of David Cronheim Company, received the sum of $299,392, $258,626 and $245,597 in 2004, 2003 and 2002, respectively for management fees. In 1998, the Company entered into a new management contract with Cronheim Management Services. Under this contract, Cronheim Management Services receives 3% of gross rental income on certain properties for management fees. Cronheim Management Services provides sub- agents as regional managers for the Company's properties and compensates them out of this management fee. Management believes that the aforesaid fees are no more than what the Company would pay for comparable services elsewhere.
Report of Board of Directors on Executive Compensation
Overview and Philosophy
The Company has a Compensation Committee consisting of two independent outside Directors. This Committee is responsible for making recommendations to the Board of Directors concerning compensation. The Compensation Committee takes into consideration three major factors in setting compensation.
ITEM 11 - EXECUTIVE COMPENSATION (CONT'D)
The first consideration is the overall performance of the Company. The Board believes that the financial interests of the executive officers should be aligned with the success of the Company and the financial interests of its shareholders. Increases in funds from operations, the enhancement of the Company's equity portfolio, and the success of the Dividend Reinvestment and Stock Purchase Plan all contribute to increases in stock prices, thereby maximizing shareholders' return.
The second consideration is the individual achievements made by each officer. The Company is a small real estate investment trust (REIT). The Board of Directors is aware of the contributions made by each officer and makes an evaluation of individual performance based on their own familiarity with the officer.
The final criterion in setting compensation is comparable wages in the industry. In this regard, the REIT industry maintains excellent statistics.
Evaluation
The Company's funds from operations continue to increase. The Committee reviewed the growth of the Company and progress made by Eugene W. Landy, Chief Executive Officer and whether his accomplishments met the bonus goals outlined in his employment contract. His base compensation under his amended contract was increased in 2004 to $175,000 per year, and his bonus for 2004 was $15,000.
Compensation Committee: Matthew I.Hirsch Stephen P.Wolgin
ITEM 11 - EXECUTIVE COMPENSATION (CONT'D)
Comparative Stock Performance
The following line graph compares the total return of the Company's common stock for the last five fiscal years to the NAREIT All REIT Total Return Index, published by the National Association of Real Estate Investment Trusts (NAREIT), and the S&P 500 Index for the same period. The total return reflects stock price appreciation and dividend reinvestment for all three comparative indices. The information herein has been obtained from sources believed to be reliable, but neither its accuracy nor its completeness is guaranteed.
		 Monmouth 		 Real Estate 		 Investment 	Year	 Corporation	 NAREIT	S&P 500
	1999	 100	 100		 100 	2000	 106	 126		 91 	2001	 142	 145		 80 	2002	 176	 153		 62 2003 220 212 80 	2004	 242	 241		 81
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONT'D)
(4)Includes (a) 36,493 Shares owned jointly with Ms. Chew's husband; and (2) 12,623 Shares held in Ms. Chew's 401(k) Plan. Includes 50,000 Shares issuable upon exercise of a Stock Option. Excludes 50,000 Shares issuable upon exercise of a Stock Option, which Stock Option is not exercisable until May 21, 2005.
(5)Includes 15,000 Shares issuable upon exercise of a Stock Option.
(6)Excludes 5,000 shares issuable upon exercise of a Stock Option, which Stock Option is not exercisable until May 21, 2005.
(7)Owned jointly with Mr. Hirsch's wife. Includes 14,000 Shares issuable upon exercise of a Stock Option.
(8)Includes 89,106 Shares owned by Mr. Landy's wife; (b) 161,764 Shares held in the Landy & Landy Employees' Profit Sharing Plan of which Mr. Landy is a Trustee with power to vote; (c) 126,585 Shares held in the Landy & Landy Employees' Pension Plan of which Mr. Landy is a Trustee with power to vote; and (d) 60,000 Shares held in the Eugene W. and Gloria Landy Family Foundation, a charitable trust, of which Mr. Landy has power to vote. Includes 195,000 shares issuable upon exercise of Stock Options. Excludes 65,000 Shares issuable upon exercise of a Stock Option, which Stock Option is not exercisable until August 3, 2005.
(9)Includes 8,645 Shares owned by Mr. Landy's wife; and (b) 57,257 Shares held in custodial accounts for Mr. Landy's minor children under the New Jersey Uniform Transfer to Minors Act in which he disclaims any beneficial interest but has power to vote.
10)Includes 6,883 Shares owned by Mr. Landy's wife; (b) 77,358 Shares held in custodial accounts for Mr. Landy's minor children under the New Jersey Uniform Transfer to Minors Act in which he disclaims any beneficial interest but has power to vote; (c) 1,000 Shares held in the Samuel Landy Family Limited Partnership and; (d) 32,064 Shares held in Mr. Landy's 401(k) Plan. Includes 15,000 Shares issuable upon exercise of a Stock Option.
(11)Includes 1,002 Shares held in Ms. Morgenstern's 401(k) Plan. Excludes 50,000 Shares issuable upon exercise of a Stock Option, which Stock Option is not exercisable until May 21, 2005.
(12) Includes 2,000 Shares held in custodial accounts for Mr. Sampson's minor children under the New Jersey Uniform Gifts to Minors Act in which he disclaims any beneficial interest but has power to vote. Includes 20,000 Shares issuable upon exercise of a Stock Option.
(13)Excludes 15,000 Shares issuable upon exercise of a Stock Option, which Stock Option is not exercisable until May 21, 2005.
(14)Excludes 5,000 shares issuable upon exercise of a Stock Option, which Stock Option is not exercisable until May 21, 2005.
