Participants

John Raney; COO & General Counsel; Modiv Industrial Inc

Aaron Halfacre; President, CEO, & Director; Modiv Industrial Inc

Ray Pacini; CFO, EVP, Treasurer, & Secretary; Modiv Industrial Inc

Robert Stevenson; Analyst; Janney Montgomery Scott

Bryan Maher; Analyst; B. Riley Securities

Gaurav Mehta; Analyst; Alliance Global Partners

Presentation

Operator

Ladies and gentlemen, good day, and welcome to the Modiv Industrial Inc. first quarter 24 conference call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to John Raney, Chief Operating Officer and General Counsel. Please go ahead, sir.

John Raney

Thank you, operator, and thank you, everyone, for joining us for Modiv Industrial's First 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, potential strategic partner discussions 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 said, I would like to turn the call over to Aaron.

Aaron Halfacre

Thanks, John. Everyone, I hope you're doing well in the first quarter right around the corner from fourth quarter results. I'm not in the traditional done the last couple of quarters have put it all out there in the earnings release for the most part. So instead of me jabbing away, first, let's go to Ray and then I'll catch up at the end. Ray?

Ray Pacini

Thank you, Aaron. I'll begin with an overview of our first quarter operating results, rental income for the first quarter was $11.9 million compared with $10.3 million in the prior year period. This 15.4% increase reflects the impact of 12 industrial manufacturing property acquisitions during 2023, partially offset by 14 noncore property dispositions in August 2023 and two additional non-core dispositions during the first two months of 2024 first quarter adjusted funds from operations or AFFO was $3.3 million, up 6.6% when compared with $33.1 million in the year. Ago quarter. The increase in AFFO primarily reflects the increase in rental income and a decrease in property expenses, which were partially offset by increases in straight-line rents and interest expense on a per-share basis. Affo was $0.29 per diluted share for this quarter, which reflects an increase of $1 million shares in the weighted average number of fully diluted common shares outstanding compared to $0.3 per diluted share in the year ago quarter. The increase in fully diluted shares is attributable to performance shares earned by management during 2023 and shares issued during April 2023 in connection with the property acquisition through an upgrade transaction, property expenses decreased 723,000 compared with the year ago quarter primarily reflecting the disposition of properties with modified gross leases and double net leases in August 2023. Excluding the impact of swap valuations, cash interest expense increased by approximately $1.3 million, reflecting grading greater borrowings outstanding during 2024. Given that during the year ago quarter, we only had an average of $157 million outstanding on our credit facility, while G&A increased by $91,000 compared to the year ago quarter. The increase was entirely due to nonrecurring costs for our transfer agent and legal fees related to the distribution of GIPR.'s common stock to our stockholders in January. We expect general and administrative expenses to be lower in future quarters since the first quarter of each year includes higher costs for audit and tax professionals, along with higher social security taxes for employees to reach the Social Security max owned tax during the first quarter.
Now turning to our portfolio, following the January and February dispositions of two noncore assets, our 42 property portfolio has an attractive weighted average lease term of 13.9 years, and approximately 34% of our tenants or their parent companies have an investment grade credit rating from a recognized credit rated rating agency of triple-B minus or better annualized base rent for our 42 properties totals $39.9 million as of March 31st, 2024, with 38 industrial properties representing 75% of ABR three office properties, representing 14% of ABR and one retail property, representing 11% of ABR.
With respect to our balance sheet and liquidity as of March 31st, 2020, four, total cash and cash equivalents was $18.4 million, and we had $281 million of debt outstanding. Our debt consists of $31 million of mortgages on two properties and a $250 million term loan outstanding on our $400 million credit facility. And we do not have any debt maturities until January 2027 based on interest rate swap agreements that we entered into during 2022, 100% of our indebtedness as of March 31st, 2024 are the fixed interest rate with a weighted average interest rate of 4.44 0.52% based on our leverage ratio of 48% at quarter end we are exploring various alternatives to extend or restructure for December 31st, 2020 for cancellation options on our existing swaps. As previously announced, our Board of Directors declared a cash dividend for common share of approximately $0.095 for the month of April, May and June 2024, representing an annualized dividend rate of $1.15 per share of common stock. This represents a yield of 7.72% based on the $14.90 closing price of our common stock. As of May first, 2024. I'll now turn the call back over to Aaron.

