Deidre Woollard: I'm here with, Matt DiLallo today, who has written a lot of our real estate crowdfunding reviews. We're proud to welcome Aaron Halfacre, who is the CEO of Modiv. He is in charge of strategy and business growth. He's got this massive 25-year track record in the industry.
Matt DiLallo: Hey everybody, I'm Matt DiLallo I'm one of the writers here at Millionacres. One of the tasks that I've been really interested to follow is crowdfunding. I was able to do a lot of the reviews for all the crowdfunding platforms. One of them is Modiv. As a company that I personally invest in, I've just been really interested in real estate investing outside of the stock market. You can invest in REITs and homebuilders and that thing. But I just wanted something outside the stock market and that's where private real estate fits in. One of the companies that I came across during that time, it was called Rich Uncles at that time. But they essentially changed their name to Modiv and it's really interesting. I've really been excited to get to know Aaron and his team. Aaron, once you tell us a little bit about Modiv and what makes you guys different.
Aaron Halfacre: Sure Matt, I appreciate you having me on board. Deidre, a pleasure to meet your acquaintance. Modiv, as you mentioned, acquired the Rich Uncles platform and its prior legacy. Modiv is a lot of things and they are all applicable. If I told you that we were seasoned real estate team, that is an investment manager, that'll be accurate. If I told you that we are real estate crowdfunding company that is also acquired other real estate crowdfunding companies, that would be accurate. If I told you that we are a $400 million portfolio, single tenant assets that elects a REIT status, that would be accurate. We're all these things and we cross a lot of different industries. We crossed the non-traded REIT space. We crossed the crowdfunding space. We're unlike any other opportunity out there in the sense that we are all those things. But it's a little bit nebulous describing Modiv at the end of the day but we were designed for people who want exposure to that private real estate or you talked about who want growth and income. Not just growth, and we pay a monthly dividend Modiv. That's what we do.
Deidre Woollard: Just tell us little bit about how it works and why is it an option compared to publicly traded REITs?
Aaron Halfacre: I get the question a lot. If you guys are a REIT, why should I invest in you and versus a publicly traded REIT? My answer is always been like, "I came from over a decade at BlackRock. I worked at Green Street was one of the premier REIT research firms. I've always been ensconced in the real estate capital markets, both public and private." My answer to anyone who asked that is, I actually think you should have exposure of both because they, exhibit different price behaviors. If I am a publicly traded REIT, oftentimes I'm a mid-cap name. If I'm a mid-cap name I'm going to get picked up by ETFs and indices. That could be the Russell 2000 or something like that. I'm going to have trading constituents, buyers and sellers of the stock who don't care about real estate, but they're buying index. You're going to have price volatility in a publicly traded one, that is different. You're obviously going to have enhanced liquidity in a publicly traded one, assuming the markets are coherent. On a private one, you're getting just the real estate price of the assets. In our case, we have Cushman & Wakefield, which is a nationally recognized valuation agent. They go and appraise our assets every quarter. Every quarter we release an NAV or net asset value. It's not a stock price because it's not decided by supply and demand of buyers and sellers. It's really determined by the value of the real estate. Our real estate values are going to be reflective of actual real estate pricing whereas with a publicly traded REIT can be reflective of fearing contagion about coronavirus or the fed interest rates or whatever happens to be in the news that day in the market. I think they're complementary. If you look at pension plans and sovereign wealth funds, they tend to have allocations to both.
Matt DiLallo: I know personally one of the things that drew me to crowdfunding, which is the opportunity to get outside of the stock market because a lot of REITs will just trade with the stock market. Then as you mentioned, net asset value, I noticed I was particularly interested, for example, apartment REITs and at one point I was looking at them. They just seem to trade much higher than I would have paid above buying an apartment complex. With Non-Traded REITs, a lot of times you get the actual value. That was one of the things that drew me to it. But I really think that's interesting about Modiv is you've got that real estate platform, that crowdfunding, and that just makes sure unique and how you draw capital. For example, people can log onto your website and buy stock. Can you tell us a little bit about why that platform works for you guys as opposed to being publicly traded. Then you mentioned some of the, like the fintech and proptech. Explain a little bit about more of that, how that makes you guys different.
