Modiv Industrial, Inc. Q4 FY2025 Earnings Call

Good day, and welcome to Modiv Industrial, Inc. Fourth Quarter 2025 Conference Call. On today's call, management will provide remarks and then we will open up the call for your questions. Please note this event is being recorded. I would now like to turn the conference over to Sara Grisham, Chief Accounting Officer. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us for Modiv Industrial's Fourth Quarter and Full Year 2025 Earnings Call. We issued our earnings release after market close today, and it's available on our website at modiv.com. I'm here today with Aaron Halfacre, Chief Executive Officer; Ray Pacini, Chief Financial Officer; and John Raney, Chief Operating Officer and General Counsel. 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 or phrases. Statements that are not historical facts, such as statements about our expected acquisitions and dispositions and business plans 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 like to turn the call over to Aaron. Aaron, please go ahead.

Thanks, Sara. Hello, everyone. I hope you're doing well. Crazy times. So I know I'm looking forward to this call. I'm sure you are, too. Let me start off by saying that Sara just read the standard preamble that everyone has that talks about forward-looking statements. And I spend the vast majority of my time thinking about forward things. But the historical things and the things that are measured, the accounting are really important. And I just want to emphasize that this is a point in time because this is going to be Ray's last earnings call, even though Ray is going to be with us for the remainder of the year, it's his last official earnings call, and John is going to be taking over the helm. And I just really want to thank our team. So Sara, John, Winnie, Lamont, Jason, all the accounting team, in particular, which is candidly more than half of our company, does such a good job and they make my job easier so I can spend all this time talking about the forward-thinking items and dealing with these things that don't always have measurable outcomes. And that messy part of it that I do is that much easier because of how good they are. So I appreciate that they're all here and just wanted to welcome Sara to the call, even though she's always been there in the background, she’s going to be part of the call now along with John going forward. And of course, Ray. So with that, let me shift gears. I’m sure we’re going to have a whole host of interesting questions. I have no idea if I can answer your interesting questions, but I will do my best. But first, let's let Ray have the stage and do his thing. Ray?

Thank you, Aaron. I'll begin with an overview of our fourth quarter operating results. Rental income for the fourth quarter was $11 million compared with $11.7 million in the prior year period. The decrease in rental income reflects the expiration of our lease with Costco on our office property in Issaquah, Washington, which was sold to KB Home on December 15, 2025, and the expiration of our lease with Solar Turbines on an office property in San Diego, California, which we plan to market for sale upon receiving approval from the City of San Diego for a lot split. Fourth quarter adjusted funds from operations, or AFFO, was $4 million compared to $4.1 million in the year-ago quarter. The $30,000 decrease in AFFO reflects a $554,000 decrease in cash rents, which was partially offset by a $299,000 decrease in cash interest expense, a $138,000 decrease in preferred stock dividends, a $40,000 decrease in property expenses, and a $15,000 decrease in G&A. AFFO per share decreased from $0.37 per share in the prior year period to $0.32 per share for the fourth quarter of 2025. The decrease in AFFO per share was primarily due to a 1.7 million share increase in diluted shares outstanding, which reflects the previously disclosed issuance of operating partnership units during the first quarter of 2025, along with the issuance of common shares in our ATM and distribution reinvestment plan. Interest expense for the quarter was $1.1 million higher than the comparable period of 2024, primarily due to amortization of off-market interest rate swaps. With respect to our balance sheet and liquidity, as of December 31, 2025, total cash and cash equivalents were $14.4 million, and we had $30 million available to draw on our revolver. Our $262.1 million of consolidated debt outstanding consists of a $12.1 million mortgage on one property, excluding a $12.1 million mortgage on the Santa Clara property that was owned by tenants in common and therefore not consolidated as of December 31, 2025, and $250 million of outstanding borrowings on our $280 million credit facility. Following the January 2026 extension of our credit facility, we do not have any outstanding debt maturities until July 2028. Based on interest rate swap agreements we entered into in January 2026, 100% of our indebtedness as of December 31, 2025, held a fixed interest rate with a weighted average interest rate of 4.15% based on our leverage ratio of 45.1% at quarter-end and the January amendment to our credit facility. I'll now turn the call back over to Aaron.

Thanks, Ray. Let’s just proceed, operator, let’s go to questions, it’d just be easier.

And your first question comes from the line of Gaurav Mehta from Alliance Global Partners.

I wanted to ask you, I think in your press release, you talked about receiving multiple offers and spending some time on one of those and not pursuing it. So I just want to get some more color on what those reasons were for not pursuing the offer.

I figured you'd ask that. And I don't really have an answer that I can give you other than to say that at that moment, we didn't see a secure path forward. So we stepped back from discussions. And I think that fundamentally, the vast majority of the stuff there was good. It's just that our job is to protect our investors and to make sure that we have put forward the requests that we need to ensure that our investors are going to get what they're supposed to get. And it was just a process. I think it was a generally positive exchange. And sometimes these things happen where it's just like it's not quite flowing. So that's about all I could say. It doesn’t give you much. But as it relates to that, in that particular moment, we didn't see a secure path forward. And so we stepped back from discussions.

