Modiv Industrial Inc (MDV) 2025 Q1 法說會逐字稿

Ladies and gentlemen, greetings, and welcome to Modiv Industrial Inc.'s first-quarter 2025 earnings conference call. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Raney, Chief Operating Officer and General Counsel of Modiv Industrial.

Thank you, Ryan, and thank you, everyone, for joining us for Modiv Industrial's First Quarter 2025 Earnings Call. We issued our earnings release before market opened this morning, and it's available on our website at modiv.com. I'm here today with Aaron Halfacre, Chief Executive Officer; and Ray Pacini, Chief Financial Officer. On today's call, management will provide prepared remarks, and we 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 and business plans are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements.

Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and Form 10-Q.

With that said, I'd like to turn the call over to Aaron.

Thanks, John. Hi, everyone. I hope you're doing well. I guess I'll start off by saying it looks like we had 32,261 shares traded this morning. We're off $0.25.

Let's see what it does. Let's all track it while we're on this call and see what it does. I'd be interested to see if it goes up or down. Probably nothing, though, because we're right in front of Powell, and we are in a weird time, a time of great uncertainty, a lot of histrionics, a lot of raw emotion. The fear and greed in Mr.

Market is pretty pronounced, has been really for quite a while. And I think there's probably a lot of fatigue setting in the marketplace. As all of you who are probably on this call know, you're long REITs or you're certainly in the REIT space. REITs, they're a bit of a roller coaster, taking it on the chin one day, doing well the next, not a lot of consistency and certainly not a lot of consistency relative to the stability of the asset classes that are underneath those. I think that's true for us.

As normal, I tried to lay out a lot of detail in our earnings release for those people who don't ever dial into the call or who can't make heads and tails of the AI auto-enabled transcripts, they don't get it quite right. I try to put it out there. So if someone picks it up today, someone picks it up next week, someone picks it up next year, they have a little bit of a historical record of how we see things. And how we see things are good. They're stable.

They're strong. We've got a weighted average lease term of roughly 14 years. And if you actually look at the manufacturing portfolio, that's over 20 years. And we got 20 years of tenants who -- their rent is a very small percentage of their overall cost input. And they're all doing really solidly, if not better than solid, during this really hard time.

And so for me, there's a lot of peace, a lot of sleep-well-at-night sort of vibes. It's amusing sometimes. It's frustrating sometimes to see the whipsaws in the marketplace. But most importantly, I suppose it's interesting. Like, for instance, we saw yesterday a large selloff, 143,000, 144,000 shares sold off.

Someone made a very brass balls decision to sell in front of our earnings release. I'm curious, but that makes me interested. What are they seeing that I don't see, that I have so much insight on? What are they seeing? Is it just fear? Are they worried about what Powell is going to say? Do they have a different thesis? Did they buy us at $13.62 on April 7, and they're collecting gains? It's hard to know, but it is interesting. It is amusing.

It is sometimes frustrating, right? I will tell you there would be better days. It would be far easier to be a private company given the stability of our asset class. But we believe in the public markets, and we believe that there's an opportunity here. Yesterday was like the eighth largest trading volume day that we've had since inception.

So not the largest by a long shot and not even the largest down day. So we've seen this before. I don't predict that it will recover overnight, but I feel very comfortable at these price levels. And I think others will too. That said, let's go to Ray.

Let's go over the financials a little bit, and then I'll come back, add a little more commentaries, and then let's see if we can dive into some Q&A. Ray?

Thank you, Aaron. I'll begin with an overview of our first quarter operating results. Rental income for the first quarter was $11.7 million compared with $11.9 million in the prior year period. This 2% decrease reflects the disposition of two properties with expiring leases during the first two months of 2024, partially offset by acquisitions of industrial manufacturing properties in July 2024 and March 2025.

First-quarter adjusted funds from operations, or AFFO, was $3.9 million, up 18% when compared with $3.3 million in the year ago quarter. The increase in AFFO primarily reflects $195,000 increase in cash rental income, a $200,000 decrease in cash interest expense, and $140,000 decrease in property expenses. On a per share basis, AFFO was $0.33 per diluted share for this quarter, which reflects an increase of 483,000 shares in the weighted average number of fully diluted common shares outstanding compared to $0.29 per diluted share in the year ago quarter.

The increase in fully diluted shares is attributable to common shares issued in our ATM, Class X OP units issued to employees during the first quarter of 2025 and shares issued during March 2025 in connection with the property acquisition through an UPREIT transaction. The decrease in cash interest expense reflects the new swaps we put in place in January, which are 28 basis points lower than the swaps that were canceled at the end of December 2024. The decrease in property expenses primarily reflects the disposition of an office property in February 2024.