Aaron Halfacre: Sure, absolutely. If you think about publicly traded REITs, we know them and see them now as public securities. But for the most part, every one of them started out as a private portfolio. Because it takes the aggregation of the real estate assets and capital before it gets to enough size and then you choose to list. If you look at like Simon. Simon was a family's portfolio of retail shopping centers and apartments. They got rid of their apartments and they went into malls and they eventually got big enough that they listed. If you look at the history of almost every publicly traded REIT it started out as a private portfolio. Now how those portfolios are raised is interesting. Historically, it was either they would go Country Club thing where they go to their accredited investors and then do a series of raises to a Reg D private placements and they would buy assets and they will cover them together in a portfolio and eventually they got the size and scale. Back in the late 90s and early 2000s, what you started to see were the non-traded REIT portfolio. These were sponsors that would launch non-traded REITs. They're public filing but not listed and they would sell them through the broker-dealer community so that the LPLs and the Ameriprise's and then they would raise capital that way and aggregate up large sums. Many of the REITs that we see today, you have their genesis in that form. The conundrum with that non-traded reformat, if anyone has done the history, is there is a lot of investor reviews. What I mean by that is there were seven percent upfront commissions and a lot of inner-company dealings where they would form their own Asset Management Company, their own brokerage services, and they were just paying themselves a bunch of fees because the manager of the REIT was externally managed. That meant that they were a hired gun to manage that portfolio. If you look at the modern REIT era since 1992 and up, the vast majority and certainly the 99 percent of the REITs, any of those that are favorable on the publicly traded side, they are internally managed so that the CEO and the CFO and all the employees worked for the REIT, they don't work for an external advisor gets paid a fee. In fact, externally managed REITs that are public are frowned upon, they usually trade at discounts. Going back to this point of how does the crowdfunding platform work for us, we've been able to raise over $250 million of equity into a single REIT portfolio without paying any intermediaries. There has been no commissions paid. The investor, just to your point, just come online, they make their investments they get qualified. We sell through a FINRA broker-dealer. We're level set against every FINRA-registered type of product. But we eliminate all those costs. Now, technology helps to do that certainly, but now allows us to aggregate that portfolio. Right now, you spent a dollar, it goes into a dollars worth of real estate. The old days and non-traded days, you spend about a dollar and about 85 cents went into real estate. I think that's the reason why we like it. That's why we also think like crowdfunding is going to continue and its demand. We think that crowdfunding as a microcosm is advancing real estate capital markets. The interplay between real estate and the people's access to capital. The fintech, proptech investments we've made have been along those lines, are these technology companies that are advancing a real estate capital markets? Is it finding better ways to facilitate more efficient pricing, more efficient price discovery, more efficient use of capital being matched to properties? Because if that happens on a grander scale, we're going to see more and more efficient pricing in real estate and greater acceptance as an asset class. Obviously, it's a huge asset class as we know, but heretofore it's still been relatively limited and certainly the commercial aspect of it by individual investors. We think that the technology interplay between real estate is a way for investors to increase and get exposure.
Deidre Woollard: Let's talk a little bit about that because you mentioned REITs and we saw through history, how REITs developed and became accepted by investors. Real estate crowdfunding, obviously very early days. We saw some changes last year on accreditation and what's required. What other changes do you think are going to come in real estate crowdfunding and how does the industry itself need to improve as it grows up?
Aaron Halfacre: Yeah, that's a great question. I've actually gotten the question quite a bit lately. Do you think the SEC should or will lower the accreditation standards as a mechanism to provide access. My view might be controversial, but I actually view the accredited investors standard that SEC originally established was ideally suited towards Reg D or private placements. A lot of times these Reg D or private placements are high risk. They might have full speculation. That could be a development deal, could have very little income. That is true at-risk capital. That's not necessarily the traditional income-producing type of real estate investment you do. If you're doing true at-risk capital, the standard should be high. You're not having abuse by the sponsors who are misleading investors. You also want to make sure that those investors can afford to put that money at risk. The non-credit standards which allow people to come in as little as $500 have been relegated to the Reg A Plus. Reg A Plus up until recently was limited to $50 million in any 12-month period, and now it's been increased to 75. I think the direction that the SEC would be better served to doing is increasing the Reg A Plus percentage or the dollar amount. It's 100 or 120 or 150 million dollars and leaving a accredited investor status where it is. How does that work? As a Reg A Plus vehicle you have to file with the SEC, so you have to be public, at least semi public, you have to have semiannual filings. You have to do the equivalent of an 8K, which is called a 1K. You're under SEC scrutiny. If you're under SEC scrutiny, there's afforded better protections for the less sophisticated or less accredited investors, if you will. So that there is better safe harbors and protections. By increasing the size of Reg A Plus more people can cut, more sponsors will come in and offer products because they're not capped at $75 million. But it still allows the accredited investors threshold to be for those things that are speculative or esoteric. It's appropriate where you have to have a higher net-worth or you have to have more sophistication being a registered rep to go into those investments. The kind of direction, I think, would be better served for the marketplace.
Deidre Woollard: Interesting, just a quick follow-up on that. Do you feel that it makes sense to have non accredited investors invest in individual projects? Like for now, most of them are investing into larger pools of properties.
Aaron Halfacre: You think about the real estate crowdfunding spaces in particular, I look at it as a spectrum. On one end of the spectrum where you have what is I call digital syndication. It's the same form of syndication we've seen time eternal. CrowdStreet best exemplifies this. They're creating a two-sided marketplace and they're matching investors with sponsors and they're putting together into these individual deals. At the other end of the spectrum, you have what are asset aggregators. Modiv is an asset aggregator. So all the capital we raise, we own title to, we happen to control in a single vehicle. Fundrise does it in multiple vehicles. But we're not selling individual properties, we're selling co-mingled portfolios. I think those business models will converge and I think the convergence of those will allow for both accredited and non-accredited investors into it, I liken individual property deals to stock-picking. There are people who prefer to own a mutual fund and they want it co-mingled and they want someone to manage work, and there's others who say, "Well, I might want a mutual fund, but I also want to overweight Apple" or "I want to overweight this" and so they buy the individual stocks. I think that's a behavioral finance aspect and that's never going to go away and there's always going to be people who want to own individual assets. In fact, Modiv is getting ready to launch in the 4th quarter what we think is a blend of those two things. It's a product that offers individual properties, but it's structured in a REIT on the backend, under Reg A, and allows for non-accredited investors to make investments in properties. The key we'll be doing those, it'll be income-producing properties. So that you'll be buying a Walgreens or CVS or some sort of thing like that where you own the economics of just that asset. So you own the shares of just that asset but it will be Reg A allowing for non-accredited.
Matt DiLallo: I know personally when I was looking at what opportunities that were at crowdfunding, I was looking for something that replaced the idea of me going out, buying an apartment building. It sounded like such a great concept to be able to buy a stake in an apartment building in my hometown or even somewhere else that I thought was an attractive market and not have to manage it because I think that's one of the things that gets a lot of people. I don't want that phone call about there's an issue with an apartment building. I always saw the accreditation rules as holding people back from that ability to get that. It's interesting that you're going in that direction. I'm excited to see that. Now, switching gears. A lot of our investors, they're stock investors, they know about benchmarking. They look at the S&P 500. We're trying to be beat the S&P 500. If you're going to pick stocks, that's what you want to try to do. But private real estate investing is totally different. So how do you look about returns? What is Modiv looking for returns? How do you benchmark returns and what should your investors be comfortable with?
