Modiv Inc. (NYSE:MDV) Q1 2024 Earnings Call Transcript

Modiv Inc. (NYSE:MDV) Q1 2024 Earnings Call Transcript May 5, 2024

Modiv Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, good day and welcome to the Modiv Industrial Inc. First Quarter ’24 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] On today’s call, management will provide prepared remarks and then we will open up the call for your questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to John Raney, Chief Operating Officer and General Counsel. Please go ahead, sir.

John Raney: Thank you, operator and thank you, everyone for joining us for Modiv Industrial’s first quarter 2024 earnings call. We issued our earnings release before market opened this morning and it’s available on our website at modiv.com. I’m 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’ll 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, potential strategic partner discussions 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 these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that said, I would like to turn the call over to Aaron Halfacre. Aaron?

Aaron Halfacre: Thanks, John. Hello, everyone. I hope you’re doing well. First quarter right around the corner from fourth quarter results. In the tradition I’ve done in the last couple of quarters, I’ve put it all out there in the earnings release for the most part. So, instead of me jabbing away, first let’s go to Ray and then I’ll catch up at the end. Ray?

Ray Pacini: Thank you, Aaron. I’ll begin with an overview of our first quarter operating results. Rental income for the first quarter was $11.9 million, compared with $10.3 million in the prior-year period. This 15.4% increase reflects the impact of 12 industrial manufacturing property acquisitions during 2023, partially offset by 14 non-core property dispositions in August 2023 and two additional non-core dispositions during the first two months of 2024. First quarter adjusted funds from operations or AFFO was $3.3 million, up 6.6% when compared with $3.1 million in the year-ago quarter. The increase in AFFO primarily reflects the increase in rental income and a decrease in property expenses, which were partially offset by increases in straight line rents and interest expense.

On a per share basis, AFFO was $0.29 per diluted share for this quarter, which reflects an increase of 1 million shares in the weighted average number of fully-diluted common shares outstanding, compared to $0.30 per diluted share in the year-ago quarter. The increase in fully-diluted shares is attributable to performance shares earned by management during 2023 and shares issued during April 2023 in connection with the property acquisition through an UPREIT transaction. Property expenses decreased $723,000 compared with the year-ago quarter, primarily reflecting the disposition of properties with modified gross leases and double net leases in August 2023. Excluding the impact of swap valuations, cash interest expense increased by approximately $1.3 million, reflecting greater borrowings outstanding during 2024, given that during the year-ago quarter, we only had an average of $157 million outstanding on our credit facility.

While G&A increased by $91,000, compared to the year-ago quarter. the increase was entirely due to non-recurring costs for our transfer agent and legal fees related to the distribution of GIPR’s common stock to our stockholders in January. We expect general and administrative expenses to be lower in future quarters since the first quarter of each year includes higher costs for audit and tax professionals along with higher social security taxes for employees, who reached the social security maximum tax during the first quarter. Now, turning to our portfolio. Following the January and February dispositions of two non-core assets, our 42-property portfolio has an attractive weighted average lease term of 13.9 years and approximately 34% of our tenants or their parent companies have an investment grade credit rating from a recognized credit rating agency of BBB- or better.

20 Affordable, Promising Cities to Buy Real Estate in 2024

Annualized base rent for our 42 properties totals $39.9 million as of March 31st, 2024, with 38 industrial properties representing 75% of ABR, three office properties representing 14% of ABR and one retail property representing 11% of ABR. With respect to our balance sheet and liquidity, as of March 31st, 2024, total cash and cash equivalents was $18.4 million and we had $281 million of debt outstanding. Our debt consists of $31 million of mortgages on two properties and a $250 million term loan outstanding on our $400 million credit facility. And we do not have any debt maturities until January 2027. Based on interest rate swap agreements that we entered into during 2022, 100% of our indebtedness as of March 31st, 2024, held a fixed interest rate with a weighted average interest rate of 4.52% based on our leverage ratio of 48% at quarter end.

