Q2 2024 Modiv Industrial Inc Earnings Call
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Operator: Good day, and welcome to Motive Industrial Link 2Q24 conference call. All participants will be in a listen-only mode. Should you need a distance, please signal a conference specialist by pressing star followed by zero.
Operator: Good day and welcome to Modiv Industrial Inc.'s QQ24 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star followed by zero. On today's call, management will provide the prepared remarks, and then we will open up the call for your questions. Ask a question, and let's make a star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key, and to withdraw your question, please press star then. 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.
Speaker Change: Good day, and welcome to Modiv Industrial Inc's QQ24 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star followed by zero.
Operator: On today's call, management will provide the prepared remarks, and then we will open up the call for your questions. So, ask a question, and let's make a star of them one on your touch-tone phone. If you're using your speaker phone, please pick up your headset before pressing the key. And to withdraw your question, please press star, then two. Please note, this event is being recorded.
Speaker Change: On today's call, management will provide the prepared remarks, and then we will open up the call for your questions.
Speaker Change: To ask a question, analysts may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key. And to withdraw your question, please press star, then two.
John Raney: I would now like to turn the conference over to John Rainey, Chief Operating Officer and General Counsel. Please go ahead.
Speaker Change: 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.
John Raney: Thank you, operator, and thank you, everyone, for joining us for Motive Industrial second quarter 2020 for Ernie School. We issued our earnings release before market open this morning, and it's available on our website at Motive.com. I'm here today with Aaron Halfaker, Chief Executive Officer, and Ray Puccini, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we'll open up the call for your questions.
John Raney: Thank you, operator. Thank you, everyone, for joining us for Modiv Industrial's second quarter 2024 earnings. We issued our earnings release before the 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 Raymond 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.
John Rainey: Thank you, operator, and thank you, everyone, for joining us for Modiv Industrial's second quarter 2024 earnings call.
Aaron Halfacre: Deem sort of light assembly is manufacturing, and I don't, you know, I don't look at flex spaces, um, as, as manufacturing, we're looking for things that are really durable, durable in terms of their products in terms of where they're in their market segment. So that narrows the universe, but it's been pretty choppy, as you can expect. I mean, for instance, on the Tampa-based deal, we did, you know, the reason why we were comfortable doing that one, and obviously, it had, you know, a good client list that we were buying their products. They were making something that was sort of very durable and needed for infrastructure-based needs, but more importantly, the money from the sell lease back went, and we tied it to this.
Speaker Change: 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 Raymond Pacini, Chief Financial Officer.
Raymond Pacini: That is correct. Okay.
Raymond Pacini: Sure. I think the credit profile, IG, and non-IG,
Speaker Change: On today's call, management will provide prepared remarks and then we'll open up the call for your questions.
John Raney: 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, joint ventures, and strategic partner discussions, are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those consequences by such forward-looking statements.
Operator: Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines at this time.
Speaker Change: Before we begin, I would like to remind you that today's comments will include forward-looking statements under the federal securities laws.
Speaker Change: Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, or other comparable words and phrases.
Speaker Change: Statements that are not historical facts, such as statements about our expected acquisitions or dispositions, joint ventures, and strategic partner discussions are also forward-looking statements.
Speaker Change: Our actual financial condition and result of operations may vary materially from those contemplated by such forward-looking statements.
John Raney: Discussion of the factors that could cause our results to differ materially from these forward-looking statements contained in our SEC findings, including our reports on Form 10-K and 10-Q.
Speaker Change: Discussion of the factors that could cause our results to differ materials from these forward-looking statements 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 Halfacre. Aaron?
John Raney: That said, I would like to turn the call over to Aaron Halfaker.
Aaron Halfacre: Eric. Thanks, John.
Aaron Halfacre: Hello, everybody. Thanks for joining our second quarter conference call. Most of you would rather be tracking the stocks on your watch lists in this long-home market, so our goal is to try to make this a snappy one.
Speaker Change: Bye.
Aaron: Thanks, John .
Aaron Haffrichter: Hello everybody, thanks for joining our second quarter conference call. Most of you would rather be tracking the stocks on your watch lists in this volatile market, so our goal is to try to make this a snappy one. I said all my prepared remarks like I normally do in an earnings release, so let's just jump straight to Ray and then we'll go to Q&A. Ray?
Aaron Halfacre: I said all my prepared remarks, and I can normally do an Arnie's release, so let's just jump straight to Ray, and then we'll go to Q&A, right?
Raymond Pacini: Thank you, Aaron. I'll begin with an overview of our second quarter operating results. Reynolds income for the second quarter was $11.3 million, paired with $11.8 million in the prior year period. This 4% decrease primarily reflects a decrease in tenant reimbursements related to 13 properties sold to GIPR in August 2023, which included properties with modified gross leases and double met leases. Reynolds income for the quarter also reflects the impact of 12 industrial manufacturing property acquisitions during 2023, partially offset by 16 dispositions of nine core properties from August 1, 2023, to February 28, 2024. Second quarter adjusted funds from operations for AFO was $3.9 million, up 17% when compared with a $3.3 million in the year-ago quarter.
