Modiv Industrial, Inc. Q2 FY2025 Earnings Call

Good day, and welcome to Modiv Industrial, Inc. Second Quarter 2025 Conference Call. 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.

Thank you, everyone, for joining us for Modiv Industrial's Second Quarter 2025 Earnings Call. We released our earnings information 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. We will start today's call with prepared remarks and then open it up for your questions. I want to remind you that today's comments will include forward-looking statements. These statements may be identified by words such as will be, intend, believe, expect, or anticipate. Statements that are not historical facts, like those about our expected acquisitions or operating results, may differ significantly from these forward-looking statements. Information about factors that could cause our results to vary is included in our SEC filings, including reports on Form 10-K and 10-Q. With that, I'll turn the call over to Aaron Halfacre. Aaron?

Thanks, John. Welcome, everyone, to the second quarter 2025 earnings release. I think in past practice, I'll just hand it over to Ray first and then I'll add some comments and then we'll just kind of get into questions and I assume we'll have some this quarter. Ray?

Thank you, Aaron. I'll begin with an overview of our second quarter operating results. Revenue for the second quarter was $11.8 million compared with $11.4 million in the prior year period. This 4% increase primarily reflects the impact of two industrial manufacturing property acquisitions since June 30, 2024. Second quarter adjusted funds from operations, or AFFO, was $4.8 million, up 22% when compared with the $3.9 million in the year ago quarter. The $900,000 increase in AFFO reflects a $576,000 increase in cash rents, a $217,000 decrease in G&A and a $126,000 decrease in preferred stock dividends. AFFO per share increased 12% from $0.34 per share in the prior year period to $0.38 per share for the second quarter of 2025. The increase in AFFO per share was less than the 22% increase in AFFO due to a $1.2 million increase in diluted shares outstanding, which reflects 895,043 Class X Operating Partnership units issued during the first quarter of 2025 and 344,119 Class C Operating Partnership units issued in connection with the property acquisition in March 2025. Cash interest expense for the quarter was $255,000 less than the comparable period of 2024, reflecting a decrease in the weighted average fixed rate as set by the respective swap agreements from 4.53% at June 30, 2024, to 4.25% at June 30, 2025, along with a decrease in unused commitment fees that resulted from our decision to reduce the size of our revolver. Now turning to our portfolio. Our 43 property portfolio has an attractive weighted average lease term of 14.4 years. Though the majority of our tenant credits are private, approximately 29% of our tenants or their parent companies have an investment-grade credit rating from a formerly recognized credit rating agency of BBB- or better. Annualized base rent for our 43 properties totals $39 million as of June 30, 2025, with 39 industrial properties representing 81% of ABR and 4 noncore properties representing 19% of ABR. With respect to our balance sheet and liquidity, as of June 30, 2025, total cash and cash equivalents were $5.8 million and we have $30 million available to draw on our revolver. Our $280 million of debt outstanding consists of $31 million of mortgages on two properties and $250 million of outstanding borrowings on our $280 million credit facility and we do not have any debt maturities until January 2027. Based on interest rate swap agreements we entered into during January 2025, 100% of our indebtedness as of June 30, 2025, held a fixed interest rate with a weighted average interest rate of 4.27% 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 $0.0975 for the months of July, August and September 2025, representing an annualized dividend rate of $1.17 per share of common stock. This represents a yield of 8.1% based on the $14.44 closing price of our common stock as of August 6, 2025. I'll now turn the call back over to Aaron.

