Modiv Inc.

Good day, and welcome to Motive's first quarter 2023 earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, 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 the call up for your questions. To ask a question, analysts may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key and to withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for Motive. Please go ahead, ma'am.

Thank you, Diego, and thank you all for joining us today to discuss Motive's first quarter 2023 financial results. We issued our earnings release and investor supplement before market opened this morning. These documents are available in the investor relations section of 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'll open up the call for your questions. Before we begin, I'd 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 comfortable 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 those forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that, I'd now like to turn the call over to Erin. Erin, please go ahead.

Thank you, Margaret. Hello, everybody, and thank you for joining our first quarter conference call. We're going to jump right in with a review of the financial results by Ray Buccini, our CFO, followed by my closing comments before we open the line for Q&A. Ray?

Thank you, Aaron. I'll begin with an overview of the first quarter operating results. First quarter adjusted funds from operations, or AFFO, was $3.1 million, or $0.30 per diluted share, compared with 3 million or 29 cents per diluted share in the year-ago quarter. Revenue for this first quarter increased 7.7 percent to 10.3 million, compared with 9.6 million in the prior year period, reflecting the benefit of the acquisitions we completed during 2022. The net loss attributable to common stockholders improved $6.4 million for the first quarter coming in at a loss of $4.7 million, or 62 cents per basic and diluted share. This compares to a net loss attributable to common stockholders of $11.1 million, or $1.47 per basic and diluted share in the prior year period. Were it not for two primary offsets, we would have obtained an even stronger improvement in our operating results. The recent quarter results include a $3.5 million real estate impairment charge and a $2.5 million year-over-year increase in interest expense. The real estate impairment charge relates to our property in Nashville, Tennessee, which is leased to Cummins. Since we are planning to dispose of this property later this year, we evaluated its carrying value compared with comparable sales values and reduced the carrying value accordingly. The increase in interest expense includes a $1.7 million of unrealized losses on interest rates swap valuations. While the swap on the first $150 million of our term loan was treated as a cash flow hedge from July 1st until December 31st, 2022, it did not qualify for hedge accounting treatment for the first quarter of 2023 because the swap was deemed ineffective. The primary reason the swap was deemed ineffective is the potential for a reduced term of the swap that could result from a one-time cancellation option available on December 31st, 2024, compared with the January 2027 maturity date of the term loan. We provided this cancellation option at the time we entered into the swap because it reduced the swap rate by approximately 50 basis points. If there's a significant drop in interest rates in the future, this interest rate swap derivative could potentially qualify again as a cash flow hedge. The unrealized loss is a non-cash expense that does not impact AFFO, and we continue to benefit from the hedge with a $250 million term loan outstanding today at a weighted average interest rate of 4.3% based on our leverage of 40% as of March 31, 2023. The balance of the increase in interest expense reflects the fact that the weighted average interest rate on our $170 million term loan outstanding as of March 31, 2023 was 4% based on the existing swaps, compared with $150 million outstanding as of March 2022 at a weighted average interest rate of 2.1%. Now turning to our portfolio. During the first four and a half months of 2023, we continued to focus on acquiring industrial manufacturing properties. Year-to-date through May 12th, we acquired $100.6 million across 10 industrial manufacturing properties and an attractive blended initial cap rate of 7.7% and a weighted average cap rate of 9.9%. Two of the acquisitions occurred during the first quarter, and following completion of the remaining eight property acquisitions during April and May this year, our portfolio now consists of 56 properties located in 18 states. On a pro forma basis, as of March 31, 2023, the portfolio composition included 37 industrial core properties representing 67% of the portfolio with a 14.5-year weighted average lease term, or WALT, and 2.4% annual rent bumps. Three tactical non-core properties representing 20% of the portfolio with a 15.3-year WALT and 2.3% annual rent bumps. And 16 other non-core legacy retail and office properties representing 13% of the portfolio. As part of our active investment strategy to acquire industrial manufacturing assets, we've successfully increased our industrial exposure to a supermajority allocation from just 39% as of September 30th, 2021. Our tactical non-core allocation, as detailed in our Form 8K filing today, offers motive potentially meaningful upside over an interim holding period while our other non-core allocation consisting of 16 legacy retail and office assets not acquired by Moda's management team presents a near-term capital recycling opportunity as we are now focusing our efforts on selling those properties. Since the beginning of 2020, immediately following the acquisition of a non-traded REIT, Moda's management team has successfully repositioned the portfolio by selling 143 million of non-core legacy assets in completing over $278 million of accretive acquisitions. Annualized base rent, based on rates in effect on March 31, 2023, totals $41.8 million on a pro forma basis, reflecting the acquisitions completed in April and May 2023. The portfolio's weighted average lease term is 13.3 years, and approximately 38% of our tenants or their parent companies have an investment grade credit rating from a recognized credit-rated agency of BBB minus or better. Now turning to our balance sheet and liquidity. As of March 31, 2023, total cash and cash equivalents were $13.3 million, and we had $214.4 million of debt outstanding, consisting of $14.4 million of mortgages and $170 million of outstanding borrowings on our $400 million credit facilities. Our leverage ratio was 40% at the quarter end. Based on interest rate swap agreements we entered into during 2022, 100% of our indebtedness as of March 31, 2023 held a fixed interest rate and the weighted average interest rate was 4.1%. In April of 2023, we drew the remaining $80 million available under our term loan. We used these funds along with cash on hand and the issuance of $5.2 million of Class C operating units in our partnership at an agreed upon price of $18 per share to fund the equity property acquisitions I just mentioned. The weighted average interest rate on the $294.4 million of total debt outstanding as of May 12th, 2023 was 4.4% based on the existing swaps and consolidated leverage of 40% as of March 31, 2023. As previously announced, our Board of Directors declared a cash dividend for common share of approximately 9.5 cents for the months of April, May, and June 2023, representing an annualized dividend rate of $1.15 per share of common stock. This represents a yield of almost 9% based on the recent share price of our common stock. I will now turn the call back over to Aaron.

