Q3 2024 Modiv Industrial Inc Earnings Call
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Speaker Change: Good day and welcome to Modiv Industrial Inc. 3Q24 conference call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: On today's call, management will provide remarks and then we will open the call for your questions.
Speaker Change: To ask a question, analysts may press star then 1 on their touchtone phone.
If you are using a speakerphone, please pick up your handset before pressing the key. And to withdraw your question, please press star then 2.
Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to John Raney, Chief Operating Officer and General Counsel. Please go ahead, sir.
John Raney: Thank you, operator, and thank you, everyone, for joining us for Motive Industrial's third quarter 2024 earnings call.
We issued our earnings release before market opened this morning, and it's available on our website at Modo.com I'm here today with Aaron Halfacre, Chief Executive Officer, and Ray Pacini, Chief Financial Officer
John Raney: On today's call, management will provide prepared remarks, and then we will open up the call for your questions.
John Raney: Before we begin, I would like to remind you that today's comments will include forward-looking statements under the Federal Securities Law. Forward-looking statements are identified by words such as will be, intend, believe, expect, anticipate, or other comparable words and phrases.
John Raney: Statements that are not historical facts, such as statements about our expected acquisitions or dispositions in business plans, are also forward-looking statements.
John Raney: 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.
Speaker Change: With that, I would like to turn the call over to Aaron. Aaron, the floor is yours.
Aaron Halfacre: Hey, John. Hey, everyone. Thanks for joining us. Like some of you, I probably stayed up fairly late watching the results. You know, no matter what someone's opinion is,
Aaron Halfacre: I was hoping that it was decisive either way. One more.
Aaron Halfacre: One more uncertainty removed from the marketplace. So we have that. Of course, 10 years are up to where they were in June. So it makes for an interesting time for REITs. Most REITs are signing off today. We are up a little bit, but I guess, you know.
Speaker Change: a broken clock's right twice a day. With that, why don't we get started? I'm just going to go right into Ray, have him give some prepared remarks, then I'll have a few comments, and then we'll open up to questions.
Aaron Halfacre: Ray?
Ray: Thank you, Aaron. Rental income for the third quarter was $11.6 million compared with $12.5 million in the prior year period.
Ray Pacini: The decrease in rental income primarily reflects the disposition of two properties during the first quarter of 2024 and the sale of 14 properties in August 2023, partially offset by rental income from one industrial manufacturing property acquired on July 15, 2024.
Ray Pacini: Third quarter adjusted funds from operations, or AFFO, was $3.7 million, which is comparable to the $3.7 million in the year-ago quarter.
John Raney: The decrease in rental income was partially offset by decreases in the adjustment for straight-line rents primarily associated with the May 2024 increase in rent paid by the State of California's Office of Emergency Services for our Rancho Cordova property.
John Raney: along with decreases in property expenses and G&A.
Aaron Halfacre: AFFO per share of 34 cents reflects a one cent increase over the prior year quarter AFFO 33 cents per share due to a decrease in fully diluted weighted average shares outstanding
Aaron Halfacre: Our repurchase of 780,000 operating partnership units and shares on August 1st, 2024 was partially offset by 157,000 shares sold in our ATM offering during September 2024.
Aaron Halfacre: If our repurchase of the 780,000 shares from First City Investment Group on August 1st had occurred at the beginning of the quarter, pro forma AFFO would have been $0.35 for a fully diluted share.
Ray Pacini: The interest expense for the quarter was $3.2 million greater than the comparable period of 2023 due to $2.4 million of unrealized non-cash net losses on swap valuations.
Ray Pacini: which increased interest expense in the current period. Well, the prior year period, it included the 795,000 of unrealized gains on swap valuations which decreased interest expense.
Aaron Halfacre: Now turning to our portfolio, following our 8-year lease extension with WSP USA for our San Diego property, and a 5-year lease extension with LabCorp for our San Carlos, California property,
Aaron Halfacre: Our 43-property portfolio has an attractive weighted average lease term of 13.8 years.
Aaron Halfacre: Though the majority of our tenant credits are private, approximately 33% of our tenants or their current companies have an investment-grade rating from a formally recognized credit rating agency of BBB- or better.
Aaron Halfacre: Annualized base rent for our 43 properties totals $40.2 million as of September 30th, 2024.
Aaron Halfacre: With respect to our balance sheet and liquidity, as of September 30th, 2024, total cash and cash equivalents were 6.8 million, and we had 280 million of debt outstanding.
Aaron Halfacre: Our deck consists of $31 million of mortgages on two properties and $250 million of outstanding borrowings on our $400 million credit facility.
Aaron Halfacre: We do not have any outstanding debt maturities until January 2027.
Aaron Halfacre: Based on interest rate swap agreements we entered into during 2022, 100% of our indebtedness as of September 30th, 2024 held a fixed interest rate with a weighted average interest rate of 4.52% based on our leverage ratio of 48% at quarter end.
Aaron Halfacre: We are actively evaluating the changing interest rate environment and intend to enter the new swap agreements on or before December 31, 2024 to continue our full cash hedge position.
Aaron Halfacre: since we expect at least one, if not both, of the current swaps to be canceled on December 31st, 2024.
Aaron Halfacre: As we reported in our earnings release,
Aaron Halfacre: Our Board of Directors declared a cash dividend for Common Share of $0.0975 for the months of January, February, and March 2025, representing an annualized dividend rate of $1.17 per share, which is an increase of $0.02 per share, or 1.7%, compared with our current annual dividend rate of $1.15 per share of Common Stock.
Speaker Change: I'll now turn the call back over to Aaron.
Aaron Halfacre: Thanks, Ray.
Aaron Halfacre: Thank you.
