PART I

ITEM 1 – BUSINESS

General Development of the Business

In this 10-K, “we”, “us”, “our”, “MREIC” or “the Company”, refers to Monmouth Real Estate Investment Corporation, together with its predecessors and subsidiaries, unless the context requires otherwise.

The Company isWe are a corporation operatingthat qualifies as a qualified real estate investment trust (REIT) under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the Code). The Company has been a REIT since 1969Our investment focus is to own well-located, modern, single tenant, industrial buildings, leased primarily to investment-grade tenants or their subsidiaries on long-term net leases. We were founded in 1968 and intendsare one of the oldest public equity REITs in the world. We intend to maintain itsour qualification as a REIT in the future. As a qualified REIT, with limited exceptions, the Companywe will not be taxed under Federal and certain state income tax laws at the corporate level on taxable income that it distributeswe distribute to itsour shareholders. For special tax provisions applicable to REITs, refer to Sections 856-860 of the Code. We are subject to franchise taxes in several of the states in which we own properties.

The CompanyIn December 2017, as part of the Tax Cuts and Jobs Act of 2017 (the TCJA), Code Section 199A, was added to the Code and became effective for tax years beginning after December 31, 2017 and before January 1, 2026. Under the TCJA, subject to certain income limitations, an individual taxpayer and estates and trusts may deduct 20% of the aggregate amount of qualified REIT dividends they receive from their taxable income. Qualified REIT dividends do not include any portion of a dividend received from a REIT that is classified as a capital gain dividend or qualified dividend income.

We were established in 1968 as a New Jersey Business Trust (NJBT). In 1990, the NJBT merged into a newly formed Delaware corporation. On May 15, 2003, the Companywe changed itsour state of incorporation from Delaware to Maryland by merging with and into a Maryland corporation (the Reincorporation).corporation.

Narrative Description of Business

The Company’sOur primary business is the ownership of real estate. ItsOur investment focus is to own well-located, modern, single tenant, industrial buildings, leased primarily to investment-grade tenants or their subsidiaries on long-term net leases. In addition, the Company ownswe own a portfolio of REIT investment securities which the Companywe generally limitslimit to no more than approximately 10% of itsour undepreciated assets (which is the Company’sour total assets excluding accumulated depreciation).

As of September 30, 2018, we had 14 full-time employees and one part-time employee.

At September 30, 2016, the Company2018, we held investments in ninety-nine111 properties totaling approximately 16,010,00021,174,000 square feet with an occupancy rate of 99.6% (See Item 2 for a detailed description of the properties). These properties are located in thirty30 states: Alabama, Arizona, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington and Wisconsin. All of these properties are wholly-owned with the exception of the two properties in New Jersey in which the Company ownswe own a majority interest. All properties in which the Company haswe have investments are leased on a net basis except an industrial park in Monaca (Pittsburgh), Pennsylvania and the shopping center located in Somerset, New Jersey.

During fiscal 2016, the Company2018, we purchased eightseven industrial properties totaling approximately 1,830,0002,655,000 square feet with net-leased terms ranging from ten10 to fifteen15 years resulting in a weighted average lease maturity of 12.311.4 years. Approximately 1,567,0002,255,000 square feet, or 86%85% of the properties purchased, are leased to investment-grade tenants or their subsidiaries, of which, approximately 761,000 square feet, or 29%, is leased to FedEx Corporation (FDX) or FedEx Ground Package System, Inc., a subsidiary of FedEx Corporation (FDX).FDX. The aggregate purchase price for the eightseven properties was approximately $210,747,000 and they$282,332,000. These properties are located in Colorado,Alabama, Florida, Kansas, Kentucky, Louisiana, North Carolina, PennsylvaniaGeorgia, Oklahoma and Washington.South Carolina. These eightseven properties generate annualized rental income over the life of their leases of approximately $14,076,000. The funds for these eight acquisitions were provided by eight property level$17,414,000. In connection with the seven properties acquired during the 2018 fiscal year, we entered into four 15 year fully-amortizing mortgage loans, totaling $141,586,000, draws ontwo 14 year fully-amortizing mortgage loans and one 10 year loan amortizing over 18 years. The seven mortgage loans originally totaled $175,160,000 with an unsecured lineoriginal weighted average mortgage loan maturity of credit facility14.1 years and cash on hand. The eight mortgages have a weighted average interest rate of 3.85% and a weighted average maturity of 14.9 years.

Subsequent to the fiscal yearend, on October 17, 2016, the Company purchased a newly constructed 338,584 square foot industrial building located in Hamburg, NY, which is in the Buffalo Metropolitan Statistical Area (MSA)3.91%. The building is 100% net-leased to FedEx Ground Package System, Inc. for fifteen years through March 2031. The purchase price was $35,100,000. The Company obtained a 15 year fully-amortizing mortgage loan of $23,500,000 at a fixed interest rate of 4.03%. Annual rental revenue over the remaining term of the lease averages approximately $2,308,000.

In addition, subsequent

On October 1, 2018, our Board of Directors approved a cash dividend of $0.17 per share, to be paid on December 17, 2018, to common shareholders of record at the close of business on November 15, 2018, which represents an annualized common dividend rate of $0.68 per share. We intend to pay these distributions from cash flows from operations.

We have maintained or increased our common stock cash dividend for 27 consecutive years. On October 1, 2015, our Board of Directors approved an increase in our quarterly common stock cash dividend from $0.15 per share to $0.16 per share representing a 6.7% increase in our quarterly cash dividend. Then again, most recently, on October 2, 2017, our Board of Directors approved an increase in our quarterly common stock cash dividend and from $0.16 per share to $0.17 per share on October 2, 2017, representing a 6.3% increase in our quarterly cash dividend. These two dividend raises represent a total increase of 13%.

Our common stock dividend policy is dependent upon our earnings, capital requirements, financial condition, availability and cost of bank financing and other factors considered relevant by the Board of Directors. It is our intention to continue making comparable quarterly distributions in the future and to grow our distributions over time.

Subsequent to fiscal yearend, on October 1, 2016,19, 2018, we purchased a 50,741newly constructed 347,145 square foot expansion of aindustrial building, leasedsituated on 62.0 acres, located in Trenton, NJ. The building is 100% net-leased to FedEx Ground Package System, Inc. located in Edinburg, TXfor 15 years through June 2032. The purchase price was substantially completed for$85,248,352. We obtained a cost15 year, fully-amortizing mortgage loan of $55,000,000 at a fixed interest rate of 4.13%. Annual rental revenue over the remaining term of the lease averages approximately $4,988,000, resulting in a new 10 year lease which extended the prior lease expiration date from September 2021 through September 2026. In addition, the expansion resulted in an increase in annual rent effective from the date of completion of approximately $499,000 from approximately $598,000, or $5.27 per square foot, to approximately $1,097,000, or $6.68 per square foot.

