Modiv(MDV) - 2022 Q2 - Quarterly Report

PART I Financial Statements The company's total assets increased to $456.3 million as of June 30, 2022, from $428.5 million at year-end 2021, primarily driven by real estate acquisitions. For the six months ended June 30, 2022, the company reported a net loss of $9.7 million, largely due to a $17.3 million goodwill impairment, compared to a net loss of $1.9 million in the prior-year period. Despite the net loss, cash flow from operations increased to $5.1 million from $3.1 million year-over-year Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet Highlights (Unaudited) | Metric | June 30, 2022 ($) | December 31, 2021 ($) | | :--- | :--- | :--- | | Total real estate investments | $427.1 million | $337.6 million | | Total assets | $456.3 million | $428.5 million | | Total mortgage notes payable, net | $44.6 million | $173.9 million | | Credit facility term loan, net | $148.9 million | $0 | | Total liabilities | $219.1 million | $206.1 million | | Total equity | $237.1 million | $222.4 million | Condensed Consolidated Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended June 30, 2022 ($) | Three Months Ended June 30, 2021 ($) | Six Months Ended June 30, 2022 ($) | Six Months Ended June 30, 2021 ($) | | :--- | :--- | :--- | :--- | :--- | | Rental income | $10.4 million | $9.1 million | $20.0 million | $18.1 million | | Impairment of goodwill | $0 | $0 | $17.3 million | $0 | | Net income (loss) | $2.4 million | $(1.0 million) | $(9.7 million) | $(1.9 million) | | Net income (loss) per share - Basic | $0.17 | $(0.13) | $(1.31) | $(0.25) | | Net income (loss) per share - Diluted | $0.14 | $(0.13) | $(1.31) | $(0.25) | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Metric | Six Months Ended June 30, 2022 ($) | Six Months Ended June 30, 2021 ($) | | :--- | :--- | :--- | | Net cash provided by operating activities | $5.1 million | $3.1 million | | Net cash (used in) provided by investing activities | $(58.4 million) | $14.6 million | | Net cash provided by (used in) financing activities | $6.6 million | $(15.7 million) | | Net (decrease) increase in cash | $(46.7 million) | $2.0 million | Business and Organization - Modiv is an internally-managed REIT that became self-managed on December 31, 2019. The company holds its investments primarily through the Modiv Operating Partnership, LP, in which it held an approximate 72% interest as of June 30, 2022[31][32] - As of June 30, 2022, the company's portfolio consisted of 43 real estate properties totaling approximately 2.9 million square feet. The portfolio is diversified by property type: 48% industrial, 19% retail, and 33% office, based on annual base rent[33] - The company's Class C common stock began trading on the NYSE under the symbol "MDV" on February 11, 2022. In connection with the listing, all Class S common stock was converted into Class C common stock[30][36] - On February 15, 2022, the board authorized a share repurchase program of up to $20 million through December 31, 2022. From February 15 to June 30, 2022, the company repurchased 187,430 shares for a total of $3.3 million[41][42] Real Estate Investments Real Estate Acquisitions (Six Months Ended June 30, 2022) | Property Type | Number of Properties | Total Acquisition Price ($) | | :--- | :--- | :--- | | Industrial | 9 | $63.1 million | | Retail | 1 | $69.4 million | | Total | 10 | $132.5 million | Real Estate Dispositions (Six Months Ended June 30, 2022) | Property Type | Number of Properties | Contract Sale Price ($) | Gain on Sale ($) | | :--- | :--- | :--- | :--- | | Office | 4 | $37.8 million | $6.3 million | | Flex | 1 | $8.8 million | $2.1 million | | Total | 5 | $46.5 million | $8.4 million | - As of June 30, 2022, the company had significant asset concentration in two tenants. The KIA property in Carson, CA represented 15.1% of total assets, and the eight Lindsay properties represented 12.0% of total assets[103] - The company executed lease extensions for three properties during the first six months of 2022 with tenants Cummins, ITW Rippey, and Williams Sonoma, resulting in an average lease term increase of 3.7 years and an average annual rent increase of 1.9%[107] Goodwill - The company recorded a full impairment of goodwill, resulting in a non-cash charge of $17.3 million for the six months ended June 30, 2022. The carrying