Modiv Industrial, Inc. Q3 FY2025 Earnings Call

Good day, and welcome to Modiv Inc. Third Quarter 2025 Conference Call. All please signal a conference specialist by pressing the star key followed by zero. On today's call, management will provide prepared remarks and then we will open up the call for your questions. To ask a question, analysts may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. And to withdraw your question, please press star then 2. Please note that this event is being recorded. I would now like to turn the conference over to John C. Raney, Chief Operating Officer and General Counsel. Please go ahead, sir.

Thank you, Chloe, and thank you everyone for joining us for Modiv Inc. Third Quarter 2025 Earnings Call. We issued our earnings release after market close today, it's available on our website at modiv.com. I'm here today with Aaron Scott Halfacre, Chief Executive Officer, and Raymond J. Pacini, Chief Financial Officer. 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 and business plans, 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-Ks and 10-Q. With that, I'd like to turn the call over to Aaron. Aaron?

Thanks, John. Hello, everyone. Hope you're doing well. This time, we're going to do it. We are doing everything a little bit differently. Certainly, I had the call on a Friday afternoon. I'm surprised to see if many of you dialed in as you did. Hopefully, you have a cocktail in your hand. But we're not going to do prepared remarks. I put a little more context into the press release. So we're going to prefer all questions, but I think what I'll say is kind of an iteration. It's really grindy, and I really like that. You know, we purposely waited toward the end of the earnings season because some of the early reporters, it was interesting to see them come out like, wow. It's pretty solid. And then, you know, they just got hit in the markets. And I was like, okay. We'll see what else works comes out. And then so I really wanted to spend some time observing because, candidly, it doesn't really move the needle when we come out. And typically when we come out, you know, we're stacked four deep, and you guys don't have a chance to breathe. I wanted to give you a chance to breathe. And so that's the only reason. So there's nothing else into it other than that. We won't do this that often. But, you know, I feel generally optimistic. I mean, look, no one knows where Powell will be in December. You know, are they done or not? But I think we can probabilistically underwrite that, you know, there's going to be a new Fed regime come May. And so that regime has a high propensity to be easing. So at some point in the future, we should see easing. Modiv Inc. share price is very easy to predict in a five-minute pattern, and probably on a five-year pattern, but not sort of in between. But if you think you've got easing, you think you've got a long period of capitulation, we started to see sort of non-equity when I say equity, I guess, we've seen preferred and debt deals being done, which I think are key leads of capital market activity. I think July, we saw, I think, I well, at least I got a palpable sense that there was some interest. And, you know, we saw, like, the deals, like we saw with the fundamental deal, we saw the early pre-version of the Plymouth deal announced, and we saw the sort of Elm Tree, and we were starting to see pipeline. And then it kind of went sideways in late August, September, or early October where it's just like people got scooped and their shadows were seen. For instance, we saw we were in process bidding on a pipeline deal that we liked. It was a company that was doing Prophco sell along with an Opco transaction, and they were like, guns ablaze, and then they pulled it. We've seen some of that stuff, over the course of last quarter. So it was a bit of sort of a volatile quarter where people thought they had a look, and then the market gave them a head fake. And then they're like, oh, you know, pausing on the margin. But I think, you know, we get this real palpable sense there's still a lot of money on the sidelines. I think still right now, a lot of people just want like, you know, bloodbath returns. They really want to, you know, harm people who they think that are desperate. And, you know, some of those people are being, you know, picked off. Right? We're seeing more read stuff that, you know, I think either they waved the white flag or they didn't have the wherewithal or whatever. But you know, and so I think that capital is still really sort of let's just be patient and let's just only get the super, super sweetheart deals. But if we start to see real easing and we start to see some consistent trends for REITs, I don't know if that means we need, you know, consolidation on the sort of the rest of the S&P and Nasdaq to get that or not. It's hard to say. Because you could argue that, you know, until tech and some of these names cool off, then no one's really going to ever consider, you know, boring REITs. But at the same time, if they force correct, is that just going to drag everyone back down? So it remains to see. It's pretty cloudy. But even despite that cloudiness, I feel pretty optimistic. About what I'm seeing. And, again, it's because I'm gritty and grindy, and I like that. So that doesn't mean, you know, we're off to the races, but it does feel like, I mean, for us, I mean, we're like a cockroach that could survive a nuclear war. There's no real fundamental reason why we should be as durable as we are given how small we are now in the context. I mean, we there's a reminder. I said before. We came out two weeks before Putin invaded Ukraine, and we came out, like, what was it? Three and a half weeks before the Fed started raising rates. So the entire publicly traded existence of us has been, like, you know, difficult. Yet I feel like our balance is stronger. I feel like our AFFO is better. I feel I just I have a much more clarity now than I did even a year ago. And so I think that leads to optimism. But enough of me rambling. Let's open up to questions, shall we?

