Modiv Inc.

Good day and welcome to Modus Industrial Incorporated fourth quarter and full year 2024 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star zero key. On today's call, management will provide prepared remarks and then we'll open up the call for questions. To ask a question, analysts may press star one on your touchtone phone to get into the queue. If you're using speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star 2 on your telephone keypad. Please note this conference is being recorded. I would now like to turn the conference over to your host, John Rainey, Chief Operating Officer and General Counsel. Please go ahead, sir.

Thank you, Rob, and thank you, everyone, for joining us for Motive Industrial's fourth quarter and full year 2024 earnings call. We issued our earnings release before market opened this morning, and it's available on 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 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-K and Form 10-Q. With that said, I would like to call over to Aaron. Aaron, please go ahead.

Thanks, John. Hello, everyone. Welcome. What a great day to come out with earnings. The same day we got tariffs gone. We timed these things perfectly for your entertainment. I am going to have some comments this time, but let's first jump to Ray, and then I'll make comments after that, and then we'll do Q&A.

Ray? Thank you, Aaron. I'll begin with an overview of our fourth quarter operating results. Revenue for the fourth quarter was $11.7 million. Fourth quarter adjusted funds from operations, or AFFO, was $4.1 million on a per-share basis. AFFO was $0.37 for diluted share for this quarter, which is $0.08 above the average of the analyst estimates, compared with $0.40 for diluted share in the prior year period. I'll now discuss our full-year operating results. Rental income for the full year was $46.5 million. ASFO for the full year was $14.99 million, and ASFO for a fully diluted share was $1.34 for 2024. The $400,000 revenue decrease in properties sold in the first quarter of 2024 was offset by a corresponding decrease in straight-line rent. The increase in AFFO reflects a full year of decreased property expenses following the disposition of 14 properties in late 2023, many of which were not triple net leases, and a $300,000 decrease in G&A primarily due to reduced employee compensation. Now turning to our portfolio, annualized base rent from our 43 properties totals $39.6 million as of December 31, 2024. with 39 industrial properties representing 78% of ABR and nine core properties representing 22% of ABR. Our portfolio has an attractive weighted average lease term of 13.8 years, and approximately 32% of our tenants or their parent companies have an investment grade rating from a recognized credit rating agency of BBB minus or better. Now turning to our balance sheet and liquidity. As of December 31st, 2024, total cash and cash equivalents were $11.5 million, and we had $280 million of debt outstanding, which consists of $31 million of mortgages on two properties and $250 million of outstanding borrowings on our term loan. Based on interest rate swap agreements we entered into in January 2025, 100% of our indebtedness as of December 31st, 2024 of a fixed interest rate with a weighted average interest rate of 4.27% based on our leverage ratio of 47.6% a year end. We also have $30 million of availability on our revolver, which we reduced from $150 million in December 2024 in order to save $300,000 per year in unused fees. As previously announced, our board of directors declared a cash dividend for common shareholders of approximately 9.75 cents per share for the months of January, February, and March 2025, representing an annualized dividend rate of $1.17 per share of common stock. This represents a yield of 7.5 percent based on the $15.55 closing price of our common stock as of March 3rd, 2025. I'm now going to call back over to Erin.