Aaron Halfacre: So, you know, this was a quarter where we spent a lot of time on that.
Aaron Halfacre: that prior
Aaron Halfacre: potential JV deal yet despite spending a lot of time on that and digging in that doing the work of that which ultimately as you saw in October didn't come to fruition at least
Aaron Halfacre: certainly not in its current form. We were still minding the store and still getting things done and I think that speaks really highly of our team, right? With a company of this size, you know, and with a finite number of assets,
Aaron Halfacre: you are undoubtedly making an investment choice that is largely predicated on the quality of your team.
Aaron Halfacre: to know, to be patient in what has been a crazy market ever since we listed, to make the tough choices that sometimes are not the sexy ones.
Aaron Halfacre: and to do that consistently I think speaks to the caliber of the team that we have and I'm very grateful for them.
Aaron Halfacre: And I think, you know, I just want to highlight that.
Aaron Halfacre: Doing all these things with basically no fresh capital and in an adverse rate and volatility market with limited traded float It in some ways we shouldn't even be here
Aaron Halfacre: I remember, I mean, if you think about it, when we listed this company, Powery, ticker PW, was a $200 million marketing company. I think they're like $3 million now.
Aaron Halfacre: Square Foot was a bigger, Presidio that is, was a bigger company than we are. OPI was a bigger company. There's so many companies that have made the wrong choices over the last two and a half years.
Aaron Halfacre: And here we are, still standing.
Aaron Halfacre: Still I think the quality of the portfolio is better than it was. We were more than 50% office three years ago
Aaron Halfacre: and now we are the really the only pure play industrial manufacturing readout there. You know I know Gladstone has picked up some in the end and that you know they trade, we trade Damir and Perry some days. But it really speaks to us just trying to be patient, trying to be disciplined.
Aaron Halfacre: not trying to be sensational. Yes, I have a very candid approach. Yes, you're seeing that in the press releases. But I think it really boils down to the fact that we're just getting stuff done. We're getting stuff done. We're being smart about it. We're being patient. And as we think about the balance of this year,
Aaron Halfacre: There's primarily two things that I'm focused on, and we don't have much of the year left, but one is that
Aaron Halfacre: that a pre-transaction that we
Aaron Halfacre: You know, we ordered our thirds.
Aaron Halfacre: on that and we're doing a site visit and you know we've been this has been negotiated for for months so I think you know barring there being a you know environmental toxic dump there that we didn't know about you know I think this is an all signs that we're going to get get this closed so that's one thing and the other one which you know many of you have caught on to and some of you if you know may be brushed over is the swaps
Aaron Halfacre: and just to spell it out in real simple terms.
Aaron Halfacre: When we put on our two different hedges for two different term loans, one was a hundred fifty million dollar term loan, one was a hundred million dollar term loan, they were done in 22 and 23 respectively, we
Aaron Halfacre: We entered into, to save on interest expense, we made, you know, a calculated decision to go into a type of swap contract that has a put feature at the end of the year.
Aaron Halfacre: And if the rates are materially, so we're massively in the money on these swaps, and so they're hedged us comfortably. And so, you know, we think it's highly, highly likely, like I would, you know.
Aaron Halfacre: zero percent probability in my mind that the first swap that's on 150 million will get put back to us.
Aaron Halfacre: And where the tenure is, which is, I mean, I don't know who hates the tenure like this more, Reits or Powell, because.
Aaron Halfacre: Thou doesn't have that in his chamber anymore because rates are higher than they were before we cut. So it's a confusing environment I think but right now I'm I'm betting that the second swap will also have to be canceled
Aaron Halfacre: will put back to us.
Aaron Halfacre: And we've been anticipating this for months. So it's not, there's no alarm, there's no concern. We have a game plan. We use Chatham Financial, which is sort of the premier derivative accounting pricing shop out there. And they price for us daily a series of different swap contracts that we can look at.
Aaron Halfacre: That would allow us to address this and like anything with the volatility in the rates We've been monitoring it right and so we've got it's
Aaron Halfacre: I know it's out there. I know for instance Steve Chick, one of our investors, might ask about it. I think we've got it covered. I think, you know, our approach to this is that the rates will be the same or lower.
Aaron Halfacre: right? And that's how we've engineered this going forward. That's the next thing on the focus, obviously.
Aaron Halfacre: I think that the third thing, if I was to add a third thing, that isn't necessarily economic, but I do think it's important, is we're going to...
Aaron Halfacre: increase the communication with investors.
Aaron Halfacre: We're going to continue to do some things differently. We are a very retail...
Aaron Halfacre: oriented REIT. I think we're probably the lowest institutional ownership of any REIT of this size.
Aaron Halfacre: Bar none. I mean, I think we have less than 90% institutional ownership.
Aaron Halfacre: And I'm okay with that. I'm okay with the fact that our stock trades damn near by appointment.
Aaron Halfacre: We trade a fraction of the shares that are outstanding because a lot of our investors just like to hold it, they like their dividend, they like to know what they're owning.
Aaron Halfacre: and they don't pay attention to the daily fluctuations in the market price. That makes it hard, obviously, to get big, large institutional investors into your ecosystem.
Aaron Halfacre: No large institutional investor is really interested in making those types of bets in this current market anyway. And so we like the retail investor. We like the individual investor. We think that's a force to be reckoned with. And so we're gonna try to work on that communication as well.
Aaron Halfacre: for the balance of this quarter and thereafter.
Aaron Halfacre: So, let's keep it interactive, and hopefully we have some good questions. I'm going to allow you guys to ask your questions, and if you need to, come back. We can, but I'd like to have a dialogue and make this a little bit more constructive for folks.
