Modiv Inc. (NYSE:MDV) Q3 2023 Earnings Call Transcript

Modiv Inc. (NYSE:MDV) Q3 2023 Earnings Call Transcript November 13, 2023

Modiv Inc. misses on earnings expectations. Reported EPS is $-0.94 EPS, expectations were $0.32.

Operator: Good day and welcome to Modiv Industrial Third Quarter 2023 Earnings Conference Call and Webcast. 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 the call up for your questions. Please note this event is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for Modiv Industrial. Please go ahead, ma’am.

Margaret Boyce: Thank you, Shomali, and thank you all for joining us for Modiv Industrial’s third quarter 2023 earnings call. We issued our earnings release before market opened this morning and it’s available on web site @motive.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 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, and 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 these 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 third quarter conference call. I think third quarter results were solid. I’d like to think they were relatively trauma free. Let’s just go straight to Ray to discuss financial results and I’ll come back at the end before we take questions. Ray?

Ray Pacini: Thank you, Aaron. I’ll begin with an overview of third quarter operating results. Revenue for the third quarter was $12.5 million, a 21% increase compared with the $10.3 million in the prior year period, and reflects the impact of the 12 industrial manufacturing acquisitions we completed during the first nine months of 2023 and the 14 non-core property dispositions in August 2023. Third quarter adjusted funds from operations, or AFFO, was $3.7 million, up 19% when compared with $3.1 million in the year ago quarter. The increase in AFFO was primarily due to the revenue increase and was partially offset by increases in straight-line rents and interest expense. On a per share basis, AFFO was $0.33 for this quarter, which is in line with consensus estimates, even after accounting for the increase in the weighted average number of fully diluted common shares outstanding.

The %1.7 million non-cash loss on sale of real estate investments during the quarter includes a $1.9 million non-cash loss on the previously announced sale of 13 properties to Generation Income Properties which close on August 10, 2023, partially offset by $178,000 gain on the sale of the property previously leased to the EMC shop. The loss on the GIPR transaction reflects the difference between the $9.6 million estimated share value of the Series A redeemable preferred stock of GIPR compared to the $12 million nominal value received as partial consideration for the sale on August 10, 2023. The GIPR has the right to redeem the preferred stock for GIPR common stock prior to March 15, 2024, subject to registering the common stock with the SEC and obtaining shareholder approval, which GIPR obtained on November 9, 2023.

The estimated share value of the preferred stock increased to $10.1 million as of September 30, 2023, reflecting the progress GIPR has made for registering up to 3 million shares of its common stock as of that date. The net loss attributed to common stockholders of $6.5 million for the third quarter or $0.86 for basic and diluted share reflects a one-time catch-up adjustment of $7.8 million for non-cash stock compensation expense related to the company’s determination that it is probable the company will achieve the contractually stipulated FFO performance target which is exclusive of the expense of the performance component of stock-based compensation. That target is $1.05 per diluted share for the year ending 2023. This performance component of the three and quarter year long-term stock incentive plan which was approved in January 2021 and distributed to all employees at that time will result in the issuance of an additional 474,515 Class C operating partnership units on March 31, 2024.

Aerial view of a neighborhood with houses and a real estate brokerage office.

This one time charge reflects a catch up adjustment to reflect amortization of the $19.58 per share fair value of the performance units from the January 25, 2021 grant date through September 30, 2023. The remaining unamortized fair value of $733,331 per quarter will be recorded as compensation expense for the performance units through the end of divesting period on March 31, 2024 as achieving the FFO performance target of $1.5 per share is still deemed probable. The FFO performance target of $1.5 per diluted share was established in January 2021 and represented a 20% increase over the FFO per diluted share achieved for the year-ended December 31, 2020. There are no other stock-based compensation plans in existence or approved. We experienced less volatility in net interest expense from gains or losses on the valuation of our swaps in the most recent quarter compared to the first half of 2023.

Interest expense, net of derivative settlements, and unrealized gain on interest rate swaps was $2.9 million during the third quarter of 2023 compared with $2.5 million in the prior year period. The increased interest expense associated with greater debt outstanding on our term loan was partially offset by a $795,000 unrealized gain on swap valuations. We will continue to benefit from our interest rate hedges with our $250 million term loan outstanding today at a weighted average interest rate of 4.53% based on our leverage of 48% as of September 30, 2023. Now turning to our portfolio. Following the two acquisitions and 14 dispositions completed during the third quarter, our 44 property portfolios have an attractive weighted average lease term of 14 years and approximately 33% of our tenants or their parent companies have an investment grade rating from a recognized credit rating agency of BBB minus or better.

