Modiv Industrial Inc (MDV) 2023 Q1 法說會逐字稿

Good day and welcome to Modiv's first quarter 2023 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, Diego, and thank you all for joining us today to discuss Modiv's first quarter 2023 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; and Ray Pacini, Chief Financial Officer. On today's call, management will provide prepared remarks and then will open up the call for your questions.

Before we begin, I would like to remind you that today's comments will include forward-looking statements under the federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, 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 those 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 first quarter conference call. We're going to jump right in with a review of the financial results by Ray Pacini, our CFO, followed by my closing comments before we open the line for Q&A. Ray?

Thank you, Aaron. I'll begin with an overview of first quarter operating results. First quarter adjusted funds from operations or AFFO was $3.1 million or $0.30 per diluted share, compared with $3 million or $0.29 per diluted share in the year ago quarter. Revenue for the first quarter increased 7.7% to $10.3 million, compared with $9.6 million in the prior year period, reflecting the benefit of the acquisitions we completed during 2022.

The net loss attributable to common stockholders improved $6.4 million for the first quarter, coming in at a loss of $4.7 million, or $0.62 per basic and diluted share. This compares to a net loss attributable to common stockholders of $11.1 million, or $1.47 per basic and diluted share in the prior year period.

Were it not for two primary offsets, we would have obtained an even stronger improvement in our operating results. The recent quarter results include a $3.5 million real estate impairment charge and a $2.5 million year-over-year increase in interest expense.

The real estate impairment charge relates to our property in Nashville, Tennessee, which is leased to Cummins. Since we are planning to dispose of this property later this year, we evaluated its carrying value compared with comparable sales values and reduced the carrying value accordingly.

The increase in interest expense includes $1.7 million of unrealized losses on interest rate swap valuations. While the swap on the first $150 million of our term loan was treated as a cash flow hedge from July 1 until December 31, 2022, it did not qualify for hedge accounting treatment for the first quarter of 2023 because the swap was deemed ineffective.

The primary reason the swap was deemed ineffective is a potential for a reduced term in a swap that could result from a one-time cancellation option available on December 31, 2024, compared with a January 2027 maturity date of the term loan. We provided this cancellation option at the time we entered into this swap, because it reduced the swap rate by approximately 50 basis points.

If there's a significant drop in interest rates in the future, this interest rate swap derivative could potentially qualify, again, as a cash flow hedge. The unrealized loss is a non-cash expense, it does not impact AFFO, and we continue to benefit from the hedge with a $250 million term loan outstanding today at a weighted average interest rate of 4.3% based on our leverage of 40% as of March 31, 2023.

The balance of the increase in interest expense reflects the fact that the weighted average interest rate on our $170 million term loan outstanding as of March 31, 2023, was 4% based on the existing swaps, compared with $150 million outstanding as of March 2022, and a weighted average interest rate of 2.1%.

Now, turning to our portfolio, during the first 4.5 months of 2023, we continued to focus on acquiring industrial manufacturing properties. Year-to-date through May 12, we acquired 100.6 million across 10 industrial manufacturing properties at an attractive blended initial cap rate of 7.7% and a weighted average cap rate of 9.9%.

Two of the acquisitions occurred during the first quarter, and following completion of the remaining eight property acquisitions during April and May this year, our portfolio now consists of 56 properties located in 18 states.

On a pro forma basis as of March 31, 2023, the portfolio composition included 37 industrial core properties, representing 67% of the portfolio with a 14.5 year weighted average lease term, or WALT, and a 2.4% annual rent bumps.

Three tactical non-core properties representing 20% of the portfolio with a 15.3 year WALT and 2.3% annual rent bumps, and 16 other non-core legacy retail and office properties, representing 13% of the portfolio. As part of our active investment strategy to acquire industrial manufacturing assets, we've successfully increased our industrial exposure to a supermajority allocation from just 39% as of September 30, 2021.

Our tactical non-core allocation as detailed in our Form 8-K filing today offers Modiv potentially meaningful upside over an interim holding period, while our other non-core allocation consisting of 16 legacy retail and office assets not acquired by Modiv's management team presents a near term capital recycling opportunity, as we are now focusing our efforts on selling those properties.

Since the beginning of 2020, immediately following the acquisition of a non-traded REIT, Modiv's management team has successfully repositioned the portfolio by selling $143 million of non-core legacy assets and completing over $278 million of accretive acquisitions. Annualized base rent based on rates in effect on March 31, 2023, totals $41.8 million on a pro forma basis, reflecting the acquisitions completed in April and May 2023.

