Modiv Inc. (NYSE:MDV) Q4 2024 Earnings Call Transcript

Modiv Inc. (NYSE:MDV) Q4 2024 Earnings Call Transcript March 4, 2024

Modiv Inc. misses on earnings expectations. Reported EPS is $-0.46 EPS, expectations were $0.38. MDV isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here)

Operator: Good day and welcome to Modiv Industries Incorporated’s Fourth Quarter 2023 Conference Call. All participants will be in listen-only mode. [Operator Instructions] On today’s call, management will provide prepared remarks and then we’ll 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 fourth quarter 2023 earnings call. We issued our earnings release before market open 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 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 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 now to turn the call over to Aaron. Aaron, the mic is yours.

Aaron Halfacre : Thank you, John. Hello, everybody. Thanks for joining our fourth quarter conference call. For those who don’t know John, he’s our COO and our General Counsel, and with the release of these financial results, we’ll formally make him a named executive officer, which means he’ll be subject to Form-4 filings alongside myself and Ray and our Board of Directors. Speaking of Ray, since I said a ton in our earnings press release, how about we jump right to hear more details on our financial results and I’ll come back before the end to take questions. Ray?

Ray Pacini: Thank you, Aaron. I’ll begin with an overview of our fourth quarter operating results. Revenue for the fourth quarter was $12.3 million compared with $13.8 million in the prior year period, which included a $3.8 million early termination fee from Sutter Health in advance of our signing of new lease for a Rancho Cordova property in the state of California. Excluding the 2022 lease termination fee, revenue increased 23% compared to the prior year period. The revenue increase reflects the impact of 12 industrial manufacturing property acquisitions during the first seven months of 2023, partially offset by 14 non-core property dispositions in August 2023. Fourth quarter adjusted funds from operations or AFFO was $4.5 million, up 41% when compared with the $3.82 million in the year-ago quarter after excluding the 2022 lease termination fee.

The increase in AFFO reflects the revenue increase along with decreases in G&A and property expenses, which were partially offset by increases in straight line rents and interest expense. On a per share basis, AFFO was $0.40 per diluted share for this quarter, which is $0.05 above the average of our three analyst estimates, even after accounting for an increase of 1 million shares in the weighted average number of fully diluted common shares outstanding. G&A decreased by $850,000 compared with a year ago quarter, reflecting the absence of a relocation reserve accrued in the year ago quarter, lower professional fees due to timing differences, and a decrease in D&O insurance. Property expenses decreased $807,000 compared with a year ago quarter, primarily reflecting the disposition of properties with modified gross leases and double net leases in August.

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Excluding the impact of swap valuations, cash interest expense increased by approximately $1.3 million, reflecting greater borrowings outstanding during 2023, given that during the year ago quarter we only had an average of $157 million outstanding on our credit facility. I’ll now discuss our full year operating results. Revenue for the full year was $46.9 million compared to $40 million on the prior year, excluding the $3.8 million early termination fee, for an increase of 17%. AFFO was $14.7 million, up 14% when compared with the $12.9 million in the prior year after excluding the 2022 lease termination fee. The AFFO per fully diluted share was $1.33 for the full year compared with $1.26 for fully diluted share after excluding the 2022 lease termination fee in the prior year.

The 6% increase in the AFFO per diluted share is less than the percentage increase in AFFO due to an increase of 842,000 shares and the weighted average number of fully diluted common shares outstanding. The increase in AFFO reflects the $6.9 million revenue increase, offset by a $3 million increase in straight line rents, a $1.2 million decrease in G&A, a $1.4 million decrease in property expenses, and $475,000 of dividend income, also contributed to the increase in AFFO. The decrease in G&A reflects lower headcount, the absence of the 2022 relocation reserve, decreases in D&O insurance and technology costs, partially offset by an increase in professional services. The decrease in property expenses again relates to the disposition of properties with modified gross leases and double net leases in August.

These positive variances were partially offset by a $5.1 million increase in cash interest expense, which primarily reflects the increase in average borrowings outstanding during 2023 compared to 2022. The $475,000 of dividend income was earned on the investment in preferred stock of Generation Income Properties, Inc. that we received as partial consideration for the disposition of 13 properties last August. GIPR redeemed the preferred stock per common stock on January 31st 2024 and we immediately distributed the majority of the GIPR common stock to our common stockholders and holders of Class C units in our operating partnership. Now turning to our portfolio, following the January and February dispositions of two assets held for sale, our 42-property portfolio has an attractive weighted average lease term of 14 years, and approximately 33% of our tenants or their parent companies have an investment grade credit rating from a recognized credit rating agency of BBB minus or better.

Annualized base rent from these 42 properties totals $39 million as of December 31, 2023 with 38 industrial properties representing 76% of ABR, one retail property representing 11% of ABR, and three office properties representing 13% of ABR. Now turning to our balance sheet and liquidity. As of December 31st, 2023, total cash and cash equivalents were $3.1 million and we had $280 million of debt outstanding after repaying the $3 million remaining balance of the mortgage on our Sacramento property in December. Our debt consists of $31 million of mortgages on two properties and $250 million of outstanding borrowings on our $400 million credit facility. Based on interest rate swap agreements we entered into during 2022, 100% of our indebtedness as of December 31, 2023 held a fixed interest rate with a weighted average interest rate of 4.52% based on our leverage ratio of 48% at year end.

