MODIV INDUSTRIAL, INC. (MDV) FY 2024 MD&A

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition, results of operations and cash flows together with the consolidated financial statements and related notes included in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. Also, see “Cautionary Note Regarding Forward-Looking Statements” preceding Part I of this Annual Report on Form 10-K and Part I, Item 1A. Risk Factors herein.

Management’s discussion and analysis of financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

Overview

We are a Maryland corporation with issued and outstanding stock consisting of Series A Preferred Stock, listed on the NYSE under the symbol “MDV.PA,” and Class C Common Stock, listed on the NYSE under the symbol “MDV.” We currently own and manage single-tenant net-lease properties throughout the United States, which are primarily, but not exclusively, industrial properties. Our focus for future acquisitions is on critical industrial manufacturing properties with long-term leases to tenants that fuel the national economy and strengthen the nation’s supply chains. We elected to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2016. We believe that we have operated in conformity with the requirements for qualification as a REIT for U.S. federal income tax purposes. Since December 31, 2019, we have been internally managed.

Although we are not limited as to the form our investments may take, our investments in real estate will generally constitute acquiring fee title or interests in entities that own and operate real estate. We will make substantially all acquisitions of our real estate investments directly through the Operating Partnership or indirectly through limited liability companies or limited partnerships, including through other REITs, or through investments in joint ventures, partnerships, tenants-in-common, co-tenancies or other co-ownership arrangements with other owners of properties. We are the sole general partner of, and owned an approximate 89% and 83% interest in the Operating Partnership as of December 31, 2024 and February 28, 2025, respectively. The Operating Partnership’s limited partners are further described in Note 12 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K. We report with the SEC as a smaller reporting company under Rule 12b-2 of the Exchange Act.

Primary Investment Objectives

Our primary investment objectives are:

•to provide attractive growth in AFFO (as defined below) and sustainable cash distributions;

•to realize appreciation from proactive investment selection and management;

•to provide future opportunities for growth and value creation; and

•to provide an investment alternative for stockholders seeking to allocate a portion of their long-term investment portfolios to industrial manufacturing real estate.

We expect the trend of onshoring manufacturing to accelerate and we will continue to focus future acquisitions on industrial manufacturing properties, subject to market conditions and the availability of prices that we consider attractive. We can provide no assurance that we will achieve our investment objectives. See the Part I, Item 1A. Risk Factors section of this Annual Report on Form 10-K for additional information.

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Recent Events and Uncertainties

There are continuing significant uncertainties in the market in which we operate related to inflation and interest rates, supply chain disruptions, potential tariffs and negative impacts associated with the violence and unrest in the Middle East, the ongoing Russian war against Ukraine and sanctions which have been implemented by the United States and other countries against Russia, China and Iran. Volatility in stock and bond markets and particularly the rapid rise in yields on U.S. Treasury securities during 2023 and 2024 may negatively impact our operating results, liquidity and sources of borrowings.

We, our tenants and operating partners are impacted by inflation and interest rates. While the rate of inflation has declined from historic highs, inflation remains somewhat elevated and there is continued uncertainty over the future rate of inflation. In January 2025, the Federal Reserve maintained the current federal funds rate after reducing rates three times in 2024. The Federal Reserve may continue to refrain from reducing interest rates to try to rein in inflation, which could lead to a recession and will negatively impact our future results due to higher borrowing costs on any future borrowing. In addition, sustained elevated inflation rates may negatively impact our longer term leases if contractual rent increases are not sufficient to keep up with market leases.

On December 31, 2024, the counterparties to the swap agreements exercised their one-time options to cancel the swap agreements (see Note 8 for more details). In January 2025, we entered into two new swap agreements, effective December 31, 2024, for $125.0 million each, for an aggregate of $250.0 million, corresponding to the Term Loan (as defined

below), which fixed the Secured Overnight Financing Rate (“SOFR”) for the year ending December 31, 2025 to 2.45%, resulting in a fixed rate of 4.25% based on our leverage ratio of 47.6% as of December 31, 2024. We paid aggregate premiums of $4.2 million to buy down the fixed rate below the prevailing market rate. The buydown premium is a derivative that will be recorded as an asset on our balance sheet as of January 31, 2025 and amortized over the 12 months ending December 31, 2025, increasing interest expense by approximately $1.1 million per quarter. We designated these pay-fixed, receive-floating interest rate swaps as cash flow hedges, which are expected to be effective through December 31, 2025. The derivatives will be marked to fair value each reporting period with any change in fair value being recorded through accumulated other comprehensive income as long as the derivatives are deemed effective.

