Good day and welcome to Modiv’s First Quarter 2023 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for Modiv. Please go ahead, ma’am.

Thank you, Diego, and thank you all for joining us today to discuss Modiv’s first quarter 2023 financial results. We issued our earnings release and investor supplement before the market opened this morning. These documents are available in the Investor Relations section of our website at modiv.com. I am 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 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 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 are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from those forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that, I would now like to turn the call over to Aaron. Aaron, please go ahead.

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

Thank you, Aaron. I'll begin with an overview of first quarter operating results. First quarter adjusted funds from operations or AFFO was $3.1 million or $0.03 per diluted share, compared with $3 million or $0.29 per diluted share in the year ago quarter. Revenue for the first quarter increased 7.7% to $10.3 million, compared with $9.6 million in the prior year period. Reflecting the benefit of the acquisitions we completed during 2022. The net loss attributable to common stockholders improved $6.4 million for the first quarter, coming in at a loss of $4.7 million, or $0.62 for basic and diluted share. This compares to a net loss attributable to common stockholders of $11.1 million, or $1.47 per basic and diluted share in the prior year period. Were it not for two primary offsets, we would have obtained an even stronger improvement in our operating results. The recent quarter results include a $3.5 million real estate impairment charge and a $2.5 million year-over-year increase in interest expense. The real estate impairment charge relates to our property in Nashville, Tennessee, which is leased to Camergon. Since we are planning to dispose of this property later this year, we evaluated its carrying value compared with comparable sales values and reduced the carrying value accordingly. The increase in interest expense includes a $1.7 million of unrealized losses on interest rate swap valuations, while the swap in the first $150 million of our term loan was treated as a cash flow hedge from July 1 until December 31 2022 and did not qualify for hedge accounting treatment for the first quarter of 2023, because the swap was deemed ineffective. The primary reason the swap was deemed ineffective, is a potential for a reduced term in swap that could result from a one-time cancellation option available…

Thanks Ray, as you just heard, Modiv has been able to produce yet another solid quarter of results. Further as we detailed in our earnings release, the 10 acquisitions we completed represent an impressive mix of accretive high quality industrial manufacturing properties. However, beyond the financial results, I believe there's a message to take away from this, but I would argue is even more important. And that is the ethos or character of the management team that produced the results. Any given REIT in any given quarter can deliver a decent result, as they say, even a stopped watch is right twice a day. Heck, even delivering consistent quarterly financial results is nothing more than a nice confirmation that you made the right initial investment decision. But the investment you are ultimately making, particularly in the net lease sector is on the caliber and capability of the management team to produce those consistent, positive financial results. Picking the right management team is critically important. It's like picking the right horse at the Kentucky Derby. The right team during the playoffs, or the right soldiers to go to war. Sometimes stats don't tell you the full story, so you have to rely on your instinct. And when your gut tells you to choose the underdogs, the Warriors, the hardscrabble crew that has no quit, then you know right then and there that you have found something special. Modiv’s secret sauce can be summed up in two simple but powerful words, grit, and grind. Modiv’s grit is exemplified by our focus and perseverance. Combined with our ability to grind it out every day relentlessly. We are hard wired to achieve our goals. Combined with our decades of real estate experience, our grit and grind produce results that are both intelligent and compelling.…

[Operator Instructions] Our first question comes from Rob Stevenson with Janney. Please state your question.

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

It's a good question. We haven't other than the Gap property, we haven't formally designated the other properties held for sale. That doesn't mean we haven't done a lot of work to know where we interact. There's a bit of a balancing act with the selling of this, I'll give you my sort of inside baseball on this. I could sell my retail assets, like right away attractive cap rates. But if I do that, then my weight to office gets disproportionate. And then for people who are uninitiated, they're just going to say, Oh, you got your percentage of office went up. So we're balancing the disposition of these. I think in ideal context, we would sell them in one fell swoop. I don't think that's necessarily going to happen. But I think that would be our ideal context. And then from there, we're working on it. So timing, look my goal is to get it done this year. That said, we've had a crazy credit market, right. So who knows when the next bank is going to trip over itself, and even further restrict lending. And I think individual credit lending is important for some of these assets. If it's $1. General, no, it's not. But if it's an office asset, yes, it is. So I don't have a projection on the timing. But I'd say that, it's our focus. As when I focus on something, it gets a lot of attention. And I think our goal is to get it executed in a very timely manner. That said, it's a rough market. So we're -- I think we're eyes wide open. So if you think about why some transactions don't get done, it's typically because sellers aren't accepting where the market is. We're not naive about that. So we're cognizant of it, we're going to maximize proceeds, but right at the same time, we're going to accomplish the goal, because at this point, we don't want them in the portfolio and recycle. And there's other plenty of other things to buy. And it’s kind of rough, because hard in the sense that, like, I can continue on focusing on acquisitions, there's lots of assets, we have deals we like out there, but we just need to ship get this done. So we're going to make sure it's done in a timely manner.