General and administrative expenses remained constant at $2 million for each of the three months ended March 31, 2025 and 2024, which includes approximately $200,000 in the current quarter of non-recurring separation pay. General and administrative expenses are expected to be lower in future quarters since the first quarter of each year includes higher costs for legal, audit, and tax professional fees, along with higher social security taxes for employees who reached the social security maximum during the first quarter upon payment of bonuses for the prior year.

We also reduced our headcount from 12 employees to 9 employees in April 2025, and Aaron ceased drawing a salary effective April 1, 2025, in connection with his grant of Class X OP units, which will vest over the next five years. Now turning to our portfolio. Our 43 property portfolio has an attractive weighted average lease term of 14.2 years after including the lease amendments executed in April for our TIC interest in Santa Clara, California.

Annualized base rent for our 43 properties totals $39.4 million as of March 31, 2025, with 39 industrial properties representing 80% of ABR and 4 noncore properties representing 20% of ABR. Approximately 30% of our tenants or their parent companies have an investment-grade credit rating from a recognized credit agency of BBB- or better.

With respect to our balance sheet and liquidity, as of March 31, 2025, total cash and cash-equivalents were $6,200,000 and we had $280,000,000 of debt outstanding. Our debt consists of $31,000,000 of mortgages on two properties and $250,000,000 of outstanding borrowings on our $280,000,000 credit facility and we do not have any debt maturities until January 2027.

Based on interest rate swap agreements we entered into during January 2025, 100% of our indebtedness as of March 31, 2025 held a fixed interest rate with a weighted average interest rate of 4.27% based on our leverage ratio of 47.6% at quarter end.

As previously announced, our Board of Directors declared a cash dividend for common shares of $0.0975 for each of the months of April, May and June 2025, representing an annualized dividend rate of $1.17 per share of common stock. This represents a yield of 8% based on the $14.58 closing price of our common stock yesterday. I'll now turn the call back over to Aaron.

Thanks, Ray. As you just heard from Ray, as I said in the press release, solid quarter, right? Just delivered as we expected, nothing earth shattering, but really solid. And I think that's noteworthy. I think also consistent in the sense that it's been several quarters now where we haven't really necessarily been anxious to acquire.

If I look at O's first quarter results, I mean, I think they acquired, what, 200,000,000 or something like that, which is really small for them. And I think they take the same approach that it's not a lot of value add. I've seen other REITs announce acquisitions or announce the continued intent of acquisitions. And I think some of them have been punished for it just because of where cost of capital is. Think so it helps that we are in a market environment that it's super volatile and it doesn't really make sense unless it's really compelling to pull the trigger.

I'm not immune to the fact that even if we are in a really robust market, we would have to push the envelope a little bit because I don't like a bunch of debt. And if you saw from the 275,000 shares of preferred that we've retired, we're effectively delevering. And I think that's smart money. But we bought those like a dollar less than where it's trading right now. So I think the bloom may be off the rose there.

I don't know that we're all that interested in buying at a value that is near par. And I also think that we got a lot more than we thought on that front, almost 14%. We'll look around, never know what's on and what has a large block and they want to come to us and we'll talk to them. But I think, unfortunately our preferred is strong and our equities is weak, but I think that's kind of normal for this environment. We're in a really sort of, I feel like talking to the wall here, but we all know that this is a rough market.

It's a rough time to understand what capital decisions you need to make. And so I think what we're doing is pretty impressive, right? Just delivering results, tightening expense controls, allowing the portfolio to breathe and get its natural 2.5% plus annual growth rate in there, looking for different spots to take on. In our pipeline, we actually had a handful more than one conversation with folks that might be equity deals in terms of properties being contributed. So I think there's something there.

I don't know if I want to do them at today's pricing. So who knows? We'll see how that shakes out. But we are seeing things. We are getting good looks. We are passing on a lot of things. Because sometimes it's hard to do the calculus. Particularly as you've seen both in this writing and prior writings, we have a very narrow box for what we like in manufacturing. So we're really focused on risk management. And to do that, you have to be highly disciplined.

You have to be very specific. And there's a lot of deals out there that just don't fit that box. They may be more appropriate for a much larger balance sheet with a lot larger number of properties. It may be more appropriate for someone who doesn't have the same worldview as we do. So I'm not knocking the other assets.

They just don't fit our box as much as we'd like, unless there's a real compelling real estate or financial opportunity. As I noted in the press release, we did talk to tenants. Didn't talk to L3, didn't talk to Northrop. They wouldn't tell us anything anyway. They're public companies.

And we have one asset of a legion of assets in their thing. So it's hard. You couldn't get them -- even if you could get them to talk, they're not going to tell you what that division's doing. But we see the financials. So we know where those are at.

All the other ones though, the ones that probably scoop people the most, the middle market credits, we didn't speak to. And we have great rapport with them. And we spoke to at length, and this is on top of already getting their financials on a quarterly basis and getting updates. But we talked about real world things, about how supply chains are being impacted, how they're thinking about it, how they're projecting around the corner. The what if scenario, if Trump does this or Trump does that or China does this.

