Modiv Inc. (NYSE:MDV) Q1 2023 Earnings Call Transcript May 15, 2023

Modiv Inc. misses on earnings expectations. Reported EPS is $-0.62 EPS, expectations were $-0.16.

Operator: Good day and welcome to Modiv’s First Quarter 2023 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for Modiv. Please go ahead, ma’am.

Margaret Boyce: Thank you, Diego, and thank you all for joining us today to discuss Modiv’s first quarter 2023 financial results. We issued our earnings release and investor supplement before the market opened this morning. These documents are available in the Investor Relations section of our website at modiv.com. I am here today with Aaron Halfacre, Chief Executive Officer and Ray Pacini, Chief Financial Officer. On today’s call, management will provide prepared remarks and then we will open up the call for your questions. Before we begin, I would like to remind you that today’s comments will include forward-looking statements under the federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, or other comparable words and phrases.

Statements that are not historical facts such as statements about our expected acquisitions or dispositions are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from those forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that, I would now like to turn the call over to Aaron. Aaron, please go ahead.

Aaron Halfacre: Thank you, Margaret. Hello, everybody and thank you for joining our first quarter conference call. We’re going to jump right in with a review of the financial results by Ray Pacini, our CFO, followed by my closing comments before we open the line for Q&A. Ray?

Ray Pacini: Thank you, Aaron. I’ll begin with an overview of first quarter operating results. First quarter adjusted funds from operations or AFFO was $3.1 million or $0.03 per diluted share, compared with $3 million or $0.29 per diluted share in the year ago quarter. Revenue for the first quarter increased 7.7% to $10.3 million, compared with $9.6 million in the prior year period. Reflecting the benefit of the acquisitions we completed during 2022. The net loss attributable to common stockholders improved $6.4 million for the first quarter, coming in at a loss of $4.7 million, or $0.62 for basic and diluted share. This compares to a net loss attributable to common stockholders of $11.1 million, or $1.47 per basic and diluted share in the prior year period.

Were it not for two primary offsets, we would have obtained an even stronger improvement in our operating results. The recent quarter results include a $3.5 million real estate impairment charge and a $2.5 million year-over-year increase in interest expense. The real estate impairment charge relates to our property in Nashville, Tennessee, which is leased to Camergon. Since we are planning to dispose of this property later this year, we evaluated its carrying value compared with comparable sales values and reduced the carrying value accordingly. The increase in interest expense includes a $1.7 million of unrealized losses on interest rate swap valuations, while the swap in the first $150 million of our term loan was treated as a cash flow hedge from July 1 until December 31 2022 and did not qualify for hedge accounting treatment for the first quarter of 2023, because the swap was deemed ineffective.

The primary reason the swap was deemed ineffective, is a potential for a reduced term in swap that could result from a one-time cancellation option available on December 31 2024. Compared with the January 2027 maturity date of the term loan. We provided this cancellation option at the time we entered into this swap, because it reduced the swap rate by approximately 50 basis points. If there’s a significant drop in interest rates in the future, this interest rate swap derivative could potentially qualify again, as a cash flow hedge. The unrealized loss is a non-cash expense, it does not impact AFFO, and we continue to benefit from the hedge with a $250 million term loan outstanding today at a weighted average interest rate of 4.3%. Based on our leverage of 40% as of March 31 2023.

The balance of the increase in interest expense reflects the fact that the weighted average interest rate on our $170 million term loan outstanding as of March 31, 2023, was 4% based on the existing swaps, compared with $150 million outstanding as of March 2022, and a weighted average interest rate of 2.1%. Now, turning to our portfolio, during the first 4.5 months of 2023, we continue to focus on acquiring industrial manufacturing properties. Year-to-date through May 12, we acquired 100.6 million across 10 industrial manufacturing properties, at an attractive blended initial cap rate of 7.7% and a weighted average cap rate of 9.9%. Two of the acquisitions occurred during the first quarter, and following completion of the remaining eight property acquisitions during April and May this year, our portfolio now consists of 56 properties located in 18 states.

On a pro forma basis as of March 31, 2023, the portfolio composition included 37 industrial core properties, representing 67% of the portfolio will have a 14.5 year weighted average lease term or wealth, and a 2.4% annual rent bumps. Three tactical non-core properties representing 20% of the portfolio with a 15.3 year wall, and 2.3% annual rent bumps, and 16 other non-core legacy retailing office properties, representing 13% of the portfolio. As part of our active investment strategy to acquire industrial manufacturing assets, we’ve successfully increased our industrial exposure to a supermajority allocation from just 39% as of September 30, 2021. Our technical noncore allocation as detailed in our Form 8-K filing today offers Modiv potentially meaningful upside over an interim holding period, while our other non-core allocation consisting of 16 legacy retail and office assets that acquired by Modiv’s Management team presents a near term capital recycling opportunity, as we are now focusing our efforts on selling those properties.

Since the beginning of 2020, immediately following the acquisition of a non-traded REIT, Modiv’s Management team has successfully repositioned the portfolio by selling 143 million of non-core legacy assets and completing over $278 million of accretive acquisitions. Annualized base rent based on rates in effect on March 3120 23, totals $41.8 million on a pro forma basis, reflecting the acquisitions completed in April in May 2023. The portfolio’s weighted average lease term is 13.3 years, and approximately 38% of our tenants or their parent companies have an investment grade rate credit rating from a recognized credit rating agency of BBB minus or better. Now turning to our balance sheet and liquidity. As of March 31, 2023, total cash and cash equivalents were $13.3 million and we had $214.4 million of debt outstanding, consisting of $14.4 million of mortgages and $170 million of outstanding borrowings on our $400 million credit facility.