The portfolio's weighted average lease term is 13.3 years, and approximately 38% of our tenants or their parent companies have an investment grade credit rating from a recognized credit rating agency of BBB minus or better.

Now turning to our balance sheet and liquidity. As of March 31, 2023, total cash and cash equivalents were $13.3 million and we had $214.4 million of debt outstanding, consisting of $14.4 million of mortgages and $170 million of outstanding borrowings on our $400 million credit facility.

Our leverage ratio was 40% at quarter end. Based on interest rate swap agreements we entered into during 2022, a 100% of our indebtedness as of March 31, 2023, held a fixed interest rate and the weighted average interest rate was 4.1%.

In April of 2023, we drew the remaining $80 million available on our term loan. We used these funds along with cash on hand and the issuance of $5.2 million of Class C operating units in our partnership at an agreed upon price of $18 per share to fund the equity property acquisitions I just mentioned. The weighted average interest rate on the $294.4 million of total debt outstanding as of May 12, 2023, was 4.4% based on the existing swaps and consolidated leverage of 40% as of March 31, 2023.

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 2023, representing an annualized dividend rate of $1.15 per share of common stock. This represents a yield of almost 9% based on the recent share price of our common stock.

I'll now turn the call back over to Aaron.

Thanks, Ray. As you just heard, Modiv has been able to produce yet another solid quarter of results. Further, as we detailed in our earnings release, the 10 acquisitions we completed represent an impressive mix of accretive high quality industrial manufacturing properties.

However, beyond the financial results, I believe there's a message to take away from this that I would argue is even more important, and that is the ethos or character of the management team that produced the results.

Any given REIT in any given quarter can deliver a decent result, as they say, even a stopped watch is right twice a day. Heck, even delivering consistent quarterly financial results is nothing more than a nice confirmation that you made the right initial investment decision. But the investment you are ultimately making, particularly in the net lease sector, is on the caliber and capability of the management team to produce those consistent positive financial results.

Picking the right management team is critically important. It's like picking the right horse at the Kentucky Derby. The right team during the playoffs, or the right soldiers to go to war. Sometimes stats don't tell you the full story, so you have to rely on your instinct. And when your gut tells you to choose the underdogs, the warriors, the hardscrabble crew that has no quit, then you know right then and there that you have found something special.

Modiv's secret sauce can be summed up in two simple but powerful words, grit and grind. Modiv's grit is exemplified by our focus and perseverance, combined with our ability to grind it out every day relentlessly. We are hardwired to achieve our goals. Combined with our decades of real estate experience, our grit and grind produce results that are both intelligent and compelling.

Think about it for a quick moment, since the beginning of last year, Modiv has grown over 30% by accretively acquiring nearly 300 million of assets without raising any institutional capital. Modiv has transformed its balance sheet with all fixed rate debt with a weighted average interest rate of 4.4%, despite an unprecedented rising rate environment. The Modiv team has done all this while also selling millions of non-core assets and executing impressive new leases and renewals and managing all the financial reporting of our company. We did all that with just 12 people. That takes grit, we had to grind it out.

Let me ask you this. How many CEOs do you know that tour every property acquired? I've been in the REIT industry for over two decades, and I've never met another. To find the right acquisitions this quarter, our Chief Investment Officer and I had to take 25 flights with countless winter delays to 18 cities, driving over 1,700 miles between site visits across seven different states. That takes grit and requires you to grind.

When we moved our Corporate Headquarters to Reno late last year to save our shareholders every bit of money we could, our COO and I loaded up the company's office furniture into a 26-foot U-Haul and drove it up over the Sierra Nevada Mountains, grit and grind.

This past Saturday, I ran a half marathon trail race in the mountains. Two weeks ago, to prepare for the race after a rough winter that offered very few good training days, I decided I had to grind out several long runs to get to my goal. So in one week, I knocked out four mountain runs for 8 miles, 13 miles, 14 miles, and 15 miles just because it had to be done. Another example of how Modiv is defined by its grit and its ability to grind.

Last quarter we did our goal to acquire a minimum of 100 million of industrial manufacturing properties. When I stated that publicly, I didn't know when we would accomplish that goal. However, we got it done sooner than we thought. Now, our focus has shifted to selling the 16 legacy non-core assets that we inherited through prior M&A.