On October 27, 2016, the Company sold its only vacant building, (which increased our occupancy rate from 99.6% to 100.0%), consisting of a 59,425 square foot industrial building situated on 4.78 acres located in White Bear Lake, MN for approximately $4,272,000, which is the Company’s approximate U.S. GAAP net book carrying value.$5,328,000.

The industrial propertiesproperty purchased expanded and soldthus far during fiscal 2017 to date2019 increased our current total leasable square feet to approximately 16,340,000 and increased our occupancy rate to 100.0%.21,521,000.

In addition to the property purchased subsequent to theour fiscal yearend, as described above, we have entered into agreements to purchase eighttwo new build-to-suit, industrial buildings that are currently being developed in Florida, Michigan,Georgia and North Carolina, Ohio and South Carolina totalingconsisting of approximately 2,099,000398,000 square feet, each with net-leased terms ranging between tenfrom 10 to fifteen15 years, with a weighted average lease maturityterm of 13.313.4 years. Approximately 1,267,000 square feet, or 60%, is leased to FDX and its subsidiaries.  The purchase price for the eightthese properties is approximately $212,373,000.$68,747,000 and both are leased to FedEx Ground Package System, Inc.  Subject to satisfactory due diligence and other customary closing conditions and requirements, we anticipate closing these eight transactions during the first quarter of fiscal 20172019 and fiscal 2018.2020.  In connection with fiveone of the eightthese properties, the Company haswe have entered into commitmentsa commitment to obtain five mortgages totaling $101,204,000 at fixed rates ranging from 3.60% to 4.20%,a 15 year, fully-amortizing mortgage loan of $17,500,000 with a weighted averagefixed interest rate of 3.83%4.40%. EachWe currently have one 154,800 square foot property expansion in progress at our property located in Monroe, OH which is expected to be completed in fiscal year 2019 for a total project cost of these mortgagesapproximately $9,072,000. The expansion will beresult in a fifteennew 15 year fully-amortizing loan. The Companylease which will extend the prior lease expiration date from February 2030 to January 2034. In addition, the expansion will result in an increase in initial annual rent effective from the date of completion by approximately $862,000 from approximately $961,000 to approximately $1,823,000. In addition, the annual rent will increase 2% per annum. We may makehave additional acquisitions and expansions in fiscal 20172019 and fiscal 2018,2020, and the funds for these acquisitions may come from funds generated from operations, mortgages, draws on our unsecured line of credit facility, cash on hand, sale of marketable securities, other bank borrowings, proceeds from the Dividend Reinvestment and Stock Purchase Plan (DRIP), proceeds from the At-The-Market Preferred Equity Program (Preferred Stock ATM Program), and proceeds from private placements and public offerings of additional common or preferred stock or other securities. To the extent that funds or appropriate properties are not available, fewer acquisitions will be made.

Currently, the Company derives itswe derive our income primarily from real estate rental operations. Rental and Reimbursement Revenue (excluding Lease Termination Income in fiscal 2018, 2017 and 2016 2015of $210,261, $-0- and 2014 of $-0-, $238,625 and $1,182,890, respectively) was $94,916,110, $77,775,497$139,161,849, $116,385,305 and $64,672,341$97,755,433 for the years ended September 30, 2016, 20152018, 2017 and 2014,2016, respectively. Total undepreciated assets (which is our total assets excluding accumulated depreciation) were $1,229,758,028$1,925,443,520 and $915,991,942$1,614,123,838 as of September 30, 20162018 and 2015,2017, respectively.

As of September 30, 2016, the Company2018, we had approximately 16,010,00021,174,000 square feet of property, of which approximately 7,584,00010,083,000 square feet, or 47%48%, consisting of fifty-three60 separate stand-alone leases, were leased to FDX and its subsidiaries (6%(7% to FDX and 41% to FDX subsidiaries). These properties are located in twenty-four24 different states. As of September 30, 2016,2018, the 60 separate stand-alone leases that are leased to FDX and FDX subsidiaries had a weighted average lease maturity of 9.4 years. As of September 30, 2018, the only tenantstenant that leased 5% or more of the Company’sour total square footage werewas FDX and(including its subsidiaries and Milwaukee Electric Tool Corporation, which leased approximately 862,000 square feet, comprising approximately 5% of the Company’s rental space.subsidiaries).

During fiscal 2016,2018, the only tenant that accounted for 5% or more of the Company’sour rental and reimbursement revenue was FDX (including its subsidiaries). The Company’sOur rental and reimbursement revenue from FDX and its subsidiaries for the fiscal years ended September 30, 2016, 20152018, 2017 and 2014,2016, respectively, totaled approximately $80,726,000, $68,151,000 and $52,793,000, $41,954,000 and $35,007,000, or 56%58% (7% from FDX and 49%51% from FDX subsidiaries), 54% (8%59% (7% from FDX and 46%52% from FDX subsidiaries) and 54% (10%55% (9% from FDX and 44%46% from FDX subsidiaries), of total rent and reimbursement revenues.

FDX is a publicly-owned company and financial information related to this entity is available at the SEC’s website,www.sec.gov. FDX is rated “BBB” by S&P Global Ratings (www.standardandpoors.com) and is rated “Baa2” by Moody’s (www.moodys.com), which are both considered “Investment Grade” ratings. The references in this report to the SEC’s website, S&P Global Ratings’ website and Moody’s website are not intended to and do not include or incorporate by reference into this report the information of FDX, S&P Global Ratings or Moody’s on such websites.

In addition to real estate property holdings, the Companywe held $73,604,894$154,920,545 in marketable REIT securities at September 30, 2016,2018, representing 5.3%8.0% of the Company’sour undepreciated assets (which is the Company’sour total assets excluding accumulated depreciation). These liquid real estate holdings are not included in calculating the tenant concentration ratios above and therefore further enhance the Company’sincrease our diversification. As a result, theThe securities portfolio provides the Companyus with additional diversification, liquidity, diversification,and income, and serves as a proxy for real estate when more favorable risk adjusted returns are not available.

The Company’sOur weighted-average lease expiration was 7.48.1 years and 7.27.9 years as of September 30, 20162018 and 2015,2017, respectively, and itsour average annualized rent per occupied square foot as of September 30, 20162018 and 20152017 was $5.72$6.01 and $5.48,$5.93, respectively. The Company’sOur occupancy rate as of September 30, 20162018 and 20152017 was 99.6% and 97.7%99.3%, respectively. Subsequent to fiscal yearend, on October 27, 2016, the Company sold its only vacant building for $4,272,000 which increased our occupancy rate to 100.0%.

