Modiv Inc.

Good day, and welcome to Motive Industrial's second quarter 2023 earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal the conference specialist by pressing star followed by the zero. On today's call, management will provide prepared remarks, and then we will open the call up for your questions. To ask a question, analysts may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Margaret Boyce and Best Relations for Motive Industrial. Please go ahead.

Thank you, Melissa, and thank you all for joining us for Motive Industrial's second quarter earnings calls. We issued our earnings release and our 10Q before market opened this morning. These documents are available in the investor relations section of our website at motive.com. Our quarterly supplement will be published later this week. I'm here today with Aaron Halfacre, Chief Executive Officer, and Ray Pacini, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we'll open up the call for your questions. Before we begin, I would like to remind you that today's comments will include forward-looking statements under the federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, and 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 these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that, I would now like to turn the call over to Aaron. Aaron, please go ahead.

Thank you, Margaret. Hello, everybody, and thank you for joining our conference call today. Over the last 90 days, we have continued our no-nonsense execution. Let me rattle off a few facts about the work we've done. On August 10th, we completed the $42 million sale of our non-core assets at a 7.55 cap rate, and we did this only 90 days after we told you of our plan. In July, we acquired another $29 million of industrial assets at greater than an 8% cap rate, which was on top of the 100 million of assets we acquired earlier this year. In the past 18 months, we've acquired nearly $300 million of assets, which means nearly 50% of our total AOM was acquired at exceedingly attractive cap rates, while others watched their vintage low cap rate portfolio shrink in value with every Fed rate increase. We did all this without raising dilutive equity. Instead, we chose to issue nearly $38 million of accretive OP units at an average price 80% greater than our current share price, while at the same time recycling over $100 million of capital from our portfolio repositioning. Through our continuous disciplined efforts, we have now created an industrial portfolio with an impressive 14.7 weighted average lease term with an equally impressive 2.45% average annual rent profile. However, what I'm most proud of is that we accomplished all this with just a 12-person team, despite an unprecedented market environment and when few thought we could. I share these facts not to ring a bell, but to offer a proof statement. We have been saying this since day one. Our team knows how to execute and is not afraid of the heavy lifting required of us as we crank out results. Motive has only just begun to scratch the surface of our opportunity. We needed to work hard to produce these proof statements because rightly so, no one was just going to take our word for it. As the saying goes, build it and they will come. So we are focused intensely on execution to make it happen. Motive has a strong vision of our future. We want and know we need to achieve greater scale. We want and know we need to increase our liquidity. We want to, and we know we can, become the best pure play net lease industrial manufacturing in our industry. I personally believe that the next 18 months will be even more transformational than the last 18. Next, you'll begin to see our efforts to raise investor awareness of Motive Industrial and our compelling investment thesis. When Motive listed last year, and arguably the noisiest risk-off market environment since 2008. We chose to be patient as we knew that our investment story would evolve. However, now that the majority of our reposition is behind us, you will see us relentlessly pursue telling our story, highlighting our upside potential, and sharing our vision with as many retail and institutional investors as we can. I believe that investors will like what they hear. All right, enough of me standing on the soapbox. I will now turn the call over to Ray Puccini, our CFO, to review the financial results. Ray?