I don't know how soon we will get them sold, but I can promise you this: our grit and grind will make sure it gets done. After we sell those assets, we will then shift to showcasing to everyone how we have become the first pure play industrial manufacturing REIT and how we are focused on becoming the leading investor in industrial manufacturing properties.

With every ounce of my perseverance and determination, I'll be spreading the word, even if it requires me to meet every financial advisor in the country and making investors aware of how great an investment opportunity Modiv represents and in doing so, improve our share price. I encourage all who are listening and all who will read this transcript in the future to know this. With our grid and our ability to grind, Modiv will prosper.

Operator, let's open it up for Q&A.

(Operator Instructions) Rob Stevenson, Janney.

Good morning, guys. Aaron, how should we be thinking about the size and timing of dispositions besides the Gap property that I guess is supposed to close later this month? Maybe you guys out there in the marketplace with stuff under contract or marketing? Is that more of a back half ended sort of process?

It's a good question. We haven't -- other than the Gap property, we haven't formally designated the other properties held for sale. That doesn't mean we haven't done a lot of work to know where we interact. There's a bit of a balancing act with the selling of this, I'll give you my sort of inside baseball on this.

I could sell my retail assets like right away at attractive cap rates. But if I do that, then my weight to office gets disproportionate. And then for people who are uninitiated, they're just going to say, Oh, you got -- your percentage of office went up. So we're balancing the disposition of these.

I think in ideal context, we would sell them in one fell swoop. I don't think that's necessarily going to happen. But I think that would be our ideal context. And then from there, we're working on it.

So timing, look, my goal is to get it done this year. That said, we've had a crazy credit market, right. So who knows when the next bank is going to trip over itself and even further restrict lending. And I think individual credit lending is important for some of these asset [sales].

If it's a Dollar General, no, it's not. But if it's an office asset, yeah, it is. So look, I don't have a projection on the timing. But I'd say that, it's our focus as -- when I focus on something, it gets a lot of attention. And I think our goal is to get it executed in a very timely manner. That said, it's a rough market. So we're -- I think we're eyes wide open. So if you think about why some transactions don't get done, it's typically because sellers aren't accepting where the market is.

We're not naive about that. So we're cognizant of it, we're going to maximize proceeds. But right at the same time, we're going to accomplish the goal because at this point, we don't want them in the portfolio, we're going to recycle. And there's plenty of other things to buy. And it's kind of rough, because -- hard in the sense that, look, I can continue on focusing on acquisitions, there's lots of assets we have -- deals we like out there, but we just need to shift, get this done. So we're going to make sure it's done in a timely manner.

Okay. And I guess to that point, how should we also be thinking about acquisitions? Are you guys -- is it basically from here on out? Could it sort of be matched more with disposition proceeds? Or is the pipeline good enough and strong enough and you're comfortable enough with the balance sheet that we could see another $40 million or $50 million worth of acquisitions this year prior to doing any material dispositions?

Yeah, I don't think I will do that much prior to dispositions. And we turned away probably about $40 million to $50 million of deals that we could have closed on. And I like where we're at, we're not -- we haven't pulled on the revolver, we've used up the term loan, so we're not escalating into the spread of the leverage -- our leverage is still where we want it to be. We're thoughtful about leverage in the forward environment.

I think once I have a better bead on the sales or like the timing of the sales or the surety of the sales, then we could do it. We definitely will acquire more this year. But my view is, look, I'd rather front load it as best we could so we can get the benefit of that, sort things out on the margin.

But -- so I can't -- I won't -- as we stated last quarter, our minimum acquisitions was 100. We've achieved the minimum, we want to do more, we're intending to grow. But we're just trying to be also mindful of the balance sheet. It doesn't do us any good to buy a bunch of assets and then be like 60% levered, because we're just going to get beat up for it. So we're just being disciplined in the process.

Okay. And then you funded about half the Redding acquisition with OP Units at 18, can you talk a little bit, was that just a specific circumstance there that they needed tax protection? Is there demand out there from sellers that you're talking to, to take OP Units today?

Well, I think anyone who wants to take OP Unit does have a tax awareness element to what they're doing. So I wouldn't say people -- generally speaking, cash is king, and particularly if you're an institution selling it where they don't have the tax sensitivity. When you have founders or entrepreneurs who own these things, and sometimes they could have material basis -- low basis, so tax savings makes sense.

I think, though, in this situation, it was someone who really believed in what we were doing, had opportunities to take OP Units from multiple different REITs and chose us. And I think it's a testament to us and our company, but also the spirit of this individual, whose name's Gary and I think he's a great guy.