Thanks, Ray. So I wanted to go over a couple different areas that, you know, it didn't feel like writing them out extensively in the press release, but wanted to talk about them on the call. And it may either prompt following questions or preempt some, some preliminary questions. I think first let's, let's look at transactions, right? Though we, you know, I think you've, You clearly understand now that we don't feel compelled to do things just for the sake of doing them. We look at a lot of things, but we've been picking our spots. I'd say when we released third quarter earnings in November to now, it's been quite an opaque economic landscape with a lot of vacillation between fear and euphoria. just didn't really see anything you know usually how it works in in the the property markets you know the the the available inventory dies down sort of early december and it starts picking back up sort of mid later january and so we saw some we kicked the tires on some but just didn't didn't see anything that said oh geez let's let's go you know extend ourselves or let's you know let's do something just for the sake of doing it so clearly we've shown patience you know obviously you know we're now probably a year away from the sort of 200 million dollars of acquisitions we had done in aggregate in sort of a 12 month time frame so we've kind of slowed it down um but that doesn't mean we're not looking it doesn't mean we won't do transactions um i just you know it's it's a real lesson in patience and and i think my points about maybe reach on growth stocks is the fact that at the end of the day, you know, we have to grow really prudently and we, and each decision we make on the balance sheet we're living with for a long period of time. And we've all seen, uh, others out there who make decisions that are a little bit more near term and they will either issue out some costly preferred and, you know, public or private, they will, you know, unwind some of their portfolio to read, redeploy it into other areas. Or they'll issue a large amount of equity that just doesn't really pencil. And I'm faulting them. They all have their own reasons for doing things like that. But for us, I just think any of those decisions would be a far greater drag on us than it would the benefit from buying a property. So we're just being thoughtful about that. But as we look for the course of the year, I do not intend to stare at my navel. And as most of you should know, we don't. it just means we're looking diligently working to try to get something up that makes sense. So for a couple of reasons, um, so pipeline wise, you know, you know, you notice that we reduced the revolver and, uh, that's a material savings. We had contemplated doing it last year. Uh, but last year, you know, early part of the year, at least we were contemplating, um, uh, We thought about it, but we weren't sure, and we wanted to hold off because there was a lot of battleship conversations. Would we need the revolver for those? And then I think as we worked through more of those battleship conversations, which I'll touch on in a second, we realized that you probably wouldn't need the revolver. In fact, there would be other sources of debt that would probably be more favorable. And so the revolver was nice to have, but you wouldn't buy your car with a credit card, right? And I actually look at the revolver kind of like a credit card. And, you know, for me, for instance, personally, I put everything on my credit card for the month and I pay it off at the end of the month. So I always view it as it's going to be extinguished right away. And at $150 million revolver, I mean, that's 100% of our market cap. And so how am I supposed to pay it off if I have it dangling in front of me? So we downsized it. to what i thought was a reasonable amount uh 30 million dollars that's 20 of if we ever had to pull off and we found something that was super compelling it's like oh geez it's a nine cap and you know our our revolver paper is only a you know six and a half and we're gonna get the spread and then i gotta backfill that somehow i didn't want it to be too large of a backfill that caused us to choke on the chicken bone so we reduced a revolver that saved money But that revolver is, I think, used for us to think about timing purposes, right? So if it's a mismatch in timing, we could use that. We don't want to use the revolver for big acquisitions. Like I said, big acquisitions, there are other, we've now identified plenty of other sources of financing that we could use that would be less costly. So it does not foretell that we're not able to grow or that we won't grow. It just means we won't grow with that mechanism. But we'll use that mechanism for its intended purposes, which is, you know, a lot of times we see revolvers that are a billion or one and a half billion dollars, which is great, but I don't know if they're always used. And we were paying, what, $300,000 a year for something that wasn't being used. And so we right-sized that. And I right-sized it very specifically. We have probably comfortably $80 million worth of properties that are in the portfolio right now that we have, you know, have the ability to recycle, and we would pick up at least 125 basis points on that $80 million in AFFO. And that would be standstill, and that wouldn't require any change of things. And we don't have that model. That wasn't in the 137. I don't know that we'll do that. We've had several unsolicited offers on some of these properties. one of the reasons why i haven't sold now is i just think that the better clarity we have in the right environment the better pricing is across the board and that might mean that pricing is tighter on the purchases but the pricing is also tighter on