Modiv(MDV) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents Modiv Industrial, Inc.'s unaudited condensed consolidated financial statements for the periods ended June 30, 2023 Condensed Consolidated Balance Sheets As of June 30, 2023, Modiv Industrial, Inc. reported total assets of $549.4 million, an increase from $454.4 million at December 31, 2022. This growth was primarily driven by an increase in net real estate investments. Total liabilities rose to $309.3 million from $213.4 million, mainly due to increased borrowings on the credit facility term loan. Total equity slightly decreased to $240.1 million from $241.0 million Condensed Consolidated Balance Sheet Summary | Balance Sheet Item | June 30, 2023 ($) | December 31, 2022 ($) | | :--- | :--- | :--- | | Total real estate investments, net | $515,295,451 | $425,963,908 | | Total assets | $549,409,970 | $454,429,919 | | Credit facility term loan, net | $248,263,340 | $148,018,164 | | Total liabilities | $309,316,713 | $213,395,959 | | Total equity | $240,093,257 | $241,033,960 | Condensed Consolidated Statements of Operations For the three months ended June 30, 2023, the company reported net income attributable to common stockholders of $3.1 million ($0.41 basic EPS), a significant improvement from $1.2 million ($0.17 basic EPS) in the same period of 2022. For the six-month period, the company recorded a net loss of $1.6 million (-$0.22 basic EPS), compared to a net loss of $9.8 million (-$1.31 basic EPS) in the prior year. The improvement was driven by higher rental income and the absence of the large goodwill impairment charge recorded in 2022 Key Operational Metrics (Attributable to Common Stockholders) | Metric | Q2 2023 ($) | Q2 2022 ($) | H1 2023 ($) | H1 2022 ($) | | :--- | :--- | :--- | :--- | :--- | | Rental Income | $11,836,563 | $10,144,478 | $22,147,745 | $19,714,091 | | Net Income (Loss) | $3,058,435 | $1,249,255 | ($1,626,162) | ($9,817,755) | | Basic EPS | $0.41 | $0.17 | ($0.22) | ($1.31) | | Diluted EPS | $0.35 | $0.14 | ($0.22) | ($1.31) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, net cash provided by operating activities was $7.3 million, up from $5.1 million in the prior-year period. Net cash used in investing activities increased to $95.9 million, primarily for real estate acquisitions. Net cash provided by financing activities was $89.9 million, driven by $100 million in borrowings from the credit facility term loan, which funded the acquisitions Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2023 ($) | 2022 ($) | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,289,108 | $5,076,472 | | Net cash used in investing activities | ($95,877,378) | ($58,420,894) | | Net cash provided by financing activities | $89,891,731 | $6,642,351 | | Net increase (decrease) in cash | $1,303,461 | ($46,702,071) | Notes to Condensed Consolidated Financial Statements This section details the company's accounting policies, strategic portfolio shift, debt structure, equity, and significant subsequent events - As of June 30, 2023, the company's portfolio consisted of 56 properties, with industrial properties representing 68% of annual base rent, reflecting a strategic shift. 14 properties (11 retail, 3 office) were classified as held for sale[36] - During H1 2023, the company acquired 10 industrial properties for a total price of $98.9 million[86] - The company expanded its credit facility to $400 million ($150M Revolver, $250M Term Loan) and entered into interest rate swaps to fix the rate on its term loan debt[129][142][144] - Subsequent to quarter-end, on August 10, 2023, the company sold 13 retail and office properties for $42 million ($30M cash, $12M preferred stock) and acquired two industrial properties for $28.9 million in July 2023[205][206][207] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's strategic pivot to industrial properties, financial performance, liquidity, and capital resources, including FFO and AFFO Overview and Recent Developments The company is an internally-managed REIT focusing on acquiring critical industrial manufacturing properties. A significant strategic shift has occurred, with industrial properties growing to represent 76% of the portfolio's pro forma Annual Base Rent (ABR) as of June 30, 2023, up from 41% at the end of 2021. This was achieved through targeted acquisitions and the disposition of non-core retail and office assets, including a major sale of 13 properties on August 10, 2023 - The company is executing a strategic plan to focus on industrial manufacturing properties, reducing its retail and office exposure[212] - Post-quarter end, the portfolio consists of 45 properties, with 40 being industrial, representing 76% of pro forma ABR. The portfolio has a weighted average remaining lease term (WALT) of 14.3 years[218] - On August 10, 2023, the company sold 13 retail and office properties to Generation Income Properties, Inc. (GIPR) for $42 million[217] Liquidity and Capital Resources The company's primary liquidity sources are its $400 million credit facility, property sales, and internally generated funds. The credit facility consists of a $150 million revolver and a $250 million term loan. The company has used interest rate swaps to fix the rates on its term loan debt. During H1 2023, the company drew down the remaining $100 million on its term loan to fund acquisitions. A share repurchase program is active, with $1.1 million in shares repurchased in H1 2023 - The company increased its credit facility to $400 million, comprised of a $150 million revolver and a $250 million term loan[228] - Interest rates on the $250 million term loan are fixed through swap agreements, with the original $150M at 4.058% and the additional $100M at 5.240% (based on a 47% leverage ratio)[230][231] - Under the 2023 Share Repurchase Program, the company repurchased 93,357 shares of Class C common stock for $1.1 million at an average price of $12.10 per share during the six months ended June 30, 2023[239] Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO) For Q2 2023, FFO per fully diluted share was $0.75 and AFFO was $0.31. For H1 2023, FFO per fully diluted share was $0.90 and AFFO was $0.61. The results are broken down by property type, showing that the 'Industrial Core' segment is the primary driver of FFO