I was wondering if you expect to sell any assets this year related to asset recycling. Also, could you provide some comments on the acquisition environment you are observing?

On a go-forward basis, we anticipate the recycling process will pick up significantly. Recent developments may complicate matters as volatility in rates is impacting buyer and seller confidence across the board. While there is still appetite in the market, the challenges make it difficult. Buyers are factoring in significant safety margins due to potential misjudgments, while sellers hesitate to agree on deals they might regret shortly thereafter. The market landscape has shifted considerably. Currently, the near term appears somewhat challenging, but it is not fundamentally different from what we've seen in the past. Long term, we expect REITs to gain favor again, although it may take longer than we would like. Our approach to recycling involves several phases. The first phase focuses on non-core assets, especially in the office sector. We plan to divest our two office properties. One in San Diego, previously leased to a solar company, has garnered strong interest exceeding its appraised value, but we are awaiting a parcel split to proceed with a sale. The second property, OES, has a purchase option we're discussing and is considered a stable asset due to its government tenant. However, we are taking a balanced approach before deciding whether to sell. As for the Kia dealership, it's a straightforward non-core asset with interest but also carries a significant value of around $70 million. We're cautious about selling it without a clear reinvestment plan in place, preferably diversifying into smaller manufacturing facilities. We're also addressing a number of shorter lease terms with our tenants to refine our portfolio, ensuring that we aim for stability and long-term growth. We received unsolicited offers for some shorter WALT properties and are exploring these opportunities as they arise, staying flexible for other potential industrial credits that may come up for recycling. Moreover, we remain vigilant for opportunistic assets that, while not manufacturing-focused, could become prime candidates for future transactions. Overall, we're cautious about tax implications when selling assets, as we want to avoid creating taxable events for investors. While selling assets can happen quickly, the challenge lies in identifying suitable replacements. We're committed to being selective and patient in our approach to finding high-quality manufacturing properties with strong lease structures and financial stability. The current market environment has produced some tight pricing, with discussions indicating cap rates between 6.75% and 7.5%, reflecting a more competitive landscape. Despite some volatility in the market connected to geopolitical events, we recognize opportunities and are moving forward thoughtfully, though it requires considerable patience. We aim to enhance shareholder value through our recycling strategy, and while this process might not seem glamorous, it is essential for our long-term goals.

I appreciate it. That's all I had.

And your next question comes from the line of Jay Kornreich from Cantor Fitzgerald.

In line with a lot of your comments there, obviously, a lot of questions on the macro perspective at the moment. And I guess if we could just wrap up all those comments you just made about the transaction front and how you're thinking about that going forward. Do you still feel on track to get the portfolio to the 100% pure-play manufacturing industrial over the next 24 months? Or does maybe the timeline shift just with everything that's going on at the moment?

Yes, I believe we are still on track. I prefer to set cautious expectations and aim to exceed them. If the market improves, transitioning could take closer to 12 months. The key challenge is finding the right assets, which will become clearer as the market stabilizes. In theory, if I identify an ideal portfolio of assets and the timing is right, I could potentially make a significant move in one transaction. Mathematically speaking, while it's unlikely due to the difficulty of finding such opportunities, it’s still possible. For instance, if I identified a $100 million portfolio that meets our criteria, we could sell our current assets in a way that aligns with tax regulations, allowing us to complete the transition efficiently. Ultimately, the pipeline is what matters, and I still believe that achieving our goal within 24 months is realistic and achievable.

Okay, I appreciate that. And then just one follow-up. And I recognize that there's a little commentary you can provide on the potential acquisition offers that you received. But can you maybe just from a different angle, talk about what's perhaps brought you more on the radar of others more recently as an acquisition target, maybe relative to a year ago? Is it the state of interest rates? Is it the progress you've done on the asset recycling efforts? Is it something else? Just what do you think has brought you more into the light of others looking for a portfolio like yours? And how do you expect additional potential inbounds moving forward?