Ray Ficcini: Thank you, Aaron. I'll begin with an overview of our second quarter operating results.
Ray Ficcini: Rental income for the second quarter was $11.3 million compared with $11.8 million in the prior year period.
Ray Ficcini: Rental income for the quarter also reflects the impact of 12 industrial manufacturing property acquisitions during 2023.
Ray Ficcini: Second quarter adjusted funds from operations, or AFFO, was $3.9 million, up 17% when compared to the $3.3 million in the year-ago quarter.
Raymond Pacini: The increase in AFO primarily reflects an 834,000 decrease in property expenses and 179,000 decrease in DNA, which were partially offset by the $493,000 decrease in rental income. The increase in AFO was impacted on a per share basis by a 781,000 increase in diluted shares of standing, resulting in AFO per share of 34 cents compared with 31 cents in the prior year period. The current period of AFO includes non-recurring state and property tax refunds of $138,000 or one cent per share, and a decrease in DNA expenses of approximately $179,000 or two cents per share.
Ray Ficcini: The increase in AFFO was impacted on a per share basis by a 781,000 increase in diluted shares outstanding, resulting in AFFO per share of $0.34 compared with $0.31 in the prior year period.
Ray Ficcini: The current period AFFL includes non-recurring state and property tax refunds of $138,000 or 1 cent per share.
Ray Ficcini: and a decrease in G&A expenses of approximately $179,000 or 2 cents per share. Due to timing of expenses that will be reflected in the third quarter.
Raymond Pacini: The timing of expenses that will be reflected in the third quarter. If our repurchase of 780,000 shares from First City and Bestman Group on August 1, that occurred at the beginning of the quarter. Proformer AFO would have been $0.37 per fully diluted share. Cash interest expense for the quarter was approximately $25,000 greater than the comparable period of 2023 when we drew the final $80 million of our term loan in mid-April 2023. The current period expense included $550,000 of unrealized non-cash net losses on swap valuations, which increased interest expense. While the prior year period included $3.7 million of unrealized gains on swap valuations, which decreased interest expense.
Ray Ficcini: If our repurchase of 780,000 shares from First City Investment Group on August 1st had occurred at the beginning of the quarter, pro forma AFFO would have been $0.37 per fully diluted share.
Ray Ficcini: The current period expense included $550,000 of unrealized non-cash net losses on swap valuations.
Raymond Pacini: Now turning to our portfolio, following the July 2024 acquisition of a photonics manufacturing property located in the Tampa, MSA, our 43-property portfolio has an attractive weighted average lease term of 13.6 years. Davis. Though the majority of our tenant credits are private, approximately 34% of our tenants or their parent companies have an investment grade rating from a formally recognized credit agency of triple B minus or better. Analyze base rent for our 43 properties; it'll $40.5 million on a pro forma basis as of June 30, 2024. With 39 industrial properties representing 76% of ABR and four nine core properties representing 24% of ABR.
Ray Ficcini: Though the majority of our tenant credits are private, approximately 34% of our tenants or their parent companies have an investment grade rating from a formally recognized credit agency of BBB- or better.
Ray Ficcini: Analyze base rent for our 43 properties.
Ray Ficcini: totals $40.5 million on a pro forma basis as of June 30, 2024, with 39 industrial properties representing 76% of ABR and four non-core properties representing 24% of ABR.
Raymond Pacini: With respect to our balance sheet and liquidity, as of June 30, 2024, total cash and cash with equivalents were $18.9 million, and we had $280 million of debt outstanding. Our Tampa property acquisition and a repurchase of $780,000 shares from First City reduced our cash position at $3.2 million following quarter end. Our debt consists of 31 million of mortgages on two consolidated properties and 250 million of outstanding borrowings on our 400 million credit facility, and we do not have any debt maturities until January 20, 20, 7. Based on interest rate swap agreements, we entered into during 2022.
Ray Ficcini: Our debt consists of $31 million of mortgages on two consolidated properties and $250 million of outstanding borrowings on our $400 million credit facility, and we do not have any debt maturities until January 2027.
Raymond Pacini: 100% of our indebtedness is the June 30, 2024. How the fixed interest rate will weigh the average interest rate of 4.52%, based on our leverage ratio of 47% at quarter end. We are actively evaluating the changing interest rate environment and presently intend to enter into new swap agreements on and before December 31, 2024, to continue our full cash hedge position.
Ray Ficcini: 100% of our indebtedness as of June 30, 2024 held a fixed interest rate with a weighted average interest rate of 4.52% based on our leverage ratio of 47% at quarter end.