And the conversations were very productive. I think we all walked away agreeing, let's talk again in another quarter. It's an isolated kind of environment in terms of if you're manufacturing X widget, and you don't get to hear what the person who manufactures Y widgets is doing. And we had a unique perspective. We also talked to some of the private equity sponsors of these companies.

And so I think it was a real collaborative effort, a lot of sharing, a lot of insight. But again, just much ado about nothing. I think I've told some investors who panic, I think the [panicans] sold us at $13.62 on April 7. And I had some conversations and I said a couple of things to them. Is one, look, the capital markets react emotionally and at a faster pace than the physical markets can ever move.

Physical markets can't be that emotional, in part because you can't move, you can't make decisions that quickly. And so I said, look, things transact slower so that we don't know what we don't know. There is a lot of uncertainty. There's a lot of headlines but there's not a lot of detail. And so I think that's really important.

And then the last thing is that the global supply chain is very nuanced. It's very detailed. It's very specific. And broad brush strokes just don't apply. And you have to think about how specialized the distribution networks have become over the last 3.5 decades.

And where you source things and how you source things. And you also have to think about how a lot of those decisions have been made in response to prior legislation. So if you think about NAFTA and its predecessor, I mean its follow-on successor, USMCA, where we had a lot of effectively free trade between Canada and Mexico, you saw a lot of infrastructure built, right? We've purposely avoided -- over the last four years we've seen a lot of deals about buying factories in Canada and Mexico. And candidly, sometimes they're very attractive pricing.

I think the real answer why we never did that is one, we wanted to stick to our knitting, keep focused, laser focused. Two, we're too small to have sort of all those tax implications. And I think it's more suited for much larger REITs. But I bring this up because the whole supply chain infrastructure is really nuanced. It's really nuanced.

And I think it was Ackman who posted on X the other day, he was suggesting that and again, he's always talking his book, but he was suggesting that Trump pull back on tariffs and then sort of have this incremental clipping coupon sort of effect where it grows at 50 basis points every month or something or whatever period it was until it gets to some sort of acute level.

And I think his point was to allow people time to change. Because it does take time. I heard comments that said, look, even if we had permanent tariff implementation, there's a wait and see. Because even if you have permanent tariffs, there's a view out there that, okay, if the Republicans aren't in control of White House in four years, and that's a big if, but if they're not, then maybe all this stuff is undone.

And sometimes do you want to rip off and destroy a supply chain for 3.5 years? So I think there's that sort of long term perspective that people have had. But there's also a near term saying, oh yes, they're at 145 right now, but is it really going to be that way? And that was before we've heard them soften their tone. And that's before yesterday's announcement that Xi and Besant are -- representative for Xi and Besant are talking.

I think -- again, I'm not at that level of influence. We have to generally take it and wait and see what happens with the tariff conversations. And is this a bold move to negotiate? Or was this a fumble? We don't know.

And everyone's going to have their opinions. And no one's going to be convinced otherwise of their opinions. But we have to wait and see how they shake out. Because if they shake out and they work, well then great. And if they don't, well then that's bad.

But we don't know. And I understand the uncertainty in our stock. I understand the uncertainty in the market. But for us, we're long. We're committed. And we feel comfortable about it. I mean, I have so much of my network tied in this thing. If I was stressed about this, you would hear it. But I'm not. It's a solid portfolio, doing well.

I got to think this is a pro our asset class strategy over the next four years at the minimum. But we need other things to clear. We need less uncertainty in the -- we just had India and Pakistan last night. I mean, let's -- how many things can we have pop up? The whack-a-mole of geopolitical risk has been incessant for 3.5 years.

And we also need insight into rates. I think we're rolling into this year and we had people pricing a bunch of rate cuts. And most of those people are not pricing in rate cuts now. We don't know what to expect. I'm glad I'm not in Powell's job.

That's not an easy one to do. But I have to respond to what he's doing, so it's not also easy. But we feel good about it. We feel good about our tenants. I mean, I heard stories about, yes, I think the biggest price import right now has been steel, candidly, steel and aluminum pricing, because they're indexed.

If you buy from The US, you buy from China, you buy from Brazil, you buy from Germany, you're still got index pricing. And those and a lot of infrastructure based critical types of things rely on these types of metals. So there's been that pricing pressure, but it's not, again, not out of the ordinary, it's not that they haven't seen it before.

Typically, think some of the remedies they have -- we had one client who talked about they had a 10% surcharge placed on the metal components of their products and their clients readily accepted it. Yet they had 8 months of inventory such that they didn't have to pay the higher prices.

So in the near term, their contribution margins are improving. And their view is that they'll have to buy steel when inventory runs out, but who knows where steel prices will be at that time. We had -- I mentioned in there the manufacturer who decided to leave China. They started thinking about this in August. They formally started the implant in November when the elections had passed.

