Modiv(MDV) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for Modiv Industrial, Inc Item 1. Financial Statements (Unaudited) This section presents Modiv Industrial, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, equity, and cash flows, with detailed explanatory notes Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity as of September 30, 2023, and December 31, 2022 | Metric | September 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------------- | :------------------- | | Assets | | | | Total real estate investments, net | $499,734,347 | $425,963,908 | | Cash and cash equivalents | $5,641,610 | $8,608,649 | | Total assets | $539,063,193 | $454,429,919 | | Liabilities and Equity | | | | Total liabilities | $300,659,357 | $213,395,959 | | Total equity | $238,403,836 | $241,033,960 | | Total liabilities and equity | $539,063,193 | $454,429,919 | - Total assets increased by approximately $84.6 million from December 31, 2022, to September 30, 2023, primarily driven by an increase in real estate investments[11] - Total liabilities increased significantly by approximately $87.3 million, mainly due to an increase in the credit facility term loan[11] Condensed Consolidated Statements of Operations This section outlines the company's financial performance, including rental income, operating expenses, and net income (loss) for the three and nine months ended September 30, 2023 and 2022 | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Rental income | $12,500,338 | $10,303,402 | $34,648,083 | $30,017,493 | | Total operating expenses | $15,575,404 | $7,401,841 | $34,364,118 | $40,212,928 | | Operating (loss) income | $(4,783,867) | $6,833,589 | $(1,424,836) | $1,331,750 | | Net (loss) income attributable to common stockholders | $(6,458,221) | $3,000,352 | $(8,084,383) | $(6,817,403) | | Basic EPS | $(0.86) | $0.40 | $(1.07) | $(0.91) | | Diluted EPS | $(0.86) | $0.35 | $(1.07) | $(0.91) | - Rental income increased by 21% for the three months ended September 30, 2023, and by 15% for the nine months ended September 30, 2023, compared to the prior year periods[13] - The company reported a net loss attributable to common stockholders of $(6,458,221) for the three months ended September 30, 2023, a significant decline from a net income of $3,000,352 in the same period last year, primarily due to increased stock compensation expense and a loss on sale of real estate investments[13] Condensed Consolidated Statements of Comprehensive (Loss) Income This section details the company's comprehensive income (loss), including net income (loss) and other comprehensive income components for the three and nine months ended September 30, 2023 and 2022 | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net (loss) income | $(6,905,242) | $4,450,767 | $(6,854,210) | $(5,232,053) | | Comprehensive (loss) income | $(6,652,150) | $8,706,673 | $(6,097,714) | $(976,147) | | Comprehensive (loss) income attributable to Modiv Industrial, Inc. | $(5,238,990) | $7,540,704 | $(4,436,516) | $(433,301) | - Comprehensive loss attributable to Modiv Industrial, Inc. was $(5,238,990) for the three months ended September 30, 2023, a significant decrease from comprehensive income of $7,540,704 in the prior year, mainly due to the net loss and changes in cash flow hedge adjustments[15] Condensed Consolidated Statements of Equity (Three Months) This section presents changes in Modiv Industrial, Inc.'s equity for the three months ended September 30, 2023 and 2022, reflecting net loss, distributions, and stock compensation | Metric | Sep 30, 2023 (Total Modiv Industrial, Inc. Equity) | Jun 30, 2023 (Total Modiv Industrial, Inc. Equity) | | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Balance, beginning of period | $154,720,206 | $156,186,587 (June 30, 2022) | | Issuance of common stock - distribution reinvestments | $552,086 | $663,219 (June 30, 2022) | | Stock compensation expense | $70,000 | $165,000 (June 30, 2022) | | OP Units compensation expense | $8,399,867 | $466,740 (June 30, 2022) | | Net loss | $(5,536,346) | $3,922,227 (June 30, 2022) | | Balance, end of period | $154,903,900 | $161,115,023 (Sep 30, 2022) | - Modiv Industrial, Inc. equity decreased from $159,750,904 at December 31, 2022, to $154,903,900 at September 30, 2023, primarily due to net losses and distributions, partially offset by additional paid-in capital from stock compensation and distribution reinvestments[11][18] Condensed Consolidated Statements of Equity (Nine Months) This section presents changes in Modiv Industrial, Inc.'s equity for the nine months ended September 30, 2023 and 2022, reflecting net loss, stock repurchases, and compensation | Metric | Sep 30, 2023 (Total Modiv Industrial, Inc. Equity) | Dec 31, 2022 (Total Modiv