There are no equity compensation plans other than the 1997 Stock Option Plan. See Note 7 in the notes to the Consolidated Financial Statements for a description of that plan.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Certain relationships and related party transactions are incorporated herein by reference to Item 15 (a) (1) (vi) Note 9 of the Notes to the Consolidated Financial Statements - Related Party Transactions.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
KPMG LLP (KPMG) served as the Company's independent auditors for the years ended September 30, 2004 and 2003. The following are the fees billed by KPMG in connection with services rendered:
2004 2003 ____ ____
Audit Fees $59,000 $73,000 Audit Related Fees -0- -0- Tax Fees 38,500 39,500 All Other Fees -0- -0- _______ ________ Total Fees $97,500 $112,500 					 ====== =======
Audit fees include professional services rendered by KPMG for the audit of the Company's annual financial statements and reviews of financial statements included in the Company's quarterly reports on Form 10-Q. Audit fees also include services that are normally provided by the Company's independent auditors in connection with statutory and regulatory filings, such as consents and assistance with and review of documents filed with the Securities and Exchange Commission.
Tax fees include professional services rendered by KPMG for the preparation of the Company's federal and state corporate tax returns and supporting schedules as may be required by the Internal Revenue Service and applicable state taxing authorities. Tax fees also include other work directly affecting or supporting the payment of taxes, including planning and research of various tax issues.
Audit Committee Pre-Approval Policy
The Audit Committee has adopted a policy for the pre-approval of audit and permitted non-audit services provided by the Company's principal independent accountants. The policy requires that all services provided by KPMG to the Company, including audit services, audit-related services, tax services and other services, must be pre-approved by the Committee. The pre-approval requirements do not prohibit day-to-day normal tax consulting services, which matters will not exceed $10,000 in the aggregate.
The Audit Committee has determined that the provision of the non-audit services described above is compatible with maintaining KPMG's independence.
PART IV
ITEM 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PAGE(S) _______ (a) (1) The following Financial Statements are filed as part of this report:
(i) Report of Independent Registered Public Accounting 45 Firm
(ii) Consolidated Balance Sheets as of September 30, 2004 and 46
(iii) Consolidated Statements of Income for the years Ended September 30, 2004, 2003 and 2002 47
(iv) Consolidated Statements of Shareholders' Equity for the years ended September 30, 2004, 2003 and 2002 48-49
(v) Consolidated Statements of Cash Flows for the years ended September 30, 2004, 2003 and 2002 50
(vi) Notes to the Consolidated Financial Statements 51-76
(a) (2) The following Financial Statement Schedule is filed as part of this report:
(i) Schedule III - Real Estate and Accumulated Depreciation as of September 30, 2004 77-79
All other schedules are omitted for the reason that they are not required, are not applicable, or the required information is set forth in the Consolidated Financial Statements or Notes hereto.
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(3) Exhibits
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation, or Succession (i) Reference is hereby made to the Agreement and Plan of Merger dated April 23, 1990 by and between Monmouth Real Estate Investment Trust and Monmouth Real Estate Investment Corporation filed with The Securities and Exchange Commission on April 3, 1990 on Form S-4 (Registration No. 33-34103). (ii) Reference is hereby made to the Agreement and Plan of Merger dated March 24, 2003 by and between MREIC Maryland, Inc., a Maryland corporation ("Monmouth Maryland"), and Monmouth Real Estate Investment Corporation, a Delaware corporation ("Monmouth Delaware") filed with The Securities and Exchange Commission on April 7, 2003 in the 2002 proxy (Registration No. 000-04258).
(3) Articles of Incorporation and By-Laws (i) Reference is hereby made to the Articles of Incorporation of MREIC Maryland, Inc. filed with The Securities and Exchange Commission on April 7, 2003 in the 2002 proxy (Registration No. 000-04258). (ii) Reference is hereby made to the Bylaws of MREIC Maryland, Inc. filed with the Securities and Exchange Commission on April 7, 2003 in the 2002 proxy (Registration No. 000-04258).
(10) Material Contracts (i) Employment Agreement with Mr. Eugene W. Landy dated December 9, 1994 is incorporated by reference to that filed with the Company's Form 10-K filed with The Securities and Exchange Commission on December 28, 1994. (ii) Amendment to Employment agreement with Mr. Eugene W. Landy dated November 5, 2003 is incorporated by reference to that filed with the Securities Exchange Committee on April 1, 2004 in the 2004 proxy (Registration No. 000-04248). (iii) Employment Agreement with Mr. Ernest V. Bencivenga dated November 9, 1993 is incorporated by reference to that filed with the Company's Form 10-K filed with The Securities and Exchange Commission on December 28, 1994. (iv) Employment Agreement with Cynthia J. Morgenstern dated January 15, 2004, as amended September 16, 2004.
(14) Code of Business Conduct and Ethics.
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(23) Consent of KPMG LLP.
(31.1) Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
(31.2) Certification pursuant to18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
(32) Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
(99) Audit Committee Charter
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders Monmouth Real Estate Investment Corporation:
We have audited the consolidated financial statements of Monmouth Real Estate Investment Corporation and subsidiary as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Monmouth Real Estate Investment Corporation and subsidiary as of September 30, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Short Hills, New Jersey December 3, 2004
See Accompanying Notes to the Consolidated Financial Statements
See Accompanying Notes to the Consolidated Financial Statements
See Accompanying Notes to the Consolidated Financial Statements
See Accompanying Notes to the Consolidated Financial Statements
See Accompanying Notes to the Consolidated Financial Statements
MONMOUTH REAL ESTATE INVESTMENT CORPORATION AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Business
Monmouth Real Estate Investment Corporation and its wholly-owned subsidiary, MRC I LLC (the Company) operates as a real estate investment trust (REIT) deriving its income primarily from real estate rental operations. As of September 30, 2004 and 2003, rental properties consist of thirty-four and thirty-three commercial holdings, respectively. These properties are located in New Jersey, New York, Pennsylvania, North Carolina, Mississippi, Massachusetts, Kansas, Iowa, Missouri, Illinois, Michigan, Nebraska, Florida, Virginia, Ohio, Connecticut, Wisconsin, Maryland and Arizona. The Company also owns a portfolio of investment securities.