Thanks, Ray. As I mentioned in the press release, this quarter felt somewhat uneventful. Personally, I found it a bit frustrating. Hard work and patience can sometimes lead to frustration, and this quarter felt boring compared to others, as well as our previous quarter. We didn't actively pursue much this time around. We did secure a lease extension at Northrop and have been working on a few projects, particularly one property we're currently pursuing, but that process can't be completed within a single quarter. Our share price has seen significant volatility; about 60 days before the Russell inclusion, we experienced a steep decline. We were in the $16 range and have since settled in the $14 range for around 90 days. Our moving averages now reflect those levels. We're committed to maintaining discipline and did not issue any shares at those lower prices. This quarter was marked by volatility and numerous buying opportunities. I personally bought around 4,000 or 5,000 shares, as I believe they are very undervalued. Analysts have indicated an implied cap rate in the mid-8s, but properties are hard to acquire at rates below the low to mid-7s, with some even in the high 6s. While this is reassuring, it's also frustrating. This experience highlights the challenges of being a small-cap company. Patience is essential, and we are playing the long game here with little to report for now. We can discuss Clara and other comments from the release during the Q&A. Overall, it was a solid quarter, and the consistent decisions we've made are why we've achieved strong results. I believe that even without significant activity this quarter, those decisions will yield positive outcomes by this time next year. We need to be patient, recognize our strengths and weaknesses, and respond quickly as necessary. There is a real demand for our offerings, and we are steadily building a community around them. While I feel a bit frustrated with the current quarter and would love to expand our REIT, I don’t want to engage in unwise decisions. It's important for us to focus on smart strategies and continue that focus every day. With that, let's open the floor to questions.

Your first question comes from Gaurav Mehta of Alliance Global Partners.

I wanted to ask you about the remarks you made in the earnings release regarding asset recycling. It seems like the environment is improving for you, possibly getting closer to selling some of those assets. Can you provide more insight into what you're observing regarding recycling? Also, about the $150 million asset you mentioned, is it going to be a 20% noncore asset that you intend to sell?

Yes, that's a good question. The assets we plan to sell are mainly legacy assets, which may include both core and noncore. Currently, some noncore assets are in the process of being sold. For instance, KB Homes is under contract to purchase Costco, and we expect at least one extension on that deal, as they are finalizing paperwork with the city. They've already put down $1.7 million hard money on it, and it’s part of the noncore assets being liquidated. Additionally, OES has an option to purchase another property, but they are going through a lengthy appraisal process, so we don’t expect that to liquidate until at least next year. These transactions are not likely to generate significant additional value; while we can sell them, we would essentially be breaking even after replacing them. On the other hand, there are some other assets we are considering that don’t quite align with our strategy, primarily industrial legacy assets. These could be very beneficial for us as we sell them in the high 5s to low 6s and reinvest in the 7s. These properties have also received unsolicited offers in the past, which shows they are attractive in the market. Over time, we’ve noticed that the cap rates for these unsolicited offers have tightened, indicating a shift in market interest. We think we might be at a pivotal point where we can start moving forward. We discussed potentially raising around $150 million, which could yield close to a 100 basis points in accretion. This gives us confidence because, without this, we would feel constrained. However, we’re actively managing expenses, tightening our operations, and growing our AFFO. While we’re not acquiring much at the moment, we believe we have other strategies available. I don’t feel pressured; instead, I’m motivated to work harder. I have options and am focused on exercising patience and discipline. I believe the share price will recover, and recycling these assets will contribute to that recovery. While I mention these considerations, it doesn't mean we’ve already initiated any sales. When we do proceed with asset recycling, I will certainly inform you. We’re preparing to reach that next stage over the next year or so, which seems like the right time for such actions.

Okay. Maybe a follow-up. I think you also made some comments about the lending market. It seems like you are exploring options even though the term loan is not expiring until 2027. I'm just curious, I know you mentioned there's lending available, but what kind of terms and rates are you seeing in the market?

Yes, I enjoy working and have a blue-collar mindset. I haven’t developed many habits besides running and a bit of working out; my main focus is work. In a quarter like this where patience is required and there isn’t much urgent work, I’m dedicating my time to thinking about the future—12, 18, 24, and 36 months down the line—considering various possibilities. I have a strong appreciation for REIT capital market history and the industry as a whole, having been involved for a long time. This quarter, I’ve spent significant time assessing our upcoming term loan and credit facility maturities and engaging in early discussions. We’ve connected with our bank syndicate and others, and the current environment for a new term loan or credit facility seems at least as favorable as before. Our impressive AFFO growth over the last three years and the strengthened balance sheet contribute positively to lenders' perceptions. We’re understanding all financing options because I appreciate data and flexibility, weighing choices and their future implications. Overall, we feel optimistic and will be taking further steps in this direction. The wildcard for everyone is the Federal Reserve’s actions. If treasury rates decline, it will likely benefit us, as market shifts can have immediate impacts on our position. If interest rates do drop, it would be a positive development, but currently, our conversations reveal no negative indicators. If anything changes, I’ll communicate that promptly. Right now, I feel confident about our situation, even with upcoming maturities, as we have a solid average lease term. The core portfolio remains strong and appealing to lenders.