Aaron Halfacre: It's a really good question. I should have started off by saying in the real estate crowdfunding and the private real estate space, in the space that we're working on right now, is pretty devoid of benchmarking as a general practice. I think the industry is a loss for that because by establishing benchmarking you have a better relative context. So things get measured in a better way and then you generally find more acceptance. If you go to those crowdfunding sites as part of the syndication models, by the way, those are not FINRA-regulated models. If you're going to buy something from a Schwab or Fidelity or Vanguard, as an example, they're FINRA-regulated. They have gotten their securities licenses and they're very specific about how they can advertise and what they can say. Most of the crowdfunding space, there's a handful of us that are FINRA-regulated, but most of them are not. What you see there is when you're talking about performance is this description of here's a 18.25 percent IRR and we think it's going to get a 2.15 equity multiple and they project this. Now, FINRA doesn't allow you to do that. So that's why you won't see us ever do that. Those are forward-looking returns and those are engineered and they're modeled. I can go into Excel and I can give you any output that I want because I can just manipulate the cells and give you variable outputs. If you think about it, that return is theoretically possible as is a wide spectrum of return. We don't see Vanguard or even Apple going out and say, we think we're going to give you a two-point multiple next year and a 15 percent IRR. Past performance is not indicative of future results. We all know that. But that's why benchmarking is important. We don't have a ready benchmark, but I will tell you what we do is we measure ourselves in a variety of ways. We measure ourselves first and foremost by AFFO growth. So adjusted funds from operations, which is a measure of free cash flow, is what we measure ourselves against. We make sure that we have a targeted AFFO and we're growing it, and we look for industry best practices. We'll look at the AFFO metric of a lot of publicly-traded REITs, which most people who are just buying and selling stocks don't look at, they're looking at the share price. Again, we don't have a share price, we have a real estate price. So we can't control the metrics because it's fully independent of the price. We can control our AFFO, we can control our G&A, how much revenue we generate, how efficient or profitable we are making our company. So that's one of our benchmarks. As bellwether benchmarks, because we're primarily single-tenant net lease, we look to the net lease sector, publicly traded to see how they are performing. But we also look at NCREIF. For those of your followers who're not familiar, NCREIF is a National Council Real Estate Investment Funds and so the pension community, so CalPERS and CalSTRS of the world and a lot of sovereign wealth funds, they own private real estate and they own it within what's called NCREIF. NCREIF is a not-for-profit organization that gathers all the real estate data and measures unlevered private real estate returns. We look at those as a benchmark to how much are the income are assets producing? What is their quarterly change in NAV? So we look at ourselves to juxtapose of that. That doesn't do the investor much good. At the end of the day, they have to rely on the acumens of our team and our expertise to manage that we're growing overtime the NAV, we're growing overtime the dividend, and we're growing the AFFO per share, so we're making ourselves more profitable.
Deidre Woollard: Interesting. So what are you thinking right now in terms of different sectors? Obviously, office is a little bit concerning right now, industrial is booming like crazy. What are you looking at?
Aaron Halfacre: Right now we own single-tenant office, single-tenant industrial, and single-tenant retail. Most of these are triple-net, some might be in double-net that are on long-term leases. So we don't necessarily have to worry about the conundrum of multi-tenant office, but I think it's an interesting thought process. I was at a conference last week on the East Coast. It was a real estate panel. We all had an office in some way or we'd all had touched office in some way and what is the verdict of an office? I think you have to look at a major CBD office and then secondary, tertiary office. Downtown Manhattan or midtown Manhattan, probably more particular, people were saying, is this going to be doomsday? Will office prices just be destroyed? I remember living in Manhattan after 9/11 and the pundits will say there is no one ever is going to reside in a high-rise office tower again. Within about two-and-a-half years, all the supply was absorbed and we had pricing going up. I think what you'll see in high-demand epicenters is that the density on the floor will reduce.
If you think about the move was to open floor plans and packing more people in along these trading desk styles, that might shift away where we're starting to get more square footage per employee. But generally speaking, I am finding, though we're a remote-based company, and I know a lot of people who have moved to a hybrid model or a work-from-home model, there is still a need for collaboration. There's still a need to periodically for a lot of these corporations to have people convene. I think what you could see is a hub-and-spoke system. If I were a technology company or if I were a service company, instead of having a major headquarters where I spent a gazillion dollars to build something in Northern California, I might have a bunch of regional leases in markets that I know my employees like to live, so Nashville, or Austin, or Denver where I go and have space where they have built-in IT infrastructure so we can video conference, but they can collaborate and they can come in periodically. Then I can have five or 10,000 square foot lease in 10 locations and have people live in all these hip areas that they want to live in across the nation, and still have a lower real estate expense or a real estate profile than I built my mega headquarters.
I think we will see some of that. I think on the margin, certainly, office pricing or rental property demand is an interesting time. Like for instance, we always have lease renewals and we have two office renewals. We've just finished one office renewal. We have another one coming up, and it's advance. We have a single-tenant, they need this building and it's like manufacturing or secured information facility. It's mission-critical to their thing but there's still the dynamics of how much tenant improvements do I want to give them or how much free rent do they want to get or what's the lease term. If you multiply that on a multi-tenant basis, it gets really hard. I think that the tenants or the potential tenants have all the pricing power when you have a traditional office building. I think we'll see rents probably go down in the tertiary markets and I think some of the poor older quality assets will suffer. But I still think there will be a demand.
