Modiv Industrial Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to Motive's First 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 the call up for your questions. Please note this event is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for Motive.

Operator

Please go ahead, ma'am.

Speaker 1

Thank you, Diego, and thank you all for joining us today to discuss Motive's Q1 2023 financial results. We issued our earnings release and investor supplement before market opened this morning. These documents are available in the Investor Relations section of our Web site 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.

Speaker 1

Before we begin, I'd 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. Discussion of the factors that could cause our results to differ materially from those forward looking statements are contained in our SEC filings, including our reports on Form 10 ks and 10 Q.

Speaker 1

With that, I'd now like to turn the call over to Aaron. Aaron, please go ahead.

Speaker 2

Thank you, Margaret. Hello, everybody, and thank you for joining our Q1 conference call. We're going to jump right in with a review of the financial results by Ray Bucchini, our CFO, followed by my closing comments before we open the line for Q and A. Ray?

Speaker 3

Thank you, Aaron. I'll begin with an overview of 1st quarter operating results. 1st quarter adjusted funds from operations or AFFO was $3,100,000 or $0.30 per diluted share compared with $3,000,000 or $0.29 per diluted share in the year ago quarter. Revenue for this Q1 increased 7.7 percent to $10,300,000 compared with $9,600,000 in the prior year period, reflecting the benefit of the acquisitions we completed during 2022. The net loss attributable to common stockholders or $0.62 per basic and diluted share.

Speaker 3

This compares to a net loss attributable to common stockholders of $11,100,000 or $1.47 per basic and diluted share in the prior year period. Were it not for 2 primary offsets, we would have obtained an even stronger improvement in our operating results. The recent quarter results include a $3,500,000 real estate impairment charge and a $2,500,000 Year over year increase in interest expense. The real estate impairment charge relates to our property in Nashville, Tennessee, which is leased to Cummins. Since we are planning to dispose of this property later this year, we evaluated its carrying value compared with comparable sales values reduce the carrying value accordingly.

Speaker 3

The increase in interest expense includes a $1,700,000 of unrealized losses on interest rate Swap valuations. While the swap on the first $150,000,000 of our term loan was treated as a cash flow hedge From July 1 until December 31, 2022, it did not qualify for hedge accounting treatment For the Q1 of 2023, because the swap was deemed ineffective. The primary reason the swap was deemed ineffective There's a potential for a reduced term of the swap that could result from a one time cancellation option available on December 31, 2024, compared with the January 2027 maturity date of the term loan. We provided this cancellation option at the time we entered into the swap because it reduced the swap rate by approximately 50 basis points. If there's a significant drop in interest rates in the future, This interest rate swap derivative could potentially qualify again as a cash flow hedge.

Speaker 3

The balance of the increase in interest expense reflects the fact that the weighted average interest rate on our $170,000,000 term loan Outstanding as of March 31, 2023 was 4% based on the existing swaps compared with 150,000,000 Outstanding as of March 2022 at a weighted average interest rate of 2.1%. Now turning to our portfolio. During the 1st 4.5 months of 2023, we continue to focus on acquiring industrial manufacturing properties. Year to date through May 12, We acquired $100,600,000 across 10 industrial manufacturing properties at an attractive blended initial cap rate of 7.7% and a weighted average cap rate of 9.9%. 2 of the acquisitions occurred during the Q1 And following completion of the remaining 8 property acquisitions during April May this year, our portfolio now consists of 56 properties located in 18 states.

Speaker 3

On a pro form a basis as of March 31, 2023, the portfolio included 37 industrial core properties, representing 67% of the portfolio, with a 14.5 year weighted average lease term or WALT and a 2.4 percent annual rent bumps. 3 tactical non core properties representing 20% of the portfolio With a 15.3 year wall and 2.3 percent annual rent bumps and 16 other non core legacy retail and office properties representing 13% of the portfolio. As part of our active investment strategy to acquire industrial manufacturing assets, We have successfully increased our industrial exposure to a super majority allocation from just 39% as of September 30, 2021. Our tactical non core allocation, as detailed in our Form 8 ks filing today, Offers Motive potentially meaningful upside over an interim holding period, while our other non core allocation consisting of 16 legacy Retail and office assets not acquired by Motive's management team presents a near term capital recycling opportunity as we are now focusing our efforts on selling those properties. Since the beginning of 2020, immediately following the acquisition of a non traded REIT, Mova's management team has successfully repositioned the portfolio by selling $143,000,000 of non core legacy assets In completing over $278,000,000 of accretive acquisitions, annualized base rent based on rates in effect on March 31, 2020 3, totals $41,800,000 on a pro form a basis, reflecting the acquisitions completed in April May 2023.

