Modiv Inc.

Ladies and Chairman, good day and welcome to the MoDev Industrial Inc. First Quarter 24 Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star 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 their 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 two. Please note this event is being recorded. I would now like to turn the conference over to John Rainey, Chief Operating Officer and General Counsel. Please go ahead, sir.

Thank you, Operator, and thank you everyone for joining us for MoDev Industrial's First Quarter 2024 Earnings Call. We issued our earnings release before market open this morning and it's available on our website at moedev.com. I'm here today with Aaron Halfacre, Chief Executive Officer and Ray Pagini, Chief Financial Officer. On today's call, management will provide prepared remarks and then we will open up the call for your questions. Before we begin, I would like to remind you that today's comments will include forward-looking statements under the Federal Security Law. 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, potential strategic partner discussions are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings including our reports on Form 10K and 10Q. With that said, I would like to turn the call over to Aaron Halfacre. Aaron?

Thanks,

John.

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

Thank you, Aaron. I'll begin with an overview of our first quarter operating results. Rental income for the first quarter was $11.9 million compared with $10.3 million in the prior year period. This .4% increase reflects the impact of 12 industrial manufacturing property acquisitions during 2023, partially offset by 14 non-core property dispositions in August 2023 and two additional non-core dispositions during the months of 2024. First quarter adjusted funds from operations or AFFO was $3.3 million, up .6% when compared with $3.1 million in the year ago quarter. The increase in AFFO primarily reflects the increase in rental income and a decrease in property expenses, which were partially offset by increases in straight line rents and interest expense. On a per share basis, AFFO was $0.29 per diluted share for this quarter, which reflects an increase of 1 million shares in the weighted average number of fully diluted common shares outstanding compared with $0.30 per diluted share in the year ago quarter. The increase in fully diluted shares is attributable to performance shares earned by management during 2023 and shares issued during April 2023 in connection with a property acquisition through an up-read transaction. Property expenses decreased $723,000 compared with the year ago quarter, primarily reflecting the disposition of properties with modified gross leases and double net leases in August 2023. Excluding the impact of swap valuations, cash interest expense increased by approximately $1.3 million, reflecting greater borrowings outstanding during 2024, given that during the year ago quarter, we only had an average of $157 million outstanding on our credit facility. While GNA increased by $91,000 compared to the year ago quarter, the increase was entirely due to non-recurring costs for our transfer agent and legal fees related to the distribution of GIPR's common stock to our stockholders in January. We expect general and administrative expenses to be lower in future quarters, since the first quarter of each year includes higher costs for audit and tax professionals, along with higher Social Security taxes for employees who reach the Social Security maximum tax during the first quarter. Now turning to our portfolio. Following the January and February dispositions of two non-core assets, our 42 property portfolio has an attractive weighted average lease term of 13.9 years, and approximately 34 percent of our tenants or their parent companies have an investment grade credit rating from a recognized credit rating agency of triple B minus or better. Annualized base rent for our 42 properties totals $39.9 million as of March 31, 2024, with 38 industrial properties representing 75 percent of ABR, three office properties representing 14 percent of ABR, and one retail property representing 11 percent of ABR. With respect to our balance sheet and liquidity, as of March 31, 2024, total cash and cash equivalents was $18.4 million, and we had $281 million of debt outstanding. Our debt consists of $31 million of mortgages on two properties and a $250 million term loan outstanding on our $400 million credit facility, and we do not have any debt maturities until January of 2027. Based on interest rate swap agreements that we entered into during 2022, 100 percent of our indebtedness as of March 31, 2024 held a fixed interest rate with a weighted average interest rate of 4.52 percent, based on our leverage ratio of 48 percent at quarter end. We are exploring various alternatives to extend or restructure the December 31, 2024 cancellation options on our existing swaps. 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 2024, representing an annualized dividend rate of $1.15 per share of common stock. This represents a yield of 7.72 percent based on the $14.90 closing price of our common stock as of May 1, 2024. I'll now turn the call back over to Aaron.

