Good day and welcome to Modiv Industrial Third Quarter 2023 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 the call up for your questions. Please note this event is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for Modiv Industrial. Please go ahead, ma’am.

Thank you, Shomali, and thank you all for joining us for Modiv Industrial's third quarter 2023 earnings call. We issued our earnings release before market opened this morning and it’s available on web site @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 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, and 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 these 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 third quarter conference call. I think third quarter results were solid. I'd like to think they were relatively trauma free. Let's just go straight to Ray to discuss financial results and I'll come back at the end before we take questions. Ray?

Thank you, Aaron. I'll begin with an overview of third quarter operating results. Revenue for the third quarter was $12.5 million, a 21% increase compared with the $10.3 million in the prior year period, and reflects the impact of the 12 industrial manufacturing acquisitions we completed during the first nine months of 2023 and the 14 non-core property dispositions in August 2023. Third quarter adjusted funds from operations, or AFFO, was $3.7 million, up 19% when compared with $3.1 million in the year ago quarter. The increase in AFFO was primarily due to the revenue increase and was partially offset by increases in straight-line rents and interest expense. On a per share basis, AFFO was $0.33 for this quarter, which is in line with consensus estimates, even after accounting for the increase in the weighted average number of fully diluted common shares outstanding. The %1.7 million non-cash loss on sale of real estate investments during the quarter includes a $1.9 million non-cash loss on the previously announced sale of 13 properties to Generation Income Properties which close on August 10, 2023, partially offset by $178,000 gain on the sale of the property previously leased to the EMC shop. The loss on the GIPR transaction reflects the difference between the $9.6 million estimated share value of the Series A redeemable preferred stock of GIPR compared to the $12 million nominal value received as partial consideration for the sale on August 10, 2023. The GIPR has the right to redeem the preferred stock for GIPR common stock prior to March 15, 2024, subject to registering the common stock with the SEC and obtaining shareholder approval, which GIPR obtained on November 9, 2023. The estimated share value of the preferred stock increased to $10.1 million as of September 30, 2023, reflecting the progress…

Thanks, Ray. As you all saw, I've already shared a lot of information in our earnings release, and I did that in order to get our thoughts distributed to as wide as possible audiences as we could. So I don't really think there's much more to say in terms of prepared remarks. Other than I believe, and I hope you also find that our level of transparency and candor is unique. I don't think I've seen an earnings release with that much detail and that much sort of candor and thought about it. We understand. We're a small cap company or microcap company. In this really volatile time, who would think you would wake up over the weekend and find that Moody's downrated, the US credit rating, and more headlines about this, that, or the other? So it's a very volatile time, and so certainly it's hard for us to give out sort of formal guidance. We did the first year, we achieved it, but we don't think it's merited in the near term just because anything that we do could be a huge catalyst. But that said, I don't want to say nothing. And so we shared a lot of what we're looking at and a lot of thoughts. I suppose there's going to be some questions about that as well as our results for the quarter. So let's stop talking and turn it over to Q&A. Operator?

[Operator Instructions] And our first question comes from the line of Barry Oxford with Colliers.

Great. Yes, Aaron, I agree with you. You gave some very nice detail as far as where your brain is and how you're thinking about raising money. When it comes to the strategic partner, you kind of went through a few things that what you're not looking for. But then when you said what you're looking for, you're kind of looking for the halo effect that maybe give a little more detail on what you mean by that. And then also maybe to the extent you can without showing your hand, talk about broad brush, maybe the terms that would be acceptable to you in a broad brush sense. I know you can't kind of show your hand here.

Yes, I'd say in the broadest, so look, as we kind of alluded to in the comments, we're seeing a lot of people are offering sort of -- some sort of preferred, right? And it really feels like debt to me. And that doesn't feel very original. And in the return expectations that we're seeing for these, they want mid-teens or higher returns, and they want repayment. And so to me, that just seems, if you want, that feels like equity, but without equity treatment. And so that doesn’t interest to us. I think as it relates, look, I don't have specific terms for you. I know that what works for us, and I can't share those now, but I will say that it needs to be organic. We view this as any potentiality of this happening as it's got to be organic. So it has to be our needs. And so any shop's going to have some particular concerns they have. I think the biggest concern that we've seen floated to us, which is the one we are the most cognizant of, is that if they were to do something with us, they're concerned about concentration risk, right? But given that even a $12 million check would be 10% of our cap stack right now and if you looked at it in certain ways, right? So we have to solve for that over the long term. To us, it has to be, it's close, it has to be equity, effectively. And it has to be, they have to believe in our thesis. We're looking at some that have existing assets, some that just have cash. I think the halo effect is, like if I did a joint venture with some overseas partner that felt they couldn't name themselves, I…

Perfect. No, all that makes sense. Appreciate the color there. Ray, a quick question for you on the performance incentive plan for the stock comp. How should we think about that line item throughout ‘24?