The Company competesWe compete with other investors in real estate for attractive investment opportunities. These investors include other equity real estate investment trusts, limited partnerships, syndications and private investors, among others. Competition in the market areas in which the Company operateswe operate is significant and affects the Company’sour ability to acquire or expand properties, occupancy levels, rental rates, and operating expenses of certain properties. Management hasWe have built long-term relationships withwithin our tenant base as well as within the merchant builders whichbuilder community. These relationships have historically provided the Companyus with investment opportunities that fit the Company’sour investment policy. The amount of new construction of industrial properties on the national level has been increasing the past foursix years following several years of historically low levels of new supply. These levels of new supply, although increasing, continue to be below historical norms. Driven to a large extent by the rampantcontinued growth in ecommerce sales, demand for industrial space remains very strong, driving national occupancy rates to an all-time high of 95% currently. For further discussion of potential impact of competitive conditions on our business, see Item 1A: Risk Factors below.

Industrial space demand is very closely correlated to Gross Domestic Product (GDP) growth. Despite nine years of unprecedented monetary stimulus, real annual GDP growth averaged less than 2.0% over this period. Economic growth has been strong this past year further increasing demand for industrial space. The Companymost significant demand driver for modern industrial real estate continues to be ecommerce. Every year since the turn of the century, the percentage of goods purchased on-line has increased at an average 16% annual growth rate. Today, excluding food, fuel, and autos, approximately 19% of total retail sales have migrated from traditional store sales to on-line sales and we expect this growth in market share to continue. We expect these favorable trends for the industrial real estate sector to be a leading demand driver for the foreseeable future, as consumers continue to embrace the added efficiencies of on-line consumption. The strong financial position of our tenants, together with the long duration of our leases, provides for high quality, reliable income streams throughout the business cycle.

We continue to invest in marketable securities of other REITs, which the Companywe generally limitslimit to no more than approximately 10% of itsour undepreciated assets (which is the Company’sour total assets excluding accumulated depreciation). The Company fromOur investments in equity securities of other REITs provide us with additional diversification, liquidity, and income, and serves as a proxy for real estate when more favorable risk adjusted returns are not available. From time to time, we may purchase these securities on margin when the dividendinterest and interestdividend yields exceed the cost of funds. In general, we may borrow up to 50% of the funds.value of the marketable securities, which was $154,920,545 as of September 30, 2018. As of September 30, 2016 and 2015, there were no draws against2018, we had borrowings of $26,608,676 under our margin line, bearing interest at 2.75%. Subsequent to fiscal yearend, on October 9, 2018, we paid off the margin.margin loan. As of September 30, 2017, we had borrowings of $10,091,417 under our margin line, bearing interest at 2.05%. The REIT securities portfolio provides us with additional income, and to the extent not pledged to secure borrowings, provides the Companyus with additional liquidity and additional income.liquidity. Such securities are subject to risks arising from adverse changes in market rates and prices, primarily market price risk relating to equity securities and interest rate risk relating to debt securities and market price risk relating to equity securities. From time to time, the Companywe may use derivative instruments to mitigate interest rate risk, however, this has not occurred during any periods presented. At September 30, 20162018 and 2015, the Company2017, we had $73,604,894$154,920,545 and $54,541,237,$123,764,770, respectively, of securities available for sale. The unrealized net gain (loss) on securities available for sale at September 30, 20162018 and 20152017 was $12,942,267$(24,744,579) and $(5,441,603),$6,570,565, respectively, resulting in an increasea decrease for the fiscal year of $18,383,870.$31,315,144. For the fiscal years ended September 30, 2018, 2017 and 2016, 2015 and 2014, the Company’sour net realized gains from the sale of securities were $4,398,599, $805,513$111,387, $2,311,714 and $2,166,766,$4,398,599, respectively.

On September 13, 2016,June 29, 2017, we entered into a Preferred Stock At-The-Market Sales Agreement Program with B. Riley FBR, Inc., or B. Riley (formerly FBR Capital Markets & Co.), that provided for the Company issued 5,400,000offer and sale of shares of aour 6.125% Series C Cumulative Redeemable Preferred Stock, (Series C Preferred Stock) at an offering price$0.01 par value per share, with a liquidation preference of $25.00 per share, or our 6.125% Series C preferred stock, having an aggregate sales price of up to $100,000,000. On August 2, 2018, we replaced this program with a new Preferred Stock At-The-Market Sales Agreement Program (Preferred Stock ATM Program) with B. Riley that provides for the offer and sale from time to time of $125,000,000 of our 6.125% Series C preferred stock. We began selling shares through these programs on July 3, 2017. Since inception through September 30, 2018, we sold 3,088,001 shares under these programs at a weighted average price of $25.06 per share, and generated net proceeds, after offering expenses, of approximately $75,828,000, of which 1,648,556 shares were sold during the fiscal year ended 2018 at a weighted average price of $24.84 per share, and generated net proceeds, after offering expenses, of approximately $40,094,000. As of September 30, 2018, there is approximately $119,096,000 remaining that may be sold under the Preferred Stock ATM Program.

As of September 30, 2018, 11,488,001 shares of the 6.125% Series C Preferred Stock were issued and outstanding.

Subsequent to fiscal yearend, in an underwrittenOctober 2018, we completed a public offering. The Companyoffering of 9,200,000 shares of our Common Stock (including the underwriters’ option to purchase 1,200,000 additional shares) at a price of $15.00 per share, before underwriting discounts. We received net proceeds from the offering, after deducting the underwriting discountdiscounts and all other estimated offering expenses,transaction costs, of approximately $130,543,000. On September 15, 2016, the Company used $45,000,000 of such net proceeds from the offering to reduce the amounts outstanding under its unsecured line of credit facility (the “Facility”) and on October 14, 2016, the Company used $53,493,750 of such net proceeds from the offering to redeem all of the 2,139,750 issued and outstanding shares of its 7.625% Series A Cumulative Redeemable Preferred Stock (7.625% Series A Preferred Stock). In addition, on October 14, 2016, the Company used $498,540 of such net proceeds from the offering to pay all dividends, accrued and unpaid, to and including the redemption date of the 7.625% Series A Preferred Stock. The Company intends to use the remaining proceeds to reduce the amounts outstanding under its Facility and to purchase properties and fund expansions of its existing properties in the ordinary course of business and for general corporate purposes.$132,339,000.

