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Introduction
If you're looking for an investment opportunity in the real estate market, Modiv Inc. (NYSE:MDV) might have caught your attention. Modiv is a small-cap net lease REIT that offers high yield and diversification. While the company faces some challenges, it presents an intriguing value play with potential upside. In this article, we'll explore Modiv's background, portfolio, balance sheet, and future outlook.
Thesis: Lots Of Potential But Cost of Capital Disadvantaged
Modiv Inc. recently made its debut as a public company, but its roots trace back to 2006 when it started as a commercial real estate crowdfunding platform called Rich Uncles. Over the years, Modiv has evolved and expanded its offerings, focusing on net lease properties. With a refreshed management team and improved portfolio quality, Modiv has the potential for growth. However, its cost of capital disadvantage poses a challenge. The company will need to rely on capital recycling for expansion rather than raising new equity or debt capital.
Overview of a Net Lease REIT Newcomer
As of March 31st, 2022, Modiv owned 36 net lease properties across the United States. The second quarter saw significant acquisition activity, bringing the total to 44 properties leased to 29 different tenants. Approximately 55% of the portfolio is leased to investment-grade credit-rated tenants. The property breakdown by annual base rent is as follows:
- Industrial: 46%
- Office: 35%
- Retail: 19%
Modiv's top three tenant industries are Automobile & Components, Pharmacies, and General Retail. The weighted average remaining lease term has increased to 10.6 years, providing long-term stability and income potential. The company has been strategically disposing of office and non-essential retail properties to optimize its portfolio.
Balance Sheet
Modiv's balance sheet has undergone significant changes over the past year. Equity constitutes approximately 53% of total capitalization, while the remaining consists of various forms of debt. The majority of debt (93%) is fixed rate, providing stability amid rising rates. The second half of 2021 and early 2022 saw property dispositions and debt reduction. Although the net leverage ratio fluctuated due to timing gaps, Modiv's overall debt decreased steadily. The company aims to maintain a reasonable leverage level within the net lease REIT sector.
Bottom Line
In 2021, Modiv generated $1.30 in AFFO per share while paying out $1.05 in dividends, resulting in a payout ratio of approximately 81%. Management expects to generate around $1.31 in AFFO per share with a higher dividend payout ratio of 88% in 2022. Given the complexity of Modiv's portfolio and the ongoing evolution of its balance sheet, it is prudent to wait for the company to settle into its final form before developing a more concrete investment thesis.
However, Modiv's preferred equity, MDV.PA, presents an intriguing high-income opportunity. The Series A preferred equity offers a yield of 7.375% and has a call date in September 2026. With a current trading price of $24.36, the effective yield stands at 7.57%, slightly higher than MDV's common stock dividend yield. It's worth noting that MDV.PA's trading volume is low, so using limit orders when buying or selling is advisable.
Overall, Modiv holds potential as a value play, but investors should consider the cost of capital disadvantage. For those seeking high income, Modiv's preferred equity appears attractive.