On May 15, 2003, Monmouth Real Estate Investment Corporation changed its state of incorporation from Delaware to Maryland (the Reincorporation).
Use of Estimates
In preparing the financial statements, management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements include the Company and its wholly-owned subsidiary. The Company formed a wholly-owned subsidiary, MRC I, LLC (a Wisconsin limited liability company) in 2001, to purchase the Cudahy, Wisconsin property. All intercompany transactions and balances have been eliminated in consolidation.
Buildings, Improvements and Equipment
Buildings, improvements and equipment are stated at the lower of depreciated cost or net realizable value. Depreciation is computed based on the straight-line method over the estimated useful lives of the assets utilizing a half-year convention in the year of purchase. These lives range from 5 to 40 years. The Company accounts for its undivided interest in the Somerset, NJ property based upon its pro rata share of assets, liabilities, revenues and expenses. If there is an event or change in circumstances that indicates that the basis of an investment property may not be recoverable, management assesses the possible impairment of value through evaluation of the estimated future cash flows of the property, on an undiscounted basis, as compared to the property's current carrying value. A property's carrying value would be adjusted to fair value, if necessary, to reflect an impairment in the value of the property.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONT'D.)
Acquisitions
Upon acquisition of a property, the Company allocates the purchase price of the property based upon the fair value of the assets acquired, which generally consist of land, buildings, leasing commissions and intangible assets including in-place leases and above market and below market leases. The Company allocates the purchase price to the fair value of the tangible assets of an acquired property determined by third party appraisal of the property obtained in conjunction with the purchase. Acquired above and below market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates over the remaining lease term.
The purchase price is further allocated to in-place lease values based on management's evaluation of the specific characteristics of each tenant's lease and the Company's overall relationship with the respective tenant. Acquired above and below market leases are amortized over the remaining non-cancelable terms of the respective leases. The value of in-place lease intangibles, which is included as a component of Other Assets, is amortized to expense over the remaining lease term. If a tenant terminates its lease early, the unamortized portion of the tenant improvements, leasing commissions above and below market leases and the in-place lease value is immediately charged to expense.
Investment in Hollister `97, LLC
The Company's 25% investment in Hollister `97, LLC is accounted for under the equity method. Under the equity method, the initial investment is recorded at cost. The carrying amount of the investment is increased or decreased to reflect the Company's share of income or loss and is also reduced to reflect any dividends received. An unrelated New Jersey limited partnership owns the remaining 75%.
Securities Available for Sale
The Company classifies its securities among three categories: Held-to- maturity, trading and available-for-sale. The Company's securities at September 30, 2004 and 2003 are all classified as available-for-sale and are carried at fair value based on quoted market prices. Gains or losses on the sale of securities are calculated based on the average cost method and are accounted for on a trade date basis. Unrealized holding gains and losses are excluded from earnings and reported as a separate component of Shareholders' Equity until realized.
A decline in the market value of any security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value. Any impairment would be charged to earnings and a new cost basis for the security established.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONT'D.)
Derivative Financial Instruments
During the current year, the Company invested in futures contracts of ten-year treasury notes to reduce exposure of the debt securities portfolio to market rate fluctuations. These futures contracts do not qualify for hedge accounting under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138 and No. 149. The contracts are marked-to-market and the unrealized gain or loss is recorded in the income statement in gain on securities transactions, net with corresponding amounts recorded in other assets or other liabilities on the balance sheet. Gain or loss on settled futures contracts are also recorded as a component of gain on securities transactions, net.
Cash Equivalents
Cash equivalents consist of money market funds.
Lease Costs and Financing Costs
Costs incurred in connection with the execution of leases are deferred and are amortized over the term of the respective leases. Unamortized lease costs are charged to expense upon cancellation of leases prior to the expiration of lease terms. Costs incurred in connection with obtaining mortgages and other financings and refinancings are deferred and are amortized over the term of the related obligations. Unamortized costs are charged to expense upon prepayment of the obligation.
Revenue Recognition
Rental income from tenants with leases having scheduled rental increases are recognized on a straight-line basis over the term of the lease. Leases typically provide for reimbursement of real estate taxes, insurance, and other operating costs. These occupancy charges are recognized as earned.
Gains and Deferred Gains on Installment Sales
Gains on the sale of real estate investments are recognized by the full accrual method when the criteria for the method are met. Generally, the criteria are met when the profit on a given sale is determinable, and the seller is not obliged to perform significant activities after the sale to earn the profit. Alternatively, when the foregoing criteria are not met, the Company recognizes gains by the installment method.
Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period (16,206,433, 13,844,056 and 11,177,294 in 2004, 2003 and 2002, respectively). Diluted net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding plus the weighted-average number of net shares that would be issued upon exercise of stock options pursuant to the treasury stock method (16,290,284, 13,872,650 and 11,196,388 in 2004, 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONT'D.)