Ladies and gentlemen, we will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. And if you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star to the number two. We'll pause for a moment as callers join the queue. Our first question comes from the line of Craig Gerald Kucera from Lucid Capital Markets. Your line is open.

So, Craig Yeah. Hey, guys. Good afternoon. Just a few for me. Were there any one-time revenue in your other property income, and how should we think about that going forward?

Yeah. It was a $300,000 fee that we obtained for terminating some easements that are marked for property. And that's it.

So did you be add a little clarity to that? There so our north of property, which is in Melbourne Space Coast, there was a large piece of sort of underutilized near vacant land. And, you know, it was a former, like, I don't know, call it, like, a kids park or something like amusement park. And that's getting redeveloped into a housing project. You know, townhouse type of arrangement. The prospective buyer had come to us because there were certain easements and they wanted certain rights. And so we negotiated it to a while, candidly. I would say we probably negotiated for nine to twelve months, and they basically gave us a fee to sign a paper. And so what that that's that's what that was.

Got it. Was that all recognized here in the third quarter, or will we expect any other additional fees? Going forward?

One time.

Okay. Yeah. One time. Okay. Got it. It looks like you added another asset to the held for sale bucket. Can you give us some color on what you're looking to sell here? And are you actively marking that for sale as well?

Yeah. So, obviously, we've had Costco in the held for sale up until this point. And then I guess, about six weeks ago, we formally engaged a broker to sell Clara. So Clara is held for sale. And in the process right now of, I think, our anticipation is that we would try to get this sold either by the end of the year or probably early January. So that's the other property that's going to help for sale.

Got it. And speaking of the Costco property, I think KB Home was expected to extend a couple of times until maybe December. Are you getting any change in sort of their viewpoint on the asset if they still expect it to close?

Yeah. So they did extend to December. We've had some conversations recently about they're wanting to time the closing for their for a demolition permit. But, you know, they've got to go through their process. But as it stands right now, per the agreement, you know, we have not been heard if they're going to extend beyond December 15. So they have one more extension that would take us through to, I think, February 15. But right now, it's through December 15.

Got it. Am I over to bet my bet is is they'll close by then.

Okay. Fair enough. And just one more for me. I feel like last quarter, you were saying you were seeing an increasing number of acquisition opportunities. I'm just sort of curious, based on your opening commentary, it sounds like things are maybe more loosening up, but now sort of seized. What's your viewpoint currently, or do you think things are coming back? Yeah. So it's interesting. So I would say that we were seeing some stuff in, you know, that sort of July time frame. And then we started throwing out some bids, and then it kind of contracted because we got a little sideways. And I would say we've seen more in the last week and a half than we had probably in the prior month and a half. So I don't know what it was about it. I mean, if the markets were just volatile, maybe because the end of summer, maybe it was because we knew we had the September decision. I'm not sure. But, you know, it kind of we didn't see much. And now we're starting to see more. Like, now it actually feels like, I'm measuring it by quantity, not quality. It's starting to feel healthier. Like, there's definitely I mean, I think John C. Raney, I'm thinking we've probably looked at, you know, four or five deals in the last week. Right?

