Modiv Industrial Inc (MDV) 2023 Q3 法說會逐字稿

Good day, and welcome to Modiv Industrial's third-quarter 2023 earnings conference call and webcast. (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 industrial Please go ahead.

Thank you, Schmale, and thank you, everyone, for joining us for Modiv Industrial's third-quarter 2023 earnings call. We issued our earnings release before the 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 are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussions 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'd now like to turn the call over to Aaron. Aaron, please go ahead.

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 drama 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?

Thank you, Aaron. I'll begin with an overview of the -- 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 that 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 closed on August 10, 2023, partially offset by a $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 fair 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. 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 November9, 2023.

The estimated fair value of the preferred stock increased to $10.1 million as of September 30, 2023, reflecting the progress GIPR has made for it registering up to 3 million shares of its common stock as of that date.

The net loss attributable to common stockholders of $6.5 million for the third quarter or $0.86 per 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 targeted $1.5 per diluted share for the year ending 2023.

This performance component of the 3.25-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. 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 the vesting period on March 31, 2024, if 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 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 rating from a recognized credit rating agency of BBB minus or better. Annualized base rent for our 44 properties totals $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 of mortgages 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 September 30 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 for 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 of our common stock as of November 10, 2023.

I'll now turn the call back over to Aaron.

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 the widest possible audience 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, and we understand. Look, 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 downgraded 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 that 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?

(Operator Instructions) Barry Oxford, Colliers.

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 say what you're looking for, you're looking for the halo effect. 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 show your hand here.

Yes, and I'd say in the broadest sense -- look, as we alluded to in the comments, we're seeing a lot of -- a lot of people are offering some sort of preferred, right? And it really feels like debt to me.

Right.

That doesn't feel very original, and 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 interests us. I think as it relates -- I don't have specific terms for you. I know 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 meet their needs. And so any shop is 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, given that -- even a $12 million check would be 10% of our cap stack right now if you looked at it in certain ways, right?

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 been smart in money and underwriting and not someone who's just a carnivore, then I think we get the halo effect.

The halo effect is really designed as 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 is that we want to increase tradable float, remove the pricing gap between where I think our shares are at a liquidation value and where they're trading today, and be a more functional REIT that over time gets the economies of 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 like literally 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 REITs -- I'm not talking about sort of the A&B, 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? I want to buy that deal and then I'll solve for it later. And I think, sometimes, they work out. They pull themselves out and they do okay, but it tends to be very costly. And we're trying to avoid making foolish capital decisions.

So I think it's organic. And if we find somebody that works in it with a partner that makes sense, then we'll do it. If it doesn't, we won't because what good does that do us to -- we don't need to build an empire here. We just want to be able to make ourselves more functional in terms of tradable float, the market cap, all the things that require -- that you, the investing community, require of a REIT.

Perfect. All that makes sense. I appreciate the color there. A very quick question for you on the performance incentive plans for the stock comp, how should we think about that line item throughout '24?

Well, at this point, there isn't an approved plan for 2024. I think that's something that the compensation committee will be considering. So we'll just have to wait and see what comes out of the compensation committee.

I would say, Barry, that there's $721, 000 a quarter that we still have to accrue in the fourth quarter and first quarter. So first-quarter numbers will have the $721,000 plus the [$499,000] that we are already doing for the time based. So you're going to -- you're looking at roughly a one-two hit already for the balance of year.

I am of the view that G&A is going to be in line, right? So I don't think you should expect any sort of material change from run-rate G&A that you've seen over the sort of consistently -- on a consistent basis. That's how I would answer that. And I conclude that [it is a] component of G&A.

Okay, great. Yes, that's exactly what I was trying to kind of get at just how shall I think about it from a modeling standpoint. That's helpful. All right, guys. Thanks so much.

Bryan Maher, B. Riley Securities.

Thank you and good morning, Aaron and Ray, just a couple from me. I enjoyed reading your thing this morning. But as I read it, I kind of was thinking to myself, what do you think snaps first to break this inertia and get things moving again?