Office feels a little bit to me like strip centers and retail did about three years ago where everyone was like, "I'm not touching those retail centers. Amazon is going to kill them." Now if you look at cap rates, a lot of those have come in. Industrial tends to be super hot, I think in some ways it's a little unrealistic. I've seen cap rates on Amazon industrial centers at sub-four cap rates. You are buying a 10-year bond at 375, which is better than a treasury, of course, but there's a lot of real estate risk if they don't renew. I think it's an interesting space for sure. Other sectors that we liked besides those, I think multifamily, we like, self-storage, we like. Interestingly enough, those have multi-tenancy. Self-storage has hundreds of tenants, but they don't know each other, they don't communicate, they can't coalesce and give you pricing power. Whereas a bunch of office tenants can say, "Well, this is the market. We weren't going to move in here unless you give us X, Y, Z."
Self-storage tenants don't do that and there is recourse. Unlike an apartment community, right now if you don't pay your rent apartment, there's no eviction ability or if you're in a condo, there's no ability foreclose since there's moratorium on that. In the self-storage, if you think about it, those are exempt from those foreclosure eviction things. You can always sell the belongings of storage if you have to. I like self storage, we do like multifamily. Multifamily has obviously the benefits of a lot of leverage. We leveraged about 48 percent of our portfolio, so it's a really relatively low leverage. Apartments are doing 75 percent oftentimes, maybe more, maybe a little bit less depending on where the market is.
Deidre Woollard: It seems like a lot of things have changed during the pandemic. Did your investment thesis change overall in terms of what types of properties you were looking for?
Aaron Halfacre: As I mentioned before, Modiv is the vestige of acquiring Rich Uncles. We actually merged two real estate investment trust together into one, so we inherited a lot of assets. I think COVID last year was an interesting impact to commercial real estate. If you go back to 2008 with the Lehman crisis or the financial crisis, real estate was hit. Specific commercial real estate prices, I'll set aside residential, commercial real estate prices fell precipitously and then they recovered. They fell largely because it was a leveraged economic situation. There was excess leverage and there was a dearth of new refinancing ability available and so the question became, can I refinance my properties or can afford the debt, etc. We didn't have a leverage issue last year. What we had was a more fundamental issue. If you think about commercial real estate, its primary purpose is to physically co-locate a business with its people, those people could be their employees or their customers. But it's designed to house them under one roof. When you have an economically disincentive third party, which was a state or local government entity, says you can't physically co-locate because we're going to shelter in place.
We're going to like a light switch and turn off the primary value proposition of your building. We're not going to tell you for how long we're going to do this for. It really called into question, how do I value my real estate. As a tenant paying rent, how much do I really want to pay if I can't use this? Then for a buyer or seller, the real estate is like how high value what the real income stream of this property is? We went through this nebulous period of time, at the same time, banks were frozen up because they were doing PPP loans. It's like, okay, the transaction market grounds to halt. In most valuation pricing in real estate is done by sales comps. When there are no sales, pricing use a different valuation methodology. They look at the valuation of what would happen if you went dark and you had to re-light it, or what is the replacement value based on the materials that you put in? Those values are typically very different and oftentimes lower than they are based on trade transactions. We had this period of time last year where we had a large degree of uncertainty, for about six months of uncertainty. If you make the parallels to 2008, we saw a REIT commercial real estate prices fall, but they lagged public REITs. Public REITs fell right away and then private commercial real estate fell a little longer, then public REITs rebounded and then commercial real estate rebounded afterward, so there was a lag. We saw the same here, like for instance, we chose to have Cushman value our portfolio, scrub out any risk in it. It was a downdraft last year, and now we've recovered a good chunk of that and I think we'll have it fully recovered in no time. During the course of last year because we had inherited properties, look for those tenants, or those properties that we said aren't really durable. Maybe they asked for rent relief and I don't fault anyone for asking for rent relief, you put your head and asked, we didn't necessarily provide it. But what was the quality of the strength of that tenant? What we ended up doing was selling some of what I deemed non-durable or non-essential retail assets, but I don't think would survive again, if we had another COVID shelter-in-place mandate. We were a net seller of those assets at the same time that the 1031 market individual buyers were paying even lower and lower cap rates for those types of assets.
We thought, we can't find the ones we'd like to buy, so therefore, we maybe we were a net seller and we sold those off. As a go-forward basis, I think we like our portfolio right now, it's solid. We've collected 100 percent of all our rents. Our tenants are renewing, so we feel good about that nature. But buying in this market, you have to be very careful because there's a lot of money chasing assets. I think pricing is really important because so often I see people say, "Well, I can afford this property now because I got a low interest rate." But almost every former financing, unless it's like a really long-term thing, requires you to refinance it. If you're going to refinance in five years or 10 years, I'm willing to bet a dollar that your interest rates are going to be higher than it is today.
Matt DiLallo: That leads into the next question about acquisition. What is your favorite type of acquisition? What is the ideal acquisition for Modiv look like?
Aaron Halfacre: We just closed one, I think yesterday. We closed on a Raising Cane's. That's a quick-service restaurant. If you're familiar with Raising Cane's, it's a chicken purveyor, second in demand to Chick-Fil-A, they're complementary in terms of things. We bought one in San Antonio. We found this off-market. It was by an insurance company who owned this in their portfolio. We got it off market. We paid about 6 and a quarter cap for it, cap rate. The market for these are probably 5.75, 5.80, 5.60. It had a shorter-term lease, it has five years left on it. But we talk to Raising Cane's, the real estate department. They actually had tried to buy it back, which to us is a good sign. That means they like the location if they're willing to try to buy it back. Their sales were above average. To us, an off-market deal where we can buy it at an attractive cap rate, that there's automatic impression day 1, that we have good quality real estate: main and main location, the dirt is good, people like it. There's a reuse possibility of the tenant, for some reason didn't renew. That's an example of something we really like.
