Good day and welcome to Modiv Industrial Third Quarter 2023 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. On today's call, management will provide prepared remarks and then we will open the call up for your questions. Please note this event is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for Modiv Industrial. Please go ahead, ma’am.

Thank you, Shomali, and thank you all for joining us for Modiv Industrial's third quarter 2023 earnings call. We issued our earnings release before market opened this morning and it’s available on our website at motive.com. I'm here today with Aaron Halfacre, Chief Executive Officer; and Ray Pacini, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we will open up the call for your questions. Before we begin, I would like to remind you that today's comments will include forward-looking statements under the federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, and other comparable words and phrases. Statements that are not historical facts, such as statements about our expected acquisitions or dispositions, are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that, I would now like to turn the call over to Aaron. Aaron, please go ahead.

Thank you, Margaret. Hello, everybody, and thank you for joining our third quarter conference call. I think third quarter results were solid. I'd like to think they were relatively trauma-free. Let's just go straight to Ray to discuss financial results and I'll come back at the end before we take questions. Ray?

Thank you, Aaron. I'll begin with an overview of third quarter operating results. Revenue for the third quarter was $12.5 million, a 21% increase compared with the $10.3 million in the prior year period, and reflects the impact of the 12 industrial manufacturing acquisitions we completed during the first nine months of 2023 and the 14 non-core property dispositions in August 2023. Third quarter adjusted funds from operations, or AFFO, was $3.7 million, up 19% when compared with $3.1 million in the year-ago quarter. The increase in AFFO was primarily due to the revenue increase and was partially offset by increases in straight-line rents and interest expense. On a per share basis, AFFO was $0.33 for this quarter, which is in line with consensus estimates, even after accounting for the increase in the weighted average number of fully diluted common shares outstanding. The $1.7 million non-cash loss on sale of real estate investments during the quarter includes a $1.9 million non-cash loss on the previously announced sale of 13 properties to Generation Income Properties which closed on August 10, 2023, partially offset by a $178,000 gain on the sale of the property previously leased to the EMC shop. The loss on the GIPR transaction reflects the difference between the $9.6 million estimated share value of the Series A redeemable preferred stock of GIPR compared to the $12 million nominal value received as partial consideration for the sale on August 10, 2023. The GIPR has the right to redeem the preferred stock for GIPR common stock prior to March 15, 2024, subject to registering the common stock with the SEC and obtaining shareholder approval, which GIPR obtained on November 9, 2023. The estimated share value of the preferred stock increased to $10.1 million as of September 30, 2023, reflecting the progress GIPR has made for registering up to 3 million shares of its common stock as of that date. The net loss attributed to common stockholders of $6.5 million for the third quarter or $0.86 for basic and diluted share reflects a one-time catch-up adjustment of $7.8 million for non-cash stock compensation expense related to the company's determination that it is probable the company will achieve the contractually stipulated FFO performance target which is exclusive of the expense of the performance component of stock-based compensation. That target is $1.05 per diluted share for the year ending 2023. This performance component of the three and quarter year long-term stock incentive plan which was approved in January 2021 and distributed to all employees at that time will result in the issuance of an additional 474,515 Class C operating partnership units on March 31, 2024. This one-time charge reflects a catch-up adjustment to reflect amortization of the $19.58 per share fair value of the performance units from the January 25, 2021 grant date through September 30, 2023. The remaining unamortized fair value of $733,331 per quarter will be recorded as compensation expense for the performance units through the end of the divesting period on March 31, 2024 as achieving the FFO performance target of $1.5 per share is still deemed probable. The FFO performance target of $1.5 per diluted share was established in January 2021 and represented a 20% increase over the FFO per diluted share achieved for the year-ended December 31, 2020. There are no other stock-based compensation plans in existence or approved. We experienced less volatility in net interest expense from gains or losses on the valuation of our swaps in the most recent quarter compared to the first half of 2023. Interest expense, net of derivative settlements, and unrealized gain on interest rate swaps was $2.9 million during the third quarter of 2023 compared with $2.5 million in the prior year period. The increased interest expense associated with greater debt outstanding on our term loan was partially offset by a $795,000 unrealized gain on swap valuations. We will continue to benefit from our interest rate hedges with our $250 million term loan outstanding today at a weighted average interest rate of 4.53% based on our leverage of 48% as of September 30, 2023. Now turning to our portfolio. Following the two acquisitions and 14 dispositions completed during the third quarter, our 44 property portfolios have an attractive weighted average lease term of 14 years and approximately 33% of our tenants or their parent companies have an investment-grade rating from a recognized credit rating agency of BBB minus or better. Analyzed base rent for our 44 properties holds $40 million as of September 30, 2023. Now turning to our balance sheet and liquidity, as of September 30, 2023, total cash and cash equivalents were $5.6 million and we had $284 million of debt outstanding consisting of $34 million in mortgages and $250 million of outstanding borrowings on our $400 million credit facility. Based on interest rate swap agreements we entered into during 2022, 100% of our indebtedness as of September 30, 2023 held fixed interest rates with a weighted average interest rate of 4.52% based on our leverage ratio of 48% at quarter end. As previously announced, our board of directors declared a cash dividend per common share of approximately $0.095 for the months of October, November, and December, representing an annualized dividend rate of $1.15 per share of common stock. This is a yield of 7.77% based on share price over common stock as of November 10, 2023. I'll now turn the call back over to Aaron.