Speaker 3

The portfolio's weighted average lease term is 13.3 years and approximately 38% of our tenants or their parent companies Have an investment grade credit rating from a recognized credit rating agency of BBB- or better. Now turning to our balance sheet and liquidity. As of March 31, 2023, total cash and cash equivalents were $13,300,000 and we had $214,400,000 of debt outstanding, consisting of 14,400,000 Mortgages and $170,000,000 of outstanding borrowings on our $400,000,000 credit facility. Our leverage ratio was 40% at the quarter end. Based on interest rate swap agreements we entered into during 2022, 100% of our indebtedness as of March 31, 2023, held the fixed interest rate and the weighted average interest rate was 4.1%.

Speaker 3

In April of 2023, we drew the remaining $80,000,000 available under our term loan. We used these funds Along with cash on hand and the issuance of $5,200,000 of Class C operating units in our partnership weighted average interest rate on the $294,400,000 of total debt outstanding as of May 12, 2023 It was 4.4% based on the existing swaps and consolidated leverage of 40% as of March 31, 2023. As previously announced, our Board of Directors declared a cash dividend per common share of approximately $0.095 for the months of April, May June 2023, representing an annualized dividend rate of $1.15 per share of common stock. This represents a yield of almost 9% based on the recent share price of our common stock. I will now turn the call back over to Aaron.

Speaker 2

Thanks, Ray. As you just heard, Motive has been able to produce yet another solid quarter of results. Further, as we detailed in Earnings release, the 10 acquisitions we completed represent an impressive mix of accretive high quality industrial manufacturing properties. However, beyond the financial results, I believe there is a message to take away from this that I would argue is even more important. And that is the ethos or character of the management team that produced the results.

Speaker 2

Any given REIT in any given quarter can deliver a decent result. As they say, Even a stopped watch is right twice a day. Heck, even delivering consistent quarterly financial results is nothing more than a nice confirmation that you made the right Initial investment decision. But the investment you are ultimately making, particularly in the net lease sector, is on the caliber and capability of the management team to Produce those consistent positive financial results. Picking the right management team is critically important.

Speaker 2

It's like picking the right horse at the Kentucky Derby, The right team to win the playoffs or the right soldiers to go to war. Sometimes stats don't tell you the full story, so you have to rely on your instinct. And when your gut tells you to choose the underdogs, the warriors, the hardscrabble crew that has no quit, then you know right then and there That you have found something special. Motive's secret sauce can be summed up in 2 simple but powerful words, Grit and grind. Motive's grit is exemplified by our focus and perseverance, combined with our ability to grind it out every day relentlessly.

Speaker 2

We are hardwired to achieve our goals. Combined with our decades of REIT and real estate experience, our grit and grind produce results that are both intelligent and compelling. Think about it for a quick moment. Since the beginning of last year, Motive has grown over 30% by accretively acquiring nearly $300,000,000 of without raising any institutional capital. Motive has transformed its balance sheet with all fixed rate debt with a weighted average interest rate of 4.4% Despite an unprecedented rising rate environment, the motive team has done all this while also selling millions of non core assets Executing impressive new leases and renewals and managing all the financial reporting of our company.

Speaker 2

We did all that with just 12 people. That takes grit. We had to grind it out. Let me ask you this, how many CEOs do you know that tour every property acquired? I've been in the REIT industry for over 2 decades and I've never met another.

Speaker 2

To find the right acquisitions this quarter, our Chief Investment Officer and I had to take 25 flights With countless winter delays to 18 cities, driving over 1700 miles between site visits across 7 different states, that takes grit and requires you to grind. When we moved our corporate headquarters to Reno late last year to save our shareholders every bit of money we could, our COO and I loaded up the This past Saturday, I ran a half marathon trail race in the mountains. 2 weeks ago, to prepare for the race after a rough winter that offered very few good training days, I decided I had to grind out several long runs to get to my goal. So in one week, I knocked out 4 mountain runs for 8 miles, 13 miles, 14 miles and 15 miles, Just because it had to be done, another example of how motive is defined by its grit and its ability to grind. Last quarter, we stated our goal to acquire a minimum of $100,000,000 of industrial manufacturing properties.

Speaker 2

When I stated that publicly, I didn't know when we would accomplish that goal. However, we got it done sooner than we thought. Now, our focus has shifted to selling the 16 legacy non core assets that we inherited through I don't know how soon we will get them sold, but I can promise you this, our grit and grind will make sure it gets done. After we sell those assets, we will then shift to showcasing to everyone how we have become the 1st pure play industrial manufacturing REIT and how we are focused on becoming the leading investor Industrial Manufacturing Properties. With every ounce of my perseverance and determination, I'll be spreading the word.