Thank you, Aaron. I'll begin with an overview of second quarter operating results. Second quarter adjusted funds from operations, or AFFO, was $3.3 million, or $0.31 per diluted share, compared with $3.6 million, or $0.35 per diluted share, in the year-ago quarter. The decrease in AFFO was primarily due to a $600,000 increase in the adjustment for straight-line rents related to the 10 industrial manufacturing properties acquired during the first half of 2023 and the lease signed with the state of California in January 2023. Revenue for this second quarter increased 16.7% to $11.8 million, compared with $10.1 million in the prior year period. reflecting the benefit of the 16 industrial manufacturing acquisitions we completed since June 30, 2022. Net income attributable to common stockholders improved $1.8 million for the second quarter, coming in at $3.1 million, or 41 cents per basic and 35 cents per diluted share. This compares the net income attributable to common stockholders of $1.3 million, or 17 cents per basic and 14 cents per diluted share, in the prior year period. The increase in net income reflects the revenue increase I just described, along with unrealized gains on interest rate swap derivatives. While we experienced a $1.7 million loss on valuation of interest rate swap derivatives in the first quarter this year, We had a $3.7 million unrealized gains on valuation of interest rate swap derivatives in the second quarter, representing an increased gain of $3.1 million year over year. This unrealized gain on swap valuations, along with cash derivative settlements of $1.4 million, offset interest expense paid to our lenders, resulting in negative interest expense of $180,000 for the quarter. We've captured this somewhat unusual phenomenon of negative interest expense for the quarter with a new caption in our statement of operations, which we've termed interest expense, net of derivative settlements and unrealized gain on interest rate swaps. As I explained during our first quarter call, the first swap did not qualify for hedge accounting treatment because it has a built-in one-time cancellation option available on December 31st, 2024. We structured this cancellation option when we entered into the swap in May 2022 because it reduced the swap rate by approximately 50 basis points. As a result, depending on fluctuations in the forward SOFR curve between now and December 2024, we may continue to experience volatility in net interest expense from gains or losses on the valuation of our swaps. We will continue to benefit from our interest rate hedges with our $250 million term loan outstanding today at a weighted average interest rate of 4.53% based on our leverage ratio of 47% as of June 30th, 2023. We also had interest income of $217,000, which reflects interest earned on cash proceeds from April 2023 draws on our term loan prior to utilizing such cash to acquire industrial manufacturing properties in May 2023. Now turning to our portfolio, we've continued to focus on acquiring industrial manufacturing properties. Year-to-date through August 14th, we acquired $129.8 million across 12 industrial manufacturing properties at an attractive blended initial cap rate of 7.8% and a weighted average cap rate of 10.3%. During the second quarter, we acquired 89 million of industrial manufacturing properties, and in July, we acquired an additional 29 million of industrial manufacturing properties. On July 3rd, we acquired an industrial manufacturing property located in Pequot, Ohio, leased to Vistech Manufacturing Solutions for $13.5 million. Vistech has a 20-year operating history and is a leading provider of niche automotive parts in the noise, vibration, and harness category. On July 11th, we acquired another industrial manufacturing property located in Andrews, South Carolina, leased to Six Access for $15.5 million. Six Access has over a 20-year operating history and is a designer and manufacturer of highly engineered, patented, and modular solutions in the workplace safety market. On August 10th, we sold our non-core portfolio of 13 legacy retail and office assets to Generation Income Properties for $42 million at an exit cap rate of 7.55%. Transaction consideration included $3 million in cash and $12 million of GITR preferred stock, which will pay monthly dividends at an annual rate of 9.5%. With the sale of these 13 legacy retail and office assets, and our additional $29 million of industrial acquisitions, we have achieved our goal of having a supermajority of industrial manufacturing exposure. As Aaron mentioned, for the remainder of the year, we are focused on the disposition of our non-industrial assets. Following the sale of non-industrial assets to GIPR, our industrial portfolio exposure includes 40 of our 45 properties. representing 76% of pro forma NOI as of June 30th, 2023, with a wealth of 14.7 years and a weighted average annual rental increases of 2.45%. Our three tactical non-core properties now represent 20% of the portfolio with a 14.9 year wealth and 2.3% annual rent bumps. And the two remaining other non-core legacy office properties represent only 4% of the portfolio. Annualized base rent for our 45 properties totals $41 million on a pro forma basis as of June 30th, 2023, reflecting the recent acquisitions and dispositions. We are currently marketing our Nashville, Tennessee office property lease to Cummins and plan to begin marketing our San Diego office property current lease to Solar Turbines later this year. We categorize tactical non-core assets is those assets that offer compelling value-add or opportunistic investment characteristics when measured over a near-term or interim holding period. These three assets include our Kia Auto dealership property, located in a prime location in Los Angeles County, acquired in January 2022, which was structured as an upgrade transaction resulting in a favorable equity issuance of $32.8 million in Class C OP units at a cost basis of $25 per share. Our 12-year lease to the State of California's Office of Emergency Services executed in January 2023 for one of our existing assets in Sacramento, California that includes an attractive purchase option by the tenant, which we believe has a favorable probability of being executed upon in the next 24 months. And our third tactical non-core asset, is a property lease to Costco located in Issaquah, Washington, which offers compelling redevelopment opportunities when Costco's lease expires in July 2025, given its higher density infill location and the fact that the land is zoned for additional uses to include flex R&D and multifamily. Following the GIPR transaction, Motive's industrial Industrial's 45 property portfolio has an attractive weighted average lease term of 14.3 years, and approximately 34% of our tenants or their parent companies have an investment grade credit rating from a recognized credit rating agency of BBB minus or better. Now turning to our balance sheet and liquidity. As of June 2023, total cash and cash flow was $9.9 million. and we had $294 million of debt outstanding, consisting of $44 million of mortgages and $250 million of outstanding borrowings on our $400 million credit facility. Based on interest rate swap agreements we entered into during 2022, 100% of our indebtedness ended June 30, 2023, held a fixed interest rate with a weighted average interest rate of 4.52% based on our leverage ratio of 47% at quarter end. We borrowed 21 million on a revolver during July 2023 to fund the industrial acquisitions I discussed earlier, and we will repay the revolver with proceeds from the recent sale of the 13 non-industrial assets this month. As previously announced, our Board of Directors declared a cash dividend for common shares of approximately 9.5 cents for the months of July, August, and September 2023, representing an annualized dividend rate of $1.15 per share of common stock. This represents a yield of over 9% based on the recent share price of our common stock. I'll now turn the call back over to Aaron.