Thanks, Ray. I'd

say pretty straightforward quarter. I think if we look at a lot of reach coming out, very similar theme, a lot of volatility, doesn't make sense to be actively acquiring too much. Those who have distressed assets seem to be disposing of them. For us, it was mainly a quarter of patience, sort of like a duck on the surface of the water. It may look calm, but furiously kicking the legs, the bulk of that time being spent on the aforementioned strategic partner conversations. These take a lot of time, a lot of effort, a lot of thinking, but primarily a lot of patience. I think we feel constructive on the company. It's probably the best we've ever been in a position. We have no gun to our head. We don't have to do anything. We'd love the capital markets to open back up, but everyone on this call would love the same. It's been a long trough. Our entire public existence has been eating nuts and berries and never having a steak. We're keeping the faith and doing quite fine. It's a crazy time now for people to make decisions. Three weeks ago, we had 300 missiles coming over into the Middle East. We've got campus riots. I think it was December. At the end of December, the market was pricing six cuts in. We've had a lot of volatility. I think the stability that we've shown is worth something. I think we're still massively undervalued. That's why I have a big, big personal position. I'm very comfortable with that and about closing that gap. The NAB that we came out with, some people may have disdain for appraisals, but they're a legitimate part of the real estate space. We chose two very high-profile, legitimate appraisers to go out and appraise our portfolio of assets as well as our fixed-rate mortgages. We use that information to come up with an NAB. I think if you look at the history of our NAB, you can find a lot of them in our S11 that we did two years ago. Obviously, we came out with an NAB last year. I think directionally, they show the right trend. Unlike, say, B-REIT or S-REIT out there, in the non-trade space, our valuations have gone down from last year. That passes a smell test, in my perspective, because we have had wider cap rates and higher rates. You shouldn't see that in your appraisals. I think it just shows that our lack of float, the fact that the vast majority of our legacy investors do not even pay attention to the share price, do not even remotely consider trading it. If you look at a percentage of our shares outstanding, it is what trades. Ours is like a tenth of what a normal REIT is. We have very thin volume, and we understand that we have to address that. We have had many conversations with people of the institutional space who really like what we are doing, like our theme, but there is no way right now for them to find a way to get in. We just have to be patient. We don't have our ATM open right now. We are not looking at that. We did try it out in prior quarters to try to grease the skids. We are just being patient, operating with what we have, mining our P's and Q's, saving every penny that we can to get something done. We are optimistic that we can get something done. We just don't know when it will happen. This environment, again, to say this for the fifth time, requires patience. That said, optimism is high. Focus is strong.

Ready for some Q&A. Operator?

Thank you. Ladies and Chairman, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. We will wait for a moment while we poll for questions. Our first question is from the line of Robert Stevenson with Janie Montgomery Scott. Please go ahead.

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

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

Are they currently paying you? No. They have not gotten out and they have not paid? They are not in it.

They are not in it. They are not occupying it. It is just stuck up in the bankruptcy proceedings.

I believe the window just opened for the tenant purchase option on the state of California asset ranch. What is the likely play there at this point?

We reached out to them about last week. They said they have a meeting scheduled to discuss it. We probably will not hear back if they are going to start their option process for a little bit more time. Call it this quarter, second quarter probably. Our view is a couple of things on our calculus, which may or may not be their calculus, but from ours, when they originally did it, California had a big budget surplus. That is not the case now. The purchase price is not going to move the needle in terms of their budget. We think about those things in terms of there is a political element in terms of when do they do this? Our view is when we talked to them, I guess it was probably late last year, and they indicated they were likely to start the process in May, we called them again and he said it is on the docket for the discussion. They have to go through their real estate department, which has very finite resources in terms of people who can do acquisitions and things like that. It goes to their acquisitions department and then they come up with evaluation mechanism, which we have one embedded. Basically, there is a price in the lease that if it is plus or minus 10% of that, they can just move forward. If it is outside of that price range, then they have to make – we have a back and forth process between us if we want to agree to this different price. I don't see any issues with that mechanism. From there, it then goes to the various state departments to get approval. Once it is approved, it is put on the budget. The budget would not get approved until next year. They clearly told us the process would take at least 12 to 14 months whenever they did initiate it. Our view is if they tell us they are going to initiate it, we will be patient. If they say they are not sure they are going to initiate it because they have a couple of year window to do it, then we are probably just going to take it to market. It is a AAA rated credit or at least a AA plus rated credit and it has got term.