On September 14, 2016, the Company announced that it intended to redeem all 2,139,750 issued and outstanding shares of its 7.625% Series A Preferred Stock. As discussed above, the Company redeemed the 7.625% Series A Preferred Stock on October 14, 2016 at a redemption price of $25.00 per share, plus all dividends accrued and unpaid to and including the redemption date, in an amount equal to $0.23299 per share. As of September 30, 2016, the outstanding 7.625% Series A Preferred Stock has been reclassified out of stockholder’s equity and is reflected as a liability at redemption value and has recognized a deemed dividend of $2,942,149 on the Company’s consolidated statement of income for the fiscal year ended September 30, 2016, which represents the difference between redemption value and carrying value net of original deferred issuance costs.

Investment and Other Policies

The Company’sOur investment policy is to concentrate itsour investments in well-located, modern, single tenant,single-tenant, industrial buildings, leased primarily to investment-grade tenants or their subsidiaries on long-term net leases. The Company’sOur strategy is to obtain a favorable yield spread between the income from the net-leased industrial properties and interest costs. In addition, management believeswe believe that investments in well-located, modern industrial properties provide a potential for long-term capital appreciation. There is the risk that, upon expiration of leases, the properties will become vacant or will be re-leased at lower rents. The results obtained by the Company byfrom re-leasing the properties will depend on the market for industrial properties at that time. The Company has renewed all three leases, or 100%

In fiscal 2018, approximately 8% of theour gross leasable area, representing 16 leases totaling 1,546,637 square feet, was set to expire. We have renewed 11 of the 16 leases that was scheduledwere set to expire during fiscal 2016 atexpire. One of the 11 leases, which is with FedEx Ground Package System, Inc. for a property located in Hanahan (Charleston), SC, renewed for only four months because the tenant moved its operations from our 91,776 square foot facility to a newly constructed, much larger, 265,318 square foot facility, which is also located in Charleston, SC. We purchased this new facility on August 15, 2018. Excluding this four month lease renewal, the ten leases that have renewed, represent 972,048 square feet, or 63% of the expiring square footage, and have a weighted average lease term of 6.8 years. These ten lease renewals result in a U.S. GAAP straight-line weighted average lease rate of $5.87 per square foot. The renewed weighted average initial cash rent per square foot also results in a weighted average lease rate of $5.87 per square foot. This represents an increase in the weighted average lease rate of 5.3%4.08% on a U.S. GAAP straight-line basis and a decreasean increase in the weighted average lease rate of 2.2%2.80% on a cash basis. Five of the sixteen leases, representing 482,813 square feet or 31% of the expiring square footage, did not renew. Three of these five buildings, representing 183,837 square feet or 12% of the expiring square footage, have been sold and one of the remaining five properties, representing 218,120 square or 14% of the expiring square footage, has been re-tenanted.

The Company seeksWe seek to invest in well-located, modern, single tenant, industrial buildings, leased primarily to investment-grade tenants or their subsidiaries on long-term net leases. In management’s opinion, the newly builtrecently acquired facilities meet these criteria. The Company hasWe have a concentration of properties leased to FDX and FDX subsidiaries. This is a risk factor that shareholders should consider. FDX is a publicly-owned corporationcompany and financial information related to FDXthis entity is available at the SEC’s website,www.sec.gov. FDX is rated “BBB” by S&P Global Ratings (www.standardandpoors.com) and is rated “Baa2” by Moody’s (www.moodys.com), which are both considered “Investment Grade” ratings. The referencereferences in this report to the SEC’s website, isS&P Global Ratings’ website and Moody’s website are not intended to and doesdo not include or incorporate by reference into this report the information of FDX, S&P Global Ratings or Moody’s on this website.such websites.

The CompanyWe may issue securities for property; however, this has not occurred to date. The CompanyWe may repurchase or reacquire itsour shares from time to time if, in the opinion of the Board of Directors, such acquisition is advantageous to the Company.in our best interest. No shares were repurchased or reacquired during fiscal 20162018 and, as of September 30, 2016, the Company does2018, we do not own any of itsour own shares.

Property Management

Currently, all ninety-nine properties owned by the Company, withWith the exception of twothree properties, that are located in Streetsboro, Ohio and Carlstadt, New Jersey,all of our 111 properties are self-managed by the Company.us.

The CompanyWe paid fees directly to local property management subagents in the amount of $356,316, $306,487approximately $437,000, $394,000 and $264,811$356,000 for fiscal years ended September 30, 2016, 20152018, 2017 and 2014,2016, respectively.

Until October 31, 2014, the Company’s twoOur industrial properties in Olive Branch, Mississippi, were managed by Industrial Developments International (IDI). Management fees paid to IDI for the fiscal years ended September 30, 2016, 2015Stow, OH and 2014 were $-0-, $8,274 and $49,476, respectively. These management fees were reimbursed to the Company by the tenants. Effective November 1, 2014, the Company began to self-manage these properties.

The Company’s industrial property in Streetsboro, Ohio isOH are managed by GEIS Companies (GEIS). Management fees we paid to GEIS for the fiscal years ended September 30, 2018, 2017 and 2016 2015were approximately $78,000, $52,000 and 2014 were $50,082, $50,112 and $50,138,$50,000, respectively. These management fees were reimbursed to the Companyus by the tenants.

The Company’sOur industrial property in Carlstadt, New JerseyNJ is owned by Palmer Terrace Realty Associates, LLC. The Company ownsWe own 51% of Palmer Terrace Realty Associates, LLC. This property is managed by Marcus Associates, an entity affiliated with the owner of the 49% non-controlling interest. Management fees paid by Palmer Terrace Realty Associates, LLC to Marcus Associates were $15,804approximately $17,000, $16,000 and $16,000 for each of the fiscal years ended September 30, 2018, 2017 and 2016, 2015 and 2014.respectively.

Environmental Matters

Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under such property as well as certain other potential costs relating to hazardous or toxic substances. These liabilities may include government fines and penalties and damages for injuries to persons and adjacent property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances. Although generally our tenants are primarily responsible for any environmental damages and claims related to the leased premises, in the event of the bankruptcy or inability of a tenant of such premises to satisfy any obligations with respect to such environmental liability, the Companywe may be required to satisfy such obligations. In addition, as the owner of such properties, the Companywe may be held directly liable for any such damages or claims irrespective of the provisions of any lease.