Well, that's a good question. Crystal balls are more like bowling balls right now, really heavy and thick and more likely to drop on your toes. So I'll be careful with what I say, but I look, I think we have not -- we don't have healthy markets. And how I think about this is I do get a real palpable sense. There's capital on the sidelines and they're increasingly getting ready to do something, but they're looking for the right catalysts and the right reason to do so.

We don't have any more clarity -- we may be talking collectively about what the Fed might cut at the end of this next year, but there's a big debate if they will. We still don't have economic data. I don't know if we're going to be hard -- augur it hard or not. There's so many variables out there.

I think, for us, because -- we're not the tail wagging the dog. The body of this whole thing is the broader markets. And so I think we need to see some sort of healthiness. I think, if I were to be logical, I would think A, do we see more -- the well-performing REITs in terms of capitalization and size and access to the market starting to do more follow-ons, right? Do we see health response to those follow-ons?

If we've seen that, then I think we -- it will be easier for us in a traditional way. I think, on the strategic partner side, it's like if it happens, it happens. And if it happens, our goal is to be positively received in the marketplace, but it also depends on what the marketplace is at that time, right?

So I wish I knew what the catalyst was. I am psychologically, and we've prepared our balance sheet in a way that we can stay in our bomb shelter for another year if we have to, right, and just keep waiting until the mushroom clouds disappear and we can -- people can start coming back out.

So we'll be focused on recycling assets on the near term. There's opportunities to improve our AFFO despite just mining our Ps and Qs. We are actively looking. It doesn't mean we won't buy, but I've seen things out there that -- I've seen some deals out there that they still want cap rates that are dated, right? So they're just heads stuck in the sand.

I've seen others which are weird like, they come out really short or we've come out because they didn't get it done before. And they're wanting really wide cap rates, and I'm like, well -- and if you dig into it, you're like, they don't want any restrictions on subsequent sales or -- and so to me, it's a weird time right now.

And so we're just being prepared, looking out. I don't know what the real catalyst is other than the most obvious one, which is the broader markets start to heal.

I also got the sense when reading it that M&A is kind of bouncing around in your head. How serious is that? Is that something that could be an all-stock deal where you're the buyer or the seller that kind of ultimately solves for float?

Good question. M&A is kind of in my DNA and in the team. So I was at Cole when we merged with ARCP to become [their REIT]. When I was at Campus Crest, we did a take-private to Harrison Street. This REIT was formed by me merging two REITs and internalizing together, so the skill set, it is not foreign to us.

John Raney, our General Counsel, he was involved -- I was involved with a deal when we sold a Cole portfolio to Spirit, which is now obviously (inaudible) with REIT. So M&A is part of our DNA. We're not afraid of it. We do see the opportunity. If you study recent -- historically, those who gain size, if they've done it smartly, they can grow.

I think what we've seen by the Spirit deal and the peak deal is that stock for stock is an environment that makes sense because take-privates, unless you're Hersha going to someone, well, he'll -- take-privates require a lot of capital to take out public instruments. And that capital is very expensive unless it's just -- so I think, generally speaking, stock-for-stock deals, I wouldn't be surprised we see more of them. We're receptive to them.

Look, if we could find a target that will work with us and we can take it out stock for stock, we will do that. If someone comes -- I've said this before, but I'm a much bigger shareholder than I am a manager. And what I mean by that is I understand that I'm hired by the Board, and the Board is elected by shareholders. I'm a very large shareholder. What's right for the stock is what will win.

So if someone comes over the top and says, hey, you guys, we want to give you fair value, and fair value is not anywhere near where we're at today, then that will be the best choice because they're going to be able to close the value gap sooner than we can. Then we'll do that.

I don't see that happening, but that doesn't -- you don't see it happening until it comes across your desk. That's that we're looking at. We're looking at a lot of these things. I think some of the deals that we've seen, they just have -- they have some bad cap stacks. So we need to sort of wait and see how that sorts out, right?

They got some looming. Do they get some extensions? Do they -- does that looming maturity cause them to rethink their pricing? So we're being patient that regard. But yes, I think in an ideal world, stock for stock would be a very efficient way to gain tradable float and pick up scale.

Yes, thank you.

