Good day, and welcome to Modiv Industrial Inc. 2Q '24 Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to John Raney, Chief Operating Officer and General Counsel. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us for Modiv Industrial's second quarter 2024 earnings call. We issued our earnings release before the market opened 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'll 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 words and phrases. Statements that are not historical facts, such as statements about our expected acquisitions or dispositions, joint ventures, and 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. A discussion of the factors that could cause our results to differ materially from these forward-looking statements is 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, everybody. Thanks for joining our second quarter conference call. Most of you would rather be tracking the stocks on your watch list in this volatile market. So our goal is to try to make this a snappy one. I said all my prepared remarks and I normally do in our earnings release. So let's just jump straight to Ray, and then we'll go to Q&A. Ray?

Thank you, Aaron. I'll begin with an overview of our second quarter operating results. Rental income for the second quarter was $11.3 million compared with $11.8 million in the prior year period. This 4% decrease primarily reflects a decrease in tenant reimbursements related to 13 properties sold to GIPR in August 2023, which included properties with modified gross leases and double net leases. Rental income for the quarter also reflects the impact of 12 industrial manufacturing property acquisitions during 2023, partially offset by 16 dispositions of non-core properties from August 1, 2023, to February 28, 2024. Second quarter adjusted funds from operations, or AFFO, was $3.9 million, up 17% when compared to the $3.3 million in the year-ago quarter. The increase in AFFO primarily reflects an $834,000 decrease in property expenses with a $179,000 decrease in general and administrative expenses, which were partially offset by a $493,000 decrease in income. The increase in AFFO was impacted on a per share basis by a $781,000 increase in diluted shares outstanding, resulting in AFFO per share of $0.34 compared with $0.31 in the prior year period. The current period AFFO includes non-recurring state and property tax refunds of $138,000 or $0.01 per share and a decrease in G&A expenses of approximately $179,000 or $0.02 per share due to the timing of expenses that will be reflected in the third quarter. If our repurchase of 780,000 shares from First City Investment Group, which occurred at the beginning of the quarter on August 1, is considered, pro forma AFFO would have been $0.37 per fully diluted share. Cash interest expense for the quarter was approximately $25,000 greater than the comparable period of 2023 when we drew the final $80 million of our term loan in mid-April 2023. The current period expense included $550,000 of unrealized non-cash net losses on swap valuations, which increased interest expense, while the prior year period included $3.7 million of unrealized gains on swap valuations, which decreased interest expense. Now, turning to our portfolio. Following the July 2024 acquisition of a photonics manufacturing property located in the Tampa-MSA, our 43 property portfolio has an attractive weighted average lease term of 13.6 years. Though the majority of our tenant credits are private, approximately 34% of our tenants or their parent companies have an investment-grade rating from a formally recognized credit agency of BBB- or better. Annualized base rent for our 43 properties totaled $40.5 million on a pro forma basis as of June 30, 2024, with 39 industrial properties representing 76% of ABR and 4 non-core properties representing 24% of ABR. With respect to our balance sheet and liquidity, as of June 30, 2024, total cash and cash equivalents were $18.9 million, and we had $280 million of debt outstanding. Our Tampa property acquisition and a repurchase of 780,000 shares from First City reduced our cash position by $3.2 million following the quarter-end. Our debt consists of $31 million of mortgages on two consolidated properties and $250 million of outstanding borrowings on our $400 million credit facility, and we do not have any debt maturities until January 2027. Based on interest rate swap agreements we entered into during 2022, 100% of our indebtedness as of June 30, 2024, held a fixed interest rate with a weighted average interest rate of 4.52% based on our leverage ratio of 47% at quarter end. We are actively evaluating the changing interest rate environment and presently intend to enter into new swap agreements on or before December 31, 2024, to continue our full cash hedge position. As previously announced, our board of directors declared a cash dividend per common share of approximately $0.095 for the month of July, August, and September 2024, representing an annualized dividend rate of $1.15 per share of common stock. This represents a yield of 7.9% based on the $14.76 closing price of our common stock as of yesterday. I'll now turn the call back over to Aaron.

Thanks, Ray. Okay. And the fun part begins here where you guys get to ask your questions and I tend to talk too much. But before we do, jump to Q&A, I want to address two things. Mr. Maher, I know my comments tend to be dramatic, but they're not meant to be. They're meant to be cryptic though. The reason is that there are a lot of constituents out there. So there may be some messaging in those, but they're so cryptic that sometimes they can be confusing. So to that end, Mr. Stevenson, I want to point out that the portfolio in the joint venture is not focused on the city of Miami. Just to be clear, it's diversified in its geography. So with that, operator, let's go to Q&A.

Thank you. And our first question comes from the line of Gaurav Mehta with Alliance Global Partners. Please proceed.

Yeah. Thank you and good morning. I wanted to ask you about the joint venture. Wondering if you are willing to disclose any more details on the size of the JV? And do you expect to derive any management fee, property management fees once you get into the JV?

