10-Q: Modiv Industrial Reports Third Quarter 2024 Results, Portfolio Transformation Continues

Sentiment:

Quarterly Report 5 November 2024 6:56 PM

Modiv Industrial's third quarter 2024 results show a net loss, but also highlight ongoing portfolio transformation with a focus on industrial properties and strategic dispositions.

Capital raiseThe company sold and issued 76,991 shares of Class C Common Stock under the ATM Offering for $1,137,028, net of sales commissions of $23,205 during January 2024.During September 2024, 157,006 additional shares were sold at an average price of $16.68 per share and issued for $2,561,095, net of sale commissions of $57,612.From October 1, 2024 through October 15, 2024, the Company sold and issued 81,236 shares of Class C Common Stock at an average price of $16.26 for $1,291,619 net of sales commissions of $29,055, in connection with the ATM Offering.

Worse than expectedThe company reported a net loss of $1.5 million for the third quarter of 2024, which is worse than the net income of $1.7 million for the first nine months of 2024.Rental income decreased by 7% in Q3 2024 compared to Q3 2023, indicating a decline in revenue generation.Interest expense increased significantly due to unrealized losses on interest rate swaps and higher debt balances, negatively impacting profitability.

Summary

Modiv Industrial reported a net loss attributable to common stockholders of $1.5 million for the third quarter of 2024, compared to a net loss of $6.5 million in the same period last year.
For the first nine months of 2024, the company reported a net income attributable to common stockholders of $1.7 million, a significant improvement from a net loss of $8.1 million in the same period of 2023.
Rental income decreased to $11.6 million in Q3 2024 from $12.5 million in Q3 2023, primarily due to property dispositions.
The company's portfolio consists of 43 properties, with 39 industrial properties representing 77% of the portfolio's annualized base rent (ABR).
Modiv sold two properties in the first quarter of 2024 for a net gain of $3.4 million and acquired one industrial property in July 2024 for $5.1 million.
The company's weighted average remaining lease term is 13.8 years, and the occupancy rate is 98%.
Modiv's total assets were $507.4 million as of September 30, 2024, compared to $530.9 million at the end of 2023.
The company's total liabilities were $295.6 million as of September 30, 2024, compared to $305.8 million at the end of 2023.
The company has a $250 million term loan and $31 million in mortgage notes payable, with a weighted average interest rate of 4.52% due to interest rate swaps.
Modiv declared a dividend of $0.2875 per share for the third quarter of 2024, consistent with the previous year.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While the company is making progress in its portfolio transformation and has a strong occupancy rate, the net loss for the quarter and increased interest expenses are concerning. The company's future performance is subject to various risks and uncertainties, which tempers the overall positive aspects.

Positives

The company's strategic shift towards industrial properties is progressing well, with 77% of the portfolio's ABR now derived from industrial assets.
The company has successfully disposed of non-core assets, generating a net gain of $3.4 million in the first nine months of 2024.
The acquisition of a new industrial property in Tampa, Florida, with a long-term lease and attractive cap rate, demonstrates the company's focus on high-quality assets.
The company's long weighted average lease term of 13.8 years provides stability and predictability of cash flows.
The high occupancy rate of 98% indicates strong demand for the company's properties.
The company's fixed interest rate on its debt provides protection against rising interest rates.
The company's AFFO increased to $10.9 million for the first nine months of 2024, compared to $10.2 million for the same period in 2023.

Negatives

The company reported a net loss of $1.5 million for the third quarter of 2024, although this is an improvement from the $6.5 million loss in the same period last year.
Rental income decreased by 7% in Q3 2024 compared to Q3 2023, primarily due to property dispositions.
The company's total assets decreased from $530.9 million at the end of 2023 to $507.4 million as of September 30, 2024.
The company's total liabilities decreased from $305.8 million at the end of 2023 to $295.6 million as of September 30, 2024.
Interest expense increased significantly due to unrealized losses on interest rate swaps and higher debt balances.

