Good day, and welcome to the Modiv Industrial, Inc. First Quarter '24 Conference Call. On today's call, management will provide prepared remarks, and then we will open up the call for your questions. Please note, this event is being recorded.

Thank you, operator, and thank you, everyone, for joining us for Modiv Industrial's First Quarter 2024 Earnings Call. We issued our earnings release before market open this morning, and it's available on our website at modiv.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 or other comparable working phrases. Statements that are not historical facts, such as statements about our expected acquisitions or dispositions, potential strategic partner discussions 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 said, I would like to turn the call over to Aaron Halfacre. Aaron?

Thanks, John. Hello, everyone. I hope you're doing well. First quarter, right around the corner from fourth quarter results. In the tradition I've done in the last couple of quarters, I've put it all out there in the earnings release for the most part. So instead of me driving away, first, let's go to Ray, and then I'll catch up at the end. Ray?

Thank you, Aaron. I'll begin with an overview of our first quarter operating results. Rental income for the first quarter was $11.9 million compared with $10.3 million in the prior year period. This 15.4% increase reflects the impact of 12 industrial manufacturing property acquisitions during 2023, partially offset by 14 noncore property dispositions in August 2023 and 2 additional noncore dispositions during the first 2 months of 2024. First quarter adjusted funds from operations or AFFO was $3.3 million up 6.6% when compared with $3.1 million in the year-ago quarter. The increase in AFFO primarily reflects the increase in rental income and a decrease in property expenses which were partially offset by increases in straight-line rents and interest expense. On a per share basis, AFFO was $0.29 per diluted share for this quarter which reflects an increase of 1 million shares and the weighted average number of fully diluted common shares outstanding compared to $0.30 per diluted share in the year-ago quarter. The increase in fully diluted shares is attributable to performance shares earned by management during 2023 and shares issued during April 2023 in connection with the property acquisition through an UPREIT transaction. Property expenses decreased $723,000 compared to the year-ago quarter, primarily reflecting the disposition of properties with modified gross leases and double net leases in August 2023. Excluding the impact of swap valuations, cash interest expense increased by approximately $1.3 million, reflecting greater borrowings outstanding during 2024 and given that during the year-ago quarter, we only had an average of $157 million outstanding on our credit facility. While G&A increased by $91,000 compared to the year-ago quarter, the increase was entirely due to nonrecurring costs for our transfer agent and legal fees related to the distribution of GIPRs common stock to our stockholders in January. We expect general and administrative expenses to be lower in future quarters since the first quarter of each year includes higher costs for audit and tax professionals, along with higher social security taxes for employees who reached the Social Security max on tax during the first quarter. Now turning to our portfolio. Following the January and February dispositions of 2 noncore assets, our 42-property portfolio has an attractive weighted average lease term of 13.9 years and approximately 34% of our tenants or their parent companies have an investment-grade credit rating from a recognized credit rating agency of BBB- or better. Annualized base rent for our 42 properties totaled $39.9 million as of March 31, 2024, with 38 industrial properties representing 75% of ABR, 3 office properties representing 14% of ABR and one retail property representing 11% of ABR. With respect to our balance sheet and liquidity, as of March 31, 2024, total cash and cash equivalents was $18.4 million, and we had $281 million of debt outstanding. Our debt consists of $31 million of mortgages on 2 properties and a $250 million term loan outstanding on our $400 million credit facility, and we do not have any debt maturities until January 2027. Based on interest rate swap agreements that we entered into during 2022, 100% of our indebtedness as of March 31, 2024, held a fixed interest rate with a weighted average interest rate of 4.52% based on our leverage ratio of 48% at quarter end. We are exploring various alternatives to extend our restructure to December 31, 2024, cancellation options under existing swaps. As previously announced, our Board of Directors declared a cash dividend for common share of approximately $9.05 for the months of April, May and June 2024, representing an annualized dividend rate of $1.15 per share of common stock. This represents a yield of 7.72% based on the $14.90 closing price of our common stock as of May 1, 2024. I'll now turn the call back over to Aaron.

