Modiv Industrial, a relatively young REIT specializing in industrial manufacturing properties, recently held its Q1 2024 earnings call. While the call itself seemed a calm affair, CEO Aaron Halfacre dropped a bombshell revelation: Modiv is engaged in "strategic partner conversations" with two other REITs, hinting at a potential major consolidation play. While analysts have picked up on the possibility of a merger, a deeper dive into Halfacre's language and Modiv's current financial position reveals a tantalizing possibility that hasn't yet been explored: a full-blown takeover, potentially involving more than just the two publicly disclosed suitors.

Halfacre uses the term "battleships" to describe the players in this potential consolidation game. He specifically mentions three "battleships," two of which are actively engaged in discussions with Modiv. This implies a third entity, a "mystery battleship," lurking in the background, perhaps waiting for the right moment to make its move. This raises the intriguing question: who is this silent player, and what are their intentions?

Halfacre divulges that the two active suitors have "shared information about their portfolios," "have a working model" to assess the combined entity, and have "actively spoken about cap rates and share prices, and governance mechanics." This level of detail suggests that these are not merely preliminary talks, but rather, advanced discussions with a genuine possibility of reaching a definitive agreement.

However, he remains tight-lipped about the size of these portfolios, declining to provide even a general range. This secrecy further fuels the intrigue. If these were simply merger talks among relatively equal-sized entities, there would be less need for such tight-lipped confidentiality. The reluctance to disclose scale suggests that the size discrepancy between Modiv and at least one of the suitors may be substantial.

Modiv's Financial Snapshot

Consider Modiv's current financial situation. Despite wider cap rates and higher interest rates, Modiv's NAV has actually decreased since last year, a testament to their prudent valuation practices compared to some of their larger peers. They have a healthy debt structure with no maturities until 2027 and a credit facility offering significant untapped borrowing capacity.

With a robust portfolio, strong financials, and a niche focus on a sector increasingly recognized as a viable asset class, Modiv presents an attractive acquisition target for a larger REIT looking to expand its footprint in industrial manufacturing. Halfacre's emphasis on Modiv's lack of a "forced deadline" and their ability to "weather the storm" implies confidence in their standalone prospects, further strengthening their negotiating position.

One can hypothesize that the "mystery battleship" may be a larger player, potentially eyeing a complete takeover of Modiv. This would explain the secrecy surrounding the portfolio sizes and Halfacre's confidence in Modiv's ability to patiently navigate this complex situation.

Potential Benefits of a Takeover

The potential benefits of a takeover for Modiv's shareholders are significant. A larger entity would bring increased scale, potentially leading to index inclusion, greater institutional ownership, and improved liquidity. This, in turn, would reduce equity volatility and likely drive the share price closer to its intrinsic value, a point Halfacre subtly emphasizes by highlighting Modiv's current undervaluation.

AFFO Growth: A Look at Modiv's Performance

Despite market challenges, Modiv has demonstrated growth in its Adjusted Funds From Operations (AFFO), a key metric for REIT profitability. The chart below highlights this positive trend, indicating Modiv's underlying strength.

Of course, this is speculative, and a merger between Modiv and one of the identified "battleships" remains the most probable outcome. However, the deliberate vagueness surrounding the size of these entities, combined with Modiv's strategic position in the manufacturing REIT space, warrants consideration of a takeover scenario, potentially orchestrated by the elusive "mystery battleship." This captivating possibility adds another layer of complexity and intrigue to Modiv's future, making it a REIT to watch closely in the coming months.

"Fun Fact: The industrial manufacturing sector is experiencing a resurgence in the United States, driven by factors like reshoring, automation, and the growth of e-commerce. Modiv's specialized focus on this sector positions them at the forefront of this trend, potentially making them an even more valuable acquisition target."