Industrial, Inc. Equity) | | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Balance, beginning of period | $159,750,904 | $171,826,892 (Dec 31, 2021) | | Issuance of common stock - distribution reinvestments | $1,708,285 | $2,866,846 (2022) | | OP Units compensation expense | $9,555,206 | $1,493,352 (2022) | | Repurchase of common stock | $(1,129,162) | $(3,957,752) (2022) | | Net loss | $(5,318,758) | $(4,051,778) (2022) | | Balance, end of period | $154,903,900 | $161,115,023 (Sep 30, 2022) | - For the nine months ended September 30, 2023, Modiv Industrial, Inc.'s equity decreased by approximately $4.8 million, influenced by net losses and common stock repurchases, despite contributions from OP Units compensation and distribution reinvestments[20] Condensed Consolidated Statements of Cash Flows This section summarizes the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2023 and 2022 | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $11,210,166 | $9,326,763 | | Net cash used in investing activities | $(90,995,924) | $(64,969,591) | | Net cash provided by financing activities | $76,818,719 | $2,962,196 | | Net decrease in cash and cash equivalents | $(2,967,039) | $(52,680,632) | | Cash and cash equivalents, end of period | $5,641,610 | $5,726,888 | - Net cash provided by operating activities increased by $1,883,403 for the nine months ended September 30, 2023, compared to the same period in 2022[24] - Net cash used in investing activities significantly increased by $26,026,333, primarily due to higher real estate acquisitions and lower net proceeds from sales[24] - Net cash provided by financing activities saw a substantial increase of $73,856,523, mainly driven by increased borrowings from the credit facility term loan[24] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering business operations, accounting policies, and specific financial line items NOTE 1. BUSINESS AND ORGANIZATION Modiv Industrial, Inc. is a Maryland REIT primarily investing in industrial properties through its Operating Partnership, with its Class C common stock and Series A Preferred Stock listed on the NYSE - Company changed its name from Modiv Inc. to Modiv Industrial, Inc. effective August 11, 2023[30] - As of September 30, 2023, the portfolio consists of 44 real estate properties (4.6 million sq ft): 39 industrial (76% of ABR), 1 retail (10% of ABR), and 4 office (14% of ABR)[32] - The Company is the sole general partner of Modiv Operating Partnership, LP, owning approximately 68% interest as of September 30, 2023[31] NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details the company's significant accounting policies, including basis of presentation, consolidation, estimates, real estate acquisitions, revenue recognition, impairment, fair value disclosures, and derivative instruments - All real estate acquisitions for the nine months ended September 30, 2023, and the year ended December 31, 2022, were accounted for as asset acquisitions[43] - The Company records derivative instruments at fair value for risk management purposes to hedge exposure to interest rate variability on variable rate debt[67] - Immaterial error corrections were made in Q1 2023 for property tax accounting and in Q4 2022 for straight-line rent receivable write-offs, which did not affect net income (loss) or EPS[71][72] NOTE 3. REAL ESTATE INVESTMENTS, NET This note details the company's real estate portfolio, including acquisitions, dispositions, and impairment charges, highlighting its shift towards industrial properties - As of September 30, 2023, the Company's portfolio included 44 operating properties: 39 industrial, 1 retail, and 4 office properties[76] Real Estate Activity | Activity | Nine Months Ended Sep 30, 2023 | | :----------------------------------- | :----------------------------- | | Acquisitions (12 industrial properties) | $127,953,499 | | Dispositions (14 properties) | $47,466,960 | | (Loss) Gain on sale of real estate investments | $(1,708,801) | | Impairment charge (Cummins property) | $3,499,438 | - The KIA, Carson, CA property represented 12.5% of total assets as of September 30, 2023, and 10.3% of rental income for the three months ended September 30, 2023[89][90] - Future minimum contractual rent payments from non-cancellable operating leases total $715,669,876 as of September 30, 2023[96] NOTE 4. UNCONSOLIDATED INVESTMENT IN REAL ESTATE PROPERTY This note describes the company's equity method investment in an unconsolidated industrial property and its related income and cash distributions - The Company holds an approximate 72.7% TIC interest in a Santa Clara, California industrial property, accounted for using the equity method[106] Unconsolidated Investment Income and Distributions | Metric | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :----------------------------------- | :------------------------------ | :----------------------------- | | Income from unconsolidated investment | $79,164 | $207,506 | | Cash distributions received | $54,706 | $179,121 | NOTE 5. INVESTMENT IN PREFERRED STOCK This note details the company's investment in GIPR Series A Redeemable Preferred Stock, received from a property disposition, and its fair value and expected redemption terms - The Company received $12,000,000 in GIPR Series A Redeemable Preferred Stock as part of a property sale on August 10, 2023[110] GIPR Preferred Stock Fair Value | Metric | September 30, 2023 | | :----------------------------------- | :------------------- | | Liquidation value of GIPR preferred stock | $12,000,000 | | Fair value of GIPR preferred stock as of August 10, 2023 | $9,620,000 | | Increase in fair value for the period | $440,000 | | Fair value of GIPR preferred stock as of September 30, 2023 | $10,060,000 | - The Company expects GIPR to redeem the preferred stock for GIPR common stock as early as January 2024, leading to an immediate in-kind distribution to Modiv Industrial, Inc. stockholders[112] NOTE 6. OTHER BALANCE SHEET DETAILS This note provides details on tenant receivables, prepaid expenses, and accounts payable, accrued and other liabilities, including a significant construction-in-progress liability Balance Sheet Details | Metric | September 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------------- | :------------------- | | Tenant receivables | $11,211,058 | $7,263,202 | | Prepaid expenses and other assets | $4,881,383 | $6,100,937 | | Accounts payable, accrued and other liabilities | $8,893,630 | $7,649,806 | - Accrued expenses as of September 30, 2023, include a $2,350,000 liability for construction in progress at the Kalera property, related to mechanic's liens[116] NOTE 7. DEBT This note details the company's debt structure, including mortgage notes and credit facility borrowings, highlighting the increase in total debt and the fixed interest rate achieved through swaps Debt Summary | Debt Type | September 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------------- | :------------------- | | Mortgage notes payable, net | $34,118,748 | $44,435,556 | | Credit facility revolver | $0 | $3,000,000 | | Credit facility term loan, net | $248,385,927 | $148,018,164 | | Total debt | $282,504,675 | $195,453,720 | - The Credit Facility was increased to $400,000,000 in October 2022, comprising a $150,000,000 Revolver and a $250,000,000 Term Loan[124] - As of September 30, 2023, 100% of the Company's consolidated indebtedness was at fixed rates with a weighted average rate of 4.52% due to swap agreements[221] Interest Expense, Net | Interest Expense Component | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :----------------------------------- | :------------------------------ | :----------------------------- | | Mortgage notes payable interest expense | $411,610 | $1,354,642 | | Credit facility interest expense | $4,509,026 | $10,895,933 | | Derivative cash settlements | $(1,586,641) | $(4,062,442) | | Total Interest expense, net | $2,922,918 | $6,761,779 | NOTE 8. INTEREST RATE SWAP DERIVATIVES This note describes the company's interest rate swap agreements used to fix SOFR on its Term Loan, noting the accounting treatment for fair value changes and hedge effectiveness - The Company has two interest rate swap agreements to fix SOFR on its Term Loan: one for $150,000,000 (fixed at 2.258%) and another for $100,000,000 (fixed at 3.440%)[141][142] - The $150,000,000 swap failed to qualify as a cash flow hedge in 2023 due to a counterparty cancellation option, resulting in fair value changes being recorded in interest expense[144][145] Derivative Instrument Fair Value | Derivative Instrument | September 30, 2023 Fair Value | | :----------------------------------- | :------------------------------ | | Interest Rate Swaps (Asset) | $6,156,179 | | Interest Rate Swaps (Liability) | $0 | NOTE 9. PREFERRED STOCK AND COMMON STOCK This note details the company's outstanding Series A Preferred Stock and Class C common stock, including dividend rates, redemption terms, and common stock distributions - 2,000,000 shares of 7.375% Series A Preferred Stock are issued and outstanding, with cumulative dividends of $1.84375 per share annually[151][158] - The Series A Preferred Stock is redeemable at the Company's option after September 17, 2026, or upon certain Delisting or Change of Control events[153] Distributions Declared Per Common Share | Metric | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :----------------------------------- | :------------------------------ | :----------------------------- | | Distributions