And because he recognized the inherent value of our company and was able to take shares or OP Units above our current skim price. We get opportunities from time to time look at that, we're not going to take everyone. Because we treat them as partners, and they are a significant shareholders. And I don't want to be a slush fund just to get OP Unit transactions, because sometimes you see that, particularly for the legacy non-traded kind of environment. We pick our partners carefully. And so in this case, it was a situation that works for both parties, and we're happy about it.

Okay. And then last one for me, you extended the Levins property lease by about 16 months, are they moving out and just needed a short term extension? Something else going on? Is that lease still -- is the tenant still likely to occupy that asset after the end of next year?

Yeah, I think they're likely to occupy after next year, but they wanted -- what they did is they made another acquisition. And so there were just doing a little bit of consolidation. So they wanted -- they just wanted a bridge. And because we -- and the rate increase was higher, they had a really below market rent. And so they just wanted to do a reset.

We're also doing some -- they're doing some LED light work in there, [it's what we got] -- in terms of swapping out things. So they've put in probably, I'd say, over $1 million of improvements over the last 18 months. So they seem to be sticky.

They just wanted to bridge one because they're working on -- they're focused on acquisitions and their clock was running out. And so we said, fine, let's just do that. Because we're hopeful -- we're fine with that. And if you noticed, we've done that with our solar assets and things like that.

I think maybe what they were thinking is like they'll just do a short-term model and take the higher rate increases, but maybe the markets will stabilize. And so when we do a longer term lease, it may not be as costly for us.

Okay, that's helpful. Thank you. Appreciate the time this morning.

Gaurav Mehta, EF Hutton.

Thanks. Good morning. I wanted to ask on acquisitions. In your prepared remarks, you said the pace of acquisition was faster than what you'd expected? And just -- so just want to get some color on what drove that, achieving of $100 million of acquisitions, I guess, in the first four months? I guess, trying to understand what the state of transaction market is, and what you guys saw that led to that in execution in faster time?

Yeah. So we -- a little backstory, when we originally secured our term loan, I think it was, correct me if I'm wrong, Ray, it was September, October of last year, the term loan extension. We had been underwriting a portfolio, it was an institutional portfolio, had been a legacy store portfolio that a former colleague of mine was the GP on. It's a great portfolio, would have loved to transact on it.

But the cap rate that they wanted, just didn't -- we weren't very concerned about that cap rate going into the environment that we're in. So we tried to negotiate, we just couldn't get it done. Maybe we'll get it done down the road. Who knows? But that was a sizable one. That would have increased our leverage. It was over $200 million transaction.

And so we didn't close on that. And so we had to shift gears and the pipeline, even as early as mid-January or late January, the pipeline was thin. We had been on several deals in November, December that the sellers just pulled. They couldn't accept the pricing in the market and they just pulled, they never did the deal.

And then and sort of late January, the deal volume started to pick up. We passed on a lot of deals. We bid on a lot of deals that we didn't win like, for instance, the American Roller deal that Gladstone did was a great asset. We just -- we didn't get it.

But the other ones we did, as I mentioned just a minute ago, we did -- a couple of deals we had under LOI that we just ultimately, we didn't close on. The market has shifted and we had outs and we took some of those outs. They're -- either their credit got weaker or something like that.

So we've been disciplined. So it wasn't like we were just feeding at the trough, we could easily do another $100 million, it wouldn't be hard to do. But we have constraints. And we got to manage our balance sheet and be thoughtful about that. That was our goal to get it done. I think it's good to get it done in that manner.

As you look at the acquisition dates and the filings, Gladstone just closed last week. So these were -- and some of these were -- they're a pretty fast process. We have historically gotten like, we'll go out, I'll fly out with Bill. We'll go look at a property, we'll get ordered thirds, if they don't have thirds done right away. We will move fast. So it's not like we've been sitting on these for months. There are deals that take a while. And so pipeline is like sort of real time.

Look, I see a lot of assets out there, I don't see a lot of seller acceptance on some of the prices like for instance, legacy assets. And there's some attractive opportunities out there I think in terms of the quality of the assets that people have already bought. So these aren't de novo sale leasebacks, but the sellers aren't there yet. They're still in the high 6s and low 7s. And the market has moved on from that. And, if they have favorable financing, they can sit it out and wait. If they don't, then their time will come and they'll have to do something.