Income Tax
The Company has elected to be taxed as a Real Estate Investment Trust (REIT) under Sections 856-860 of the Internal Revenue Code. The Company will not be taxed on the portion of its income which is distributed to shareholders, provided it distributes at least 90% of its taxable income, has at least 75% of its assets in real estate investments and meets certain other requirements for qualification as a REIT. The Company is subject to franchise taxes in some of the states in which the Company owns property.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) includes items that are otherwise recorded directly in equity, such as unrealized gains or losses on securities available for sale.
Reclassifications
Certain amounts in the consolidated financial statements for the prior years have been reclassified to conform to the financial statement presentation for the current year.
(1) This represents the Company's 2/3 undivided interest in the property.
(1) This represents the Company's 2/3 undivided interest in this property.
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
Fiscal 2004
On February 23, 2004, the Company purchased a 170,779 square foot industrial building in Tampa, Florida. This building is 100% net-leased to FedEx Ground Package System, Inc., a subsidiary of Federal Express Corporation (FDX), for 15 years. The purchase price including closing costs was approximately $17,657,000. The Company paid approximately $400,000 in cash, obtained a mortgage of $12,800,000, and obtained $4,500,000 from its margin loan. The mortgage payable is at a rate of 6% and matures on March 1, 2019.
Fiscal 2003
On November 6, 2002, the Company purchased a 288,211 square foot manufacturing and warehouse facility in Tolleson, Arizona. This facility is 100% net leased to Western Container Corporation, which manufactures plastic bottles for Coca-Cola soft drink products for 10 years. The lease is guaranteed by Coca-Cola Enterprises. The purchase price was approximately $14,800,000. The Company paid approximately $550,000 in cash, borrowed approximately $2,200,000 against its security portfolio with Prudential Securities, used approximately $1,100,000 of its revolving credit line with Fleet Bank and obtained a mortgage of approximately $10,950,000. This mortgage payable is at an interest rate of 5.8% and is due November 1, 2012.
On November 21, 2002 the Company purchased a 90,020 square foot warehouse facility in Fort Meyers, Florida. This warehouse facility is 100% net leased to Fed Ex Ground Package System, Inc., a subsidiary of Federal Express Corporation for 10 years. The purchase price was approximately $4,400,000. The Company paid approximately $1,200,000 in cash, and obtained a mortgage of approximately $3,200,000. This mortgage payable is at a rate of 6.33% and matures December 1, 2012.
On April 1, 2003, the Company purchased a 179,280 square foot industrial building in Wyandotte County, in the City of Edwardsville, Kansas. This industrial building is 100% net-leased to Carlisle Tire and Wheel Company, for 10 years. The purchase price was approximately $7,000,000. To fund this purchase, the Company used approximately $2,050,000 of its revolving credit line with Bank of America and assumed a mortgage of $4,950,000. This mortgage payable is at an interest rate of 7.375% and is due in 2017.
NOTE 4 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Company has approximately 3,734,000 square feet of property, of which approximately 1,223,000 square feet or 33% is leased to Federal Express Corporation and subsidiaries (14% to FDX and 19% to FDX subsidiaries) and approximately 274,000 square feet, or 7%, is leased to Keebler Company. Rental and occupancy charges from Federal Express
NOTE 4 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK(CONT'D)
Corporation and subsidiaries totaled approximately $8,252,000, $7,205,000 and $6,317,000 for the years ended September 30, 2004, 2003 and 2002, respectively. Rental and occupancy charges from Keebler Company, (a subsidiary of the Kellogg Company) totaled approximately $1,978,000, $2,281,000 and $2,159,000 for the years ended September 30, 2004, 2003 and 2002, respectively. During 2004, 2003 and 2002, rental income and occupancy charges from properties leased to these companies approximated 48%, 48%, 52% of total rental and occupancy charges, respectively.
Information on these tenants is provided below. The information has been obtained from sources believed to be reliable, but neither its accuracy nor its completeness is guaranteed.
		 S&P Credit Rating at 		Tenant September 30,2004
		Federal Express 		Corporation (FDX) BBB/Stable/NR
		Kellogg Company (K) BBB+/Stable/A-2
NOTE 5 - SECURITIES AVAILABLE FOR SALE
Dividend income for the years ended September 30, 2004, 2003 and 2002 amounted to $1,693,650, $1,346,706 and $915,904, respectively. Interest income for the years ended September 30, 2004, 2003 and 2002 amounted to $107,457, $341,742 and $111,316, respectively.
The Company received proceeds of $10,973,706, $8,092,425, and $4,643,905, on sales or redemptions of securities available for sale during 2004, 2003 and 2002, respectively. The Company recorded the following Gain on Securities Transactions, net:
2004 2003 2002 ____ ____ ____ Gross realized gains $2,078,697 $1,074,554 $976,544 Gross realized losses (2,971) (55,692) (66,840) Net loss on closed futures contracts (208,182) -0- -0- Unrealized loss on open futures contracts (30,235) -0- -0- Impairment loss (122,914) -0- -0- _________ _________ _________ Total Gain on Securities Transactions, net $1,714,395 $1,018,862 $909,704 ========== ========= =========
During September, 2004, the Company invested in futures contracts of ten- year treasury notes with a notional amount of $9,000,000 with the objective of reducing the exposure of the debt securities portfolio to market rate fluctuations. Changes in the market value of these derivatives have been recorded in gain on securities available for sale transactions, net with corresponding amounts recorded in other liabilities on the balance sheet. The fair value of the
NOTE 5 - SECURITIES AVAILABLE FOR SALE (CONT'D)
derivatives at September 30, 2004 was a loss of $30,235 and is included in gain on securities transactions, net.
During 2004, the Company recorded a realized loss of $208,182 on settled futures contracts, which is included in gain on securities transactions, net.