Thanks, Ray. Having shared my two cents earlier in the call and not wanting to bore you with more prepared remarks, I know you're going to have questions about the GRPR transaction of non-core assets and what lies ahead. I figured it would be best to answer your questions directly. So to that end, let's begin the Q&A. Operator?

Thank you. As a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our first question comes from the line of Brian Marr with B Reilly Securities. Please proceed with your question.

Hello.

They're non-core, non-taxable, whatever you want to call them. Nashville's in the market now and San Diego sometime in the second half of this year. Is that correct?

yeah um the reason san diego isn't up already is it actually one of our we have two properties in the same uh subdivision and so we they they had one common parcel uh even though they're not located in each other so we're in the process of splitting the parcels so that we can comfortably peel off uh solar turbines so we anticipate taking that out either late third or early fourth to the market okay and then the 3d tactical ones

The Kia, the Costco, and the California lease, those are just going to hold for some period of time. Is that correct?

Correct. Unless something opportunistic comes about. I think the first two that would move would be OES and Costco. I think Kia, you should expect it to be in the portfolio for a bit. um the way we structure the op unit transaction um it's also you know 25 year lease term initially so it's we like where it's at but i think you know i think the there's a chance that uh costco and oes will self-liquidate uh favorably over the next you know call it 24 months and then can you give us any idea what you're thinking about in the way of cap rates for nashville and san diego Uh, no, we, we call for offers is this week for the broker who's running Nashville. So we, we don't know what to expect. We are that I will say that that one's being positioned as an industrial flex conversion. So it's a, it's a super tight market with and do our analysis. We think the highest and best use is an industrial flex version. We don't want to do it ourselves. I think we just, we've already, you know, we've already taken the impairment charge in the first quarter. And we're just looking to create, you know, get that off the balance sheet and create some liquidity. Don't know the cap rate on that one. That said, on the San Diego, we've actually in the past received a couple of unsolicited bids that would be, you know, gains to our NAV, which, you know, clearly we're trading well below our NAV. So that's a favorable sub-market for sure. But we haven't started the BOE process on that one yet.