Thanks, Ray. As you just heard, Motive has been able to produce yet another solid quarter of results. Further, as we detailed in our earnings release, the 10 acquisitions we completed represent an impressive mix of creative, high-quality industrial manufacturing properties. However, beyond the financial results, I believe there's a message to take away from this that I would argue is even more important, and that is the ethos or character of the management team that produced the results. Any given REIT in any given quarter can deliver a decent result. As they say, even a stopped watch is right twice a day. Heck, even delivering consistent quarterly financial results is nothing more than a nice confirmation that you made the right initial investment decision. But the investment you are ultimately making, particularly in the net lease sector, is on the caliber and capability of the management team to produce those consistent positive financial results. Picking the right management team is critically important. It's like picking the right horse at the Kentucky Derby, the right team to win the playoffs, or the right soldiers to go to war. Sometimes stats don't tell you the full story, so you have to rely on your instinct. And when your gut tells you to choose the underdogs, the warriors, the hardscrabble crew that has no quit, then you know right then and there that you have found something special. Motive's secret sauce can be summed up in two simple but powerful words, grit and grind. Motive's grit is exemplified by our focus and perseverance. Combined with our ability to grind it out every day, relentlessly, we are hardwired to achieve our goals. Combined with our decades of REIT and real estate experience, our grit and grind produce results that are both intelligent and compelling. Think about it for a quick moment. Since the beginning of last year, Motive has grown over 30% by creatively acquiring nearly $300 million of assets without raising any institutional capital. Motive has transformed its balance sheet with all fixed-rate debt with a weighted average interest rate of 4.4%, despite an unprecedented rising rate environment. The Motive team has done all this while also selling millions of non-core assets and executing impressive new leases and renewals and managing all the financial reporting of our company. We did all that with just 12 people. That takes grit. We had to grind it out. Let me ask you this. How many CEOs do you know that tour every property acquired? I've been in the REIT industry for over two decades and I've never met another. To find the right acquisitions this quarter, our chief investment officer and I had to take 25 flights with countless winter delays to 18 cities, driving over 1700 miles between site visits across seven different states. That takes grit and requires you to grind. When we moved our corporate headquarters to Reno late last year to save our shareholders every bit of money we could, our COO and I loaded up the company's office furniture into a 26-foot U-Haul and drove it up over the Sierra Nevada mountains. Great. And grind. This past Saturday, I ran a half-marathon trail race in the mountains. Two weeks ago, to prepare for the race after a rough winter that offered very few good training days, I decided I had to grind out several long runs to get to my goals. So in one week I knocked out four mountain runs for eight miles, 13 miles, 14 miles, and 15 miles, just because it had to be done. Another example of how motive is defined by its grit and its ability to grind. Last quarter, we stated our goal to acquire a minimum of 100 million of industrial manufacturing properties. When I stated that publicly, I didn't know when we would accomplish that goal. However, we got it done sooner than we thought. Now, our focus has shifted to selling the 16 legacy non-core assets that we inherited through prior M&A. I don't know how soon we will get them sold, but I can promise you this, our grit and grind will make sure it gets done. After we sell those assets, we will then shift to showcasing to everyone how we have become the first pure play industrial manufacturing REIT and how we are focused on becoming the leading investor in industrial manufacturing properties. With every ounce of my perseverance and determination, I'll be spreading the word. even if it requires me to meet every financial advisor in the country and making investors aware of how great an investment opportunity Motive represents, and in doing so, improve our share price. I encourage all who are listening and all who will read this transcript in the future to know this. With our grit and our ability to grind, Motive will prosper. Operator, let's open it up to Q&A.