Aaron Halfacre

Thanks, Ray. I'd say pretty pretty straightforward quarter. And I think if we look at a lot of things coming out, very similar theme, a lot of volatility doesn't make sense to be actively acquiring too much. And those who have have distressed assets seem to be disposing of them for us. It was you know, was mainly a quarter of patients sort of like a duck on the surface of the water may look calm, but furiously sort of given the lags the bulk of that time being spent on the aforementioned strategic partner conversations. These take a lot of time, a lot of effort, lot of thinking, but primarily a lot of patients. And I think we feel constructive on the Company side, the best we've ever been in a position. We feel like we have no gun to our head. We don't have to do anything. We'd love to capital markets to open back up, but everyone on this call would love the same. It's been a it's been a long trough in our entire public existence has been eating nuts and berries and never having a steak. And so we're keeping keeping the faith and doing quite fine. It's a crazy time now for people to make decisions or was it three weeks ago. We had three other missiles coming over into the Middle East. We've got campus rights. We've got them well, I think it was December to the end of December, the market was pricing six cuts, and we've had a lot of volatility. And I think the stability that we've shown is where something I think we're I think we're still massively undervalued. That's why I'm I have a big, big personal position, and I'm very comfortable with that at about closing that gap and the NAV that we came out with you know, some people may have disdain for appraisals, but there a legitimate part of the real estate space. We chose two very high-profile legitimate appraisers to go out and appraise our portfolio of assets as well as our fixed rate mortgages. And we use that information to come up with.
And maybe I think if you look at the history of our NAV and you define, you know, along a lot of them in our S-11 that we did two years ago, but obviously we came out with an NAV last year. I think I think directionally they show the right trend right on unlike say, the reader as read out there in the non-traded space, our valuations have gone down for last year. So that that's that passes the smell test, in my mind perspective because we have had wider cap rates and higher rates. So you should see that in your appraisals some. But I think it just clearly shows that our lack of float that the fact that the vast majority of our legacy investors do not even pay attention to the share price do not even remotely considered trading at.
And if you look at a percentage of our shares outstanding often is what trades. Ours is like a 10th of what a normal years. So we have very thin volume. And we understand that we have to address that. We've had many conversations with people in the institutional space who really like what we're doing, like our theme, but there's no way right now for them to find a way to get in. And so we just have to be patient and we don't we don't have our ATM open right now. We're not looking at that. We did tried out on prior quarter just charter grease the skids, but we're being patient operating with what we have on minding our P's and Q's saving every penny, we can get something done and we're optimistic that we can get something done. We just don't know when it will happen. This is this environment again to say this week for the fifth time requires patience. But that said, optimism is high. Some focus is strong and ready for some Q&A. Operator?

Question and Answer Session

Operator

(Operator Instructions) Robert Stevenson, Janney Montgomery Scott.

Robert Stevenson

Please go ahead and good morning, guys. Where are you on the color asset in St. Paul. So it looks like a sale or a release at this point.

Aaron Halfacre

Great question, Tom. I think we're we have been actively exploring both of those. I candidly, the reason why I don't have enough progress on that yet is we still haven't got it fully rejected from Clara. They're they have we've been in contact with them and we're waiting for them we presume that they will fully reject it, but they haven't yet. And until such time that they do it kind of hop sizes on the margin. That said, we've been proactive on speaking to brokers in that market, how we house in developing strategies. We've spoken to other growers as well, who have who know the property interests interest a little interesting fact is the US Foods has a significant presence there. And in the original context, they were going to be providing micro greens to US Foods. And so that has spurred a lot of, let's say, seems to be some interest. That said, it's a that's a very unique space. And in terms of vertical growers, the building itself is a great box. I mean, they over the over improved it. And so I think upwards of $15 million of capital improvements they put into this property. And there's also some equipment that we had purchased from them originally that's in there. So we're off in addition to looking at sell leases as a vertical or were also contemplating the concept of sell leases, an empty box and in that part would require us to sell off the equipment. So we're actively exploring all the things were a bit of a holding pattern, waiting for them to reject. And then after that we'll probably be able to get a little bit more momentum.