As previously announced, our Board of Directors declared a cash dividend per common share of approximately $0.95 from the months of January, February, and March 2024, representing an annualized dividend rate of $1.15 per share of common stock. This represents a yield of 7.5% based on the closing price of $15.39 on our common stock as of March 1st, 2024. I’ll now turn the call back over to Aaron.

Aaron Halfacre: Thanks, Ray. As you all know, I much rather prefer to open dynamic dialogue. So instead of providing any more canned response, how about we dive into Q&A. Operator?

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Q&A Session

Operator: Thank you. We’ll now be conducting today’s question-and-answer session. [Operator Instructions] Thank you. And our first question today will be coming from the line of Rob Stevenson with Janney. Please receive your question.

Rob Stevenson: Good morning, guys. How much NOI do we need to be backing out for the $15 million of Levins and Cummins sales When we’re thinking about projecting our models for 2024?

Ray Pacini: [Multiple Speakers] Well, I was going to say that’s already factored in in the — the $39 million of ABR excludes Levens and Cummins.

Rob Stevenson: Okay. That’s helpful. And then, what is the most likely timing on the Costco sale closing? I assume that they wanted to get that rezoned for single-family before closing. Any other major contingent issues that needs to be resolved before that deal could close?

Aaron Halfacre: So, good question. The way the deal is structured is, they have a contingency window through April 1st and assuming in that process they’re doing their feasibility. And if they come back on April 1st and they’re comfortable, then they’ll put a $1 million hard money down. And then we both pick the date of no later than August of next year, because we have this remaining lease term, and we negotiated, let’s say, like we’re going to benefit from this rent. There is ability that should they get their stuff done sooner, we can approach Costco for a lease termination and close it sooner. But as it’s contemplated right now, we wanted to give them plenty of time to finish out their approvals. What they’re contemplating building here is a series of town homes.

And so they’ve — and this particular builder — and there were three — they got three bids from three builders actually. And one of them was actually a higher bid, but we thought this one was more solid because they had done this homework on this property before Costco had ever moved into the property. So they have been studying this property for close to a decade. And so, they were pretty dialed in. So we remain optimistic, but [indiscernible] now the next milestone will be April 1st. So then after that, we could close sooner than 2025. But in either scenario, we’re going to get the rent from Costco.

Rob Stevenson: Okay, that’s helpful. Thanks, Aaron. I guess another one here is, do you guys — you talked about distributing the GIPR shares. How much shares do you guys still have and what are the plans for those?

Aaron Halfacre: Ray will get you the number here in just a second. The plan is, we’re going to sell those off in an early fashion. We have like less than 5% of the stake that we got, we retained for running purposes. Ray what’s the actual share count?

Ray Pacini: 171,000 shares.

Rob Stevenson: Okay all right that’s helpful.

Aaron Halfacre: We’ll move those up.

Rob Stevenson: Okay. And where was occupancy in the portfolio after taking consideration the [Clara] (ph) vacancy?

Aaron Halfacre: 98%.

Rob Stevenson: That’s helpful. And then when do you get full control of that asset back? I think, Aaron, you talked in the release about that, that there was still some stuff going on there. Can you talk about that and when the expected timing for being able to release that asset would be?

Aaron Halfacre: We’ve been waiting sort of on a daily basis for now for about six weeks. They keep saying it’s going to get finalized in the courts and finalized in the courts and it hasn’t yet. So we keep thinking any day. We don’t know exactly what the hangup is. It’s an okay process. But we negotiated with them. So probably soon is my guess. We did receive one LOI for the property already at rents that were potentially higher. But that said, we’re not negotiating with anyone until we’re fully released. I’ve heard scuttle, and I think it’s not a rule of probability that they may come back to us and say they don’t want to reject it, but all signs now indicate that they will. That’s what we’re underwriting and we’re prepared for that.

As soon as we do have it in hand, then we will start the process, which is kind of good, because right now it’s — you’re in St. Paul in the winter, it’s dead season anyway, so as we roll into spring, that’s going to be the more opportune time.

Rob Stevenson: Okay. And then, Ray, when did they stop paying rent on that asset?

Ray Pacini: They stopped paying in February, but then we had a letter of credit that covered the next six months.

Rob Stevenson: Okay. All right. So that hasn’t been in the numbers for quite some time. I just wanted to make sure that there wasn’t any repayments as things went along or whatever, sporadically or anything. All right. Thanks, guys. Appreciate the time this morning.

Aaron Halfacre: Thank you.

Operator: [Operator Instructions] The next question is from the line of Bryan Maher with B. Riley Securities. Please receive your questions.

Bryan Maher: Thanks. Good morning, Aaron and Ray. Just a couple from me this morning, and I’m sorry if I missed this on your prepared comments, and I appreciated the commentary you already put out there this morning, Aaron. But can you give us a little bit more color on what your pipeline actually looks like? And given your dialogue with private equity and other investors, your likelihood to act upon any of that before maybe coming to some kind of terms with one of them, is in fact that ever happens?

Aaron Halfacre: Yes. So, good question. Look, as we think about, if we’re going to do something with the strategic partners, it’s going to — we’re going to — my guess is, we’ll announce that before the end of April, right? Because if it isn’t going to get done by then. And when you — something like that, you wouldn’t — you would spend a lot of time, and we’re not there yet, but you would spend a lot of time on the [DD] (ph) getting the docs ready, because anything like that we’re talking about, order of magnitude, is probably going to require a proxy. And if it requires a proxy, then we’d want to do it in one else swoop, because we have an annual proxy that has to come out anyway, and so it’s going to pain for two proxies to fly around to one.