Possible future declines in rental rates and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from office properties. We have two leases expiring in the next 12 months: our office property in Issaquah, Washington leased to Costco, which expires on July 31, 2025 and is under contract to be sold to KB Home, as described in Note 3 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K, and our office property in San Diego, California leased to Solar Turbines that also expires on July 31, 2025. We also have two leases scheduled to expire in 2026: our industrial property in Santa Clara, California leased to Fujifilm Dimatix, Inc. that expires on March 16, 2026 and our industrial property in Melbourne, Florida leased to Northrop Grumman that expires on May 31, 2026.

Potential future declines in economic conditions could negatively impact commercial real estate fundamentals and result in lower occupancy and rental rates and cause declining values in our real estate portfolio, which could have the following negative effects on us: the values of our investments in commercial properties could decrease below the amounts paid for such investments; and/or revenues from our properties could decrease due to fewer tenants and/or lower rental rates, making it more difficult for us to make distributions or meet our debt service obligations. We successfully negotiated lease extensions for six properties during the years ended December 31, 2024 and 2023; however, changing circumstances may make future lease extensions more difficult.

The debt market remains sensitive to the macro environment, such as inflation, Federal Reserve policy, the impacts of increases in tariffs by the U.S. and other countries, market sentiment and regulatory factors affecting the banking and commercial mortgage-backed securities industries. Our Credit Facility (as defined below), includes floating interest rates based on SOFR and our leverage ratio as described below and although our swaps entered into in 2022 were cancelled on December 31, 2024, we entered into new swaps for 2025 which fix the rate of our Term Loan for one year. Our two mortgages with fixed rates do not mature until after September 2027. As a result of the interest rate swap agreements entered into for the year ending December 31, 2025, 100% of our consolidated indebtedness held a weighted average fixed interest rate of 4.27% as long as our leverage ratio is less than 50%.

Any future uncertainties in the capital markets may cause difficulty in refinancing debt obligations prior to maturity at terms as favorable as the terms of existing indebtedness. If we are not able to refinance our indebtedness on attractive terms, or at all, at the various maturity dates, we may be forced to dispose of some of our assets. Market conditions can change quickly, potentially negatively impacting the value of real estate investments.

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Liquidity and Capital Resources

Generally, our cash requirements for property acquisitions, debt payments and refinancings, capital expenditures and other investments will be funded by bank borrowings through our Credit Facility (as defined below), mortgage indebtedness on our properties, real estate property sales, internally generated funds or offerings of shares of our Class C Common Stock.

Purchases of properties in the near-term will be funded primarily with proceeds from dispositions of remaining non-core properties, proceeds from our ATM program and cash on hand. In the future, we expect to sell additional shares of our Class C Common Stock, subject to market conditions and a recovery in the trading price of our Class C Common Stock. We are targeting leverage, over the long-term once we achieve scale, of 40% or lower of the aggregate fair value of our real estate properties plus our cash and cash equivalents; however, we increased our borrowing during 2023 in order to execute attractive acquisition opportunities resulting in leverage of 47.6% as of December 31, 2024. We have $30.0 million of borrowing capacity available under our Credit Facility which we may utilize in the near or medium-term if we identify attractive investment opportunities in advance of completing dispositions or raising additional equity, which could result in temporary increases in leverage.

We expect that our cash requirements for operating and interest expenses, dividends on our Series A Preferred Stock and distributions on our Class C Common Stock and OP Units will be funded by internally generated funds. We expect to have adequate liquidity to meet our cash requirements for the next 12 months and beyond.