Thank you. And ladies and gentlemen, at this time, we will conduct our question and answer sessions. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from Rob Stevenson with Jani. Please state your question.

Good morning, guys. Aaron, how should we be thinking about the size and timing of dispositions besides the gap property that I guess is supposed to close later this month? I mean, are you guys out there in the marketplace with stuff under contract or marketing? Is that more of a back half-ended sort of process?

It's a good question. We haven't, other than the GAAP property, we haven't formally designated the other properties held for sale. That doesn't mean we haven't done a lot of work to know where we think they're at. There's a bit of a balancing act with the selling of this. I'll give you my sort of inside baseball on this. I could sell my retail assets like right away, attractive cap rates. But if I do that, then my weight to office gets disproportionate. And then for people who are uninitiated, they're just going to say, oh, your percentage of office went up. So we're balancing the disposition of these. I think in an ideal context, we would sell them in one fell swoop. I don't think that's necessarily going to happen, but I think that would be our ideal context. And from there, we're working on it. So timing, look, my goal is to get it done this year. That said, we've had a crazy credit market. So Who knows when the next bank is going to trip over itself and even further restrict lending. And I think individual credit lending is important for some of these assets. Right. If, you know, if it's a dollar general, no, it's not. But if it's an office asset, yes, it is. So I don't have a projection on the timing, but I'd say that, you know, it's our focus. When I focus on something, it gets a lot of attention, and I think our goal is to get it executed in a very timely manner. That said, it's a rough market, right? So I think we're eyes wide open. So if you think about why some transactions don't get done, it's typically because sellers aren't accepting where the market is. We're not naive about that. So we're cognizant of it. We're going to maximize proceeds, but at the same time, we're going to accomplish the goal because at this point, we don't want them in the portfolio. We want to recycle, and there's plenty of other things to buy. And it's kind of rough, hard in the sense that, look, I can continue on focusing on acquisitions. There's lots of deals we like out there, but we just need to shift, get this done, so we're going to make sure it's done in a timely manner.

Okay. And I guess to that point, I mean, how should we also be thinking about acquisitions? Are you guys, you know, is it basically from here on out going to sort of be matched more with disposition proceeds or is the pipeline good enough and strong enough and you're comfortable enough with the balance sheet that, you know, we could see another $40 or $50 million worth of acquisitions this year prior to doing any material dispositions?

Yeah, I don't think I would do that much prior to dispositions. We turned away probably about $40 million to $50 million of deals that we could have closed on. And, you know, I like where we're at. We haven't pulled on the revolver. We've used up the term loan, you know, so we're not escalating into the spread of the leverage. Our leverage is still, you know, where we want it to be. We're thoughtful about leverage in the forward environments. I think once I have a better bead on the cells or like the timing of the cells or the surety of the cells, then we could do it. We definitely will acquire more this year. But, you know, my view is, look, I'd rather front-loaded it as best we could so we can get the benefit of that, sort things out on the margin. But, you know, so I can't – I won't – you know, as we stated last quarter, our minimum acquisitions was 100%. We've achieved the minimum. We want to do more. We're intending to grow. But we're just trying to be also mindful of the balance sheet. It doesn't do us any good to buy a bunch of assets and then be like 60% levered because we're just going to get beat up for it. So we're just being disciplined in the process.

Okay. And then you funded about half the Redding acquisition with OP units at 18%. Can you talk a little bit, was that just a specific circumstance there that they needed tax protection? Is there demand out there from sellers that you're talking to to take OP units today?

Well, I think anyone who wants to take OP units does have a tax awareness element to what they're doing. So I wouldn't say people, generally speaking, cash is king, particularly if you're an institution selling it where they don't have the tax sensitivity. When you have founders or entrepreneurs who own these things, and sometimes they can have material low basis, those tax savings make sense. I think though in this situation was someone who really believed in what we were doing, had opportunities to take OP units from multiple different REITs, and chose us. And I think it's a testament to us and our company, but also the spirit of this individual. His name's Gary and he's a great guy. And because he recognized the inherent value of our company and was able to take shares or OP units that are above our current screen price. We get opportunities from time to time to look at that. We're not going to take everyone, right, because we treat them as partners. And, you know, they're significant shareholders. And, you know, I don't want to be a slush fund just to get OP unit transactions because sometimes you see that, particularly in sort of legacy non-traded kind of environments. we pick our partners carefully. And so in this case, it was a situation that works for both parties, and we're happy about it.

