Good day and welcome to Modiv’s Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for Modiv. Please go ahead, ma’am.

Thank you, operator and thank you all for joining us today to discuss Modiv’s fourth quarter and full year 2022 financial results. We issued our earnings release and investor supplement before the market opened this morning. These documents are available in the Investor Relations section of our website at modiv.com. I am here today with Aaron Halfacre, Chief Executive Officer of Modiv and Ray Pacini, Chief Financial Officer. On today’s call, management will provide prepared remarks and then we will open up the call for your questions. Participants may also ask a question by e-mailing ir@modiv.com. Before we begin, I would like to remind you that today’s comments will include forward-looking statements under the federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, or other comparable words and phrases. Statements that are not historical facts such as statements about our expected acquisitions or dispositions are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that, I would now like to turn the call over to Aaron. Aaron, please go ahead.

Thank you, Margaret. Hello, everybody and thank you for joining our fourth quarter and full year conference call. Joining me today is Ray Pacini, our CFO. In a few minutes, Ray will review our results in detail and then I will close our prepared remarks before we open the line for Q&A. Our team successfully navigated our first full year as a public company and what was undoubtedly the worst decline in public REIT valuations experienced since 2008. When you measure the fundamental results that are in the direct control of our management team, Modiv experienced a tremendous year of execution. Here are a few highlights. Our full year adjusted funds from operations grew by 45% to a total of $16.6 million or $1.63 per fully diluted share. Total revenue increased 22% to $46.2 million compared to $37.9 million in 2021. We acquired over $162 million of real estate properties at attractive cap rates and we sold over $70 million of our non-core legacy assets with even more sales of the non-core assets on the horizon. Our weighted average lease term nearly doubled to 11.9 years. We decreased our office exposure by nearly 30%. And with careful expense management, we decreased our G&A by $1.9 million. We believe our goal to be a pure-play industrial manufacturing REIT is a key differentiator for Modiv within the net lease sector. Nearly daily headlines call out the need for the reshoring of manufacturing capabilities in the U.S. and the importance of creating supply chain independence. Following the global pandemic and the increasing geopolitical risk environment, the public rhetoric surrounding a desire to strengthen our nation’s manufacturing capabilities and supply chain independence has reached the highest levels. To quote our current President from his most recent State of the Union speech, we need to…

Thank you, Aaron. I will now discuss our fourth quarter and full year 2022 operating results, provide an update on our portfolio and cover our balance sheet and liquidity. We reported fourth quarter AFFO of $6.9 million or $0.68 per diluted share, more than double AFFO of $2.4 million or $0.27 per share reported in the fourth quarter of 2021. The $4.5 million increase in AFFO was primarily attributable to early termination fee revenue of $3.8 million related to our property in Rancho Cordova, California. Rather than wait for the tenant in this property, Sutter Health, to end their lease without a renewal and squander an opportunity to bring in a new long-term tenant. We negotiated an early termination fee with Sutter and simultaneously negotiated a new lease with the State of California. AFFO per diluted share also reflects an increase in fully diluted shares outstanding from our dividend reinvestment program and the issuance of 1.3 million Class C units in our operating partnership, at $25 per unit in connection with the January 22 acquisition of a Kia auto dealership property in Carson, California. AFFO for the full year was $16.6 million or $1.63 per diluted share compared with AFFO of $11.4 million or $1.30 per diluted share reported in the prior year. The $5.2 million increase in AFFO was primarily attributable to a $2.4 million increase in early termination fee revenue and a $1.9 million decrease in general and administrative expenses. AFFO for 2021 included $1.4 million in early termination fee revenue from our property formerly leased to Dana Incorporated in Cedar Park, Texas, which we sold in July 2021. Excluding the $3.8 million early termination fee revenue for 2022, AFFO per diluted share was $1.26. Fourth quarter revenue was $14.4 million, a 63% increase over $8.8 million in…

Thanks, Ray. I will keep my closing remarks short and sweet so that we can jump right into Q&A. In 2022, Modiv showed that it could execute our plan and deliver results. In 2023, I am personally very confident that we can do even better. I will now open the call for questions.

Thank you. [Operator’s Instructions] Thank you. And our first question comes from Gaurav Mehta with EF Hutton. Please state your question.

Thanks. Good morning. I wanted to go back to your remarks about the 2023 guidance. You talked about some investment proposals from institutional investors. Are you able to provide any color on what those proposals would look like?

No. What I can say though is the totality of what I stated in the goals sort of acquisition floor versus a range sort of constrain the common equity and the debt on the balance sheet and the fact that we have received multiple interest. I just think that this year will be a year that will be – if we have given a range, it would be so very wide that it would be meaningless. And so we know we need to execute. And I think last year, our view was we’re going to come out with guidance because we have – there is no real basis. We didn’t do a traditional IPO, and we wanted to show that we could execute on that range. We did. And so this year, it’s a little bit trickier. We’re clearly in a stage of growth, unlike some of our larger brethren who can better articulate it. So suffice it to say that we have increased. We’re going to look at them. We’re not meant to be – we’re not trying to be coy. We just – there is some potential big movements associated with any of those.