declared per common share | $0.2875 | $0.8625 | NOTE 10. RELATED PARTY TRANSACTIONS This note outlines related party transactions, including board member compensation, a property lease with a related party, and management fees earned from an unconsolidated investment Board Compensation | Board Compensation | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :----------------------------------- | :------------------------------ | :----------------------------- | | Payments for services rendered | $57,500 | $192,500 | | Value of shares issued for services rendered | $70,000 | $235,000 | | Total | $127,500 | $427,500 | | Number of shares issued | 4,194 | 17,455 | - The Company acquired an industrial property leased to Kalera Inc. in January 2022, a transaction approved by disinterested board members due to a related party's executive role at Kalera[165] - The Company's taxable REIT subsidiary earned $65,993 in management fees from the TIC Interest property for both the three and nine months ended September 30, 2023[167] NOTE 11. COMMITMENTS AND CONTINGENCIES This note details the company's commitments for tenant improvements and significant contingencies, including mechanic's liens related to a bankrupt tenant's property - The Company has obligations to pay $2,595,468 for on-site and tenant improvements as of September 30, 2023[171] - Kalera Inc. filed for Chapter 11 bankruptcy on April 4, 2023, and is expected to reject its lease with the Company, making the Company responsible for $3,110,443 in mechanic's liens[172][175] - An estimated $2,350,000 has been accrued in the balance sheet to settle the pending mechanic's liens at less than face value[175] NOTE 12. OPERATING PARTNERSHIP UNITS This note describes the company's various classes of Operating Partnership Units, their conversion terms, and the accounting for performance-based equity incentive compensation - Class M OP Units are convertible to Class C OP Units at a 1.6667:1 ratio and will automatically convert on March 31, 2024[179][182] - Class P OP Units are 'profits interests' convertible to Class C OP Units at a 1.6667:1 ratio after a lockup period, also converting automatically on March 31, 2024[183][188] - A one-time non-cash catch-up adjustment of $7,822,197 was recorded for performance-based Class R OP Units, as achieving the 2023 FFO performance target ($1.05 per diluted share) is deemed probable, leading to a 2.5-for-1 conversion ratio to Class C OP Units on March 31, 2024[191] Stock Compensation Expense | Stock Compensation Expense | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :----------------------------------- | :------------------------------ | :----------------------------- | | Class P OP Units | $88,783 | $266,350 | | Class R OP Units - Time Vesting Units | $488,887 | $1,466,659 | | Class R OP Units - Performance Units | $7,822,197 | $7,822,197 | | Class C common stock to board | $70,000 | $235,000 | | Total | $8,469,867 | $9,790,206 | NOTE 13. EARNINGS (LOSS) PER SHARE This note presents the company's basic and diluted earnings per share, reflecting net losses and the treatment of anti-dilutive Operating Partnership Units Earnings Per Share | Metric | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :----------------------------------- | :------------------------------ | :----------------------------- | | Net (loss) income attributable to common stockholders | $(6,458,221) | $(8,084,383) | | Basic EPS | $(0.86) | $(1.07) | | Diluted EPS | $(0.86) | $(1.07) | | Weighted-average common shares outstanding (Basic) | 7,548,052 | 7,537,505 | | Weighted-average common shares outstanding (Diluted) | 7,548,052 | 7,537,505 | - The weighted average dilutive effect of 3,580,720 shares for the three months and 3,484,881 shares for the nine months ended September 30, 2023, related to OP Units, were excluded from diluted EPS computation because their effect would be anti-dilutive[199] NOTE 14. SUBSEQUENT EVENTS This note discloses significant events occurring after September 30, 2023, including dividend payments, authorized distributions, and developments regarding the Kalera Inc. lease and mechanic's liens - Series A Preferred Stock dividends of $921,875 for Q3 2023 were paid on October 16, 2023, and Q4 2023 dividends were declared payable on January 16, 2024[202][203] - Monthly distributions to common stockholders and Class C OP Unit holders were authorized through March 2024 at an annualized rate of $1.15 per share[205][206] - Kalera Inc. filed a motion on October 31, 2023, to reject its lease, confirming the Company's responsibility for $3,110,443 in mechanic's liens, with $2,350,000 already accrued[207] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition, results of operations, and cash flows, emphasizing strategic