Our leverage ratio was 40% at quarter end, based on interest rate swap agreements we entered into during 2022 a 100% over indebtedness as of March 31, 2023, held a fixed interest rate and the weighted average interest rate was 4.1%. In April of 2023, we drew the remaining $80 million available on our term loan. We use these funds along with cash on hand and the issuance of $5.2 million of Class C operating units in our partnership that agreed upon price of $18 per share, to fund the equity property acquisitions I just mentioned. The weighted average interest rate on the $294.4 million of total debt outstanding as of May 12, 2023, was 4.4% based on the existing swaps and consolidated leverage of 40% as of March 31 2023. As previously announced, our Board of Directors declared a cash dividend for common share of approximately $0.95 for the month of April, May and June 2023, representing an annualized dividend rate of $1.15 per share a common stock.

This represents a yield of almost 9% based on the recent share price of our common stock. I’ll now turn the call back over to Aaron.

Aaron Halfacre: Thanks Ray, as you just heard, Modiv has been able to produce yet another solid quarter of results. Further as we detailed in our earnings release, the 10 acquisitions we completed represent an impressive mix of accretive high quality industrial manufacturing properties. However, beyond the financial results, I believe there’s a message to take away from this, but I would argue is even more important. And that is the ethos or character of the management team that produced the results. Any given REIT in any given quarter can deliver a decent result, as they say, even a stopped watch is right twice a day. Heck, even delivering consistent quarterly financial results is nothing more than a nice confirmation that you made the right initial investment decision.

But the investment you are ultimately making, particularly in the net lease sector is on the caliber and capability of the management team to produce those consistent, positive financial results. Picking the right management team is critically important. It’s like picking the right horse at the Kentucky Derby. The right team during the playoffs, or the right soldiers to go to war. Sometimes stats don’t tell you the full story, so you have to rely on your instinct. And when your gut tells you to choose the underdogs, the Warriors, the hardscrabble crew that has no quit, then you know right then and there that you have found something special. Modiv’s secret sauce can be summed up in two simple but powerful words, grit, and grind. Modiv’s grit is exemplified by our focus and perseverance.

Combined with our ability to grind it out every day relentlessly. We are hard wired to achieve our goals. Combined with our decades of real estate experience, our grit and grind produce results that are both intelligent and compelling. Think about it for a quick moment, since the beginning of last year, Modiv has rollover 30% by accretively acquiring nearly 300 million of assets without raising any institutional capital. Modiv has transformed its balance sheet with all six rate debt with a weighted average interest rate of 4.4%, despite an unprecedented rising rate environment, the Modiv team has done all this while also selling millions of non-core assets and executing impressive new leases and renewals and manage all the financial reporting of our company.

We did all that would just 12 people that takes grit, we had to grind it out. Let me ask you this. How many CEOs do you know that tour every property acquired? I’ve been in the REIT industry for over two decades, and I’ve never met another. To find the right acquisitions this quarter, our Chief Investment Officer and I had to take 25 flights with countless winter delays to 18 cities, driving over 1700 miles between site visits across seven different states. That takes grit and requires you to grind. When we moved our Corporate Headquarters to REIT only last year, to save our shareholders every bit of money we could. Our COO and I loaded up the company’s office furniture into a 26-foot U haul and drove it up over the Sierra Nevada Mountains, grit and grind.

This past Saturday, I ran a half marathon trail race in the Mountains. Two weeks ago to prepare for the race after a rough winter that offered very few good training days, I decided I had to grind out several long runs to get to my goal. So in one week, I knocked out four mountain runs for eight miles, 13 miles, 14 miles, and 15 miles just because it had to be done. Another example of how Modiv is defined by its grit and its ability to grind. Last quarter we did our goal to acquire a minimum of 100 million of industrial manufacturing properties. When I stated that publicly, I didn’t know when we would accomplish that goal. However, we got it done sooner than we thought. Now, our focus has shifted to selling the 16 legacy non-core assets that we inherited through prior M&A.

I don’t know how soon we will get them sold. But I can promise you this, our grit and grind will make sure it gets done. After we sell those assets, we will then shift to showcasing to everyone how we have become the first pure play industrial manufacturing REIT and how we are focused on becoming the leading investor in industrial manufacturing properties. With every ounce of my perseverance and determination, I’ll be spreading the word, even if it requires me to meet every financial advisor in the country and making investors aware of how great an investment opportunity Modiv represents and in doing so, improve our share price. I encourage all who are listening and all who will read this transcript in the future to know this. With our grid and our ability to grind, Modiv will prosper.

Operator, let’s open it up for Q&A.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Rob Stevenson with Janney. Please state your question.

Operator: The next question comes from Gaurav Mehta with EF Hutton, please state your question.

Operator: Our next question comes from John Massocca with Ladenburg Thalmann, please state your question.

Operator: [Operator Instructions] Our next question comes from Bryan Maher with B. Riley. Please state your question.

, :

Aaron Halfacre: Well, I think we said we beat it up pretty much. Thank everyone for being on the call. We’ll put our heads back down and get back to it. I don’t think anyone’s really paying attention to us, unfortunately right now. But it’s a risk off environment. REITs are topsy turvy. It’s been a crazy 15 months. It could be another crazy 12 months or more. We’ll just keep getting things done and we look forward to brighter days for everyone. Do well. Thanks.

Operator: Thank you. That concludes today’s conference all parties may disconnect. Have a good day.