Risks

The company faces uncertainties related to inflation, interest rates, and geopolitical events, which could negatively impact its operating results and liquidity.
The debt market remains sensitive to macroeconomic factors, which could make refinancing more expensive.
Potential declines in rental rates and occupancy could negatively impact the company's cash flows.
The company's interest rate swaps have a cancellation option in December 2024, which could expose the company to interest rate risk if not replaced.
The company's future performance is subject to various risks and uncertainties, including those described in its annual report.

Future Outlook

The company expects rental income, depreciation expense, and interest expense to increase for the full year of 2024 compared to 2023 due to recent acquisitions, partially offset by property dispositions. The company intends to implement a new hedging arrangement prior to December 31, 2024. The company is exploring opportunities to acquire the minority interests in the property in which it holds the TIC Interest, or to sell the TIC Interest. The company is also exploring potential lease extensions for certain of its other properties.

Management Comments

Management is currently exploring opportunities to acquire the minority interests in the property in which we hold the TIC Interest, which would result in consolidation of the asset, or to sell the TIC Interest.
The Company has evaluated various alternatives available to enter into new swap agreements given that it anticipates the exercise of the cancellation options discussed above and intends to implement a new hedging arrangement prior to December 31, 2024.

Industry Context

The company's focus on industrial properties aligns with current industry trends, as demand for industrial space remains strong. The company's strategic shift away from non-core assets also reflects a broader trend in the REIT sector towards focusing on core competencies and higher-quality assets. The company's use of interest rate swaps to manage interest rate risk is a common practice in the industry.

Comparison to Industry Standards

Modiv's portfolio transformation towards industrial properties is similar to strategies employed by other REITs like Prologis (PLD) and Duke Realty (DRE), which focus on logistics and industrial assets.
The company's weighted average lease term of 13.8 years is competitive with other net-lease REITs such as Realty Income (O) and National Retail Properties (NNN), which typically have long-term leases.
Modiv's occupancy rate of 98% is strong and comparable to industry averages for well-managed industrial portfolios.
The company's use of interest rate swaps to manage interest rate risk is a common practice among REITs with significant debt exposure, similar to how companies like American Tower (AMT) manage their debt.
The company's AFFO per share of $0.97 for the first nine months of 2024 is a key metric for evaluating its operating performance, and it is important to compare this to other REITs with similar portfolios to assess its relative performance.

Legal Proceedings

On October 31, 2023, Kalera filed a motion with the bankruptcy court to reject the company's lease and abandon all of its property located at the premises in Saint Paul, Minnesota effective as of October 31, 2023, subject to approval of the motion by the bankruptcy court.
On November 21, 2023, the company filed (i) a limited objection to retroactive rejection of its lease and (ii) a motion to compel Kalera to pay post-petition rent and related charges with the bankruptcy court.
The company and Kalera entered into a settlement agreement for these claims on March 18, 2024, which was approved by the bankruptcy court on April 12, 2024.
Kalera's revised motion to reject the company's lease effective as of October 31, 2023 was approved by the bankruptcy court on June 28, 2024.

Related Party Transactions

The company pays the members of its board of directors who are not executive officers for services rendered through cash payments and by issuing shares of Class C Common Stock to them.
The company earns management fee income from the Santa Clara property, in which it has a TIC Interest.
The company repurchased Class C Common Stock and Class C OP Units from First City Investment Group, LLC on August 1, 2024.

Stakeholder Impact

Shareholders will be impacted by the company's net loss for the quarter, but also by the company's strategic shift towards industrial properties and the increase in AFFO.
Employees may be impacted by the company's ongoing portfolio transformation and strategic decisions.
Tenants will be impacted by the company's property management and lease terms.
Creditors will be impacted by the company's debt levels and ability to meet its financial obligations.

Next Steps

The company intends to implement a new hedging arrangement prior to December 31, 2024.
The company is exploring opportunities to acquire the minority interests in the property in which it holds the TIC Interest, or to sell the TIC Interest.
The company is exploring potential lease extensions for certain of its other properties.
The company is evaluating various alternatives available to enter into new swap agreements.