But from the sale leaseback perspective, I think a lot of the brokers and the community have to recognize the pricing has shifted. And so what we saw that was beginning of the year, people said, okay, I need to get sale leasebacks done, or I want to get sales leaseback done, and I'm willing to accept market pricing. And so what -- that's what we saw.

I think the number of buyers has gone down on the margin. If you still have -- if you look about sort of institutional buyers, you definitely have Gladstone, you have -- on the margin bridge, which is the legacy Gladstone team, you have Broadstone here and there, Spirit here and there.

They're diversified. So they don't necessarily -- they're not focused quite the same way. You have some private guys like [Fundamental] and [Tenet], which we haven't seen recently, or MAG Capital or AIV -- AIC, excuse me. So there are a few buyers, but there used to be more. And I think the other buyers that were out there were requiring -- needed bank lending a lot more and they're not -- it's not there. So there's -- I think the buyer pool is a little bit tighter.

But I also think the buyer pool has also gotten pickier, right? There are deals that we -- they go 7.25 cap, and we're like, no, no, thanks. We don't want to -- because we don't have to, there's no need to chase an asset. So I think our acquisition volume is just reflective of we are focused on our goal. We're getting it done. We didn't think we were taking adverse risks. The pricing was right, and we got it done.

Okay. Great. That's great color. I also wanted to ask you on your disposition efforts. Can you provide some color on what your view is on office? And how soon I guess maybe you could get -- exit the office properties given what's going on with office real estate?

Look, I think office is a six letter curse word right now. And people just -- it's the new, the new thing to hate. If you go back, what, four years ago, it was strip centers. Everyone loves to hate office now and look -- and for good reason. But I think office is not one homogenic bucket. And I think if people really dig into it, there are a lot of gradations to what you own in terms of office.

If I had Class B multitenant urban office, I would be sweating it because I would have low vacancy, high TI cost, and I would have properties that no one really want. If I had Class A, major market, newer vintage office, I would be okay. Yeah, you'll have some noise and things like that.

But people -- I think what I found, and I think increasingly what I found is that like we have had a sort of seismic shift in how we think about office, but I don't think office is obsolete. I think for me, I ran a company that has been sort of hybrid. We have -- our accounting staff works remotely. They've been remote since COVID. It works fine.

They're certainly -- our accountants, they know what they need to do. They don't need to see some people every day and they communicate. The rest of us, the real estate folks and the CFO and legal officer, we've been in our office all the time.

As we transition to Reno, some of us got up here earlier, some of us are still coming. I found it hard. I think it's hard sometimes not to have people in an office. So I think, and you see increasing rhetoric, some of its probably got some other motivations. But ultimately, as a leader, it's hard to communicate with people sometimes with electronic devices and you want them to be able to convene not every day, but often.

So I think office as whole has some legs, I think it's going to shift. I think, if you go back just 20 years ago, McGuire properties was building a ton of stuff, because it was relatively new. And now we all hate it. And so it's -- I think there's a little bit of a fickleness in the market today.

That being said, our office portfolio is very unique. We still have single tenant office buildings that were designed. So some of them are in markets that if you looked at it generically, like a multi-tenant office, you'd say, oh, that's no good, but it's germane to that tenant.

Our WALTs are getting shorter. And that's partly for a couple of things. One is some of these people are not sure what they want to do, but two, why would you go out and ask a tenant right now to do a 20-year lease, they're going to rake you over the coals.

So if I have three or four years left, I'll wait three or four years, because I think we're going to be in a better environment then. That said, I want to get rid of office. I didn't buy any of these office properties. I wouldn't buy office properties. I don't really like office properties. No offense to all the people who run them because they know how to do it. But it takes a real skill to run a multitenant office, a single tenant office doesn't. Historically REITs have just bought the office because of the yield play, it's a credit play. They never really thought about a lot of the other problems.

So our office assets, our [OES lease] is golden. I'm not in a rush to sell that. I think we're going to -- I think that there's high probability that the state will execute its purchase option. And then that will be a self-liquidating vehicle.

Our Costco one, I don't even really think about it as an office. It was converted from flex to office to house Costco. When Costco leaves, we're going to probably redevelop it, sell it to a redeveloper or JV with a redeveloper. I think there's upside there. But the rest of the stuff is not really super strategic to us. So we will get rid of it.