Well, at this point, there isn't an approved plan for 2024. I think that's something that the compensation committee will be considering. So we'll just have to wait and see what comes out of the compensation committee.

I would say, Barry, that, look, there's seven, what is it, 721,000 a quarter that we still have to accrue for, in the fourth quarter, first quarter. So first quarter numbers will have the 721 plus the 499 that we are already doing for the time-based. So you're going to, you're looking at roughly a one-two hit already for the balance of year, I'm of the view that G&A is going to be in line, right. So I don't think you should expect any sort of material change from run rate G&A that you've seen over the sort of consistently on a consistent basis. That's how I would answer that. And I conclude that FDC [inaudible] is component of G&A.

Okay. Yes, that's exactly what I was trying to kind of get at, just how should I think about that from a model standpoint? That's helpful.

And our next question comes from the line of Bryan Maher with B. Riley Securities.

Thank you. Good morning, Aaron and Ray. Just a couple for me. I enjoyed reading your thing this morning, but as I read it, I kind of was thinking to myself what do you think snaps first to kind of break this inertia and get things moving again?

Oh, that's a good question. Crystal balls are more like bowling balls right now, really heavy and thick and more likely to drop on your toe. So I'll be careful with what I say. But look, I think we don't have healthy markets. And how I think about this is I do get a real palpable sense. There's capital on the sidelines and they're increasingly getting ready to do something, but they're looking for the right catalyst and the right reason to do so. We don't have any more clarity. We may be talking collectively about what the Fed might cut at the end of this next year, but there's a big debate if they will. We still don't have economic data, know if we're going to be hard just augur it hard or not. There are so many variables out there. I think for us because we're not the tail wagging the dog. The body of this whole thing is the broader markets. And so I think we need to see some sort of healthiness. I think if I were to be logical, I would think, hey, do we see more of the well performing REITs in terms of capitalization and size and access to the market starting to do more follow-ons, right? And do we see health response to those follow-ons? If we see that, then I think we, it'll be easier for us, sort of in a traditional way. I think on the strategic partner side, it's like if it happens, it happens. And if it happens, our goal is to be positively received in the marketplace. But it also depends on what the marketplace is at that time, right? And so I wish I knew what the catalyst was. I'm prepared, sort of, psychologically and we've prepared our balance sheet in a way that we can stay in our bomb shelter for another year if we have to, right. And just keep waiting until the mushroom clouds sort of disappear and people can start coming back out. So we'll be focused on recycling assets on the near term. There are opportunities to improve our AFFO just by just mining our Ps and Qs. We are actually looking; it doesn't mean we won't buy. But I've seen things out there that I've seen some deals out there that they still want cap rates that are dated, right? So they're just head stuck in the sand. I've seen others which are weird, like they come out really short or we’ve come out because they didn't get it done before, and they're wanting really wide cap rates. And I'm like, well, and if you dig into it, you're like, they don't want any restrictions on subsequent sales or and so to me, it's a weird time right now. And so we're just being prepared, looking out. I don't know what the real catalyst is other than the most obvious one, which is the broader markets start to heal.

I also got the sense when reading it that M&A is kind of bouncing around in your head. How serious is that? Is that something that could be an all-stock deal where you're the buyer or the seller that kind of ultimately solves for float?

So good question. M&A is kind of in my DNA and in the team. So I was at Coal when we merged with ARCP to become BREIT. When I was at Campus Crest, we did a take private to Harrison Street. This REIT was formed by me merging two REITs and internalizing together. So the skill set is not foreign to us. John Raney, our General Counsel, he was involved. I was involved in the deal when we sold a cold portfolio to Spirit, which is now obviously like with REIT. So M&A is part of our DNA. We're not afraid of it. We do see the opportunity. If you study REITs historically, those who can size, if they've done it smartly, they can grow. I think what we've seen by the Spirit deal and the Peak deal is that stock for stock is an environment that makes sense because take privates, unless your [inaudible] going to someone well-heeled, take privates require a lot of capital to take out public instruments and that capital is very expensive unless it's just, so I think generally speaking, stock for stock deals, I wouldn't be surprised we see more of them. We're receptive to them. But if we can find a target that will work with us and we can take it out, stock for stock, we will do that. If someone comes, I've said this before, look, I'm a much bigger shareholder than I am a manager. And what I mean by that is I understand that I'm hired by the board and the board is elected by shareholders. I'm a very large shareholder. What's right for the stock is what will win. So if someone comes over the top and says, hey, you guys, we want to give you fair value, and fair value is not anywhere near where we're at today, then that will be the best choice because they're going to be able to close the value gap sooner than we can. Then we'll do that. I don't see that happening, but that doesn’t’ -- you don't see it happening until it comes across your desk. That's what we're looking at. We're looking at a lot of these things. I think some of the deals that we've seen, they just have some bad cap stacks, so we need to sort of wait and see how that sorts out, right. They've got some looming. Do they get some extensions? Does that looming maturity cause them to rethink their pricing? So we're being patient in that regard, but yes, I think in an ideal world, stock for stock would be a very efficient way to gain tradable float and to pick up scale.