Your next question comes from Craig Kucera from Lucid Capital Markets.

You had a pretty sizable pickup in income recognized from your joint venture or your TIC interest, I should say. Can you give us some color there on what to expect going forward?

Yes, that reflects the impact of extending the lease. The way straight-line rent works is in the early years of a lease, you're picking up rent that's going to be received down the road. So that was a 10-year increase in the lease term with 3% annual bumps. So that's what's driving it.

I'd say we are in active dialogue and discussion with our TIC partner. It's important for us to end the TIC in a timely manner. There are various ways to achieve this, but TICs are a throwback to the pre-GFC days. There aren't many TICs anymore, and they are not as fluid for a REIT. Our longer-term goal is to eliminate the TIC, and we will accomplish that one way or another. This will change some of the dynamics, but there shouldn't be any additional changes after we signed the lease.

I understand. That's helpful. Switching topics, you recorded the impairment charge, which seems to be related to the Kaleyra equipment. Are you considering selling that asset instead of leasing it? How do you view that situation?

Yes. We've had the equipment on the market and received interest from various parties. What we've increasingly realized is that I don't think leasing is the right approach for us. Instead, I believe we want to sell it to free up our capital and redeploy it. We've learned that there are as many different types of growing technologies as there are growers and varieties of leafy greens. The growing technology in this equipment has become several years outdated, and we're finding a limited market for it unless we can connect with a buyer who has a specific interest in that growing style. Therefore, we decided to take an impairment charge on it. This doesn't mean we won't find a buyer who sees value in it, but we thought that was a clearer path forward. My ideal situation is to have that property sold by the end of the year if I have any control over it.

Got it. When the tariffs were first announced, you mentioned that your discussions with them indicated they believed the impact would be limited. As they have been shifting in the marketplace and you are reviewing their financials, are you seeing this in your discussions with your tenants?

Yes, we are currently collecting second quarter financials and analyzing them. From what we have reviewed, there is a significant amount of data, and our findings are consistent. The tariff situation has been somewhat uncertain this summer, with definitive updates only emerging recently. However, the impacts have been as we anticipated, and there hasn't been any notable cost increase. We've heard from some clients that decisions on larger capital projects are being delayed as many are waiting to understand the market better. This seems typical; it's not that clients are unwilling to proceed, they are just not ready yet. We’re still uncertain about Canada's position on this. The countries that have announced tariffs are not ones we are exposed to significantly. If the China deal materializes as expected, it would be beneficial for us. Overall, I don't foresee a major issue with tariffs affecting our specific situation, although there may still be some impact, it shouldn't be disproportionate based on what we can see.

Got it. I want to circle back to Costco. That lease was scheduled to expire at the end of July. Can you give us a sense of the annual rent they were paying? And did you receive the first extension fee from KB Home?

KB has until August 15. We have been in discussions with them, and they indicated they will definitely pursue at least one extension, possibly two. They are looking to close some matters around December. This delay is purely due to logistics with the city, as they are dealing with a process that has been complicated by personnel taking vacations, which has made things take longer than anticipated. They have another 8 days to officially request the extension, and we expect them to do that. Ray, do you have the rent information that Costco is paying?

Yes, it was running about $2.4 million.

Got it. Finally for me, late last year, you're looking at a number of transformational transactions you didn't close, but they were still potentially out there and may come back. Are you looking at anything out there that's similar or any other large portfolio transactions?