And they said they should be up and running in their Malaysia production in about another 45 days. So they just wanted to cut out the risk of the volatility because they had it with COVID, which was really frustrating. And then they had it again this time. And so volatility in supply chain is just as stressful as cost in the supply chain. And I think this is an important element that we think about this and that it takes time to sort this out.

But I feel good. I feel really good about where we're at. We don't have that many properties. We've got 3.5 dozen eggs in our basket, and we're watching every one of these eggs all the time. And so I feel good about it.

I don't see any real reason to be concerned. But again, like you, I don't know what I don't know. I don't know what's going to be said tomorrow or happen the next day. But I can tell you that we have good margins. The rent coverage is strong. We have dividend coverage is strong. We're super tight in our expenses. We're super patient. There's no ego involved. I don't need to spend money if we don't need to.

It makes for -- it can make for boring soup. But look, we could very well be Bubba Gump Shrimp Boat here and in 1.5 years, we could find ourselves as the asset play and whoever bought now is going to win. But hey, if you're a day trader in REITs, it's a good time because you can make 4% or 5% swings on hard assets that haven't changed the value over the last 60 days, and you can pick up a lot more alpha than you could by just a buy and hold. So kudos to the hedge funds and the day traders out there who are doing that in our name and others. I made 12% on ProLogis in about a week.

So we're all, there's money to be had out there. And so it's an interesting space. Enough of rambling though, let's get to Q&A and see what we get that's interesting.

(Operator Instructions) Rob Stevenson, Janney Montgomery Scott.

Aaron, can you talk about the cap rates that you're seeing on deals? Are you not finding the quality industrial manufacturing assets with good tenants still selling at the 8 cap to be able to pull the trigger there? Or is it now the cost of equity at 14 versus 15, 16, almost 17 and change before that's keeping you on the sidelines at this point?

So cap rates, I'd say that right now we're seeing they're a little bit tighter than they were in 3rd and 4th quarter. But I think the sweet spot is 7.5 to 8.25, whereas before they were probably they were probably 25 plus basis points higher. We have seen some clear sub 7.5. We've certainly seen brokers still pushing sort of the low 7s. We got someone yesterday at 7.9.

We've seen some that are wider. So look, those work, maybe not at $14 but they do certainly work in the $15s. But it's not so much the cap rate, right? Because remember, look, the cap rate is not necessarily your ongoing yield because most of these have 3% bumps. I think where it is, is just saying -- I think a lot of it is what we're seeing right now is just not that compelling.

They're not bad assets, but they're not compelling assets. And what's the point of buying something that's marginal in terms of your motivation behind it and it's also marginal in yield? In a time where you could either look like a genius or look like an idiot, but in that, on hindsight.

So if we've got a strong, if we've either really strong real estate or a really strong tenancy or they're in terms of they're making a very unique product or they're very financially strong, or it's just a compelling financial opportunity, then we're kind of just like, why? I've said this before, so many REITs just feel like they to grow, they have to grow, they have to buy, they have to buy.

But we're not really growth stocks. We want to grow. And look, there's enough of price appreciation in the REIT industry overall from the depressed level of share pricing right now to get people a pretty good appreciation with yield. And so I'm just not seeing compelling reasons. The other thing I think about that is you always have to think about the motivation.

And some of the deals we've seen have been PE led. So why are you PE firms selling this now in the most volatile time when cap rates are higher? Why? Because you apparently really need the money and you now understand that this is a cheaper form of leverage. Those motivations are not always in line with us as a long term holder.

So I think all that comes into play when we're looking at this. I think the last thing saying is, I got finite dollars and I'm going to use those dollars. If I don't spend them, yeah, I may not be growing today, but I'm not shrinking. If I so if I do spend them, I'm going to spend them so I get the maximum amount of growth.

Okay. That's helpful. And then I guess as a follow-up to that, I mean, I don't know whether you were blacked out or not, but I were you guys thinking about doing stuff under the ATM a few weeks ago when you guys were in the 16s, given the fact that you said that a lot of these deals would work for you in the 15s to be able to do -- hit the ATM in the 16s. I mean, was that attractive to you at that point? Or at that point, the volatility in the marketplace still had you dissuaded from doing that?

Look, think even I think the average was, I forget what the average was, $15.86, there was some of that for the quarter that was actually at the very beginning of the year that rolled over that we had tried to do in $12.31, but it settled in January. So that was a little bit lower number because we were closing out that year. But we did buy quite a bit in or sell quite a bit in the 16s for the quarter. But to your point where we're like, it was like $13.62 and I was like, oh, I want to buy that myself. And then within a week, was like $17, that'd be sweet.

But we were already in blacked out. And that unfortunately seems to be the case with us. And so kudos to those hedge funds who seem to play this game. We tend to -- like right now, we are last week, Friday, we're $16.42. I'd like, okay.