Ray Ficcini: We are actively evaluating the changing interest rate environment and presently intend to enter into new swap agreements on or before December 31st, 2024 to continue our full cash hedge position.
Raymond Pacini: As previously announced, our Board of Directors declared a cash dividend for common share of approximately 9.5 cents for the month of July, August, and September, 2024, representing an annualized dividend rate of $1.15 per share of common stock. This represents a yield of 7.79%, based on the $14.76 closing price of our common stock as of yesterday.
Ray Ficcini: This represents a yield of 7.79% based on the 1476 closing price of our common stock as of yesterday.
Aaron Halfacre: I'll turn the call back over to Aaron. Thanks, Ray.
Ray Ficcini: I'll now turn the call back over to Aaron.
Aaron Halfacre: Okay, the fun part begins here where you guys get to ask your questions, and I tend to talk too much. But before we do jump to Q&A, I want to address two things. Mr. Maher, I know my missives tend to be dramatic, but they're not meant to be. They're meant to be cryptic, though. And the reason is that, you know, there are a lot of constituents out there, and so there may be some messaging in those. They're so cryptic, though, that sometimes they could be confusing.
Aaron: Thanks, Ray.
Aaron: Okay, the fun part begins here where you guys get to ask your questions, and I tend to talk too much, but before we do...
Aaron: jump to Q&A. I want to address two things.
Aaron: Mr. Maher, I know my missives tend to be dramatic.
Aaron: But they're not meant to be. They're meant to be cryptic, though. And the reason is, is that...
Aaron: There may be some messaging in those.
Aaron Halfacre: So, to that end, Mr. Stevenson, I want to point out that the portfolio in the city of Miami, just to be clear, it is diversified in its geography. So, with that operator, let's go to Q&A.
Aaron: They're so cryptic, though, that sometimes they can be confusing. So to that end, Mr. Stevenson, I want to point out that the portfolio in the JV is not focused on the city of Miami. Just to be clear, it is diversified in its geography.
Speaker Change: So with that, operator, let's go to Q&A.
Operator: Chris, thank you. Ladies and gentlemen, just to reiterate, to ask a question, perhaps a star one on your keypad, and you'll hear a confirmation song. And if you're using speaker equipment, you may need to pick up your handsets before questions.
Speaker Change: Thank you. Ladies and gentlemen, just to reiterate, to ask a question, press star 1 on your keypad and you'll hear a confirmation tone. And if it's your question, please press star then 2. And if you're using speaker equipment, you may need to pick up your handset before pressing the keys.
Operator: and the keys.
Gaurav Mehta: And our first question comes from the line of Gaurav Mehta with Alliance Global Partners. Please proceed. Yeah, thank you. Good morning.
Speaker Change: And our first question comes from the line of Gaurav Mehta with Alliance Global Partners. Please proceed.
Aaron Halfacre: I wanted to ask you on the JV, wondering if you were willing to disclose any more details on what the size of the JV is and do you expect to derive any management fee, property management fee once you get into the JV? So, appreciate the question. Figure you get it. You should generally assume that I will try to tell you everything I can.
Gaurav Mehta: Yeah, thank you. Good morning. I wanted to ask you on the JV, wondering if you were willing to disclose any more details on what's the size of the JV and do you expect to derive any management fee, property management fee, once you get into the JV?
Speaker Change: So...
Speaker Change: Appreciate the question. Figured you'd get it.
Aaron Halfacre: So, I will not tell you statistics on that portfolio at this stage. And I have my reasons, so you'll trust me on that. As it relates to the JV, we're not doing this sort of a fee generation thing. So, this is a participation. So, we will readily be participating in the income and expenses, and we're not we are not looking to make any fees on it at all. Okay.
Speaker Change: Generally assume that I will try to tell you everything I can.
Speaker Change: So I will not tell you statistics on that portfolio at this stage.
Speaker Change: And I have my reasons, so you'll have to trust me on that. As it relates to the JV fee, though, we're not doing this as sort of a fee generation thing. So this is a participation.
Speaker Change: So we will readily be participating in the income and expenses, and we are not looking to make any fees on it at all.
Aaron Halfacre: Second question, maybe big picture, any color on what you guys have seen in the transaction market for industrial manufacturing? Yeah, just, I mean, you're seeing one off continue this whole year. It's been one off. You'll get something comes up. And you know, sometimes the cap rates look attractive, but there's a reason they look attractive, but they're not really attractive. It's the credit's pretty thin, or they're desperate for cash, or something like that. Other times, on the more solid ones, you know, they're not, and they're not in a rush to sell, than the cap rates are too tight.
Speaker Change: Okay, second question, maybe big picture, any color on what you guys are seeing in the transaction market or industrial manufacturing?
Speaker Change: Yeah, just, I mean, you're seeing one-offs continue this whole year. It's been one-offs, you'll get, something comes up.