Aaron Halfacre: So with that, operator, let's open it up.
Speaker Change: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Aaron Halfacre: You may press star and two if you would like to remove your question from the queue.
Aaron Halfacre: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Aaron Halfacre: Ladies and gentlemen, we will wait for a moment while we poll for questions.
Speaker Change: The first question is from Rob Stevenson from Janney Montgomery Scott, please go ahead.
Rob Stevenson: Good morning. Aaron, beyond the Jacksonville asset, now that you've moved beyond these two larger deals that you were looking at, how active is the pipeline today and, you know, how are you guys feeling about that given your comments about rates and asset pricing, etc.?
Speaker Change: you know I like the pipeline right now it was in the last month which I think you saw comments from
Aaron Halfacre: from Buzz on GlideStone that they were seeing some opportunities, we are as well. I think over the summer it was pretty dry. I'm seeing a few more that I like.
Aaron Halfacre: Pricing, you know, it's price talk on some of these. These are manufacturing assets. These are durable manufacturing assets. These are not flex spaces. These are not warehouses. These are true manufacturing, but I think price talk on a lot of these has been
Aaron Halfacre: High 7s, low 8s.
Aaron Halfacre: You know, nothing that...
Speaker Change: Thank you.
Speaker Change: I get a sense from the brokers that, you know, there's not a lot of buyers out there right now, which makes sense, right? It's really hard to make some decisions in this environment. I think that, you know,
Speaker Change: Part of that logjam might have gotten cleared last night. We have tomorrow to see what that looks like, and more importantly, the response to tomorrow.
Speaker Change: So, I'm generally encouraged by the pipeline. That being said, you know, we're being disciplined because I don't want to take...
Speaker Change: I don't want to take on any more debt. And so, you know, that does limit our choices if you look at just raw capital. So we're being very mindful. That said, we have, and we sort of alluded to it in October, you know,
Speaker Change: on that that JV deal that one particular JV deal that you know it's been tabled for now contemplated as recycling some assets
Speaker Change: That's very, very viable and there are some assets on there that are not sort of true manufacturing. They are either industrial assets that are basically warehouses or they are non-industrial assets.
Speaker Change: There's a handful of them that are, you know, easily low six-cap assets that we could recycle into, you know, eight-cap assets and on a standstill basis generate a fair amount of AFFO growth.
Speaker Change: But I'd say, as it relates to the pipeline, we like what we're seeing. Early signs of it seems encouraging. I don't know how the inventory will change. You know, it's a weird phenomenon. What we're seeing now is what we're going to see for the balance of the year, typically, because it's too hard to get anything else closed.
Speaker Change: we typically then see a new surge sort of mid-January and but we see things we like, I'll put it that way.
Speaker Change: Okay and then the Jacksonville OP unit asset is that the is the six million of OPs the entire purchase price or is there also a cash element there too that pushes the price over that up over six million from a modeling perspective?
Speaker Change: Yeah, no, it's all in. That's it. There's no cash.
Speaker Change: Okay.
Speaker Change: And then I guess the other one for you is that you alluded to it a minute ago in terms of asset sales. How are you thinking about the the Kia asset and sort of when the right time is for you to sell that asset given that it
Speaker Change: It's probably, you know, one of, if not your largest asset.
Speaker Change: and going to wind up having significant capital coming in and to be redeployed is...
Speaker Change: you know.
Speaker Change: some time in 25 the right time to sell that asset? Is there certain, you know, benchmarks along the way that you're looking for to figure out when the right time is to recycle that asset?
Speaker Change: um
Speaker Change: or OES that they, you know, they're going through their valuation process in hopes of exercising their purchase option. So those are two assets that are also large.
Speaker Change: that also need to, you know, that are definitely...
Speaker Change: office and so we want to address those.
Speaker Change: Interesting, in Solar Turbines, which is a tenant that's in San Diego that is leaving in July, and we've known this and we'll look to put that on the market as an owner-occupant, just up until about three weeks ago, that parcel, the Solar Turbines parcel, was conjoined with the WSP parcel.
Speaker Change: And we've been spending the last two years trying to get that split in the city of San Diego, which we did. So those parcels have been formally split, and so that's good for us because obviously we have an eight-year lease on woods.
Speaker Change: that positions that asset well, we'll explore options with that one, but then we can now pair off the solar turbines. I bring this up because there's some housecleaning still to do, we're not done with those.
Speaker Change: In the meantime, Kia continues to be a high quality asset, great long lease term, attractive rent bumps.
Speaker Change: And my view is that as we get into a much more stable rate environment, because it is a large asset to purchase, you're going to find that the cost of capital for those who want to buy it is going to be better. And so, could it happen in 2025? I don't have any designs on that.
Speaker Change: It does have a very low tax basis, so we have to be very mindful of the 1031 exchange.
Speaker Change: I think there'll be plenty of opportunities. I do say that you know at some point we're going to want to have all industrial and that's going to be sooner than later.
Speaker Change: As I look on the horizon, I'm spending a good amount of my time, obviously, we're looking to grow.
Speaker Change: Thank you.
Speaker Change: gain more market cap, but absent that, absent there being a real demand, I have to be mindful of our existing investors and there's, you know, there's...
Speaker Change: there's over 10 million shares outstanding and those people care about what we're doing. And so a big part of my focus is thinking about the preferred that is callable.
Speaker Change: I think it's September of 26, and I think I'm also thinking a lot about our January 2027 maturities.
Speaker Change: and making decisions today that will put us in a really, really good position.
Speaker Change: for those events. And so Kia could could come into play on that time horizon, certainly. But you know, I'd say that it's an attractive asset. It's massively cash flowing. That was a really smart trade for us.