ATM Program

On March 30, 2022, we filed a Registration Statement on Form S-3 (File No. 333-263985), and on May 27, 2022, we filed Amendment No. 1 to the Registration Statement on Form S-3, to issue and sell from time to time, together or separately, the following securities at an aggregate public offering price that will not exceed $200.0 million: Class C Common Stock, preferred stock, warrants, rights and units. The Form S-3, as amended, became effective on June 2, 2022 and we filed a prospectus supplement for our at-the-market offering of up to $50.0 million of its Class C Common Stock (the “ATM Offering”) on June 6, 2022 (the “ATM Prospectus”).

On November 13, 2023, we filed Supplement No. 1 to the ATM Prospectus to reflect the Amended and Restated At Market Issuance Sales Agreement, dated November 13, 2023, and the change in our corporate name. During the year ended December 31, 2024, 521,837 shares were sold at an average price of $16.16 per share and issued for $8.2 million, net of sale commissions of $0.2 million, of which 287,840 shares were sold at an average price of $16.16 per share and issued for $4.5 million, net of sale commissions, during the three months ended December 31, 2024. The resulting net proceeds from the ATM Offering for the year ended December 31, 2024 were $7.7 million after legal, accounting, investor relations and other offering costs of $0.5 million. As of December 31, 2024, we had $40.3 million of shares of Class C Common Stock available for future issuance under the ATM Offering.

Credit Facility and Mortgages

Our Operating Partnership entered into an agreement for a line of credit (the “Credit Agreement”) on January 18, 2022 with KeyBank and the other lending institutions party thereto (the “Lenders”), with KeyBank acting as agent for the Lenders (in such capacity, the “Agent”). The Credit Agreement currently provides a $280.0 million line of credit comprised of a $30.0 million revolving line of credit (“Revolver”), and a $250.0 million term loan (“Term Loan” and together with the Revolver, the “Credit Facility”), as further described in Note 7 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K. The Credit Facility is available for general corporate purposes, including, but not limited to, acquisitions, repayment of existing indebtedness, capital expenditures and general corporate purposes.

On February 26, 2025, we entered into an agreement with the Lenders to amend the Credit Agreement by (a) extending the maturity of the Revolver to January 18, 2027, which is coterminous with the maturity of the Term Loan, and (b) changing the definition of “Distributions” to exclude any repurchases of our Series A Preferred Stock that are funded by proceeds from the sale of our Class C Common Stock.

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The Credit Facility is priced on a leverage-based grid that fluctuates based on our actual leverage ratio at the end of the prior quarter. With our leverage ratio of 47.6% as of December 31, 2024, the spread over SOFR, including a 10-basis point credit adjustment, is 185 basis points and the interest rate on the Revolver was 6.2250% as of February 28, 2025; however, there was no outstanding balance on the Revolver. We also pay an annual unused fee of up to 25 basis points on the Revolver, depending on the daily amount of the unused commitment, and incurred total unused fees of $0.4 million for each of the years ended December 31, 2024 and 2023. On December 27, 2024, we exercised our right to reduce the Revolver to $30.0 million from $150.0 million in order to reduce annual unused fees to less than $0.1 million.

On May 10, 2022, we entered into a swap agreement, effective from May 31, 2022 to January 17, 2027, subject to our counterparty’s one-time cancellation option on December 31, 2024, to fix SOFR at 2.258% with respect to our original $150.0 million Term Loan. On October 26, 2022, we entered into a swap agreement, effective from November 30, 2022 to November 30, 2027, subject to our counterparty’s one-time cancellation option on December 31, 2024, to fix SOFR at 3.44% with respect to the $100.0 million expansion of our Term Loan. On the December 31, 2024, the counterparties to both swap agreements exercised their one-time options to cancel their respective swap agreements (see Note 8 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for more details). In January 2025, we entered into two new swap agreements, for $125.0 million each, for an aggregate of $250.0 million, corresponding to the Term Loan, to fix SOFR for the year ending December 31, 2025 at 2.45%, resulting in a fixed rate of 4.25% effective December 31, 2024, based on our leverage ratio of 47.6% as of December 31, 2024. (see Note 14 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for more details).