Okay. And then last one for me. You extended the Levin's property lease by about 16 months. Are they moving out and just needed a short-term extension? Something else going on? Is that tenant still likely to occupy that asset after the end of next year?

Yeah, I think they're likely to occupy after the next year, but they wanted – what they did is they made another acquisition. And so there was doing a little bit of consolidation. So they wanted, they just wanted a bridge. Um, and you know, we, cause we, and the rate increase was high, right? They had really below market rents. And so they just wanted to do a reset. Um, we're also doing some, uh, where they're doing some led light work in there. So they got, uh, in terms of swapping out things. So they've put in probably, I'd say over a million dollars of improvements over the last 18 months. So they seem to be sticky. Um, you know, they just wanted to bridge one because they're working on their focus on acquisitions and their clock was running out. Uh, and so we, we said, fine, let's just do that. Cause we're, we're hope we're fine with that. If you notice, we've done that with our solar assets and things like that. I think maybe what they were thinking is like, let's just do a short term model. We'll take the higher rate increases, but maybe the markets will stabilize. And so when we do a longer term lease, it may not be as costly for us.

Okay. That's helpful. Thank you. Appreciate the time this morning.

Sure.

Our next question comes from Guarav Mehta with EF Hutton. Please state your question.

Thanks. Good morning. I wanted to ask on acquisitions. In your prepared remarks, you said the PSM acquisition was faster than what you expected. And just wanted to get some color on what drove that, achieving $100 million of acquisitions, I guess, in the first four months. I guess trying to understand what the state of transaction market is and what you guys saw that led to that in execution in faster time?

Yeah. So, you know, we – a little back story. When we originally secured our term loan, I think it was – correct me if I'm wrong, Ray. It was September, October of last year, the term loan extension. We had been underwriting a portfolio. It was an institutional portfolio. It had been a legacy store portfolio that a former colleague of mine – was the GP on. It's a great portfolio. Would have loved to transact on it. But the cap rate that they wanted, we were very concerned about that cap rate going into the environment that we were in. So we tried to negotiate. We just couldn't get it done. Maybe we'll get it done down the road. Who knows? But that was a sizable one. That would have increased our leverage. It was over $200 million transactions. And so we didn't close on that. And so we had to shift gears and, and, and there, the pipeline, even in as early as mid January or late January, the pipeline would stay right. We had bid on several deals in November, December that the, the sellers just pulled, they couldn't accept the pricing in the market and they just pulled and they never did the deal. And then, and sort of late January, the deal volume started to pick up. Um, we, We passed on a lot of deals. We bid on a lot of deals that we didn't win. For instance, the American Roller deal that Gladstone did was a great asset. We didn't get it. But the other ones we did. As I mentioned just a minute ago, there's a couple of deals that we had under LOI that we just ultimately didn't close on. The market has shifted and we had outs and we took some of those outs. you know, they're either their credit got weaker or something like that. So we've been disciplined. So it wasn't like we were just feeding us a trough. We could easily do, you know, I could easily do another a hundred billion. It wouldn't be hard to do, but you know, we have constraints, right? And we've got to, we've got to manage our balance sheet and be thoughtful about that. That was our goal to get it done. I think it's good to get it done in that manner. As you look at the acquisition dates and the funds, I mean, last one just closed last week. So these were, and some of these were, you know, they're a pretty fast process. We have historically gone like, we'll go out, I'll fly out with Bill, we'll go look at a property, we'll get ordered thirds if they don't have thirds done right away. We will move fast. So it's not like we've been sitting on these for months. There are deals that take a while. And so pipeline is like sort of real time. Like I see a lot of assets out there. I don't see a lot of seller acceptance on some of the prices, like for instance, legacy assets. And there's some attractive opportunities out there I think in terms of the quality of the assets that people have already bought. So these aren't the local sale leasebacks, but the sellers aren't there yet, right? They're still in the high sixes or low sevens and the market has moved on from that. And, you know, if they have favorable financing, they can sit it out and wait. If they don't, then their time will come and they'll have to do something. But from the sale leaseback perspective, I think a lot of the brokers in the community have recognized the pricing has shifted. And so what we saw that was, beginning of the year, people say, okay, I need to get sell-lease specs done, or I want to get sell-lease specs done, and I'm willing to accept market pricing. And so that's what we saw. I think the number of buyers has gone down on the margin. So you still have, you know, if you look about sort of institutional buyers, you know, you definitely have Gladstone. You have on the margin Bridge, which is the legacy Gladstone team. You have Broadstone here and there, Spirit here and there. You know, they're diversified, so they're not focused quite the same way. You have some private guys like Fundamental and Tenant, which we haven't seen recently, or MagCapital or AIT. So there are a few buyers, but there used to be more. And I think the other buyers that were out there were requiring – needed bank lending a lot more, and it's not there. So I think the buyer pool is a little bit tighter. But I also think the buyer pool has also gotten pickier. There are deals that we – they go seven and a quarter cap, and we're like, no, no thanks. Because we don't have to. There's no need to chase an asset. So I think our acquisition volume is just reflective of we are focused on a goal, we're getting it done, we didn't think we were taking an adverse risk, the pricing was right, and we got it done.

