Q4 2023 Modiv Industrial Inc Earnings Call

Participants

John Raney; COO & General Counsel; Modiv Industrial, Inc.

Aaron Halfacre; CEO, President & Director; Modiv Industrial, Inc.

Ray Pacini; CFO; Modiv Industrial, Inc.

Rob Stevenson; Analyst; Janney Montgomery Scott LLC

Bryan Maher; Analyst; B. Riley Securities Inc.

Presentation

Operator

Good day and welcome to Modiv Industrial, Inc.'s fourth quarter 2023 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
On today's call. Management will provide prepared remarks, and then we'll open up the call for your questions. To ask a question, analysts may press star, then one on your telephone keypad. If using a speakerphone, please pick up your handset before pressing the key. And to withdraw your question, press star then two. 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.

John Raney

Thank you, operator, and thank you everyone for joining us for Motive's Industrial's fourth quarter 2023 earnings call. We issued our earnings release before market opened this morning, and it's available on our website at 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'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 state. 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 now to turn the call over to Aaron Halfacre.

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 general counsel and with the release of the financial results will formally make. I'm a named executive officer, which means you'll be subject to Form four filings along Mike 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 Pacini

Right. Thank you. And 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 a new lease for our Rancho Cordova property for the State of California.
Excluding the 2022 lease termination fee revenue increased 23% compared with 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 40 41% when compared with the $3.82 million in the year. Ago quarter after excluding the 2022 lease termination fee. The increase in FFO 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, FFO was $0.4 per diluted share for this quarter, which is $0.05 above the average of our three analysts' 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 the year ago quarter, reflecting the absence of a relocation reserve accrued in the year ago quarter. Lower professional fees due to timing differences and increase decrease in D&O insurance property expenses decreased $807,000 compared with the year ago quarter, primarily reflecting the disposition of properties with modified gross leases and double net leases in August. Excluding the impact of swap valuations.
Cash interest expense increased by approximately $1.3 million, reflecting greater power 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 in the prior year. Excluding the $3.8 million early termination fee for an increase of 17%, FFO was $14.7 million, up 14% when compared with the $12.9 million in the prior year. After excluding the 2022 lease termination fee, FFO per fully diluted share was $1.33 for the full year compared with $1.26 per fully diluted share after excluding the 2022 lease termination fee in the prior year.
The 6% increase in AFFO per diluted share is less than the percentage increase in AFFO, would it increase of 842,000 shares at a 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 of $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, $475,000 of dividend income was earned on the investment in preferred stock or generation Income Properties Inc. that we received as partial consideration for the disposition of 13 properties last August, GIPR. redeem the preferred stock for common stock on January 31, 2024, and we immediately distributed the majority of the GIPR. common stock to our common stockholders and holders of Class B 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 are their parent companies. We have an investment grade credit rating from a recognized credit rating agency of triple B minus or better annualized base rent for these 42 properties totals $39 million as of December 31st, 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, how the 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 $0.095 for the month of January, February 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 first, 2024.
I'll now turn the call back over to you.

Aaron Halfacre

Sure, as you all know, I much rather prefer an open dynamic dialogue. So it's sort of providing more canned response. Now we'll dive into Q&A. Operator?

Question and Answer Session

Operator

Thank you for attending today's question and answer session. If you'd like to ask a question at this time, please press star one from your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two. If you'd like to remove your question from the queue For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please while we poll for questions. Thank you.
Thank you. And our first question today will be coming from the line of Rob Stevenson with Janney.

Rob Stevenson

How much NOI do we need to be backing out for the $15 million of elevens incoming sales? When we're thinking about protecting our models for 24 years ago that was where you have it? Well, I was going to say that I already factored in the the $39 million of ABR. It excludes levels and covenants 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 first and assuming that in that process, they're doing their feasibility. And if they come back on April first and they're comfortable, then they'll put a hard money down. And then we both pick the date and no later than August of next year because we have this remaining lease term and we negotiated that say, look, we're going to benefit from this rent. There is ability to should they get their stuff done sooner. We can post Costco for lease termination and close it sooner.
But as it's contemplated right now, we wanted to give you plenty of time, the finish out their approvals, what they're contemplating building here is a series of townhomes. And so they in this particular builder and there were three, though we got three bids from three builders actually. And one of them was actually a hire 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 are pretty dialed in. So we remain optimistic, but fans. Now the next milestone we April first. And then after that, we could close sooner than 2025. But neither scenario we're going to get the rental Cosco.

Rob Stevenson

Okay. That's helpful, thanks. And 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, and Ray will get you the number here in just a second.

Aaron Halfacre

The plan is we're going to sell those off in an orderly fashion. We have like less than 5% of the stake that we got we retain for rounding 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 vacancy?

