Good day, and welcome to Modiv Industrial Inc. 3Q '24 Conference Call. All participants will be listen-only mode. [Operator Instructions] On today’s call, management will provide remarks, and then we will open up the call for your questions. [Operator Instructions] Please note this event is being vrecorded. I would now like to turn the conference over to John Raney, Chief Operating Officer and General Counsel. Please go ahead, sir.

Thank you, operator, and thank you, everyone, for joining us for Modiv Industrial's third-quarter 2024 earnings call. We issued our earnings release before market opened this morning, and it's available on our website at modiv.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 10-Q. With that I would like to turn the call over to Aaron. Aaron, the floor is yours.

Thanks, John. Hello, everyone. Thanks for joining us. Like some of you, I probably stayed up fairly late watching the results. No matter what someone's opinion is, I was hoping that it was decisive either way. One more uncertainty removed from the marketplace, so we have that. Of course, 10 years are up to where they were in June. So it makes for an interesting time for REITs. Most REITs are selling off today. We are up a little bit, but I guess a broken clock is right twice a day. With that, why don't we get started? I'm just going to go right into Ray, have him give some prepared remarks, then I'll have a few comments and then we'll open up to questions. Ray?

Thank you, Aaron. Rental income for the third quarter was $11.6 million compared with $12.5 million in the prior year period. The decrease in rental income primarily reflects the disposition of two properties during the first quarter of 2024 and the sale of 14 properties in August 2023, partially offset by rental income from one industrial manufacturing property acquired on July 15, 2024. Third quarter adjusted funds from operations or AFFO was $3.7 million, which is comparable to the $3.7 million in the year-ago quarter. The decrease in rental income was partially offset by decreases in the adjustment for straight-line rents, primarily associated with the May 2024 increase in rent paid by the State of California's Office of Emergency Services to our Rancho Cordova property, along with decreases in property expenses and G&A. AFFO per share of $0.34 reflects a $0.01 increase over the prior year quarter AFFO of $0.33 per share, due to a decrease in fully-diluted weighted average shares outstanding. Our repurchase of 780,000 operating partnership units and shares on August 1st, 2024, was partially offset by 157,000 shares sold in our ATM offering during September 2024. If our repurchase of the 780,000 shares from First City Investment Group on August 1 that occurred at the beginning of the quarter, pro forma AFFO would have been $0.35 per fully diluted share. Interest expense for the quarter was $3.2 million greater than the comparable period of 2023 due to $2.4 million of unrealized non-cash net losses on swap valuations, which increased interest expense in the current period, while the prior year period had included $795,000 of unrealized gains on swap valuations, which decreased interest expense. Now turning to our portfolio. Following our eight-year lease extension with WSP USA for our San Diego property and a five-year lease extension with…

Thanks, Ray. So this was a quarter where we spent a lot of time on that prior potential JV deal. Yet despite spending a lot of time on that and digging in that, doing the work of that, which ultimately, as you saw in October, didn't come to fruition, at least certainly not in its current form. We were still mining the store and still getting things done, and I think that speaks really highly of our team. With a company of this size and with a finite number of assets, you are undoubtedly making an investment choice that is largely predicated on the quality of your team. And to know to be patient in what has been a crazy market ever since we listed, to make the tough choices that sometimes are not the sexy ones, and to do that consistently, I think, speaks to the caliber of the team that we have and I'm very grateful for them. And I think, I just want to highlight that, doing all these things with basically no fresh capital and in an adverse rate and volatility market with limited traded float. In some ways, we shouldn't even be here. I remember, I mean, if you think about it when we listed this company, Power REIT, ticker PW, was a $200 million marketing company. I think they're like $3 million now. SquareFoot was a bigger Presidio that is, was a bigger company than we are. OPI was a bigger company. There are so many companies that have made the wrong choices over the last two-and-a-half years and here we are still standing, I think the quality of the portfolio is better than it was. We were more than 50% office three years ago and now we are the really the only pure-play…

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. [Operator Instructions] The first question is from Rob Stevenson from Janney Montgomery Scott. Please go ahead.

Good morning. Aaron, beyond the Jacksonville asset, now that you've moved beyond these two larger deals that you were looking at, how active is the pipeline today? And how are you guys feeling about that given your comments about rates and asset pricing, et cetera?