Thanks, Ray. As you all saw, I've already shared a lot of information in our earnings release, and I did that in order to get our thoughts distributed to as wide as possible an audience as we could. So I don't really think there's much more to say in terms of prepared remarks, other than I believe, and I hope you also find that our level of transparency and candor is unique. I don't think I've seen an earnings release with that much detail and that much sort of candor and thought about it. We understand. We're a small-cap company or micro-cap company. In this really volatile time, who would think you would wake up over the weekend and find that Moody's downrated the US credit rating, and more headlines about this, that, or the other? So it's a very volatile time, and so certainly it's hard for us to give out sort of formal guidance. We did the first year, we achieved it, but we don't think it's merited in the near term just because anything that we do could be a huge catalyst. But that said, I don't want to say nothing. And so we shared a lot of what we're looking at and a lot of thoughts. I suppose there's going to be some questions about that as well as our results for the quarter. So let's stop talking and turn it over to Q&A. Operator?

And our first question comes from Barry Oxford with Colliers.

Great. Yes, Aaron, I agree with you. You gave some very nice detail as far as where your brain is and how you're thinking about raising money. When it comes to the strategic partner, you kind of went through a few things that what you're not looking for. But then when you said what you're looking for, you're kind of looking for the halo effect that maybe give a little more detail on what you mean by that. And then also maybe to the extent you can without showing your hand, talk about broad brush, maybe the terms that would be acceptable to you in a broad brush sense. I know you can't show your hand here.

Yes, I'd say in the broadest, so look, as we kind of alluded to in the comments, we're seeing a lot of people are offering sort of some sort of preferred, right? And it really feels like debt to me. And that doesn't feel very original. And in the return expectations that we're seeing for these, they want mid-teens or higher returns, and they want repayment. And so to me, that just seems, if you want, that feels like equity, but without equity treatment. And so that doesn’t interest us. I think as it relates, look, I don't have specific terms for you. I know that what works for us, and I can't share those now, but I will say that it needs to be organic. We view this as any potentiality of this happening as it's got to be organic. So it has to be our needs. And so any shop's going to have some particular concerns they have. I think the biggest concern that we've seen floated to us, which is the one we are the most cognizant of, is that if they were to do something with us, they're concerned about concentration risk, right? But given that even a $12 million check would be 10% of our cap stack right now and if you looked at it in certain ways, right? So we have to solve for that over the long term. To us, it has to be, it's close. It has to be equity, effectively. And it has to be, they have to believe in our thesis. We're looking at some that have existing assets, some that just have cash. I think the halo effect is, like if I did a joint venture with some overseas partner that felt they couldn't name themselves, I would get no benefit because it would just be a black box. But if I did a joint venture or some strategic partnership with someone that was recognized in the institutional space as having being smart money and underwriting and not sort of not someone who is just a carnivore, then I think we get the halo effect. And the halo effect is really designed to say, hey, look, what is our long-term goal? To the extent that we're still in charge and we're doing this long-term goal post is that we want to increase tradeable float, remove the pricing gap between where I think our shares are at a liquidation value and where they're at trading today, and be a more functional REIT that over time gets the economy to scale and benefits and actually is able to message and consistently deliver to investors. Right now, we're in this really unique box. I don't know of any REIT that came out literally like two weeks before the Fed started moving. And we didn't raise any money, and we've done a great job, in my opinion, because it's not been easy. But at the same time, who cares? Right because on any given day, we might have 5,000 shares trade in one direction or other, and that could be one investor. So we know we have to solve for float longer term, and we want that. I see, if you look at history, a lot of the deals that we see in strategic partnerships for the smaller REIT, I'm not talking about sort of the AMB, Prologis, Kimco sort of vintage back then those were a lot of different stories. But the smaller ones tend to be, give me money because I've got a deal, and I want to hammer that deal, right. I want to buy that deal, and then I'll solve for it later. And I think sometimes they work out, and they pull themselves out, and they do okay, but it tends to be very costly. And we're trying to avoid making foolish capital decisions. So I think it's organic. And if we find something that works, and with a partner that makes sense, then we'll do it. If it doesn't, we won't. Because what good does that do us to, like, we don't need to build an empire here. We just want to be able to make ourselves more functional in terms of tradeable float with market cap, all the things that require, that you, the investing community require of a REIT.