Key Dates

Date	Description
2022-01-18	The Operating Partnership entered into an agreement for a line of credit.
2022-02-15	The company's board of directors amended and restated the company's distribution reinvestment plan.
2022-03-30	The Company filed a Registration Statement on Form S-3.
2022-05-10	The company entered into a five-year swap agreement to fix SOFR.
2022-05-27	The Company filed Amendment No. 1 to the Registration Statement on Form S-3.
2022-06-02	The Form S-3, as amended, became effective.
2022-06-06	The company filed a prospectus supplement for the at-the-market offering of Class C Common Stock.
2022-10-21	The Credit Agreement was amended.
2022-10-26	The company entered into a second five-year swap agreement to fix SOFR.
2022-12-20	The Credit Agreement was amended to allow the company to draw on the additional $100,000,000 Term Loan commitment.
2022-12-21	The company's board of directors authorized up to $15,000,000 in repurchases of the company's outstanding shares of common stock and Series A Preferred Stock.
2023-01-01	The company's stock repurchase program commenced.
2023-04-04	Kalera filed a voluntary petition for bankruptcy relief.
2023-04-19	The $100,000,000 Term Loan commitment was fully drawn.
2023-08-10	The company disposed of 13 properties to Generation Income Properties, Inc.
2023-08-11	The company changed its name from Modiv Inc. to Modiv Industrial, Inc.
2023-11-13	The company filed Supplement No. 1 to the ATM Prospectus.
2023-12-31	The company's stock repurchase program ended.
2024-01-10	The company sold an industrial real estate property in Sacramento, California.
2024-01-31	GIPR issued 2,794,597 shares of GIPR common stock to the company.
2024-02-15	The 1,312,382 Class C OP Units issued to Group of Trophy, LLC were assigned to its affiliate, First City.
2024-02-16	656,191 of the Class C OP Units were exchanged for Class C Common Stock.
2024-02-28	The company sold an office real estate property in Nashville, Tennessee.
2024-03-01	The company's board of directors declared Series A Preferred Stock dividends for the first quarter of 2024.
2024-03-18	The company and Kalera entered into a settlement agreement.
2024-04-01	The company entered into an amendment to the purchase and sale agreement with KB Home.
2024-04-12	The bankruptcy court approved the settlement agreement between the company and Kalera.
2024-05-01	The company's board of directors declared Series A Preferred Stock dividends for the second quarter of 2024.
2024-05-09	The company sold the remaining 171,444 shares of GIPR Common Stock.
2024-06-28	The bankruptcy court approved Kalera's revised motion to reject the company's lease.
2024-07-15	The company acquired an industrial manufacturing property in Tampa, Florida.
2024-07-31	The company entered into an agreement with First City to purchase the remaining Class C OP Units and repurchase shares of Class C Common Stock.
2024-07-31	The company's board of directors declared Series A Preferred Stock dividends for the third quarter of 2024.
2024-08-01	The company completed the repurchase of Class C OP Units and shares of Class C Common Stock from First City.
2024-09-09	The ATM Offering resumed.
2024-09-27	The company sold a land parcel in Fulton, Ohio.
2024-10-15	The company paid its Series A Preferred Stock dividends for the third quarter of 2024.
2024-10-25	The company paid its monthly distributions to common stockholders and Class C OP Unit holders.
2024-10-31	The company received a notice from Labcorp that it is exercising its first option to extend its lease.
2024-10-31	The company entered into an agreement to acquire an industrial property through an UPREIT transaction.
2024-11-04	The company's board of directors declared Series A Preferred Stock dividends for the fourth quarter of 2024.
2024-11-04	The company's board of directors authorized a 1.7% increase in the annual distribution rate.
2024-12-07	The company increased the discount for the purchase price of shares of Class C Common Stock under the company's DRP from 3% to 5%.

Keywords

industrial properties, real estate investment trust, REIT, net lease, property acquisition, property disposition, interest rate swaps, financial results, portfolio transformation, lease term

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