Published on March 13th, 2023 by Nathan Parsh
Real estate investment trusts, or REITs, are often a popular investment option for those looking for generous dividend yields. REITs are required by law to pay out the vast majority of income in the form of dividends.
As a result, many REITs pay very high dividend yields. One example of this is Modiv Inc. (MDV), which currently offers a yield in excess of 10%.
Some REITs, such as Modiv, even pay dividends on a monthly schedule, as opposed to quarterly or annually, which can be appealing to those investors looking for more consistent cashflows.
You can download our full Excel spreadsheet of all 84 monthly dividend stocks (along with metrics that matter, like dividend yield and payout ratio) by clicking on the link below:
But investors shouldn’t focus solely on yield when assessing an investment opportunity. This article will analyze the investment prospects of Modiv in detail to determine if investors should consider adding the name to their portfolio.
Business Overview
Modiv is a real estate investment trust that acquires, owns, and actively manages single-tenant net-lease industrial, retail, and office properties in the U.S.
Source: Investor Relations
Modiv has nearly 50 properties in its portfolio that occupy 3.2 million square feet of aggregate leasable area.
The trust had its public listing in 2022. Prior to this, Modiv was one of the largest non-listed REITs to raise funds entirely via crowdfunding. The trust was the first real estate crowdfunding platform to be entirely investor-owned.
Modiv reported fourth-quarter results on February 23rd, 2023. Adjusted funds-from-operation (AFFO) totaled $6.9 million, or $0.68 per share, easily topping the prior year’s results of AFFO of $2.4 million, or $0.27 per share. Revenue grew 63% to $14.4 million.
However, an early termination fee paid by a tenant for a California property positively impacted results. Excluding this, revenue would have increased 20% to $10.6 million. AFFO also benefited from the termination fee and full year AFFO of $2.22 per share was well ahead of the $1.52 produced in 2021. The company has not provided guidance for 2023, but we believe that AFFO will normalize to $1.25 for the current year absent any further one-off benefits.
Growth Prospects
Modiv has only been a publicly traded entity for a short time, but management’s aim has been to acquire high-quality properties that can be added to the portfolio. This has led to a focus primarily on adding industrial properties. For example, Modiv added four industrial properties and one retail property to the portfolio last year.
Despite a heavy acquisition spree, Modiv is still a rather small REIT as evident by its market capitalization of just $84 million. Even after a number of acquisitions, the total portfolio is less than 50 properties.
It will take time and capital for the trust to become one of the larger names in its area of real estate. REITs often use share issuances to gain the capital needed for acquisitions, but this comes at a cost for Modiv due to the stock’s double-digit yield. Due to this hefty yield, the share count has remained relatively stable, though we do anticipate that the trust will use this avenue to help acquire attractive properties in the future.
Financing debt to fund transactions might be a difficult way forward as well due to Modiv being one of the smaller players in its industry. Creditors may require a higher interest rate. Rising interest rates will likely act as a headwind as well.
The good news is that Modiv’s portfolio does offer some advantages. For example, the weighted average lease term is 11.9 years, which should provide the trust with predictable cash flows. Some of the trust’s tenant base can be considered high-quality as Modiv counts 3M Company (MMM), Costco Wholesale Corp. (COST), and Northrop Grumman Corp. (NOC) as three of its tenants.
Finally, the properties that are leased to tenants can be considered mission-critical for their business, meaning that they are needed for these companies to perform their basic function. This doesn’t make Modiv recession proof necessarily as an economic downturn could impact the need for these facilities. We note that the trust has also not operated under adverse economic conditions as of yet.
Given the relative youth of the trust and the likelihood of share issuance to fund acquisitions, we believe that AFFO will remain stable through 2028.
Dividend & Valuation Analysis
The dividend is the most attractive part of Modiv from an investment angle in our view.
Source: Investor Relations
Modiv’s dividend currently yields 10.3%, which is more than six times the average yield of 1.7% for the S&P 500 Index. This is one of the higher yields that the stock has traded with since Modiv went public.
Modiv has a projected payout ratio of 92% for 2023. This is a high payout ratio, even when considering REITs typically have loftier payout ratios. While we believe that the dividend yield is safe for the time being, we would prefer a lengthier track record of payments before fully trusting the security of the trust’s dividend.
Given the payout ratio, we forecast that dividends will remain flat through 2028 unless AFFO is able to grow at a faster than anticipated rate.
Shares of Modiv trade at over $11 per share, giving the stock a price-to-AFFO ratio of just under 9.0. This is slightly below our five-year target valuation of 9.0 times AFFO. Reverting to our target valuation would add slightly to total annual returns moving forward. Overall, we project total annual returns of 8.7% through 2028, powered almost entirely by the stock’s dividend yield.
Final Thoughts
Modiv is a new name in real estate and has some interesting characteristics. The trust is motivated to grow, with acquisitions expanding its portfolio since becoming a publicly traded company. The stock also offers one of the more generous dividend yields in our coverage universe. The dividend does look safe, but short-term headwinds, such as debt financing or a possible recession, could call that safety into question.
Considering that the dividend accounts for nearly all of our total return projection, we believe that investors are better off looking for more secure yields. For this reason, Modiv earns a hold recommendation at the current price.
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
- 20 Highest Yielding Monthly Dividend Stocks
- 10 Cheapest Monthly Dividend Stocks
- 10 Safest Monthly Dividend Stocks
- 3 Top ‘Hold Forever’ Monthly Dividend Stocks
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
- Dividend Kings: 50+ years of rising dividends
- Dividend Champions: 25+ years of rising dividends
- Dividend Aristocrats: 25+ years of rising dividends and in the S&P 500
- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 4%+ dividend yields
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more