Generation Income Properties, Inc. (GIPR) Earnings Call Transcript & Summary

Thank you, and good morning to all of you. Joining me on this call are David Sobelman, our Chief Executive Officer, along with Allison Davies, who serves as Chief Financial Officer. David is going to walk through an overview covering the company's growth strategy, its business, and capital markets activities, plus highlights from the second quarter and events that have occurred since then up to today. Allison will then go over the financial results for the quarter. Prior to getting started, I want to remind everyone that remarks made on today's call will contain forward-looking statements under federal securities law. Statements that aren't historical facts — for instance, statements regarding acquisitions or dispositions we expect — count as forward-looking statements. Our actual financial condition and results of operations could differ materially from what those forward-looking statements contemplate. A discussion of the factors that might cause our results to differ materially from these forward-looking statements appears in our SEC filings, which include our 2022 Form 10-K that was previously filed with the SEC, our Form 8-Ks, and our report on Form 10-Q. Additionally, certain financial information presented during this call includes non-GAAP financial measures. For definitions, GAAP reconciliations, and an explanation of why we consider such non-GAAP financial measures useful to investors, please refer to our earnings release. With that, I'll hand the call over to our Chief Executive Officer, David Sobelman.

Greetings from Tampa, Florida, this morning. We appreciate you being with us today. There are a number of things we want to share with our shareholders and the broader public. It feels right to begin by thanking our Chief Financial Officer, Allison Davies. This marks the final earnings season she will spend with GIPR. We're glad to say that her role in growing our company deserves to be highlighted and celebrated. The contributions Allison has made to the team on behalf of our shareholders mean a great deal to us. We look forward to seeing her career flourish going forward. As we told you at the start of the third quarter of this year, in August we bought a $42 million net lease portfolio containing 13 properties across eight states. That deal, done off-market with the New York Stock Exchange REIT Modiv Industrial, lifted nearly every key metric in our portfolio, benefiting our shareholders. GIPR now holds 26 net lease assets, which is a 100% increase versus the prior quarter. That's almost 540,000 sq ft of commercial properties, up 60%. Occupancy now stands at 96%, a 3% increase. The average lease term across the portfolio is 4.5 years, an 8% increase. Perhaps most importantly, our adjusted base rent as of the end of the third quarter now comes to roughly $8.6 million, a 70% increase. We managed to achieve all of this without materially altering the investment-grade credit composition of our portfolio, which today sits at 68% — among the highest levels of IG credit relative to our net lease REIT peers. While these meaningful improvements to our portfolio's metrics thrill us, we unfortunately believe the current share price does not reflect them. Our thinking and planning span generations rather than existing just to satisfy one quarter. As Warren Buffett put it, "Someone's sitting in the shade today because someone planted a tree a long time ago." We have plainly laid the foundation, or planted our tree, for what we see as an enormous opportunity to add assets and grow our company's value. Our focus will remain on disciplined growth and building long-term value for shareholders that we hope the wider market will eventually recognize. With this deal, our total gross asset value now exceeds $100 million — one of our goals for 2023, and one that Nasdaq acknowledged on the Times Square Tower known throughout the globe; we understand that even monumental transactions belong to the past, so the team at GIPR keeps monitoring the net lease and capital markets to identify the best opportunities for beginning to buy on a regular basis. A capitalization rate, or cap rate, is one of the main barometers we rely on to judge when to reenter the acquisition market. It's the yield a property produces based on the relationship between the purchase price and the net rent received from the tenant. Cap rates are rising. Yields keep climbing, and people are starting to accept the fact that the pool of buyers looking to acquire net lease properties is much smaller today than it was across the prior decade or so. With deal volume down, interest rates up, and fewer 1031 exchange participants, an industry that lately has relied mainly on sales to less sophisticated private investors—REITs look to be in a strong position to capitalize on the dislocations that have worked their way into our sector during the past year. Across a 20-year career spent almost entirely on net lease properties, I have witnessed cap rates rising at this exaggerated pace on just one other occasion: from 2008 to 2011, the great financial crisis. Many professionals in our industry have told me the famous last words, "This time it's different." The data is the data, and our plan is to follow it rather than anecdotes that pull our attention away from seizing the opportunities in front of us. We have remained patient. That patience paid off with the Modiv acquisition, which we believe has sped up our company's trajectory. Patience will also be necessary for the next phase of growth, as we devote all of our efforts to striking the right balance between pricing and current market conditions. Our shareholders are served by a long-term outlook—one in which we believe we can keep building a portfolio delivering stable and above-market returns, and one we also believe will beat other fixed income investments. To our shareholders we made a promise and a commitment: be prudent, not reactive. We look forward to reporting our company's next stage of growth, though we cannot do that without methodically working out the best opportunities for every shareholder who is counting on us. Turning to an operations update: GIPR has recently brought on Ron Cook through ONE10, an accounting firm based in Tampa, Florida. Ron will take on the role of the company's Vice President of Accounting and will act as our company's Principal Finance and Accounting Officer. Together with Beth Sedgwick, our current Controller, and the many professionals on the ONE10 team, plus the governance oversight provided by the Audit Committee of our Board of Directors, we are confident he will effectively lead the company's accounting team, and we are excited to have his help as we enter our next stage of growth. I also want to point out that during this expansion phase for our business, we implemented certain financial changes that brought down our general and administrative expenses — that's G&A — by 6%, not counting roughly $88,000 of legal fees tied to the preferred equity investment made by Loci related to the Modiv transaction, all so we could adopt a lean, efficient REIT structure capable of not just growing considerably but also enduring downturns; that careful, thrifty approach is embedded across our organization as we seek additional chances to be thoughtful about deploying shareholder capital toward items delivering the greatest returns across the longest time horizons. Also, following the close of 2023's third quarter, we convened a shareholder special meeting last week so a vote could be held, consistent with Nasdaq's rules, regarding issuing shares of the company's common stock to redeem preferred shares that had been issued to Modiv Industrial. We're happy to share that more than 50% of shareholders cast votes, and 94% of them backed the proposal, so it passed. That approval represents one of two requirements that have to be satisfied before the company's redeemable Series A preferred stock — originally issued to Modiv Industrial as part of the portfolio acquisition referenced earlier — can be redeemed. Satisfying the SEC's effectiveness requirement for a registration statement covering those shares is the other condition; we expect to be able to meet that second requirement so the redemption can be carried out in exchange for GIPR common shares, followed by the eventual distribution of those shares to Modiv Industrial's shareholders; doing so would broaden GIPR's investor base and expand our public float by roughly 100%. Prior to handing the floor to Allison for a financial recap of the third quarter, I want to assure our shareholders that our acquisition pipeline remains quite robust, and our connections, standing, and dialogue throughout the net lease sector sit far above the level a small REIT would typically reach. We have put ourselves in an excellent position to operate as a high-growth net lease REIT, and we are delivering on our commitments to expand this company prudently. Once the capital markets and acquisition timing place us in the strongest position to seize what we view as an enormous buying opportunity, we will feel assured in our decisions to go back into the market on GIPR's behalf and capture our opportunities. With that, I'm happy to introduce Allison Davies, GIPR's CFO, for her last update.