During the year ended September 30, 2004, the Company recognized a loss of $122,914 due to a write down to the carrying value of securities available for sale which was considered other than temporarily impaired. The Company's securities available for sale consist primarily of debt securities and common and preferred stock of other REITs. The Company does not own more than 10% of the outstanding shares of any of these securities, nor does it have controlling financial interest.
The following is a listing of investments in debt and equity securities at September 30, 2004:
NOTE 5 - SECURITIES AVAILABLE FOR SALE (CONT'D)
			 Estimated Description Shares Cost Fair Value ___________ ______ ____ __________ FelCor Lodging $1.95 Sr A 13,000 296,414 314,600 FelCor Lodging 9% Sr B 11,500 261,127 294,400 G & L Realty 10.25% Sr A 1,000 23,320 25,290 Glenborough Realty 7.75% Sr A 14,960 345,024 375,646 Glimcher Realty 8.125% Sr G 4,000 100,000 101,800 Health Care Reit 7.625% Sr F 4,000 100,000 99,000 Health Care Reit 7.875% Sr D 14,000 351,000 354,760 Healthcare Properties 7.1% Sr F 11,000 275,000 276,760 Healthcare Properties 7.25% Sr E 5,000 125,000 129,200 Highwood Properties Inc. 8% Sr D 8,500 203,920 212,075 Hospitality Properties 8.875% Sr B 6,000 152,131 164,400 Host Marriott Corp 10% Cl C 1,000 25,600 26,920 Host Marriott Corp 8.875% ClE 4,000 100,000 110,240 HRPT Properties 8.75% Sr B 15,000 378,730 409,050 HRPT Properties 9.875% Sr A 5,500 145,660 150,040 Innkeepers USA 8% Sr C 4,000 100,000 101,200 iStar Financial 7.875% Sr E 20,000 500,000 503,800 Kramont Realty Trust 8.25% SrE 10,000 250,000 265,700 Lasalle Hotel Properties 10.25% Sr A 14,500 367,245 404,550 Lexington Corporate Properties 8.04% Sr B 20,000 500,000 517,000 LTC Properties 8% Sr F 10,000 250,000 254,200 Maguire Properties Inc 7.625% Sr A 12,800 314,736 318,720 Mid America Apt Communities 8.3% Sr H 10,000 254,500 257,700 Mills Corp 9% Sr B 18,000 467,975 489,240 Mills Corp 9% Sr C 24,500 633,495 673,750 New Plan Excel 7.625% Sr E 14,000 352,200 363,720 Omega Healthcare 8.375% Sr D 10,000 250,000 260,500 Pennsylvania Reit 11% Sr A 10,000 458,810 595,000 Post Properties 7.625% Sr B 8,000 197,370 209,600 Prologis 6.75% Sr G 8,000 200,000 199,120 PS Business Parks 7% Sr H 8,000 200,000 196,000 PS Business Parks 7.95% Sr K 4,000 100,000 104,200 Public Storage 6.5% Sr W 6,000 150,000 149,040 Ramco-Gershenson 7.95% Sr C 12,500 360,625 380,000 Realty Income Corp 7.375% Sr D 4,000 100,000 104,600 Reckson Assoc 7.625% Sr A 727 14,273 19,004
NOTE 5 - SECURITIES AVAILABLE FOR SALE (CONT'D)
Estimated Description Shares Cost Fair Value _____________ ______ _____ __________ Shurgard Storage 8.7% Sr C 1,000 26,264 25,550 Sizler Property Investors 9.75% Sr B 1,000 25,000 26,840 SL Green Realty 7.625% Sr C 10,000 250,000 256,300 SL Green Realty 7.875% Sr D 4,000 100,000 102,000 SNH Capital 10.125% Sr Z 6,000 159,004 160,500
_________ _________
Total Equity Securities - Preferred Stock 13,803,563 14,431,011 __________ __________
Equity Securities - Common Stock
American Financial Realty Trust 1,000 12,500 14,110 Biomed Realty Trust 8,000 120,004 140,720 BNP Residential Properties 18,000 192,595 246,240 Equity Office Properties 8,000 210,250 218,000 Equity Residential 1,000 27,900 31,000 First Industrial Realty Trust 1,000 33,542 36,900 Getty Realty Corp 41,090 882,360 1,077,380 Health Care Property Investors 21,000 473,632 546,000 Health Care Reit 1,000 30,430 35,200 HRPT Properties 11,000 88,607 120,890 Kramont Realty Trust 10,000 158,876 186,000 Mission West Properties 58,100 601,335 601,335 Monmouth Capital Corp (1) 39,879 138,119 261,235 Nationwide Health Properties Inc 1,000 17,970 20,750 New Plan Excel Realty Trust 40,000 772,381 1,000,000 Omega Healthcare Investors 1,000 9,070 10,760 Price Legacy Corp 2,500 27,724 47,375 Senior Housing Property Trust 1,000 15,280 17,820 Shurgard Storage Centers 1,000 35,456 38,800 Sizeler Property Investors 140,000 1,184,292 1,302,000 United Dominion Realty Trust 1,000 19,326 19,830 US Restaurant Properties 1,000 15,764 16,890 Windrose Medical Properties 1,000 10,600 12,990 _________ _________ Total Equity Securities - Common Stock 5,078,013 6,002,225 __________ __________
Debt Securities: Monmouth Capital Corp Conv SubDebenture (1) 500,000 500,000 545,844
(1) Investment is an affiliate. See Note No. 9 for further discussion.