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

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

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

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

Okay. And then last one for me, you extended the Levins property lease by about 16 months, are they moving out and just needed a short term extension? Something else going on? Is that, you know, lease still is the tenant still likely to occupy that asset after the end of next year?

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

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

The next question comes from Gaurav Mehta with EF Hutton, please state your question.

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

Yes, so we a little backstory, when we've originally secured our term loan, I think it was correct me if I'm wrong, Ray was September, October of last year, they beat the term loan extension. We had been underwriting a portfolio, it was an institutional portfolio had been a legacy store portfolio that a former colleague of mine was the GP on. It's a great portfolio would have loved to trends act on it. But the cap rate that they wanted, just didn't, we weren't very concerned about that care for cap rate going into the environment that we're in. So we picked we tried to negotiate, we just couldn't get it done. Maybe we'll get it done down the road. Who knows? But that was a sizable one that would have increased our leverage. It was over $200 million transaction. And so we didn't close on that. And so we had to shift gears and the pipeline, even as early as mid-January or late January, the pipeline was thin. We had been on several deals in November, December that the sellers just pulled, they couldn't accept the pricing in the market, and they just pulled, they never did the deal. And then and sort of late January, the deal volume started to pick up. We pass on a lot of deals. We bid on a lot of deals that we didn't win, like, for instance, the American Roller deal that glad so that was a great asset. We just -- we didn't we didn't get it. And but the other ones we did, as I mentioned just a min ago, we did -- a couple of deals we had under LOI that we just ultimately, we didn't close on. The market has shifted and we had outs and we…

Okay. Great. That’s a great color. I also wanted to ask you on your disposition efforts. Can you provide some color on what your view is on office? And how soon I guess you could get -- exit the office properties given what's going on with office real estate?

Look, I think office is a six letter curse word right now. And people just -- it's the new, the new thing to hate. If you go back, what, four years ago, it was strips centers. Everyone loves to hate office now and look and for good reason. But I think office is not one homogeneous bucket. And I think if people really dig into it, there are a lot of gradations to what you own in terms of office. If I had, you know, Class B multitenant, urban office, I would be swayed it, right, because I would have low vacancy high TI cost, and I would have properties that no one really wants. If I had Class A, major market, newer vintage office, I would be okay. Yes, you'll have some noise and things like that. But people that I think what I found and I think increasingly what I found is that like we have had a sort of seismic shift in how we think about Office, but I don't think office is obsolete. I think for me, I ran a company that has been sort of hybrid. We have our accounting staff works remotely. They've been remote since COVID. It works fine. They're certainly -- our accountants, they know what they need to do. They don't need to see some people every day and they communicate. The rest of us the real estate folks and the CFO and legal officer, we we've been in our office all the time. As we transition to Reno. Some of us got up here earlier, some of us are still coming. I found it hard. I think it's hard sometimes not to have people in office. So I think and you see increasing rhetoric, some of its, probably got some…

Great. Thanks for all the color.

Our next question comes from John Massocca with Ladenburg Thalmann, please state your question.

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

They're roughly 7.5 to 8, I'd say. I'd say that what we found as more deals have come out and even some of the deals recently is that the brokers are coming out with deals price better. Before they -- like in December, they'd be like, oh, yeah, we're looking at low seven, we think this is going to clear maybe sub seven. And it would it would go to 7.5. And now they're coming out and they're saying yeah, we think it's mid to high 7. And we're somewhere my bid eight in the first round and still be lead in second round. So I think -- I will qualify that there are certain like in what we were focused on industrial manufacturing properties, that's all we look at. So there are certain brokers who are they're really excellent what they're doing and they have a really good bead on it. And those individuals are those shops that have gotten transactions done. There's others who've gotten listings who maybe their generalist industrial or maybe they do manufacturing assets here or there and they have had trouble getting it done because they have not really drilled in on the right things. But cap rate is just one aspect, right? And when I say that is how these work is they get you to bid they have they can have 10 people bidding or five people bidding you don't really ever know but they always sound like there's a lot. You get them to bid to get the cap rate and then the devils in the details, its on assignment language, it's on credit quality, it's on all these things that the negotiation or the minutia, and Elise, that's where erosion can happen. When we pass on deals where we did a cap rate that we thought, okay, based on what we know, risk adjusted price, this is fair and equitable, we'll get it done. And then find out that they want like, they don't want any sign language, or they want to be able to kick something out or do this. And then it's like, okay, really, what you're doing is you had a good first and now you're voting the credit quality and so we’ll will walk over vote them and say, Look, if you really want us to do this, this cap rate not lighter. And sometimes they say yes, because it, just -- so I think, the cap rate range, so to get that thing was probably around 50 basis points, mid sevens to just under eight. Sometimes you see eight. I think, what I always ask myself, if I see an 8.5 cap rate out there, is it a 7, 7.55 and I'm getting an 8.5, or is an 8.5. Is it a 10 cap and a binary 8.5? So we're being thoughtful about it. But I like I think you could do, I could do 300 million in the sevens all day long.