Speaker Change: And, you know, sometimes the cap rates look attractive, but there's a reason they look attractive, but they're not really attractive. The credit's pretty thin or they're desperate for cash or something like that. Other times...
Speaker Change: on the more solid ones, you know, they're not and they're not in a rush to sell, then the cap rates are too tight. So it hasn't been, it's been a really
Aaron Halfacre: So, it hasn't been, it's been a really, you know, not on like our stock. It's been a really choppy market for industrial manufacturing.
Aaron Halfacre: Remember, we're pretty picky. You know, I, I don't, I don't look and deem sort of light assembly as manufacturing, and I don't, you know, I don't look at flex spaces. You know, as, as manufacturing, we're looking for things that are really durable, durable in terms of their products, in terms of where they're in their market segment. So, that narrows the universe, but it's been a pretty choppy, as you can expect. I mean, it's just, I mean, if you, like for instance, on the Tampa-based deal we did, you know, the reason why we were comfortable doing that one, and obviously it was, it had, you know, a good client list that we're buying their products there and making something that was sort of very durable and needed for infrastructure-based needs.
Speaker Change: you know, not unlike our stock, it's been a really choppy market for industrial manufacturing. Remember, we're pretty picky, you know, I don't, I don't look and
Speaker Change: Dean sort of light assembly is manufacturing. I don't you know, I don't look at flex spaces
Speaker Change: you know, as manufacturing. We're looking for things that are really durable, durable in terms of their products, in terms of where they are in their market segment. So that narrows the universe, but it's been a pretty choppy, as you can expect. I mean, it's just been, I mean,
Speaker Change: If you, like for instance, on the Tampa-based deal we did,
Speaker Change: You know, the reason why we were comfortable doing that one, and obviously, it had...
Speaker Change: You know, a good client list that were buying their products, they were making something that was sort of very durable and needed for infrastructure-based needs. But more importantly, the money from the sale leaseback went, and we tied it to this.
Aaron Halfacre: But more importantly, the money from, from the, the sell Eastback went and we tied it to this, to make an acquisition overseas; it did the same thing. So, by doing this acquisition, they were more than doubling their top line and really getting synergies. So, to us, that was a smart use of capital versus if it had been a PE shop who was just stripping out cash. And so, there's so many different motivations into why we choose or why we think is, there's a good market or bad market for assets. And right now, it's just been, it's been hit or miss.
Speaker Change: to make an acquisition overseas that did the same thing. So by doing this acquisition.
Speaker Change: They were more than doubling their top line and really getting synergies. So to us, that was a smart use of capital.
Speaker Change: versus if it had been a P.E. shop who was just stripping out cash. And so there's so many different motivations into why we choose or why we think it's...
Aaron Halfacre: So, we look, but you know, there's not a lot of volume.
Speaker Change: There's a good market or a bad market for assets, and right now it's just been hit or miss. So we look, but there's not a lot of volume. It's not like you're buying Walgreens.
Gaurav Mehta: It's not like you're buying Walgreens. Okay, thank you. That's all I had. Thanks.
Speaker Change: Okay, thank you. That's all I have.
Rob Stevenson: The next question comes from the line of Rob Stevenson with Jenny Montgomery Scott. Please proceed.
Speaker Change: Thanks.
Speaker Change: The next question comes from the line of Rob Stevenson with Jannie Montgomery Scott. Please proceed.
Rob Stevenson: A good morning. Aaron, can you talk about the expected timing on the non-Miami centric battleship deal? Is this likely a third quarter event if it happened? Yes. Okay. I think if it pulls together on the pace we're working on, it'll happen before the queue. Okay. Perfect.
Rob Stevenson: Good morning. Aaron, can you talk about the expected timing on the non-Miami-centric battleship deal? Is this likely a third quarter event, if it happens?
Speaker Change: Yes. I think if it pulls together on the pace we're working on, it'll happen before the Q, is my guess.
Rob Stevenson: And then, can you talk about what is your role? Are you going to be in charge of managing these assets? Is it essentially a passive sort of ownership interest? Like how should we be thinking about these in your involvement? Yeah, we'll plug them into our ecosystem. We'll manage them in the PE Sponsor. We'll actually be stepping into the position of a prior joint venture partner that was that had or has a much smaller percentage than right now than what we are anticipating acquiring. So it'll be a more equitable partner relationship, but we will do the management on a day-to-day basis, including probably management that counting all those aspects.
Speaker Change: Perfect. And then can you talk about what is your role? Are you going to be in charge of managing these assets? Is it essentially a passive sort of ownership interest? Like how should we be thinking about these in your involvement?
Speaker Change: Yeah, we'll plug them into our ecosystem, we'll manage them, the PE sponsor.
Speaker Change: will actually be...
Speaker Change: stepping into the position of a.