It just blasts for me on the expenses. They seem to be pretty well under control. But I did notice on page 16 of the queue, you know, kind of the commentary there around, I guess it was some property tax and maybe reallocating how that's done. You know, is there anything funky that we should be aware of as we model out expenses? Or is that better to discuss offline?

Ray, you want to take that?

Yeah, I mean, there's nothing funky. I mean, we can talk about it further offline, but I think you can expect expenses to be, you know, fairly in line with where we are today.

I would say we manage them pretty tightly. Yeah, yeah. Great, thanks.

No, when you're renting U-Hauls and moving your office space yourself, that's indicative of what we would expect for expenses. Good for you guys. Thank you.

Thank you.

Thank you. Our next question comes from the line of Rob Stevenson with Danny Montgomery Scott. Please proceed with your question.

Good morning there, guys. Is there a lockup on the generation preferred shares, and is that a long-term hold, and what's your plan there?

So the preferred has a feature that allows them to redeem in shares or cash. And the mechanism is, is that they have up until March 15th, we've actually created a caller range that, you know, would be determined the share price that they could, if they were to issue those shares, they could give us the shares. So, I'd say how we look at the preferred is and underwriting some probability that they may issue equity and give us shares. In the event that they do give us shares and the net of anything we haven't sold in advance, because we're allowed to sell the preferred off if we want to, we would then look to distribute any common shares out to our shareholders as a distribution so as not to have any consolidation risk. of their operations. So we don't have any formal restriction on time trading. If we find a private party that's interested in some preferred, we'll talk to them in best interest. And then net of any sales that we haven't done in advance, assuming that we get a comment from them, which I think is their objective, then we would look to distribute that out to our shareholders.

And you said that that timing is March?

They have so the timing is to them, they have to have notified us that they wish to redeem with chairs prior to March 15th. There's certain in the article supplementary of their documents. It details the mechanics, but basically there's a, there's a mechanism of which they can determine how many shares they would issue us. And it's collar bound until March 15th after March 15th. We're open to accepting cash or shares, but after that date, it's a de novo negotiation on how many shares.

Okay. And in the interim, Ray, that'll just appear as whatever, $285,000 a quarter in interest income, or is that going to be somewhere else?

It'll be another income.

Okay. And then the EMC lease included a nine-month purchase option. Are they likely to buy? Is that why it's a shorter-term option, or is that your sort of design there?

This is the tenant that – we had this house for sale. This property was locked up under contract. It's an owner-user. They – attained SBA financing to close it, but they actually asked to wait. They thought they would better have favorable financing rates as they went on a little bit. They were willing to sign a 10-year lease, but they wanted to be able to purchase it sometime at the same price that they had negotiated. And so we said, that's fine. We'll do that, but we'll give you a finite window to do that. And so we signed the 10-year lease. And if You know, they decided they liked the financing. And what we understand is they probably will execute that sooner than the nine months. But if they don't, we have an occupied tenant. So we didn't want to keep it tied up on the market. If they wanted to waste more time, we figured we'd collect rent. And so that turned out to be sort of a win-win for both of them. They could better time their debt exposure, and we got a lease.

Okay. And then, you know, given that you're, you know, you could wind up having proceeds from there, you've got the proceeds from the big sale. How deep is the pipeline today and what's your sort of timeframe in expectations in terms of redeploying that capital into industrial assets?

