Good day, and welcome to Modiv's Third 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. And please note that this event is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for Modiv. Thank you. Please go ahead, ma'am.

Thank you, operator, and thank you all for joining us today to discuss Modiv's third quarter 2022 financial results. We issued our earnings release and investor supplements before the 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'll 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 the federal securities laws. 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'd now like to turn the call over to Aaron. Aaron, please go ahead.

Thank you, Margaret. Hello, everyone, and thank you for joining our third quarter earnings call. Joining me today is Ray Pacini, our CFO, who will cover our financial results in detail following my opening remarks. I'll then close with a few more thoughts on the market before we open the line for Q&A. The major theme for the third quarter was steady disciplined execution. We completed two core acquisitions and two non-core asset dispositions as part of our continued long-term growth plan and strategic portfolio repositioning. We have been intently focused on price discovery as we evaluate both potential portfolio acquisitions and select industrial manufacturing investments. As part of our focus on identifying investment opportunities that could offer Modiv greater enterprise scale, we successfully expanded the capacity of our credit facility by $150 million. As most of you know, the markets remained volatile during the quarter with large swings in interest rates creating disruption in the real estate markets. An environment like this requires patience and an experienced management team to navigate the uncertainty and we have been in no hurry to sign deals unless they can create long-term value for our shareholders. That said, third quarter revenue increased 17% year-over-year, excluding the one-time early termination revenue reported the prior year quarter, reflecting strong portfolio performance. Due to market conditions, we exercised patience this quarter and our reported transaction activity was lighter than the second quarter. That said, our pipeline is robust and we see significant opportunities on the horizon. We are especially focused on the emerging trend of U.S. industrials reassuring their manufacturing operations. Based on our experience in providing the vital infrastructure needed for critical manufacturing facilities, Modiv is well qualified to partner with key manufacturers making this transition. As I'm sure you are aware, reassuring is gaining…

Thank you, Aaron. Good morning, everyone. I will now discuss our operating results for the third quarter and first nine months of 2022, provide an update on our portfolio and cover our balance sheet and liquidity. Third quarter AFFO was $3.1 million or $0.31 per diluted share compared with AFFO of $3.8 million or $0.44 per diluted share in the third quarter of 2021. The primary drivers of the decrease in AFFO per share relate to one, an increase in dividends on our preferred stock as the third quarter of last year only had 14 days of dividends payable on the preferred stock, which we issued on September 17, 2021; and secondly, an increase in the fully diluted share count, primarily due to the issuance of $1.3 million Class C units in January 2022 in connection with our acquisition of the Kia auto dealership property. AFFO for the first nine months of 2022 increased 8% to $9.7 million or $0.95 per diluted share from AFFO of $9.1 million or $1.04 per diluted share in the first nine months of 2021. AFFO per share benefited from our acquisition activity and rent bumps offset by the increase in preferred stock dividends and the higher share count that I just mentioned. After excluding early termination fee revenue of $1.5 million in the prior year quarter, third quarter revenue of $10.2 million increased by $1.5 million or 17.2% reflecting rental income contribution from our acquisition of 16 properties during the first seven months of 2022. The increased rental income from these recent acquisitions was partially offset by decreases in rental income from the sale of eight non-core properties over the last 12 months. The early termination fee related to a Texas property, which was leased to Dana Incorporated and sold during July 2021. Total…

Thank you, Ray. Before we turn to Q&A, I'd like to share some final thoughts. Volatile times in the marketplace can be true tests for our company's strategy, management team, and Board of Directors. And I'm proud to say that for Modiv, our strategy is battleship strong and our management and Board remain not only confident but optimistic. We are more convinced than ever in our long-term value creation strategy and believe that our story is unique and compelling. Our commitment to providing our investors with an attractive, stable monthly dividend is unwavering and the quality, resilience and long-term earnings power of our portfolio continues to improve. With that, I'd like to thank everyone for joining us today, as well as wishing you and yours a happy holiday season. Now, I'll turn the call over to the operator for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. And our first question comes from the line of Gaurav Mehta with EF Hutton. Please proceed with your question.

Thanks. Good morning. You guys talked about having a strong pipeline of acquisitions. I was hoping if you could maybe provide some more color on what you have in the pipeline between portfolio level acquisitions and individual properties?