I would say that transformative transactions are still definitely a possibility. For all parties involved, it just needs to be the right environment, and it seems like we might be approaching conditions that are favorable for those. There are still discussions happening, but during the first half of the year, they were more about checking in due to various moving parts. It's challenging for teams and balance sheets to make decisions without having a few solid data points. So, I would say these transactions are still an option. They have to be, right? We can't just take a slow, steady approach forever because we’re a small REIT and need to do something transformative eventually. It doesn’t have to happen immediately, but if in five years we still operate like a $150 million market cap REIT, then that would be a problem. This is not how capital markets function. We care about our shareholders; my compensation is tied to shares, so we are fully aligned in that respect. Transformative transactions probably won’t happen unless they are fully prepared at this stage.

Your next question comes from John Massocca from B. Riley.

It's always kind of a difficult question to ask in this context, I think given the answer you gave to the last question and some of the commentary on the earnings call. I mean, do you think there is maybe an opportunity given some of the loosening of capital broadly out there in the market to maybe market Modiv in its entirety as kind of a portfolio and platform or either/or?

I've talked about this before regarding our annual portfolio appraisal, a tradition we maintained even when we were a nontraded REIT before going public. Unlike some other REITs, we don't have liquidity windows, which used to be our model. We have maintained this appraisal tradition, and while there's a cost involved, I believe it's been beneficial. Over the past two years, the appraisal values have been around $24 per share, with some fluctuations, and this is conducted by Cushman & Wakefield, a reputable firm. I acknowledge that there are delays in how indices relate to NAREIT, and while I can't definitively say we're worth $24 a share, I am confident that our value exceeds $14. We are committed to bridging this gap through our actions. In the past, I mentioned that if a compelling offer comes in to address this value gap, we would consider it seriously, as that's our responsibility. However, I don't believe it makes sense to actively solicit such offers right now, as that might signal vulnerability to market players. I recall a time when our share price was $9.53 with minimal trading, and back then, there were inquiries at around $10 a share, which was insufficient given the real value represented by our dividends. We recognize the current challenges in the broader market, particularly for small-cap REITs, but we believe we are holding our ground reasonably well compared to our peers. Our strategy is to continue striving for growth, delivering dividends, and working to close the value gap. Wise investors will recognize the opportunity to close this gap quickly, and we will be open to serious offers. We aim to advocate fiercely for our investors without becoming complacent. Although challenges in the REIT sector are significant, we will approach them thoughtfully and without desperation.

Okay. Given the volatility in capital markets and the fluctuations in cost of capital, it's important to consider how acquisitions might impact our bottom line. How are you weighing this against the potential benefits of increased scale, whether it affects your valuation as a public company or makes you more appealing for private capital investment?

I believe that as long as we focus on enhancing value, we will remain attractive. If we prioritize what is best for our shareholders by making wise decisions, growing and protecting our finances and assets, we will consistently be appealing. Even if we were to suddenly triple in size, we would still be appropriately sized. In terms of being publicly or privately held, we will always be seen as either a desirable option for a quarter or a significant consideration for the year, depending on other factors. I'm aware that as long as our market cap is below $1 billion, we may be considered a target. Our aim is to improve value, not to inflate our size out of ego. We are committed to making choices that boost our value, such as managing our lease portfolios effectively. For instance, if a company approached us with an offer of $15 a share, our investors would likely reject it, believing that in a few years our stock could be worth $15 or more, combined with dividends exceeding $3.5. This would mean a potential value of $18, $19, or even $20. Our strategy remains clear: by doing the right things for our shareholders, we will inevitably grow in value. Regardless of market fluctuations, we have an appealing portfolio and are committed to our mission of benefiting our shareholders. If we stay on this path, everything will fall into place.

Okay. And then on a much more kind of micro basis, the property in Washington with KB Homes, is there any risk that the city doesn't zone that for KB Homes or some kind of regulatory reason that falls out? I'm just thinking is the delay purely kind of bureaucratic inactivity? Or is there some kind of debate going on in the municipality as to whether to greenlight that project or not?

So it's purely the bureaucracy of the city. I mean, they have entitlement rights that the city can't disregard those. It's zoned to allow additional housing.