Speaker Change: you know 405 frontage it's not going to go away I don't I'm not I'm not itching to sell that
Speaker Change: Okay, that's helpful. And then Ray, from a numbers perspective, you bought back some OP units and possibly some stock during the quarter. What was the average price on the stuff that you bought back in in the third quarter?
Speaker Change: 1480
Speaker Change: in January 22 at 25.
Ray Pacini: So, the 780,000 units, which was OP units and stock, issued at $25,000, retired at $1,480, and then we turned around and prospectively with the OP unit transaction for the Jacksonville, Florida, we'll have reissued 600,000 of those 780,000 at a $2 per share premium.
Speaker Change: okay that's helpful and the last numbers one for me the dividend increases effective January not for the already declared fourth quarter dividends right
Speaker Change: That is correct. Yeah. Okay. Thanks guys. Appreciate the time this morning.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from Brian Mark with Be Riley Securities. Please go ahead.
Brian Mark: Good morning and thank you. Just a couple for me this morning. Aaron, you know, you've been pretty quiet, I think, on your current tenant performance except for, you know, the ones we know about Costco, Keyu just talked about.
Speaker Change: Is there anything else going on in the portfolio that we should know about, any known vacates other than I think you just talked about solar turbine, can you just give us a little bit more color on, you know, kind of the day to day with your tenants?
Aaron Halfacre: Yeah, so, there's cholera still out there, right? So, we've resolved that. That's an empty box. It's been empty, basically, since summer, since the bankruptcy proceedings ended. We are...
Speaker Change: We've had numerous conversations with different strategic parties.
Speaker Change: both
Speaker Change: both vertical growers as well as even, you know, we even had someone reach out to us who liked it for dry cleaning business because of its water source. So we are getting ready to take that property to
Speaker Change: formally to market.
Speaker Change: We're kind of over waiting. I think I think we're going to do it soon But you know some day fourth quarter or probably January. That's the only one that's you know not
Speaker Change: that's not carrying its freight and we we will look to to
Speaker Change: Four years ago, they did a two-year extension.
Speaker Change: And then two years ago they did one more two-year extension, or they had an option, they exercised it, and we knew they were leaving here. And we're hope—we're actually very glad they are, because the pricing on that from an owner-occupant standpoint is much higher than it would have been from a tenant standpoint. So it's in a—
Speaker Change: And I think you actually toured it back three years ago. So we're looking forward to that one. Other than that, I mean, this portfolio, look.
Speaker Change: And I think this is a framework that I think I think an individual investor appreciates, right? Like all my network is in this company.
Speaker Change: and, you know, and I hate the belief that a lot of people's net worth or a meaningful portion of it is in here and they they don't want us to, pardon my language and I, you know, I'm already a foul-mouthed sailor as it is, but they don't want us to fuck it up.
Speaker Change: And so we're spending a lot of time building what I believe is a fortress.
Speaker Change: I mean, we've got 14-year WALT, a 13.8-year average WALT, but that includes solar that is going to be leaving in six months, right? That LabCorp, which just, you know, we just got a five-year extension a year early, and, you know, they'll probably get, continuously do fibers. We don't have...
Speaker Change: Really, almost all of our things are absolute triple net. There's a handful of some double net leases in there that are legacy that eventually I'd like to take care of. But the vast, vast majority of our portfolio is absolute triple net with 20 plus year leases.
Speaker Change: and they're solid, like.
Speaker Change: salt-of-the-earth manufacturers that just keep making the same stuff they've been making for 30 or 40 years. And so it's a really solid portfolio.
Speaker Change: And there's not a lot of, you know, pulling your hair and ashing of your teeth in this, I think. That helps, I mean, so there's inherently, when you look at the top ten roster, you look, oh, there's concentration risk. There is. I would love to be five times the size.
Speaker Change: But when you have 43 properties, you watch them like crazy, right? I mean, you're sitting on your eggs. And so this portfolio is really solid. So there's nothing in the portfolio at all that causes me…
Speaker Change: To be worried or I gotta I gotta I gotta do this before that You know, obviously if the unknown unknown happens, that's always a shitty situation. That's what we had with cholera But we're working through that and you know, I think Other than that, this is a really solid portfolio in my opinion
Speaker Change: And just one more for me. Thanks for those comments. You know, given the election outcome, you know, regardless of what you think of each candidate
Speaker Change: Is that changing your view on your acquisitions? I mean, I guess we should expect increased on-shoring of manufacturing, but how does that...
Speaker Change: tweak how you're thinking about acquisitions of industrial manufacturing going forward. And that's all for me. Thanks.
Speaker Change: Yeah so I and I think I mentioned this and I have to go back and pull it but you know I talked about why industrial manufacturing. I think there's some great some great
Speaker Change: national
Speaker Change: were there under both
Speaker Change: campaigns.
Speaker Change: But I think they're still going to be there.
Speaker Change: for the next while, right? I think if we look at Trump and if he introduces tariffs.
Speaker Change: But the things that we're manufacturing are already being built here.
Speaker Change: They're already being sold here. They're already valuable. So I don't expect them to
Speaker Change: will they get a surge of new orders? Maybe they will. But even if they got a surge of new orders, maybe even if our tenants got like triple the orders tomorrow.
Speaker Change: We're still getting our rent.
Speaker Change: We're an at-least company, so we're not participating in them. Just like if they had a slightly low manufacturing output number, we're not looking for them to go dark. It's really sort of bedrock. I'm grateful that we're supporting sort of American workers. I really believe in them. I think that ...