From time to time, in connection with managing the properties or upon acquisition of a property, the Company authorizeswe authorize the preparation of Phase I and, when necessary, Phase II environmental reports with respect to itsour properties. Based upon such environmental reports and the Company’sour ongoing review of itsour properties, as of the date of this Annual Report, the Company iswe are not aware of any environmental condition with respect to any of itsour properties which it believeswe believe would be reasonably likely to have a material adverse effect on itsour financial condition and/or results of operations. There can be no assurance, however, that (1) the discovery of environmental conditions, the existence or severity of which were previously unknown; (2) changes in law; (3) the conduct of tenants; or (4) activities relating to properties in the vicinity of our properties, will not expose the Companyus to material liability in the future.

Contact Information

Additional information about the Companyus can be found on the Company’sour website which is located at www.mreic.reit.www.mreic.reit. Information contained on or hyperlinked from our Web siteWebsite is not incorporated by reference into and should not be considered part of this Annual Report on Form 10-K or our other filings with the Securities and Exchange Commission (SEC). The Company makesWe make available, free of charge, on or through itsour website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.You can also read and copy any materials the Company files with the SEC at its Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internetinternet site (http:(http://www.sec.gov)www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Segment Reporting & Financial Information

The Company’s primary business is the ownership and management of real estate properties. The Company invests in well-located, modern, single tenant, industrial buildings leased primarily to investment grade tenants or their subsidiaries on long-term net leases. The Company reviews operating and financial information for each property on an individual basis and, therefore, each property represents an individual operating segment. The Company evaluates financial performance using Net Operating Income (“NOI”) from property operations. NOI is defined as recurring Rental and Reimbursement Revenue, less Real Estate Taxes and Operating Expenses, such as insurance, utilities and repairs and maintenance. The Company has aggregated the properties into one reportable segment as the properties share similar long-term economic characteristics and have other similarities, including the fact that they are operated as industrial properties subject to long-term net leases primarily to investment grade tenants or their subsidiaries.For required financial information related to our operations and assets, please refer to our consolidated financial statements, including the notes thereto, included in Item 8 “Financial Statements and Supplementary Data” in this Annual Report.

ITEM 1A – RISK FACTORS

The following risk factors address the material risks concerning our business. If any of the risks discussed in this report were to occur, our business, prospects, financial condition, results of operation and our ability to service our debt and make distributions to our shareholders could be materially and adversely affected and the market price per share of our stock could decline significantly. Some statements in this report, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Statement Regarding Forward-Looking Statements.”

Real Estate Industry Risks

Our business and financial results are affected by local real estate conditions in areas where we own properties.We 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 and potential tenants could have a negative effect on us.

Other factors that may affect general economic conditions or local real estate conditions include but are not limited to:

We may be unable to compete with our larger competitors and other alternatives available to tenants or potential tenants of our properties. The real estate business is highly competitive. We compete for properties with other real estate investors and purchasers, including other real estate investment trusts, limited partnerships, syndications and private investors, some of whom may have greater financial resources, revenues and geographical diversity than we have. Furthermore, we compete for tenants with other property owners. All of our industrial properties are subject to significant local competition. We also compete with a wide variety of institutions and other investors for capital funds necessary to support our investment activities and asset growth. To the extent that we are unable to effectively compete in the marketplace, our business may be adversely affected.

We are subject to significant regulation that inhibits our activities and may increase our costs. Local zoning and use laws, environmental statutes and other governmental requirements may restrict expansion, rehabilitation and reconstruction activities. These regulations may prevent us from taking advantage of economic opportunities. Legislation such as the Americans with Disabilities Act may require us to modify our properties at a substantial cost and noncompliance could result in the imposition of fines or an award of damages to private litigants. Future legislation may impose additional requirements. We may incur additional costs to comply with any future requirements.

Our investments are concentrated in the industrial distribution sector and our business would be adversely affected by an economic downturn in that sector. Our investments in real estate assets are primarily concentrated in the industrial distribution sector. This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities included a more significant portion of other sectors of the real estate industry.

Risks Associated with Our Properties

We may be unable to renew or extend leases or re-let space as leases expire. While we seek to invest in well-located, modern, single tenant, industrial buildings, leased to investment-grade tenants or their subsidiaries on long-term net leases, a number of our properties are subject to short-term leases. When a lease expires, a tenant may elect not to renew or extend it. We may not be able to re-let the property on similar terms, if we are able to re-let the property at all. The terms of renewal, extension or re-lease (including the cost of required renovations and/or concessions to tenants) may be less favorable to us than the prior lease. If we are unable to re-let all or a substantial portion of our properties, or if the rental rates upon such re-letting are significantly lower than expected rates, our cash generated before debt repayments and capital expenditures and our ability to make expected distributions, may be adversely affected. We have established an annual budget for renovation and re-letting expenses that we believe is reasonable in light of each property’s operating history and local market characteristics. However, this budget may not be sufficient to cover these expenses.

Our business is substantially dependent on FedEx Corporation. FDX, together with its subsidiaries, is our largest tenant, consisting of fifty-three60 separate stand-alone leases located in twenty-four24 different states as of September 30, 2016.2018. As of September 30, 2016, the Company2018, we had approximately 16,010,00021,174,000 square feet of property, of which approximately 7,584,00010,083,000 square feet, or 47%48%, were leased to FDX and its subsidiaries (6%(7% from FDX and 41% from FDX subsidiaries). Rental and reimbursement revenue from FDX and its subsidiaries is approximately 56%58% (7% from FDX and 49%51% from FDX subsidiaries) of total rental and reimbursement revenue for fiscal 2016.2018. No other tenant accounted for 5% or more of the Company’sour total Rental and Reimbursement revenue for fiscal 2016.2018. As a result of this concentration, our business, financial condition and results of operations, including the amount of cash available for distribution to our stockholders, could be adversely affected if we are unable to do business with FDX or FDX reduces its business with us or FDX and its subsidiaries were to become unable to make lease payments because of a downturn in its business or otherwise.

FDX is a publicly-owned company and financial information related to this entity is available at the SEC’s website,www.sec.gov. FDX is rated “BBB” by S&P Global Ratings (www.standardandpoors.com) and is rated “Baa2” by Moody’s (www.moodys.com), which are both considered “Investment Grade” ratings. The references in this report to the SEC’s website, S&P Global Ratings’ website and Moody’s website are not intended to and do not include or incorporate by reference into this report the information of FDX, S&P Global Ratings or Moody’s on such websites.

We are subject to risks involved in single tenant leasesleases..We focus our acquisition activities on real properties that are net-leased to single tenants. Therefore, the financial failure of, or other default by, a single tenant under its lease is likely to cause a significant reduction in the operating cash flow generated by the property leased to that tenant and might decrease the value of that property. In addition, we will be responsible for 100% of the operating costs following a vacancy at a single tenant building.