As of December 31, 2024 and 2023, the outstanding principal balance of our mortgage notes payable secured by two properties, including one held for sale property, was $30.9 million and $31.2 million, respectively. As of December 31, 2024 and 2023, the Term Loan outstanding principal balance was $250.0 million and there was no outstanding balance on the Revolver. As of December 31, 2024, our approximate 72.7% pro-rata share of the TIC Interest’s mortgage note payable of $12.4 million was $9.0 million, which is not included in our consolidated balance sheets in this Annual Report on Form 10-K.

The Credit Facility includes customary representations, warranties and covenants. The Credit Facility is secured by a pledge of all of the Operating Partnership’s equity interests in certain of the single-purpose, property-owning entities (the “Subsidiary Guarantors”) that are indirectly owned by us, and various cash collateral owned by the Operating Partnership and the Subsidiary Guarantors. In connection with the Credit Facility, we and each of our Subsidiary Guarantors entered into an Unconditional Guaranty of Payment and Performance in favor of the Agent, pursuant to which we and each of our Subsidiary Guarantors agreed to guarantee the full and prompt payment of the Operating Partnership’s obligations under the Credit Agreement.

While we intend for the Credit Facility to be an important source of financing, we may continue to use mortgage debt financing for certain real estate investments and acquisitions. This financing may be obtained at the time an asset is acquired or an investment is made or at such later time as determined to be appropriate. In addition, debt financing may be used from time-to-time for property improvements, lease inducements, tenant improvements and other working capital needs.

The $30.0 million unused capacity on our Revolver as of the date of this Annual Report on Form 10-K, subject to our borrowing base covenant, along with proceeds from any future offerings of shares of Class C Common Stock, can be used to invest in real estate and real estate-related investments or to re-lease and reposition our properties in accordance with our investment strategy and policies, including costs and fees associated with such investments, such as capital expenditures, tenant improvement costs and leasing costs. We also may use a portion of the proceeds from our equity offerings for payment of principal on our outstanding indebtedness and for general corporate purposes.

Compliance with All Debt Agreements

Pursuant to the terms of our Credit Facility and our two mortgage notes payable secured by certain of our properties, we and/or our subsidiary borrowers are subject to certain financial loan covenants. We and/or our subsidiary borrowers were in compliance with such financial loan covenants as of December 31, 2024.

Acquisitions and Dispositions of Real Estate Investments

We define “initial cap rate” for property acquisitions as the initial annual cash rent divided by the purchase price of the property. We define “weighted average cap rate” for property acquisitions as the average annual cash rent including rent escalations over the lease term, divided by the purchase price of the property.

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Acquisitions

The details of the one property and 12 properties we acquired during the years ended December 31, 2024 and 2023, respectively, are as follows (dollars in thousands):

During the year ended December 31, 2023, we acquired 12 industrial manufacturing real estate properties for an aggregate of $129.8 million, including closing costs, at a blended initial cap rate of 7.8% and a weighted average cap rate of 10.3%. These properties are located in Princeton, Savage, Detroit Lakes and Plymouth, Minnesota; Gap and Reading, Pennsylvania; Roscoe, Illinois; Lansing, Michigan; Ashland and Piqua, Ohio; Alleyton, Texas; and Andrews, South Carolina. The properties acquired had a weighted average lease term of approximately 20.6 years upon acquisition.

On or before March 14, 2025, following the completion of our exploration of a potential tenant build-to-suit opportunity, we will acquire an industrial property for $6.1 million, consisting of a $0.25 million cash deposit that has been distributed to the contributor, and at closing, approximately 344,118 Class C OP Units valued at $5.85 million, based on an agreed upon value of $17.00 per Class C OP Unit. The property is located in the Jacksonville, Florida metropolitan statistical area and is subject to an existing lease that expires on December 31, 2032, with annual rent escalations based on the consumer price index. The property contains an adjacent land parcel that has the potential to be developed into additional industrial space. We priced this transaction at an 8.00% initial cap rate based upon a rent increase that will occur on July 1, 2025.