We've probably put LOIs or letters of intent out on, actually, probably $90 million of real estate year-to-date, and we've ended up closing on very few of them because we're selective. What we're seeing is, we're putting into competitive cap rate that we think is competitive, and then people are just chasing this things ever lower. We're pretty disciplined. We're talking about AFFO earlier. We managed a $400 million portfolio of real estate. We have over 7,500 investors, and we do it with the team of 19 people. We do that because we have technology; day-to-day property accounting and property management we outsourced the Colliers. Colliers is a nationally-recognized shop like CBRE or [inaudible 00:30:01] or Cushman, and they put all the transaction data with these assets, which are pretty straightforward into Yardi. We use Yardi as our backbone accounting system, and our accounting team processes it. I bring this up because we're able to leverage a lot of technology to manage these assets. The key here is, when we buy an asset, we're modeling to see, is it accretive? If we buy this property, does it add pennies to the share price, the AFFO? We just don't buy a property because we love the property. Because so often people fall in love with real estate, they don't fall in love with the finance or the economics of real estate. We make sure that every property we buy is accretive. We're not buying something that's dilutive. It doesn't make sense when you look at it two years later. We want to make sure that everything we're buying is going to increase in value, and that we have a positive spread between the relative rates today as well as the refinancing rates later.
Deidre Woollard: I want to bring in a couple of questions that we've gotten from the audience. Jonathan asks, "For an honest investor in REITs, it seems like investing in Modiv is riskier than investing in larger, publicly traded REITs, and only open to accredited investors. What are Modiv's advantages over larger REITs besides the 12-13 dividend payments per year?"
Aaron Halfacre: Actually, any form of investment comes with relative risk. I think there is no such thing as a risk-free investment, particularly when you're looking at equity. When you are buying shares of Modiv, you're buying into the equity of the company. We have $400 million of real estate, we have $200 million of debt, there's $200 million of equity, that's the same as you're buying into a publicly traded REIT. I think the biggest differences of the two is, as I mentioned before, we don't have those same price volatility that a publicly traded does. We also don't have the same liquidity. You would go and sell your shares at any given day on the stock market, but there is worst there; someone who wants daily liquidity, then I think you shouldn't be in any private real estate vehicle, because real estate by its nature is illiquid. That said, we do provide monthly liquidity. Assuming that we balanced purchases with redemptions, each month we redeem request that people get. You can come in on any given day, you can redeem. Lot of the crowdfunding real estate opportunities they don't have any known liquidity. They'll have liquidity in five years or whenever they go full-cycle. We're a long-term buy-and-hold strategy, so we're not looking to flip assets, but we are looking to pay dividends. Our dividend yield is commensurate with a lot of the publicly traded REITs. It's in the four percent range right now. That was higher, but the share price has gone up. The share price has gone up I think 17 percent already year-to-date. Our next NAV is coming out next month. We do pay 13 dividends. That 13th dividend is unique. A couple of companies pay monthly dividends. We pay a 13th dividend, and how it's designed; it's designed, not unlike how you would think of about an insurance rebate that you might get from your auto insurance member. If we exceed that AFFO target for the year that we set for ourselves, we're going to distribute the excess to our shareholders. But it's not just a special dividend payment like a REIT does, where everyone gets it at the end of the year. Ours is designed that if you owned more shares and you held them for a longer period of time, you get more of the dividend. It's calculated on a daily basis. If you held shares for the entire year, you're going to get 365 days of that rate. If you only owned it for five days, you only get for five-day.
Reward is for long-term investor, and that's what's unique, and that allows us to increase the dividend yield while also maintaining that AFFO discipline. I think on the margin, we have more liquidity risk. I think that's important. We have less price risk. The asset quality is very similar. You're going to see we have over 70 percent investment grade on our leases. What we're buying is the same as the publicly traded REITs. Many times we find ourselves at the table alongside STORE or VEREIT or these other ones when we're buying assets because we're buying the same institutional volume assets.
Matt DiLallo: Another thing that I noticed that you guys have instituted to try to set yourself apart from others, like crowdfunding spaces, you hold quarterly conference calls, and you're really setting yourself up as a traditional publicly traded REIT. I found it interesting on your last call, you mentioned that you see a liquidity event, possibly an IPO over the next 24-48 months. Talk to me about why an IPO, because we've talked a lot about why being private has its advantages. What would being public have advantage over private for you guys?
Aaron Halfacre: Yeah, absolutely. I've taken a REIT public and then sold it. I joined a public REIT and then took it private to a private equity firm. I've been on the public side for awhile. I tried to bring all those aspects into Modiv. For example, we're fully internalized. I, as an employee, or all the team, our members of the REIT, we work for the REIT. We're not an external part. There are no fees being charged, so there are no acquisition fees, there are no disposition fees. There's no promoted interest or carried interest. We have the normal cost of a company. We have the G&A and the normal expenses, just like any publicly traded company does or any company does. We manage those tightly, that's why our focus is on AFFO.