The following is a isting of investments in debt and equity securities at September 30, 2003:
NOTE 5 - SECURITIES AVAILABLE FOR SALE (CONT'D)
NOTE 5 - SECURITIES AVAILABLE FOR SALE (CONT'D)
The Company had eleven securities that were temporarily impaired investments at September 30, 2004. The individual unrealized losses were 2% or less of original cost. The following is a summary:
Less than 12 Months 12 months or longer ___________________ ____________________
Description of Unrealized Unrealized Securities Fair Value Losses Fair Value Losses
Preferred stock $1,666,210 $14,040 $25,550 $714 __________ ________ ________ _______ Total $1,666,210 $14,040 $25,550 $714 ========== ======== ======== =======
The Company had margin loan balances of $1,261,901 and $8,512,853 at September 30, 2004 and 2003, respectively, which were collateralized by the securities portfolio.
NOTE 6 - MORTGAGE NOTES AND LOANS PAYABLE (CONT'D)
Principal on the foregoing debt is scheduled to be paid as follows:
Year Ending September 30, 2005 $5,484,926 2006 8,265,536 2007 6,167,311 2008 6,309,231 2009 6,664,665 Thereafter 64,639,294 ___________
$97,530,963 ===========
Line of Credit
In May 2003, the Company received a line of credit (the line) from PNC Bank (the Bank), which replaced the line with Bank of America. The amount of the facility was $10,000,000 during the first year and $15,000,000 thereafter and matures in May 2006. The interest rate charged on the new line is the Bank's prime rate. The interest rate as of September 30, 2004 and 2003 was 4.50% and 4% respectively. The amount outstanding on the new line at September 30, 2004 and 2003 was $1,361,198 and $3,361,198, respectively.
Margin Loans
During fiscal 2004 and 2003, the Company purchased securities on margin. The interest rate charged on the margin loan was 3.5% and 2.75% at September 30, 2004 and 2003, respectively and are due on demand. At September 30, 2004 and 2003, the margin loans amounted to $1,261,901 and $8,512,853, respectively and are collateralized by the Company's securities portfolio. The Company must maintain a coverage ratio of approximately 50%.
Other
In connection with the St. Joseph, Missouri property, the Company issued a $500,000 note to Butler at an interest rate of 8.12% due February 29, 2016. The balance of this note at September 30, 2003 was $450,875. The Company prepaid this note on October 21, 2003 for a discounted amount of $439,555 pursuant to an agreement with Butler.
NOTE 7 - STOCK OPTION PLAN
On April 24, 1997, the shareholders approved and ratified the Company's 1997 Stock Option Plan (the Plan) authorizing the grant to officers, directors and key employees options to purchase up to 750,000 shares of common stock. On April 25, 2002, the shareholders approved an increase to the number of shares of common stock under the Plan to 1,500,000 shares. Options may be granted any time up to December 31, 2006. No option shall be available for exercise beyond ten years. All options are exercisable after one year from the date of grant.
NOTE 7 - STOCK OPTION PLAN (CONT'D)
The option price shall not be below the fair market value at date of grant. Canceled or expired options are added back to the "pool" of shares available under the Plan.
The Company adopted the fair value recognition provisions of SFAS No. 123, "Accounting for Stock Based Compensation" on October 1, 2002. During the year ended September 30, 2004, 13 directors, officers, and employees were granted options to purchase 240,000 shares. The fair value of those options was $99,334 based on the assumptions noted below and is being amortized over the 1-year vesting period.
The fair value of each option grant is estimated on the date of grant using the Black-Sholes option-pricing model with the following weighted-average assumptions used for grants in 2004, 2003, and 2002:
2004 2003 2002 				 ____ ____ ____ Dividend yield 7.46% 8.0% 8.0% Expected volatility 17.40% 13.3% 13.0% Risk-free interest rate 3.90% 3.4% 3.4% Expected lives (years) 8 8 5
During the year ended September 30, 2004, four directors and officers exercised their stock options and purchased 131,500 shares for a total of $830,705.
The following is a summary of stock options outstanding as of September 30, 2004:
Date of Number of Number of Option Expiration Grant Grants Shares Price Date ________ ________ _________ ______ __________
6/20/01 1 5,000 5.85 6/20/06 10/4/01 1 65,000 6.765 10/4/06 6/21/02 13 234,000 7.13 6/21/10 1/22/03 1 65,000 6.90 1/22/11 5/20/04 12 175,000 7.41 5/20/12 8/3/04 1 65,000 7.89 8/3/12 _________ 609,000 ===========
As of September 30, 2004, there were 495,000 shares available for grant under this plan.
NOTE 8 - INCOME FROM LEASES
The Company derives income primarily from operating leases on its commercial properties. In general, these leases are written for periods up to ten years with various provisions for renewal. These leases generally contain clauses for reimbursement (or direct payment) of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. Minimum rents due under noncancellable leases at September 30, 2004 are scheduled as follows: 2005 - $17,855,000; 2006 - $16,920,000; 2007 - $15,028,000; 2008 - $13,307,000; 2009 - $11,515,000; thereafter - $38,669,000.
NOTE 9 - RELATED PARTY TRANSACTIONS
Eugene W. Landy received $16,000, $17,500 and $16,300 during 2004, 2003 and 2002 as Director. The firm of Eugene W. Landy received $17,500, $17,500, and $- 0- during 2004, 2003 and 2002, respectively, as legal fees. On January 1, 2004, Eugene W. Landy's Employment Agreement with the Company was amended to extend for five years to December 31, 2009. Mr. Landy's amended Employment Agreement provides for (1) an increase in his annual base compensation from $150,000 to $175,000; (2) an increase in his severance payment from $300,000 payable $100,000 a year for three years to $500,000 payable $100,000 a year for five years; and (3) an increase from $40,000 a year to $50,000 a year of his pension benefits payable for ten years; and (4) an extension of three years of his pension payments. The Company accrued additional compensation expense related to the pension benefits of $141,000. Mr. Landy receives bonuses and customary fringe benefits, including health insurance and five weeks vacation. Additionally, there will be bonuses voted by the Board of Directors. The Employment Agreement is terminable by either party at any time subject to certain notice requirements.