In evaluating the above properties as potential acquisitions, including the determination of an appropriate purchase price to be paid for the properties, we considered a variety of factors, including the condition and financial performance of the properties, the terms of the existing leases and the creditworthiness of the tenants, property location, visibility and access, age of the properties, physical condition and curb appeal, neighboring property uses, local market conditions, including vacancy rates, area demographics, including trade area population and average household income and neighborhood growth patterns and economic conditions.

Dispositions

Our dispositions during the year ended December 31, 2024 were as follows (dollars in thousands):

For the year ended December 31, 2023, we sold 14 non-core real estate properties (11 retail and three office) comprised of 241,795 square feet for aggregate contract sales prices of $47.5 million, with net proceeds of $44.4 million (net of commissions and closing costs) and a net loss on sales of $1.7 million. See Note 3 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for further details of these dispositions.

On February 26, 2025,we completed the sale of our property that is located in Endicott, New York and is leased to New Vision Industries, LLC, a subsidiary of Producto Holdings LLC (“Producto”) for a sales price of $2.4 million. In connection with this sale, the lease for our property in Jamestown, New York with another Producto subsidiary was amended to increase the base rent by $2,500 per month.

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Capital Expenditures and Tenant Improvements

Other than as discussed below, we do not have plans to incur any significant costs to renovate, improve or develop our properties. We believe that our properties are adequately insured. Pursuant to our lease agreements, as of December 31, 2024 and 2023, we had obligations to reimburse $3.0 million and $2.4 million, respectively, for future on-site and tenant improvements expected to be incurred by tenants. We expect that the related improvements will be completed during the 2025 calendar year and will be funded from cash on hand, operating cash flow, offerings of shares of our Class C Common Stock or borrowings under our Credit Facility.

In addition, we have identified approximately $0.5 million of capital expenditures that are expected to be completed in the next 12 months which are not recoverable from tenants with double-net leases. These improvements will be funded from cash on hand or operating cash flows. More information on our properties and investments can be found in Note 3 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K.

Funds from Operations and Adjusted Funds from Operations

In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“Nareit”) promulgated a measure known as Funds from Operations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding gains and losses from sales of depreciable operating property, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated investments, preferred dividends and real estate impairments. Because FFO calculations adjust for such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current Nareit definition or may interpret the current Nareit definition differently than we do, making comparisons less meaningful.

Additionally, we use Adjusted Funds From Operations (“AFFO”) as a non-GAAP financial measure to evaluate our operating performance. AFFO excludes non-routine and certain non-cash items such as stock-based compensation, amortization of deferred rent, amortization of below/above market lease intangibles, amortization of deferred financing costs, gain or loss from the extinguishment of debt, unrealized gains (losses) on derivative instruments, and write-offs of due diligence expenses for abandoned pursuits. We also believe that AFFO is a recognized measure of sustainable operating performance in the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies. Management believes that AFFO is a beneficial indicator of our ongoing portfolio performance. More specifically, AFFO isolates the financial results of our operations. AFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, AFFO for the period presented may not be indicative of future results. By providing FFO and AFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities.

For all of these reasons, we believe the non-GAAP measures of FFO and AFFO, in addition to income or loss from operations, net income or loss and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. AFFO is useful in assisting management and investors in assessing our ongoing ability to generate cash flow from operations and continue as a going concern in future operating periods. However, a material limitation associated with FFO and AFFO is that they are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and AFFO. Therefore, FFO and AFFO should not be viewed as a more prominent measure of performance than income or loss from operations, net income (loss) or cash flows from operating activities and each should be reviewed in connection with GAAP measurements.

Neither the SEC, Nareit, nor any other applicable body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate AFFO and its use as a non-GAAP performance measure. In the future, the SEC or Nareit may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure.

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The following are the calculations of FFO and AFFO for the years ended December 31, 2024 and 2023 (in thousands, except shares outstanding and per share data):

(1)    Fully diluted weighted average number of shares for 2023 includes the Class M OP Units which automatically converted to Class C OP Units on January 30, 2024, and Class P and Class R OP Units which automatically converted to Class C OP Units as of March 31, 2024, to compute the fully diluted weighted average number of shares.