Okay, second question on your acquisition guidance of $100 million, should we expect that you guys would fund those acquisitions purely with that given that you intend to issue equity or would it be a mix of debt and proceeds from expected sales of properties?

So I would say that we certainly can fund with both of those instruments, the recycling of assets and the facility. I think what you’ll see is the staging of that over the course of the year. So some might be – might first be facility, subsequent recycling or rights versa. But yes, I think those two sources are where we’re looking at for that acquisition floor.

Okay, thank you.

Thanks.

Thank you. Our next comes from John Massocca with Ladenburg Thalmann. Please state your question.

Good morning. Thank you. With potential sources of proceeds, as you look at the disposition market today, what should we maybe kind of roughly expect in terms of timing on dispositions over the course of the year? And I guess, how are cap rates trending primarily in the office side of things just as we think about dispositions?

Good questions. I’d say, look, I think the bulk of the dispositions will occur in the second half of the year. There is two reasons for that. One, we’re mindful of AFFO and two we’re not trying to throw them away. So that’s the timing. In terms of cap rate and the distribution market, we’ve seen on the retail side, really effectively no impact. I think it depends on the margin if you’re going institution are you going 101, but we’ve not really seen anything that’s of concern. I think office is part. Like we’ve been selling office for all last year. I think we were relatively successful in getting those moved. I think as we look this year, there is been very few comps, right? Because the individual office buyers need the individual debt market, and that hasn’t been around since from September to until now. The institutional purchases that you’ve seen either be the Workspace GIC deal or some others, those are – I think they are taking advantage of the fact that they have a large capital and someone wanted to move a bulk. So I think the cap rates are very idiosyncratic, right? So if you have an empty building in a rural market, that’s just going to be a lot worse cap rate than if you have an occupied long-term thing in an important market. I mean, obviously, I’m sitting at whatever knows. We’ve underwritten fairly dire cap rates in our models in terms of what we know our recycling effort. So that way, we’re not disappointed. But we did that last year, and we didn’t see that happen.

Okay. And then maybe kind of on specific assets, with Rancho Cordova, does the new tenant impact kind of run rate, rent and NOI going forward? And also with the other – with the renewal at the property in the San Diego area was there any kind of change in run rate rent from either of those?

Ray, do you want to take that one?

Yes. So the Rancho Cordova lease the state rent kind of phases in over time. So roughly, they are paying roughly half of the rent between now and March of – I’m sorry, May of 2024 and then they’ll pay full rent starting them. In terms of the – repeat your again on the – yes. So that rent goes up significantly. They were below market. And as we stated, I think on August 1, it goes up by 14% and then a year later, it goes up another 3%. So we call them up to market.

I’d add to the OES California. It was a unique situation. So they actually own – the state already owns the building adjacent to it. They were leasing another space, and they had 2 more years on this lease. And so – but they wanted to move into this because they want to sense the perimeter of the two buildings and turn it into a campus. The Office of Emergency Services is the office that handles forest fires, heavy floods, all the natural disasters in the state of California, so they get both state and federal funding. And so they were relatively hot to trot. Otherwise, I don’t think we would have moved as fast as we did. And one thing that did take us a little bit of time to negotiate was this purchase option. They wouldn’t sign a lease unless they had this purchase option, and so I think it was fortuitous to do that. But that’s part of the reason because they have 2 years, they had to eat the rent and there is other place for 2 years. We worked with them on graduating the rent into it over the first 2 years of the lease term.

That makes sense. And then maybe with that property mind, are there any other properties in the portfolio today where you could anticipate a lease termination fee coming through?

No. I don’t think so in this calendar year. We’ve had some conversations about us going to them. But for instance, if we find someone that opportunistically likes the property, we kind of find out where they feel about it and their timing. And so – but I don’t – no, I don’t expect any this year.

Okay. There is nothing structural we should bake in is the model?

No, no, no. There is nothing now.

Okay. That’s it for me. Thank you very much.

Thanks. [Operator’s Instructions] Our next question comes from Andrew Cedar with B. Riley Securities. Please state your question.

Hi, good morning. I’m in for Bryan today. My first question is, can you provide any color on like what you have in the acquisition pipeline in the sense of are you moving toward or way any specific markets geographically?