We have directors. These are all people I'd work with in the past. They've been CEOs of publicly traded REITs, they are really best-in-class board of directors. Because ultimately, a lot of people forget about this, as a shareholder of a company, the shareholders are electing the directors. You want to make sure you have a good board of directors because then they are in turn engaging the management team. The duty falls on the directors to oversee or steward the well-being of a company. Good corporate governance to me is key. Transparency is a key, and that's why the earnings call came in. We're running it just like we are a public filing company. We'll do Qs and Ks, and we'll do 8Ks, and we'll do everything just like a publicly-filed company. We just aren't listed. Eventually, we think a listing makes sense.
You raised a good question, why? If I just made the argument that private real estate is complementary to public real estate, which I do believe, then why would you even go public? We're unique in the sense that our investors also own the real estate crowdfunding platform. They own the technology, we raised all this money through our own technology. They own that. If I go to CrowdStreet and I invest in a deal, I own that deal, but I don't own CrowdStreet. If I go to Fundrise and I buy that, I own a REIT but I don't own Fundrise. When you go to Modiv, you own Modiv, and you own the real estate, and you also own the proptech and fintech investments we do. Why would you go listing then? Well, Cushman values your real estate. What I mentioned before about our NAV; each quarter we get our real estate valued. We don't value the technology, accounting rules just don't allow for it. We're not going out and getting independent appraisals of all the technology and all the critical mass or both. The only real way to unlock that value is to have it on a public listing. I'd love to talk to you about what I think about the crowdfunding spaces and how it's evolving, but we have all this technology, we have all these stuff that's not getting valued in our NAV, but it's valuable. We view that probably the only way to get that valued is to eventually list and so that the public market can decide for it. For instance, Apple's accounting will only give you certain value of its assets. But people pay far more for Apple because they believe the intrinsic value of what they're creating. You would have never found that out in a private company, were private. It happens because they're public and there's these discerning investors buying and selling at the same time.
Deidre Woollard: What real estate trends are you most excited about right now? It seems there's a lot of different things happening.
Aaron Halfacre: The most exciting to me right now is the convergence of technology in real estate. Real estate is one of the slowest adopters of technology, and you ask yourself why? It's a huge asset class, trillions of dollars in size globally in the asset class. We've had technology in financial services for 20 years. Now we're talking about proptech and fintech in a way that's novel or new for real estate. But real estate has gotten away from having technology just because it's a very physical asset. It's very conducive to people. You need people that's on the ground so to speak, and so you didn't have to have it. But I think technology is really going to accelerate the demand for real estate, and so that's where we think it's interesting if you will actually think about real estate crowdfunding as a technology play. I liken it to the discount brokerage environment. If you go back to May 1st of 1975, that's when stock commissions were deregulated. Before that, you were controlling how much you could pay for stock commissions. Charles Schwab launched the company shortly thereafter. From the late 70s to the mid 80s, you saw a bunch of discount brokerage firm stock. There were Scottrade, and Ameritrade, E-Trade, you name it, and what happened is you saw them emerge. The low barriers to entry but high barriers to success. Then you start to see them go public and then consolidate. Now discounted brokerage and then use of technology in the financial services is so accepted that we don't think anything of it. We're at the early stages of that with real estate. I think as more crowdfunding gets adapted, more players will see consolidation in the space. We'll see listing events of the space. We will start to see real estate become more and more like the traditional financial services we have. I think that's a positive for investors and a positive for capital markets because more investors come to that space, that provides more demand for the asset class, and then it's self-fulfilling prophecy. That's where I think is the most exciting.
Matt DiLallo: You mentioned that you think consolidation needs to happen in the space, and I know you guys made a couple of deals. What do you mean exactly by consolidation? You're talking there about the REITs consolidating or more of the platforms. How does that look, and how will that benefit investors?
Aaron Halfacre: I think the answer is both. Externally managed portfolios where there's not just a single deal, but a collection of deals that is externally managed where there's fees getting paid. That means there's a conflict of interest. If I, as an investor, have to pay someone to manage my assets and they're getting paid on acquisition fee or disposition fee, I'm getting all of these unnecessary fees that publicly, it's insurance we don't need. We don't need to have excessive fees in our structures to own good real estate. The fact that we shouldn't have excess fees in our structures. Any orphaned or zombie external vehicle out there, I think should be consolidated. That can be someone like us consolidating, could be a publicly traded REIT consolidating, there's a lot of choices out there, or it should be sold and disbanded. We should sell the portfolio and break it off. But I think this arcane, antiquated structure of charging lots of fees, it's acceptable in the mutual fund space because mutual funds can afford to have employees, so they outsource it, but the fees are really reduced. Vanguard led the way in that regard. The management fees or the total expense ratio of a mutual fund is very low. But if you look at the externally managed vehicles on the REIT space, they're high, and they don't need to be. I think there's consolidation in that for purposes of improvement. On the crowdfunding side, as I mentioned before, there's these multiple models. There's digital syndicate model and asset aggregator model. Going back to that discount brokerage, if you think about Charles Schwab as an example to discount brokerage and back in late '70s or '80s, you had Fidelity and Vanguard who just asset aggregators. Now Schwab offers mutual funds and asset management, and Fidelity and Vanguard offer discount brokerage. The models merged, and a lot of these shops consolidated players into this as they thought of merging of the models. I think you'll see the convergence of these business models in real estate crowdfunding as we get scale. Crowdfunding real estate volumes have grown about 15 percent annually. We're well over one-and-a-half billion dollars of distribution in a given year in collection among these platforms, so it's gaining more attraction. As it gains more attraction, you have to get more acceptance. I think consolidation and scale always benefits the economics, both for the investors of the company as well as the industry overall. I think that's why we will see it happen on both fronts.
Deidre Woollard: Let's talk a little bit about the potential for a second COVID event. We're starting to see some of the mask mandates return. The CDC just announced that today. How is that changing your thinking about future investing?