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Property Portfolio Information

Following the issuance of our publicly listed Series A Preferred Stock in September 2021, we began to significantly transform our portfolio in furtherance of our strategic plan to reduce our exposure to office properties and increase our WALT. The following is a summary of how we have transformed the composition of our real estate portfolio over time, resulting in a majority of our ABR produced by industrial properties, including the TIC Interest, as shown and described below.

Percentage of Annual ABR:

Following the public listing of our Class C Common Stock in February 2022, we began to focus strategically and exclusively on acquiring industrial manufacturing properties while at the same time continuing the tactical reduction of our non-core properties exposure. To that end, we acquired 15 industrial manufacturing properties and sold eight non-core properties during 2022.

In 2023, we acquired 12 more industrial manufacturing properties and made a significant step in transforming our portfolio in August 2023 when we sold 13 non-core properties to GIPR, comprised of 11 retail properties and two office properties (see Notes 3 and 5 to our accompanying unaudited condensed consolidated financial statements included in this Annual Report on Form 10-K for details), followed by the sale of another office property at the end of August 2023.

We continued our transformation in 2024 with the sale of two non-core properties in January and February and the acquisition of an industrial manufacturing property in July 2024. Industrial properties now comprise 78% of the portfolio ABR and 22% of ABR is attributable to non-core properties, as of December 31, 2024. Our goal is to have a portfolio consisting of 100% industrial manufacturing properties over the intermediate-term.

The following is a breakdown of our income by property type for the year ended December 31, 2024 (in thousands):

(1)    Industrial core properties include an approximate 72.7% TIC interest in the Santa Clara, California property.

(2)    Non-core properties include the following:

(i)    our non-core acquisition of a leading KIA retail property located in a prime location in Los Angeles County acquired in January 2022, which was structured as an OP Unit transaction resulting in a favorable equity issuance of $32.8 million represented by 1,312,382 Class C OP Units at a cost basis of $25 per share. We repurchased 656,191 of those units and 123,809 shares of Class C Common Stock from an affiliate of the seller at $14.80 per share on August 1, 2024 as described in Note 12 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K;

(ii)    our 12-year lease with OES executed in January 2023 for one of our legacy assets located in Rancho Cordova, California that includes a purchase option which OES may exercise until December 31, 2026. We have received preliminary indications from OES of interest in exercising the option. (We define legacy assets as those that were acquired by different management teams utilizing different investment objectives and underwriting criteria);

(iii)    our legacy property leased to Costco located in Issaquah, Washington which offers compelling redevelopment opportunities, following Costco’s lease expiration on July 31, 2025, given its higher density infill location and the fact that the land is zoned to allow for multi-family development. We entered into a purchase and sale agreement for the Costco property with KB Home, a national homebuilder, in January 2024 and the buyer has made $1.7 million of non-refundable deposits as of December 31, 2024 (see Note 3 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for additional details of the pending sale); and

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(iv)    two legacy office properties including a property leased to Solar Turbines that we expect to sell after we complete a parcel split to maximize its value and a property leased to Cummins that was sold on February 28, 2024 (see Note 3 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for additional details of this sale).

The following is a breakdown of our assets by property type (in thousands):

(1)    See footnote (1) above

(2)    See footnote (2) above.

(3)    As part of our continued effort to increase balance sheet simplicity, management is currently exploring opportunities to acquire the minority interests in the property in which we hold the TIC Interest, which would result in consolidation of the asset, or to sell the TIC Interest.

We have one mortgage secured by an industrial core property and one mortgage secured by a non-core property. The equity of each special purpose subsidiary that owns our other properties is pledged as collateral under our Credit Facility or the properties are unencumbered. See details of mortgage debt in Note 7 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K.

Distributions

The source of cash used to pay our distributions has been and is expected to continue to be internally generated funds from operations.

A table of distributions declared and paid is disclosed in Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Distribution Information.