I like that. I'll do that. And then, of course, today, we're f****** whatever, $14.30. So it -- we tend to miss a lot of big [slots] to the window. I think the last period of time where we had robust volume at a good price while we were open was like, in December.

And so just another it's like [Job], just constant patience there. But yes, we look at it. We look at it constantly. And the strategy for the ATM is twofold. I don't like issuing it even at 16 necessarily because I think that's a steep discount.

But it's a balancing act of incremental growth. We're not doing large volume. We're not a big lead, so we're not doing large ATM. But it's also increasing float, right? Because we understand that what happened on any given day when you could have 10,000 shares, which is what, that's nothing in terms of dollar value.

10,000 shares could cause us to move 4% or 5%. And so we understand that we need to over time, gradually, consistently increase float. And trading volumes are up substantially. We're probably averaging 40 right now on whatever look you use, 40 to 50, depending on what day count you use. And you contrast that to like it was 9,000 two years ago.

So we're incrementally doing that. So there's a couple of strategies there. But I think the short answer is, if we were doing well, we would issue more. We would never destroy the price to issue because we have a long game. But I'd love to get more equity out there to do more deals.

But I got to have things lined up.

Okay. That's helpful. And then a couple of questions on some of the individual assets. Any clarity on a time frame for OES to exercise their purchase option? I saw the comments in the footnotes, but just curious as to whether or not you guys think that, that's any closer to a resolution in the near term?

Well, they have -- by the lease agreement, they have a 4-year window to purchase that. They're already 1.5 years, I guess, into that. I will say that they have engaged -- I think I said this before, but they have engaged their appraisal process. So that's the first step they have to do is they have to engage a third party vendor to -- they actually go out, they RFP for appraisers, they get those RFPs, they select an appraiser and the appraiser starts a process. That's already underway.

Even if they -- and they don't move fast. They just don't move fast. And they forward us. We're like there's one department that does real estate, there's another part that does valuation, there's another part that does acquisitions. And so it's a government entity.

And I'm not saying that they're inefficient, they're just built this way. And so they forewarned us that it takes a long time, that's why they asked for the 4-year window. They are taking all the signs to suggest that they are certainly exploring getting the valuation. I think it's laid out in the lease how that works. And so they'll get evaluation.

If it's within the parameters, then they can proceed as is and they can put it forward to the budget for approval. And then it would catch up for the next year. So even if they were actually approved it today, which they won't, then it won't even be available. The monies wouldn't be available until next year. So this is long tail, but from all the TVs we see, it's progressing.

They're heavily utilizing the property. They put improvements in it. As I remind everyone, it's literally next door to their own headquarters, which is the Office of Emergency Services, which has got -- I mean this is where all the natural disasters are happening, which is probably the biggest business in Southern California or excuse me, in California. And so we're positive on it, but we have to unfortunately be patient, right? Because if I were to go and say, well, I don't want to be wait, I want to go try to flip it, I mean, good luck.

I mean, all the office streets, right? So that's where that stands.

Okay. And then latest thoughts on the vacant Minneapolis or Minnesota asset. Is that looking like a sale or a release at this point?

Yes. So I think there's a question someone had asked is why is it showing up held for sale? The held for sale test is you think it will -- you have a reason also to believe that it will sell within 12 months. And that's the test for [that]. It's on the market.

We have had numerous tours. I think they picked up now that winter is passing, it's really rough to go tour an empty industrial building in the dead of winter in St. Paul. So tours are picking up. We are having conversations for both lease and sell.

I think when we underwrote and engaged the broker, the broker said this is going to be a 10-plus month marketing process and then a closing. So that's why it doesn't trigger the Help Yourself standard 12 months. We're going to keep monitoring it. Look, I'm receptive to selling it. I'm receptive to leasing it.

I'm probably more receptive to selling it, candidly. And look, I think my hope is that we will have resolution on that or at least progressive resolution on that this calendar year.

Okay. That's helpful. And then last one for me. Ray, the stock -- the G&A commentary was helpful. The stock compensation expense was only $484,000 this quarter versus $1.4 million last year. What does that trend look like over the course of the remainder of 2025? Is it in that sort of $400,000 to $500,000 a quarter range? Does it spike at some point? How should we be thinking about that line item as we run through our models for '25?

The run rate will be about $750,000 for the OP units and then the directors is another roughly $60,000. So the round number is about $800,000 a quarter. The reason it was lower in the first quarter is the units weren't granted until February and March. So you've only got that roughly two-thirds or so, a little less than that.

I would add that that noncash stock comp will be -- that will be -- that you can model that for the next numerous years. There's not going to be any volatility in that $750,000 component because that's how we designed it. It's bridged out over, like, for instance, my comp is five years, et cetera, et cetera.