I'd like to get rid of it, like I said, first, if I could. We're a cognizant of cap rates. I think you need to find the right buyers. We're seeing activity out there a little bit more than I would have thought. It was dead in the fourth quarter. We didn't focus on it until now because you know what, let's get the acquisitions done, let's get revenue generating properties in the door. And then we'll shift our focus. Because there's only so many of us here who can do things.

The Gap property that we've had under contract, it's an owner occupant, owner user, they're getting SBA financing. It was taking a little bit longer for the banks, but they kept ponying up money. So think about it, there are $125,000 spent on this property, and it's not a big purchase price.

So we gave them more time because, look, we're focused on acquisitions. They're willing to enter into a long term lease, but we're just like, yeah, let's just get it done and get it sold. We're now shifting our focus to these other assets like I said, looking very creatively at ways to get it done. Confident we'll get it done. And I'd like to be in a spot this time next year where we're not talking about office, at least as it relates to Modiv.

Great. Thanks for all the color.

John Massocca, Ladenburg Thalmann.

Good morning. Maybe kind of any deal you can provide on cap rate trends over the course of that kind of March to May acquisition window? I think it may be kind of how wide were those kind of cap rate bands on some of the acquisitions you were seeing subsequent to quarter end?

They're roughly 7.5 to 8, I'd say. I'd say that what we found as more deals have come out and even some of the deals recently is that the brokers are coming out with deals priced better. Before they -- like in December, they'd be like, oh, yeah, we're looking at low seven, we think this is going to clear maybe sub 7. And it wouldn't. It would go to 7.5. And now they're coming out and they're saying, yeah, we think it's mid to high 7. And we're -- someone might bid 8 in the first round and still be able to lead in the second round.

So I think -- and then I will qualify that. There are certain, like in what -- we were focused on industrial manufacturing properties. That's all we look at. So there are certain brokers who are -- they're really excellent at what they're doing, and they have a really good beat on it. And those individuals, or those shops, have gotten transactions done.

There's other who have gotten listings who, maybe they're generalists, industrial, or maybe they do manufacturing assets here or there. And they have had trouble getting it done because they have not really drilled in on the right things.

But cap rate is just one aspect, right? And when I say that is how these work is they get you to bid. They have -- they could have 10 people bidding or 5 people bidding, you don't really ever know. But they always sound like there's a lot.

You get them to bid, you get the cap rate, and then the [devil] is in the details. It's on assignment language. It's on credit quality. It's on all these things that the negotiation or the minutia and the lease. That's where erosion can happen, right?

We've passed on deals where we bid a cap rate that we thought, okay, based on what we know, our risk adjusted price, this is fair and equitable, we'll get it done. And then find out that they want like -- they don't want any assignment language, or they want to be able to kick something out or do this. And then, it's like, okay, we really what you're doing, is you had us bid first, and now you're eroding the credit quality into a walk. Or we'll go to them and say, look, if you really want us to do this, this cap rate is now lighter. And sometimes they say yes because it just --

So I think the cap rate range, though, to get back to [your thing] was probably around 50 basis points, mid-7s to just under 8. Sometimes you see 8. I think what I always ask myself, if I see an 8.5 cap rate out there, is it a 7, 7.5 that I'm getting at an 8.5? Or is it an 8.5 -- is it a 10 cap that I'm buying at an 8.5? So we're being thoughtful about it. But I think we could do -- I could do $300 million in the 7s all day long.

Okay. And then I know it's kind of early days, but any kind of change or impact to deal flow caused by some of the recent turmoil we've seen in the regional banking market? I'd imagine that's kind of a common financing avenue for some of your potential tenants and even current tenants?

Not deal flow, but I think buyer pool. Yeah. So I think the people whoa re coming out are talking about sort of where markets are at, and they're looking to get a transaction. I think if you look at the sale leaseback, it's a form of financing.

So I think in some ways, it may be a little bit more assured than bank financing. But most of these deals require bank financing too of some sort. I think the buyer pool is what's changed the most. The individual buyers, the small private equity type, one to two man shops, those guys are gone because it just doesn't pencil.

Okay. And then, can you talk about any impact from the Kalera bankruptcy in April? Is that tenant kind of paying rent in full? And has there been any indication from them if they're going to reaffirm or reject the lease?

So as we -- as you'll see in our disclosures when the Q gets filed, they are going through their 363 process. So they got good financing. They are now going through a process of selling their company. So those results are not until, I believe it's June 9, is that right, Ray?

Yeah, that's correct. That's when the auction takes place, on June 9.