Speaker 2

Even if it requires me to meet every financial advisor in the country Making investors aware of how great an investment opportunity Motive represents and in doing so improve our share price. I encourage all who are listening And all who will read this transcript in the future to know this, with our grit and our ability to grind, Motive will prosper. Operator, let's now open it up for Q and A. Thank you.

Operator

Our first question comes from Rob Stevenson with Janney. Please state your question.

Speaker 4

Good morning, guys. Aaron, how should we be thinking about the size and timing of dispositions besides The Gap property that I guess is supposed to close later this month. I mean, are you guys out there in the marketplace with stuff under contract or marketing? Is that a more of a back half ended sort of process?

Speaker 2

It's a good question. We haven't other than the GAAP property, we haven't formally done any of the other properties held for sale. That doesn't mean we haven't done a lot of work to know where we think they're at. There's a bit of a balancing act with the selling of this. I'll give you my sort of inside baseball on this.

Speaker 2

I could sell my retail assets Like right away, attractive cap rates. But if I do that, then my way to office gets disproportionate, right? And then for people who are uninitiated, they're just Oh, you got your percentage of profits went up. So we're balancing the disposition of these. I think in an ideal context, we would sell them in one fell swoop.

Speaker 2

Don't think that's necessarily going to happen, but I think that would be our ideal context. And then from there, we're working on it. So timing, look, my goal is to get it done this year. That said, we've had a crazy credit market, right? So who knows when the next bank is going to trip over itself And even further restrict lending.

Speaker 2

And I think individual credit lending is important for some of these assets, Right. If it's Dollar General, no, it's not. But if it's an office asset, yes, it is. So Look, I don't have a projection on the timing, but I'd say that it's our focus. As when I focus on something, it gets a lot of And I think our goal is to get it executed in a very timely manner.

Speaker 2

That said, it's a rough market, right? So I think we're eyes wide open. So if you think about why some transactions don't get done, it's typically because sellers aren't accepting Where the market is? We're not naive about that. So we're cognizant of it.

Speaker 2

We're going to maximize proceeds, but right at the same time, we're going to Because at this point, we don't want them in the portfolio, we're going to recycle and there's plenty of other things to buy. And it's kind of rough, hard in the sense that Look, I can continue on focusing on acquisitions. There's lots of assets deals we like out there. But we just need to shift, get this done. So we're going to make sure it's done in a timely manner.

Speaker 4

Okay. And I guess to that point, I mean, how should we also be thinking about acquisitions? Are you guys is it basically from here on out, could it sort of be matched More with disposition proceeds or is the pipeline good enough and strong enough and you're comfortable enough the balance sheet that we could see another $40,000,000 or $50,000,000 worth of acquisitions this year prior to doing any material dispositions?

Speaker 2

Yes. I don't think I would do that much prior to dispositions. We turned away Probably about $40,000,000 to $50,000,000 of deals that we could have closed on. And I like where we're at. We're not we haven't pulled on the revolver.

Speaker 2

We've used up the term loan. So we're not escalating into the spread of the our leverage is still where we want it to be. We're thoughtful about leverage in the forward environment. I think once I have a better bead On the sales, like the timing of the sales or the surety of the sales, then we could do it. We definitely will acquire more this year.

Speaker 2

But My view is, look, I'd rather front loaded it as best we could, so we can get the benefit of that, sort things out on the margin. But so I can't I won't as we stated last quarter, our minimum acquisitions was 100. We've achieved the minimum. We want to do more. We're intending to grow, but we're just trying to be also mindful of the balance sheet.

Speaker 2

It doesn't do us any good Buy a bunch of assets and then be like 60% levered, because we're just going to get beat up for it. So we're just being disciplined in the process.

Speaker 4

Okay. And then you funded about half the Reading acquisition with OP units at 2018. Can you talk a little bit, was that just a Specific circumstance there that they need a tax protection? Is there a demand out there from sellers that you're talking to take OP units today?

Speaker 2

Well, I think anyone who wants to take over units does have a tax awareness element to what they're doing. So I wouldn't say people generally speaking, cash is king, particularly if you're an institution that's selling it, where they don't have the tech sensitivity. When you have founders or entrepreneurs who own these things and sometimes they can have material low basis of tax Savings makes sense. I think though in this situation was someone who really believed in what we were doing, had opportunities to take OP units from multiple different REITs And chose us. And I think it's a testament to us and our company, but also the spirit of This individual, his name is Gary, and I think he's a great guy.