Yeah, so I think how we think about near term. So, you know, we have 250 on the term loan. We're paying off the revolver with the proceeds that we got from GIPR. The next asset that mortgage debt will pay off is the OES. That's coming due in March of next year. I think we're going to make a partial payment here real soon. And so proceeds from Cummins, proceeds from Solar, proceeds from EMC, you know, any proceeds from the sale of the preferred of GIPR will pay off that mortgage debt because that's coming due, and that just, you know, increases the equity profile. And then after that, we would look to do acquisitions. In terms of pipeline, you know, we are really, really – we spend a lot of time sourcing and identifying out there. So – Pipeline is not my issue. It's clearly it's equity is my issue, right? I mean, if you looked at it right now, I think we've traded 2,800 shares. So, I mean, it's something like $30,000 worth of shares have traded, and we have like almost 8 million shares outstanding. Our investors, which are legacy, they just don't sell, right? So, we don't have much liquidity, and we've been disciplined about issuing. I could buy $700 million of properties tomorrow at attractive cap rates. So, we're constantly looking, I don't think pipeline's an issue. We've gotten very selective, you know, now that we've kind of repositioned as much as we can in the near term, we're not looking to chase anything down. If we find something that's super compelling, we'll act on it. We're not afraid to. We clearly have the revolver. And I think, you know, my focus now, which is, you know, heretofore has been lots of traveling, lots of structuring, lots of doing things like this and cleaning up. I think now you'll see me calling upon the shops that cover us, yours included, to do NDRs. We'll start going out and talking to investors. If you think about that 2,800 shares traded at 30 grand, if I'm starting to talk, I mean, like hitting the road, really talking to IRAs and FAs and institutions, it's not hard to create some volume. And I think that's our next focus. And I think that's our next focus for really the balance of the year. We'll always be looking for something that achieves scale. And I want to try to find something that's scalable that when you guys tune in for every quarter. You have to pay attention because, you know, I'm not going to, I'm not going to lead you prior to the quarter. Yes. You know, do something that's transformational. That's my hope. But my main focus in the near term is to, you know, start to get more attention to the name. Cause I think we have a really compelling story. I think we've executed really well. And it's that Proverbs says, you know, if a tree falls in a forest, does anyone hear it? Clearly not today, but they will.

Okay. That's helpful. And then last one for me, What's the current timing expectation for the Calera bankruptcy resolution? And do I have it correct if the lease is rejected, you get the asset back, and the mechanics lien comes to you, but if the buyer affirms it's their lease obligation?

So you're correcting the mechanic that if they reject the lease, we're stuck holding the bag. We've known this for a while. We're well on that. We are still in discussions with Claire, so I couldn't probably await the likelihood of rejection our properties a little bit unique than some of the other ones and they've already rejected some assets. If you follow the proceeds, they have, they've extended it, I think, until October, but they, as the bankruptcy, as I understand the bankruptcy proceeds ago, they have the right to continue to. punt on the assumption of their sale because they work through all this with all their landlords. And so we've underwritten it. We've looked at it. We're pretty eyes-open about what we may need to do. We've already also looked at alternatives in the event that they, you know, if it doesn't work out with them. Interesting enough, earlier this year, Minnesota passed marijuana. We are one of the only industrial properties in the urban center that has its own aquifer. It's designed for vertical growing. So we've had some interest from that already, some other vertical growers. So we've been looking at the market. I think even if we have, you know, can't be, you know, Growing up here, if we have to pay the liens, we'll work to try to reduce the face value of those liens, but we think the property and the opportunity for a lease is still in excess of that lien value and our purchase price.

Okay. And I guess one question that comes up from that is if it winds up being the highest and best use for this is something like cannabis, is that something that you hold or given the legality and the restructure, that's something that you sell, um, either to the user or to somebody else to own, um, Great question.

I think it depends on the tenant. We have food production. I wouldn't call it food, but it's a similar design. We already have food production as a category in our thing that we're not opposed to owning. I don't want to infringe on New Lake or the other fine cannabis REITs out there. If I want to take it off, great. I don't know. I think it depends on the tenant, depends on the lease, depends on what we have. You know, I would say that would be sort of a byproduct of what's happened at Clara. I would not be seeking cannabis facilities on a go-forward basis at all. But if it happens to be one, we'll see. But maybe it becomes a tactical non-core. I don't know. We'll see.

Okay. That's helpful. Thanks, and have a good day. Thank you.

Thank you. As a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Barry Oxford with Colliers. Please proceed with your question.

Great. Thanks, guys. Aaron, when you talk about transformational, what might that look like? Would it come in the form of a decently sized joint venture partner? If you could wrap some color behind those comments.