Yeah. At least. Quantity is.

Yeah, quantity is down I mean, quality is still challenging. Right? I mean, we I think the one thing that that I like, you know, if you imagine us as a steel blade or a knife, you know, we're constantly sort of sharpening and sharpening on a grindstone and getting better at what we want knowing better what we want. And so our buy box has probably gotten a lot tighter and there's stuff that I probably would've you know, been willing to bid on two years ago. I'm like, man. Forget it. I'm out. I don't want to bother. So we've gotten much more selective, but that said, you know, it feels right now at least, and it's usually odd because, candidly, you don't tend to see a lot at year end. You tend to see them waiting early January. Right? That's where the pipeline tends to pick up normally. Like, now you would generally think it's going to slow down because, you know, these take anywhere from thirty to sixty-ish days to close, and so then you're, smack in the holidays, and you're like so I think that's an interesting sign. I think some of I think what we are seeing sort of key lead wise is there's probably more PE activity going on. Which I think is always an indicator an early indicator. Right? PE and hedge funds sometimes can be you you generally construe them as to be smarter capital, maybe not smart capital, than sort of you know, people who have just know, got long buyers or doing ten thirty ones or something like that where they they're forced by mandate to do something. These guys are looking for something. So we have seen a little bit of PE activity pick.

Okay. Great. Thank you.

Our next question is from Gaurav Mehta from Alliance Global Partners. Your line is open.

Yeah. Thank you. Following up on your comments on acquisition, can you comment on where the cap rates are for the kind of properties you're looking at?

Cap rates are mainly in the seven handles. That's first year. Right? Some we've seen some eight, but mainly seven handles. Not necessarily low seven handles, but seven handles. Like, I think brokers are certainly asking for the moon, and that's their job, and I get it. On a weighted average basis, those are probably, you know, tens. Right? And so now I guess, in fairness, we've seen some wider ones, but you're like, I own that. You know? Have we seen any tighter ones at all?

No, not that I have, right now, to be honest with you.

Okay. Thanks for that color. Second question on I guess asset recycling as the acquisition market picks up for your target assets? Should we expect that you may sell more assets to fund those acquisitions?

You should expect that we will be deliberate and systematic about asset recycling. If you think back, right, we did the asset recycling, the GIPR, which is a large bowl. And so just for everyone's education purposes, you know, generally speaking, if you sell if you do seven individual transactions, to seven individual buyers in a given year, that's sort of the limit for an IRS perspective. If you go over that, you kind of have to get what is called a private letter ruling to sort of get exemptive relief because otherwise, you might be deemed a trader. You're dealing. Like and so when we sold that big bunch of office and dollar stores to GIPR, that was one transaction. And then, you know, that was sort of kicked it off in earnest. We sold the one in Nashville. We sold one out in California. And then, you know, it gets kind of super volatile, and we've been sitting on the KB thing for the Costco purchase for a while. Looking forward to that closing soon. You know, as I said, OES has this purchase option, so we can't do anything with that until we actually have conversations with them and their process. Is you know, they have time on their clock. So that one is what wasn't going to happen immediately. And then, and then, you know, the solar property, we've been with it's been four years of trying to get a lot split. So San Diego is, like, really difficult to work with in terms of doing anything. That's taken on. So it's felt really, like, long in the tooth. Like, we haven't really shown much recycling. And I think at the same time, we have other assets we could—they would fly off the shelf. Right? They would just immediately go. And what I say these other assets is, obviously, there's the Kia asset, which is a noncore, but we also have in our industrial bucket some legacy assets. Not all there's a handful one until they're, like, a that are not absolute trip I don't like because it's leakage and it's not scale-efficient. Some of them are are just not the very focused sharpened knife blade of manufacturing that we want. And so those would have flown off the shelf in this period of time. But at the same time, we're saying, they're not hurting us. Very comfortable credits. Let's see if we get a little bit of a more stability in the cap rate markets. If the cap rate market if the cap rates start to start to tighten, then we can comfortably roll those off, and we're not, like, leaving a lot of chips on the table. And so I think what you'll see over the next period of time is we will continue to do that. Start recycling those, and it'll be systematic, and we'll use since those have a long legacy, that we'll have to— we'll have in terms of a low basis, we've held them for a long time that they will be ten thirty-one or they'll be tax-sensitive. So we will be sort of timing rolling into new acquisitions. If that makes sense.