Speaker Change: With a Trump administration, it's probably more likely that you'll see
Speaker Change: you know on shorting possibly even near shorting I think you're going to have but even if that did even if that did happen
Speaker Change: It takes time right and I think I think there was actually
Speaker Change: or Elon Musk. He just noted that manufacturing takes time to start up.
Speaker Change: That's why we're very focused on manufacturing that's already been here, it's durable, and not necessarily something that moves like a stock, right? And so I like manufacturing because it makes something.
Speaker Change: It's not based on consumerism.
Speaker Change: separating your discretionary dollar from your wallet so to make someone else it's stuff that's very durable products I mean you know things that you're just not going to see on Amazon or eBay or even in a dollar store of all you're just not going to see these products and they're really and they're boring and I like that
Speaker Change: You know, I like the way they're born and they're consistent and so I think this environment is conducive for that I think people would this is the unique thing about us because we have no institutional fellowship
Speaker Change: is that we trade very different to the broader market. We're almost an automatic diversifier. And you could own, if you wanted to own, you know, a handful of REIT sectors.
Speaker Change: We're really the best option if you want to own American manufactured There's not a really another way to cleanly do that unless you own industrial names themselves But then they take on so many other different noises with commodity pricing things like that You know we basically have
Speaker Change: You know if management gonna is gonna screw up your balance sheet or not so far We haven't you know and if we do shoot me
Speaker Change: And then, what is the rate environment going to do, and what are the broader trends for REITs? And if you think those are going to be in your favor, and you like real estate, and you like REITs, this is kind of an easy thing to add into your portfolio, because it's non-correlated to your BNQ trade.
Speaker Change: and it's buying something that's got lots of durability and yes, it has upside. I mean, if you go back and look at our last appraisal for the NAD in January, which we'll probably do another one next year, it was like $23 a share.
Speaker Change: And someone might say, oh, you guys just hit a new 52-week high in the last two weeks. And believe it or not, we hit a new 52-week high after we told the market we weren't going to do the JV, which shows you that people want you to make smart decisions with your money.
Speaker Change: And I read so many press releases from so many CEOs, and it's not written by them. It's written by their attorneys, it's written by their IR folks, and there's nothing wrong with that. And if you're a large institution, you've got to do that. But, you know, you think back for...
Speaker Change: 20, 30 years.
Speaker Change: and they just raised retail money and they did a great job doing that. But you have to be very transparent, you have to be very solid. So this is a good investment at a good time. And so I'm encouraged by manufacturing.
Speaker Change: I need more money to buy more assets, but I only get more money if people want it because I'm not going to borrow it.
Speaker Change: So we're only going to get more money if people like the share price.
Speaker Change: and they own more of this. And the good news and the bad news about having no float is that on any single day, some dude in his underwear could sell 1,000 shares and our stock can fall 2%, but also can go up 2%. I don't even know what it's doing right now, but it trades very differently than the rest of the market. And if it's trading well, we're gonna focus on raising capital to retail investors.
Speaker Change: so that they get rewarded because eventually we'll have to you know down the road and it could be it could be 500 million could be a 600 million could be a billion dollar markup before you're really going to have institutional investors.
Speaker Change: care about to in any meaningful way. Until such time, we're going to focus on the people who have been in the fund and like it, and I think they like manufacturing.
Speaker Change: Thanks, Aaron. Up 4%.
Speaker Change: Oh, nice.
Speaker Change: Thank you. The next question is from Gaurav Mehta with Alliance Global Partners. Please go ahead.
Gaurav Mehta: Thank you. Good morning. I wanted to go back to your comments about your expiring swaps. Do you expect the new hedges that you're looking at to have similar terms and similar rates as your expiring swaps?
Speaker Change: So yeah, so I said, the way we're engineering it was it's going to be at the same all-in rate or better. So that's how we've been looking at it. That's how we've been getting our daily quotes. I'd say the one thing, I won't do any more cancellation features. I remember being in business school.
Speaker Change: 23 years ago at Rice and this is back when Enron was around and you know all those crazy things and there was a case study about airlines and should they hedge their fuel cost or jet fuel cost or not and some airlines
Speaker Change: took a 50% hedge, some went on hedge, and some...
Speaker Change: Some, you know, went fully hedged. And the decision to hedge comes with consequences. In read environment, you absolutely need to hedge. Is it safe to assume that between this point now and maturity rates will go down? I think it's generally leaning towards that versus going up.
Speaker Change: So you could argue, well, rates should come down.
Speaker Change: But I don't like the uncertainty. I don't think an individual investor likes the uncertainty. I don't like debt. I understand how debt is a necessary evil in the REIT space.
Speaker Change: I like the days when, remember, public storage had all they had were preferreds and common? That was a wonderful time. I don't personally care for debt, but I know I understand its role, but we will hedge it. So we'll hedge it at the same rate or lower.
Speaker Change: What we will do differently than we did last time is we will not put any put features in and we will hedge exactly to the maturity date of our debt.
Speaker Change: And why that is significant is our FFO gets swung around because of this hedge is not deemed a perfect hedge.
Speaker Change: So you have this non-cash.
Speaker Change: interest expense that hits us one time it's up, one time it's down, that's just noise. And I don't like noise either. So I think you'll look to us to buy hedges that are.
Speaker Change: perfectly tied to a maturity and and all things being equal those should lead to perfectly hedges and so then they will will strip out some of that FFO volatility that I wish I didn't have.
Speaker Change: Okay, thank you. That's all I had.
Speaker Change: Bye.
Speaker Change: Thank you. The next question is from the line of Barry Oxford with Colliers. Please go ahead.
Speaker Change: Great, thanks guys. Thanks for the explanation on the hedge, Aaron.
