Modiv Industrial Q3 2023 Earnings Call Transcript

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November 13, 2023

There are 7 speakers on the call.

Operator

Good day, and welcome to Motive Industrial's Third Quarter 2023 Earnings Conference Call and Webcast. All participants will be in a listen only mode. On today's call, management will provide prepared remarks and then we will open Please note this event is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for Motive Industrial. Please go ahead, ma'am.

Speaker 1

Thank you, Shamali, and thank you everyone for joining us for Motive Industrial's Q3 2023 earnings call. We issued our earnings release before the market opened this morning and it's available on our website at motive.com. I'm here today with Erin Halfacre, Chief Executive Officer and Marie Puccini, 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.

Speaker 1

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 ks and 10 Q. With that, I'd now like to turn the call over to Aaron.

Speaker 1

Aaron, please go ahead.

Speaker 2

Thank you, Margaret. Hello, everybody, and thank you for joining our Q3 conference call. I think, 3rd quarter results were solid. I'd like to think they were relatively drama free. Let's just go straight to Ray And I'll come back at the end before we take questions.

Speaker 2

Ray?

Speaker 3

Thank you, Aaron. I'll begin with an overview of 2nd quarter operating results sorry, 3rd quarter operating results. Revenue for the Q3 was $12,500,000 a 21% increase compared with the $10,300,000 in the prior year period and reflects the impact of the 12 industrial manufacturing acquisitions we completed during the 1st 9 months of 2023 and the 14 non core property dispositions in August 2023. 3rd quarter adjusted funds from operations or AFFO was $3,700,000 up 19% when compared with $3,100,000 in the year ago quarter. The increase in AFFO was primarily due to the revenue increase and was partially offset by increases in straight line rents and interest expense.

Speaker 3

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 $1,700,000 non cash loss on sale of real estate investments during the quarter includes a $1,900,000 non cash loss on the previously announced sale of 13 properties to Generation Income Properties, which closed on August 10, 2023, partially offset by $178,000 gain on the sale of the property previously leased to the EMC shop. The loss in the GIPR transaction reflects the difference between the $9,600,000 estimated fair value of the Series A redeemable preferred stock of GIPR compared to the $12,000,000 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 November 9, 2023. The estimated fair value of the preferred stock increased to $10,100,000 as of September 30, 2023, Reflecting the progress GIPR has made towards registering up to 3,000,000 shares of its common stock as of that date.

Speaker 3

The net loss attributable to common stockholders of $6,500,000 from the 3rd quarter our $0.86 per basic and diluted share reflects a one time catch up adjustment of $7,800,000 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. The target is $1.05 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 point 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 $1.05 per share is still deemed probable.

Speaker 3

The FFO performance target of $1.05 per 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 Interest expense, net of derivative settlements and unrealized gain on interest rate swaps was $2,900,000 during the Q3 of 2023 compared with $2,500,000 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 $250,000,000 term loan outstanding today at a weighted average interest rate of 4.53 percent based on our leverage of 48% as of September 30, 2023.

Speaker 3

Now turning to our portfolio. Following the 2 acquisitions and 14 dispositions completed during the Q3, our 44 property portfolio has an attractive weighted average lease term of 14 years and approximately 33% of our tenants or the recurring 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 $40,000,000 as of September 30, 2023. Now turning to our balance sheet and liquidity. As of September 30, 2023, total cash and cash equivalents for $5,600,000 and we had $284,000,000 of debt outstanding, consisting of $34,000,000 of mortgages and $250,000,000 of outstanding borrowings on our $400,000,000 credit facility.

Speaker 3

Based on interest Trade 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 percent 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 December, representing an annualized dividend rate of $1.15 per share of common stock. This represents a yield of 7.77 percent based on the share price of our common stock as of November 10, 2023. I'll now turn the call back over to Harritt.

Speaker 2

Thanks, Ray. As you all saw, I've already shared a lot of information in our earnings release tonight, I did that in order to get our thoughts distributed to as wide as 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 micro cap company.

Speaker 2

In this really volatile time, who would think you would wake up over the weekend and find that Moody's down the U. S. 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 the 1st 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.