value of goodwill was reduced to zero[121] - The impairment was triggered by a decline in the company's stock price following its NYSE listing, which caused its market capitalization to fall below the book value of its equity as of March 31, 2022[121] Debt - On January 18, 2022, the company entered into a new $250 million credit facility, consisting of a $100 million four-year revolver and a $150 million five-year term loan[135] - Proceeds from the new credit facility were used to repay 20 property mortgages aggregating $153.4 million, significantly reducing the number of individual mortgage notes from 23 at year-end 2021 to 3 at June 30, 2022[141][128] - As of June 30, 2022, the company was in compliance with all debt covenants, which include a minimum fixed charge coverage of 1.50x and maximum leverage of 60% of the borrowing base[138][147] - The company entered into a five-year interest rate swap effective May 31, 2022, to fix the interest rate on the $150 million Term Loan at 3.858%[136][151] Equity and Distributions - The company has 2,000,000 shares of 7.375% Series A Cumulative Redeemable Perpetual Preferred Stock outstanding, which pay a cumulative dividend of $1.84375 per share annually[156][161] - In February 2022, the company completed a listed offering of 40,000 shares of Class C common stock at $25.00 per share, with the primary purpose of providing liquidity to existing stockholders[169] - The board declared quarterly dividends of $0.9 million on its Series A Preferred Stock for both Q1 and Q2 2022[168] Subsequent Events - In July and August 2022, the company acquired six industrial properties in two separate sale-leaseback transactions for a total purchase price of approximately $28.7 million[201][202] - On July 12, 2022, the company entered into an agreement to sell its Williams Sonoma-leased property in Las Vegas for $9.3 million, with the sale scheduled to close by August 26, 2022[204] - Between July 1 and August 9, 2022, the company repurchased an additional 32,713 shares of its Class C common stock for $0.5 million under its share repurchase program[200] - The company drew a total of $28 million on its revolver in July 2022 to fund the Producto and Valtir acquisitions[205] Management's Discussion and Analysis (MD&A) Management discusses the company's transition to a publicly-listed REIT and its strategy of focusing on industrial properties while divesting office assets. The new $250 million credit facility established in January 2022 provided significant liquidity and enabled a major debt refinancing. Results for the first half of 2022 were marked by strong rental income growth from acquisitions, offset by a significant non-cash goodwill impairment charge. Management highlights the growth in Adjusted Funds from Operations (AFFO) as a key performance indicator, which increased to $0.64 per diluted share for the first half of 2022 from $0.59 in the prior year period Overview and Strategy - The company's primary business is acquiring, financing, and owning single-tenant net-lease industrial, retail, and office properties, with a focus on strategically important and mission-critical assets[220] - The investment strategy is focused on acquiring a diversified portfolio of income-generating commercial real estate, with a current emphasis on increasing allocations to the industrial sector and decreasing allocations to the office sector[228][229] - As of June 30, 2022, the portfolio consisted of 43 operating properties, was 100% occupied, and had a weighted average remaining lease term of approximately 10.5 years[221][222] Liquidity and Capital Resources - The primary source of liquidity is the $250 million credit facility established in January 2022, which was used to repay approximately $153.4 million in existing mortgages and the prior line of credit[233][238] - The company's leverage ratio was 38% as of June 30, 2022. The board has approved a maximum leverage of 55% of asset value, but the long-term target is 40% or lower[241] - The company has an active share repurchase program, having repurchased 220,143 shares for $3.8 million between its inception in February 2022 and August 9, 2022[250] - An "UPREIT" transaction was completed for the KIA property acquisition, where the seller received 1,312,382 Class C OP Units valued at $25.00 per unit[251] Results of Operations