So – good question, thank you. Industrial manufacturing tends to be in certain markets, right? So you’re going to see Midwest markets some of the Carolinas some – you don’t tend to have sort of coastal markets so much or certainly gateway centers. So where that business is, and it’s probably been there for 20 to 30 years or more, is where the property is. So if you try to filter industrial manufacturing first, I’m only going to go into these Toughened markets. You’re either going to find a very limited supply or ridiculous cap rates. I think that’s different for distribution, which has a different mission. So there is no direction that we’re going in terms of geographic exposure. I think we’re always mindful of it, but it’s sort of – that’s not the tail. I do think what we do drive for is really looking for sort of recession resilient types of manufacturers. We’re looking with those that have, what I’d call, particularly unique hard skills. So, abilities to do complex production or machining or can work with – have stability in their infrastructure that they could switch product lines, they could do things, but they are not making things that are typically consumer-driven. So we’re looking at things that, yes, they could be automotive components, but they are not OEM. They are more Tier 1 type suppliers. It could be infrastructure-based, things that are providing for municipalities or others. So where that purchase dollar is not the 22-year-old with a credit card. And so that’s the direction. On our pipeline, we were really actually pretty busy in the fourth quarter, putting out LOIs, and it was a weird quarter. In two instances, we had deals that we had been verbally awarded and they said the LOI was…

Great. Thank you, that was informational. My next question is, in your move to become a predominantly industrial manufacturing REIT. How long do you think it will take to get to that point?

Well, I’ll gladly pay you a large bonus check if you can give me a crystal ball how quickly I can normalize interest rates. But no, not to be facetious. Look, I think it’s clear that office assets are less liquid than the other types. And so as a seller of office assets, you have the choice of trying to hold on to cap rate, which could mean taking time because there eventually are people who like your properties or you can give on cap rate and sell faster. I don’t feel any pressure to sell fast. We want to sell smart. If we get to the point where we’re almost cleaned up and there is like one asset and maybe that changes the story, but we still have got more work to do. We’ve obviously reduced office materially. You saw that we sold a raise in cans already. I think the retail will sell relatively quickly. The office is case by case. And so I don’t know that we will be there by end of the year, but we could be, for sure.

Okay, that was it for me. Thank you for your time.

Sure. Thanks.

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

Just a quick follow-up based on your kind of prior commentary, are you still seeing – it kind of sounded a bit like you were seeing at 4Q, but are you still seeing kind of buyer-seller disconnect on the industrial side in terms of cap rate? And I guess, maybe can you put brackets around how wide it is from a basis point perspective if it does exist?

So fourth quarter, absolutely big disconnect. I think what I would argue is the disconnect and what was it before it was probably, if I’m going to guess, at least 50 basis points, probably more, right? You still had a lot of brokers wanting Phase 6. And then sometimes you have buyers saying, well, that’s an 8 because it was just the volatility. And so maybe they be $675. But realistically, though, where deals were getting done, it was probably more like 50 to 75 bps of disparagement between the two. I think what I’ve noticed this year is that the inventory that’s out now seems to have – they need to close, whereas I think some of the times in the fourth quarter, they were testing the market. I think more of these deals seem like they need to close or they are just committed to closing their tire to the volatility. This is where it’s going to be. They have gotten a better read on rates are for their own business. And so that the sellers are getting more realistic, right? I think that’s also a function of the brokers have run a couple of all of these now and seeing that they didn’t get what they thought they could deliver. And so that’s impacting the expectations. At the same time, though, I think buyers have realized like, I’m not – I can’t be super greedy because there is other buyers. And so I think they have come in in the margin. So I think it’s tightened. It’s hard to know. We’re in the process of a number of them. So it’s still hard to know. But I think that we’re finding ourselves first rounds are much first and second runs are much more accurate than they were 3 months ago in terms of where your first on where you end up at? It seems to be a lot closer and more accurate.

Okay, very helpful color. Thank you.

Sure. Thanks.

Thank you. And there are no further s at this time. So I will now turn the call back to Aaron Halfacre for closing remarks.

Thank you very much, operator. Thank you all for joining the call. Look, I think we executed – we understand that we’re not giving you – we’re not on fitting everything we need for this year, but we just think there is a lot of positive potential change on the horizon. And that’s why I think if anything, we hope that after how many four or five earnings calls we have, that you can see that we are no-nonsense, we execute. I think if you look at it from an acquisition volume, I mean we did amount of acquisition volume in our first year without any raise that was on par with like pine and good and a lot of the other bigger, more established teams, so we can do it. I think that’s important. I think we’ve shown that we didn’t make any sort of foolish capital market decisions that you might see typically or what you expect typically of a very small REIT. I think we’re obviously disappointed in our share price. The NAV that we had Cushman calculate shows that there is still intrinsic value there. What we’re suffering from is very idiosyncratic. I think our average daily volume going in today was 14,000 ships. That’s a very small amount of the 7.8 million shares that are freely tradable. I actually did a little bit of a liquidity analysis – and if you look at our net lease peers and you look at sort of the 12 months of average trading volume and you – as your numerator and you look at weighted average shares outstanding as a denominator, most of our larger broaden trade anywhere from 125% to sort of 200% volume, right? So there is – shares are turning over fairly healthy. And if you…

Thank you. Thank you. And that concludes today’s conference. All parties may disconnect. Have a great day.