I appreciate the question, and you should generally assume that I will try to tell you everything I can. So I will not disclose statistics on that portfolio at this stage. I have my reasons, so you can trust me on that. As it relates to the JV fee, though, we're not doing this as a fee generation thing. This is a participation. So we will participate ratably in the income and expenses, and we are not looking to make any fees on it at all.

Okay. Second question, maybe big picture. Any color on what you guys have seen in the transaction market for industrial manufacturing?

Yeah. I mean, you're seeing one-off transactions continue this whole year; it has been mostly one-offs. Occasionally, something comes up, and sometimes the cap rates look attractive, but there’s a reason they look attractive; they’re not really attractive. If the credit is pretty thin or they're desperate for cash or something like that. Other times, for the more solid ones, they’re not in a rush to sell, and the cap rates are too tight. So it hasn’t been, not unlike our stock, a really choppy market for industrial manufacturing. Remember, we’re pretty picky. I don’t consider light assembly to be manufacturing. I don’t look at flex spaces as manufacturing. We’re seeking things that are durable in terms of their products and where they are in their market segment. So that narrows the universe. It’s been choppy, as you can expect. For instance, on the Tampa-based deal we did, the reason why we are comfortable doing that one, and obviously, it had a good client list that we're buying their products. They’re making something durable and essential for infrastructure-based needs. More importantly, the money from the sale leaseback went into an acquisition overseas that did the same thing. By doing this acquisition, they were more than doubling their top line and really getting synergies, so we viewed it as a smart use of capital versus if it had been a private equity shop just stripping out cash. There are many different motivations as to why we think the market is good or bad for assets. Right now, it's been hit or miss; not a lot of volume. It’s not like you're buying Walgreens.

Okay. Thank you. That’s all I had.

Thanks.

The next question comes from the line of Rob Stevenson with Janney Montgomery Scott. Please proceed.

Good morning. Aaron, can you talk about the expected timing of the non-Miami-centric Battleship deal? Is this likely a third quarter event if it happens?

Yes. I think if it pulls together on the pace we're working on, it will happen before Q3.

Okay. Perfect. And then can you talk about what your role will be? Are you going to be in charge of managing these assets? Is it essentially a passive sort of ownership interest? How should we be thinking about your involvement?

Yeah, we'll plug them into our ecosystem. We'll manage them. The private equity sponsor will actually be stepping into the position of a prior joint venture partner that had a much smaller percentage than what we anticipate acquiring. So it will be a more equitable partner relationship, but we will manage day-to-day operations including property management, accounting, and all those aspects, while the private equity sponsor will continue in what I would characterize as a more passive role.

Okay. And the materiality of the deal isn’t such that, given your current size, you’d need to get any type of approvals other than from the board for the share issuance?

That is correct.

Okay. And then sort of switching gears here a bit. How should we be thinking about First City going forward? Is this just a staggered sort of deal or do they want to sell out of their remaining shares and units? And going forward now, do they own primarily shares or units at this point?

Great questions. First City is a wonderful investor; we think highly of them. We've had a dialogue with them for the last two years or more. They’re very smart investors. Although on the surface, this has been smart for us, they have a history of making money in the space that they deal with, which tends to be in automotive dealerships. They now have only common shares. They are still a significant shareholder with a meaningful size. They converted those shares from OP units to shares back in January, so they have been in possession of those. They are freely tradable and can do what they want. Obviously, I don’t ask them about their business. I don’t know if they will stay long-term, but we hope they do. We think very highly of them. This transaction met the needs of both parties. They have no more OP units, and this ended the OP units, which was the original cycle of the 721 transaction.

Okay. That's helpful. And then how are you thinking about the most appropriate time to monetize the KIA asset? Is that a '24 event at some point in time? Is that a wait for rates to come down, likely a '25 event? How should we be thinking about that in the current market environment?

Yeah. I think that is a great property with a great lease and a great tenant. In my view, in this rate environment, you would only get punished. You wouldn’t get the credit that you would expect. I believe it's a natural candidate along with our Costco and OES recycling projects because they are non-core. Costco, as we know, is underway, as previously disclosed. The other tenant, OES, is interested in exercising their purchase option. It’s an arduous process for them as a government entity, so we won’t be sure until we know. Those are probably the natural first candidates. And then at the right time, we would execute on KIA. I think because there’s a substantial embedded gain in that, we will need to be tied very much to a 1031 exchange. That could involve new assets, another portfolio, or the second half of the aforementioned joint venture. There are many opportunities to naturally sequence that, but I have zero expectations that it’s in the near term.

Okay. And then speaking of Costco, at this point, given the way that KB is moving, what's the earliest that deal closes for you guys?

It's really up to the zoning and the final permits. But we’re earmarking mid-next year? Right now, we don’t see any reason why that would happen earlier; there are provisions for it to be earlier, but I don't think it will be before February of next year, so it’s definitely a '25 event.