on yourselves and so our view if any one of those properties that we wanted to recycle and we had a mismatch because we wanted to do a 1031 that the revolver would be useful so we do think that we can use a revolver for acquisitions uh but they would be ones that we would self-fund or could immediately fund. And so that we would not put ourselves in any sort of leverage situation. And I've been pretty adamant that I don't want leverage to really go up unless it's something that was super significant and positive. And I had a path of line of sight to, to retire it. As it relates to the battleship conversations, you know, they're not over. I'm not going to get play by plays like I did. I think, you know, we were down the line on that one. They didn't get done. That portfolio is still out there. We have had other battleship conversations. I think collectively, us and the other parties all realized that we were in a super volatile market. Everyone had to roll into swaps or caps at the end of the year. They had to reset sort of their interest expenses. So I think those portfolios are still there. I still think there's conversations to be had. So those are certainly a potentiality. um i think we're receptive to to to them uh i think someone asked a question to me offline you know well how it seems pretty straightforward why wouldn't you get one done you know the sponsor would just need to take a mark to market hit and then they get your equity and then have huge upside and i agree with that on on paper uh but you've got to get a sponsor to take a mark to market hit and so i think that's it's a little bit of a time uh you know we're obviously If we were issuing out equity, we'd be doing so below NAD, so we would be taking out a hit. No one's going to take our equity at $24. But at the same time, they have to. I think those could happen potentially, or one of them could happen, but I'm not cooking that number anywhere. It's not anywhere in our horizon other than it's a potentiality. I'd say that we want to acquire. We just want to be really balanced because at some point here, I don't know when, and your guys' guess is as good as mine. We're going to, we're going to move away from this risk off trade in this asset class. And it's been sort of bottle toil, you know, on, off, on, off, on, on, given the day or given the hour. And at some point we should, we'll, we'll start to see activity. Now we're starting to see little tea leaves. You know, you saw the BSR Blackstone thing. We've seen Ackman with, you know, Hughes, you're starting to see a little rumblings of activity. Obviously, Navy wants to profess that, you know, IPOs are going to pick back up, even though I think, you know, line choked on that one a little bit. So, look, I think once we see better activity and we're better poised and pricing is more normalized, I want to be in a position to act. I don't want to act before that because think about it. What if we had pulled the trigger on something a year ago? we would just would have been absolutely dragged through the mud and beat about, right? And the market has been, and all of you have been very stern with your capital as it relates to other REITs who don't make good decisions. You punish them, right? We're still suffering from the same quagmire that we've suffered from for three years is that, you know, we don't trade a lot. We don't have a lot of following. We have not done a big issuance ever. Um, and we're okay with that. Uh, our dividends solid, our investors who have been with us for a long time are there. We are adding new and new investors as time goes on. The volume is probably, I mean, if you go back, like, uh, I mean, at one point in our history, public history, we were like $9 and change, right. And we were trading maybe two or 3000 shares a day. And now we're consistently higher volumes, much more stable price. greater following certainly a lot of potentiality in the name. And so we're comfortable with that. And we recognize that by not making bad decisions, it preserves us to be able to make a good decision when the market environment is conducive to that. And so that's how we're thinking about that. So that may be a little underwhelming for the machine in terms of, we don't have X volume for the quarter, but I wanted to share that logic that that doesn't mean we're not doing anything. It doesn't mean we're just going to sort of float around the ocean without a rudder or a motor. We have intent. That intent includes patience, though. I think one of the things, I think it's important to talk about today, given the fact that we now officially have tariffs in place. And I guess it's, I don't fully understand it, but I guess I kind of understand it. There's been a lot of concern that, oh, tariffs are bad for someone like us. And so we've actually gone out and talked to our tenants. You know, we get quarterly financials from them, so we use that opportunity to talk to CFOs. And we've asked them how they think about tariffs and how the tariff rhetoric. Now, granted, up until now, we don't really have tariffs. All we've had is the threat of tariffs. And I would say that there was two instances where they said some of their metals input costs would be higher because of tariffs, but they would simply pass those on. And so they weren't concerned. They did note that some of their input costs as it relates to the metals that they're using would be higher but they would have no problem passing those on in their contracts to their clients and so there was i wasn't concerned that was the only thing we found that anyone said negatively about tariffs uh some people have said and like you know give you give an example some of some of our things are very domestic manufacturing productions