Speaker 2

But that said, I don't want to say nothing. And so we shared a lot of what we're looking at, 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 and A. Operator?

Operator

And our first question comes from the line of Barry Oxford with Colliers. Please proceed with your question.

Speaker 4

Great. Yes. Aaron, I agree with you. You gave some very nice detail as far as where your brain is and where and how you're thinking about When it comes to the strategic partner, you kind of went through a few things that what you're not looking for. But When you said what you're looking for, you're kind of looking for the halo effect.

Speaker 4

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 kind of show your hand here.

Speaker 2

Yes. No, I'd say in the broadest so look, as we kind of alluded to in the comments, we're seeing a lot of a lot of people are offering sort of some sort of preferred, right? And it's really feels like that to me. And that doesn't feel very original. And in the expectations that we're seeing for these, they want mid teens or higher returns and they want repayment.

Speaker 2

And so to me that just seems if you want that feels like equity, but without equity treatment. And so that's an interest to us. I think as it relates, look, I don't have specific terms for you. I know that 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 our needs.

Speaker 2

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? But given that even a $12,000,000 check would be 10% of our cap stack right now if you looked at it in certain ways, right. So 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.

Speaker 2

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 money and underwriting and not sort of not someone who's just a carnivore, then I think we get the halo effect. And the halo effect is really designed to say, 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 at 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.

Speaker 2

Right now, we're in this really Unique Box, I don't know of any REIT that came out like literally like 2 weeks before the Fed started moving and we didn't raise any money and we've done 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. 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 AMB, Prologis, Kimco sort of vintage back then those were a lot different story, but the smaller wins 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.

Speaker 2

I think sometimes they work out and 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 something that works and 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 like we don't need to build an empire here.

Speaker 2

We just want to be able to make ourselves more functional in terms of tradable flow, the market cap, all the things that require that you the investing community require of a REIT.

Speaker 4

Perfect. No, all that makes sense. Appreciate the color there. Very quick question for you on the performance incentive plan for the stock comp, how should we think about that line item throughout 2024?

Speaker 3

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 The compensation committee.

Speaker 2

I would say, Barry, that look, there's 7, what is it, dollars 721,000 a quarter that we still have to accrue for in Q4, Q1. So first numbers will have the 7.21 plus the 4.99 that we are already doing for the time based. So you're going to you're looking at like a roughly a 1, 2 hit already for the balance of the year, I'm of the view that G and 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 and A that you've seen over the sort of consistently on a consistent basis. That's how I would answer that.

Speaker 2

And I conclude that you see it's component of G and A.

Speaker 4

Okay. Great. Yes, that's exactly what I was trying to kind of get at just How should I think about that from a modeling standpoint? That's helpful.

Speaker 2

Yes. All

Speaker 4

right, guys. Thanks so much.

Operator

And our next question comes from the line of Bryan Maher with B. Riley Securities. Please proceed with your question.

Speaker 5

Thank you. Good morning, Aaron and Ray.

Speaker 6

Just a

Speaker 5

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 kind of break this inertia and get things moving again?

Speaker 2

Oh, 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 toe, so I'll be careful with what I say. But 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 catalyst and the right reason to do so. We don't have any more clarity.

Speaker 2

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 data know if we're going to be hard, just 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.

Speaker 2

I think if I were to be logical, I would think, hey, do we see more of the well performing REITs in terms of capitalization and size and access to the market starting to do More follow ons, right? And do we see health response to those follow ons? If we see Matt, then I think we it will be easier for us, sort of 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 they'd be positive received in the marketplace, but it also depends on what the marketplace is at that time, right.

Speaker 2

And so I wish I knew what the catalyst was. I'm prepared sort of psychologically and we've prepared our balance sheet in a way that look we can stay in our bomb shelter for another year if we have to, right, and just keep waiting until the mushroom clouds sort of 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 just by just mining our P in queues, we are actually 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.

Speaker 2

So they're just head sucking. I've seen others which are weird like they come out really short or they've come out because they didn't get it done before 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 market start to heal.