Okay. Thanks for that color. That's all I had.

Cool.

Our next question is from John James Massocca from B. Riley Securities. Your line is open.

Good afternoon. Hey. So as we think about maybe going? As we think about maybe over a longer time horizon, you know, the outlook for true growth. What's kind of interesting maybe as the Fed dynamic changes a little bit in terms of sources of capital perspective. And I just maybe hop in on you know, your preferred stocks had a little bit of a run. There's been some smaller REITs that have been out there in the preferred market. But that would in some people's mind, be a leveraging transaction if you did raise in that market. So just kind of curious where we should be thinking about sources of kind of external growth capital in the future if and when the market gets a little more accommodative?

Well, I think when we know the market is accommodative, I think that that'll be a better time to ask that question. I think for us, and I've kind of alluded to this, is that, like, I that question predates that we have to grow, and we have to find sources for it. Right? And I kind of rebel against that question in general right now, and I don't I know I don't I know the answer is underwhelming. Like, well, if don't have external growth capital, you can't really grow. And I was like, yeah. I don't, you know, we have several assets that are you're going to, you know, can trade low sixes, and then we can rotate them into mid to high sevens. And so that's growth. Right? And that's something to do in the near term. Until it makes it clear that we're the trend know, you think about we're in a downward trend in REITs or we have been, generally speaking, and, you know, it's correlated to rates. And so until we have clarity on where rates are, then I think we'll start to see you know, where pricing is. And another way I think a couple of ways I think about it. Right? And I'll talk the preferred stuff too in a second. But you know, look at o or w b care. I mean, I think their dividend yields are, high fives. Right? Mid fives, high fives. You know? And we're, what, eight. So we're roughly 200 basis 50 basis points off of them, 200-250 basis points. That doesn't seem terrible to me. I don't like it. I think we're certainly undervalued. Right, from a standpoint. But, arguably, everyone is. Right? I mean, it was always forever, it was, you know, sub four dividend yield. And they're trading fairly wide. I mean, that's much wider than a money market. And do they do they have a lot of risk in them? I don't I mean, they have risk that they may not grow. But so I think we need to see, you know, the broader, more liquid, the more easily bought, the easily loved names, right, the big names to start to see some love from the broader institutional community, which they haven't seen. Because flows into REITs have not been good. When you start to see that, then then the next sign would be, okay. Are we, you know, we're the tail. Do we start to see that? Right? So, obviously, price of our share our share price, if it's at a realm that's accretive, then we would start to access that. But we're not there yet. And so until it is, I can't do anything with that. Right? The strategic capital stuff, look, we're always looking. I think like, we've had like, we've seen three preferred deals really in the last week. GMRE, we saw Pine, and we saw Frontview. I thought the deal that Preston and Fitzgerald did was really—I like that. It was clever. Right? I'd love to have conversations with him and reach out to him and do it. But I think that was a clever deal. Right? I think that one is a constructive deal that'll cause growth. If I look at GMRE and PINT, look, I get it. It's cheaper. That that 8% preferred is cheaper than your equity loans. But you gotta step back. And then and so that answers the question. Which source of capital do I wanna use? And I wanna step back to the primary question and say, should I be using either of those? And if my if I have a hammer and the hammer says, you know, hammer every mill that says growth on it, then you're gonna use capital. But like, I mean, think about it. If you just pull back on a time horizon, and you under and you underwrite that we could be in an easy environment and that this time next year, our returns our our share prices could be better as a as a category. Then won't it feel a little like a chump to have issued a bunch of perpetual preferred at 8% when you could've just waited and maybe your dividend yield and equity could've been issued at seven and a half or seven? But, clearly, I get that they will make that accretive. So it's not like it's bad. It's not like they're gonna destroy themselves by it. By no means. I mean, they're probably finding investments that are wider than that age. So it's gonna be accretive. But they are also just burdening their franchise with this thing that they got to deal with. And so to me, I just want to step back and say, hey. What is does it really make sense? Do I need to post you know, stats for the quarter Because that's what everyone else does. But that was kind of my framework about being a small read is the bigger guys, yeah, I get it. They got super low cost of capital. They do need to show activity. Right? But our smaller folks, I mean, is that the right blueprint? So many small cap REITs just try to follow this bigger mantra of the normalized REIT, and they're just not. And I know it's a circular thing. Like, you said, well, if you don't grow, then you're never gonna get capital, and therefore, you're always gonna be small. And I'm like, maybe. But maybe you could actually create a really valuable franchise that you know, people will buy. And you know? But that just that's an experiment that we're doing. I fundamentally take the view that if I improve the real the durability and quality of the income coming in, and I sort of rightsize the balance sheet and make it stronger, not weaker, and that I continuously do the right things over time that you know, as I think Warren Buffett says, when the tide goes out, you know, you'll see who had have their swim trunks on. And so right now, I don't know where those buckets of capital is, but I don't have a line of sight to tell you, yeah. I'm I've got someone who's gonna give me equity It's $18 a share. Because if I did, I would just, you know, I would take it and I would go put it to work.