Perfect. No, all that makes sense. Appreciate the color there. Ray, a quick question for you on the performance incentive plan for the stock comp. How should we think about that line item throughout ‘24?

Well, at this point, there isn't an approved plan for 2024. I think that's something that the compensation committee will be considering. So we'll just have to wait and see what comes out of the compensation committee.

I would say, Barry, that, look, there's 721,000 a quarter that we still have to accrue for, in the fourth quarter, first quarter. So first quarter numbers will have the 721 plus the 499 that we are already doing for the time-based. So you're going to, you're looking at roughly a one-two hit already for the balance of year, I'm of the view that G&A is going to be in line, right. So I don't think you should expect any sort of material change from run rate G&A that you've seen over the sort of consistently on a consistent basis. That's how I would answer that. And I conclude that FDC is component of G&A.

Thank you. Good morning, Aaron and Ray. Just a couple for me. I enjoyed reading your thing this morning, but as I read it, I kind of was thinking to myself what do you think snaps first to kind of break this inertia and get things moving again?

Oh, that's a good question. Crystal balls are more like bowling balls right now, really heavy and thick and more likely to drop on your toe. So I'll be careful with what I say. But look, I think we don't have healthy markets. And how I think about this is I do get a real palpable sense. There's capital on the sidelines and they're increasingly getting ready to do something, but they're looking for the right catalyst and the right reason to do so. We don't have any more clarity. We may be talking collectively about what the Fed might cut at the end of this next year, but there's a big debate if they will. We still don't have economic data, know if we're going to be hard just augur it hard or not. There are so many variables out there. I think for us because we're not the tail wagging the dog. The body of this whole thing is the broader markets. And so I think we need to see some sort of healthiness. I think if I were to be logical, I would think, hey, do we see more of the well-performing REITs in terms of capitalization and size and access to the market starting to do more follow-ons, right? And do we see health response to those follow-ons? If we see that, then I think we, it'll be easier for us, sort of in a traditional way. I think on the strategic partner side, it's like if it happens, it happens. And if it happens, our goal is to be positively received in the marketplace. But it also depends on what the marketplace is at that time, right? And so I wish I knew what the catalyst was. I'm prepared, sort of, psychologically and we've prepared our balance sheet in a way that we can stay in our bomb shelter for another year if we have to, right. And just keep waiting until the mushroom clouds sort of disappear and people can start coming back out. So we'll be focused on recycling assets on the near term. There are opportunities to improve our AFFO just by just mining our Ps and Qs. We are actually looking; it doesn't mean we won't buy. But I've seen things out there that I've seen some deals out there that they still want cap rates that are dated, right? So they're just head stuck in the sand. I've seen others which are weird, like they come out really short or we’ve come out because they didn't get it done before, and they're wanting really wide cap rates. And I'm like, well, and if you dig into it, you're like, they don't want any restrictions on subsequent sales or and so to me, it's a weird time right now. And so we're just being prepared, looking out. I don't know what the real catalyst is other than the most obvious one, which is the broader markets start to heal.

I also got the sense when reading it that M&A is kind of bouncing around in your head. How serious is that? Is that something that could be an all-stock deal where you're the buyer or the seller that ultimately kind of solves for float?