Speaker 2

And because he recognized the inherent value of our company We're able to take shares or open units that are above our current screen price. We get opportunities from time to time to look at that. We're not going to take everyone, right? Because we treat them as partners, and they're significant shareholders. And I don't want to be flush fund just to get OP unit transactions, because sometimes you see that, particularly in sort of legacy non traded kind of environment.

Speaker 2

We pick our partners Carefully. And so in this case, it was a situation that works for both parties and we're happy about it.

Speaker 4

Okay. And then last one for me. You extended the Levins property lease by about Are they moving out and just needed a short term extension, something else going on? Is that lease still is that tenant Still likely to occupy that asset after the end of next year?

Speaker 2

Yes, I think they're likely to occupy after the next year, but they wanted What they did is they made another acquisition and so they're doing a little bit of consolidation. So they wanted they just wanted to bridge. And we because we And the rate increase was higher, right? They had really below market rents, and so they just wanted to do a reset. We're also doing some They're doing some LED light work in there and so they got in terms of swapping out things.

Speaker 2

So they've put in probably, I'd say, over $1,000,000 of improvements over the last 18 months, so they seem to be sticky. They just wanted to bridge 1 because they're working on they're focused on acquisitions and their clock was running out. And so we said, fine, let's just do that, because we're fine with that. If you notice, we've done that with our solar assets and things like that. I think maybe what they were thinking is like, they'll shoot you a short term model, we'll take the higher rate increases, but maybe the markets will stabilize.

Speaker 2

And so when we do a longer term lease, it may not be as costly for

Operator

Our next question comes from Gaurav Mehta with E. F. Hutton. Please state your question.

Speaker 5

Yes. Thanks. Good morning. I wanted to ask on acquisitions. In your prepared remarks, you said the pace of acquisition was faster than what you expected.

Speaker 5

And just wanted to get some color on what drove that achieving $100,000,000 of acquisitions, I guess in the 1st 4 months, I guess, I'm trying to understand what the state of transaction market is and what you guys saw that led to that in execution In faster time?

Speaker 2

Yes. So we a little back story. When we originally Our term loan, I think it was correct me if I'm wrong, Ray, it was September, October of last year, the term loan extension. We had been underwriting a It was an institutional portfolio, had been a legacy store portfolio that a former colleague of mine What is the GP on? It's a great portfolio, would have loved the trends act on it.

Speaker 2

But the cap rate That they wanted, just didn't we were very concerned about that cap rate going into The environment that we're in. So we tried to negotiate. We just couldn't get it done. Maybe we'll get it done down the road, who knows. But that was a sizable one.

Speaker 2

That would have increased our leverage. Over $200,000,000 transaction. And so we didn't close on that. And so we had to shift gears. And The pipeline, even in as early as mid January or late January, the pipeline was thin, right?

Speaker 2

We had bid on several deals in November, December that The sellers just pulled. They couldn't accept the pricing in the market. They just pulled. They never did the deal. And then in sort of late January, the deal volume started to pick up.

Speaker 2

We passed on a lot of deals. We bid on a lot of deals that we didn't win. For instance, the American Roller deal that Gladstone did, it was a great asset. We just we didn't get it. And but the other ones we did.

Speaker 2

As I mentioned Just a minute ago, we did there's a couple of deals we had under LOI that we just ultimately we didn't close on. The market has shifted And we had outs when we took some of those outs. Either their credit got weaker or something like that. So we've been disciplined. So it wasn't like we were just Feeding us a trough.

Speaker 2

We could easily do another $100,000,000,000 It wouldn't be hard to do, But we have constraints, right? And we got to manage our balance sheet and be thoughtful about that. That was our goal to get it done. I think it's good to get it done in that manner. As you look at the acquisition dates and the filings, I mean, last one just closed last week.

Speaker 2

So these were and some of these were They're a pretty fast process. We have historically gone we'll go out, I'll fly out with Bill, we'll go look at a property, we'll get order thirds if they don't have thirds done right away. We will move fast. So it's not like we've been sitting on these for months. There are deals that take a while.

Speaker 2

And so pipeline is like sort of real time. Look, I see a lot of assets out there. I don't see a lot of seller acceptance on some of the prices, like for instance, legacy assets. And there's some attractive opportunities out there, I think in terms of the quality of the assets That people have already bought, so these aren't de novo sale leasebacks, but the sellers aren't there yet, right? They're still in the high 6s or low 7s and the market has moved on from that.

Speaker 2

And if they have favorable financing, they can sit it out and wait. If they don't, then their time will come and they'll have to do something. But from the sell leaseback perspective, I think a lot of the brokers in the community have recognized the pricing has shifted. And so what we saw that was Beginning of the year, people said, okay, I need to get sell leasebacks done or I want to get sell leasebacks done and I'm willing to accept market pricing. And so that's what we saw.