Okay, great. That's great color. I also wanted to ask you on your disposition efforts, can you provide some color on what your view is on offers and How soon, I guess, you could exit the office properties given what's going on with the office, real estate?

Look, I think office is a six-letter curse word right now, and people just, you know, it's the new thing to hate. You know, go back, what, four years ago, it was strips, centers, and things like that. Everyone loves to hate office now, and for good reason. But I think office is not one homogeneic bucket. And I think if people really dig into it, there are a lot of gradations to what you own in terms of office. If I had, you know, class B multi-tenant urban office, I would be sweating it, right? Because I would have low vacancy, high TI cost, and I would have properties that no one really wanted. If I had class A, you know, major market office, you know high you know newer vintage office i would be okay right yeah you'll you'll have some noise and things like that but people i think what i found and i think increasingly what i found is that like we we have had a sort of seismic shift in how we think about office but i don't think office is obsolete i think for for me and running a company that has been um sort of hybrid we have Our accounting staff works remotely. They've been remote since COVID. It works fine. Our accountants, they know what they need to do. They don't need to see some people every day, and they communicate. The rest of us, the real estate folks and the CFO and legal officer, we've been in our office all the time. As we transitioned to Reno, some of us got up here earlier. Some of us are still coming. I found it hard. I think it's hard sometimes not to have people in an office. So I think, and you see increasing rhetoric, some of it, you know, probably got some other motivations, but ultimately as a leader, it's hard to communicate with people sometimes with electronic devices and you want them to be able to convene not every day, but often. So I think office as whole has, has some legs. I think it's going to shift. I think, you know, if you go back just 20 years ago, you know, McGuire properties was building a ton of stuff. because it was relatively new and now we all hate it. Right. So it's, you know, I think there's a little bit of a fickleness in the market today. That being said, our office portfolio is very unique. We still have single tenant, you know, office buildings that were designed. So some of them are in markets that if you looked at it generically, like a multi-tenant office is like, well, that's no good, but it's, it's germane to that tenant. You know, our walls are getting shorter. And that's, Partly for a couple of things. One is some of these people are not sure what they want to do. But two, why would you go out and ask a tenant right now to do a 20-year lease? They're going to rake you over the coals. So if I have three or four years left, I'll wait three or four years because I think we're going to be in a better environment then. That said, I want to get rid of office. I didn't buy any of these office properties. I wouldn't buy office properties. I don't really like office properties. No offense to all the people who run them because they know how to do it, but it takes a real skill to run a multi-tenant office. A single-tenant office doesn't. Historically, REITs have just bought that office because it's a yield play. It's a credit play. They never really thought about a lot of the other problems. So our office assets, our OES lease is golden. I'm not in a rush to sell that. I think there's a high probability that the state will execute its purchase often. And then that will be a self-liquidating vehicle. Our Costco one, I don't even really think about it at Office. It was converted from Flex to Office to House Costco. When Costco leaves, we're going to probably redevelop it, sell it to a redeveloper or JV with a redeveloper. I think there's upside there. But the rest of the stuff is not really super strategic to us, so we will get rid of it. I'd like to get rid of it, like I said, first, if I could. We're a cognizant of cap rates. I think you need to find the right buyers. We're seeing activity out there a little bit more than I would have thought. It was dead in the fourth quarter. We didn't focus on it until now. It's because, you know what, let's get the acquisitions done. Let's get revenue-generating properties in the door, and then we'll shift our focus. There's only so many of us here who can do things. The gap property that we've had under contract, it's an owner-occupant. uh, owner user, uh, they're getting SBA financing. It was just taking a little bit longer for the banks, but they kept ponying up money. So, I mean, think about they're $125,000, you know, spent on this property. It's not a big purchase price. So we're given more time because look, we are focused on acquisitions. They've, they've been, they're willing to enter into a long-term lease. Um, but we just like, yeah, let's just get it done and get it sold. Um, we're now shifting our focus to these other assets. Like I said, uh, looking very creatively at ways to get it done. Confident we'll get it done. And, you know, I'd like to be in a spot this time next year where we're not talking about office, at least as it relates to motive.