I like the pipeline right now. It was in the last month, I think you saw comments from Buzz and Gladstone that they were seeing some opportunities. We are as well. I think over the summer, it was pretty dry. I'm seeing a few more that I like. Pricing, it's price talk on some of these -- these are manufacturing assets, these are durable manufacturing assets, these are not flex spaces, these are not warehouses, these are true manufacturing. But I think price talk on a lot of these has been high-7s, low-8s for the majority of them. And nothing that -- I get a sense from the brokers that there's not a lot of buyers out there right now, which makes sense, right? It's really hard to make some decisions in this environment. I think that part of that logjam might have gotten cleared last night. We have tomorrow to see what that looks like and more importantly, the response to tomorrow. So, I'm generally encouraged by the pipeline. That being said, we're being disciplined because I don't want to take on any more debt and so that does limit our choices if you look at just raw capital. So we're being very mindful. That said, we have and we sort of alluded to it in October on that JV deal that one particular JV deal that has been tabled for now contemplated as recycling some assets and that's very, very viable. There are some assets on there that are not sort of true manufacturing. They are either industrial assets that are basically warehouses or they are non-industrial assets. But there's a handful of them that are easily low six cap assets that we could recycle into eight cap assets and on a standstill basis generate a fair amount of AFFO growth. But I'd say, as it relates to the pipeline, we're we like what we're seeing early signs of it, seems encouraging. I don't know how the inventory will change. It's a weird phenomenon. What we're seeing now is, what we're going to see for the balance of the year typically because it's too hard to get anything else closed. We typically then see a new surge sort of mid-January, and but we see things we like, I'll put it that way.

Okay. And then the Jacksonville OP unit asset, is that -- is the $6 million of OP is the entire purchase price or is there also a cash element there too that pushes the price over that up over $6 million from a modeling perspective?

Yes. No, it's all in. That's it. There's no cash.

Okay. And then I guess the other one for you is that you alluded to it a minute ago in terms of asset sales. How are you thinking about the Kia asset and sort of when the right time is for you to sell that asset given that it's probably one of if not your largest asset and going to wind up having significant capital coming in and to be redeployed? Is sometime in '25 the right time to sell that asset? Is there certain benchmarks along the way that you're looking for to figure out when the right time is to recycle that asset?

Good question. I think, you know. First things first, we still -- we've got Costco looking solid to close next July-ish or August. We have heard from our tenant in -- OES that they're going through their valuation process in hopes to exercising their purchase options. So those are two assets that are also large, that also need to that are definitely office, and so we want to address those. And interesting in solar turbines, which is a tenant that's in San Diego that is leading in July, and we've known this and we'll look to put that on the market to, as an owner occupant, just up until about three weeks ago, that parcel, the solar turbines parcel was conjoined with the WSP parcel and we've been spending the last two years trying to get that split in the City of San Diego, which we did. So those parcels have been formally split, and so that -- it's good for us because obviously, we have an eight-year lease on Woods that positions that asset well. We'll explore options with that one, but then we can now pair off the solar turbines. I bring this up because there's some housecleaning still to do. We're not done with those. In the meantime, Kia continues to be a very high-quality asset, very long lease term, attractive rent bumps. And my view is that, as we get into a much more stable rate environment because it is a large asset to purchase, you're going to find that the cost of capital for those who want to buy it is going to be better. And so could it happen in '25? I don't have any designs on that. I think it does have a very low tax basis, so we have to be very mindful of the 10/31 exchange. But I think there'll be plenty of opportunities. I do say that at some point, we're going to want to have all industrial, and that's going to be sooner than later. There -- as I look on the horizon, I'm spending a good amount of my time. Obviously, we're looking to grow and gain more market cap. But absent that, absent there being a real demand, I have to be mindful of our existing investors, and there's over 10 million shares outstanding and those people care about what we're doing. And so, a big part of my focus is thinking about the preferred that is callable in, I think, in September of ‘26, and I think I'm also thinking a lot about our January 2027 maturities and making decisions today, that will put us in a really, really good position for those events. And so, Kia could come into play on that time horizon, certainly. But I'd say that, it's an attractive asset. It's massively cash-flowing. That was a really smart trade for us. 405 Furnish, it's not going to go away. I don't -- I'm not itching to sell that.

Okay. That's helpful. And then Ray, from a numbers perspective, you bought back some OP units and possibly some stock during the quarter. What was the average price on the stuff that you bought back in the third quarter?

$14.80.

Okay. So that's what that $14.80 number was. Okay. I didn't know whether or not that was the number.

Yes. That was the owner of Kia, right? So that was their units. We bought them back. Those are the same units we issued to him in January 2022 at $25. So the 780,000 units, which was OP units hence talk, issued at $25, retired at $14.80, and then we turned around and prospectively with the OP unit transaction for the Jacksonville, Florida, we'll have reissued $600,000 of those $780 at a $2 per share premium.