Thanks, Ray. I would describe this quarter as quite straightforward. Many REITs are experiencing similar themes of volatility, making aggressive acquisitions less sensible. Those with distressed assets are mostly looking to sell. For us, it was largely a quarter of patience; while we may seem calm on the surface, we are actively engaged beneath. Much of our time has been focused on strategic partner discussions, which require significant effort and considerable patience. We feel optimistic about the company; this is perhaps the best position we have ever been in. We don't have any immediate pressures to make decisions. While we would appreciate a revival in the capital markets, we recognize that many others feel the same way. It's been a challenging period for us. Historically, we have operated on minimal resources without significant gains. We remain hopeful and are managing well. It's a tumultuous time for making decisions, especially given recent global tensions and market fluctuations. The stability we've maintained is valuable, and we believe our company remains undervalued. I hold a substantial personal investment and feel confident about bridging that gap. The NAV we announced, while some may question appraisals, is a valid aspect of the real estate sector. We engaged two reputable appraisers to evaluate our asset portfolio and fixed-rate mortgages, using their insights to determine our NAV. Historically, our NAV trends have been consistent, which is reassuring. Compared to competitors in the non-traded space, our valuations have decreased from last year, which aligns with the wider cap rates and higher rates we've seen, thus supporting the appraisals. Our low trading volume is notable since most of our long-term investors don't actively monitor the share price. A tiny fraction of our shares are traded compared to other REITs, resulting in very thin liquidity, and we recognize the need to address this. We've spoken with several institutional investors who appreciate our strategy but currently lack the means to invest. We are taking a measured approach, not opening our ATM at this time and being careful with our resources. We are hopeful and working diligently, though the timing for any developments is uncertain. This environment demands patience, but our outlook remains positive, and our focus is sharp. I'm ready for some Q&A now. Operator?

Our first question is from Robert Stevenson with Janney Montgomery Scott.

Aaron, where are you on the Calera asset in St. Paul? Is that looking like a sale or a lease at this point?

It's a great question. I think we've been actively exploring both of those. I can see kind of the reason why we don't have enough progress on that yet: we still haven't got it fully rejected from Calera. They've been in contact with them. We're waiting for them. We presume that they will fully reject it, but they haven't yet. And until such time that they do, it kind of hogties us on the margin. That said, we've been proactive speaking to brokers in that market. We house in developing strategies. We've spoken to other growers as well who know the property and express interest. An interesting fact is US Foods has a significant presence there. In the original context, they were going to be providing microgreens to US Foods, and so that has spurred a lot of what seems to be some interest. That said, that's a very unique space in terms of vertical growers. The building itself is a great box. I mean, they over-improved it. I think upwards of $15 million of capital improvements that they put into this property. There's also equipment that we had purchased from them originally that's in there. So in addition to looking to sell lease as a vertical grower, we're also contemplating the concept of sell lease as an empty box. And then that part would require us to sell off the equipment. So we're actively exploring all those things. We're in a bit of a holding pattern. We're waiting for them to reject. And then after that, we'll probably be able to get a little bit more momentum.

Are they currently paying you?

No.

So they haven't gotten out and they haven't paid?

They're not in it. They're not in it, so they're ...

Okay.

It's just stuck up in the bankruptcy proceedings.

Okay. I believe the window has just opened for the tenant purchase option on the California asset in Rancho Cordova. What are the prospects at this point? Are we not going to proceed with it?

Yes, we contacted them about last week. They mentioned they have a meeting scheduled to discuss it. We probably won't receive feedback on whether they'll begin their option process for some time, likely this quarter or next. There are a few factors in our analysis, which may differ from theirs. Initially, when they considered it, California had a significant budget surplus, which is no longer the case. The purchase price won’t significantly impact their budget, but there are political considerations regarding the timing of this decision. When we spoke with them last year, they suggested they would likely start the process in May. We reached out again, and they confirmed it is on the agenda for discussion. They need to go through the real estate department, which has limited resources for acquisitions. This will proceed to their acquisitions department, where they will establish a valuation mechanism, which we already have in place. There's a lease price, and if the valuation is within 10% of that, they can move forward. If it falls outside that range, we would engage in a negotiation. I don't see any problems with that process. After that, it goes to various state departments for approval, and once approved, it will go on the budget. However, that budget won't be approved until next year. They have clearly indicated that the process will take at least 12 to 14 months once they initiate it. If they inform us they intend to start, we will be patient. If they are uncertain about starting because they have a couple of years to decide, then we will likely take it to market. This asset is backed by a AAA or at least a AA+ rated credit with a significant term. It wouldn’t make sense to hold onto it, especially if we sell the Costco property, leaving us with only this. We expect to provide a better update during the second quarter earnings.

Okay. And then last one for me. How significant are the acquisition opportunities at similar rates to the Tampa acquisition, if you had access to more decently priced capital at this point? I mean is it a lull like we're seeing in other asset classes? Or is there a lot of opportunity and it's just a matter of the capital for you guys?

I think there is a pause. There are fewer opportunities compared to last year. However, I saw a great opportunity, likely an acquisition, valued at $100 million. It was a multi-site portfolio, not just a standard brand-new sale leaseback. Clearly, there is capital to deploy. The reasoning for us regarding industrial manufacturing sale leasebacks is important, as there are hardly any existing leased properties available on the market right now. Occasionally, there are some, but they tend to be more specialized, like HVAC companies, which aren't necessarily strategic. The rationale for pursuing strategic sale leasebacks involves a long decision-making process. We haven't seen many private equity transactions affecting small to mid-sized companies in the past 18 months because they don't generate enough paperwork for them. When a private equity firm acquires a company, one of their first steps typically involves reviewing the assets. If you have an owner-operator looking to free up capital, it can be a lengthy journey to convince them to sell something they perceive as extremely valuable. This concept can be unfamiliar to some, even now, despite the fact that sale leasebacks have been around for generations. That decision-making process can take anywhere from 12 to 24 months. When we were acquiring assets last year, those decisions had been made in 2021 or 2022, in a different market environment. The momentum was established, and commitments were made. The deals that are emerging now suggest a real need for capital. For instance, in the recent Photonics deal, they are pursuing an international merger and found sale leaseback financing to be a better capital source than traditional bank loans for growth. If there are parties looking to cash out or issue dividends, that raises red flags for us in this market. We anticipate a slowdown in volume. However, while not every opportunity is exceptional, anything above a 7.5% return could allow me to replicate the size of the company if capital were available.