Great. Thanks for all the color.

Thanks. Our next question comes from John Masako with Leidenberg Thalman. Please state your question.

Good morning. Good morning. Maybe any deal you can provide on cap rate trends over the course of that March to May acquisition window? Maybe how wide were those cap rate bands on some of the acquisitions you were seeing subsequent to quarter end?

They're roughly seven and a half to eight, I'd say. I'd say that what we found as more deals have come out, and even some of the deals recently, is that the the brokers are coming out with deals priced better. Before they, like in December, they'd be like, oh yeah, we're looking at low sevens. We think this is going to clear maybe sub seven. And it wouldn't, it would go at a seven and a half, right? And now they're coming out and they're saying, yeah, we think it's, you know, you know, mid to high sevens. And, you know, where someone might bid eight in the first round and still be able to lead in the second round. So I think, you know, I, and I, I will qualify that there are certain, like in what we were focused on industrial manufacturing properties. That's all we look at. So there are certain brokers who are, they're really excellent at what they're doing. They have a really good beat on it. And those, those individuals or those shops have, have, have gotten transactions done. There's others who've gotten listings who maybe they're generalist industrial, or maybe they do a manufacturing asset here or there. And they, they have had trouble getting it done because they, They have not really drilled in on the right things. But cap rate is just one aspect, right? And what I think that is, you know, how these work is they get you to bid. They have, you know, they could have 10 people bidding or five people bidding. You don't really ever know, but they always sound like there's a lot. You get them to bid. You get the cap rate. And then the devil's in the details. It's on assignment language. It's on credit quality. It's on all these things that, you know, the negotiation of, you know, the minutia and the lease. That's where – you know, erosion can happen, right? We passed on deals where we did a cap rate that we thought, okay, based on what we know, risky adjusted price, this is fair and equitable, we'll get it done. And then find out that they want, like, they don't want any assignment language or they want to be able to kick something out or do this. And then it's like, okay, really what you're doing is you had us bid first and now you're voting the credit quality. And so we'll walk or we'll go to them and say, okay, if you really want us to do this, this cap rate's now wider. And sometimes they say yes, because, you know, it's just, so I think, The cap rate range, though, to get back to what you were saying, was probably around 50 basis points, mid-7s to just under 8. Sometimes you see 8s. I think, you know, what I always ask myself, if I see an 8.5 cap rate out there, is it a 7.5 that I'm getting at 8.5, or is it an 8.5, is it a 10 cap that I'm buying at 8.5? So we're being thoughtful about it. But I think you could do – I could do – you know, 300 million in the sevens all day long.

Okay. And then I know it's kind of early days, but any kind of change or impact to deal flow caused by some of the recent turmoil we've seen in the regional banking market? I mean, I'd imagine that's kind of a common financing avenue for some of your potential tenants and even current tenants.

Not, not deal flow, but I think buyer pool. Yeah. So I think, I mean, I think the people who are coming out are cognizant of where markets are at and they're looking to get a transaction. I think, you know, you know, If you look at a tele-leaseback, it's a form of financing, so I think in some ways it may be a little bit more assured than bank financing. But most of these deals require bank financing, too, of some sort. I think the buyer pool is what's changed the most. I mean, the individual buyers, the small private equity type, one- and two-man shops, those guys are gone because it just doesn't pencil.

Okay. And then... Can you talk about any impact from the Calera bankruptcy in April? Is that tenant kind of paying rent in full? And has there been any indication from them if they're going to reaffirm or reject the lease?

So as we, as you'll see in our disclosures, when we, in the queue gets filed you know, they are going through the three 63 process. So they got, they got dip financing. They're now going through a process of selling the company. So those results are not until I believe it's June 9th. Is that right, Ray?

Yeah, that's correct. That's when the auction takes place on June 9th.