We may be affected negatively by tenant financial difficulties and leasing delays. At any time, a tenant may experience a downturn in its business that may weaken its financial condition. Similarly, a general decline in the economy may result in a decline in the demand for space at our industrial properties. As a result, our 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 us.

We receive 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 revenues, we, in our sole discretion, may deem it advisable to modify lease terms to allow tenants to pay a lower rental rate or a smaller share of operating costs, taxes and insurance. If a tenant becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to the tenant. We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises. If a tenant becomes bankrupt, the federal bankruptcy code will apply and, in some instances, may restrict the amount and recoverability of our claims against the tenant. A tenant’s default on its obligations to us for any reason could adversely affect our financial condition and the cash we have available for distribution.

We 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 our ability to vary our property portfolio promptly in response to changes in economic or other conditions. In addition, the Code may limit our ability to sell our properties. The inability to respond promptly to changes in the performance of our property portfolio could adversely affect our financial condition and ability to service debt and make distributions to our shareholders.

Environmental liabilities could affect our profitability. We face possible environmental liabilities. 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. As a current or former owner and operator of real estate, we may be required by law to investigate and clean up hazardous substances released at or from the properties we currently own or operate or have in the past owned or operated. We may also be liable to the government or to third parties for property damage, investigation costs and cleanup costs. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs the government incurs in connection with the contamination. Contamination may adversely affect our ability to sell or lease real estate or to borrow using the real estate as collateral. We are not aware of any environmental liabilities relating to our investment properties which would have a material adverse effect on our business, assets, or results of operations. However, we cannot assure you that environmental liabilities will not arise in the future and that such liabilities will not have a material adverse effect on our business, assets or results of operation.

Actions by our competitors may decrease or prevent increases in the occupancy and rental rates of our properties. We compete with other owners and operators of real estate, some of which own properties similar to ours in the same submarkets in which our properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose potential tenants, and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants’ leases expire. As a result, our financial condition, cash flow and cash available for distribution, the market price of our preferred and common stock and our ability to satisfy our debt service obligations could be materially and adversely affected.

Coverage under our existing insurance policies may be inadequate to cover losses. Weather conditions and natural disasters such as hurricanes, tornados,tornadoes, earthquakes, floods, droughts, fires and other environmental conditions can harm our business operations. We generally maintain insurance policies related to our business, including casualty, general liability and other policies, covering our business operations, employees and assets. However, we would be required to bear all losses that are not adequately covered by insurance. In addition, there are certain losses that are not generally insured because it is not economically feasible to insure against them, including losses due to riots or acts of war. If an uninsured loss or a loss in excess of insured limits were to occur with respect to one or more of our properties, then we could lose the capital we invested in the properties, as well as the anticipated future revenue from the properties and, in the case of debt, which is with recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the properties. Although we believe that our insurance programs are adequate, we cannot assure you that we will not incur losses in excess of our insurance coverage, or that we will be able to obtain insurance in the future at acceptable levels and reasonable costs.

We may be unable to acquire properties on advantageous terms or acquisitions may not perform as we expect. We have acquired individual properties and intend to continue to do so. However, we may be unable to acquire any of the properties that we may identify as potential acquisition opportunities in the future. Our acquisition activities and their success are subject to the following risks:

Financing Risks

We face inherent risks associated with our debt incurrence. We finance a portion of our investments in properties and marketable securities through the incurrence of debt. We are 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. In addition, debt creates other risks, including:

We mortgage our properties, which subjects us to the risk of foreclosure in the event of non-payment.We mortgage many of our properties to secure payment of indebtedness and, if we are unable to meet mortgage payments, the property could be foreclosed upon or transferred to the mortgagee with a consequent loss of income and asset value. A foreclosure of one or more of our properties could adversely affect our financial condition, results of operations, cash flow, and ability to service debt and make distributions and the market price of our preferred and common stock.

We face risks related to “balloon payments” and refinancings. Certain mortgages will have significant outstanding principal balances on their maturity dates, commonly known as “balloon payments.” There can be no assurance that we will have the funds available to fund the balloon payment or that we will be able to refinance the debt on favorable terms or at all. To the extent we cannot either pay off or refinance this debt on favorable terms or at all, we may be forced to dispose of properties on disadvantageous terms or pay higher interest rates, either of which could have an adverse impact on our financial performance and ability to service debt and make distributions.

We face risks associated with our dependence on external sources of capital. In order to qualify as a REIT, we are required each year to distribute to our shareholders at least 90% of our REIT taxable income, and we are subject to tax on our income to the extent it is not distributed. Because of this distribution requirement, we may not be able to fund all future capital needs from cash retained from operations. As a result, to fund capital needs, we rely on third-party sources of capital, which we may not be able to obtain on favorable terms, if at all. Our access to third-party sources of capital depends upon a number of factors, including (i) general market conditions; (ii) the market’s perception of our growth potential; (iii) our current and potential future earnings and cash distributions; and (iv) the market price of our capital stock. Additional debt financing may substantially increase our debt-to-total capitalization ratio. Additional equity issuances may dilute the holdings of our current shareholders.

We may become more highly leveraged, resulting in increased risk of default on our obligations and an increase in debt service requirements which could adversely affect our financial condition and results of operations and our ability to pay distributions.We have incurred, and may continue to incur, indebtedness in furtherance of our activities.activities. Our governing documents do not limit the amount of indebtedness we may incur. Accordingly, our Board of Directors may authorize us to incur additional debt and would do so, for example, if it were necessary to maintain our status as a REIT. We could therefore become more highly leveraged, resulting in an increased risk of default on our obligations and an increase in debt service requirements which could adversely affect our financial condition and results of operations and our ability to pay distributions to shareholders.

Fluctuations in interest rates could materially affect our financial results.Because a portion of our debt bears interest at variable rates, increases in interest rates could materially increase our interest expense. If the United States Federal Reserve increases short-term interest rates, this may have a significant upward impact on shorter-term interest rates, including the interest rates that our variable rate debt is based upon. Potential future increases in interest rates and credit spreads may increase our interest expense and affect our ability to obtain fixed rate debt at favorable interest rates and therefore negatively affect our financial condition and results of operations, and reduce our access to the debt or equity capital markets.

Covenants in our loan documents could limit our flexibility and adversely affect our financial condition. The terms of our various credit agreements and other indebtedness require us to comply with a number of customary financial and other covenants, such as maintaining debt service coverage and leverage ratios and maintaining insurance coverage. These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we had satisfied our payment obligations. If we were to default under credit agreements or other debt instruments, our financial condition could be adversely affected.