So that's going to be very stable, whereas if you go back and look historically when we had the other types of the other units that had the earn-out provision, the variability, we saw it spiked materially. So year-over-year comparisons are not valid. So just think about the $750,000 plus the stock -- I mean, the director comp is sort of a steady state.

Craig Kucera, Lucid Capital Markets.

We move on to our next question. Gaurav Mehta, Alliance Global Partners.

I wanted to ask you on some of your noncore properties. Is there any update on the sale of Costco property and any expectations for Solar Turbines?

So Costco, we have calls with them. So the buyer, KB Home, we have calls with them approximately every 4 to 6 weeks. We had one about two weeks ago. They -- everything is moving forward. They have another meeting with the city.

Right now, we think -- we see -- well, they're [hard] quite a bit of money. And so that's moving on track. And so we see nothing to suggest that doesn't go on the time line that we've already suggested. I'll point out that they do have the right for extensions. And if they do those extensions, that's really just a matter of their logistics of finalizing approvals, scraping the property, when they want to get that teed up, things like that, and there's economic benefit to those extensions.

So in some ways, if they extended, we'd be fine with that because we'd actually pick up. The first extension, half of it goes towards purchase price, the other half is in our pocket, right? And then the subsequent extensions are just in our pocket. So we're kind of comfortable with them. We're working with them. They're great. They're very savvy people. They're very sophisticated. So that feels moving along. As it relates to Solar, we are actually in conversations with Solar.

They probably need to extend a few more months. We're working out the punch list. They're definitely leaving, but they just need a little bit more time to restore the property back to sort of original flex space. And so we're working through that. We'll probably know more by the next earnings, but they wouldn't need much more than, call it, two months if they needed any at all.

And then concurrent with that, as we've stated before, the Solar and WSP property are actually on one parcel. And literally since 2021, we've been working to split this parcel. And this shows the challenges of working with municipalities and in particular, Southern California municipalities, but we are almost there. My gut is these will line up fairly close where we'll have the formal parcel split toward the end of the year. The tenant will be out towards the end of the year.

And then our intent is, as we stated before, for the solar property itself is to market it to an owner user, ideally for a sale, we're receptive to tenancy, but ideally for a sale. And we think the owner user market in that San Diego submarket is pretty robust. We've seen prints greater than $300 a foot. And so that was just going to take time, unfortunately. But, if we get a couple more months out of them, that's great.

They get it cleaned up for us, that's great. It's moving according to plan.

Okay. And then second question I wanted to ask you was on the preferred share repurchases. Is that something that we should expect more of going forward? Or was this like onetime sort of opportunistic repurchase?

Well, as sort of alluded in the opening comments, I'm pleased that we acquired them. We acquired what, 13.8% of the shares outstanding at a very favorable price. That price on the blended price is like $1 or less than where it's trading at right now. When the share price of the preferred is closer to par, I'm not as compelled, right? I would say -- and when I mentioned the bloom is a little bit off the roads.

So look, if someone reaches out to us and they have -- I think the thing is it's very illiquid, right? It's trading up at whatever it is, $24.50, $24.60, but it trades like 900 shares, right? And so think about if we were to buy 900 shares in the market every day, if it even traded every day, that would take a long time to get 275,000. So I don't want to bang my head against the wall. I think also there's a little bit of play here in interest rates, right, where people think things are going.

Look, opportunistically, sure. I think reducing leverage on the margin, we bought those. That was in lieu of a property acquisition, and that's a yield like I have no underwriting cost, I don't have any dead deal cost. I know I can guarantee my downside and I know my upside by acquiring that. And in total, I think that was $6.5 million.

It would be really hard to find a $6.5 million manufacturing property that did the exact same thing. So it made sense. So it's a way for us to take action when there's not much action to be taken. And it reduces our effective leverage from some people's perspective. It increases AFFO because now we're saving over $400,000 a year in preferred dividends.

If we could buy more, sure. But I mean, I think the signal should be to the market, we're not trying to take this down, right? We have the right to call it. I don't know that we would even call it next year if we wanted to. We've already taken off some of the steam.

So like we look at all things at all times, and we're trying how do we place money, how do we be smart about this money. Regardless of what Mr. Market thinks on any given day, we're trying to do the right thing for our shareholders who are long term, who care about the dividend and care about the long-term share price.

John Massocca, B. Riley Securities.

Maybe kind of thinking big picture. I know you talked about having conversations with multiple kind of your mid-market tenants. What's kind of their view on transaction activity given the macro uncertainty? And I mean just thinking that potentially drives some potential deal flow for you. Are they tightening up because of all the uncertainty? Or are they may be viewing it as an opportunity given they're in the business of manufacturing in the United States?

Yes, good question. So I think what you're asking is, are they seeing opportunities to consolidate or expand? Or how are they looking at their respective transaction markets? Is that the question?