Robert Stevenson

Are they currently paying, you know, so So there so they haven't gotten out and they have a debate. They're not in.

Aaron Halfacre

It's not in it to go gain it, but it is not up in the bankruptcy proceedings.

Robert Stevenson

Okay. And then on the I believe the window just opened for the tenant purchase option on the state of California asset in Rancho Cordova, what's the likely play there at this point?

Aaron Halfacre

Yes, it wasn't. I'm not going to take it. Yes, we reached out to them about last week and the <unk> data there, they're having, they have a massive media scheduled to discuss it. So we probably won't hear back if they're going to start their auction process for a little bit more time, I'll call it yield this quarter. Second quarter, probably on our view is a couple of things that are on our calculus which may or may not be their calculus independently, but from ours, when they originally did it, they were covering a big budget surplus. That's not the case.
Now on the purchase price isn't going to move the needle in terms of their budget. But we think about those things in terms of there's a policy political element in terms of when do they do this. And our view is when we talk to them as it was prior late last year and they indicated that they were they were they were likely to start the process in May, we call them again. And if it's it's a bit on the docket for the discussion, how to have a good day, they have to go through their real estate department, which has very finite resources in terms of people who can do acquisitions with that, it goes to their acquisitions department and then they come up with the valuation mechanism which we have one embedded. And basically, there's a price in the belief that if it's plus or minus 10% of that, that can they can just move forward if it's outside of that price range, then they have to make we have a back-and-forth process between us if we wanted to agree to do this different price. I don't see any issues with that mechanism from there, it then goes to on the various state departments to get approval. And then once it's approved, it's put on the budget and then the budget would not get approved until next year. So they clearly told us the process would take at least 12 to 14 months whenever they did initiate it. And our view is if they tell us they're going to initiate. It will be patient if they say they're not sure they're going to initiate it because they have a couple of year window to do it then we're probably going to take it to market on because it does have been, you know, it's a triple-A rated credit or at least a double A. plus rated credit and it's got term. And so no sense in holding it, particularly if we get rid of the Costco property because they work, they were down to the last bits. But so I guess?
Well, I assume we'll have a better update for the Knick on second quarter earnings.

Robert Stevenson

Okay. And then last one for me. How significant are the acquisition opportunities at similar rates to the Tampa acquisition. If you had access to more decently priced capital at this point, I mean, is it a lull like we're seeing in other asset classes? Or is there a lot of opportunity and it's just a matter of the capital for you guys.