Aaron Halfacre: I don't think it's changed our way of thinking, but it is reinforced the way we did things. We're primarily buying single-tenant long-term leases, so we want to make sure that that tenant has long-term viability. We look at their financials. We're underwriting them. We've seen some deals about private equity led sell lease backs. This is when a private equity shop will come in, buy a business, and then they'll turn around and sell the asset and lease it back from them to generate cash. Oftentimes, we'll look at those balance sheets and their super highly levered. You wonder, how are they going to survive if they don't grow themselves out of it? Those are the margin we're looking, I don't think we like. We want solid financials by our tenants so that they know that they can pay the rent. We also want to know that this property is important to them, that they just don't care if they have to walk away from it. We got burned. We had a 24 Hour Fitness. We had one in Las Vegas. 24 Hour Fitness got hit by COVID. They filed for bankruptcy. They rejected over half of their properties across the nation, ours just got rejected. We managed to sell it to another REIT, and make lemonade out of lemons as best we could, but that was an example of that wasn't critical to them. They could shut it down if they didn't want it conveniently. When we're looking at office space, it needs to be a headquarters building so that this is where the CEOs and all the ones who are making decisions are going in when they like. It's not like it's a regional office or we have several and they have secured data facility. These are government contractors who have secured facilities within their buildings and they spend hundreds of thousands of dollars to improve these buildings. It's like you fixing up your house really fancy. If you're running it, you're going to keep running it because you want all that stuff that you put into it. So we look for those types of signs. I don't care so much about the market if that's a mission-critical to that tenant. It could be in Missouri, and so I want to say, that's not a primary market. But if it's primarily to this tenant and it's core to their business, then its primary to them. Therefore, I can live with that. That being said, I'd love to get primary markets if I can. The last thing we look at is just good real estate, if we have to, in the worst case scenario, that the tenant leaves and their business goes on, how do we repurpose this real estate? Can we scrape and put something new? Does the building have a good footprint, so we can put a new tenant in? We think about all those types of things. If COVID happens again, God forbid, or it's happening, I guess, but if the shelter and place mandates come back, which I don't think is that unreasonable to expect. It was a mechanism that worked. I liken it to the aerial bombings in World War II, where in England, people would just going to the top. Every time there was bombings there, they would go down into the tunnels, the tube. That was a safe measure, and I think shelter and places are safe measure that we will see governments enact. I think everyone will be a little bit more wise the next time it happens, and so I think tenants will be a bit quicker to ask for something particularly if they're around on the lease renewal. They have leverage, I think landlord is going to be a lot more wise about it.
Matt DiLallo: You guys are, as you mentioned, the triple-net lease space. You like that business model because it just provides a steady cash flow. Is there a company that you emulate? Is that why you are in that space, or is there an investor? What drew you to that space and what kind of public company, private company do you guys want to aspire to be like?
Aaron Halfacre: I look at us as amalgamation because as I started the conversation, we're a real estate investment manager. We're real state crowdfunding company. We're technology investor, and we're also net lease REIT. We have a few proxies to look at as it relates to the net lease REIT space, and having listed a net lease REIT and sold it. I like Realty Income. I think they're a great model. Their history is great, their management team is solid. There are a lot of good REITs, I know a lot of the executives of all of those REITs, and there's a lot of good REITs. I think they're probably the easiest one to example, they're the largest. They're not too far down the street from us here in Southern California, so on that front, I think they're a worthy role model. From an asset aggregator standpoint, we've been called the Vanguard of real estate. I find only compliment in that description. I think John Bogle was a genius at what he did. It's a mutually owned structure, in a way, in effect, our shareholders own all of this enterprise. I believe honestly you get exposure to the asset class. I think that lease is conducive to that, because it's income producing and it provides long-term leases, but it has CPI elements to it. I think it's conducive, I think exposure to asset class is absolutely the best way to go for real estate, but you need to reduce the cost of ownership. I think Vanguard is an emulation on that front. From the technology side, I think there's a lot of examples. None of them are directly applicable, but I think it's the smart use of technology. For instance, we use off-the-shelf technology as well as proprietary. I think we built this. The fact that we have over $400 million REIT, 75,000 investors and 19 employees, it's a clean sheet approach who we said, "How do we build this?" Actually, I built the team to be very similar to the hedge fund or private equity. We are very seasoned, if you look at our executive team, very seasoned, lots of experience. By having very capable people who are all, by the way, incentive on the long-term with that AFFO growth, they only earn money if we do well from the shareholders. That allows us to manage with less people, because they're very capable. It's very much like you see in a private equity and hedge fund model. We try to emulate best practices across a lot of different things, but those companies come to mind for sure.
Deidre Woollard: I wanted to ask you about ESG issues. Your thoughts about climate change, how that's affecting how you select properties.
Aaron Halfacre: It's not, to be honest. I don't mean to be callous about it, I think right now we have so much capital chasing in the real estate markets, and so many different constituents that ESG qualifiers, though they're nice to have, are hard to fit in. I'd say on top of that, if you look at the biggest vein of ESG as it relates to real estate, it's been LEED certification. LEED certification buildings have been around for a good while. I've worked in a number of them, I've owned some in the past. They tend to be office buildings on the margin, and they tend to be custom developments. You can retrofit buildings, stuff like that. They're always nice to have. I think buildings that are conducive to solar are an interesting way to think about it. As solar technology pounds construction, gets even more efficient, a lot of your Southwestern assets which have large roofs, make very easy to think about in terms of doing that. I think overall, right now we're seeing ESG is not a primary driver for lease real estate acquisitions of income producing assets. I think it probably is more prevalent in the development space as they are thinking about how they develop it with consciousness footprint.