Speaker 5

I also got the sense when reading it that M and 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

Speaker 2

So good question. M and A is kind of in my DNA and In the team, so I was at Coal when we merged with ARCP to become VERIT. When I was at Campus Crest, we did a take private to Harrison Street. This REIT was formed by me merging 2 REITs and internalizing together. So the skill set is it's not foreign to us.

Speaker 2

John Rainey, our General Counsel, he was involved I was involved in the deal when we sold a cold portfolio to Spirit, which is now obviously, oh, like with VEREIT. So M and A is part of our DNA. We're not afraid of it. We do see the opportunity. If you study reason historically, those who gain size, if they've done it smartly, they can grow.

Speaker 2

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 heeled, 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 can 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, 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.

Speaker 2

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 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 you don't see it happening until it comes across your desk.

Speaker 2

That said, we're looking at it. 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?

Speaker 2

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

Speaker 5

Okay. Thank you.

Speaker 2

Yes.

Operator

And our next question comes from the line of Rob Stevenson with Janney Montgomery Scott.

Speaker 6

Good morning, guys. Not sure I saw the occupancy numbers anywhere. Are you guys at 100% this quarter?

Speaker 3

Yes.

Speaker 6

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

Speaker 2

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 lease, it's a very attractive price. But then the pricing mechanism is a reference price. They also have to go through this process where they're seeking out, they have to do appraisals.

Speaker 2

And if the appraisals are within plus or 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 18 month process for them to exercise the mechanism, the option process, so and they've talked to us about starting it, but they can't start it until next year.

Speaker 2

They would start it next year, they would go through the evaluation process, they would get it approved, they get a requisition, then it would go through the governor and then they would get on the on once the budget is approved, they would then be able to relinquish funds. So I think that liquidation if it were to happen and it seems reasonable that it will happen, it would be in 2025. So from a modeling standpoint, we would be still capturing that AFFO to the balance of this year and into I mean, it's a balance of 24% and into 25% for a bit. But it was a big component of our lease negotiation. It probably added an extra month into the leasing issue because they insisted on having it, it wasn't just a boilerplate one.

Speaker 2

This property was strategic to them and they wanted to make sure that mechanism we had agreed to and the process was there and so that's all embedded in.

Speaker 6

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 motive shareholders?

Speaker 2

Yes. So, can I have alluded anything, barring any private party sales that we do in advance and I don't know if we'll do any, but if we did, we'll take those? We would distribute those concurrent when they redeem. So it would be sort of simultaneous distribution and we would be coordinated with GIPR. I don't see it happening in the Q4.

Speaker 2

I see it happening very early Q1. 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.

Speaker 6

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 Q4 and then for whatever part of Q1 until those shares are redeemed?

Speaker 3

Yes, there will be an adjustment as of December 31. If we continue to hold the shares for some reason at March 31, there'd be an adjustment as well, but most likely they'll be redeemed before the end of Q1. So one more adjustment is coming at December 31.

Speaker 6

Okay. And then how should I 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 $5,000,000 a quarter of interest expense before netting out all the GAAP treatment of derivatives and swaps. But if you're just doing the math on the $282,000,000 at $4,52,000 gets you to more like $3,200,000 a quarter.

Speaker 6

How should I be thinking about before any of the derivative swap stuff, what interest expense is running you guys a quarter these days?

Speaker 3

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 $284,000,000

Speaker 2

Yes, that's the economic rate. Yes, so you take the $452,000,000 on the $484,000,000 that's kind of your economic run rate because the mortgages are amortizing too.

Speaker 6

All right. And then last one for me, just to clear, the OP units we're not being included in FFO per share, but are being included in AFFO per share this quarter because of the end of dilutive? Correct. Okay. All right.

Speaker 6

Thanks guys. Appreciate the time.

Speaker 2

Thanks so much.

Operator

And we have reached the end of the question and answer session. I'll now turn the call back over to Aaron Athacre for closing remarks.

Speaker 2

Everyone, thank you for listening, joining in. We appreciate your attention, we appreciate your investment. And for those that I see you tomorrow and Wednesday at NAREIT, look forward to talking to you. Until then, we'll talk to you again when we come out with 4th quarter results. Thanks.

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