Speaker Change: of a prior joint venture partner that was, that had
Speaker Change: or has a much smaller percentage than right now than what we are anticipating acquiring. So it'll be a more equitable partner relationship, but we will do the management on a day-to-day basis.
Speaker Change: including, you know, property management, accounting, you know, all those aspects. And the private equity sponsor will continue in what I would characterize as more of a passive role.
Rob Stevenson: And the private equity sponsor will continue in what I would characterize as more of the passive role. Okay.
Rob Stevenson: And the materiality of the deal isn't such that, given your current size, that you need to get any type of approvals other than from the board for the share issuance. That is correct. Okay.
Speaker Change: Okay, and the materiality of the deal isn't such that given your current size that you'd need to get any type of approvals other than from the board for the share issuance?
Rob Stevenson: And then, sort of switching gears here a bit.
Speaker Change: That is correct.
Speaker Change: Okay.
Rob Stevenson: How should we be thinking about First City going forward? Is this just a staggered sort of deal? Are they want to sell out of their remaining shares and units and going forward now? Do they own primarily shares or units at this point? Great questions. First City is a wonderful investor. We think highly of them and have had a dialogue with them for the last two years or two plus years. They're very smart investors. So even though on the surface this was smart for motive, they have a history of making money in the space that they deal with, which tends to be in the automotive dealership space.
Speaker Change: And then, sort of switching gears here a bit, how should we be thinking about First City going forward? Is this just a staggered sort of deal, or do they want to sell out of their remaining shares and units, and going forward now, do they own primarily shares or units at this point?
Speaker Change: Great questions. First City is a
Speaker Change: is a wonderful investor. We think highly of them.
Speaker Change: and have had a dialogue with them for the last two years or two plus years. They're very smart investors. So even on the surface,
Speaker Change: This was Smart for Modiv. They have a history of making money in the space that they deal with, which tends to be in the automotive dealership space.
Rob Stevenson: So they now have only common shares. They are still a significant shareholder. So they have a meaningful size. They have had those shares that were not; they were converted from OP units to shares back, I want to say, in January. So they've had those at the possession. So those are freely createable. They're allowed to do what they want. Obviously, I don't ask them about their business. So if they are going to stay longer term, I don't know. We hope they do. We think the world of them. And this was just a transaction that met the needs of both parties.
Speaker Change: They now have only common shares. They are still a significant shareholder. So, you know, they have, you know, a meaningful size. They have had those shares.
Speaker Change: that were not, you know, they were converted from OP units to shares back, I want to say, in January .
Speaker Change: So they've had those at their possession, so those are freely tradable, they're allowed to do what they want.
Speaker Change: Obviously, I don't ask them about their business, but they...
Speaker Change: If they are going to stay longer term, I don't know. We hope they do. We think the world of them. And this was just a transaction that, you know, met the needs of both parties. So they have no more OP units, though, and this ended the OP units, which
Rob Stevenson: So they have no more OP units, though. And this ended the OP units, which was the original cycle of the 721 transaction.
Rob Stevenson: Okay, that's helpful.
Speaker Change: which was the original cycle of the 721 transaction.
Rob Stevenson: And then how are you thinking about the most appropriate time to monetize the key asset? Is that a 24 event at some point in time? Is that a wait for rates to come down and probably more likely a 25 event? How should we be thinking about that in the current market market? Chairman. Yeah, I think, you know, you know, that that is a great property with a great lease, with a great tenant. And in my view, in this rate environment, you would only get punished. You wouldn't get the credit that you do. I think, you know, it's a natural candidate, along with our, you know, Costco and OES as recycling, because they are non-core.
Speaker Change: Okay, that's helpful. And then how are you thinking about the most appropriate time to monetize the?
Speaker Change: the key asset. Is that a 24 event at some point in time? Is that a wait for rates to come down and probably more likely a 25 event? How should we be thinking about that in the current market environment?
Speaker Change: Yeah, I think, you know, um, you know, that
Speaker Change: That is a great property with a great lease with a great tenant
Speaker Change: And in my view, in this rate environment, you would only get punished. You wouldn't get the credit that you're due. I think...
Speaker Change: You know
Speaker Change: It's a natural candidate, along with Costco and OES, as recycling, because they are non-core.
Rob Stevenson: You know, we, Costco, as we know, just previously, the slows is underway. The other tenant, OES, is indicated that they are, as I mentioned before, interested in exercising their option, purchase option. It's an arduous process for them as a government entity, so we don't know until we know. But those are probably their natural first candidates. And then, you know, at the right time we would execute on Kia. And I think because there's a substantial embedded gain in that, we'd have to be very tied very much to a 1031 exchange. And so, you know, that could be new assets out there, another portfolio; it could be, you know, the second half of this aforementioned JB. I think there's a lot of opportunities to naturally sequence that.
Speaker Change: Costco is, as we know, just previously disclosed is underway. The other tenant, OES, has indicated that they
Speaker Change: They are, as I mentioned before, interested in exercising their option, purchase option. It's an arduous process for them as a government entity, so we don't know until we know.