Yeah, so that's their window that they have for all their properties to accept or reject. So, you know, their rent is current. You know, they weren't in the building. They were still... getting it ready to go online. It's not like there were people in it to begin with. The status of the asset is fine. I've been out there four times in the last five months, checked on it. Everything's good. We're waiting for the process to go through. We're hopeful and optimistic, but we understand how these go. I don't think I would do another pre-revenue type of deal like that again. Lesson learned there. Had a lot of uh inbound inquiries on the property uh and two and i didn't even pay attention to this i guess the there's a bill in the state senate there they passed the house and it's intended to legalize uh marijuana and we've had some marijuana growers uh reach out to us our property is unique in the sense that it was built on top of an aquifer so it has its own robust source of water which is really important to growing things and that's why it was issued to clara So we remain optimistic, but we don't have any really news until after they finish their process.

Okay. And then just a quick one on the property that was kind of – the lease was extended during the quarter. Is it kind of fair to kind of interpret those comments as being that if they were going to do a longer lease that it might be at a rate lower than kind of where it was extended to, just given the short-term nature of what you did? Or is that kind of the new – was it kind of reset to market, I guess?

Yeah, so they had been in there for a long time, and the rent, I think it, I don't remember the math, it was like 69 or 64% increase in rent. It was sticker shock for them because they hadn't really been paying. They're a busy company. They're spread thin. They've been buying a lot of these, you know, distributors and stuff like that. And so I think when it came time to the conversations, and candidly, they were like, you know, we didn't start talking to them until like, I would say, two weeks before their their window closed. And cause they just, you know, we ping them, they ping us back and then we'd never connect. And so I think if part of it was, wow, that's the rents have really gone up and it's marketing and we hadn't paid attention cause they've been there a long time and they are consolidating some other businesses and all these things. So they, they asked to do this one. I think their view, again, I don't know for sure, but based on what our team leases, if they wanted to do a longterm lease, they would, you know, that's a bigger nut to swallow and that they didn't have, they had a short window to get, get something signed. And I think it was in the confines of what they could do without having a deep dive budget review. Cause they kind of did this off cycle. They liked the asset. They've been there. I think, you know, there's a good chance that they'll stay. If they don't, I'm not worried about it. I mean, that that's, you know, right off the 80s into location. It's, you know, it's warehouse. We don't long-term. I don't know that I really even want it to be candid. It's better held by someone who's doing distribution. But I think what it was is just it was a lot of sticker shock. They had to get the medicine to get used to being market rate, and they just did it for 16 months because they know they need to use the property, but they want to right-size things on a longer-term basis.

Okay. That's a very helpful caller, and that's it for me. Thank you very much. Thanks. Thanks.

Thank you. And a reminder to ask a question, press star 1. To remove yourself from the queue, press star two on your phone. Our next question comes from Brian Maher with B Riley. Please state your question.

Great. Good morning, Aaron and Ray. Aaron, most of my questions have already been asked, but you talked about earlier in the call holding off on selling retail until you can unload some office. But when we think about it and we think who owns your shares and those of us in institutional investors who are focused on it, I mean, we get it. Um, and, and, and, you know, many of the retail people, you know, may not look at it, may not care. Why not just sell the retail if you can? And, and, you know, I think the market gives you guys a path on holding the office till you sell it. And then you could redeploy that into more industrial manufacturing, which then kind of balances out the ratio anyway.

Yeah, so look, that's a fair point. And it's not just the optics that I'm talking about. I think some of it is sort of a logistic sequencing. So if you think about 16 properties, you can either sell 16 individually, you could sell some of them in a portfolio, and the DGs probably naturally make a portfolio. There's a couple of things to think about. So if you want to take them out and you think that the property's sort of a little bit of an odd duck and you're better off with a 1031 buyer, then that's a different route than what you do with, with us, with, you know, more institutional buyer property. And, you know, as a 1031 listed asset, having known, selling some of these odd ducks before is you, you know, you get a slew of these offers and they look too good to be true because most of them are, because they had, they're just designated properties and you have to go through it. So that can be a little bit of time suck. I guess what we're at is we're getting ready to go, we're getting, you know, we're getting DOBs done, we're getting price discovery done, we're getting ready to go to things to market. I'd like to get our office up and running first, because I think it's a longer tail process. I think it's just going to take longer to sell some office. But get all that legwork done, then shift to getting the legwork done on retail, knowing that retail will move faster. So I don't know that, you know, I'm not controlling when they'll sell. I think retail will sell faster. But in terms of activity or the process in which we're getting ready to do it, we're focused first on, you know, finding everything out right time, pull the trigger on the office to get them up and running, then pull the trigger on retail and then figure out, then it's off to the races and you get what you get.