We’re exploring various alternatives to extend or restructure the December 31st, 2024 cancellation options on our existing swaps. As previously announced, our Board of Directors declared a cash dividend per common share of approximately $0.095 for the months of April, May and June 2024, representing an annualized dividend rate of $1.15 per share of common stock. This represents a yield of 7.72% based on the $14.90 closing price of our common stock as of May 1st, 2024. I’ll now turn the call back over to Aaron.

Aaron Halfacre: Thanks, Ray. I’d say pretty straightforward quarter. I think if we look at a lot of REITs coming out, very similar theme, a lot of volatility doesn’t make sense to be actively acquiring too much. Those who have distressed assets seem to be disposing of them. For us, it was mainly a quarter of patients, sort of like a duck on the surface of the water, it may look calm. but furiously, sort of kicking the legs. The bulk of that time being spent on the aforementioned strategic partner conversations. These take a lot of time, a lot of effort, a lot of thinking, but primarily a lot of patience. I think we feel constructive on the company. It’s probably the best we’ve ever been in a position. We feel like we have no gun to our head.

We don’t have to do anything. We’d love the capital markets to open back up, but everyone on this call would love the same. It’s been a long trough. Our entire public existence has been eating nuts and berries, and never having a steak. So, we’re keeping the faith and doing quite fine. It’s a crazy time now for people to make decisions. Was it three weeks ago we had 300 missiles coming over into the Middle East. We’ve got campus riots. We’ve got, well, I think it was December — the end of December, the market was pricing six cuts in. We’ve had a lot of volatility and I think the stability that we’ve shown is worth something. I think we’re still massively undervalued. That’s why I’m — I have a big personal position. I’m very comfortable with that and about closing that gap.

The NAV that we came out with, look, some people may have disdain for appraisals. but they’re a legitimate part of the real estate space. We chose two very high-profile legitimate appraisers to go out and appraise our portfolio of assets, as well as our fixed rate mortgages, and we use that information to come up with an NAV. I think if you look at the history of our NAV, you could find along a lot of them in our S11 that we did two years ago. but obviously, we came out with an NAV last year. I think directionally, they show the right trend, right, unlike say, BREIT or SREIT out there. And then on non-traded space, our valuations have gone down from last year. So, that passes the smell test in my perspective, because we have had wider cap rates and higher rates.

So, you should see that in your appraisals. But I think it just clearly shows that our lack of float, the fact that the vast majority of our legacy investors do not even pay attention to the share price, do not even remotely consider trading it. If you look at a percentage of our shares outstanding, it is what trades. Ours is like a tenth of what a normal read is. So, we have very thin volume and we understand that we have to address that. We’ve had many conversations with people of the institutional space, who really like what we’re doing, like our theme. but there’s no way right now for them to find a way to get in. And so, we just have to be patient. We don’t have our ATM open right now. We’re not looking at that. We did try it out in prior quarter just to try to grease the skids.

but we’re just being patient, operating with what we have, minding our Ps and Qs, saving every penny that we can to get something done and we’re optimistic that we can get something done. We just don’t know when it will happen. This environment again, to say this like for the fifth time requires patience. But that said, optimism is high, focus is strong and ready for some Q&A. Operator?

See also Anchor Capital Management’s Top 9 Stock Picks and Former Holdings in 2024 and Morgan Stanley’s Top 15 Stock Picks for 2024.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from the line of Robert Stevenson with Janney Montgomery Scott. Please go ahead.

Robert Stevenson: Good morning, guys. Aaron, where are you on the Kalera asset in Saint Paul? Is that looking like a sale or a release at this point?

Aaron Halfacre: It’s a great question. I think we’re — we’ve been actively exploring both of those. Candidly, the reason why I don’t have enough progress on that yet is we still haven’t got it fully rejected from Kalera. We’ve been in contact with them. We’re waiting for them. We presume that they will fully reject it, but they haven’t yet. And until such time that they do, it kind of hogties us on the margin. That said, we’ve been proactive speaking to brokers in that market. We house developing strategies. We’ve spoken to other growers as well, who know the property and expressed interest. A little and interesting fact is U.S. Foods has a significant presence there. and in the original context, they were going to be providing microgreens to U.S. Foods.