shifts, market uncertainties, liquidity, and REIT compliance Overview Modiv Industrial, Inc. is a REIT focused on acquiring industrial manufacturing properties, strategically shifting its portfolio composition and maintaining REIT qualification through income distribution - Modiv Industrial, Inc. is a REIT focused on acquiring critical industrial manufacturing properties[216] - Industrial properties increased from 41% to 75% of the portfolio, and office properties decreased from 50% to 14% (by ABR) since December 31, 2021[216] - The Company intends to remain qualified as a REIT, requiring annual distribution of at least 90% of taxable income[217] Recent Events and Uncertainties This section discusses significant market uncertainties, including inflation, interest rates, and geopolitical conflicts, and their potential impact on the company's fixed-rate debt and office property portfolio - Significant market uncertainties include inflation, rising interest rates, supply chain disruptions, and geopolitical conflicts[220] - As of September 30, 2023, 100% of the Company's $284,284,849 outstanding debt is at fixed rates with a weighted average rate of 4.52%[221] - The COVID-19 pandemic's impact on office properties may lead to lower occupancy, rental rates, and declining values[222][223] Liquidity and Capital Resources This section details the company's liquidity and capital resources, including funding sources for acquisitions and operations, and the structure and utilization of its Credit Facility - Cash requirements for property acquisitions, debt payments, and capital expenditures are funded by bank borrowings (Credit Facility), mortgage indebtedness, real estate property sales, and internally generated funds[227] - The Credit Facility was increased to $400,000,000 in October 2022, comprising a $150,000,000 Revolver and a $250,000,000 Term Loan[229] - As of September 30, 2023, the Revolver had zero outstanding balance, and the Term Loan had an outstanding principal balance of $250,000,000[233] Cash Flow Summary This section summarizes the company's cash flow performance for the nine months ended September 30, 2023, highlighting changes in operating, investing, and financing activities Cash Flow Summary | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $11,210,166 | $9,326,763 | | Net cash used in investing activities | $(90,995,924) | $(64,969,591) | | Net cash provided by financing activities | $76,818,719 | $2,962,196 | - Net cash provided by operating activities increased by $1,883,403, while net cash used in investing activities increased by $26,026,333[241][243] - Net cash provided by financing activities increased by $73,856,523, primarily due to decreased principal payments on notes payable and increased Credit Facility term loan borrowings[244] Funds from Operations and Adjusted Funds from Operations This section presents the company's non-GAAP performance measures, Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO), used to evaluate operating performance and compare with other REITs - FFO and AFFO are non-GAAP measures used to evaluate operating performance and compare with other REITs[246][247] FFO and AFFO Attributable to Common Stockholders and Class C OP Unit Holders | Metric | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :------------------------------------------------ | :------------------------------ | :----------------------------- | | FFO attributable to common stockholders and Class C OP Unit holders | $(1,715,231) | $7,777,265 | | AFFO attributable to common stockholders and Class C OP Unit holders | $3,721,533 | $10,160,508 | | Basic FFO Per Share | $(0.23) | $1.03 | | Fully Diluted FFO Per Share | $(0.23) | $0.71 | | Basic AFFO Per Share | $0.49 | $1.35 | | Fully Diluted AFFO Per Share | $0.33 | $0.92 | Property Portfolio Information This section provides a segmented breakdown of the company's financial performance and asset allocation by property type, reflecting its strategic focus on industrial manufacturing properties - The Company categorizes its assets into Industrial Core, Tactical Non-Core, and Other Non-Core to reflect its strategic focus on industrial manufacturing properties[253] FFO by Property Type (Nine Months Ended Sep 30, 2023) | Property Type (Nine Months Ended Sep 30, 2023) | FFO Attributable to Common Stockholders and Class C OP Unit Holders | | :----------------------------------- | :------------------------------------------------------------------ | | Industrial Core | $12,254,527 | | Tactical Non-Core | $4,420,352 | | Other Non-Core | $925,706 | | Non-Property & Other | $(9,823,320) | | Consolidated Total | $7,777,265 | Total Real Estate Investments, Net by Property Type (As of Sep 30, 2023) | Property Type (As of Sep 30, 2023) | Total Real