With the in-place portfolio, just kind of broadly, what's the feeling amongst tenants as you reach out you know, given maybe we have a little more certainty even versus the last earnings call around the tariff outlook and it's still some uncertainty, but just kind of curious how they're feeling and if there's anything maybe notable from a tenant credit perspective worth calling out.

No, I look.

Most of these operators, you know, quarters don't move that Right? They look annually. They look at cycles. They're getting orders. I think the tariff news is if anything, it's old. Right? I mean, the volatility certainly tempered. I mean, you tell me, I don't think we've heard of the verdict yet on the supreme court. And even if we do, there's two other tariffs that he can implement. And so no one knows. Right? But what we do know is it hasn't there's there's no been there's no blood in the streets. And and and our businesses are operating. I mean, most of our businesses buy US and sell US. Right? We own a lot of durable businesses. So we haven't seen anything we haven't seen anything new on the radar. Says, oh oh, no. This is you know, tariffs are are gonna squeeze us. I think look. People would love to have clarity on tariffs. I think tariffs do have economic impact you. But the near term noise is there's not really been anything. And, like, we kind of said, I think two quarters ago, that most of our the vast majority of our tenants learned from COVID and then the first Trump administration. You know, it's not the first time he's talked about tariffs. That they didn't want to have dependencies on places that could get squeezed, aka China. Right? And so a lot of the meds over the ensuing years have mitigated that risk in as this is good business practice. And that happens to look like a good reaction to the near term conversations about tariffs, but I we haven't heard anything recently. Or or at all. Since our first conversation, I think everyone was alarmed because, like, liberation day, people are, like, charged. Right? And now it's, like, yeah. Okay. Let's let's wait till we actually know something else, and then maybe that's then we maybe can then sort of reforecast. But nothing yet.

K. And then on just kind of a line item by line item basis, you know, probably more likely into 2026, what's the potential impact to property operating expense maybe even typically like a net property operating expense from completing the former Costco headquarters transaction and even maybe even the Clara if you're able to sell Clara's former property?

So I would give you characteristics that, you know, right now, as we roll, we're I'd say that cost delta on operating expense vis a vis the fee. Right, so the extension fees, is we're probably running we're probably bleeding about $40,000 a month. On that. Right? So you're not gonna so there's a there's a fairly amount of CapEx, but we have also gotten, you know, these extension fees that sort of offset that. From an AFFO perspective. But there's probably about $40,000 a month bleed on that. How we think about it in sort of third quarter, Yeah. Cholera actually is know, it's been lumpy. It's, you know, know, you got security fences in there. Things like that. I like, if we get that flushed out, I don't think you're gonna see like, don't Ray, you correct me wrong. I don't think we're gonna see world changing property expenses go down just because those clear out. We we're fairly neutral on that, but, I mean, there's a little bit of movement. In in 2026. I think, you know, as we get rid of some of we have a hand like I said, a small handful of non absolute triple nets. I think on the margin that that could that could reduce property expense next year.