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

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

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

So as we, -- you'll see in our disclosures, and the Q that’s filed, they are going through their 363 process. So they got debt financing, they're now going through a process of selling the company. So that -- those results are not until I believe it's June 9, is that right, Ray?

Yes, that’s correct. The auction takes place on June 9.

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

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

Yes, so they had been in there for a long time. And the rent actually, I think, I don't remember the math was 659 or 64% increase in rent, it was sticker shock for them because they hadn't really been paying, they do it. They're a busy company, they're spread thin. They've been buying a lot of these distributors and stuff like that. And so I think when it came time to the conversations in candidly, they were like we didn't start talking to them until like, I'd say two weeks before their window closed. And because they just we get them they take things back and then we we're connect. And so I think part of it was, Wow, that's the rents have really gone up in this market. And we hadn't paid attention, because they've been there a long time. And they are consolidating some other businesses and other things. So they do this one, I think their view? Again, I don't know for sure. But based on largely leases, so that if they wanted to do a long term lease, they would -- that's a bigger nut to swallow. And they didn't have they had a short window to get something signed. And I think it was in the confines of what they could do without having a deep dive budget review, because they kind of did this off cycle they liked after they'd been there, I think, you know, there's a good chance that they'll stay. If they don't, I'm not worried about it. I mean, that's right off the 80s in geolocation, it's warehouse, we don't -- long term, I don't know that I really even want it to be candid. It's better held by someone who's going distribution. But I think what it was just, it was a lot of sticker shock, they had to get the medicine to get used to the market rate. And they just did it for 16 months, because they know they need to use the property, but they want to right size things on a longer term basis.

Okay, that's very helpful color. And that's it for me. Thank you very much.

[Operator Instructions] Our next question comes from Bryan Maher with B. Riley. Please state your question.

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

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

Okay. And then when we think about your acquisitions, I mean, how are you sourcing those, the inbound calls. When we think about industrial, a lot of people think about an industrial distribution logistics, we all know the best players are who are out there buying it, but who are you running into as far as competition for buying industrial manufacturing?

Yes, and I kind of alluded to, I think I'm starting to grow off. There's less of these small, levered buyers out there. The shops that I think who buy industrial manufacturing, the retailer's -- so the ones who are focused on it, sort of as this is really what they're buying. I think the two most focused on us in the public space or myself or ourselves and Gladstone. I think lot of the Gladstone assets that have been bought, we bid on and I'm sure a lot of the assets we bought, they fit on. So we know we're buying the similar things. There -- Spirit has certainly, in the last three quarters made a bigger focus on buying industrial, and I don't think they're doing it just for yield. I think there's an element to yield to it because they are a diversified play, but they have really sort of honed their saw and focus on what they wanted to buy. A broad so has historically been a bitter here and there I don't think I've seen them too recently. I have to go back and look, I don't think so. But they had bought -- I think again, part of that is a yield play. And part of that is they like it. Then after on the public side, store was historically a big buyer, they're not there now, we've seen a lot of store deals come out that they use or rejected or tried to price negotiate. But the private buyers that you won't see publicly are White Oak on occasion, great shop there. AIC historically has been doing this forever they're probably the leader in the space, but they don’t -- they source all their own things. So they they're very different they end…

Perfect, thank you. , :

Well, I think we said we beat it up pretty much. Thank everyone for being on the call. We'll put our heads back down and get back to it. I don't think anyone's really paying attention to us, unfortunately right now. But it's a risk off environment. REITs are topsy turvy. It's been a crazy 15 months. It could be another crazy 12 months or more. We'll just keep getting things done and we look forward to brighter days for everyone. Do well. Thanks.

Thank you. That concludes today's conference all parties may disconnect. Have a good day.