Risks Related to our Status as a REIT

If our leases are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.To qualify as a REIT, we must, among other things, satisfy two gross income tests, under which specified percentages of our gross income must be passive income, such as rent. For the rent paid pursuant to our leases to qualify for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. The determination of whether a lease is a true lease depends upon an analysis of all the surrounding facts and circumstances. We believe that our leases will be respected as true leases for federal income tax purposes. However, there can be no assurance that the Internal Revenue Service (IRS) will agree with this view. If the leases are not respected as true leases for federal income tax purposes, we would not be able to satisfy either of the two gross income tests applicable to REITs, and we could lose our REIT status.

Failure to make required distributions would subject us to additional tax.In order to qualify as a REIT, we must, among other requirements, distribute, each year, to our shareholders at least 90 percent of our taxable income, excluding net capital gains. To the extent that we satisfy the 90 percent distribution requirement, but distribute less than 100 percent of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4 percent nondeductible excise tax on the amount, if any, by which our distributions (or deemed distributions) and the amounts of income retained on which we have paid corporate income tax in any year are less than the sum of:

To the extent we pay out in excess of 100 percent of our taxable income for any tax year, we may be able to carry forward such excess to subsequent years to reduce our required distributions for purposes of the 4 percent excise tax in such subsequent years. We intend to pay out our income to our shareholders in a manner intended to satisfy the 90 percent distribution requirement. Differences in timing between the recognition of income and the related cash receipts, the effects of non-deductible capital expenditures, the creation of reserves or the effect of required debt amortization payments could require us to borrow money or sell assets (potentially during unfavorable market conditions) to pay out enough of our taxable income to satisfy the 90 percent distribution requirement and to avoid corporate income tax.

We may not have sufficient cash available from operations to pay distributions, and, therefore, distributions may be made from borrowings.The actual amount and timing of distributions will be determined by our Board of Directors in its discretion and typically will depend on the amount of cash available for distribution, which will depend on items such as current and projected cash requirements, limitations on distributions imposed by law or our financing arrangements and tax considerations. As a result, we may not have sufficient cash available from operations to pay distributions as required to maintain our status as a REIT. Therefore, we may need to borrow funds to make sufficient cash distributions in order to maintain our status as a REIT, which may cause us to incur additional interest expense as a result of an increase in borrowed funds for the purpose of paying distributions.

We may be required to pay a penalty tax upon the sale of a property.The federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property, other than foreclosure property, held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a “prohibited transaction” that is subject to a 100 percent penalty tax. Under current law, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of real estate or other property constitutes the sale of property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular transaction. It is our intent that we and our subsidiaries will hold the interests in the real estate for investment with a view to long-term appreciation, engage in the business of acquiring and owning real estate, and make occasional sales as are consistent with our investment objectives. We do not intend to engage in prohibited transactions. We cannot assure you, however, that we will only make sales that satisfy the requirements of the safe harbors or that the IRS will not successfully assert that one or more of such sales are prohibited transactions.

We may be adversely affected if we fail to qualify as a REIT.If we fail to qualify as a REIT, we The 100% tax will not be allowedapply to deduct distributions to shareholders in computing ourgains from the sale of property that is held through a taxable REIT subsidiary or other taxable corporation, although such income and will be subject to tax in the hands of the corporation at regular U.S. federal income tax including anyrates.

There is a risk of changes in the tax law applicable alternative minimum tax, at regular corporate rates. In addition, we might be barred from qualification as a REIT forto real estate investment trusts. Because the four years following disqualification. The additional tax incurred at regular corporate rates would reduce significantlyIRS, the cash flow available for distribution to shareholdersUnited States Treasury Department and for debt service. Furthermore, we would no longer be required to make any distributions to our shareholders as a condition to REIT qualification. Any distributions to shareholders would be taxable as ordinary income to the extent of our current and accumulated earnings and profits, although such dividend distributions would be subject to a topCongress frequently review federal income tax ratelegislation, we cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted. Any of 20% (and potentially a Medicaresuch legislative actions may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of 3.8%). Corporate distributees, however, may be eligible for the dividends received deduction on the distributions, subject to limitations under the Code.us and/or our investors.

The recently enacted Tax Cuts and Jobs Act of 2017, or the TCJA, has significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their shareholders. Changes made by the TCJA that could affect us and our shareholders include:

You are urged to consult with your tax advisor with respect to the status of legislative, regulatory, judicial or administrative developments and proposals and their potential effect on an investment in our securities.

To qualify as a REIT, we must comply with certain highly technical and complex requirements. We cannot be certain we have complied, and will always be able to comply, with the requirements to qualify as a REIT because there are few judicial and administrative interpretations of these provisions. In addition, facts and circumstances that may be beyond our control may affect our ability to continue to qualify as a REIT. We cannot assure you that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to our qualification as a REIT or with respect to the federal income tax consequences of qualification. We believe that we have qualified as a REIT since our inception and intend to continue to qualify as a REIT. However, we cannot assure you that we are qualified or will remain qualified.

There is a risk of changes in the tax law applicable to real estate investment trusts. Because the IRS, the United States Treasury Department and Congress frequently review federal income tax legislation, we cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted. Any of such legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us and/or our investors.

We may be unable to comply with the strict income distribution requirement applicable to REITs. As noted above, to maintain qualification as a REIT under the Code, a REIT must annually distribute to its shareholders at least 90% of its REIT taxable income, excluding the dividends paid deduction and net capital gains. This requirement limits our ability to accumulate capital. We may not have sufficient cash or other liquid assets to meet the 90% distribution requirements. Difficulties in meeting the 90% distribution requirement might arise due to competing demands for our funds or to timing differences between tax reporting and cash receipts and disbursements, because income may have to be reported before cash is received, because expenses may have to be paid before a deduction is allowed, because deductions may be disallowed or limited or because the IRS may make a determination that adjusts reported income. In those situations, we might be required to borrow funds or sell properties on adverse terms in order to meet the 90% distribution requirement and interest and penalties could apply which could adversely affect our financial condition. If we fail to satisfy the 90% distribution requirement, we would cease to be taxed as a REIT.

Notwithstanding our status as a REIT, we are subject to various federal, state and local taxes on our income and property. For example, we 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 shareholder level. We may be subject to other federal income taxes and 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. In addition, any taxable REIT subsidiary that we may form will be subject to regular corporate federal, state and local taxes. Any of these taxes would decrease cash available for distributions to stockholders.