right so guard rails and uh some precast concrete they're a sort of they had no opinion like it doesn't affect them right they they sell domestically they source domestically no no problems there there's others who said that they've actually found quite a bit of uh uh pickup and inquiry so they they have a lot they found particularly some of them that manufacture some things that could be manufactured example in canada or mexico some of those jobs have now the people have been coming to them saying we want to source jobs from you domestically and so and there's a degree of optimism in that that they think order pickups would come most of people view that they will that will be either a slight benefit or agnostic to the tariffs so we don't see any sphere and loathing as it relates to tariffs i don't think you know we're going to catch a massive wind from uh from from all these things i mean i think that would take time and I think you'd have to have real, um, trade shut down, which I don't expect to happen at all. I think this is, this is a lot of, um, uh, political positioning and in alignment. And I don't think this has anything to do with actual trade systems, you know, grinding to complete holds, but our, our, our, our tenant base does not seem to be bothered at all by, by tariffs. And in fact, uh, expect that sort of, uh, at least an interim, uh, uplift in order demand. Do you have two tenants who come to us and ask us to expand their footprints, to physically add on to their sites? And so we're talking to them about capping that out and providing dollars to them in a way that increase our rent at a favorable cap rate and allows them to consolidate. So we think that's a positive. But we're basically like a real hard rock. The rock doesn't move very fast, but it's really a rock hard and solid, and it's a good base and good foundation. So we feel good about that. We don't have much concerns about that, if any. The swap, let's talk a little bit about the swap. So three years ago when we put the swaps in place, we elected to take this ability to do an option that, could put it back to us that put option saved us over 50 basis points and rate. So, you know, if you look back, our sort of our run rate was sort of four or five, two, it would have been well over 5% on a locked basis. So that would have been, you know, roughly one in 1.25, $1.3 million each year of added interest expense over the last three years, we saved that it was, You know, with options, you're obviously going to take, you know, you've got to dealt with the play with. And, you know, I don't think anyone underwrote in early 22 where rates would be. And so as we rolled into fourth, third and fourth quarter last year, you know, we actually was August when the Fed cut and rates got really low. There was a really good probability that one of our swaps was not going to get put back to us. And so we had to wait. And so we sort of had to wait. And we had established a budget. That budget was the 4-2. Actually, it was slightly more than that that we had budgeted. And that was for just throwing the swaps into flat, sort of the same sort of 4-5-3 blended. And we sort of monitored it on a daily basis. I want to thank our banks who, you know, meticulously provided us daily quotes on these swaps. That was tedious. We monitored, re-monitored. You know, rates really, really ran up. The tenure was going crazy. So far was going crazy. And so there was a monetary sort of momentary dip in the rates. We elected to use our budget that by doing so allowed us to pay down a little bit to four and a quarter. And so I think in that regard, we benefited from it, but we had kind of underwritten this all away. We only did a one year. We could have done a two year. But, you know, our view was is you know, the time we were doing this at the end of the year, beginning of January, uh, that there was going to be more to shake out. Clearly the 10 years, uh, receded quite a bit since then. So that's a good sign, a lot, a lot more ground to cover before year end. So we'll evaluate fresh as it comes to next year. Uh, but you know, our, our view was didn't want to float it, wanted to hedge it. We told you prior that we would, we had a little bit of our budget allowed for it. And so we took the benefit. So I think that sort of shared. I think that decision along with the revolver was us just being really tight about, you know, the near-term wins and volatility in the market and just being smart about our balance sheet. You know, as you saw, we did issue equity in the fourth quarter on the ATM. You know, it doesn't sound like much compared to some of our peers at 200, I think 287,000 shares. That was $4.6 million at 1616. That's 3% of our market cap. So under the radar completely, creatively, prices that we can comfortably you know the yield on that equity from a common uh is far below the yield that we could buy a property at so we knew we could do that and and so we grew the market cap by three percent in a quarter with no one really even knowing the difference and so that's uh you know something that we're we're proud of we think that little tiny actions we're making like last year when we bought the op units back at 1480 that we'd issued at 25 know we're doing little transactions like that that again aren't headline grabbing aren't big but each dollar that we we're accruing and creating on that is money that's going into our investors pockets so i think you know discipline wise we're we're excited about where we're at um i think there's going to be some opportunities here it feels i don't know when but it feels like there's going to be some good good action in the reed land i hope it's in this year maybe it rolls into 26 but you know the status quo i don't see

uh for the industry i think we're going to see a lot of change and and we're we're ready for it and receptive to it uh so with that uh operator why don't we uh open up for q a thank you at this time we'll be conducting a question and answer session as a reminder if you'd like to ask a question please press star 1 on your telephone keypad in confirmation tone indicate your line is in the question queue you may press star 2 if you'd like to remove your question from the queue One moment, please, while we poll for questions. Our first question comes from Rob Stevenson with Jannie Montgomery Scott. Please proceed with your question.

Good morning. Aaron, any updates on the timing of the sale of the Costco asset and the solar turbine split and sale at this point?

Yeah, so Costco, you know, we expected to – close on its original uh thing which i i want to say is pretty wrong right july they do have three options and the three options uh the first option they they get uh i think it's split where half the if they pay the extension option the half of it goes towards their purchase price the other half we keep the other two options we get to keep fully uh we've had conversations with them a couple weeks ago in fact Look, everything looks like a go. The only reason they might delay a little bit would be just because of logistics with the city. But everything looks to be fine. In the scenario where they do extend, you know, so just to be clarified, they're $1.7 million hard already. So they can't get that back. And if they do hit their extensions, that's $650,000 additional in our pocket. So, you know, in some ways we'd be fine if they extended. but I don't think they will. As it relates to solar and WSP split, we're going through that with the city. That's been a long process. I think we're getting near and near that end. There is a potential. We don't know for sure, but solar said they might want to have a little bit longer on the lease to clean things out. So they might add three or four months to that lease just to kick it out a little bit longer for them to do what they need to do and their move out. Um, but, uh, we've had several excellent unsolicited offers on that, on that property, but we're, we're, we're waiting to get it split. And we think there's going to be more value extraction from that because the solar property would be, you know, an owner owner user, most likely flex space. And then the woods, the WSP property, which already has, you know, already has an in place lease that we recently renewed. So we're, we're moving forward with that. I I'd like to see that that happens in six months, but, You know, I don't know how to handicap municipalities. They're just a different beast.

Okay. And then what about the – The scheduled closing date is August 15th for Costco.

Okay. And then what about the OES purchase option exercise? Is that increasingly likely given the commentary in the supplemental? How are you guys feeling about that, and what would be the timing on that likely at this point?

You know, so they've informed us that they started their process to get an appraiser, which is the first step. We have not gotten an update as to that, but they would obtain a third-party appraiser service. They would get an appraisal. They would evaluate that appraisal relative to the contractual prices set forth. If they're in parameters and they decide they want to purchase it, then they put it forward into their budget. and then that budget would get approved for the following year. So this has always been contemplated as a long-tailed process. We knew they couldn't start the process in earnest last year until after their budget cycle had started. I think some of the wild cards that could go both ways, and this is, again, I'm trying to read tea leaves, is obviously the state of California has a fairly large budget deficit. Um, for, for, you know, uh, so does that weigh on their decision to purchase, uh, or the timing of when it, uh, at the flip side, I think we just saw Newsome mandate that government workers go back to their office. Uh, which is an interesting, uh, signal for, for, for that state. But the other thing is, you know, this is the office of emergency services. This is the department that received both state and federal funding for natural disasters. which we just got one done in the Palisades and there's quite a few of these at hand. So this is, if, if there are budget constraints in, in the broader California, uh, budget, this is one that probably is still well funded because of the, uh, the severity of natural disasters and, and the impact that they have on lives. So we feel comfortable, but we are going to be, uh, you know, uh, flying blind because it is a government process and they are, they have their, their procedures that they can follow. So, My guess is we probably won't know anything if we do know anything at all until summer. And even if that was the case, then it would probably be, you know, they probably, they always signaled that if they were going to purchase it, it would be within that first four-year window. And that's how the right is to do so. But right now, nothing to suggest that they're not doing it. We're waiting to hear back from them on their selecting their appraisal, which I think is a good sign because if they didn't want to do it, they wouldn't engage in that process.

Okay, that's helpful. And then in the K, you guys indicated that Fujifilm exercised their lease option there. Is that just a standard increase, or is there anything abnormal about that option exercise that would impact earnings more or less than what we would think?

So, yeah, so they have two seven-year options. We have to establish mutually – Oh, we have to agree upon a rent. That rent is established at 95% of fair market value. So that's the mechanism in that place. So it's not a contractually predefined dollar amount. So the process will start to, you know, obviously both sides have different opinions of what fair market value is. And we have to sort of come to a compromise and there's a mechanism to do that. And then once we do, that'll be the rent going forward for the next seven-year option. They're a fantastic tenant. They have been in that building for a while. They have put a lot of their own capital into that, and we'd love nothing more to see them stay longer. We would have loved to have a longer-term lease, but the option is a seven-year, and I get it, given the financial world and how most CFOs like seven or five years typically. And so we look forward to having that resolved here quickly.

Okay, so that'll be a flat lease, no bumps once you establish a price off that?

No, there's a mechanism for bumps as well.

Okay. And then with that Fujifilm lease done, what are recent conversations with Northrop Grumman, who I think is the other significant expiration you have over the next couple of years that's not in the disposition pile?

Yeah, so, I mean... too soon to have conversations about renewals or exercise you know things like that they they they're coming up so um that said i mean you you you know you kind of look at what has been done there was just we just there was just a million dollars of uh dollars put in to replace the generator into that property, they also went to us and told us that they, every time they make a change, they have to, like interior change, they have to notify us. They don't have to get our approval, but they have to notify us. And so they have been expanding and doing more build out. So they do classified primary electronics in there. And so they've expanded some of their, they've retrofitted additional space Originally, when I think when we bought it, well, we didn't buy it. The legacy team had bought it. It was largely like an engineering office slash HR slash. It was kind of like a, like a office. And they, during COVID, they cleared all that out. And then increasingly what they've been doing is they've been putting lab space in there. So they'll get a contract. They'll add, you know, 10,000 feet. They'll retrofit that for a lab. They'll do more and more. So they've increasingly added more and more lab space into that, into that space. We're not even allowed to go in. We don't know what they're doing exactly because you have to have top secret clearance. But they have put in quite a bit of money in the last 12 months into their property. And they recently expanded some more. So those suggest to us that they probably are here to stay. We're going to have a very open conversation with them as we get closer to that. That's probably not going to be until end of year or early next, just by the nature of how these work. But other than that, we don't see... Candidly, if they left, we won't cry. We've had a lot of interest. Believe it or not, someone would like to develop that whole space into apartments. So we're okay, but we think they're staying.

Okay. That's helpful. And then last one for me, Ray, how should we be thinking about GNA in 2025? So you've got, you know, especially, I guess the first place to start is the non-cash GNA. You've got these Class X OP units to management. Is that just being ratably amortized there over the next five years? And so what should I be looking for versus the $1.6 million that you did in non-cash GNA? or stock compensation expense in 24 for 25, given that?

Yeah, those will be amortized over the service period. So, you know, in round numbers, I think it's around $2.5 million a year. And then the cash G&A will go down because, you know, I don't know if you saw it in the 10K, but Sandra Sudo, our chief accounting officer, is going to retire at the end of this month. So she'll be leaving. And then her financial reporting person is also going to be leaving at the end of the month. And then we have one other person leaving at the end of April. So we're going to reduce the staff size by three. We'll have nine employees. So that'll... provide savings in the GNA fund as well.

Okay. And then I assume that Aaron not getting a salary or bonus will also sort of go to subtract out from the 6.3 million that you guys had this year.

Right.

Okay. So non-cash goes up two and a half million per year to call it in the neighborhood of four-ish and then cash goes down.

No, you misinterpreted me. Two and a half million is the Absolute number, not the increase. Okay.

Okay. So that's two and a half, and then the cash will go down for the departures and for Aaron moving from cash to non-cash stock.

Correct.

Yes. Okay. And then the last one on that, are you guys still running, you know, sort of 30% of the year in the first quarter? Is that still, you know, the way that all of it sort of flushes out with this stuff in terms of the accruals and everything, that it all is going to still happen in the first quarter? And so big number and then subsequently smaller numbers throughout the year?

Yeah, I mean, the first quarter includes the, you know, the bulk of the audit expenses. And then it includes a lot of tax consulting because we have to issue K-1s this month and get ready to substantially file the tax return. So, yeah, it will be front-loaded again. I'm not sure if it's exactly 30%, but it'll include those additional professional fees, which are higher than the rest of the year.

Okay. Thanks, guys.

Appreciate the time this morning.

Thanks.

Our next question comes from Gaurav Mehta with Alliance Global Partners. Please proceed with your question.

Thank you. Good morning. I wanted to ask you on the $6 million acquisition that I think you have under contract. I think in the press release you talked about identifying the development opportunity in the land parcels. Is that something you guys plan to do yourself or is that something for the future?

Yeah. So just to give clarity. So, you know, obviously we had alluded to this, uh, free transaction, uh, prior quarter. We, um, had signed an agreement. We were going through due diligence. When we got there, we were like, well, there's a very large attached parcel to it. Um, we, uh, wanted a little bit more time to explore. We actually had a conversation with the tenant. The tenant, uh, has the existing tenant on the built portion as expressed an interest to take down. uh a we could build approximately a sixty thousand sixty to a hundred thousand square foot facility next door uh and they they expressed to take uh uh an interest in having some of that space so that they could consolidate their operations in one location because they have a they're leasing somewhere else uh and we've uh you know we so we spent time talking to them we spent time talking to some local industrial brokers in the market we also spent some time looking at sort of developers. So we definitely think there's an opportunity there. It doesn't mean we're going to pull it today, you know, but how we would do that, we would, you know, we have experience in here. We would typically work with a turnkey builder that, you know, would work with us all the way through. So, you know, we're not the contractor on this, obviously, and have it developed concurrent with leasing activity. uh so we think that's something that we'll do when we do it we're going to have to huddle we're having an off-site strategic team meeting here in april we're going to discuss that some other ones and it also highlights we actually have four of those three others uh of those types of possibilities uh because a lot of the properties we've acquired have large land footprints and you know we for instance we have a asset in the Carolinas where we've been approached for a carve out to build an industrial facility. So we're looking at those. Those are ways to obviously generate ASFO growth without necessarily simply buying something. And we'll look at those strategically over the course of this year for sure and decide which ones we want to pull the trigger on.