So good question. M&A is kind of in my DNA and in the team. So I was at Coal when we merged with ARCP to become BREIT. When I was at Campus Crest, we did a take private to Harrison Street. This REIT was formed by me merging two REITs and internalizing together. So the skill set is not foreign to us. John Raney, our General Counsel, he was involved. I was involved in the deal when we sold a cold portfolio to Spirit, which is now obviously like with REIT. So M&A is part of our DNA. We're not afraid of it. We do see the opportunity. If you study REITs historically, those who can size, if they've done it smartly, they can grow. I think what we've seen by the Spirit deal and the Peak deal is that stock for stock is an environment that makes sense because take privates, unless you're going to someone well-heeled, take privates require a lot of capital to take out public instruments and that capital is very expensive unless it's just, so I think generally speaking, stock for stock deals, I wouldn't be surprised if we see more of them. We're receptive to them. But if we can find a target that will work with us and we can take it out, stock for stock, we will do that. If someone comes, I've said this before, look, I'm a much bigger shareholder than I am a manager. And what I mean by that is I understand that I'm hired by the board and the board is elected by shareholders. I'm a very large shareholder. What's right for the stock is what will win. So if someone comes over the top and says, hey, you guys, we want to give you fair value, and fair value is not anywhere near where we're at today, then that will be the best choice because they're going to be able to close the value gap sooner than we can. Then we'll do that. I don't see that happening, but that doesn’t mean you don't see it happening until it comes across your desk. That's what we're looking at. We're looking at a lot of these things. I think some of the deals that we've seen, they just have some bad cap stacks, so we need to sort of wait and see how that sorts out, right. They've got some looming. Do they get some extensions? Does that looming maturity cause them to rethink their pricing? So we're being patient in that regard, but yes, I think in an ideal world, stock for stock would be a very efficient way to gain tradable float and to pick up scale.

Good morning, guys. Not sure I saw occupancy numbers anywhere. Are you guys at 100% this quarter?

Yes.

Okay. And Rancho Cordova government tenant, what's the timetable for them to exercise that purchase option and is there a pricing mechanism in place already on that?

There is already a pricing mechanism established. Although there is a price mentioned in the lease, it's quite appealing. The pricing mechanism acts as a reference price. They must conduct appraisals, and if the appraisals fall within plus or minus 10% of that price, they can proceed without issue; if not, they will need to submit new offers, which we are not obligated to accept. The process can be lengthy, likely taking around 12 to 18 months for them to utilize this option. They have indicated interest in starting this next year, during which they will conduct their evaluation and approval process, followed by obtaining a requisition that goes to the governor. Once the budget is approved, they can release funds. If this liquidation occurs, it appears reasonable that it would happen in 2025. From a modeling perspective, we will continue to capture that AFFO throughout this year and into 2024 and a bit of 2025 as well. This was a significant element of our lease discussion and likely extended the negotiation by an additional month because they insisted on including it. The property holds strategic importance for them, and they wanted assurance that we agreed on the mechanism and the process, which is all integrated into the agreement.

Okay, that's helpful. And then how should we be thinking about the timing on a GIPR distribution and how quickly would you turn around and redistribute that to Modiv shareholders?

Yes, I can address that. Excluding any private sales that we may conduct, I’m not sure if we will have any, but if we do, we will distribute those shares concurrently when they are redeemed. This would involve coordinating with GIPR. I don't anticipate this happening in the fourth quarter; rather, I expect it to occur very early in the first quarter. January seems like a reasonable timeframe. Once we align the redemption date with them, the shares will briefly enter our records before being distributed directly to our shareholders.

Yes, there will be an adjustment as of December 31st. If we continue to hold the shares for some reason at March 31st, there would be an adjustment as well, but most likely they'll be redeemed before the end of the first quarter. So one more adjustment is coming at December 31st.

Okay. And then how should I be thinking about cash interest expense? And I'm not sure if I'm looking at page 13 of the supplemental correctly. It looks like you're running around $5 million a quarter of interest expense before netting out all the GAAP treatment of derivatives and swaps. But if you're just doing the math on the $2.82 at $4.52 get you to more like $3.2 million a quarter, how should I be thinking about before any of the derivative swap stuff, what interest expense is running you guys a quarter these days?

Well, I think you need to take into account the cash derivative settlements. That's basically the cash that's coming in on the swaps. So the way I think of it is our average interest rate is 4.52, 4.53 on a total of $284 million. Yes, that's an economic rate. Yes, so you take the 4.52 on the 4.84. That's kind of your economic run rate because the mortgages are amortizing too.

All right. And then last one for me just to clear the OP units were not being included in FFO per share, but are being included in AFFO per share this quarter because of the end of dilutive?

Correct.

And we have reached the end of the question and answer session. I'll now turn the call back over to Aaron Halfacre for closed remarks.

Everyone, thank you for listening, joining in. We appreciate your attention. We appreciate your investment. And for those that I see you tomorrow and Wednesday at NAREIT, I look forward to talking to you. Until then, we'll talk to you again when we come out with fourth quarter results. Thanks.

And this concludes today's conference. And you may disconnect your line at this time. Thank you for your participation.