Barry Oxford: Looking at kind of your cost of capital and the arrows in your quiver,
Barry Oxford: Where does the stock price sort of come in? You're up 15%.
Barry Oxford: year-to-date You know again, you're up. You know nearly four four percent right now 17 and 40 17 and a half
Speaker Change: At what point do you say, hey, I'm
Speaker Change: I'd be willing to do a decent sized chunk, whatever number that is, in order to sort of kind of grow my asset base versus sales, which is just kind of, disposition, which is just kind of running in place.
Speaker Change: So, it's a good question. It's one that I've been obsessing over for two years, and you know, I'd say I've gone through
Speaker Change: It's sort of a bit of a cathartic process over the last two years. It's not been an easy environment.
Speaker Change: We, you know, we are...
Speaker Change: Even though there are some people who, you know, don't like any DNA, I think we've done pretty... I mean, we have 11 people. We, you know...
Speaker Change: We've squeezed the juice out of every lemon we had. We've worked really diligently to get things done with not having anything. There's a song by Oliver Anthony that says, I don't have a dollar, but I don't need a dime. And that kind of fills how it's been. We've done a very...
Speaker Change: We've done a tremendous amount of work with very little capital. I mean, if you think about the $3.9 million we raised, I mean, I think we've raised
Speaker Change: If you since we've been public in common shares, you know actual issuance and things like there's like six million bucks total Maybe if that I mean over three years
Speaker Change: Yet, you know, we're now, we just hit a new, you know, 52-week high not too long ago, we're apparently up today. I, look...
Speaker Change: about
Speaker Change: The JV about when we were looking at the JV, one of the one of the last things we looked at was, let's see, maybe we could raise some money.
Speaker Change: And I didn't want to raise very much, you know, I wanted to raise, you know, 10, 15 million bucks. I think that would be good. I could have probably papered over some of the differences in the JV, maybe.
Speaker Change: But when we started talking, the model typically is, and this is, you guys know this well, but to any retail investor who's listening to this or reading this on Seeking Alpha in a week from now.
Speaker Change: The process is you go do an overnight or a wall cross or you do a raise and everyone wants the institution to anchor the investment. They don't want to really take the risk. And so they want the institution to take the...
Speaker Change: to anchor the investment. As I already mentioned, we don't have institutional followership.
Speaker Change: We've done everything that we're supposed to do like a big REIT, but the system is designed for big REITs.
Speaker Change: The system is designed for easy money.
Speaker Change: Easy money for banks to get paid, easy money to issue, easy money to cost the capital to go buy more shares. Bigger, bigger, bigger, bigger. You know, there are huge REITs. We are minuscule on the scheme of things.
Speaker Change: But the whole ecosystem is designed for big money REITs. And what I mean by this is that you've got to go to the institutional investors and they're going to anchor you and they're going to go up to you and say, okay, well, your float sucks.
Speaker Change: I want to buy, if I'm going to do this, buy the shares, I want to be de-risked so that I can flip these shares.
Speaker Change: within a very short period of time.
Speaker Change: And if you thought about a $10 or $15 million raise, that's damn near 10% of our market cap.
Speaker Change: it would take much, much longer to unwind that position, right? There are days, like literally, there are days where we have like almost no volume for the first two hours of the day, right? And so how would someone try to unwind it? So how they do that is they say, okay, we'll take your shares, but we want a 15% discount.
Speaker Change: And then, you know, if you think about the banking costs, that's probably, with your underwriting costs and your fees, that's probably another 10% all-in cost of all the legal costs and everything like that. So, suddenly you're looking at...
Speaker Change: issuing shares at a 25% discount just to go buy a property, and that doesn't transform you.
Speaker Change: And I know there's been conversations about re-IPOs and things like that. You know, there are good and bad things about what we've done in the past. If I go back in history, we listed the shares when we did, and we didn't do a big raise.
Speaker Change: Because I felt it was really important that investors had choice. I'm a big guy about individual freedom. I don't like to be told what to do. I don't like to have to tell anyone what to do.
Speaker Change: It's important to have individual freedom. And our legacy investors were crowdfunded investors. And look what happened to BeReed or Starwoods Reed or all these other ones where they had the gate and they had the gate. I know what that feels like, the gate.
Speaker Change: We were in we had individual investors in a non-trader reach and they wanted out and I knew that we couldn't sustain Just doing that because that would be a self liquidation. So we enlisted the shares. We did not provide any lockup
Speaker Change: Had we done it differently we could have probably done a big re-IPO but that big re-IPO would have been selling half the company if we raised 150 million dollars we didn't sell it half the company to institutions at a huge discount and so they would have won and the individual investors would have lost
Speaker Change: And my view is that we can be patient, we can continue to grow. If we raised $4 million last ATM, if we did that every quarter, that's a 10% raise in the market cap without having to give away shares.
Speaker Change: without having to destroy the intrinsic value of the company.
Speaker Change: And, you know, remember, those appraisals suggested that we had Seabury and Cushman do those appraisals last year, and they said we were, you know, if you were to go sell these assets, it'd be roughly $22. You can say, oh, that's BS. It's not that much. Okay, let's take $20.
Speaker Change: there's a there's a liquidation value out there and so raising a bunch of capital or selling the company at an artificially low price all it does is you know probably lines my pockets
Speaker Change: and it probably lines bankers' pockets, but it doesn't grow.
Speaker Change: the dividend, it doesn't grow the strength of the portfolio for the investor. So it's a long way when they say that, look, we are gonna lean into the retail.
Speaker Change: Investor Forum. We think there's if they respond and they are interested that we will raise in that manner And if we can raise a lot and it can go to them We'll do that if we can raise a little but it goes to them. We'll do that Eventually what will happen?