Okay. That's helpful. And then last numbers one for me. The dividend increase is effective January, not for the already declared fourth quarter dividends, right?

That is correct. Yes.

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

Just a couple for me this morning. Aaron, you've been pretty quiet, I think, on your current tenant performance, except for the ones that we know about Costco, KIA just talked about. Is there anything else going on in the portfolio that we should know about? Any known vacates other than I think you just talked about Solar Turbine -- can you just give us a little bit more color on kind of the day-to-day with your tenants?

Yes. So there's Kalera still out there, right? So we've resolved that. That's an empty box. It's been empty basically since summer since the bankruptcy proceedings ended. We are -- we've had numerous conversations with different strategic parties, both vertical growers as well as even -- we even had some reach out to us who like it for dry cleaning business because of its water source. So we are getting ready to take that property formally to market. We kind of were waiting -- I think we're going to do it soon, but sometime fourth quarter or probably January. That's the only one that's not carrying its weight and we will look to recycle that. Anything that comes out of that will be accretive by given the fact that the capital is not earning anything right now. Solar has been -- Solar was one that had been there for a long time, say, 4 years ago they did a 2-year extension and then 2 years ago, they did one more 2-year extension, or they had an option they exercised it and we knew they were leading here. And we hope -- we're actually very glad they are because the pricing on that from an owner-occupant standpoint is much higher than it would have been from a tenant standpoint. So, I think you actually toured it back 3 years ago. So we're looking forward to that one. Other than that, I mean, this portfolio was and I think this is a framework that I think an individual investor will appreciate, right? Like all my net worth is in this company and I take the belief that a lot of people's net worth or a meaningful portion of it is in here and they don't want to, pardon my language, and I'm…

And just one more for me. Thanks for those comments. Given the election outcome, regardless of what you think of each candidate, is that changing your view on your acquisitions? I mean, I guess we should expect increased onshoring of manufacturing. But how does that tweak how you're thinking about acquisitions of industrial manufacturing going forward? And that's all for me.

Yes. And I think I mentioned this in -- I'd have to go back and pull it. But I talked about why industrial manufacturing. I think there's some great national wind in our sail. I think they were there under both campaigns, but I think there's still going to be there for the next while, right? I think if we look at Trump and if he introduces tariffs -- look, the things that we're manufacturing are already being built here. They're already being sold here. They're already valuable. So I don't expect them to, will they get a surge in new orders? Maybe they will. But even if they got a surge of new orders, maybe -- even if our tenants got like triple the orders tomorrow, we're still getting our rent, right? We're in that lease company. So we're not participating in them. Just like if they have a slightly low manufacturing output number, we're not looking for them to go dark. It's really sort of bedrock. I'm grateful that we're supporting sort of American workers. I really believe in them. I think that with a Trump administration, it's probably more likely that you'll see onshoring, possibly even nearshoring. I think you're going to have -- but even if that did happen, it takes time, right? And I think there was actually a podcast, or Elon Musk with someone, he just noted that manufacturing takes time to start up. That's why we're very focused on manufacturing that has already been, it's durable and not necessarily something that moves like a stock, right? And so I like manufacturing because it makes something. It's not based on consumerism. It's not based on separating your discretionary dollar from your wallet so to make someone else -- it's stuff that's very durable products.…

Thanks, Aaron. Up 4%.

Oh, nice.

The next question is from Gaurav Mehta with Alliance Global Partners. Please go ahead.

I wanted to go back to your comments about your expiring swaps. Do you expect the new hedges that you're looking at to have similar terms and similar rates as your expiring swaps?

So, yes, so I'd say the way we're engineering it is it's going to be at the same all-in rate or better. So that's how we've been looking at it. That's how we've been getting our daily quotes. I'd say the one thing -- I won't do any more cancellation features. We got -- so I remember being business school 2 years ago at Rice, and this is back when Enron was around and all those crazy things and there was a case study about airlines. And should they hedge their fuel costs or jet fuel costs or not? And some airlines took a 50% hedge, some went unhedged, and some went fully hedged. And the decision to hedge comes with consequences. In REIT environment, you absolutely need to hedge. Is it safe to assume that between this point now and -- our maturity rates will go down? I think it's generally leaning towards that versus going up. So you could argue, well, rates should come down but I don't like the uncertainty. I don't think an individual investor does -- would like the uncertainty. I don't like debt. I understand how debt is a necessary evil in the REIT space. I like the days when -- remember Public Storage had all the have preferred and common? That was a wonderful time. I don't personally care for debt, but I know, understand its role, but we will hedge it. So we'll hedge it at the same rate or lower. What we will do differently than we did last time was we will not put any put features in, and we will hedge exactly to the maturity date of our debt. And what that -- why that is significant is our FFO gets swung around because of this hedge is not deemed a perfect hedge. So you have this non-cash interest expense that hits us, one time it's up, one time it's down. That's just noise. And I don't like noise either. So I think you'll look to us to buy hedges that are perfectly tied to a maturity. And all things being equal, those should lead to perfectly hedges. And so then we'll strip out some of that FFO volatility that I wish I didn't have.