And our next question comes from the line of Rob Stevenson with Janney.

Good morning, guys. Not sure I saw it occupancy numbers anywhere. Are you guys at 100% this quarter?

Yes.

Okay. And Rancho Cordova government tenant, what's the timetable for them to exercise that purchase option and is there a pricing mechanism in place already on that?

There is a pricing mechanism in place already. It's a little, even though there's a price and it's referenced in the lease, it's a very attractive price. But then the pricing mechanism is a reference price. They also have to go through this process where they're seeking out, they have to do appraisals. And if the appraisals are within plus or minus 10% of that pricing mechanism that they can just go forward with it, other than that, they have to be able to submit new offers. We don't have to accept them. The mechanism is lengthy. So you should think about that in terms of probably about at least 12 months, probably more like 18 month process for them to exercise the mechanism, the option process. So and they've talked to us about starting it, but they can't start it until next year. They would start it next year, they would go through their evaluation process, they would get it approved, they would get a requisition, then it would go through to the governor and then they would get on the -- once a budget is approved, they would then be able to relinquish funds. So I think that liquidation, if it were to happen and it seems reasonable that it will happen, it would be in ‘25. So from a modeling standpoint, we would be still capturing that AFFO to the balance of this year and into, I mean, it's a balance of ‘24 and into ‘25 for a bit. But it's, it was a big component of our lease negotiation. It probably added an extra month into the lease negotiation because they insisted on having it, it wasn't just a bully play one. This property was strategic to them and they wanted to make sure that this mechanism we had agreed to and the process was there. And so that's all embedded in.

Okay, that's helpful. And then how should we be thinking about the timing on a GIPR distribution and how quickly would you turn around and redistribute that to Modiv shareholders?

Yes, so can I have alluded to anything? Barring any private party sales that we do in a van, I don't know if we'll do any, but if we did, we'll take those. We would distribute those concurrent when they redeemed. So it'd be sort of a simultaneous distribution and we'd be coordinated with GIPR. I don't think -- I don't see it happening in the fourth quarter. I see it happening very early first quarter. And I think -- as I think as early as January, I think January is reasonable. And so once we would line up the redemption date with them, the shares would hit our books for a nanosecond and then go right into the hands of our shareholders.

Okay. And then Ray, a couple of numbers, questions for you. The 440,000 of preferred stock fair value adjustment, is that an ongoing adjustment in the fourth quarter and then for whatever part of first quarter until those shares are redeemed?

Yes, there will be an adjustment as of December 31st. If we continue to hold the shares for some reason at March 31st, there would be an adjustment as well, but most likely they'll be redeemed before the end of the first quarter. So one more adjustment is coming at December 31st.

Okay. And then how should I be thinking about cash interest expense? And I'm not sure if I'm looking at page 13 of the supplemental correctly. There it looks like you're running around $5 million a quarter of interest expense before netting out all the GAAP treatment of derivatives and swaps. But if you're just doing the math on the $2.82 at $4.52 get you to more like $3.2 million a quarter, how should I be thinking about before any of the derivative swap stuff, what interest expense is running you guys a quarter these days?

Well, I think you need to take into account the cash derivative settlements. That's basically the cash that's coming in on the swaps. So the way I think of it is our average interest rate is 4.52, 4.53 on a total of $284 million. Yes, that's an economic rate. Yes, so you take the 4.52 on the 4.84. That's kind of your economic run rate because the mortgages are amortizing too so.

All right. And then last one for me just to clear the OP units were not being included in FFO per share, but are being included in AFFO per share this quarter because of the end of dilutive?

Correct.

And we have reached the end of the question and answer session. I'll now turn the call back over to Aaron Halfacre for closed remarks.

Everyone, thank you for listening, joining in. We appreciate your attention. We appreciate your investment. And for those that I see you tomorrow and Wednesday at NAREIT, I look forward to talking to you. Until then, we'll talk to you again when we come out with fourth quarter results. Thanks.

And this concludes today's conference. And you may disconnect your line at this time. Thank you for your participation.