Speaker Change: But those are probably the natural first candidates. And then, you know, at the right time, we would execute on Kia.
Speaker Change: because there's a substantial embedded gain in that we'd have to be very it has to be tied very much to a 1031 exchange.
Speaker Change: And so, you know, that could be.
Speaker Change: New assets out there, another portfolio, it could be the second half of this aforementioned JV. I think there's a lot of opportunities to naturally sequence that. But I have zero expectations that it's in the near term.
Rob Stevenson: But I don't; I have zero expectations that it's in the near term.
Rob Stevenson: Okay.
Rob Stevenson: And then, speaking of Costco, at this point, given the way that KB is moving, what's the sense is the earliest that that deal closes for you guys? Yes. It's really up to their, to their, the, the zonings, you know, and the final permits. But I, look, I, we're, we're earmarking sort of bid next year. And right now we don't see any reason why that would be earlier. There is provision for it to be earlier. I don't think it would be earlier in February of next year, so it's definitely 25 of them. Oh, right.
Speaker Change: Okay, and then speaking of Costco, at this point given the way that KB is moving, what's the sense as the earliest that that deal closes for you guys?
Speaker Change: It's really up to their, to their, the zonings, um, you know, and the, and the final permits, but I, like I, we're, we're earmarking sort of mid next year. Um, and right now we don't see any reason why that would, uh,
Speaker Change: be earlier. There is provisions for it to be earlier. I don't think it would be earlier than February of next year. So it's definitely a 25.
Rob Stevenson: And then the last one for me, you mentioned in your comments that Adam and Curtis are leaving the board. So you're losing your chairman and your lead director. How are you thinking and the board thinking about that going forward with a board shrink? Is there anyone on the board currently going to step up and take on those roles, and how committed are you in the company keeping the CEO and chairman roles separate at this point? CEO and chairman role will be separate. There's, that's best practice. There's, there's nothing there. We will, by the time we file a proxy, have all those items addressed in a thorough manner.
Speaker Change: All right, and then the last one for me, you mentioned in your comments that
Speaker Change: Adam and Curtis are leaving the board, so you're losing your chairman and your lead director.
Speaker Change: How are you thinking and the board thinking about that going forward? Will the board shrink? Is there anyone on the board currently going to step up and take on those roles? And how committed are you and the company at keeping the CEO and chairman roles separate at this point?
Speaker Change: CEO and chairman role will be separate. There's that's best practice. There's there's nothing there. We will
Rob Stevenson: And so we've, you know, we have put thought towards it. And I'd say, you know, we're not, we're not ready for, you know, to get our proxy out yet. That'll be soon. We wanted to get this, you know, get, get this JB due diligence underway. And so by the time we do that, it'll be, we'll be fully embedded and out with it. But, you know, we'll maintain the same sort of professional integrity that we've always done with our board. And, you know, it's, it's disappointing to have, you know, rotation, but, you know, it's been five years, it's been a long time.
Speaker Change: And by the time we file a proxy, have all those items addressed.
Speaker Change: in a thorough manner, and so we've, you know, we have put thought towards it.
Speaker Change: And I'd say, you know, we're not we're not ready for, you know, to get our proxy out yet. That'll be soon. We wanted to get this, you know, get get this JV due diligence underway. And so by the time we do that, it'll be will be fully vetted and out with it. But you know, we'll maintain the same sort of
Speaker Change: professional integrity that we've always done with our board and you know, it's it's disappointing to have
Rob Stevenson: And, you know, they've got other things to do. So we're, I'm very grateful for their service. And, you know, when, you know, whoever comes on next will look, you know, they'll have a high bar to measure. to.
Speaker Change: rotation, but you know, it's been five years, it's been a long time and you know, they've got other things to do. So we're, I'm very grateful for their service. And, you know, when you know, whoever comes on next, we'll look, you know, they'll have a they'll have a high bar to measure to.
Rob Stevenson: All right. Thanks. Appreciate the time this morning. Yeah.
Speaker Change: All right. Thanks. Appreciate the time this morning.
Brian Marg: The next question comes from the line of Brian Marg with the United Securities. Please proceed. Hi. This is Brandon on for Brian, but I will certainly pass along the message. Most of our questions have been answered, but two quick ones from us. So, first one was just the probability on kind of the current strategic partnership going forward. First is kind of the probability of the other strategic partnership option if you can delve into that. Yeah. So, I think you know, there's some logic to sequencing them. And this one, this one is one that we could fast track a little bit better.
Speaker Change: And the next question comes from the line of Brian Marr with the Raleigh Securities. Please proceed.
Speaker Change: Hi, this is Brandon on for Brian , but I will certainly pass along the message.