Estate Investments, Net | | :----------------------------------- | :--------------------------------- | | Industrial Core | $366,220,599 | | Tactical Non-Core | $118,255,821 | | Other Non-Core | $15,257,927 | | Consolidated Total | $499,734,347 | Results of Operations (Comparison of Three Months Ended September 30, 2023 to 2022) This section compares the company's operating results for the three months ended September 30, 2023 and 2022, highlighting changes in rental income, expenses, and real estate gains/losses - Rental income increased by $2,196,936 (21%) to $12,500,338 for the three months ended September 30, 2023[260] - Stock compensation expense increased by $7,920,627 to $8,469,867, primarily due to a one-time non-cash catch-up adjustment of $7,822,197 for performance-based Class R OP Units[262] - The Company recorded a loss on sale of real estate investments of $(1,708,801) for the three months ended September 30, 2023, compared to a gain of $3,932,028 in the prior year[266] Results of Operations (Comparison of Nine Months Ended September 30, 2023 to 2022) This section compares the company's operating results for the nine months ended September 30, 2023 and 2022, detailing changes in rental income, expenses, impairment charges, and real estate gains/losses - Rental income increased by $4,630,590 (15%) to $34,648,083 for the nine months ended September 30, 2023[272] - Stock compensation expense increased by $8,049,354 to $9,790,206, primarily due to a one-time non-cash catch-up adjustment of $7,822,197[274] - An impairment of real estate investment property of $3,499,438 was recorded for the nine months ended September 30, 2023[277] - The Company reported a loss on sale of real estate investments of $(1,708,801) for the nine months ended September 30, 2023, compared to a gain of $11,527,185 in the prior year[279] Capital Expenditures This section outlines the company's capital expenditure obligations for tenant improvements and property repairs, along with their expected funding sources - As of September 30, 2023, the Company had obligations to pay $2,595,468 for on-site and tenant improvements[287] - Approximately $343,500 in roof, HVAC, and paving repairs are expected in the next 12 months, with $6,500 recoverable from tenants and $337,000 non-recoverable[288] Distributions This section details the company's Series A Preferred Stock dividends and common stock distributions, including historical payments and future authorizations - Series A Preferred Stock dividends of $921,875 were declared for each of the first three quarters of 2023[289] Total Distributions Declared and Paid | Metric | 2023 Total (First Three Quarters) | | :----------------------------------- | :-------------------------------- | | Total Distributions Declared | $7,798,407 | | Distributions Declared Per Share | $0.862500 | | Distributions Paid Cash | $6,056,334 | | Distributions Reinvested | $1,716,399 | - Monthly common stock distributions were $0.095833 per share, representing an annualized rate of $1.15 per share, authorized through March 2024[293] Election as a REIT This section explains the company's election and intent to maintain its REIT status, outlining the tax implications and distribution requirements for qualification - The Company elected to be taxed as a REIT for U.S. federal income tax purposes beginning December 31, 2016[295] - To maintain REIT status, the Company must annually distribute at least 90% of its taxable income (excluding net capital gains)[295] - Failure to qualify as a REIT would result in corporate tax rates and disqualification for four taxable years[296] Critical Accounting Policies and Estimates This section discusses the critical accounting policies and estimates used in preparing the financial statements, noting the reliance on management judgment and the absence of significant policy changes - Preparation of financial statements requires significant management judgments, assumptions, and estimates[297] - No significant changes to accounting policies occurred during the nine months ended September 30, 2023[297] Commitments and Contingencies This section refers to Note 11 for details on the company's various commitments and contingencies - The Company may be subject to certain commitments and contingencies with regard to certain transactions[298] Related-Party Transactions and Agreements This section refers to Note 10 for details on the company's related-party transactions and agreements - Details of related-party transactions and agreements are included in Note 10 of the financial statements[299] Subsequent Events This section refers to Note 14 for details on significant events occurring subsequent to the reporting period - Events that occurred subsequent to September 30, 2023, through