Comparison of Q2 2022 vs. Q2 2021 | Metric | Q2 2022 ($) | Q2 2021 ($) | Change ($) | Change % | | :--- | :--- | :--- | :--- | :--- | | Rental Income | $10.4 million | $9.1 million | +$1.3 million | +14% | | General & Admin | $1.6 million | $1.9 million | -$0.3 million | -16% | | Interest Expense | $1.2 million | $2.1 million | -$0.9 million | -43% | | Net Income (Loss) | $2.4 million | $(1.0 million) | +$3.4 million | N/A | Comparison of H1 2022 vs. H1 2021 | Metric | H1 2022 ($) | H1 2021 ($) | Change ($) | Change % | | :--- | :--- | :--- | :--- | :--- | | Rental Income | $20.0 million | $18.1 million | +$1.9 million | +11% | | Goodwill Impairment | $17.3 million | $0 | +$17.3 million | N/A | | Net Income (Loss) | $(9.7 million) | $(1.9 million) | -$7.8 million | N/A | | Gain on Sale | $8.4 million | $0.3 million | +$8.1 million | +2799% | - The increase in rental income was primarily driven by acquisitions made in late 2021 and H1 2022, partially offset by property dispositions[266][277] - The net loss for H1 2022 was driven by the $17.3 million non-cash goodwill impairment charge recognized in Q1 2022[284] Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO) FFO and AFFO Per Share (Diluted) | Metric | Q2 2022 ($) | Q2 2021 ($) | H1 2022 ($) | H1 2021 ($) | | :--- | :--- | :--- | :--- | :--- | | FFO per Share | $0.43 | $0.26 | $(1.65) | $0.56 | | AFFO per Share | $0.35 | $0.34 | $0.64 | $0.59 | - Management uses FFO and AFFO as supplemental non-GAAP measures to evaluate operating performance. AFFO is considered a beneficial indicator of ongoing portfolio performance and the ability to sustain distributions[258] - The significant negative FFO per share in H1 2022 is a direct result of the $17.3 million goodwill impairment, which is added back for the AFFO calculation[262] Distributions - The company pays monthly distributions on its common stock. For 2022, the rate is $0.095833 per share per month, equivalent to an annualized rate of $1.15 per share[296][198] - Quarterly dividends of $0.9 million were declared and paid on the Series A Preferred Stock[292] Distribution Sources (Six Months Ended June 30, 2022) | Metric | Amount ($) | | :--- | :--- | | Total Distributions Declared | $5.1 million | | Cash Flows from Operating Activities | $5.1 million | | Distributions Paid from Cash | $3.5 million | | Reinvested Distributions | $2.2 million | Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of June 30, 2022. They concluded that these controls were effective at a reasonable assurance level. No material changes to the internal control over financial reporting were identified during the quarter - Based on an evaluation as of June 30, 2022, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[326] - There were no changes in internal control over financial reporting during the second quarter of 2022 that have materially affected, or are reasonably likely to materially affect, internal controls[327] PART II Risk Factors and Legal Proceedings The company states that there have been no material changes to the risk factors previously disclosed in its 2021 Annual Report on Form 10-K. Additionally, the company is not a party to any legal proceedings that are expected to have a material adverse effect on its business or financial condition - There have been no material changes to the risk factors set forth in the Annual Report on Form 10-K for the year ended December 31, 2021[329] - The company is not a party to any legal proceeding, nor is it aware of any pending or threatened litigation that could have a material adverse effect on its business[176][328] Share Repurchases and Unregistered Sales The company was active in its share repurchase program during the second quarter of 2022, buying back 136,567 shares of its common stock for a total of $2.4 million. The average price paid per share was $17.58. No unregistered shares were issued during the quarter Share Repurchase Activity (Q2 2022) | Month | Shares Repurchased | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | April 2022 | 86,252 | $18.45 | | May 2022 | 22,775 | $16.81 | | June 2022 | 27,540 | $15.51 | | Total | 136,567 | $17.58 | - The board authorized a $20 million share repurchase program on February 15, 2022, effective through December 31, 2022[332] - No unregistered shares were issued during the three months ended June 30, 2022[331]