Yes, pretty much.

Yes. Yes. So I have asked that question. And I think for good operators, just like for good capital allocators that are just in the investment management space, it's a really hard time to try to place capital because it's too much volatility. So I think collectively, like us, they got to beat on what other people are doing and seeing opportunities and they're looking around for things, but they're not rushing to do that.

I think the thesis could form to be very attractive. We've talked to some of the PE sponsors of this, and they're the same mind. It's like, look, there could be some unique opportunities. I think a lot of the strategies in these spaces are roll-ups where you're taking very specific like this particular CNC skill with this particular stamping skill and then you're rolling them up and you're getting order book synergies. And so I think that's on the horizon.

I think though that everyone needs capital and with a very volatile debt market, you're not super motivated. And the flip side is, if you say a super, super compelling opportunity other than if it's a liquidity concern, like they're exiting because it's an end-of-life type of situation or whatever. And so they're willing to take market because they want cash, they want cash now. Normally, great buying opportunities are wrapped in distress. And so that distress could be really amplified in this environment.

So I think there's a patient quotient going on right now. But look, I think you could see it. I think candidly, though, there's probably a balancing act between the extension of existing. So almost all of our properties have space. And the way these are designed is it could be easier to pilfer another company's production lines if they were to fall on hard times.

Like one of our camera tools bought a press. It was like a $2 million press that took 6 trucks to be shipped and they got it from Canada and they shipped it down and they built a building around it and they added it in and it added -- I mean, it paid for itself within like six months, right? And so that was an example where it's far easier just to expand your existing line because your workforce is already there and things like that. So it will be interesting to see. I think it's fair to say that depending on how everything shakes out with the sort of supply chain that you should see transaction opportunities.

Okay. And then with that in mind, I mean, how are you thinking about utilizing more leverage versus maybe doing some capital recycling out of things that are, I guess, in the core bucket today? I know there's still some more noncore wood to chop. But just longer term, how do you kind of view running capital recycling versus leverage versus, like obviously, you see capital markets?

Yeah, you are right. Yes. We have several properties that are industrial in our core bucket that are distribution properties and not manufacturing properties that would fetch lower cap rates and so can be recycled accretively. I will do that all day long before I want to sort of seek more leverage. Look, right now, I like where my leverage profile is.

I mean, I'd like it to be lower, but I like where it is. I just don't see much benefit until we have a clear line of sight on rates to play with that box, but we have definitely recycling opportunities. And I think that's why we're calm. We have enough recycling opportunities placed at the right time that will sustain us. We don't need capital to continue to grow in our models.

Craig Kucera, Lucid Capital Markets.

Sorry, the call dropped on me. And I apologize if I missed any of these questions I'm asking. But you mentioned talking to your PE shops and you sourced a lot of deals from them in the past. And I'd be curious, are they able to raise more money right now and maybe looking at accelerating investment in domestic manufacturing? Or is it still too early to tell?

It's still muddy waters. Some are sitting on capital that they raised previously. Sort of you lay back, go back, step back a little bit, '22, we saw rates go, we saw volatility, but there was an optimism in the general market that we might have sort of a hard V and then -- or that rates would kind of revert back pretty quickly. That didn't happen. Then we got into a bit of a malaise in late '22, early '23, where like, what's going on.

But then there was a bit of resurgence certainly in '23 heading into elections, heading into August rate cut. And there was a lot of capital, I think, that was raised around that timeframe. I think that slowed down because thesis haven't played out quite as anyone had expected, right? And so I think there's capital on the sidelines. Certainly, some of the PE sponsors we talked to have capital.

They have a window to deploy that capital. And so they're comfortably in that window to deploy. So it's not like there's an immediate ticking time bomb. And I think they're looking -- but they haven't necessarily deployed it for the same reasons we haven't, right? It's just that it's still pretty murky and still muddy.

And look, there's a general view that there may be better pricing. At the same time, just being thoughtful about what other opportunities. Maybe it's the same pricing, maybe it's not better pricing, but it's a better asset. So that's interesting to note. And I think also to dovetail on that, the battleship conversations, we still have been speaking to 2 of those battleships.

And look, they're doing what we're doing. They're just taking a pause. They have not made any sort of finite decisions about their existence because it's really a choppy time. And I think the near-term focus for a lot of people is the balance sheet in terms of refinancing and less about -- it's sort of more of a defensive posture than an aggressive posture.

Got it. I appreciate that. Changing gears, you've mentioned that you do have large land footprints on a number of assets that you have. And I'd be curious, are you getting any increasing number of inbound calls for developing some of those sites where maybe there could be some shared efficiencies between tenants?

So a lot of the properties have land that you wouldn't necessarily carve out because they have ideas to expand footprints. We have other properties, and I'd say one, two, three, probably four, five specific assets that we think there's good redevelopment opportunities or development opportunities, I should say, not redevelopment, development. So there's additional land that they don't need that we think could be developed. We are looking at one right now. We're speaking to sort of a build-to-suit operator about doing that.