Speaker 2

I think the number of buyers has gone down on the margin. You still have if you look about sort of institutional buyers, you definitely have Gladstone, You have on the margin bridge, which is the legacy Gladstone team, you have Broadstone here and there, Spirit here and there. They're diversified, so they don't necessarily they're Focused quite the same way. You have some private guys like Fundamental and Tenet, which we haven't seen recently or Mag Capital or AIT, excuse me. So there are a few buyers, but there used to be more.

Speaker 2

And I think the other buyers that were out there We're requiring needed bank lending a lot more and they're not it's not there. So there's I think the buyer pool is a little bit tighter, but I also think the buyer pool has also Got it. And pickier, right? There are deals that we they go 7.25% cap, and we're like, no, no thanks. Because we don't have to.

Speaker 2

There's no need to chase an asset. So I think our acquisition volume is just We are focused on a goal, we're getting it done, we didn't think we're taking adverse risk. The pricing was right and we got it done.

Speaker 5

Okay, great. That's great color. I also wanted to ask you on your disposition efforts. Can you provide some color on what your view is on office and How soon, I guess, you could get exit the office properties given what's going on with the office real estate?

Speaker 2

Look, I think office is a 6 letter curse word right now and people just it's The new thing to hate, go back, what, 4 years ago and with strips centers and everything like that, everyone loves to hate office now and look and for good reason. I think office is not one homogeneous bucket. And I think if people really dig into it, there are a lot of great to what you own in terms of office. If I had Class B multi tenant Urban office, I would be sweating it, right, because I would have low vacancy, high TI cost and I would have properties that no one really want. If I had a Class A major market, high Newer vintage office, I would be okay, right?

Speaker 2

Yes, you'll have some noise and things like that. But people I think what I found and I think increasingly what I Tom, is that, look, we have had a sort of seismic shift in how we think about office, but I don't think office is obsolete. I think for me, I'm running a company that has been sort of hybrid. We have our accounting staff works remotely. They've been remote since COVID.

Speaker 2

It works fine. There are certain our accountants, they know what they need to do. They don't need to see some people every day and they communicate. The rest of us, the real estate folks and the Sifo and legal officer, we've been in our office all the time. As we transition to Reno, some of us got up here earlier, some of us are still coming.

Speaker 2

I found it hard. I think it's hard sometimes not to have people in an office. So I think and you see increasing rhetoric, some of it's Probably got some other motivations, but ultimately as a leader, it's hard to communicate with people sometimes with And you want them to be able to convene not every day, but often. So I think office as whole has some legs. I think it's going to shift.

Speaker 2

I think if you go back just 20 years ago, McGuire Properties was building a ton of stuff because it was relatively new and now we all hate it, right? So it's I think there's a little bit of fickleness in the market today. That being said, our office portfolio is very unique. We still have single tenant Office buildings that were designed. So some of them are in markets that if you looked at it generically like a multi tenant office, you say, well, that's no good.

Speaker 2

But it's germane to that tenant. Our waltz are getting shorter, and that's partly for a couple of things. One is, some of these people are not what they want to do, but 2, why would you go out and ask a tenant right now to do a 20 year lease? They're going to rake you over the coals. So if I have 3 or 4 years left, I'll wait 3 or 4 years because I think we're going to be in a better environment then.

Speaker 2

That said, I want to get rid of office. I didn't buy any of these I wouldn't buy office properties. I don't really like office properties. No offense to all the people who run them because they know how to do it, but it takes a real to run a multi tenant office. A single tenant office doesn't.

Speaker 2

Historically, REITs have just bought office because it's a guild play. It's a credit play. They never really thought about a lot of the other problems. So our office assets, our OES Lease is golden. I'm not in a rush to sell that.

Speaker 2

I think we're going to I think there's high probability that the state will execute its purchase often. And then that will be a self liquidating vehicle. Our Costco 1, I don't even really think about it in an office. It was converted from Flex to office to house Costco. When Costco leads, we're going to probably redevelop it, sell it to a redeveloper or JV with a redeveloper.

Speaker 2

I think there's upside there. But the rest of the stuff is not really super So we will get rid of it. I'd like to get rid of it, like I said, 1st, if I could. We're cognizant of cap rates. Think you need to find the right buyers.

Speaker 2

We're seeing activity out there a little bit more than I would have thought. It was dead in the Q4. We didn't focus on it until now is you know what, let's get the acquisitions done, let's get revenue generating properties in the door and then we'll shift our focus. There's only so many of us here who can do things. The GAAP property that we've had under contract, it's an owner occupant, owner user, They're getting SBA financing.