Matt DiLallo: Earlier you talked about, you like the self-storage space and you like the multi-family space. Those are not triple net, although you can, I know WP Carey had some triple-net self storage. Do you see that as fitting in the business model, those type of properties going more completely diversified, or would you just stick with triple-net?
Aaron Halfacre: We're an experienced real estate investment management team, so we have capabilities, the team has done different asset classes. If you look at what I mentioned earlier about NCREIF and these pension and institutional money, they'll invest in a lot of our REIT structures that are true private REITs. They're not doing anything public filings, but they elect our REIT status, which is obviously that avoid double taxation. They are co-mingled fund, BlackRock had one, Principal has one, Prudential has one, ING, Clarion. There's a lot of these large multi tens of billions of dollars sizes who've been around for 30 or 40 years. A lot of the traditional retail investors don't know about these vehicles, but they invest in diversified food groups. They'll have office, industrial, retail, apartments, self-storage, they'll have all these types in them. I liken it to an engine. If I have an engine where there has got these rotating cylinders, they're firing at different times. When retail might be firing, your office maybe out of favor and vice versa. You think about publicly traded REITs have gotten to be sector focus, and that is really an interesting history to it. All the REITs started out this multi-asset class. Overtime, the sell-side analyst said, "We'll sell off this stuff because it's too hard to analyze." The other part is that, the modern REIT era , and Green Street where I worked at was a big factor in this, started catering its research to REIT portfolio managers, the Cohen & Steers of the world. They are actively managed and they're picking stocks. If I'm picking stocks, I want to pick the best apartment shop and the best net lease shop, and I don't want them to have both in their set class, because of how do I add value, or how do I make a pure-play? Active real estate stock management is actually a very small segment of the market now. The REIT passive ETFs are much larger portion of the publicly traded REIT space. The sector narrowness is really a public event. I think a diversified income portfolio ideally has cylinders that fire-all. We have no designs today to go into any of those asset classes. If we did, I'm not sure that it would be in this vehicle or it would be in a sister vehicle. To be quite honest with you, it really goes by the demands of the investors. But the fact that you have income producing assets and they're always firing on all the cylinders, only enhances the value of the portfolio, and it gives you a diversification. I liken back to last year, Simon Malls, large company, great assets. Malls were really hit by COVID, and they are invested in some of the Brooks Brothers and some of their other tenants. I'm sure David Simon would've loved to own 100,000 apartments, because he would have had rent coming in to offset the things, but the way the public markets are working he couldn't do that. But if you look at high net worth or sovereign wealth funds, they do mix them together, because they throw off income at different times.
Deidre Woollard: That is a very good point. One last question from the audience. King Remy wants to know, for a potentially new Modiv investor at $1,000 initial investment should yield, what percentage of monthly return at this point post-COVID?
Aaron Halfacre: The yield, how we look at it. The dividend right now is a $1.05 per share. The share price right now is, I think, 24.61, it's getting ready to change again. The yield comes out to about 4.3 round numbers right now. It was five percent last year, again, I mentioned the share price went up. The dividend it can/will increase overtime. That's outside of the 13th dividend, so we expect the dividend to strengthen overtime. It's all a faction of the AFFO. The $1,000 is the minimum. We recently filed for Reg A Plus status, so we'll be converting to a Reg A offering near term. That will allow us to, once again, take non-accredited investors. Most of our investors are actually non-accredited. We went to accredited for a short period of time for some specific reasons which we will announce in the near future, but yeah. It's about a 4.3 percent yield right now, plus the change in the share price, which as I mentioned before, it's been 17 percent year-to-date. I don't know what it'll be in the future, but hopefully it will be up. That's my job at least.
Deidre Woollard: All right. Matt, do you have any last questions as we get close to wrapping up?
Matt DiLallo: I probably have 1,000 questions [laughs] but I always take too long. I do just want to thank Aaron for his time. He's been just so generous with me. Like I said, we did a crowdfunding review of them and he gave me all the information I needed, and then his team has been great. It's been just an interesting company to see. I've followed a lot of these crowdfunding companies and I really think that they stand out just as their investor focus. I don't even think he mentioned it as much as he should have on the side of how investor-focused they are. I guess my last question will be, why do you want to be so investor focused? A lot of crowdfunding companies are just in it for the money it seems. But you guys seem to be in it for the average person.
Aaron Halfacre: Yeah. If I were doing it for my own pocket, there'd be a lot of other ways to go make a lot of money. Look, my dad was an electrician, my mother worked in an office. I was the first person to go to college, I got deep blue collar roots. I think about the people who sophisticated or not, wealthy or not, they all require someone to work for them. Service is so hard to find this day and age and dedication to a craft. That's how I am wired, so I wanted to build and work for a company that really put the investor first. To us, that means eliminating unnecessary fees, being very candid, we're not always going to tell you everything is pretty if it's not, we're not going to lie to you. We're going to be very honest and we'll be very transparent. If you want to access information, we're going to do our best to give it to you. We're not going to be all things to all people. I'm not going to promise you an inflated return or something that I don't think can be realistic, but I'm going to make sure I work really hard everyday and the whole team does. I think that's about putting Investor first, because that investor could be my mother, it could be my sister, it could be me. We could be any of us out there who really just want to be able to own commercial real estate. We don't want to deal with tenants, we don't want to deal with trash, we don't want to deal with toilets, we just want to be able to own it. We have a day job, or we have a family, we have other things we want to work on. We need to make sure that our vendors, the people that we're giving our hard earned money to, are doing a really good job for us, not for them. Not for the vendor, not for the manager, but for me, the investor. That's just philosophically how I am and that's the only company I would build or work for.