Thank you. The next question is from the line of Barry Oxford with Colliers. Please go ahead.

Thanks for the explanation on the hedge, Aaron. Looking at kind of your cost of capital and the arrows in your quiver, where does the stock price sort of come in? You're up 15% year-to-date. Again, you're up nearly 4% right now, 17.40 17.5. At what point do you say, hey, I'd be willing to do a decent-sized chunk, whatever number that is, in order to sort of kind of grow my asset base versus sales, which is just kind of disposition, which is just kind of running in place?

So it's a good question. It's one that I've been obsessing over for 2 years. And I'd say I've gone through sort of a bit of a cathartic process over the last 2 years. It's not been an easy environment. We are -- even though there are some people who don't like any G&A, I think we've done pretty -- and we have 11 people. We've squeezed the juice out of every lemon we had. We've worked really diligently to get things done with not having anything. There's a song by Oliver Anthony that says, I don't have a dollar, but I don't need a dime. And that kind of feels how it's been. We've done very -- we've done a tremendous amount of work with very little capital. I mean if you think about the $3.9 million that we raised, I mean I think we've raised if you -- since we've been public, in common shares, actual issuance, it's like $6 million total. Maybe, if that. I mean over 3 years. Yet we're now -- we just hit a new 52-week high not too long ago. We're apparently up today. Look, I don't want any more debt. I do want equity. We did have a conversation with a bank about the JV, about when we were looking at the JV, one of the last things we looked at was, let's see, maybe we could raise some money and I didn't want to raise money much. I wanted to raise $10 million, $15 million. I think that would be good. I could have probably tapered over some of the differences in the JV, maybe. But when we started talking, the model typically is -- and this is -- you guys know this well, but to any retail investor who's listening…

That all sounds reasonable, Aaron. Appreciate the color. Thanks.

Looks like we have one more question.

The next question comes from Steve Chick with Sebis Garden Capital LLP. Please go ahead.

Thanks for the color on the swaps, by the way. I think that's really helpful. Looking back at the JV transaction that's been tabled, the Miami battleship, with these deals and the way you want to structure it, the sellers would be kind of post money shareholders in the company. And from the terms that you kind of roughly outlined when you made the announcement last month, it looked like the deal would be very accretive and bullish for the stock. So I guess I'm curious as to the balancing act that they're doing and why -- what's kind of the obstacle for them to do a deal that -- where both sides benefit potentially so materially?

So what was known was the first half of the deal, and you're right, that would have been accretive. The shares would have been issued at an attractive price. We would have used a modicum of cash. We would have not incurred any debt in this. That would have been an accretive transaction. Assuming that we could take down the second half of that portfolio at that same cap rate, it would have -- all the way through, it would have been accretive, right? And be mindful, it was a balancing act. It wasn't like we were -- no party was ripping either's face off, right? It was balanced. It was accretive. They would be making money. They would -- have been in the money on that trade. We would have been in the money. I think a couple of things came into play. And look, I alluded to this and I own this, is that, for accounting reasons, the JV couldn't have still spelled out exactly the second half. And so I misunderstood or I wanted to be optimistic, and I thought that the agreement we had allowed us to take down the remainder of the same cap rate. And that wasn't that perspective. And I think that -- and that's fine. And I don't think they misled us at all. I think I just -- we just had a miscommunication, and sometimes that happens because you're focused on so many things. You got term sheets going back and forth with attorneys. It wasn't evident until some of the attorney language came out, was like, wait a minute, this isn't about -- the mechanics that they were suggesting wasn't the one we thought of. And so could I close over it? I mean, God, there's been so many probably…

Thank you.

All right, everyone. Thanks so much until next time. I encourage those who are reading this later on Seeking Alpha or wherever, or who are listening in, do send us your questions, do send us your critiques. I don't mind the tough questions. I will try to be as transparent as we can without breaking any rules. And I hope you guys have a good holiday and get some rest. Be well.

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