Rob Stevenson, Janney Montgomery Scott.

Hi. Good morning, guys. Not sure if I saw the occupancy numbers anywhere or you guys said 100% this quarter?

Yes.

Okay. And the Rancho Cordova government tenant, what's the timetable for them to exercise that purchase option? And is there a pricing mechanism in place already on that?

There is a pricing mechanism in place already. It's a little -- even though there's a price and it's referenced in the -- it's a very attractive price. But then pricing mechanism as a reference price, they also have to go through this process where they're seeking out, they have to do appraisals, and if the appraisals are within plus or minus 10% of that pricing mechanism that they can just go forward with it.

Other than that, they have to be able to submit new offers. We don't have to accept them. The mechanism is lengthy. So they -- you should think about that in terms of probably about at least 12 months, probably more like an 18-month process for them to exercise the mechanism, the option process.

And Dave talked to us about starting it, but they can't start until next year. They would start it next year, they would go through their evaluation process, they would get it approved, they would get a requisition, then it would go through the governor and then they would get on the -- once the budget is approved, they would then be able to relinquish at once.

So I think that liquidation, if it were to happen, and it seems reasonable that it will happen, it would be in '25. So from a modeling standpoint, we would still be capturing that AFFO through the balance of this year and into -- I mean, it's the balance of '24 and '25 for a bit.

But it was a big component of our lease negotiation. It probably added an extra month into the lease negotiation because they insisted on having it. It wasn't just a boilerplate one. This property was strategic to them, and they wanted to make sure that this mechanism we had agreed to in the process was there. And so that's all embedded in.

Okay, that's helpful. And then how should we be thinking about the timing on a GIPR distribution? And how quickly would you turn around and redistribute that to the Modiv shareholders?

Yes. So [I don't know if] we alluded anything. Barring any private party sales that we do in advance, I don't know if we'll do any. But if we did, we would take those. We would distribute those concurrent when they redeem. So it would be sort of a simultaneous distribution and we'd be coordinated with GIPR, which -- I don't think --

I don't see it happening in the fourth quarter. I see it happening very early first quarter. And I think as early as January -- I think January is reasonable. And so once we would line up the redemption date with them, the shares would hit our books for a nanosecond and then go right into the hands of our shareholders.

Okay. And then, Ray, a couple of numbers questions for you. The $440,000 of preferred stock fair value adjustment, is that an ongoing adjustment in the fourth quarter and then for whatever part of first quarter until those shares are redeemed?

Yes, there will be an adjustment as of December 31. If we continue to hold the shares for some reason, March 31 would be an adjustment as well. But most likely, they'll be redeemed before the end of the first quarter, so one more adjustment is coming at December 31.

Okay. And then how should we be thinking about cash interest expense? And I'm not sure if I'm looking at page 13 of the supplemental correctly. There, it looks like you're running around $5 million a quarter of interest expense before netting out all the GAAP treatment of derivatives and swaps.

But if you just doing the math on the $282 million at 4.52%, it gets you to more like $3.2 million a quarter. How should I be thinking about, before any of the derivative swap stuff, what interest expense is running you guys a quarter these days?

Well, I think you need to take into account the cash derivative settlements. I mean, that's basically the cash that's coming in on the swaps. So the way I think of it is our average interest rate is 4.52%, 4.53% on the total $284 million.

Okay.

That's the economic rate, yes. So you take the 4.52% on the $484 million (sic - see Quarterly Supplemental Data, page 23, "$282,504,675"), that's kind of your economic run rate because the mortgages are amortizing too.

All right. And then last one for me, just to clear, the OP units were not being included in FFO per share but are being included in AFFO per share this quarter because of the antidilutive?

Correct.

Okay. All right, thanks, guys. I appreciate the time.

Thanks so much.

We have reached the end of the question-and-answer session. I'll now turn the call back over to Aaron Halfacre for closing remarks.

Everyone, thank you for listening, joining in. We appreciate your attention. We appreciate your investment. And for those that -- I'll see you tomorrow and Wednesday at NAREIT. I look forward to talking to you. Until then, we'll talk to you again when we come out with fourth-quarter results. Thanks.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.