And so that has spurred a lot of what seems to be some interest. That said, that’s a very unique space. and in terms of vertical growers, the building itself is a great box. I mean they overimproved it. I think upwards of $15 million of capital improvements they put into this property. There’s also equipment that we had purchased from them originally that’s in there. So, we’re — in addition to looking at sell-lease as a vertical grower, we’re also contemplating the concept of sell-lease as an empty box. And then that part would require us to sell off the equipment. So, we’re actively exploring all those things. We’re a bit of a holding pattern. We’re waiting for them to reject. And then after that, we’ll probably be able to get a little bit more momentum.

Robert Stevenson: Are they currently paying you?

Aaron Halfacre: No.

Robert Stevenson: So, they haven’t gotten out and they haven’t paid?

Aaron Halfacre: They’re not in it. They’re not in it. So, they’re not occupying it.

Robert Stevenson: Okay.

Aaron Halfacre: But it’s just stuck up in the bankruptcy proceedings.

Robert Stevenson: Okay. And then, the — I believe the window just opened for the tenant purchase option on the State of California asset in Rancho Cordova. What’s the likely, play there at this point? Do you have a sense whether or not they’re going to take it?

Aaron Halfacre: Yes. We reached out to them about last week. They said they’re — they haven’t met the meeting scheduled to discuss it. So, we probably won’t hear back if they’re going to start their option process for a little bit more time, call it this quarter, second quarter probably. Our view is a couple of things on our calculus, which may or may not be their calculus candidly. but from ours when they originally did it, they — California had a big budget surplus, that’s not the case now. The purchase price isn’t going to move the needle in terms of their budget. But we think about those things in terms of there’s a political element in terms of when do they do this. Our view is when we talk to them, I guess, it was probably late last year and they indicated that they were likely to start the process in May.

We called them again, and he said it’s on the docket for the discussion. How it has to — they have to go through their real estate department, which has very finite resources in terms of people, who can do acquisitions like that. It goes to their acquisitions department and then they come up with a valuation mechanism, which we have one embedded. and basically, there’s a price in the lease that if it’s plus or minus 10% of that, they can just move forward. If it’s outside of that price range, then they have to make we have a back and forth process between us if we want to agree to this different price. I don’t see any issues with that mechanism. From there, it then goes to the various state departments to get approval. and then once it’s approved, it’s put on the budget and then the budget would not get approved until next year.

So, they clearly told us the process would take at least 12 months to 14 months, whenever they did initiate it. Our view is if they tell us they’re going to initiate it, we’ll be patient. If they say that they’re not sure they’re going to initiate it, because they have a couple of year window to do it, then we’re probably just going to take it to market. because it does have it’s a AAA rated credit or at least a AA plus rated credit and it’s got term. and so, no sense in holding it, particularly if we get rid of the Costco property, because then we’re down to the last bids. So, I guess, we’ll — I assume we’ll have a better update on second quarter earnings.

Robert Stevenson: Okay. And then last one from me. How significant are the acquisition opportunities at similar rates to the Tampa acquisition if you had access to more decently-priced capital at this point? I mean, is it a low like we’re seeing in other asset classes or is there a lot of opportunity and it’s just a matter of the capital for you guys?

Aaron Halfacre: So, I think there is a lull, there is less being shown, than there was a year ago. But there is like, I saw a great, it was a great opportunity probably going to be an ACAP. but it was $100 million, it was a multi-site portfolio, not anything that we’re talking about, just a straight up brand new sale leaseback. So, you could definitely put money to work. I think the logic for us when you think about industrial manufacturing sale leaseback, which is really what you’re seeing, you’re not seeing hardly any existing leased properties be put on the market right now occasionally, but not much. And they’re more like HVAC guys and things like that, which to me, it’s not necessarily that strategic. But on the strategic sale leasebacks, the genesis to decide that you want to move this off balance sheet and take money is a lengthy one, right.