That's a good question. We've observed that public REITs continue to trade at a discount compared to private real estate, and we've started to see some M&A activity. While one might wonder why there hasn't been more volume, there has been a notable amount of activity. In our sector, we've seen companies like Fundamental, which was private, acquired by Starwood, along with Plymouth and Peakstone being taken out as well. Similarly, Alexander & Baldwin and others have engaged in deals. Many of these companies were smaller-cap, making them more accessible to potential buyers. In recent years, if you were raising an opportunistic fund, you typically have about three years to deploy the capital. We've seen indications since the third quarter of last year that activity is picking up. As the market starts to open up, sellers become more likely to engage, attracting buyers, and this creates a dynamic where people begin searching for acquisition opportunities. Although there's some near-term volatility regarding interest rates and the global economy, there are still positive leverage opportunities within public real estate, both in public-to-public deals and public-to-private. We recognize that there may be an oversupply of REITs, particularly those that are undercapitalized, and we understand the skepticism around why we went public. At the time, we felt it was necessary for investor liquidity, unlike non-traded REITs, which often face challenges when liquidity is limited. While we've been navigating a difficult period, we've also built a valuable portfolio. Our share price reflects a considerable gap compared to the assets we hold, which makes us attractive to potential investors. The properties we own are not cutting-edge, but they are stable and have proven longevity, unlike more modern assets that might become obsolete quickly. Long-term, we believe there is a demand for our portfolio, especially as private capital can start being used for investments like retired 401(k)s. We are aware that interested parties are focusing on our assets rather than our management team. While we would enjoy showcasing our team, it's the strength of the portfolio that is attracting interest. We're open to discussing sales, but we prioritize obtaining the right value for our investors. We are committed to upholding our dividend of $0.10 per share monthly while navigating these discussions. Ultimately, there are limited small-cap industrial REITs available, which positions us uniquely in this space. If investors are interested in this sector, we are among the few options they have.

Your next question comes from the line of John Massocca from B. Riley Securities.

So I know you kind of talked a lot about the inbound interest after the January '20 update. But I guess, given that you've seen that, does that maybe spark an interest in running a kind of strategic alternatives process earlier than that, I guess, maybe that kind of post 24-month timeline that was kind of talked about in that update? Just kind of curious how that changes your mindset, if at all.

I believe the interest indicates that people recognize the value we have and understand that we can enhance the portfolio. While the portfolio isn’t bad now, making it more refined will increase its value. There’s a perception of an opportunity for them to acquire it at a lower cost before it appreciates further, which is their objective. They aim to retain potential gains for themselves while offering a minimal return to you. This suggests that unless someone actively addresses that value gap—and let’s be clear, doing so doesn’t mean setting a price of $22—there's little incentive for them, as they'd simply purchase a bond otherwise. They are looking for potential upside, just as our investors are. This dynamic creates a situation where if you picture making a used car purchase, any minor cosmetic issues would be leveraged to negotiate a lower price. However, we can improve the portfolio, increasing its value. Consider our current market environment, which is quite volatile due to inflation and fluctuating interest rates. If we were to initiate a process now or in six months, given that we’ve enhanced our portfolio, we could see it in a more stable environment, potentially with lower rates. If we project this scenario forward to 24 months, assuming no changes to our dividend, that would yield an income of $2.40 over that period along with an increased portfolio value to utilize. You would make an effort to eliminate the minor flaws to position your asset as desirable in the market. However, moving too soon could indicate either a lack of resolve from leadership or a belief that we can’t improve upon the current situation, leading to a disservice to investors. If an opportunity arises that addresses the value gap, it could provide investors with options for capital redeployment or continued dividends alongside potential REIT growth. Many REITs are considering strategic alternatives, whether openly or not, but it’s essential to question the timing of any sale. If there’s a strong reason behind considering a sale now, that’s one thing; otherwise, it’s worth asking why pursue a sale at this moment.

Okay, that makes sense. On a more detailed level, and I apologize if I missed this in the prepared material. What are the terms of the Melbourne, Florida office sale? Or is that still to be determined?

The terms are well known, but I'm not ready to share them. Out of respect for the buying party and for us, I prefer to keep that information private until after the transaction is complete. What I can share is that we have slightly more than $400,000 of earnest money that has become non-refundable. This has been a process; it was not a quick deal. It was conducted in an organized and methodical manner. Once the deal closes, I'll provide you with the details. To be clear, we currently do not have a replacement property identified, but that's not a concern at this moment in terms of tax implications. The reason being, we're selling Kalera, and to be candid, we incurred a loss on that sale, which results in a tax loss that offsets the gain from this transaction. We have some time to think carefully about reinvesting those funds. This is scheduled to close in the second quarter, and once it does, we will inform you of the outcomes.

Okay. And maybe with Kalera, the former Kalera property in mind, can you remind us what the kind of, I guess, cost of carry was for that in 4Q or kind of the OpEx costs associated with that asset in 4Q that's going to go away now that you sold it in January? Like roughly.

Yes. I mean I think it was running about $20,000, $30,000 a month.

Okay, that's it for me. And Ray, appreciate all the help over the years that you've shown on these calls.

There are no further questions at this time. Please proceed.

Thank you all for being here. I apologize for the late start, which was due to the earlier mentioned offers. I prefer not to begin our discussions so late, but given the current tumultuous situation, we are just a small part of a much larger scenario. I truly appreciate everyone who joined us today. Wishing you and your families the best and looking forward to speaking with you again next quarter. Thank you.

This concludes today's call. Thank you for participating. You may all disconnect.