Speaker Change: It's pretty clear, if you study history, it's pretty clear, one of two things will happen here. Well, there's three things. One is you guys can end up hating me, and I'm out.
Speaker Change: And, you know, good luck whoever is going to take this job.
Speaker Change: on the back end because it's still got work to be done, but I think I'm right now I'm in I'm the guy in charge. I'm gonna work my ass off every day to make sure we do it. So there's that option It's always there. It's always it's always there. We got a proxy going on right now Anyone can always say get this dude out of there, right? But barring that
Speaker Change: There's two paths. One is we'll incrementally start growing, you know, 10 million, 15 million, 20 million, 30 million, and we'll certainly be, next thing you know, we'll be at $207 million market cap, and the indices
Speaker Change: The passive indices will have to buy our shares because now we'll have we'll hit their thresholds
Speaker Change: And then, as you've ever seen this before, when they have to go buy, they have to buy.
Speaker Change: and they don't get to play the games. They go out and buy. And so that will be a huge uplift. And I'd rather do that with retail dollars than institutional dollars because eventually institutional dollars will come in.
Speaker Change: and if I just did just like knock it out of the park and if I could I would if I go out tomorrow and double our our size by raising exactly 50 you know the same amount of shares so so basically selling half the company
Speaker Change: We'd still be $300 million.
Speaker Change: We've got a long time to do. There's a lot of upside. And so there's that path that will continue to chip away and get bigger, and then eventually will be sort of mainstream, and this will die down. The alternative is…
Speaker Change: is at some point in those years it takes to get there, some will say, you know what, Dan, we like your portfolio, and we're going to go buy it.
Speaker Change: And so either way, the investor wins.
Speaker Change: It's just a slower game. It's not fast, it's not sexy. If we can raise large sums of money and we can do it accretively, and I'd like to do it for retail investors, or those institutional investors who believe in the retail investor.
Speaker Change: then we'll do it. After that, we're gonna be, you know, hunkered down, dragging our knuckles, working hard through this and, you know, seeing what we get.
Barry Oxford: That all sounds reasonable, Aaron. Appreciate the color. Thanks. Thanks, Barry. Yep, yep. Thank you.
Speaker Change: Looks like we have one more question.
Speaker Change: The next question comes from Steve Chick with Sebes Garden Capital, LLP. Please go ahead.
Steve Chick: Thanks for the call on the swaps, by the way, I think that's really helpful.
Steve Chick: Looking back at the JV transaction that's been tabled, you know, the Miami battleship, you know, with these deals and the way you want to structure it, the sellers would be, you know, kind of post money shareholders.
Speaker Change: in the company.
Speaker Change: and from the terms that you kind of roughly outlined when you made the announcement last month, it looked like the deal would be very accretive and bullish for the stock.
Speaker Change: So, I guess I'm curious as to, you know, the balancing act that they're doing and why.
Speaker Change: You know, what's kind of the obstacle for them to do a deal that where both sides benefit potentially so materially?
Speaker Change: Thank you.
Speaker Change: So...
Speaker Change: So what was known was the first half of the deal, and you're right, that would have been accretive. The shares would have been issued at an attractive price.
Speaker Change: we would have used a modicum of cash, we would not incurred any debt on this, we would have, that would have been a creative transaction.
Speaker Change: Assuming that we could take down the second half of that portfolio at that same cap rate, it would have...
Speaker Change: All the way through it would have been accretive, right? And be mindful, it was a balancing act. It wasn't like we were... no party was ripping...
Speaker Change: either's face off, right? It was a balanced, it was a creative, they would be making money.
Speaker Change: You know, they would have been in the money on that trade. We would have been in the money. I think a couple of things came into play. I think, and look, I alluded to this, and I own this, is that
Speaker Change: For accounting reasons, you know, the JV couldn't have still spelled out exactly the second half. And so I
Speaker Change: I misunderstood or I wanted to be optimistic and I thought that, you know, the agreement we had allowed us to take down the remainder of the same cap rate.
Speaker Change: Thank you.
Speaker Change: And that wasn't their perspective, and I think that, and that's fine, and I don't think they, I don't think they, uh...
Speaker Change: Misled us? At all?
Speaker Change: I think I just we just had a miscommunication and sometimes that happens because you're focused on so many things and you get a Term she's going back and forth with attorneys. It wasn't evident until some of the the attorney language came out I was like, well, this isn't what we this the mechanic that they're suggesting wasn't the one we thought of and so, you know Could I closed over it?
Speaker Change: There's been so many, probably CEOs out there who have been in that thing. I have to think about Jeff Witherall at Plymouth, right?
Speaker Change: he got done with the Madison stuff, cleaned up this balance sheet, and then he comes and does another deal with Sixth Street. And at that, and probably when he started that process.
Speaker Change: He probably thought this looks good. This is going to be a good deal. This is going to help us grow and He did everything with good intent and probably what happened is it got down to the 11th hour and you get sort of you know
Speaker Change: You get so far down the road, some people, there's this sunk cost balance.
Speaker Change: And they're like, oh, well, I got to close over it. And he did, and he was trained at 23, and I think he's at 20 now. And generally, the people didn't like it. And I'm not criticizing him or what he did. He had to do what he had to do, and he's making his own decisions, and I don't know. But there's been, undoubtedly, there's spots where CEOs are in this thing where they, like, they've got legal dollars spent, everything's good, and there's ego, there's pride, there's reputation, there's all these things.
Speaker Change: I did not know with certainty that I could take down the second portion of that portfolio at the same cap rate that I negotiated. I knew we were in a changing environment.
Speaker Change: And I knew that, hey,
Speaker Change: It was reasonable for this.