Analyzed base rent for our 44 properties holds $40 million as of September 30, 2023. Now turning to our balance sheet and liquidity, as of September 30, 2023, total cash and cash equivalents were $5.6 million and we had $284 million of debt outstanding consisting of $34 million in mortgages and $250 million of outstanding borrowings on our $400 million credit facility. Based on interest rate swap agreements we entered into during 2022, a 100% of our indebtedness as of September 30, 2023 held fixed interest rates with a weighted average interest rate of 4.52% based on our leverage ratio of 48% at quarter end. As previously announced, our board of directors declared a cash dividend per common shares of approximately $0.095 for the months of October, November, and December, representing an annualized dividend rate of $1.15 per share of common stock.

This represents a yield of 7.77% based on share price over common stock as of November 10, 2023. I’ll now turn the call back over to Aaron.

Aaron Halfacre: Thanks, Ray. As you all saw, I’ve already shared a lot of information in our earnings release, and I did that in order to get our thoughts distributed to as wide as possible audiences as we could. So I don’t really think there’s much more to say in terms of prepared remarks. Other than I believe, and I hope you also find that our level of transparency and candor is unique. I don’t think I’ve seen an earnings release with that much detail and that much sort of candor and thought about it. We understand. We’re a small cap company or microcap company. In this really volatile time, who would think you would wake up over the weekend and find that Moody’s downrated, the US credit rating, and more headlines about this, that, or the other?

So it’s a very volatile time, and so certainly it’s hard for us to give out sort of formal guidance. We did the first year, we achieved it, but we don’t think it’s merited in the near term just because anything that we do could be a huge catalyst. But that said, I don’t want to say nothing. And so we shared a lot of what we’re looking at and a lot of thoughts. I suppose there’s going to be some questions about that as well as our results for the quarter. So let’s stop talking and turn it over to Q&A. Operator?

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Q&A Session

Operator: [Operator Instructions] And our first question comes from the line of Barry Oxford with Colliers.

Barry Oxford: Great. Yes, Aaron, I agree with you. You gave some very nice detail as far as where your brain is and how you’re thinking about raising money. When it comes to the strategic partner, you kind of went through a few things that what you’re not looking for. But then when you said what you’re looking for, you’re kind of looking for the halo effect that maybe give a little more detail on what you mean by that. And then also maybe to the extent you can without showing your hand, talk about broad brush, maybe the terms that would be acceptable to you in a broad brush sense. I know you can’t kind of show your hand here.

Aaron Halfacre: Yes, I’d say in the broadest, so look, as we kind of alluded to in the comments, we’re seeing a lot of people are offering sort of — some sort of preferred, right? And it really feels like debt to me. And that doesn’t feel very original. And in the return expectations that we’re seeing for these, they want mid-teens or higher returns, and they want repayment. And so to me, that just seems, if you want, that feels like equity, but without equity treatment. And so that doesn’t interest to us. I think as it relates, look, I don’t have specific terms for you. I know that what works for us, and I can’t share those now, but I will say that it needs to be organic. We view this as any potentiality of this happening as it’s got to be organic.

So it has to be our needs. And so any shop’s going to have some particular concerns they have. I think the biggest concern that we’ve seen floated to us, which is the one we are the most cognizant of, is that if they were to do something with us, they’re concerned about concentration risk, right? But given that even a $12 million check would be 10% of our cap stack right now and if you looked at it in certain ways, right? So we have to solve for that over the long term. To us, it has to be, it’s close, it has to be equity, effectively. And it has to be, they have to believe in our thesis. We’re looking at some that have existing assets, some that just have cash. I think the halo effect is, like if I did a joint venture with some overseas partner that felt they couldn’t name themselves, I would get no benefit because it would just be a black box.

But if I did a joint venture or some strategic partnership with someone that was recognized in the institutional space as having being smart money and underwriting and not sort of not someone who is just a carnivore, then I think we get the halo effect. And the halo effect is really designed to say, hey, look, what is our long-term goal? To the extent that we’re still in charge and we’re doing this long-term goal post is that we want to increase tradeable float, remove the pricing gap between where I think our shares are at a liquidation value and where they’re at trading today, and be a more functional REIT that over time gets the economy to scale and benefits and actually is able to message and consistently deliver to investors. Right now, we’re in this really unique box.

I don’t know of any REIT that came out literally like two weeks before the Fed started moving. And we didn’t raise any money, and we’ve done a great job, in my opinion, because it’s not been easy. But at the same time, who cares? Right because on any given day, we might have 5,000 shares trade in one direction or other, and that could be one investor. So we know we have to solve for float longer term, and we want that. I see, if you look at history, a lot of the deals that we see in strategic partnerships for the smaller REIT, I’m not talking about sort of the AMB, Prologis, Kimco sort of vintage back then those were a lot of different stories. But the smaller ones tend to be, give me money because I’ve got a deal, and I want to hammer that deal, right.