Hey, Gaurav. Yes, sure. We were busy in the third quarter even though we were disciplined. We didn't -- we haven't announced anything yet. And -- but in terms of pipeline activity and due diligence activity, we've looked at four portfolios out there. Three of them were pure-play industrial manufacturing. One was diversified, but majority industrial. We've also -- I've been on the road, I've toured 30 properties physically myself, along with Bill Broms, our Chief Investment Officer. We've been doing a lot of homework trying to be very thoughtful, right? Every decision we make here at this size of the company has to be well thought out. So I'd say we -- over that course of that period of time, from early third quarter to later third quarter, we just saw a lot of shuffling of deals and cap rates and obviously we had market sell-offs and treasury impacts. And so we just wanted to be very cautious, right? And I've been looking at the prints of the other REITs that have come out, and a lot of them have third quarter results have been anywhere from sort of in the industrials basically sort of a -- and maybe some of the other retail ones too. Some are between like a 6.5 to 7.1, 7.2 cap rate in that range is what they've executed on. We've gotten indications that cap rates have gapped much wider now in terms of ask, but we're not sure where they're all necessarily closing. And so we've just been patient, we see a lot of things. There was a -- we could have pulled the trigger multiple times or just trying to be thoughtful about it right now. And - but we're not worried about the ability to put capital out. We're just trying to make sure we're seeing the key leases as best we can. And as opaque as the crystal ball may be, but just trying to think of around the corner on what the first quarter might look like in terms of opportunities as well.

Okay. Maybe one on your guidance, can you maybe talk about the $0.10 variance between lower end and upper end? What are you underwriting to get to the upper end of the guidance versus lower end?

Yes. So I mean the -- Ray can give you some more specifics, but the variance in the guidance really is driven by two factors. One is asset dispositions and the other one is acquisitions. And as a general course of matter, I don't like to tell about any of those activities until we have certainty that they're going to transact. So if you're -- for instance, if you're in a deal and you're still not hard or the buyer's not hard. If you're selling an asset, then we don't broadcast those. But to get the high-end of the range, we would have to not sell and buy more, if I'm not mistaken.

Right.

And our original guidance was $50 million of acquisitions at a 6.25% cap rate. Trust me; I'm not seeing any 6.25%. And the low-end of their -- thing was that we sold assets but didn't buy.

Correct.

Yes.

Okay. Maybe last one --

Maybe acquisitions was $28 million I think.

Yes.

Sorry, go ahead, Gaurav.

No, I'm sorry. Maybe last one on your portfolio allocation. You obviously talked about your focus on growing industrial manufacturing and then knowing it's closer to office. I was curious to maybe learn more about how you are viewing retail as a part of your portfolio.

Yes. Look, I would love nothing more to be to be a pure-play or not today. Our focus on asset dispositions has naturally been on the office. That's been our primary focus that will continue to be. Our retail that we have is fairly vanilla. There's nothing over -- it doesn't have hair on it. It's very liquid. We could sell it tomorrow if we wanted to. But we're just thoughtful about sequencing. I would tell you that long-term our intent would be not to have it.

Thank you. And our next question comes from the line of Rob Stevenson with Janney. Please proceed with your question.

Good morning, guys. Aaron, so just how are you thinking about dispositions in the current market environment? Do you wait for things to settle down? Is the spread attractive enough between where you're -- where you could sell and where you could buy that you still go-forward? How is -- how should we be thinking about disposition for you guys over the next couple of quarters?

Yes. There is some assets where we've -- we're putting out to market to just get sold. Those are on office assets. We've had -- I think the volatility in the early part of the quarter or mid part of the quarter was we had several transactions where we got in one instance an unsolicited -- like in two instances actually unsolicited bid for assets that we thought were decent cap rates. We went under contract, but then Fed did what it did and I think they cooled their jets. And so they came back for -- one of them came back for re-trades and we just weren't interested in at that -- those -- the new levels that they had suggested. So I think we've been patient, I think right now it's a somewhat quiet period for transaction activity, certainly compared to other environments. I think candidly, when you're selling office assets, those people have to have secured financing or got lined up in advance and it's been a little bit harder for them to get that pegged. I think it's getting a little bit -- stalling out a little bit now. And so we don't want to throw the baby out with the bath water. We're throwing off AAFO from these properties. They've got term. We're actively still on many of them doing lease renewal negotiations right now. And so I think our view is, look, we know we got to sell them. We don't have a specific time to sell them. We have to be mindful if we sell too much, too fast and we haven't bought something, then that'll be a drop in AFFO. If we buy too much and not sell fast enough, then we're going to have more leverage. So we're just being really thoughtful about that. And I think ultimately though, I mean, some of these are going to clear at the prices they need to clear. But we think that patience isn't hurting us and we're getting paid for that.

Okay. And then how are you -- your conversations going with tenants on annual bumps? I mean a lot of the deal -- you did one at 2.3% with Valtir, but majority of the stuff that you've done recently has been 2% bumps. Is there any acknowledgement in the marketplace that 2% is still the right number or leases as we look at them going forward from here going to start being more in the 2.5% pushing towards 3%, given how strong inflation has been? Or is it just not going to change that fast in the marketplace?