If it was assuming that we haven’t had much in the way of private equity transactions that take out the small middle market companies in the last 18 months, because it doesn’t paper for them. They’re not a catalyst, because typically, when a PE shop gets it, that’s one of the first things they’ll do. And if you have an owner-operator, who decides they want to free it up, it’s a lengthy process to say, hey, wait a minute, this is my goose that lays a golden egg, why would I sell this, right? And it’s a concept believe it or not that’s pretty foreign for some people even in the day and age, where we’ve had sale leasebacks for generations. So that journey probably takes upwards of at least 12 months, probably 24 months for them to make the decision.

And so, when we were acquiring assets last year, those were decisions made in ’21 or ’22. And the environment was different and so they had kind of started. The momentum was going was committed when you have deals coming out now from I think it’s suggestive of they have a real need for the capital. In the case of the Photonics one, we did they are doing an actual there. They’re doing an international merger. And so, they found this as a better source of capital than trying to get bank lending. So, they could they could get scale. And so, that’s why it worked right. if it’s somewhere where someone’s wanting to do this and they just want to cash it out, and they’re trying to do a dividend out or do something like that. Those are red flags, because come to us in this environment.

So, we expect a lull and then the volume. But that said, they’re all eights? No, but north of 7.5, I think you could — I could replicate the size of the company, probably if I had the gap.

Robert Stevenson: Okay. That’s helpful. Appreciate the time this morning, guys.

Aaron Halfacre: Thank you.

Operator: Thank you. Our next question is from the line of Bryan Maher with B. Riley Securities.

Bryan Maher: Thanks. My first question is just answered in kind of how deep the acquisition pipeline kind of could be. But when we look at your release this morning and you talk about the three ships scenario, can you assign any probability as to how you think it plays out I mean, I know you discussed it, kind of being in the hang of it. but where’s your head thinking that this ends up?

Aaron Halfacre: Well, attorneys won’t let me give you any probabilities. So, I won’t. I think, the four scenarios that are laid out are kind of like, I don’t have any neither do I or do these other two participants have any forced deadline. So, I think that’s the right environment to be in is that we’re all on our own regards capable of weathering the storm. And so, there’s no need to do something that is detrimental to one party and the beneficial to the other. I think if that were the case, then that — it would be far easier to do a deal from. so that I can say to start off with that. So, I think dialogues with these parties has been done. We didn’t just start in the last few months. We know these portfolios quite well. We have had on-and-off dialogues with these portfolios since we’ve been public.

I think the dialogue that we had in the last call it four months or so three months or so have been really specifically about. Okay, let’s roll up our sleeves. I can tell you that the parties have shared information about their portfolios to partner. We have a working model that allows us to see the impact to two the combined enterprise. We have actively spoken about cap rates and share prices, and governance mechanics. And so, that I can tell you that there has been some legal dollars spent. So, I would say this isn’t a wet finger in the wind. but if you can tell me the probability of geopolitical risk and economic risk and the election cycle, then I can probably dial it in better for you. but it’s just really, I literally had a CEO of another REIT text me yesterday and goes, this must be what clicks and feels like, because it’s just been a — it’s been a unique market.

That said, we’re all very constructive. I think the portfolios are very complementary. There’s one portfolio, is a little bit lumpier. But it’s got some real great sort of center of excellence assets in it. The other portfolio is smaller in size, but similar to last has more diversification. I think from an industry component, they make sense. I think from a — they’re both, candidly, they’re both shorter waltz, they’re existing portfolios, but they have good leases. So, look, we’re going to be working at this and candidly speaking to one of the journeys this probably this quarter. That’s what we said here’s, but all we’re going to say until next quarter. And in fact, we’re not actually going to go to Mary, just because we’re in the throes of discussions.

And we don’t — I don’t want to be openly talking about it much. But again, I can’t give you a probability just because the market is just I mean, in the last 60 days, our share price has been north of 16, in the fourteens and the fifteens [indiscernible]. So, we’ll keep at it and hopefully, we’ll come up with something.

Bryan Maher: That’s helpful. But buried in that commentary. I don’t think I heard anything regarding kind of the size of the portfolios. I mean, can you give us some aspect? Is it 50? Is it 100? is it 500? I mean, what zip code are we talking about the size of these two entities?