Effective January 15, 2004, the Company and Cynthia J. Morgenstern entered into a three-year employment agreement under which Ms. Morgenstern receives an annual base salary of $160,000, increasing to $176,000 in 2005 and to $194,000 in 2006, plus bonuses and customary fringe benefits, including health insurance, four weeks vacation and the use of an automobile. If there is a voluntary or involuntary termination of employment, due to merger or change in control, Ms. Morgenstern, shall be entitled to receive one year's compensation at the date of termination. In the event of her disability, her salary will continue for a period of two years. Ms. Morgenstern received $16,000, $17,500 and $5,500 during 2004, 2003 and 2002, respectively, as Director. This agreement was amended September 16, 2004 to purchase disability insurance for Ms. Morgenstern. In the event of a disability exceeding 90 days, Ms. Morgenstern will receive lost wages from a disability policy, not her salary for two years.
Daniel D. Cronheim is a Director of the Company and Executive Vice President of David Cronheim Company. Cronheim Management Services, a division of David Cronheim Company, received the sum of $299,392, $258,626 and $245,597 for management fees during the years ended 2004, 2003 and 2002, respectively. Effective August 1, 1998, the Company entered into a management contract with Cronheim Management Services. Under this contract, Cronheim Management Services receives 3% of gross rental income on certain properties for management fees. The David Cronheim Company received $132,185, $14,377 and $20,194 in lease brokerage
NOTE 9 - RELATED PARTY TRANSACTIONS (CONT'D)
commissions in 2004, 2003 and 2002, respectively. Daniel Cronheim received $16,000, $16,150 and $16,300 for Director and Committee fees in 2004, 2003 and 2002, respectively.
The Company operates as part of a group of three public companies (all REITs) which includes the Company, United Mobile Homes, Inc. and Monmouth Capital Corporation (the affiliated companies). Some general and administrative expenses are allocated among the affiliated companies based on use or services provided. Allocations of salaries and benefits are made based on the amount of the employees' time dedicated to each affiliated company.
There are two Directors of the Company who are also Directors and shareholders of United Mobile Homes, Inc. and there are two Directors of the Company who are also Directors and shareholders of Monmouth Capital Corporation.
The Company holds common stock of the affiliated companies in its securities portfolios. See Note No. 5 for holdings. The Company sold on the open market 60,200, 40,000 and 42,000 shares of United Mobile Homes, Inc. during 2004, 2003, and 2002, respectively and recorded a gain on sale of $312,661, $230,152, and $105,902 during 2004, 2003, and 2002, respectively.
During 2004 and 2003, the Company purchased 2,808 and 4,791 shares, respectively, through the Monmouth Capital Dividend Reinvestment Plan. During 2004 the Company invested $500,000 in the Monmouth Capital Corporation Convertible Subordinated Debenture.
NOTE 10 - TAXES
Income Tax
The Company has elected to be taxed as a Real Estate Investment Trust under the applicable provisions of the Internal Revenue Code and the comparable New Jersey Statutes. Under such provisions, the Company will not be taxed on that portion of its taxable income distributed currently to shareholders, provided that at least 90% of its taxable income is distributed. As the Company has and intends to continue to distribute all of its income currently, no provision has been made for income taxes.
Federal Excise Tax
The Company does not have a Federal excise tax liability for the calendar years 2004, 2003 and 2002, since it intends to or has distributed all of its annual income.
NOTE 11 - DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN/EQUITY
The Company implemented a dividend reinvestment and stock purchase plan (the DRIP) effective December 15, 1987. Under the terms of the DRIP and subsequent offerings, shareholders who participate may reinvest all or part of their dividends in additional shares of the Company at approximately 95% of market price. According to the terms of the DRIP, shareholders may also purchase additional shares, at a price of approximately 95% of market by making optional cash payments monthly.
	Amounts received, including dividend reinvestment of $3,531,838, $3,327,957 and $2,263,827 in 2004, 2003 and 2002, respectively, and shares issued in connection with the Plan for the years ended September 30, 2004, 2003 and 2002 were as follows:
2004 2003 2002
Amounts Received $12,532,541 $11,887,869 $10,535,311 Shares Issued 1,568,174 1,691,148 1,613,020
	In January 2004, the Company issued 500,000 shares in a private placement for consideration of $4,050,000 or $8.10 per share. The proceeds of the private placement were used for working capital and to pay down the Company's outstanding credit facility and margin loan. The Company incurred approximately $67,993 in offering costs related to this private placement which were recorded as a reduction to Additional Paid-In Capital.
On February 27, 2003, the Company sold 1,257,253 shares in a private placement for cash of $8,324,901 or $6.6215 a share. The proceeds of the private placement were used to pay down the Company's outstanding credit facility and working capital. The Company paid $106,826 in offering costs which were recorded as a reduction to Additional Paid-In Capital.