All right. And then the last one for me. You mentioned in your comments that Adam and Curtis are leaving the board. So you're losing your Chairman and your Lead Director. How are you and the Board thinking about that going forward? Will the board shrink? Is there anyone currently on the board that will step up to take on those roles, and how committed are you to keeping the CEO and Chairman roles separate at this point?

CEO and Chairman roles will be separate; that's best practice. We’ll have all those items addressed in a thorough manner by the time we file a proxy. We have put thought towards it, and I’d say we’re not ready to get our proxy out yet, but that will be soon. We wanted to get this joint venture due diligence underway. By the time we do that, it will be fully vetted. We’ll maintain the same sort of professional integrity that we've always done with our board. It's disappointing to have rotation, but it's been five years. It's a long time, and they have other things to do. I’m very grateful for their service. When whoever comes on next, they will have a high bar to meet.

Thanks. Thank you for your time.

Yeah.

And the next question comes from the line of Bryan Maher with B. Riley Securities. Please proceed.

Hi. This is Brandon on behalf of Brian, but I will certainly pass along the message. Most of our questions have been answered, but two quick ones from us. The first one was just the probability on the current strategic partnership going forward versus the probability of the other strategic partnership option if you can delve into that.

Yeah. I think there’s some logic to sequencing them. This one is something we could fast track a little bit better. Look, during the course of the summer, our share price fluctuated between $15.75 and $13.95. We had so much market and rate volatility that it makes it hard to negotiate if you're trying to engineer a certain outcome. And so patience is key—that's what I discussed. This one is one that we can execute faster, and it only dovetails with the next. If anything, doing this one first strengthens the opportunity for the second one. So that's how I would describe it; it wasn't an either/or decision. In my ideal world, it will be the combination of three battleships.

Got it. And you talked about your acquisitions, but I was just curious about the disposition pipeline—whether you're receiving offers on existing properties or underperforming properties? Any color there? And that's all for me.

Thanks, Brandon. There are no properties held for sale right now. We've clearly signaled that non-core assets, particularly office assets, are recycling candidates. We have some industrial assets that are less manufacturing and more distribution, which could be candidates down the road. But right now, nothing is for sale. We had a significant transaction last year involving a 13-property portfolio. We obviously sold two earlier this year, so we think we’re always able to sell. If we can find the right opportunity, we will execute. That said, if you have a good property with good operations, you don’t want to sell into this market unless you absolutely have to. We don’t feel any urgency, so we'll continue to be smart. Thanks.

The next question comes from the line of Sean Hostert with Net Lease Observer. Please proceed.

Hey, Aaron. Good morning. I'm curious if there are any specific watch list changes for you guys from a tenant credit exposure perspective? And then secondly, I'm hearing a lot of conversation in the market about pricing between investment grade and non-investment grade assets. I'd love to hear how you and your team think about pricing assets depending on credit profile.

Sure. I think that the credit profile, IG versus non-IG mindset is highly conducive to traditional net lease. When I think of traditional net lease, I think of NNN or O. They are buying a lot of retail, and there's a wide spectrum of credit quality. That way of thinking is built into many other net lease product types for good reason; they’re not unlike bonds, and so the credit matters. When it pertains to industrial manufacturing, though, it's hard to fit that square peg into a round hole. We’re typically buying really durable infrastructure-based manufacturers that have typically been around for a long time. They might be individually owned, and some could be public. I think our look-through basis on rated credits that are investment grade is 34% of the portfolio—O's is 37%. But it’s apples and oranges, there’s no real comparison. For us, if we can find someone that’s investment grade and it makes sense, and if that’s the actual guarantor of the lease, that’s fantastic. But will we buy a subpar manufacturing location just because it's investment grade? No. We have to make sure it’s a durable tenant that has been around for a long time. We need to ensure that they have a good market share of what they produce, and ideally, that the majority of their manufacturing occurs in our facility. That way, there’s a low likelihood of rejection, which in our case is a very serious outcome. We think about it differently. Credit is important, and we run internal and external credit evaluations every time we do a deal. But the investment grade criteria don’t always fit. In terms of pricing, as I mentioned to Gaurav, we’re not seeing much. The pricing can fluctuate widely because sellers can be desperate to unload their assets. So some might say that a property yields an 8 cap, but it’s really a 10 cap when you consider the true risk. Others, for solid portfolios, know they are valuable. They might want a 7.5 cap, but then they say they want 6.5. It’s difficult to gauge; this is case-by-case. There aren't many observations to draw a trend from, so I can't provide a clearer answer. Thanks, everyone on the call; appreciate your time, and until we speak again.

Great. Helpful color. Appreciate it.

Thanks, everyone for the call. We appreciate the time, and until we speak again.

Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines at this time. Enjoy the rest of your day.