Yes, the zoning is already in place and this is largely a matter of plan approval. I believe it involves bureaucracy and logistics. However, there is always some uncertainty until it's finalized. I am aware that there is 1.7 that they won't be able to recover. I don't have concerns about them not closing, but there is a small probability that could still occur until everything is completed. I consider all possible probabilities in this situation. I don't think it's very likely, and while there's some uncertainty in that assumption, I don't foresee it happening.

There are no further questions at this time. I will now turn the call back over to Aaron Halfacre, Chief Executive Officer. Please continue.

Danny, it looks like we do have a question from Steve Chick. Do you want to go and take that?

Yes. One more question from Steve Chick of Sebis Garden Capital LLC.

Just to clarify on the $150 million of recyclable assets that you've kind of soft circled, the Costco property, the $25 million you're expecting from Costco isn't in that. And can you kind of highlight how many properties that kind of refers to?

No, I cannot. Or I will not. I surely can, but I won't because if you're taking these properties to market, you want to preserve a little bit of that information since we are a public company, right? Anyone can read up on us. So we'd like to maintain some level of optionality. Suffice to say, they're legacy properties that don't quite fit our overall strategy, but they are very attractive. That's what I will say. It does not include the Costco property, excuse me. The Costco one is great; we're pleased they're buying it. Other homebuilders also bid on that and they had the top bid. The goal for that property is to provide housing in a constrained market, so we feel good about that. I don't think the proceeds will significantly impact our situation. After repaying the loan, there won’t be many proceeds left. It would be advantageous to be free of it and move on since it would be an office property. However, the other properties we’re discussing have received unsolicited offers in the past and would be considered very liquid. The concern with recycling these legacy properties is that they all have very low tax bases, which means we need to approach them with caution concerning 1031 exchanges to avoid incurring a tax liability, which is something a REIT needs to avoid. You must be very thoughtful about this, especially about what you will replace them with. The decision to sell them is straightforward and won't take long, and I don’t think we’ll be concerned about the resulting cap rates. More critical is how we sequence and place them into something that will enhance the portfolio's value. This balancing act is becoming more apparent, as last year and early this year saw very little inventory available for acquisition, certainly not as much as we prefer. Some deals are being completed, but many of them are unattractive. I’m not interested in buying subpar deals just for the sake of it. However, we are starting to see some properties come back on the market, which is giving us another side to consider. A year ago, we could have sold these $150 million of properties without significant cap rate impacts, but we would have struggled to find good reinvestment opportunities. Ultimately, these are valuable legacy properties that should sell quickly.

That's very helpful. In your comments about the many unsolicited offers you've received for your properties, I'm curious if you mean the market around you or if you've received offers that extend beyond just the properties themselves.

You understood me quite well. There was no hidden meaning there. It doesn't imply an increase, right? That's how I would characterize it. If there had been something very specific or formal, that would warrant a different type of disclosure. Alright, Danny, I think we're ready to move on. Thank you all for being here. I find it much more enjoyable to answer questions. I've been going through numerous earnings releases and transcripts; I cannot stand listening to calls where people simply read from scripts and repeat what was previously stated. I understand that's the standard approach, but it doesn't align with my style. I prefer these discussions because they provide more insight. My role in conversing with analysts or investors is to foster understanding. Our balance sheet is quite straightforward, with only 43 properties. Most of you have the data already. What you're aiming to do is get inside my thought process, and that of Ray and John, to understand our motivations, tendencies, and past experiences, as these factors shape our decision-making. As a reminder, I am an 8.9% shareholder in the company. I have invested everything I have into this venture, and I monitor it continuously. I think about it constantly. I treat every dollar as if it were my grandmother's money, and I would never want to mishandle it. That's the perspective we maintain, and I find it refreshing. I know that more and more, we receive feedback that Wall Street is eager to hear what I have to say because my writing and speaking styles are a bit unconventional, but I hope this resonates. I might be talking to some who aren't listening, while others are engaged, but let's keep moving forward and see what the next quarter brings. Thanks, everyone.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.