Other Risks

We may not be able to access adequate cash to fund our business.Our business requires access to adequate cash to finance our operations, distributions, capital expenditures, debt service obligations, development and redevelopment costs and property acquisition costs, if any. We expect to generate the cash to be used for these purposes primarily with operating cash flow, borrowings under secured and unsecured term loans, proceeds from sales of strategically identified assets and, when market conditions permit, through the issuance of debt and equity securities from time to time. We may not be able to generate sufficient cash to fund our business, particularly if we are unable to renew or extend leases, lease vacant space or re-lease space as leases expire according to expectations.

We are dependent on key personnel.Our executive and other senior officers have a significant role in our success. Our ability to retain our management group or to attract suitable replacements should any members of the management group leave is dependent on the competitive nature of the employment market. The loss of services from key members of the management group or a limitation in their availability could adversely affect our financial condition and cash flow. Further, such a loss could be negatively perceived in the capital markets.

We may amend our business policies without shareholder approval.Our Board of Directors determines our growth, investment, financing, capitalization, borrowing, operations and distributions policies. In addition, our charter provides that our Board of Directors may revoke or otherwise terminate our REIT election, without the approval of our shareholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. Although our Board of Directors has no present intention to amend or reverse any of these policies, they may be amended or revised without notice to shareholders. Accordingly, shareholders may not have control over changes in our policies. We cannot assure you that changes in our policies will serve fully the interests of all shareholders.

The market value of our preferred and common stock could decrease based on our performance and market perception and conditions.The market value of our preferred and common stock may be based primarily upon the market’s perception of our growth potential and current and future cash dividends, and may be secondarily based upon the real estate market value of our underlying assets. The market price of our preferred and common stock is influenced by their respective distributions relative to market interest rates. Rising interest rates may lead potential buyers of our stock to expect a higher distribution rate, which could adversely affect the market price of our stock. In addition, rising interest rates could result in increased expense, thereby adversely affecting cash flow and our ability to service our indebtedness and pay distributions.

There are restrictions on the ownership and transfer of our capital stock.To maintain our qualification as a REIT under the Code, no more than 50% in value of our 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, our charter contains provisions restricting the ownership and transfer of our capital stock. These restrictions may discourage a tender offer or other transaction, or a change in management or of control of us that might involve a premium price for our common stock or preferred stock or that our shareholders otherwise believe to be in their best interests, and may result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.

Our earnings are dependent, in part, upon the performance of our investment portfolio.As permitted by the Code, we invest in and own marketable securities of other REITs, which we generally limit to no more than approximately 10% of our undepreciated assets (which is our total assets excluding accumulated depreciation). To the extent that the fair value of those investments declines or those investments do not provide an attractive return, our earnings and cash flow could be adversely affected. Beginning with our fiscal year ending September 30, 2019, all changes in the fair value of the equity securities of other REITs that we own, whether realized or unrealized, will be recognized as gains or losses in our consolidated statement of income. As a result, fluctuations in the fair value of those investments will, in the future, impact our earnings even if we have not sold the underlying investments.

We are subject to restrictions that may impede our ability to effect a change in control. Certain provisions contained in our 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. These provisions include the following:

We cannot assure you that we will be able to pay distributions regularly.Our ability to pay distributions in the future is dependent on our ability to operate profitably and to generate cash from our operations and the operations of our subsidiaries and is subject to limitations under our financing arrangements and Maryland law. Under the Maryland General Corporation Law, or the MGCL, a Maryland corporation generally may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its debts as the debts became due in the usual course of business, or the corporation’s total assets would be less than the sum of its total liabilities plus, unless the charter permits otherwise, the amount that would be needed if the corporation were to be dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution. Accordingly, we cannot guarantee that we will be able to pay distributions on a regular quarterly basis in the future.

Future terrorist attacks and military conflicts could have a material adverse effect on general economic conditions, consumer confidence and market liquidity.Among other things, it is possible that interest rates may be affected by these events. An increase in interest rates may increase our costs of borrowing, leading to a reduction in our earnings. Terrorist acts could also result in significant damages to, or loss of, our properties.

We and our tenants may be unable to obtain adequate insurance coverage on acceptable economic terms for losses resulting from acts of terrorism. Our lenders may require that we carry terrorism insurance even if we do not believe this insurance is necessary or cost effective. We may also be prohibited under the applicable lease from passing all or a portion of the cost of such insurance through to the tenant. Should an act of terrorism result in an uninsured loss or a loss in excess of insured limits, we could lose capital invested in a property, as well as the anticipated future revenues from a property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property. Any loss of these types could adversely affect our financial condition.

Disruptions in the financial markets could affect our ability to obtain financing on reasonable terms and have other adverse effects on us and the market price of our capital stock.Over the last several years, the United States stock and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks and debt securities to fluctuate substantially and the spreads on prospective debt financing to widen considerably. More recently, the financial crisis in Europe (including financial difficulties at several large European banks) has had a similar, although less pronounced, effect. Adding to the European credit crisis, in June 2016, voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union and has continued to have a material adverse effect on global economic conditions and the stability of global financial markets and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing at reasonable terms, which may negatively affect our ability to acquire properties and otherwise pursue our investment strategy. A prolonged downturn in the stock or credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our investment strategy accordingly. These types of events in the stock and credit markets may make it more difficult or costly for us to raise capital through the issuance of the common stock, preferred stock or debt securities. The potential disruptions in the financial markets may have a material adverse effect on the market value of the common stock and preferred stock and the return we receive on our properties and investments, as well as other unknown adverse effects on us or the economy in general.

We are subject to risks arising from litigation.litigation.We may become involved in litigation. Litigation can be costly, and the results of litigation are often difficult to predict. We may not have adequate insurance coverage or contractual protection to cover costs and liability in the event we are sued, and to the extent we resort to litigation to enforce our rights, we may incur significant costs and ultimately be unsuccessful or unable to recover amounts we believe are owed to us. We may have little or no control of the timing of litigation, which presents challenges to our strategic planning.

Dividends on our capital stock do not qualify for the reduced tax rates available for some dividends.Income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Although these rules do not adversely affect our taxation or the dividends payable by us, to the extent that the preferential rates continue to apply to regular corporate qualified dividends, investors who are individuals, trusts and estates may perceive an investment in us to be relatively less attractive than an investment in the stock of a non-REIT corporation that pays dividends, which could materially and adversely affect the value of the shares of, and per share trading price of, our capital stock.

ITEM 1B – UNRESOLVED STAFF COMMENTS

None.

ITEM 2 - PROPERTIES

The Company operatesWe operate as a REIT. Our portfolio is primarily comprised of real estate holdings, some of which have been long-term holdings carried on our financial statements at depreciated cost. We believe that their current market values exceed both the original cost and the depreciated cost.

The following table sets forth certain information concerning the Company’sour real estate investments as of September 30, 2016:2018: