Good day and welcome to the Modiv's Second Quarter 2022 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions]. On today's call, management will provide prepared remarks and then we will open up the call for your questions. [Operator Instructions.] Participants may also ask a question by emailing ir@modiv.com. Please note this event is being recorded. I would now like to turn the conference over to Megan McGrath, Investor Relations for Modiv. Please go ahead, ma'am.

Thank you, Operator, and thank you all for joining us today to discuss Modiv's second quarter 2022 financial results. We issued our earnings release and investor supplements before market open this morning. These documents are available in the Investor Relations section of our website at modiv.com. I'm here today with Aaron Halfacre, Chief Executive Officer of Modiv; and Ray Pacini, Chief Financial Officer. On today's call, management will provide prepared remarks and then we will open up the call for your questions. Participants may also ask a question by emailing ir@modiv.com. Before we begin, I would like to remind you that today's comments will include forward-looking statements under federal securities law. Forward-looking statements are identified by words such as will, be, intends, believe, expect, anticipate, or other comparable words and phrases. Statements that are not historical facts, such as statements about our expected acquisitions or disposition 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 a report on Form 10 Q. With that, I would now like to turn the call over to Aaron Halfacre, Modiv's Chief Executive Officer. Aaron, please go ahead.

Thank you, Megan. Hello, everyone and thank you for joining our second quarter earnings call. Joining me today is Ray Pacini, our CFO, who will cover our financial results in detail following my opening remarks. Then I will close with a few more thoughts on the market before we open the line for Q&A. First, some highlights from the quarter. We grew our second quarter adjusted funds from operations by 18% to $3.6 million, while our total revenues grew by 14% to $10.4 million, driven by growth in our portfolio. We maintained a lean and disciplined cost structure and remain laser-focused on our goal of transforming and growing our portfolio while driving attractive long-term shareholder returns. We approach the second quarter with patience and discipline. On last quarter's earnings call we mentioned the disruption in the real estate transaction markets, characterized by delays and deal cancellations as buyers and sellers adjusted to the extreme volatility in interest rates and inflation. From a yield perspective, it's been a slow summer, with both buyers and sellers pausing in the marketplace to find an equilibrium. Since we are not encumbered by specific acquisition targets or liquidity concerns requiring us to buy or sell properties, we were patient, remains committed to our investment discipline and paste our transaction activity until we found opportunities in the latter part of the quarter. Early in the second quarter, we completed one acquisition Lindsay Precast for $56 million at an 8.5% weighted average cap rate, which we outlined for you on last quarter's call. We also completed the disposition of one office property during the quarter EMCOR for $6.5 million at a 7.8% cap rate. Following the close of the quarter when we felt the market had achieved a more balanced posture, we completed two additional acquisitions in…

Thank you, Aaron, and hello, everyone. I will now discuss our operating results for the second quarter and first half of 2022, provide an update on our portfolio, and cover our balance sheet and liquidity. As Aaron mentioned, second quarter AFFO increased 18% to $3.6 million or $0.35 per diluted share from AFFO of $3 million or $0.34 per diluted share in the second quarter of 2021. AFFO for the first half of 2022 increased 25% to $6.6 million or $0.64 per diluted share from AFFO $5.3 million or $0.59 per diluted share in the first half of 2021. The primary drivers of the increase are recent accretive acquisitions and the rent bumps of the portfolio. Total second quarter revenue increased 14% to $10.4 million from $9.1 million in the year ago quarter. Total revenue for the first half of the year increased 11% to $20 million from $18.1 million for the first half of 2021. These revenue increases largely reflect the rental income, contribution from the property acquisitions made during the second half of 2021, and first half of this year, partially offset by the decrease in rental income from five dispositions during 2021 and four dispositions in February 2022. On the expense side, G&A costs were $1.6 million in the second quarter, down from $1.9 million in the second quarter of last year as the company continues to focus on maximizing efficiency in our operations and undertaking process improvements, G&A costs were $3.7 million for the first half of the year, down from $4.6 million for the first half of last year. These reductions in G&A also reflect the impact of our exit from the crowdfunding business. Property expenses were $2 million in the second quarter, an increase from $1.9 million in the prior year period and were…

Thank you, Ray. Before we turn to Q&A, I would like to share some thoughts on Modiv's share price. The summer months have not been overly kind to net lease stocks overall, but particularly unkind for a thinly traded small cap rate with a still too large allocation to the office sector. Modiv's current trading prices remain well below fair value should you measure it on either NAV or the multiple Research Analyst price targets. Heck, we even trade below book value. Despite these rather depressed prices, the management team and Board of Directors do not feel panic. We understand that at some point our story will resonate with a broader institutional investor base and our share price will regain normalcy. That said, being patient is not the same as being idle. And Modiv continues to take deliberate action to deliver results that will resonate with institutional investors. In less than 10 months, since September 30, 2021, we have increased our wealth from under six years to over 11 years. We reduced our office exposure from 50% to only 30% of the portfolio, and increased our annual base rental revenue by $7 million to $36 million. These are impressive statistics and we believe we will be able to deliver even more results in the near future. The quality, resilience, and long-term earnings power of our portfolio continues to improve. As a longtime participant in the REIT markets, I know all too well the perils of the small cap conundrum Modiv is currently presented with. Some small cap REITs are really the management teams that run them, stay small cap REITs forever, finding that their skills could only bring them public, but we're not sufficient to bring them to scale. Other small cap management teams in an emotional or egoistic desire to be bigger, chase scale with poor capital allocations that either destroy their balance sheet or parentally lock them into a dilution spiral. REIT history has shown us that small cap REITs can emerge as attractive scalable enterprises. Agri, Essential and NETSTREIT are just a few examples of this. For us here at Modiv, we are ardent students of the marketplace, both past and present. And we combine our acumen with patience, knowing full well that at the right time we will be able to advance beyond the small cap conundrum into a realm of greater and greater investor following. We continue to look at all opportunities big or small, knowing that the right opportunity will present itself and we have the expertise to capitalize upon it. With that, I'd like to thank everyone for joining us today, and will now turn the call over to the operator for questions.

Thank you. At this time, we will be conducting a question and answer session. [Operator Instructions]. Our first question comes from line of Gaurav Mehta with EF Hutton. Please go ahead.

Thank you. Good morning. I wanted to go back to your prepared remarks on transaction market where you talked about some slowdown in 2Q and then achieving balance after 2Q. I was wondering if you could maybe provide some color on how much have the cap rates moved before the interest rate hike cycle and what your expectations are going forward?

Hey, Gaurav, this is Aaron. Yes, sure. I think one way to cast this is thinking about all the activity that we have gone through our investment committee where we have submitted LOIs, where we've been seeing cap rates, go those that we've been willing to win, others that we've been willing to pass on. And just I was going to talk about in -- sort of in a quarter context with fourth quarter of last year sort of being the baseline. So we've been probably on over $100 billion of deals in the fourth quarter of last year and we saw cap rates in the mid to high fives for a lot of the deals. And then as we went into the first quarter, we were obviously busy with the IPO. We did that takedown the KIA, which was an off market transaction and Kalera. But then the other ones that we've been on, we have -- I can say we've been on a little bit less volume because I think that the supply started to slow in February and March of that quarter. But we saw things largely hold up; maybe they were low sixes, six, 6.25 kind of timeframe. And by the way, I'm characterizing mainly in industrial manufacturing because that's what we've been focused on buying. Then we entered into the second quarter. And what we saw was a lot of deals come back that we wouldn't chase though they, at certain cap rates, we just don't love them and we didn't chase them. And we saw these deals come back from the brokers. And we saw several deals that had been tied up, that had fell apart. In fact, the Valtir transaction is one of those where they -- we have seen it the first…

Okay. That's -- that's great color. Thank you. And maybe I have one more question on Valtir 1. The cap rate on that acquisition is over 9%. Can you provide some color on that specific property, why the cap rate is higher on that property?

On which one? I'm sorry.

Valtir 1.

Oh, yes. So Valtir 1 is the 15-year term. These assets are the ones in Texas and Utah. The entire portfolio was available. Those two assets after we had done -- and I along with our Bill Broms, our Chief Investment Officer, I cite through all our assets. And we cite through the assets, and we just thought that the facilities in those were a little more tired, a little less critical on the margin, but the land was in the path of development. They're in really nice areas, industrial areas that are growing. And so we went to them and said, look, we'd rather structure a shorter lease on these and adjust the pricing appropriately, compared to the other ones. And they were receptive, they wanted to close the deal, and we were thoughtful about how we structured it. And, I think, that's our approach we take. We're very methodical in looking at the math. But we -- then we go in and structure something holistically that wins for both parties. And so we were comfortable with shorter term leases here because candidly that provides us some marginal optionality, they have ability to extend if they want to, but if our -- my hypothesis is right, that this is marginally less critical to them, it's in the path of development and that land value is far greater for us, 15 years from now. And so it's a way to balance the risk profile and seize an opportunity.