the filing date of this report are detailed in Note 14[300] Recent Accounting Pronouncements This section refers to Note 2 for information on recently issued and not yet adopted accounting pronouncements - Information regarding recent accounting pronouncements is provided in Note 2 of the financial statements[302] Off-Balance Sheet Arrangements This section confirms the absence of material off-balance sheet arrangements that could significantly impact the company's financial condition or results - The Company has no material off-balance sheet arrangements as of September 30, 2023[303] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company due to its status as a smaller reporting company - This item is not applicable as the Company is a smaller reporting company[304] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective due to a material weakness in accounting for non-recurring transactions, though financial statements are fairly stated, and a remediation plan is in progress Evaluation of Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2023, due to a material weakness, despite the fair presentation of financial statements - Disclosure controls and procedures were deemed ineffective as of September 30, 2023[306] - Despite the material weakness, consolidated financial statements are fairly stated in all material respects in accordance with GAAP[307] Material Weakness in Internal Control over Financial Reporting A material weakness was identified in the company's internal control over financial reporting regarding the evaluation of accounting standards for non-recurring transactions, stemming from immaterial error corrections - A material weakness was identified as of December 31, 2022, in the ability to properly identify and evaluate applicable accounting standards for non-recurring transactions and recent pronouncements[308] - The immaterial error corrections that led to this conclusion did not affect net loss or net loss per share for the years ended December 31, 2022 and 2021, nor non-GAAP measures like AFFO and EBITDA[309] Remediation Plan Management is implementing a remediation plan to address the material weakness by enhancing internal controls, utilizing consultants, and reorganizing accounting policy documentation - Management enhanced internal controls by refining policies and procedures and utilizing additional qualified consultants[311] - A review and reorganization of accounting policy documentation is underway to ensure comprehensiveness and GAAP conformance[311] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during the three months ended September 30, 2023, beyond the ongoing remediation efforts for the identified material weakness - No other material changes in internal control over financial reporting occurred during the three months ended September 30, 2023, beyond the remediation plan[312] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, other significant transactions, and exhibits for Modiv Industrial, Inc Item 1. Legal Proceedings This item incorporates by reference legal proceedings information from Note 11, primarily concerning the Kalera bankruptcy and related foreclosure action - Information on legal proceedings is incorporated by reference from Note 11 of the financial statements[313] Item 1A. Risk Factors This item confirms no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to risk factors have occurred since the Annual Report on Form 10-K for 2022[314] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item details unregistered sales of Class C common stock to board members and reports no repurchases under the active 2023 Share Repurchase Program during the period Unregistered Sales of Equity Securities The company issued Class C common stock to non-employee board members for services, relying on a Section 4(a)(2) exemption during the three months ended September 30, 2023 - 4,194 shares of Class C common stock were issued to non-employee board members during Q3 2023, exempt from registration under Section 4(a)(2) of the Securities Act[315] Our Stock Repurchases The Board authorized a $15 million share repurchase program for 2023, with no Class C common stock repurchases made during the three months ended September 30, 2023 - The Board authorized a $15,000,000 share repurchase program for Class C common stock and Series A Preferred Stock for 2023[316] - No shares of Class C common stock were repurchased during the three months ended September 30, 2023[317] Item 5. Other Information This item details the sale of 13 properties to GIPR for cash and preferred stock, including the terms of the GIPR Preferred Stock and pro forma financial statements illustrating the transaction's impact GIPR Sale Agreement Details This section outlines the sale of 