and AFFO, contributing $0.37 and $0.28 per fully diluted share, respectively, in Q2 2023 FFO and AFFO Per Fully Diluted Share | Metric | Q2 2023 ($) | Q2 2022 ($) | H1 2023 ($) | H1 2022 ($) | | :--- | :--- | :--- | :--- | :--- | | FFO | $0.75 | $0.46 | $0.90 | ($1.55) | | AFFO | $0.31 | $0.35 | $0.61 | $0.64 | Q2 2023 AFFO Breakdown by Segment (per fully diluted share) | Segment | AFFO per Share ($) | | :--- | :--- | | Industrial Core | $0.28 | | Tactical Non-Core | $0.08 | | Other Non-Core | $0.03 | | Non-Property & Other | ($0.08) | | Consolidated Total | $0.31 | Results of Operations Comparing Q2 2023 to Q2 2022, rental income increased 17% to $11.8 million due to acquisitions. For H1 2023 vs H1 2022, rental income grew 12% to $22.1 million. A significant factor in the improved H1 2023 net results was the absence of the $17.3 million goodwill impairment charge recorded in H1 2022. Interest expense decreased in Q2 2023 due to large unrealized gains on interest rate swaps, but increased for the six-month period due to higher debt balances and rates - Q2 2023 rental income rose 17% YoY to $11.8 million, driven by acquisitions of 16 industrial properties since June 30, 2022[264] - H1 2023 results were positively impacted by the absence of a $17.3 million goodwill impairment charge that was recorded in H1 2022[282] - In H1 2023, the company recorded a $3.5 million impairment charge on its Nashville, TN property (leased to Cummins) due to a plan to sell it[281] - Interest expense in Q2 2023 was significantly reduced by $3.5 million in unrealized gains on interest rate swaps, as the swaps were deemed ineffective for hedge accounting and marked to market through the P&L[271][272] Properties and Investment Activities As of June 30, 2023, the portfolio comprised 56 properties totaling 4.3 million square feet. During the first six months of 2023, the company acquired 10 industrial properties for $98.4 million at a blended initial cap rate of 7.8%. No properties were sold in H1 2023, contrasting with five sales in H1 2022. The company has been active in leasing, executing a new 11.5-year lease for its Rocklin, CA property and extending leases for its Solar Turbines and Levins properties with significant rent increases H1 2023 Acquisitions Summary | Metric | Value ($) | | :--- | :--- | | Properties Acquired | 10 (all industrial) | | Total Square Feet | 1,151,967 | | Total Acquisition Price | $98,408,574 | | Blended Initial Cap Rate | 7.8% | - Executed a new 11.5-year lease with EMC Shop for the Rocklin, CA property previously leased to Gap, Inc[303] - Extended the lease with Solar Turbines for two years with a 14.0% rent increase, and the Levins property lease with a 69.0% rent increase[301][302] Quantitative and Qualitative Disclosures About Market Risk The company has omitted this section, as it is not required for a smaller reporting company - Disclosure is not applicable as the company qualifies as a smaller reporting company[315] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, despite a previously identified material weakness. This weakness, related to the accounting for non-recurring transactions and new pronouncements, stemmed from two immaterial error corrections from prior periods. A remediation plan is underway, involving enhanced use of consultants and a review of accounting policy documentation. Management asserts that despite the weakness, the financial statements are fairly stated - A material weakness in internal control over financial reporting was identified as of December 31, 2022. It relates to the company's ability to properly identify and evaluate accounting standards for non-recurring transactions and new pronouncements[319] - A remediation plan has been initiated, which includes refining policies to utilize qualified consultants and reorganizing accounting policy documentation[321] - Despite the material weakness, management concluded that the consolidated financial statements in this 10-Q are fairly stated in all material respects[318] PART II - OTHER INFORMATION Legal Proceedings This section incorporates by reference the information on legal matters disclosed in Note 10 of the financial statements. The key legal issues mentioned are related to the Kalera bankruptcy and a foreclosure action by a general contractor on the property leased to Kalera - The company refers to Note 10 for details on legal proceedings, which primarily concern the Kalera bankruptcy and related mechanic's liens[323][175] Risk Factors The company states that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes to the risk factors from the company's 2022 Annual Report on Form 10-K[324] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2023, the company issued 5,500 shares of Class C common stock to non-employee board members for their services. Additionally, under its 2023 share repurchase program, the company repurchased 88,892 shares of its Class C common stock for a total of $1.1 million at an average price of $12.14 per share during the quarter - Issued 5,500 shares of Class C common stock to non-employee directors in Q2 2023, exempt from registration under Section 4(a)(2) of the Securities Act[325] Share Repurchases for Q2 2023 | Period | Shares Repurchased | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | April 2023 | 32,805 | $10.68 | | May 2023 | 53,268 | $12.92 | | June 2023 | 2,819 | $14.48 | | Total Q2 2023 | 88,892 | $12.14 | Other Information This section reports two key events. On August 8, 2023, board member Asma Ishaq resigned, and the board size was reduced from seven to six members. Effective August 11, 2023, the company changed its name from 'Modiv Inc.' to 'Modiv Industrial, Inc.' to better reflect its strategic focus - Board member Asma Ishaq resigned effective August 8, 2023. The board size was subsequently reduced to six members[329] - The company changed its name to 'Modiv Industrial, Inc.' effective August 11, 2023[330] Exhibits This section provides an index of all exhibits filed with or incorporated by reference into the Quarterly Report on Form 10-Q. Key exhibits include articles of amendment for the name change and officer certifications - The report includes an exhibit index listing all filed documents, including certifications and articles of amendment for the name change[333][334]