Speaker Change: other party to go out, and if they could go sell these materially tighter, then yeah, maybe I would have been unwound, right? Because we could have sold the asset, and I would have sold my portion at a tighter cap rate then. But I wasn't doing this as a trade.
Speaker Change: I was doing this to add true industrial manufacturing portfolio into ours, combine the natural strengths to diversification, and to give us size. Because size does matter down the road. But I wasn't going to do that.
Speaker Change: I wasn't going to tilt into a hope certificate or a windmill and just hope for the best, because that's not a strategy with people's dollars.
Speaker Change: And so, I didn't have that certainty. That's why we had looked at the market to see could we go do a little bit of raise to buy certainty. But then that raise, when I talked in that particular situation, was going to be not accretive. And so, okay, why am I doing this?
Speaker Change: because I want to be bigger? Because everyone tells us we need to be bigger? No, we need to be smarter.
Speaker Change: And so that's still a solid portfolio.
Speaker Change: And they very well may read or listen to these things and they're great guys. There's no problem about it. They will probably... Well, here's an interesting thing. Depending on what rates they do, they will probably sell that higher than what they sold it to, or were willing to sell it to us.
Speaker Change: They had a fund it was in an institutional fund that was closing So they had they didn't want to wait for us to sell a couple of assets and roll them over They wanted us to do it fast
Speaker Change: and I just didn't want to take that risk because if I go out and say okay I'm gonna go sell Kia tomorrow life might be a really crappy time to sell Kia and I don't really want to sell Kia right now
Speaker Change: But if I had to go put a gun to my head and tell Kia just to go close the other thing to maybe get that thing That's that's
Speaker Change: That's forcing a decision that's not smart. And so that's what really came out, is that we had to make a tough decision.
Speaker Change: We could have closed over it. The first quarter should have looked accretive. We probably would have rallied in the near term. But I would have taken on sort of existential risk on the back end.
Speaker Change: And, you know, I have to think two years ahead.
Speaker Change: I can't think a quarter and I did it two or three years ahead because I have to I have to do this I have to preserve the value of the portfolio while growing it intelligently and so
Speaker Change: very similar sides that we've had conversations with.
Speaker Change: But here is the fundamental problem right now.
Speaker Change: All these private equity portfolios, which I like, and they're neither better or worse quality than ours. I mean, when you're getting manufacturing, you know, there's always a little bit of dirt and rust on your facade, right? There's a patina, but they're good, durable assets.
Speaker Change: But they're all levered portfolios, and all of these portfolios are 21 vintage portfolios.
Speaker Change: So if you leveraged your portfolio in a PE fashion, let's say, I don't know, maybe at 60%, maybe at 70%, if you leveraged it in 2021
Speaker Change: and maybe you took four or five year paper.
Speaker Change: You've got to solve for this. You've got to solve for this probably by the end of next year.
Speaker Change: A lot of these. Some of them may be a little bit longer.
Speaker Change: If you look in August, you'll go, okay.
Speaker Change: Winds have shifted. Rates are going to come down. We're going to start to see clarity January, February, March. Maybe we're going to have a lot of, you know, flowing capital again.
Speaker Change: But we've got a 10-year that's higher than it was before the Fed ever did anything.
Speaker Change: And we don't have a clear path to what that rate's going to be in a year. And they're looming debt maturities coming.
Speaker Change: and we haven't really seen the CRE doomsday articles recently and I'm not saying that they're going to happen and I think some of them are way overblown and they're mischaracterized but the reality is there is a lot of leverage in the system that does need lower rates or they just need a sort of a come to Jesus moment because they're going to have to pony up more equity.
Speaker Change: And so with these portfolios, they all have...
Speaker Change: Highly leveraged capital assets.
Speaker Change: I'm not flush with capital.
Speaker Change: If we could go, if the market said, hey, we'll give you $100 million, a capital that's accretive.
Speaker Change: I'm going to do those deals.
Speaker Change: But I don't want to bet on some future thing and say hey, I was wrong, the market does not give a shit about us. They do not want to give us this money and now we're stuck with a portfolio that we can't close in the back end. Because remember, when I was at Campus Crest, I stepped into that and it was nasty.
Speaker Change: It was a nasty thing to do, see, where you had a half-completed upreed transaction and a JV that owned 50% of your portfolio, and you had, you couldn't, you were in a rock and a hard spot.
Speaker Change: And that's because the decision was made years prior. And so I didn't want to do that. It's a tough decision we made. Will these come back? They could.
Speaker Change: We don't want to burn bridges. We are the premier manufacturing...
Speaker Change: the reason why they are having conversations with us.
Speaker Change: and from the other ones that have been having conversations with us, is we are a form of liquidity. We are a way for their investors to get shares, but then make the individual decisions.
Speaker Change: Because if you're a fund, you're making a singular decision. We are liquidating this fund and you're all getting your money back and either they'd like to roll their money into the next fund or not.
Speaker Change: As a public company, everyone gets to make an individual decision. So you, Steve, tomorrow need money to go to Disneyland, you can sell your shares.
Speaker Change: and the guy next to you doesn't have to. And so that's still valuable, that currency is still valuable, and we believe that those opportunities still exist, but we just weren't gonna force it now.
Speaker Change: All right
Speaker Change: We talk everyone to death.
Speaker Change: Thank you.
Speaker Change: All right, everyone. Thanks so much.
Speaker Change: Until next time, I encourage those who are reading this later on Thinking Alpha or wherever or who are listening in, do send us your questions, do send us your critiques. I don't mind the tough questions. I will try to be as transparent as we can without, you know, breaking any rules. And I hope you guys have a good holiday and get some rest. Be well.
Speaker Change: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.