13 properties to GIPR for cash and preferred stock, including the company's commitment to distribute GIPR common stock to its stockholders upon redemption - The Company sold 13 net-leased properties (11 retail, 2 office) to GIPR for $42,000,000 on August 10, 2023[318][319] - Consideration included $30,000,000 in cash and $12,000,000 in GIPR Series A Redeemable Preferred Stock[319] - The Company agreed to distribute GIPR common stock (upon redemption of the preferred stock) to its stockholders and/or OP Unit holders[320] GIPR Preferred Stock Terms This section details the GIPR Preferred Stock terms, including dividend rates, redemption options for cash or common stock, and associated conditions and share limits - GIPR Preferred Stock pays cumulative cash dividends of 9.5% per annum, increasing to 12.0% per annum from August 10, 2024[322] - GIPR may redeem the preferred stock for cash or, until March 15, 2024, for GIPR Common Stock, subject to conditions[323] - Redemption for GIPR Common Stock is subject to a minimum of 2,200,000 shares and a maximum of 3,000,000 shares[323] Unaudited Pro Forma Condensed Consolidated Balance Sheet This section presents the unaudited pro forma condensed consolidated balance sheet, illustrating the estimated financial impact of the GIPR Portfolio disposition on assets and equity | Metric | Modiv Industrial, Inc. (As of Jun 30, 2023) | Pro Forma Modiv Industrial, Inc. (As of Jun 30, 2023) | | :----------------------------------- | :------------------------------------------ | :-------------------------------------------------- | | Total real estate investments, net | $515,295,451 | $476,754,048 | | Cash and cash equivalents | $9,912,110 | $39,194,618 | | Investment in preferred stock | $0 | $9,620,000 | | Total assets | $549,409,970 | $547,466,343 | | Total liabilities | $309,316,713 | $308,957,575 | | Total equity | $240,093,257 | $238,508,768 | - The pro forma balance sheet reflects the removal of the 13 properties sold to GIPR and the inclusion of cash and GIPR Preferred Stock proceeds[329] Unaudited Pro Forma Condensed Consolidated Statement of Operations (For the Six Months Ended June 30, 2023) This section presents the unaudited pro forma condensed consolidated statement of operations for the six months ended June 30, 2023, illustrating the estimated impact of the GIPR Portfolio disposition on rental income and net income | Metric | Modiv Industrial, Inc. (Six Months Ended Jun 30, 2023) | Pro Forma Modiv Industrial, Inc. (Six Months Ended Jun 30, 2023) | | :----------------------------------- | :----------------------------------------------------- | :---------------------------------------------------------- | | Total rental income | $22,147,745 | $20,266,546 | | Total expenses | $18,788,714 | $17,274,440 | | Operating income | $3,359,031 | $2,992,106 | | Net (loss) income attributable to common stockholders | $(1,626,162) | $(1,473,264) | | Basic and diluted EPS | $(0.22) | $(0.20) | - The pro forma statement reflects the removal of rental operations of the 13 properties sold to GIPR, including an allocation of interest expense[335] Unaudited Pro Forma Condensed Consolidated Statement of Operations (For the Year Ended December 31, 2022) This section presents the unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2022, illustrating the estimated impact of the GIPR Portfolio disposition on rental income and net loss | Metric | Modiv Industrial, Inc. (Year Ended Dec 31, 2022) | Pro Forma Modiv Industrial, Inc. (Year Ended Dec 31, 2022) | | :----------------------------------- | :----------------------------------------------- | :---------------------------------------------------- | | Total rental income | $46,174,267 | $42,302,305 | | Total expenses | $53,443,863 | $50,818,370 | | Operating income | $4,926,775 | $3,680,306 | | Net loss attributable to common stockholders | $(6,976,035) | $(7,323,399) | | Basic and diluted EPS | $(0.93) | $(0.98) | - The pro forma statement reflects the removal of rental operations of the 13 properties sold to GIPR, including an allocation of interest expense[335] Item 6. Exhibits This item lists all exhibits included or incorporated by reference in the Quarterly Report on Form 10-Q, such as corporate documents, agreements, and certifications - The exhibit index lists various documents, including Articles of Amendment, Bylaws, the GIPR Sale Agreement, and certifications[337][339] SIGNATURES This section contains the required signatures for the Quarterly Report on Form 10-Q, certifying its submission by the Chief Executive Officer and Chief Financial Officer - The Quarterly Report on Form 10-Q is signed by Aaron S. Halfacre, Chief Executive Officer, and Raymond J. Pacini, Chief Financial Officer, on November 13, 2023[343][344]