Thank you. Our next question comes from Bryan Maher with B. Riley Securities. Please go ahead.

Good morning, Aaron and Ray.

Hi.

Was hoping to drill down a little bit more on the, kind of, manufacturing industrial properties versus industrial warehouse, which just seems like everybody wants to bid on. And given that some of those assets that you're buying are different -- different layouts, et cetera, that are just not a big metal box. What kind of a premium on a cap rate basis you expect to get in general for those types of assets over just buying big box warehouses, like so many REITs are doing?

I think it's a significant premium. I couldn't quantify it because we simply don't look at distribution assets. Most of them are -- the cap rates are much tighter, if they're good quality. And you're absolutely right, everyone wants to be in distribution. And I -- there's a lot of players who can do a great job and there's a lot of -- there's a plethora of good assets. I just have two sort a semi-cynical views of it. As one is, I think, Prologis is going to do it better than anyone. But aside from that, we've been in Prologis can't serve all math of all clients. And two is, my cost of capital, our cost capital doesn't work, right? I can't buy 5.50% cap, distribution assets, just because I love them. I think the other element to it is, the stuff that we could buy, that stuff that is -- let's call it, I think our guidance underwrites a 6.25%, which we could -- we have clearly exceeded in terms of the cap rates. But, let's say, we could buy it at 6.25% or we could buy it at a 6% and we can hold our nose. It tends to be the older outdated stuff, that people -- just because it has a single term net -- triple net lease in it, it's trading to too tight of a cap rate, it just doesn't make sense to me. I remember this many years ago and I used to live in Pennsylvania, and I forget what turnpike actually was and there was a developer I had lunch with in, he's developed this much concrete tilt up warehouse off one of the turnpikes and signed a 10-year lease with it and some -- I don't know, it was a food…

That's really helpful. The second question I have is on retail. You've not discussed much it seems of late in buying retail or the -- you have a decent amount of Dollar General; you bought the Raising Cane's not too long back. What are your thoughts on that active segment the next year, kind of, two to four quarters?

Yes. We -- so we did the very large Kia this year. So that -- I mean, that was a big quantum of retail and that was cost advantage all day long because we issued OP units at 25, and got it at a cap rate wider than the peers. But that was a -- in terms of allocation standpoint, that was a big chunk of retail to do. We haven't been spending time on sort of smaller retail assets. They're out there, we get shown them. The cap rates are tight. I think, but I look at retail opportunistically. The Raising Cane's is an example that we bought July of last year. We bought it, it had six years left. We knew that Raising Cane's wanted to buy the assets; we knew that there was demand for it, it was the last asset in the insurance company's portfolio and we bought it probably 100 basis points wide. So we were optimistic. I think, Kia is an example of that. The reason I'm optimistic in it, and I will look at that, and I'll look at technically almost all sectors if I -- we think we can make our investors' money, and that's where we really kind of take sort of a hedge fund approach or an active and asset management approach. But generally speaking, there are a lot of peers that are buying a lot of retail, and they have better cost of capital, and they're buying in scale. And so how am I adding value if I go by the same things that NETSTREIT or, Essential, or Internet [ph] or Owl or PINE or whoever are buying and made margin and have better cost to capita. I also just -- I don't get overly inspired. I love what we have, it's fine. But at the same time, if someone wants to pay me a deer cap rate, I'm also cognizant that I can tell it. I just think we're selective on it. So we haven't seen anything overly compelling in the retail side that makes sense for us. And it's not a disparagement of it at all, it's just it doesn't seem to fit for us right now, but we always look opportunistically.

Thank you. [Operator Instructions.] Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Aaron Halfacre for closing remarks.

Thank you, Operator. Thank you, everyone for joining us today. It was a pretty straightforward quarter. We matched fund basically. We sold some office we bought, and we bought some industrial. I think that's a steady rate quarter. Hope to do it again for you in future quarters. And I appreciate your attendance. Thanks so much.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.