I think the process for these is if you really sort of want to monetize them, you have to sort of first go through a partial split, then you got to -- once you've gone through the feasibility study, you got to go through a partial split and then you can build them. So we are actively looking at that. I think that's a value add. I don't put a lot of mention to it. I put a lot of attention to it, but not mention because it's early days.

But I think there is some there. On inbound, not a ton. And the reason is you got to think about most of the industrial building was warehouse space, speculatively built, supply got too high. That's come up. There has been absorption issues.

And a lot of those operators are dealing with a much higher cost of capital with the construction loans. So I think a lot of the spec builders who would be the kind that would call you and say, hey, look, I want to build on your parcel,' they've kind of gone. They're either sitting on their hands or they're licking their wounds. There are some. We did get an inquiry probably about a month ago about one of our -- they wanted to buy our parcel.

But I think it just was a reinforcement to us that those parcels, we can do that if we want to or partner with someone to do that. And over the long term, that will generate even more return for our investors.

Got it. And given that you extended the lease with Fujifilm, does that become a potential disposition candidate now just to clean up the JV interest? Or do you still view that as a core asset?

Yes, I do think it has potential.

Okay. One more for me. Just curious, housing has been pretty slow this spring, particularly among the new homebuilders. Has the tone from KB Home changed at all? Or are you still confident that they want to move forward with the purchase?

Zero change in tone. I think, look, broad strokes, homebuilders have been slow, but we're still massively undersupplied in housing in the United States. And in certain markets, we're acutely undersupplied. So in the right submarkets, the economics work all day long.

Steve Chick, Sebis Garden Capital.

The stat you guys cite, the 30% of your portfolio ABR that's leased by investment-grade tenants, I'm assuming that like many of your tenants aren't even rated. And so I'm wondering if you kind of have -- I mean, that might be like 100% of the ones that are rated. I mean do you have --

So that is just those are rated. Having been in the net lease space for a long time, there's been a long history of people doing implied or look-through ratings, which they're trying to bolster that. We don't do that. If it's got a rating and if it's investment grade, that's what we're showing, because otherwise, I think it's kind of b******. Yes, a lot of the companies that we look at financially would probably be rated.

But look, I'm not a rating agency, and they don't have a rating. So I don't want to blow any smoke up your rear. And so the 30% is just hard coated. They got a real rating and the rest -- and look, we do that with a view that, hey, on the margin, people are like, oh, well, you don't have enough investment grade, so why don't you do a look through and so it props up your numbers. Look, let's just be honest and let's be where it is, just because they're not rated, all that means is they're not accessing the public debt markets, and so they don't need the rating, right?

And I think there's this view that if you're not rated, then you must be subpar. There's a lot of private companies who don't go public equity because it's a lot of brain damage. There's a lot of cost. Like the reason why we bought our preferred back is because it's not rated. We rated it when we listed it because that was a requirement.

But the rating agency wanted like $80,000 just to reprint the thing. I'm not spending $80,000 a year for something that's already issued. And so we had some insurance companies who -- they bought it with the rating, and so they get a different reserve treatment. So that's why we got the shares back. Rating agencies are a wonderful industry if you need that type of paper, but they're not everything. So that's a long-winded way of saying the 30% is just simply the real rated ones. The other ones are good companies, but they're not rated.

Yes. Yes. No, that's kind of what I figured. I mean, with your due diligence and knowing their financials, I mean you probably say that percentage of your portfolio is a lot higher. So it's almost -- the metric is almost irrelevant for you guys, it seems like.

And then the second thing I wanted to ask on the [Santa Clara tenant and common property], the distribution yields you guys have been realizing on that have been very attractive. I mean the cash has been higher than your proportionate income. And I'm just wondering maybe why and does that continue? I mean it's paying the dividends like $1 billion a year or $200,000-plus a quarter. Does that continue, I guess, is my question?

I'm not quite following the question. Ray, do you follow this question?

Yes. He's referring to the distributions we're getting off of the TIC. And generally, it will continue, but there'll be a slowdown for the next few months because we're going to have to pay a lease commission and we won't be distributing for the next 4 months to basically generate cash to pay a lease commission. But after that, it will kick back in.

It's clearly a pretty good asset for you guys.

(Operator Instructions) As there are no further questions --

Thanks, Ryan. So done with the call, here's the verdict. It's 46,413 shares. So 10,000 shares traded over the last hour, and we're down. So clearly, I pissed off more investors today.

But I just think that's a compelling buying opportunity. So, there's some investors out there bought 46,000 shares, excuse me, at a very attractive price. And I'm in support of that, and I think that's favorable. Until we have more news, be well, hold on tight, kiss your children, your wives and talk next time.

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