Speaker 2

It was taking a little bit longer for the banks, but they kept ponying up money. So I mean, think about there are $125,000 You know spent on this profit. It's not a big purchase price. So we're giving more time because, look, we are focused on acquisitions. They've been they're willing to enter into a long term lease, but we just like, yeah, let's just get it done and get it sold.

Speaker 2

We're now shifting our focus to these other assets, like I said, Looking very creatively at ways to get it done, confident we'll get it done. And I'd like to be in a spot this time next year where we're not talking about offers, At least as it relates to Motive.

Speaker 5

Great. Thanks for all the color.

Speaker 2

Thanks.

Operator

Our next question comes from John Massocca with Ladenburg Thalmann. Please state your question.

Speaker 2

Good morning. Good

Speaker 6

Maybe kind of any detail you can provide on kind of cap rate trends over the course of that kind of March to May Acquisition window, maybe kind of how wide were those kind of cap rate bands on some of the acquisitions you were seeing subsequent to quarter

Speaker 2

end? They're roughly 7.5% to 8%, I'd say. I'd say that What we found as more deals have come out and even some of the deals recently is that the brokers are coming out with deals priced better. Before they like in December, they'd be like, oh, yes, we're looking at low 7s. We think this is going to clear maybe sub 7 and it would, it would go at a 7.5, Right.

Speaker 2

And now they're coming out and they're saying, yes, we think it's mid to high 7s. And where someone might bid 8 in the first So I think I will qualify that. There are certain like in what we were focused on industrial manufacturing properties. All we look at. So there are certain brokers who are they're really excellent at what they're doing and they have a really good beat on it.

Speaker 2

And those individuals or those shops have Gotten transactions done. There's others who've gotten listings who maybe they're generalist industrial or maybe they do manufacturing assets here or there. And they have had trouble getting it done because they have not really drilled in on the right things. But cap rate is just one aspect, right? And what I say that is, how these work is they get you to bid, they have, they can have 10 people bidding or 5 people bidding, you don't really ever know, but they always sound like there's a lot.

Speaker 2

You get them to bid, you get the cap rate and then the devil is in the details. It's on assignment language, it's on credit quality, it's on all these things that the negotiation of The minutiae and the lease, that's where erosion can happen, right? We passed on deals where We did a cap rate that we thought, okay, based on what we know, a risky adjusted price, this is fair and equitable, we'll get it done. And then find out that they want like They don't want any assignment language or they want to be

Operator

able to kick something out or

Speaker 2

do this. And then it's like, okay, really what you're doing is you add us bid first and now you're eroding the And so we'll walk or we'll go to them and say, if you really want us to do this, this cap rate is now lighter. And sometimes they say yes, because it just so I think The cap rate range though, to get back to you, I think, was probably around 50 basis points, mid-7s to just under 8. Sometimes you see 8. I think what I always ask myself, if I see an 8.5 Cap rate out there?

Speaker 2

Is it a 7.75% that I'm getting at 8.5% or is it an 8.5% is it a 10% cap So we're being thoughtful about it, but I like I think you could do $300,000,000 in the 7s all day long.

Speaker 6

Okay. And then I know it's kind of early days, but any kind of change or impact to deal flow caused by some of the recent turmoil we've seen in the regional banking market, I mean, I'd imagine that's kind of a common financing avenue for some of your potential tenants and even current tenants?

Speaker 2

Not deal flow, but I think buyer pool. Yes. So I think I mean, I think the people who are coming out are cognizant of where markets are at and they're looking to get a transaction. I think If you look at the sale leaseback, it's a form of financing. So I think in some ways, it may be a little bit more assured than bank financing.

Speaker 2

But most of these deals require bank financing too of some sort. I think the buyer pool is what's changed the most. I mean, the individual buyers, the small private equity type, 1 in the 2 man shops, those guys are gone because it just doesn't pencil.

Speaker 6

Okay. And then Can you talk about any impact from the Calera bankruptcy in April? Is that tenant kind of paying rent in full? And has there been any indication from them if they're going to Reaffirm or reject the lease?

Speaker 2

So as we as you'll see in our disclosures when we and the Q gets filed, They are going through the 363 process. So they got dip financing. They're now going through a process of selling The company, so that those results are not until I believe it's June 9th, is that right, Ray?

Speaker 3

Yes, that's correct. That's when The auction takes place on June 9.

Speaker 2

Yes. So that's their window that they have For all other properties to accept or reject. So, their rent is current. They weren't In the building, they were still getting it ready to go online. So it's not like there were people in it to begin with.

Speaker 2

The status of the asset is fine. I've been out there 4 times in the last 5 months, checked on it. Everything is good. So we're waiting for their process to go through. And We're hopeful and optimistic, but we understand how these go.