I think 2% is the floor. I think brokers have now recognized that they -- that 2% was not as sweet anymore. I -- we've seen a lot of 2.5s and we're under LOI, which means its non-binding and it could not happen. And so it's not in our guidance numbers, we're under LOI for our property. Not a very big one, but it's -- I think it's an 8.25% cap and it's got 4% bumps. And so we are seeing movement, I've talked to some I guess peers or competitors if you will because it's a fairly small space what we're acquiring. And they're seeing -- and they're forcing a little bit differently, but they're getting sort of uncapped CPI. I'm not seeing that at all. I'm seeing -- I've seen some capped CPI deals. I've seen some sort of range, collar ranges tied to CPI. But by and large, most of the ones that we've been seeing have probably been 2.5% right now.

Okay. And then last one for me, Ray, how penal is the rate adjustment? If you were to go above 40% leverage, if you guys were to acquire more than you sell in the near-term, what is -- how does that change and how much of a drag does that impose for you guys?

So for every 5% up to 50, it goes up 10 bps. And then north of 55 or north of 50, it goes up 15 bps. So it would top out at 210 bps on the term loan and 215 bps on the revolver.

And our next question comes from the line of James Allen Villard with Ladenburg Thalmann. Please proceed with your question.

So did you repurchase any stock post 2Q earnings call? And if so, I mean, kind of how were you thinking about that utilization of that program going forward?

Post Q2, we bought -- I mean year-to-date, I know we bought 211,000 shares at an average of just under 17. During -- between -- during Q3, I don't remember the exact number of shares, but we bought it an average of just around 15 or so. It disclosed in our 10-Q I just don't have the number.

I think we stopped.

Yes. We stopped just did not work. [Indiscernible] going forward.

Yes. So look, we still have it available. We turned it off. We only do sort of a 10b5-1, so we set and forget kind of thing. We're not trying to micromanage that process. We still have capacity available. I would tell you it's a balanced reaction to these things, but at these prices, I would probably participate in the buyback. We are just trying to manage that, that, that process a little bit. But yes, it's a tool we have. It's not a panacea. We don't in fact expect it to move the needle for us. We -- so I'd say it's a tool we have right now looking at where we're at today. It's a tool that I could potentially use.

I just picked up the number from the 10-Q, which is going to get filed in a little bit. In July and August, we bought a total of 45,715 shares for a total of about $704,000. The average cost is $15.40 a share.

Yes. That's helpful. Another follow-up question is can you provide us any more color on what's under PSA, what's under LOI?

No.

No.

I can't let you know of something, but I -- my general rule is I like to know that it's baked because it's been a really -- it's been a little, it's -- the market's been very volatile. And so I don't like to chase my tail and I don't want you guys to do that either.

I appreciate that. I fully understand. That's it for me.

Great.

Thank you. And this concludes the question-and-answer session. And I would like to turn the floor back over to Aaron for any closing remarks.

Thanks, operator. Thanks, everyone for making the call. Look, it -- the quarter was steady, disciplined, not exciting. We're not going to deliver exciting every quarter. We're going to be very thoughtful. This -- when you are a -- well, we were a small, now we're a microcap name. When you're this thin and you've got to make decisions about leverage and about growth and about share price and about execution, you just really want to be thoughtful. You don't want to be knee-jerk. You don't want to be impulsive. Too many times in past, we've seen that small cap names destroy themselves because of that, right? Each decision we make is one that's going to have second and third order effects. So what you're seeing is us being thoughtful, right. Not being rote, not having blinders on, trying to pay attention to the environment. If you recall, I've created this team to be sort of like a hedge fund team or a private equity team where you have a lot of subject matter experts, leverage, it's a small team. We're 12 people in total, and we're really just really gathering data, thinking about things, making sure that we're reiterating our process, challenging our paradigms. And I think that's important in these types of end markets. Because if we're just a hammer and we're hammering every nail, it could be great or it could be bad depending on the market outcomes. And so right now, I think there's a lot of ambiguity in terms of the market. It's one, risk on, risk off, risk on risk off. It seems like that every day. And so we're just being very thoughtful. We are executing. We're not worried about executing. The timing of that execution is crucial though. And so we're being thoughtful about that. Ray and I are getting on a plane right after this, or shortly after this, heading to Nari in San Francisco where we'll be talking to investors and we'll keep plugging along looking forward to more transparency, more stability in the broader markets, and I think that's going to be something that'll avoid all net retreats as a sector it's been a little bit of a laggard. And so I think we're well poised to keep executing and get out there in the marketplace. I thank you all for your time and hope you have a great holiday season.

Thank you, everyone. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.