Brandon: Most of our questions have been answered, but two quick ones from us. So, first one was just the probability on kind of the current strategic partnership going forward versus kind of the probability of the other strategic partnership option, if you can delve into that.
Aaron Halfacre: During the course of the summer, it's just that we've had, I mean, our share prices at 1575. It was at 1395. You know, we had, you know, so much market and rate volatility that, you know, it makes it hard to negotiate if you're trying to engineer a certain outcome. And so, patience is key. And that's kind of what I talked about. This one, though, is of the two, and they're both great opportunities, and they're both very strategic, but they're different in terms of the composition. And so this one is one that we can execute faster.
Speaker Change: This one is one that we could fast track a little bit better. During the course of the summer, our share price was at $15.75. It was at $13.95. We had
Speaker Change: So much market and rate volatility that, you know, it makes it hard to negotiate if you're trying to
Speaker Change: engineer a certain outcome and so patience is key and that's kind of what I talked about. This one though is of the two and they're both great opportunities and they're both very strategic but they're different in terms of the composition and so this one is one that we can execute.
Aaron Halfacre: And I think it also only dub tells. And so I think if anything doing this one first helps strengthen the opportunity for the second one. And so that's how I would describe it. I don't; it wasn't a need or decision.
Speaker Change: faster and I think it also only dovetails and so I think it if anything doing this one first helps strengthen the opportunity for the second one
Speaker Change: And so that's how I would describe it. It wasn't an either-or decision. In my ideal world, it'll be, you know, the combination of three battleships.
Aaron Halfacre: And in my ideal world, it'll be, you know, the combination of three balls of chips. Got it.
Aaron Halfacre: And you talked about your kind of acquisitions, but I was just curious on the disposition pipeline, whether you're saving all person existing properties or under performing properties. Any color there. And that's all for me. Thanks, Brandon.
Speaker Change: Got it. And you talked about your acquisitions, but I was just curious on the disposition pipeline, whether you're receiving offers on existing properties or underperforming properties, any color there. And that's all from me.
Aaron Halfacre: There are no properties held for sale right now. Look, you know, we, we've clearly signaled that, you know, non-core assets, particularly the office assets, are natural recycling candidates. You know, we have, we have some industrial assets that are less manufacturing and more distribution that could be candidates down the road. But right now, nothing's for sale. You know, we did a big transaction last year with the 13 property portfolio. We obviously sold to earlier this year. So I think, you know, we're, we're always able to sell, and if we find the right opportunity, we will execute that. Said, if you've got, you know, a, you know, a good property with good operations or the, and you don't want to necessarily sell into this.
Speaker Change: Thanks Brandon. There are no properties held for sale right now. We've clearly signaled that non-core assets, particularly the office assets, are a natural recycling candidate. We have...
Speaker Change: We have some industrial assets that are less manufacturing.
Speaker Change: and more distribution.
Speaker Change: There could be candidates down the road, but right now, nothing's for sale. We did a big transaction last year with the 13 Property Portfolio. We obviously sold two earlier this year.
Speaker Change: I think, you know, we're always able to sell and if we can't find the right opportunity, we will execute. That said, if you've got, you know, a good property,
Speaker Change: with good operations, and you don't want to necessarily sell into this market, because you're just going to get cut off at the knees, unless you have to. And so we don't feel any urgency to have to do anything, and so we'll continue to be smart. So, thanks.
Aaron Halfacre: This market is because you're just going to get cut off at the knees, unless you have to. And so we don't feel any urgency to have to do anything. And so we'll continue to be smart. Thanks.
Sean Hosey: Any expression comes from a line of Sean Hosey with that lease observer. Please. Aaron, good morning.
Speaker Change: And the next question comes from a liner Sean Holster with Met Lease Observer. Please proceed.
Aaron Halfacre: Serious, if there's any specific watch list changes for you guys from a tenant credit exposure perspective, and then secondarily hearing a lot of talk in the market about pricing between investment grade and not an investment grade asset. Just would love to hear how you and your team think about pricing assets depending on credit profile. Sure, I think the credit profile IG, non-IG frame of mind is highly conducive to sort of traditional net lease. And what I've seen by traditional net lease is I think of an end or a or a or a agree or a net they're buying a lot of retail and you know there is a there's a there's a wide spectrum of credit quality.
Sean Holster: Hey Aaron, good morning.
Sean Holster: I'm curious if there's any specific watch list changes for you guys from a tenant credit exposure perspective.
Speaker Change: And then secondarily...
Sean Holster: I'm hearing a lot of talk in the market about pricing between investment grade and non-investment grade assets. Just would love to hear how you and your team think about pricing assets depending on credit profile.