Thanks, David. Yesterday evening, we put out a press release with our results for the quarter, both financial and operational. Revenue from operations came to $1.9 million in total, versus $1.5 million a year earlier, largely because of rental income generated by the Modiv Industrial portfolio. For the quarter, operating expenses reached $3.1 million, which is $1 million more than the comparable period a year ago, mostly from higher depreciation and amortization tied to the acquired assets, plus more interest expense from the financing of the Modiv Industrial portfolio. Net operating income came in at $1.4 million, compared with $1.2 million in last year's same period, mainly due to rental income from the Modiv Industrial portfolio acquisition. Net loss attributable to common stockholders for the quarter totaled $1.8 million, versus $639,000 a year earlier in the same period, and that ties directly to income attributable to non-controlling interests held by our new preferred equity partners. Once we adjust for non-cash income and expenses, core AFFO showed a loss of $29,000, compared with income of $358,000 a year ago, chiefly because of the interest expense increase I mentioned earlier, partly offset by a non-cash adjustment made last year for writing off deferred financing costs. Our balance sheet, we believe, is well positioned to keep weathering the market uncertainty around commercial real estate that we're seeing. Cash on hand is healthy, and our earliest mortgage maturity is not until 2024. Lastly, before I finish, I also want to say how thankful I am to GIPR and the board of directors. I appreciate the chance to have been part of such an incredible company and team. Though I look forward to whatever comes next for me, my time at Generation Income Properties will always mean a lot. Thanks, Dave.

Thank you, Allison; with that, please open the call for questions.

All right, thanks. Dave, you said the pipeline was — and I'm quoting here — "very strong." Can you give us a sense of the number of properties you're evaluating? I realize there's constantly a lot happening out of public view.

That's correct, Michael. Let me provide some background on the way our investment committee has approached acquisitions. Between January 2022 and approximately July or August 2023, we reviewed roughly $2.3 billion of assets, which amounted to around 300 properties. The reason we share this is to demonstrate that we can tap an enormous inventory — a possible inventory of net lease properties — that aligns with our investment thesis. Out of those 300 properties reviewed during that stretch, we submitted offers totaling approximately $140 million, and we acquired nothing, since we were unable to reach agreement with the sellers on those properties. That's where our patience comes in — buying assets at the right price at the right time. Modiv wasn't the right properties, the right portfolio properties, and at the right price at the right time. Our pipeline remains very robust. It's far above where we stand today as a company in terms of asset count, and we believe we can perform very well once the timing is right for that.

All right. All right, thank you. Regarding the dividend, what about its coverage? Would you speak to that? And also, in what way, if at all, might that shift in the event you redeem the preferred for common stock?