Aaron Halfacre

So I think there is a little there's less being shown on Then there was a year ago some, but there is type I saw great that was a great opportunity, probably going to be in a cap, but it was $100 million. It was a multi site portfolio, not anything that we're talking about just a straight-up brand-new sale leaseback. So you've definitely put money to work from, I think, you know, the ones, the logic for us and when you think about industrial manufacturing sale leaseback, which is really what you're seeing, you're not seeing hardly any existing leased properties be put on the market right now, occasionally, but not not much, then they're more like HVAC, guys and things like that, which to me is not necessarily that strategic. But on the strategic sale leasebacks, the Genesis to decide that you want to move this off balance sheet and take money is a lengthy one, right? If it was assuming that we haven't had much in the way of private equity transactions that take out the small middle market companies in the last 18 months because it doesn't paper for them. They're not a catalyst because typically when a PE shop gets it that that's one of the first things they'll do. And if you have an owner-operator who decides they want to free it up, it's a lengthy process to say, hey, wait a minute. This is my this is my goose that lays the golden egg. Why would why would I sell this right? And it's a concept Believe it or not, that's pretty foreign for some people, even even in the day and age where we've had sale leasebacks for generations from. So that journey, it's probably takes upwards of at least 12 months, probably 24 months for them to make the decision. And so when we were acquiring assets last year, those were decisions made in 21 or 22. And you know, the environment was different and so they had kind of started. The momentum was going was committed when you have deals coming out now from I think it's suggestive of they have a real need for the capital. In the case of the Photonics one, we did they are doing an actual there. They're doing an international merger. And so they found this as a better source of capital than trying to get bank lending so they could they could get scale. And so that's why it worked right on if it's somewhere where someone's wanting to do this and they just want to cash it out and they're trying to do a dividend out or do something like that. Those are those are red flags because come to us in this environment. So we expect a lull and then the volume. But that said, you know, I know they're all a snow, but north of 7.5, I think you could I could I could I could replicate the size of the company, probably if I had the gap.

Robert Stevenson

Okay. That's helpful. Appreciate the time this morning, guys.

Aaron Halfacre

Thank you.

Operator

Bryan Maher, B. Riley Securities.

Bryan Maher

Thanks. My first question is just answered in kind of how deep the acquisition pipeline kind of could be. But when we look at your your release this morning and you talk about the three ships scenario, can you assign any probability as to how you think it plays out I mean, I know you discussed it, you know, kind of being in the hang of it, but where's your head thinking that this ends up?

Aaron Halfacre

Well, attorneys won't. Let me give you any probabilities. So I won't come back. I think the four scenarios that are laid out are kind of like I don't have any neither do I or do these other two participants have any forced deadline. So I think that's the right environment to be in is that we're all on our own regards capable of weathering the storm. And so there's no need to do something that is detrimental to one party and the beneficial.
The other income. I think if that were the case, then that no, it would be far easier to do a deal from so that I can say to start off with that. So I think dialogues with these parties has been done. We didn't just start in the last few months. We know these portfolios quite well. We have had on-and-off dialogues with these portfolios since we've been public. I think the dialogue that we had in the last call it four months or so three months or so have been really specifically about.
Okay, let's let's roll up our sleeves. I can tell you that though, Bill, the parties have shared information about their portfolios to partner. We have a working model that allows us to own to see the impact to two the combined in enterprise. We have actively spoken about cap rates and share prices and governance mechanics. And so that I can tell you that there has been some legal dollars spent. So I would say this isn't, you know, a wet finger in the wind. And but, you know, if you can tell me the probability of geopolitical risk and economic risk and and the election cycle, then I can probably dial it in better for you, but it's just really, you know, I literally had a CEO. of another read text me yesterday. It goes is this must be what clicks and feels like because it's just been a it's been a unique market.
Now that said, we're all very constructive. I think the portfolios are very complementary. There's one portfolio, it is it's a little bit lumpier some, but it's got some real great sort of center of excellence assets in it. And the other portfolio is smaller in size, but similar to last has more diversification. I think from an industry component, they make sense. I think from a from a they're both, candidly, they're both sort of wants their existing portfolios, but they have good leases and so look at it, we're going to be working at this and go, candidly speaking to one of the Journeys this probably this quarter. That's what we said. Here's but all we're going to say until next quarter. And in fact, we're not actually going to go to Mary just because we're in the throes of discussions. And we don't I don't want to be openly talking about it much. But again, I can't give you a probability just because the market is just I mean, in the last 60 days, our share price has been north of 16 in the fourteens and the fifteens, if I can yo-yo them. So we'll keep at it and hopefully, we'll come up with something.

Bryan Maher

That's helpful. But buried in that commentary. I don't think I heard anything regarding kind of the size of the portfolios. I mean, can you give us some aspect? Is it 50? Is it 100 is it 500? I mean what zip code are we talking about the size of these two entities?