Aaron Halfacre: That’s a very great question. I can’t give you an answer.

Bryan Maher: All right. Thanks. Appreciate it, Aaron.

Operator: Thank you. Our next question is from the line of Gaurav Mehta with Alliance Global Partners.

Gaurav Mehta: Yes, thank you. Good morning. I wanted to follow up on the partnership discussion you had to think about this looking at different partnerships. Do you anticipate the quality of the assets in the partnership to be comparable to what you would have in your wholly-owned portfolio.

Aaron Halfacre: And I’d say that some, I would say that the quality is very comparable. If you think about manufacturing, sometimes you have rated credits, sometimes you don’t. I’d say, I think the thing is — I wouldn’t I can’t really discern one being lower quality life. It was — I wouldn’t be talking to them, candidly, I’d say they’re all comparable quality. Some might be stronger tenants. but with shorter leases, some may be stronger tenants with better, better lumpy or bigger assets. Some might be down perfectly fine tenants, but more diversification. I would say that the best thing that I see from it, if it were to come about any in either one direction or the other through a direction, is it very complementary? I think there’s to me, I can sleep well at night on any combination.

I certainly — and I think they think the same, I think the fact that we’re having this conversation is really related to the fact that people are besides the political rhetoric, that people understand that manufacturing is a viable asset class. I don’t think we no one at until Tier 4 really had done it in a truly dedicated space. There are certainly people, who have been buyers of it for a long time, but have not gone pure play at least not as of yet. And so, I think they see motive is a natural end state. because these portfolios, if they would eventually be selling them anyway. It’s just a matter of time. And so, I think there’s a complementary fit there. And I think, it is conducive to getting to that more scale and index inclusion and institutional ownership, which would create more flow, which allow more people to actually participate in the strategy and presumably, with less our equity volatility as a result.

And so, I think there’s a lot of different benefits. but I think the portfolios are very complementary — it seems very strategic. And I think it would open the door to others. I mean, there was a fourth battleship and that we’ve talked to at length and just given where they’re at in their cap stack. they just couldn’t be a participant at this time. And so that’s a someday maybe. if we’re successful here, God willing and we’ve gotten more size and I wouldn’t be surprised that we wouldn’t have a conversation with that other portfolio that fourth balance ship it down the road. So, there is opportunities out there, uniquely enough about manufacturing most of the manufacturing portfolios with the exception of what store owns and what O Now owns from what it acquired from whatever they were.

I can’t even think of their name. Then Spirit, excuse me. Besides those, there’s most of the portfolios are in private hands. And so, having a public currency longer term, I think is something to be looked at strategically.

Gaurav Mehta: Okay. And you talk about the exchange of your equity possible for this portfolio? So, are we talking like common stock or like OP units?

Aaron Halfacre: Yes. I look at those ubiquitously. Candidly, one provides tax protection, but these are institution players. So, generally speaking and I would I mean, I’m not ruling it out. But generally speaking, they’re less tax sensitive by the nature of their money. But to be clear, we’re talking about sort of that common equity element.

Gaurav Mehta: Okay. Thank you. that’s all I had.

Aaron Halfacre: Thanks so much.

Operator: Thank you. [Operator Instructions] As there are no further questions, I would now hand the conference over to Aaron Halfacre for his closing comments. Aaron?

Aaron Halfacre: Thanks, operator. Thanks, everyone. I’m trying to be candid as best we can, trying to get you guys know a real dialed in on what we’re doing. We think, I think a lot of environments or operators are uncomfortable or transparency. if you don’t like what you hear, you’re going to make a decision either way. I think we’re delivering results. We’re being transparent. So, you can try the best you can understand, where we’re headed. What we’re thinking. I’m very confident that we have the right team to get things done. And I have no ability to predict the markets. And so, like you are rolling with the punches. but I think we’re onto something in this company and look forward to talking to you again, at the next earnings release. Thanks, everyone.

Operator: Thank you. The conference of Modiv Industrial has now concluded. Thank you for your participation. You may now disconnect your lines.