Okay. And then when we think about your acquisitions, I mean, How are you sourcing those? Are there inbound calls? You know, when we think about, you know, industrial, a lot of people think about industrial distribution and logistics. We all know who those players are who are out there buying it. But who are you running into as far as, you know, competition for buying industrial manufacturing?

Yeah, and I kind of alluded to, I think I was talking to Groff, you know, there's less of these small levered buyers out there. The shops that I think who buy industrial manufacturing, so the ones who are focused on it sort of as this is really what they're buying, I think the two most focused on is in the public space are ourselves and Gladstone. I think a lot of the Gladstone assets that have been bought, we've bid on, and I'm sure a lot of the assets we've bought, they've bid on. So we know we're buying the similar things Spirit has certainly, in the last three quarters, made a bigger focus on buying industrial. I don't think they're doing it just for yield. I think there's an element of yield to it because they are a derver of side play, but they have really honed their stall and focused on what they wanted to buy. Broadstone has historically been a bidder here and there. I think I've seen them too recently. I have to go back and look. I don't think so. But they had bought. I think, again, part of that is a yield play, and part of that is they like it. Then after on the public side, you know, store was historically a big buyer. They're not there now. We've seen a lot of store deals come out that they either rejected or tried to price negotiate. But the private buyers that you won't see publicly are Royal Oak on occasion, Great shop there. AIC historically has been doing this forever. They're probably the leader in the space. But they source all their own things. So they're very different. They end up being net sellers a lot of times because they'll raise the fund and sell it out. But they only buy industrial manufacturing. Tenet, which is a server-aspect shop. Great guys there. They're former store guys. Fundamental has bought some on the margin. Again, former store guys. You know, there's another shop called Mag Capital Partners. Dex is a great guy. He's been focused on it in a smart way. But there's not a ton of buyers. I guess the Bridge Group, you know, the legacy Gladstone guys have been out there. But it's really a small universe to who bought manufacturing. If you think about, there are some shops out there who have exposure. You know, DRA has exposure. Samara Road has exposure. David DeKentner has exposure. So there are portfolios out there of, of of of industrial manufacturing but they may they may have fought sort of you know at a certain point in time and now they're holders of it they're not active buyers but i say they're probably the most active buyers or at least for public research gladstone ourselves as in terms of how we get we we get a lot of inbound calls now so we've now like we've bought if you back out uh the kia transaction you know, we've bought well over $200 million of real estate in the last, you know, 12 months, and it's all been industrial manufacturing. You start to get calls, right? People know that's what we're focused on. We've made it clear. There are some really good shops out there. You know, Ascension, Chelsea Ascension is great. You know, Scott's team at SFB is great. There are a lot of great teams out there. You know, Stream is a good shop, industrial manufacturing. So there's a lot of good shops out there. They've got a beat on us. And so we get calls from them. We get calls. Sometimes it's a marketing process. Sometimes it's not. It just depends on how fast the seller needs to go or how well the seller knows. We did the Lindsay transaction. That's another deal we've done by Middleground. We've done a lot with Middleground as a private equity sponsor. We have a lot of confidence in what they buy, so it helps us in our process. I think they have confidence in how we buy and we execute, so it helps us. but you know, they, I think everything should be marketed. I think it should be, you know, best price discovery for, for that, that shop. Uh, we, you know, we get other properties that come across from, you know, maybe it's a random CBRE team. We'll see it and we'll look at everything. And you know, sometimes the bidding process is click clunkier. Sometimes it works. Um, but you know, we're not, what we're not doing is what AIC does or what store used to do. Cause we just don't have the manpower is they'll have a team army of people and they'll call, sole proprietors of manufacturing or industrial assets and call them up and pitch them on the idea of a sell-leaseback and then structure a sell-leaseback and then take it. We just don't have the bandwidth to do that. I'd love to do that down the road. I do think there's some sourcing opportunities. But at the same time, we're trying to get more mainstream assets. Perfect. Thank you.

Sure. Thank you. Are there no further questions at this time? I'll hand the floor back to Aaron Halfacre for closing remarks.

uh well i don't think we said we beat it up pretty much uh thank everyone for for being on the call uh we'll put our heads back down we'll get back to it you know i don't think anyone's really paying attention to us unfortunately right now uh but it's a risk off environment you know reach or topsy-turvy it's been a crazy 15 months you know it could be another crazy 12 months or more uh we'll just keep getting things done and we look forward to brighter days for everyone be well thanks

Thank you. That concludes today's conference on Parties May Disconnect. Have a good day.