Yeah, so that's their window that they have for all their properties to accept or reject. So their rent is current. They weren't in this building, they were still getting it ready to go online.

So it didn't -- so it's not like there were people in it to begin with. So the status of the asset is fine. I've been out there four times in the last five months and checked on it. Everything is good. So we're waiting for their process to go through. And we've -- we're hopeful and optimistic, but we understand how these go. I don't think I would do another pre-revenue type of deal like that again, so lesson learned there.

Had a lot of inbound inquiries on the property. And two, and I didn't even pay attention to this. I guess there's a bill in the State Senate there, it passed the House and the Senate to legalize marijuana. And we've had some marijuana growers reach out to us.

Our property is unique in the sense that it was built on top of an aquifer. So it has its own robust source of water, which is really important to growing things. And that's why it was strategic to Kalera. So we remain optimistic, but we don't have any really news until after they finish their process.

Okay. And then on the -- just a quick one on the property that was kind of -- the lease extended during the quarter. Is it fair to interpret those comments as being that if they were going to do a longer lease that it might be at a rate lower than where it was extended to just given the short-term nature of what you did? Or is it -- is that kind of the new -- was it reset to market, I guess?

Yeah. So they have been in there for a long time. And the rent, I think it -- I don't remember the math, it was a 69% or 64% increase in rent. It was sticker shock for them because they hadn't really been paying. They are a busy company and they're spread thin, they've been buying a lot of these distributors and stuff like that. And so I think when it came time to conversations, and candidly, they were like, we didn't start talking to them until, I would say, two weeks before their window closed.

And because they just -- we'd ping them, they'd ping us back, and then we'd never connect. And so I think part of it was, wow, the rents have really gone up in this market and we hadn't paying attention because they've been there a long time. And they are consolidating some other businesses and all these things.

So they asked [this one] -- I think if you -- again, I don't know for sure. But based on our two leases, so if they wanted to do a long-term lease, they would -- that's a bigger nut to swallow. And they didn't have -- they had a short window to get something signed and I think it was in the confines of what they could do without having a deep-dive budget review because they kind of did this off cycle.

They liked the asset. They've been there. I think there's a good chance that they'll stay. If they don't, I'm not worried about it. That's right off the 80. It's infill location. It's warehouse. We don't -- long term, I don't know that I really even want it, to be candid. It's better held by someone who is doing distribution.

But I think what it was was just -- it was a lot of sticker shock. They had to get the medicine to get used to being in market rate, and they just did it for 16 months because they know they need to use the property, but they want to right size things on a longer term basis.

Okay, that's very helpful color. And that's it for me. Thank you very much.

(Operator Instructions) Bryan Maher, B. Riley.

Great. Good morning, Aaron and Ray. Aaron, you talked -- most of my questions have already been asked. But you talked about earlier in the call, holding off on selling retail until you can unload some office. But when we think about it and we think who owns your shares, and those of us, institutional investors, who are focused on it, I mean, we get it.

And many of the retail people may not look at it, may not care. Why not just sell the retail if you can? And I think the market gives you guys a pass on holding the office till you sell it. And then you could redeploy that into more industrial manufacturing, which then balances out the ratio anyway.

Yeah. So look, that's a fair point. And it's not just the office that I'm talking about. I think some of it is sort of a logistic sequencing. So if you think about 16 properties, you could either sell 16 individually, you could sell some of them in a portfolio, and the [DGs] probably would actually make a portfolio. There's a couple things to think about.

So if you want to take them out and you think the property is sort of a little bit of an odd duck and you're better off with a 1031 buyer, then that's a different route than what you do with more institutional buyer property.

And is the 1031 listed at asset having known selling some of these odd ducks before? You get a slew of these offers and they look too good to be true because most of them are because they're just designating properties and you have to go through it. So that can be a little bit of a time suck.

I guess what we're at is we're getting ready to go. We're getting [VOBs] done, we're getting price discovery done, we're getting ready to go -- things to market. I'd like to get our office up and running first because I think it's a longer tail process. I think it's just going to take longer to sell some office.

But get all that legwork done, then shift to getting the legwork done on retail knowing that retail will move faster. So I don't that -- I'm not controlling when they'll sell, I think retail will sell faster. But in terms of activity or the process in which we're getting ready to do it, we're focused first on finding everything out at right time, pull the trigger on the office to get it up and running, then pull the trigger on retail. And then you're out. Then it's off to the races and you get what you get.