Ray Pacini

98%.

Rob Stevenson

That's helpful. And then when do you get full control of that asset backs of. 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 re-lease 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 filings in the courts and it hasn't yet. So we keep thinking any day. We don't know exactly what the hang-up is that sale process, but we negotiated with them. And so we should probably assume is my guess we did receive one LOI for the property already at rents that were actually higher, but that said, we're not negotiating with anyone until we're fully leased. I've heard scuttle, and I think it's a rule 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. And then we will start the process, which is kind of good because right now, no, in St. Paul and the winter, it's dead season anyway. So as we roll into spring, that's going to be the more opportunity.

Rob Stevenson

Okay. And then, Ray, when do they stop paying rent on that asset?

Ray Pacini

They stopped paying in February, but then we had a letter of credit that cover 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 on repayments as things went along or whatever and sporadically or anything. All right. Thanks, guys. Appreciate the time this morning.

Aaron Halfacre

Thank you.

Operator

As a reminder, if you'd like to ask a question, you may press star one to the next question is from the line of Bryan Maher with B. Riley Securities. Please ask your questions.

Bryan Maher

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

Aaron Halfacre

Yes. So good question. Like as we think about it, if we're going to do something with the strategic partners. It's kind of we're going to my guess is we'll announce it before the end of April, right? Because if it isn't going to get done by then. And when you do something like that, you wouldn't you would you wouldn't spend a lot of time and we're not there yet, but we spent a lot of time on the DD., getting the data ready because anything like that. We're talking about order magnitudes probably require a proxy.
And if it requires a proxy than we'd want to do it in one fell swoop because we have an annual proxy has got anyway. And so that's sort of paying for two proxies, Liwan three one. So if we're going to do something in the near term. It's going to be done before April if we're not going to do something. And then we're probably going to just sit tight some of these dialogues have been very constructive. But as we all know, it's kind of a shitty time to do things, so we'll see how that goes.
To your question, what we deploy before then I think our view is that our cash flow that could be you saw on one of these transactions. And so we're kind of wait-and-see on that. We certainly are seeing individual property, but deals. And like I said, we were partly been partially spending around and seeing where they're going, making sure we're understanding where pricing is. There was a property that we really like we've been following for a year and a half a year ago, we were bidding on it and it was in the mid sevens was like a year and a half ago, I guess I'm sort of January of last year, December the year before and they told us they came back to market in December. They went down around January and it was probably our high stock. Everything was like a fixed. So it obviously had moved.
But then when we got to the final round, they were like at eight and a quarter and it just did not like the leverage that they were very put on it. So we just said, hey, look, we don't need it this way. And so we do see deals are hot. Now it's hard you don't want to engage too much with anyone that you're not seriously committed to pulling the trigger. So we're in there. There's always a pipeline. I'd say the pipeline right now is a little bit lighter, given that still the first quarter rates are Jack and people around. And so I don't think we would deploy prior to us, knowing if we're going to do something with a strategic partner and the event that we don't deploy these, obviously you partner them, will we'll quickly deploy that cash and to replace aircraft.

Bryan Maher

And I also noticed you sold a few shares during the quarter kind of November through January, but what was that all about? Can you give me a little color on that.

Aaron Halfacre

It was just ATM. We had never turned on the ATM. We wanted to test the waters a little bit. So we didn't really constrained volume and just trying to peel off a little bit more flow, go a little bit more liquidity. We know sort of carve out some of the price surges that we are having. So that was really just a and we probably maybe just eight weeks worth of work on the ATM just to kind of test the waters. Our goal is to balance equity issuance with liquidity and stuff like that. But that was that was what that was well.

Bryan Maher

Okay. Thank you.

Operator

Thank you. At this time, we reached the end of our question-and-answer session and I'll turn the floor over to management for closing remarks.

Aaron Halfacre

Thank you, Rob, and thanks, everyone. Obviously, to date and taking a progressively more communicative approach in the press release. I think the logic is laid out, why we're doing it. You know, not everyone is going to like that. Again, it is where it is, but we think it's we've received increasingly more feedback that was positive following our third quarter earnings that this insight helps.
We are a small company. We are not a lot of moving parts, frankly right now. And so more and more people who can kind of understand it how we're thinking so that I don't have to make 5,000 phone calls is the point here we hope you like, but I always welcome your feedback. And you know, look, I think we'll have more analysis before next earnings to be an NAV that we're releasing could be something strategic partner size. It probably will. I think we're going to have a duty to disclose if we've gone noncontingent on our on our second Costco property. So more to come as the spring rolls on But thank you all for being with us following us and and paying attention. Thank you.

Operator

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.