Speaker 2

I don't think I would do another pre revenue type of deal like that again. So lesson learned there, had a lot of inbound inquiries on the property. And 2, and I didn't even

Operator

pay attention to this.

Speaker 2

I guess, there's a bill in the state Senate there. It passed the House and it does depend to legalize Marijuana, and we've had some marijuana growers reach out to us. Our property is unique in the sense that it was built on top of an aquifer. So it has its own robust source of water, which is really important to growing things. And that's why it was strategic to Clara.

Speaker 2

So we remain optimistic, but we don't have any really news until after they finish their process.

Speaker 6

Okay. And then on the Just a quick one on the property that was kind of the lease was extended during the quarter. Is it kind of fair to kind of interpret those comments as being that if they were going to do a longer Lease that it might be at a rate lower than kind of where it was extended to, just given the short term nature of what you did? Or is it is that kind of the new was it kind of reset Market, I guess.

Speaker 3

Yes. So they had been in there for

Speaker 2

a long time and the rent, I think I don't remember the math, it was 69% or 64% increase in rent. It was sticker shock for them because they hadn't really been paying. They're a busy company, they're spread thin, they've been buying a lot of these distributors and stuff like that. And so I think when it came time to the conversations, And candidly, they were like, we didn't start talking to them until like, I would say, 2 weeks before their window closed. And because they just we ping them, they pay us back and then we never connect.

Speaker 2

And so I think if part of it was, wow, that's the rents have really gone up in this market and we hadn't paid attention because they've been Fine. And they are consolidating some other businesses and all these things. So they asked to do this one. I think their view Again, I don't know for sure. But based on what our T leases, if they wanted to do a long term lease, they would that's a bigger nut to swallow and They didn't have they had a short window to get something signed and I think it was in the confines of what they could do without having a deep budget review, because they kind of did this off cycle.

Speaker 2

They like the asset, they've been there. I think there's a good chance that they'll stay. If they don't, I'm not worried about it. I mean that's right off the 80, it's into a location, it's warehouse. We don't Long term, I don't know that I really even want it to be candid.

Speaker 2

It's better held by someone who's doing distribution. But I think what it was, it's just was a lot of sticker shock. They had to get the medicine to get used to being market rate and they just did it for 16 months because they know they need to use the property, but they want They want to right size things on a longer term basis.

Speaker 6

Okay. That's very helpful color. And that's it for me. Thank you very much.

Speaker 2

Thanks. Thanks.

Operator

Our next question comes from Bryan Maher with B. Riley. Please state your question.

Speaker 7

Great. Good morning, Aaron and Ray. Aaron, most of my questions have already been asked. But you talked about earlier in the call Holding off on selling retail until you can unload some office. But when we think about it and we think who owns Shares and those of us and institutional investors who are focused on it, I mean, we get it.

Speaker 7

And many of these retail people may not look at it, may not care. Why not just sell the retail if you can? And I think the market gives you guys a path on holding the office till you sell it. And then you could redeploy that into more industrial manufacturing, which then kind of balances out the ratio anyway.

Speaker 2

Yes. So look, that's a fair point. And it's not just the optics that I'm talking about. I think some of it is sort of a Logistics Sequencing, so if you think about 16 properties, you can either sell 16 individually, you could tell some of them in a portfolio and the DGs probably naturally make a portfolio. There's a couple of things to think about.

Speaker 2

So if you want to take them out And you think that the property is sort of a little bit of an odd duck and you're better off with a 10:30 to 1 buyer, that's a different route than what you do With more institutional buyer property. And is the 10/31 listed asset having known selling some of these odd dots before, You get a slew of these offers and they look too good to be true because most of them are because they had they're just designating properties and you have to go through it. So that can be a little bit of time suck. I guess what we're at is we're getting ready to go. We're getting VOBs done, price discovery done.

Speaker 2

We're getting ready to go to things to market. I'd like to get our office up and running first, because I think it's a longer tail process. I think it's just going to take longer to sell some office. But get all that legwork done, then shift to getting the legwork done on retail, knowing that retail will move faster. So I don't know that I'm not Controlling window sell, I think retail will sell faster.

Speaker 2

But in terms of activity or the process in which we're getting ready to do it, we're focused first Finding everything out, right time, pull the trigger on the office to get it up and running, then pull the trigger on retail and then figure out, then it's off to the races and you get what you get.

Speaker 7

Okay. And then when we think about your acquisitions, I mean, how are you sourcing those? Are there inbound calls? When we think about industrial, a lot of people think about industrial distribution and logistics. We all know who those players are, who are out there buying But who are you running into as far as competition for buying industrial manufacturing?