Okay. And then when we think about your acquisitions, how are you sourcing those? Are there inbound calls? When we think about industrial, a lot of people think about industrial distribution and logistics. We all know who those players are, who are out there buying it. But who are you running into as far as competition for buying industrial manufacturing?

Yeah, and I kind of alluded it too when I think I'm -- when I was talking to Gaurav. There's less of these small, levered buyers out there. The shops that I think who buy industrial manufacturing, the retailers -- so the ones who are focused on it, sort of as this is really what they're buying, I think the two most focused on us in the public space are myself -- ourselves and Gladstone.

I think lot of the Gladstone assets that have been bought, we bid on. And I'm sure a lot of the assets we bought, they bid on. So we know we're buying the similar things.

Then Spirit has certainly, in the last three quarters made a bigger focus on buying industrial. And I don't think they're doing it just for yield, I think there's an element to yield to it because they are a diversified play. But they have really sort of honed their saw and focus on what they wanted to buy.

Broadstone has historically been a bitter here and there, I don't think I've seen them too recently. I have to go back and look, I don't think so. But they had bought -- I think, again, part of that is a yield play and part of that is they like it.

Then after on the public side, Store was historically a big buyer, they're not there now. We've seen a lot of Store deals come out that they've either rejected or tried to price negotiate. But the private buyers that you won't see publicly are Royal Oak on occasion, great shop there.

AIC historically has been doing this forever they're probably the leader in the space, but they don't -- they source all their own things. So they're very different. They end up being net sellers a lot of times because they'll raise the fund and sell it up, but they only buy industrial manufacturing.

Tenet, which is a [service tax] shop, great guys there. They're former store guys. Fundamental has bought some on the margin, again, a former Store guy. There's another shop called MAG Capital Partners. Dex is a great guy. He's been focused on it in a smart way.

But there's not a ton of buyers. I guess the Bridge Group, the legacy Gladstone guys have been out there. But it's really a small universe to who bought manufacturing. You think about it, there are some shops out there who have exposure. DRA has exposure. SomeraRoad has exposure, Davidson Kempner has exposure.

So there are portfolios out there of industrial manufacturing. But they may have bought sort of at a certain point in time, and now they're holders of it. They're not active buyers. But, I'd say that probably the most active buyers are, at least for public REITS, are Gladstone and ourselves. As in terms of how, we get a lot of inbound calls now.

So we've now, like we've bought, if you back out the Kia transaction, we've bought well over $200 million of real estate in the last 12 months, and it's all been industrial manufacturing. You start to get calls, right? People know that's what we're focused on. We've made it clear. There are some really good shops out there, Ascension, Chelsea. Ascension is great. There's Scott's team, SLB is great. There are a lot of great teams out there.

Stream is a good shop, industrial manufacturing. So there's a lot of good shops out there who know -- they've got a beat on us. And so we get calls from them. We get calls, sometimes it's a marketing process, sometimes it's not. It just depends on how fast the seller needs to go or how well the seller is known. We did the Lindsay transaction. That's another deal we've done by Middle Ground. We've done a lot with Middle Ground as a private equity sponsor. They're -- we have a lot of confidence in what they buy. So it helps us in our process, I think they have confidence in how we buy and we execute, so it helps us.

But I think everything should be marketed. I think it should be best price discovery for that shop. We get other properties that come across from -- maybe it's a random CBRE team. We'll see it. And we'll look at everything. And sometimes, the bidding process is clunkier, sometimes it works. But, we're not -- what we're not doing is what AIC does or what store used to do because we just don't have the manpower.

They'll have a team, army of people, and they'll call sole proprietors of manufacturing or industrial assets and call them up and pitch them on may be able to sale leaseback and then structure sale leaseback and then take it. We just don't have the bandwidth to do that. I'd love to do that down the road. I do think there's some sourcing opportunities. But, at the same time, we're trying to get more mainstream assets.

Perfect, thank you.

Thank you. There are no further questions at this time, I'll hand the floor back to Aaron Halfacre, for closing remarks.

Well, I don't think -- we said, we beat it up pretty much. I thank everyone for being on the call. We'll put our heads back down. We'll get back to it. I don't think anyone is really paying attention to us unfortunately right now, but it's a risk-off environment. REITs are topsy turvy. It's been a crazy 15 months. It could be another crazy 12 months or more. We'll just keep getting things done, and we look forward to brighter days for everyone. Be well. Thanks.

Thank you. That concludes today's conference. all parties may disconnect. Have a good day.