Okay, great. Second question, Aaron, I wanted to ask you around your comments on the acquisition market. uh you know i guess you know what are some other indicators you know you're looking at to get more active in the acquisition market is it like you need like better cap rates or more product flow or maybe better cost of capital to do a few acquisitions yeah you know um i think um

as we've honed and rehomed our strategy as time goes on, I think now, whereas before we bought some smaller assets, you know, five, $6 million assets, I think now you have to be really sterling white for me to get smaller. Not because I don't have a problem with smaller assets. It's because I think just generally speaking, they're, they, they don't appear as institutional. So we're sort of looking more for that 10, 10 to, I would say $30 million size. You get above 30. If it's a single asset, it feels just way too big. It's candidly 30 is probably too big unless it's something, you know, something beneficial. You know, if it's a portfolio of assets, like, you know, our Lindsay is like, you know, multiple assets. And so they all break up, but it's sort of that 10 to 25, I guess it'd probably be the sweet spot. So that's been a filter that we've kind of looked at. And right now in this environment, you know, you know, looking at some of the deals that are coming out, they're, they're, they're PE led and you're like, okay, why are you selling this in such a shitty rate environment? And the answer probably is they, they don't care. They just want the money and they're going to, you know, do something else with it. And that's not necessarily a good reason for a landlord to buy. Right. And so I think we've been, that's, motivation is a big part of it it's like okay why are you selling it probably one of the darkest hours uh you have the absolute most clarity and you're wanting to try you're just really you know you just bought this this company and i get it it's a cash out strategy uh but it's a very it could be a very expensive one and so we we think worry about hey that might be on that might be they might price talk a seven and a half or seven and a quarter but that might really be a nine cap and you won't find out until afterwards and so we want to be careful of that because you know look you have to be cognizant that in the manufacturing space you have the binary risk is much larger than it is than say a walgreens right um re-letting is going to be a lot harder so you have to be more scrutiny so i think some of the candidly the inventory we've seen just hasn't been super compelling that says yeah screw it we're going to go get it um you know if it if there's one that looks good and we've you know we we want to buy uh we're willing to buy it just that there's no sense in just buying something that doesn't seem really compelling because I'm not buying this. Look, you know, my net worth is tied to this. All our investors network tied to this. There's a lot of people who aren't institutional, who are on our name, who don't pay attention to what you publish and they don't look at the stock market, but they care very deeply about the sanctity of what they own. And you know, that's how we got to, we've got to be mindful, right? That this is real people's money. and that we have to protect it. And protecting it is not the same necessarily as always growing it for the sake of growth that we do want to grow. We do want to make it more valuable, but we have to protect the house. And sometimes the best way to do that is not put new shit in the house that isn't good and or isn't really compelling. And so, look, cost of capital certainly matters. You know, I think right now it's been a thin pipeline of activity. I think we'll see it more robust and there'll be a lot more choice because the really smart folks are going to probably who want to sell their properties are going to wait a little bit. If I were them, just like we're waiting a little bit. So that's kind of how we think about it.

All right.

Thanks for that color. That's all I had. Thank you.

Yes. Our next question comes from Steve chick with CBUS capital, CBUS garden capital. Please proceed with your question.

Hey, thanks. Aaron, we appreciate the patience and I'm glad you discussed the upgrade transaction head on in the press release. That was helpful. I just have some questions, numbers questions. you know, maybe for Ray, the ABR for at the end of the year was a little lower than last quarter, despite the same number of properties. I'm assuming there's kind of some assumptions in there for maybe Costco and Endicott, but can you just kind of reconcile that? That'd be helpful. And then maybe actually what you're anticipating for within your AFFO guidance for 2025 for ABR. Yeah.

So the decrease reflects the fact that Costco, their lease expires at the end of July, and Solar's lease also expires at the end of July. So those are the things that are driving the decrease. They're partially offset by ongoing rent bumps, but that's basically the driver. And what was the other part of your question?

I don't know that we've given ABR for guidance.