Speaker 2

Yes. And I kind of alluded to, I think, when I was talking to Gaurav. There are less there's less of these small levered buyers out there. The shops that I think who buy industrial manufacturing, The reason is, so the ones who are focused on it sort of as this is really what they're buying are, I think the 2 most focused dollars in the public space are myself ourselves And Gladstone. I think a lot of the Gladstone assets that have been bought, we've bid on and I'm sure a lot of the assets we've bought, they've bid on.

Speaker 2

So we know we're buying the similar things. Spirit has certainly in the last Three quarters made a bigger focus on buying industrial. And I don't think they're doing it just for yield. I think there's an element of yield to it because they are a diverse side play. But they have really sort of honed their saw and focus on what they wanted to buy.

Speaker 2

Broadstone has historically been a Bitter here and there. I don't think I've seen them too recently. I have to go back and look. I don't think so. But they had bought, I think, again, Part of that is a yield play, and part of that is they like it.

Speaker 2

Then after on the public side, store was historically a big buyer. They're not There now, we've seen a lot of store deals come out that they either rejected or tried to price negotiate. But the private buyers that you won't see publicly are Royal Oak on occasion, great shop there. AIC historically has been doing this forever. They're probably the leader in the space, but they don't they source all their own things.

Speaker 2

So they They're very different. They end up being net sellers a lot of times because they'll raise the fund and sell it out, but they only buy industrial manufacturing. I have Kennett, which is a Cerberus backed shop, great guys there. They're former store guys. Fundamental has bought some on the margin, again, former store guys.

Speaker 2

There's another shop called MAG Capital Partners. Dex is a great guy. He's been focused on it in a smart way. But there's not a ton of buyers. I guess the Bridge Group, The legacy Gladstone guys have been out there, but it's really a small universe to who bought manufacturing.

Speaker 2

You think about There are some shops out there who have exposure. DRA has exposure, Samara Road has exposure, David Kevin has exposure. So there are portfolios out there of industrial manufacturing, but they may have bought So that's at a certain point in time and now they're holders of it, they're not active buyers. But I'd say that probably the most active buyers are at least for Public Leads or Gladstone and ourselves. As in terms of how we get it, we get a lot of inbound calls now.

Speaker 2

So we've now like we've bought If you back out the Kia transaction, we bought well over $200,000,000 of real estate in the last 12 months and it's all been industrial manufacturing. You start to get calls, right? People know that's what we're focused on. We've made it clear. There are some really good shops out there.

Speaker 2

Ascension, Chelsea's Ascension is great. Scott's There are a lot of great teams out there. Stream is a good shop, industrial manufacturing. So there's a lot of good shops out there who know they've got a beat on us. And so we get calls from them.

Speaker 2

We get calls sometimes It's a marketing process, sometimes it's not. It just depends on how fast the seller needs to go or how well the seller knows. We did the Lindsay transaction. That's another deal we've done by Middle Ground. We've done a lot with Middle Ground as a private equity sponsor.

Speaker 2

They're we have a lot of confidence in what they buy. So it helps us in process, I think they have confidence in how we buy and we execute, so it helps us. But I think everything should be marketed. I think It should be best price discovery for that shop. We get other properties that come across from Maybe it's a random CBRE team.

Speaker 2

We'll see it. And we'll look at everything and sometimes the bidding process is clunkier. Sometimes it works. But

Speaker 7

we're not

Speaker 2

what we're not doing is what AIC does or what store used to do, because we just don't have the manpower, is they'll have a team, army People will call sole proprietors of manufacturing or industrial assets and call them up and pitch them on, they'd be able to sell leaseback and then structure sell lease I can then take it. We just don't have the bandwidth to do that. I'd love to do that down the road. I do think there's some sourcing opportunities. But at the same time, we're trying to get more mainstream assets.

Speaker 2

Perfect. Thank you. Sure.

Operator

Thank you. There are no further questions at this time. I'll hand the floor back to Aaron I'll turn the call back over to Jeff Baker for closing remarks.

Speaker 2

Well, I don't think we beat it up pretty much. I thank everyone We'll put our heads back down. We'll get back to it. I don't think anyone's really paying attention to us unfortunately right now. But it's a risk off environment.

Speaker 2

Reach are topsy-turvy. It's been a crazy 15 months. It could be another crazy 12 months or more. We'll just keep getting things done and we look forward to brighter days for everyone. Be well.

Speaker 2

Thanks.

Operator

Thank you. That concludes today's conference. All parties may disconnect. Have a good day.

Powered by Quartr
Earnings Conference Call
Modiv Industrial Q1 2023
00:00 / 00:00