Aaron Halfacre

That's a very great question. I can give you an answer, and that's six per share.

Bryan Maher

Yes. Thank you.

Operator

Gaurav Mehta, Alliance Global Partners.

Gaurav Mehta

Yes, thank you. Good morning. I wanted to follow up on the partnership discussion you had to think about this looking at different partnerships. Do you anticipate the quality of the assets in the partnership to be comparable to what you would have in your wholly owned portfolio.

Aaron Halfacre

And I'd say that some I would say that the quality is very comparable. If you think about manufacturing, you know, sometimes you have rated credits sometimes you don't I'd say I think the thing is I wouldn't I can't really discern one being lower quality life. It was I wouldn't be talking to them, candidly, I'd say they're all comparable quality. Some might be stronger tenants, but with shorter leases, some may be stronger tenants with better, better lumpy or bigger assets. Some might be down perfectly fine tenants but more diversification. I would say that the best thing that I see from it, if it were to come about any in either one direction or the other through a direction is it is it very complementary? I think there's there's to me I can sleep well at night on any combination. I certainly and I think they think the same on I think the fact that we're having this conversation is really related to the fact that people are from in besides the political rhetoric that people understand that manufacturing is a viable asset class. I don't think we know that until Carrefour really had done it in a truly dedicated space. And there are certainly people who have been buyers of it for a long time, but have not gone pure play at least not as of yet. And so I think they see motive is a natural end state. And because these portfolios, if they they would eventually be selling them anyway. It's just a matter of time. And so I think there's a complementary fit there. And I think you know, it is conducive to getting to that more scale and index inclusion and institutional ownership, which would create more flow, which allow more people to actually participate in the strategy and presumably with less our equity volatility as a result. And so I think there's a lot of different benefits, but I think the portfolios are very complementary on the very it seems very strategic. And I think it would open the door to others. I mean, there was a there was a fourth Battleship and that we've talked to at length and just given where they're at and there and their caps that they just couldn't. They just couldn't be a participant at this time. And so, you know, that's that's us someday. Maybe if we're if we're successful here, God willing and we've gotten more size and I wouldn't be surprised that we wouldn't have a conversation with that with that other portfolio that fourth balance ship it down the road. So there is opportunities out there uniquely enough about manufacturing most of the manufacturing portfolios with the exception of what store owns and what what o now owns from what it acquired from from from whatever they were. So I can think of them from being Spirit skewing some besides those, there's most of the portfolios are in private hands. And so having a public currency longer term, I think is something to be looked at strategically.

Gaurav Mehta

Okay. And could you talk about the extent of your equity possible for this portfolio? So are we talking like common stock or like like OP units?

Aaron Halfacre

Yes, I look at those ubiquitously. Candidly, one provides tax protection, but these are institution players. So generally speaking, and I would I mean, I'm not ruling it out. But generally speaking, they're less tax sensitive by the nature of their money on. But to be clear, we're talking about sort of that common equity, our focus.

Gaurav Mehta

Thank you that's all I had. Thanks so much.

Aaron Halfacre

Thank you.

Operator

(Operator Instructions) As there are no further questions I would now hand the conference over to Aaron Halfacre for his closing comments.

Aaron Halfacre

Thanks, operator. Thanks, everyone. I'm trying to be Canada's Best. We can trying to get you guys know a real dialed in on what we're doing. We think, oh, I think a lot of environments or operators are uncomfortable or transparency. And if you don't like what you hear, you're going to make a decision either way. If you know, I think we're delivering results. We're being transparent, so you can tried to the best you can understand where we're headed. What we're thinking from a I'm very confident that we have the right team to get get things done. And I have no no ability to predict the markets. And so like you are rolling with the punches. And but I think I think we're onto something in this Company and look forward to talking to you again at the next earnings release. Thanks, everyone.

Operator

Thank you. The conference of Modiv Industrial l has now concluded. Thank you for your participation. You may now disconnect your lines.