Well, just I guess, is Endicott in there as well, the small sale?

Yes, it was, but it really is a small number.

Yeah, okay.

Right. And can you remind me, is this, you know, this kind of steady state ABR number, it doesn't include kind of rent bumps or it's not forward looking. Is it, is it an ABR?

It's the next 12 months. So it's the rent we expect to receive from January 1st to December 31st of this year.

Okay. Yeah. So any, any, any bumps that come into play this calendar year are reflective because that it's what we're basically taking is a 12 month rent roll. based on how the contractual rent is, right?

Yeah, okay.

All right, that's helpful. And then in the assets held for sale at year end on the balance sheet, it looks like, I think it's somewhere in like 22 million. Is Endicott in there? And what is in that number?

It's just Costco. You know, Endicott didn't have some come along until after the year ended, it closed. The way the GAAP rules work is you have to be committed to a sale as of the balance sheet date to include it in asset cover sale. So we didn't have discussions with the, the buyer didn't come to us until January. So that's why Indicoc's not in that number. So it's just Costco.

Gotcha.

Yeah. I would point out that for first quarter in January this year, we did, we have taken Calera to market. So that's out in the process right now. So that, that will show up for held for sale on first quarter numbers. Um, but, uh, it's early. I mean, we just took it to market less than a month ago.

Oh, gotcha. Okay. That was actually my thought on that. Do you have a, I mean, are you able to say, you know, with the Cushman valuation that was the appraisal recently done, how did Polara come out within that, I guess, relative to its book value? Can you speak to that?

No, there was, there was, um, If you're asking if there was an impairment, there was no related impairment associated with the valuation. So it was the valuation that Cushman did was remains above a book value. The marketing process that we're having is first focused on strategic growers of sort of, you know, sort of the same ilk. And then from there, the second round is sort of marijuana growers, which are legalized and legalized. in minnesota and then from there it would be just sort of general industrial use so we're running through that process right now um you know uh our broker advise it's probably a six to nine month sales process uh it's hard right now in the winter obviously there uh so it's sort of been a little bit of soft marketing but you know what look i i don't know what the outcome will be on that what i can tell you is that is Whatever dollar value we get out of that, that is dollars that are earning AFFO right now. And so we look forward to getting that redeployed and putting that money to work. And we have not made any assumptions that are numbers of that happening, just so you know.

No, that's good and fair. Because I think the book value is somewhere in the area of $9 to $10 million. So it sounds like you'd be expecting north of that sometime over the next six to nine months, assuming the process goes as you say.

I don't have any expectations right now until, until I, you know, the market's weird and we're going to see what we get and then we'll go from there. But, um, like I, I, my only desire is to get the most we can get, but I don't know. I don't have the expectation of what we're going to get.

Okay.

Um, a couple more if I could, uh, on, um, I'm wondering if it makes sense, uh, With the preferred coming up in a callable in 2026, you don't want to advertise in advance, I guess, but does it make sense at some point if it's below par value to pick off some of that in the open market? I saw with your credit agreement, it looks like you released some commentary on that. You could do that if it was funded by the common stock, but I'm just curious if you could speak to that and any future refinancings as you look out into 2026 and 2027.

So I think in the third quarter commentaries and either on the call or commentary, I alluded to, you know, a lot of our thinking is going towards that preferred that becomes callable in September of 26 and our debt maturing in January 27. And so we're very much thinking about decisions today that impact those. And, you know, I think in an ideal context, you know, should we have, the means which candidly is going to probably be equity but if we had the means to retire the preferred i would um i it was it was good for us it served us it's a purpose but you know you know i think you could it could be priced better if you ever wanted to do one like in my ideal ideal context in a world that doesn't currently exist i would be like public storage used to be and i would have i would have preferred as my sort of uh first lien position and i have common and i would not have any other debt and then that would de-risk the nature of this asset class considerably and would make it very much a perpetual income vehicle uh but i'm not there so you know to even get there though if we were ever to be there we would have to retire this preferred um i think you're right we wouldn't want to uh advertise in advance if we're going to be taking things out uh we have the flexibility to do so and we'll see

All right, great. Thanks, guys. I appreciate it. Thank you.

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There are no further questions at this time.

I'd like to turn the call back over to management for closing comments.

All right, everyone. Thanks so much. Talk again soon and we'll keep our nose to the grindstone and keep working things out.

Appreciate your support. Take care.

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