Our next question is from the line of Bryan Maher with B. Riley Securities.

My first question was just answered in kind of how deep the acquisition pipeline could be. But when we look at your release this morning and you talk about the 3 ships scenario, can you assign any probability as to how you think it plays out? I mean, I know you discussed it kind of the yin and the yang of it. But where is your head thinking that this ends up?

Attorneys have advised me not to share any probabilities, so I won't. The four scenarios outlined are the right approach. None of us have forced deadlines, which creates an environment where we can handle the challenges without making moves that could harm one party while benefiting another. If that were the case, reaching an agreement would be much simpler. The discussions with these parties didn’t just begin in the last few months; we have been familiar with these portfolios for quite some time. Our conversations over the last three to four months have focused specifically on engaging with each other. I can share that there has been information exchanged regarding their portfolios, and we have a working model that helps us understand the combined impact. We have also discussed cap rates, share prices, and governance details. While some legal expenses have been incurred, this is not just guesswork. If you could clarify the probabilities of geopolitical and economic risks, as well as the election cycle, I could provide a clearer assessment. Recently, a CEO from another REIT commented on how unpredictable the market is right now. However, we remain optimistic. The portfolios are complementary, with one being more substantial but containing excellent core assets, while the other is smaller but more diversified. Both portfolios have shorter weighted average unexpired lease terms, yet they possess good leases. We will continue to work on this. I’ve been informed by our attorneys that this might be all we can disclose until next quarter. We won't be attending NAREIT because we are in the middle of negotiations and prefer not to discuss this publicly. Again, I cannot provide a probability due to the market's volatility; our share price fluctuated significantly over the last two months. We will persist, and hopefully, we'll reach a favorable outcome.

All right. That's helpful. But in the net commentary, I don't think I heard anything regarding kind of the size of these portfolios? I mean can you give us some aspect? Is it 50? Is it 100? Is it 500? I mean what ZIP code are we talking about the size of these 2 entities?

That's a very great question. I can't give you an answer.

Our next question is from the line of Gaurav Mehta with Alliance Global Partners.

I wanted to follow up on the partnership discussion. As you consider different partnerships, do you expect the quality of the assets and the partnership to be similar to what you would have in your wholly owned portfolio?

I believe the quality is quite similar. In manufacturing, there are times when you have rated credits and times when you don’t. I can’t really identify any that are of lower quality. If they were, I wouldn't be engaging with them, to be honest. They’re all of comparable quality. Some might have stronger tenants with shorter leases, while others might have stronger tenants with larger, more substantial assets. There are also perfectly fine tenants with greater diversification. The best aspect I see, if this were to develop in any direction, is that they are very complementary. I feel confident about any potential combination. I believe they share this sentiment. The reason we are having this discussion stems from the understanding that manufacturing is a viable asset class. Until recently, no one had truly focused on it in a dedicated way. While there have been long-time buyers, they haven’t engaged in pure play until now. I think they view Modiv as a natural end point, as these portfolios would eventually be sold anyway. It's just a matter of timing. Therefore, there is a complementary fit that can lead to greater scale, inclusion in indexes, and institutional ownership, which will enhance liquidity and allow more people to engage in this strategy with presumably less equity volatility. There are numerous benefits to consider.

Okay. And you talked about the exchange of your equity possible for this portfolio. So are we talking like common stock or like OP units?

I look at those candidly. One provides tax protection. These are institutional players, and generally speaking, they are less tax-sensitive due to the nature of their money. However, to be clear, we're discussing the common equity aspect.

Thank you. There are no further questions, so I will now hand the conference over to Aaron Halfacre for his closing comments. Aaron?

Thank you, operator. Thank you, everyone. We are striving to be as open as possible and ensure you understand what we are doing. Many environments or operators may feel uneasy about transparency. If you don’t like what you hear, you will make a choice regardless. I believe we are delivering results and being transparent to help you grasp where we are headed and our thoughts. I am very confident that we have the right team to accomplish our goals. I cannot predict market movements, and like you, we are adapting as needed, but I believe we are on the right track as a company and look forward to updating you at the next earnings release. Thank you, everyone.

Thank you. The conference of Modiv Industrial has now concluded. Thank you for your participation. You may now disconnect your lines.