NOTE 12 - DISTRIBUTIONS
The following cash distributions were paid to shareholders during the years ended September 30, 2004 and 2003:
2004 2003 			____			 ____
Quarter Ended Amount Per Share Amount Per Share ______ _________ ______ _________
December 31 $2,206,622 $ .145 $1,815,746 $.145 March 31 2,331,098 .145 1,898,483 .145 June 30 2,403,361 .145 2,113,024 .145 September 30 2,485,834 .145 2,160,371 .145 _________ _________ _________ ________ $9,426,915 $ .58 $7,987,624 $ .58
========= ========= ========= =========
On October 1, 2004, the Company declared a cash dividend of $.145 per share to be paid on December 15, 2004 to shareholders of record November 15, 2004.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose certain information about fair values of financial instruments, as defined in Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments."
Limitations
Estimates of fair value are made at a specific point in time based upon where available, relevant market prices and information about the financial instrument. Such estimates do not include any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. For a portion of the Company's financial instruments, no quoted market value exists. Therefore, estimates of fair value are necessarily based on a number of significant assumptions (many of which involve events outside the control of management). Such assumptions include assessments of current economic conditions, perceived risks associated with these financial instruments and their counterparties, future expected loss experience and other factors. Given the uncertainties surrounding these assumptions, the reported fair values represent estimates only and, therefore, cannot be compared to the historical accounting model. Use of different assumptions or methodologies is likely to result in significantly different fair value estimates.
The fair value of cash and cash equivalents approximates their current carrying amounts since all such items are short-term in nature. The fair value of securities available for sale is based upon quoted market values. The fair value of variable rate mortgage notes payable and loans payable approximate their current carrying amounts since such amounts payable are at approximately a weighted-average current market rate of interest. At September 30, 2004, the
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT"D)
fair value (estimated based upon expected cash outflows discounted at current market rates) and carrying value of fixed rate mortgage notes payable amounted to $100,508,994 and $97,530,963, respectively. At September 30, 2003, the fair value and carrying value of fixed rate mortgage notes payable amounted to $95,315,781 and $90,909,299, respectively.
NOTE 14 - CASH FLOW AND COMPREHENSIVE INCOME INFORMATION
Cash paid during the years ended September 30, 2004, 2003 and 2002, for interest was $6,977,419, $6,885,146 and $6,030,744, respectively.
During 2004, 2003 and 2002, the Company had $3,531,838, $3,327,957 and $2,263,827, respectively, of dividends which were reinvested that required no cash transfers. The following are the reclassification adjustments related to securities available for sale included in Other Comprehensive Income.
2004 2003 2002 ____ ____ ____ Unrealized holding gains arising during the year $ 602,795 $ 2,003,772 $ 1,212,588
Less: reclassification adjustment for gains realized in income (1,744,630) (1,018,862) (909,704)
_________ _________ _________
Net unrealized (loss) gains $(1,141,835) $ 984,910 $ 302,884 ========= ========= =========
NOTE 15 - SUBSEQUENT EVENTS
On October 28, 2004, the Company purchased a 60,361 square foot industrial building in Denver, Colorado. The building is 100% net-leased to FedEx Ground Package System, Inc., a subsidiary of Federal Express Corporation (FDX) for ten years. The purchase price including closing costs was approximately $5,125,000. The Company paid approximately $75,000 in cash, obtained a mortgage of $3,625,000, and obtained $1,425,000 from its margin loan. The mortgage is payable at a rate of 6.07% and matures on November 1, 2019.
In November, 2004, the Company was notified by its month to month tenant at its Jackson, MS property that they would be vacating its space effective December 8, 2004. The Company has yet to re-lease the space.
NOTE 15 - SUBSEQUENT EVENTS (CONT"D)
On December 6, 2004, the Company purchased a 306,000 square foot industrial building in Hanahan, South Carolina. The building is 100% net-leased to Norton Naughton of Squire, Inc. for thirteen years. The purchase price including closing costs was approximately $14,000,000. The Company paid approximately $200,000 in cash, assumed a mortgage of $8,677,500, and obtained $5,122,500 from its line of credit. The mortgage is payable at a rate of 7.36% and matures on May 1, 2017.
*Buildings and improvements reacquired in 1986. **Property was renovated in 2001.
Page 77A
REAL ESTATE AND ACCUMULATED DEPRECIATION SCHEDULE III SEPTEMBER 30, 2004
Column A Column E (1) (2) ________ _____________________________________________ Gross Amount at Which Carried September 30, 2004
*Buildings and improvements reacquired in 1986. **Property was renovated in 2001.
Page 77B
*Buildings and improvements reacquired in 1986. **Property was renovated in 2001.
Page 77C
(2) The aggregate cost for Federal tax purposes approximates historical cost.
SIGNATURES
Pursuant to the requirements of Section 13 of 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: December 6, 2004 By: /s/Eugene W. Landy 			 Eugene W. Landy, President, Chief Executive Officer and Director
Date: December 6, 2004 By: /s/ Anna T. Chew Anna T. Chew, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: December 6, 2004 By: /s/ Daniel D. Cronheim Daniel D. Cronheim, Director
Date: December 6, 2004 By: /s/ Neal Herstik Neal Herstik
Date: December 6, 2004 By: /s/ Matthew I. Hirsch Matthew I. Hirsch, Director
Date: December 6, 2004 By: /s/ Samuel A. Landy Samuel A. Landy, Director
Date: December 6, 2004 By: /s/ Cynthia J. Morgenstern Cynthia J. Morgenstern Executive Vice President and Director
Date: December 6, 2004 By: /s/ John R. Sampson John R. Sampson, Director
Date: December 6, 2004 By: /s/ Peter J. Weidhorn Peter J. Weidhorn, Director
Date: December 6, 2004 By: /s/ Stephen B. Wolgin Stephen B. Wolgin, Director