Sure. If I was going to write a letter to Santa Claus, I think it would be the ideal world is I take down a larger portfolio of industrial manufacturing or predominantly industrial manufacturing assets. And I do that in conjunction with a strategic, meaning that, you know, maybe they come in with some of the cap stack and it gives them some optionality. Could it be structured as a JV? Sure. Could it be structured as a direct investment? Sure. I think it's, you know, It's really about figuring out a solution that creates a win-win for all the parties. I think that's the ideal for me. And I will be candid. There are portfolios out there that fit that criteria. Doesn't mean we're going to do one. Doesn't mean we're even talking about it. But I know where they're at. And I know that, you know, I've done a lot of homework and I like them. So a lot of it comes down to, as Rob asked, where are we going to buy? Buying is really going to be now a function of equity. At some point in the future, we'll need to raise more equity. I've waited this long because I don't want to be dilutive, and I think I've done a good job of being patient. So we are patient in that regard. And now telling the story, if I can double my trading volume, that's probably going to increase the share price materially. on an average basis, and that makes all this other stuff more feasible.

Got it. No, no, that makes sense. When you think about using OP units going forward, are there other buyers out there that would conceivably do it at a higher price without you offering a higher price?

So, you know, the two we've done are $25 and $18. So both are creative. I would say that how I look at OP units, I take them very seriously because they become a partner. I mean, they are making an equity investment. And, you know, we're pretty straight down the road in terms of structuring. If someone wants a lot of crazy bells and whistles, then go somewhere else. I'm not going to give it to you. You know, we treat that as being para-pursued with a classy common. But that said, you know, there is there's a little slightly different status because we don't have that many classy OP and holders now. So if it happens, I'm always open to it. But it's never my first tool. I mean, all things being equal, I'd rather, you know, have float in that equity. Right. So classy OP and it's don't create any float. So it's a great way to acquire. Right. But it doesn't solve it doesn't solve my liquidity issue.

Right. No, I got it. That makes sense. And then I guess just one question for Ray. On the straight lining, is that a good run rate right now, looking at the 2Q number, or should we be thinking about straight line differently?

It really depends on what we do going forward in terms of acquisitions. We're signing 20-year leases plus, and that increases the amount of straight line rent. So, you know, if things didn't change, if we didn't acquire anything, that would probably be a reasonable run rate. But assuming we buy more property, that number will increase. But the flip side of it is revenue is going up. So, you know, in terms of ASFO, they kind of wash it out. Revenue has gone up, and then you're deducting the straight line revenue.

Right, right, right, right. Okay. Okay. Appreciate the call, guys. Thanks for the time.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Haffaker for any final comments.

I wish to thank everyone for joining the call. You know, I want to thank David Sobelman and the GIPR team. It was, you know, what we did there was a unique transaction. It was, you could have easily just sold it off for cash. I think our goal was to do something that helped the community being a tiny REIT and working with another tiny REIT. That's what we are. Let's be candid. We're small. And most of us, most people aren't paying attention to create a structure that was a win win, I think is unique in our space. And, you know, we did it ourselves, which shows that we have the skills. I mean, so they've now more than doubled their asset size in terms of property counts. And, you know, they've now achieved 100 million gross assets. They bought what they what we sold fits their profile perfectly. And so, you know, they were good quality assets that we didn't want because we had already signaled we were going to move on, so we've given it to them. And so, we're pleased that we were able to do that. It wasn't the easiest transaction to do, but we got it done. And I think, you know, I think it shows that we can do those types of transactions on an even bigger scale. And our team has the capabilities to do that in-house, which means we save tons of money when it comes to those types of expenses. So I'm excited about what that shows that we did and what we can do. I hope most people pay attention to us because optionality is in the name. We trade well below our GAAP book value. Any acquisition that we do can add materially to the top line because of our size. We're really interesting from both a growth and value perspective for those who invest in small cap REITs. Liquidity is the issue. If there are investors out there who, you know, big investors who have blocks who want to, you know, have interest, let us know. Let our banks know. You know, but this is the next phase and I'm excited to see what it brings. And I look forward to talking to you at the next quarter call.

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