Speaker Change: Sure, I think the credit profile, IG, non-IG,
Speaker Change: frame of mind is highly conducive to sort of traditional net lease. And what I've seen by traditional net lease is, you know, if I think of Annan or O or Agri or Netgear, they're buying a lot of retail. And, you know, there is a
Aaron Halfacre: And you know that's in that that way of thinking about it is built into a lot of other net lease product types, and I think for good reason, right? Because these are, you know, not unlike bonds, and so the credit matters. I think when it pertains to industrial manufacturing, it's hard to fit that square peg into a round hole. And what I mean by that is you have a lot of private little market credits. Typically, you know, we're not buying, you know, Intel manufacturing fards that would be like four times our, you know, our market cap just to buy one of those.
Speaker Change: There's a there's a wide spectrum of credit quality and You know that's in that
Speaker Change: That way of thinking about it is built into a lot of other
Speaker Change: NetLease product types and I think for good reason right because these are you know not unlike bonds and so the credit matters.
Speaker Change: I think when it pertains to industrial manufacturing, it's hard to fit that square peg into a round hole. And what I mean by that is you have a lot of
Speaker Change: Private, middle market credits.
Speaker Change: typically, you know, we're not buying, you know, Intel manufacturing fabs, that would be like four times our, you know, our market cap just to buy one of those.
And so we're buying, you know, really durable infrastructure-based manufacturers that have typically been around for a long time. They can either be individually owned; some of them are public. I think our look-through bases on rated credits that are investment grade is 34% of the portfolio. I think Owes is like 37, but it's completely apples and oranges, right? But there's no real comparison. So for us, if we can find someone that's investment grade and it makes sense and that's on the actual guarantee on the lease, that's fantastic. Will we buy a crappy manufacturing for location just because it's an investment grade? No. Well, we've got to make sure that it's a durable tenant in terms of it's been around for a long time, what they're making is essential, that they have a good market share of what they do make, hopefully all or at least the majority of their manufacturing is in our facility, so it makes it very, very low likelihood of rejection, right? Because rejection in our case is a real dire outcome. It's not like a little incident where I can just go re-box it. And so we think about it differently. It's certainly important. We run internal and external credit every time we do a deal, but the IG thing doesn't always necessarily fit as terms of pricing. You know, well, like kind of what I alluded to go off, you know, we're not seeing a ton out there. The pricing is, you know, you see they're wide, and because they're desperate and they're trying to bait someone in the taking it, so they'll say, 'Hey, if an eight cap or eight half cap,' but it's really probably a 10 cap if you're looking at the true risk, or it's a really good part portfolio and they know it and say market is prevailing market, it might be seven and a half and they want six and a half, and you're like, 'Well, that was two years ago.' And so it's, you know, it's kind of choppy. There's not a whole lot. Ours is really a case-by-case thing. There's not a lot of observations to be to draw a trend line problem, so I can't answer that better. Robert Stevenson, Gaurav Mehta, Aaron Halfacre, John Raney, Raymond Pacini, Modiv Robert Stevenson, Gaurav Mehta, Aaron Halfacre, John Raney, Raymond Pacini.
Speaker Change: And so we're buying really durable, infrastructure-based manufacturers that have typically been around for a long time. They can either be individually owned, some of them are public. I think our look-through base is on...
Speaker Change: Rating credits that are investment grade is 34% of the portfolio. I think O's is like 37, but it's completely apples and oranges, right? There's no real comparison. So for us If we can find someone that's investment grade and it makes sense and that's on the that's the actual guarantor in the lease That's fantastic
Speaker Change: Will we buy a crappy manufacturing location just because it's investment grade? No. We've got to make sure that it's a durable tenant in terms of it's been around for a long time, what they're making is essential, that they have a good market share of what they do make.
Speaker Change: hopefully all or at least a majority of their manufacturing is in our facility so it breaks it very very low likelihood of rejection right because rejection in our case is a real dire outcome it's not like a Linens and thing where I can just go rebox it
Speaker Change: And so...
Speaker Change: So we think about it differently. It's certainly important. We run internal and external credit every time we do a deal. But the IG thing doesn't always necessarily fit. And in terms of pricing,
Speaker Change: You know, you know, like kind of what I alluded to go off, you know, we're not seeing a ton out there. The pricing is, you know, it's either wide and because they're desperate and they're trying to bait someone into taking it. So they'll say, hey, it's an 8 cap or 8 half cap, but it's really probably a 10 cap.
Speaker Change: If you looked at the true risk...
Speaker Change: Or it's a really good portfolio and they know it and say market is prevailing market It might be seven and a half and they want six and a half and you're like, well that was two years ago And so it's you know, it's kind of choppy. There's not a whole lot. Ours is really a case-by-case thing there's not a lot of observations to be to draw a trend line from so
Speaker Change: Sorry, I can't answer that better.
Speaker Change: Oh, great. That's helpful, Culler. Appreciate it.
Speaker Change: Bye-bye.
Speaker Change: Thanks, everyone, for the call.
Speaker Change: We appreciate the time and until we speak again.
Speaker Change: Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines at this time. Enjoy the rest of your day.