No

sense in holding it, particularly if we get rid of the Costco property because then we are down to the last bits. I assume we will have a better update on second quarter earnings.

Okay. Then last one for me, how significant are the acquisition opportunities at similar rates to the Tampa acquisition if you had access to more decently priced capital at this point? Is it a lull like we are seeing in other asset classes or is there a lot of opportunity and it is just a matter of the capital for you guys?

So, I think there is a lull. There is less being shown than there was a year ago. But there is, I saw a great, it was a great opportunity, probably going to be an ACAP, but it was $100 million. It was a multi-site portfolio. Not anything that we are talking about, just a straight up brand new sale lease back. So, you could definitely put money to work. I think the logic for us when you think about industrial manufacturing sale lease back, which is really what you are seeing. You are not seeing hardly any existing lease properties be put on the market right now. Occasionally, but not much. They are more like HVAC guys and things like that. Which to me is not necessarily that strategic. But on the strategic sale lease backs, the genesis to decide you want to move this off balance sheet and take money is a lengthy one. If it was, assuming that we have not had much in the way of private equity transactions to take out the small and middle market companies in the last 18 months because it does not paper for them, they are not a catalyst because typically when a PE shop gets it, that is one of the first things they will do. If you have an owner operator who decides they want to free it up, it is a lengthy process to say, wait a minute, this is my goose that lays a golden egg. Why would I sell this? It is a concept, believe it or not, that is pretty foreign for some people. Even in the day and age where we have had sale lease backs for generations. That journey probably takes upwards of at least 12 months, probably 24 months for them to make the decision. When we were acquiring assets last year, those were decisions made in 21 or 22. The environment was different. The momentum was going and committed. When you have deals coming out now, I think it is suggestive of they have a real need for the capital. In the case of the photonics one we did, they are doing an international merger. They found this is a better source of capital than trying to get bank lending so they could get scale. That is why it worked. If it is somewhere where someone is wanting to do this and they just want to cash it out and they are trying to do a dividend out or something like that, those are red flags to us in this environment. We expect a low in the volume, but that said, are they all eights? North of seven and a half, I think I could replicate the size of the company probably.

That is helpful. I appreciate the time this morning, guys.

Thank you. Our next question is from the line of Brian with B. Riley Securities. Please go ahead.

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

Attorneys will not let me give you any probabilities, so I will not. I think the I don't have any, neither do I or do these other two participants have any forced deadlines. I think that is the right environment to be in, is that we are all on our own regards capable of weathering the storm, and so there is no need to do something that is detrimental to one party and the beneficiary of the other. I think if that were the case, then it would be far easier to do a deal. So I would say start off with that. So I think the dialogues with these parties has been, you know, didn't just start in the last few months. We know these portfolios quite well. We have had on and off dialogues with these portfolios since we have been public. I think the dialogue we have had in the last, call it four months or so, three months or so, have been really specifically about, okay, yeah, let's roll up our sleeves. I can tell you that, you know, the parties have shared information about their portfolios. We have a working model that allows us to see the impact to the combined enterprise. We have actively spoken about cap rates and share prices and governance mechanics. And so I can tell you that there has been some legal dollars spent. So I would say this isn't a wet finger in the wind. But, you know, if you can tell me the probability of geopolitical risk and economic risk and the election cycle, then I could probably dial it in better for you. But it is just a really, you know, I literally had a CEO of another REIT text me yesterday and he goes, this must be what quicksand feels like. Because it has been a unique market. That said, we are all very constructive. I think the portfolios are very complimentary. There is one portfolio is, you know, a little bit lumpier. But it has got some real great sort of center of excellence assets in it. The other portfolio is smaller in size but similar to us has more diversification. I think from an industry component, they make sense. I think from, you know, from a they are both candidly, they are both shorter waltz, existing portfolios. But they have good leases. So, you know, look, we are going to keep working at this. And, you know, candidly, speaking to one of the attorneys, this probably this quarter, what we said here is about all we are going to be able to say until next quarter. In fact, we are not actually going to go to NAE REIT just because we are in the throes of discussions and we don't want to be openly talking about it much. But again, I can't give you a probability just because the market is just, I mean, in the last 60 days, our share price has been north of 16, in the 14s, in the 15s. It is a fucking yo-yo. So, we will keep at it and hopefully we will come up with something.