Well, I think it'll go down a bit, you know, maybe a 100 k or so. But I think as we sell some of the other properties, as we do the recycling, there are some others that where there's some leakage. And so over time, it'll probably go down a little bit further.

That help?

Yeah. It's very helpful. Appreciate all the detail. That's it for me. Thank you very much.

Thanks.

Our next question is from Stephen Chick from Sabis Garden Capital. Your line is open.

Hey. Thanks. Guys. I'm wondering if you could or if you know of what the same store rental income would be. You know, rental income is down 2%, but I think there's an overhang, obviously, from Costco and solar is probably in there as well. Do you calculate what same store rental income would be? Or a figure like that?

It's we don't. And and I think the general view reason why because our there's so much movement in our portfolio that we have, you know, so but I think it's fair that once we complete a recycling that that would be, and we think we're largely baked, particularly if we don't have external growth capital. I think it's fair that we would start implementing same store. You know, we may try to run that for you and polish that sometime before your end or something like that, but I don't think we have it handy. Right? Do you?

No. But I'd say that I, you know, our overall average is two and a half percent rent growth a year just based on escalations in the leases. That gives you some idea of what's happening there.

Yep. And I would care, okay, characterize it.

As we recycle those, a lot of the legacy ones have the lower bumps. Right? They're twos or or they're every five, kind of thing, every five years. So I think, you know, I think that if you look at there's a pie chart on our website, shows kind of the weighting of those. A lot of the pro stuff that we put in the last two years or last three years to their average north of two and a half percent. But I think over time, that could you know, or same store could could trend that way.

Okay. That's helpful. And then I can you say I didn't catch it. On solar, did you say when you thought that property would would be resolved or sold?

We're a lot closer than we ever were. I mean, so we literally started this process in 2021. We engaged consultants and went through the process. And it's we're four years into it. We were doing some blast, so we had to, you know, to get the split and negotiate certain easements and then have the city look at it. And what ultimately I don't have the details a hundred percent, but at a high level, we had to we had to do some modest construction work to the entrance of the driveway to be meet the new ADA compliance standards of the city. And so it took us a while to get them to give us the green light to do the construction. The construction is now underway, asking which is, you know, not a very long job. It's probably a couple of weeks. But then we have to go back and then get approval of all that stuff. But, you know, my guess right now like, I'm like, it's been a debate internally. There are some people who think we can get it done by year end, and I generally sort of hedge the downside. So I think it's a first quarter event. Ideally, it's an early first quarter event, but who knows? But once it's once we're, like, locked and loaded, then then we'll that property will be taken to market, so that'll be another held for sale. And it's like, the tenant is just finished. You know, they left in September. They ended their lease in September. They cleaned it all out. It's a beautiful box inside. You know, it's good. You know, we've had people we've had brokers come and looking at it. You know, our intent is not to lease it, but it's to sell it to an owner user. And we think that's the best the best end result for that property.

Okay. Alright. Thanks. That's helpful. Appreciate it.

There are no questions at this time. I would now like to turn the conference back to Aaron Scott Halfacre. Please go ahead.

Great. Thank you, everyone. Appreciate what you've dialed in and listening. We look forward to giving you updates as time goes ahead. Hope you have a great weekend. I hope you can all rest up for the Thanksgiving holiday, and for those who are curious, we will not be at NAREIT. I don't want to go to Denver Dallas in in December, and it's just not a you know, not relevant for us, I think, at this point. But, enjoy the conference, and I wish you guys all the best.

This concludes today's conference call. Thank you for participating. You may now disconnect.