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

That is a very great question. Can't

give you an answer. All right. Thanks. Appreciate it, Aaron.

Thank you. Our next question is from the line of Godav Mehta with Alliance Global Partners. Please go ahead.

Yeah. Thank you. Good morning. I wanted to follow up on the partnership discussion. You know, as you think about these, you know, looking at different partnerships, do you anticipate the quality of the assets in the partnership to be comparable to what

you would have in your whole yuan portfolio? I would say that

the quality is very comparable. You know, if you think about manufacturing, you know, sometimes you have rated credits, sometimes you don't. I would say, I think the thing is I can't really discern one being lower quality. Well, if it was, I wouldn't be talking to them candidly. I'd say they're all comparable quality. You know, some might be stronger tenants but with shorter leases. Some might be stronger tenants with, you know, that are lumpier, bigger assets. Some might be, you know, perfectly fine tenants but, you know, more diversification. I would say that the best thing that I see from it, if it were to direction, is they're very complimentary. I think there's, to me, I could sleep well at night on any combination. I think, you know, I think they think the same, you know, I think the fact that we're having this conversation is really related to the fact that people are, you know, besides the political rhetoric, people understand that manufacturing is a viable asset class. I don't think we, you know, no one until heretofore really had done it in a truly dedicated space. There are certainly people who have been buyers of it for a long time but have not gone pure play, at least not as of yet. And so I think they see, you know, motive is a natural end state because these portfolios, if they, they would eventually be selling them anyway. You know, it's just a matter of time. And so I think there's a complimentary fit there. And I think, you know, it is conducive to getting to that more scale and index inclusion and institutional ownership which would create more flow, which allow more people to actually participate in the strategy and presumably with less equity volatility as a result. And so I think there's a lot of different benefits but I think the portfolios are very complimentary. They're very, it seems very strategic and I think it would open the door to others. I mean, there was a, there was a force battleship that we've, you know, talked to at length and just given where they're at in their cap stack, they just couldn't be a participant at this time. And so, you know, that's a someday maybe, you know, if we're successful here, you know, God willing, and we've gotten more size and, you know, I wouldn't be surprised that we wouldn't have a conversation with that other portfolio, that force battleship down the road. So there is opportunities out there, uniquely enough about manufacturing, most of the manufacturing portfolios with the exception of what store owns and what, you know, what O now owns from what it acquired from whatever they were, I can't even think of their name, Spirit, excuse me. Besides those, there's, most of the portfolios are in private hands and so having a public currency longer term I think is something to be looked at strategically.

Okay, and, and, you know, you talk about, you know, exchange of your equity possible for this portfolio. So are we talking like common stock or like, like, open units?

You know, I look at those ubiquitously, candidly, one provides tax protection, but, you know, these are institutional players. So generally speaking, and I would, I'm not ruling it out, but generally speaking, they're less tax sensitive by the nature of their money. But to be clear, we're talking about sort of that common equity element.

Okay.

All right. Thank you. That's

all I had. Thanks so much.

Thank you. Ladies and gentlemen, a reminder, if you wish to ask a question, please press star

and

one. As there are no further questions, I would now hand the conference over to Alan Halfacre for his closing comments. Alan?

Thanks, operator. Thanks, everyone. You know, trying to be candid as best we can, trying to get you guys, you know, real dialed in on what we're doing. We think that, you know, I think a lot of environments or operators are uncomfortable with transparency. If you don't like what you hear, you're going to make a decision either way. If you, you know, I think we're delivering results, we're being transparent so you can try the best you can, understand where we're headed, what we're thinking. You know, I'm very confident that, you know, we have the right team to get things done. I have no ability to predict the markets. And so like you, we're rolling with punches. But, you know, I think we're on to something in this company and look forward to talking to you again at the next earnings release. Thanks, everyone.

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