We expect that our board of directors will continue to declare distributions based on a single record date as of the end of each month and to pay these distributions on a monthly basis. Distributions will be determined by our board of directors based on our financial condition and such other factors as our board of directors deems relevant. We have not established a minimum dividend or distribution level, and our charter does not require that we make dividends or distributions to our stockholders other than as necessary to meet REIT qualification standards. On November 4, 2024, our board of directors authorized a 1.7% increase in the annual distribution rate from $1.15 per share to $1.17 per share commencing with monthly distributions payable to common stockholders and Class C OP Unit holders of record beginning as of January 31, 2025.

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Cash Flow Summary

The following table summarizes our cash flow activity for the years ended December 31, 2024 and 2023 (in thousands):

Cash Flows from Operating Activities

The net increase in cash provided by operating activities for the year ended December 31, 2024 compared to the year ended December 31, 2023 primarily reflects a decrease in property expenses which resulted from the August 2023 sale of properties subject to gross leases and an increase in distributions from unconsolidated investment in a real estate property, which resulted from an increase in available cash following completion of roof replacements. These were partially offset by an increase in interest expense, net of derivative cash receipts, year-over-year since the Term Loan was not fully drawn until April 2023.

Cash Flows from Investing Activities

The net cash provided by investing activities for the year ended December 31, 2024 primarily reflects the net proceeds from the sale of two real estate properties and a land parcel aggregating $15.0 million, partially offset by the cost of one acquisition and building additions aggregating $7.0 million. The net cash used in investing activities for the year ended December 31, 2023 primarily reflects funds used for acquisitions of 12 properties aggregating $122.8 million and additions to existing real estate properties of $4.8 million, offset in part by the net proceeds of $34.7 million from the sale of real estate properties.

Cash Flows from Financing Activities

The net cash used in financing activities for the year ended December 31, 2024 primarily reflects the net cost of repurchasing Class C OP Units and shares of Class C Common Stock for $11.5 million, our dividends and distributions paid to preferred and common stockholders and Class C OP Unit holders and monthly repayments of mortgage notes payable, partially offset by net proceeds from the sale of common stock under our ATM offering. The net cash provided by financing activities for the year ended December 31, 2023 primarily reflects our net borrowings of $97.0 million from the Credit Facility, partially offset by repayments of principal on a mortgage note payable, funds used to repurchase common stock and dividends and distributions paid to preferred and common stockholders and Class C OP Unit holders.

Results of Operations

Portfolio Information

Our wholly-owned investments in real estate properties as of December 31, 2024 and 2023, including one and two properties held for sale as of the years ended December 31, 2024 and 2023, respectively, and the 91,740 square foot industrial property underlying the TIC Interest for all balance sheet dates presented were as follows:

(1)    Includes the TIC Interest.

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(2)    Includes one office property held for sale as of December 31, 2024 and two properties (one industrial and one office) held for sale as of December 31, 2023, which were sold on January 10, 2024 and February 28, 2024.

We acquired one operating property during 2024 and 12 operating properties during 2023, respectively. We sold two and 14 non-core properties during 2024 and 2023, respectively. The operating results of properties that were classified as held for sale as of December 31, 2024 and 2023 and the properties that were sold during 2024 and 2023 were included in the continuing results of operations in our accompanying consolidated financial statements included in this Annual Report on Form 10-K.

Our results of operations for the year ended December 31, 2024, may not be comparable to those expected for 2025 or in future periods.

Comparison of the Year Ended December 31, 2024 to the Year Ended December 31, 2023

Rental Income

Rental income for the years ended December 31, 2024 and 2023 was $46.5 million and $46.9 million, respectively, including tenant reimbursements of $2.0 million and $3.0 million, respectively. The decrease in rental income of $0.4 million, or 1%, year-over-year reflects the disposition of two properties during the first quarter of 2024 and 14 properties in August 2023, which included tenant reimbursements for modified gross leases and double-net leases. The decrease in rental income from sold properties was largely offset by rental income from 12 industrial manufacturing properties acquired in 2023 and one industrial manufacturing property acquired in July 2024. Pursuant to most of our current lease agreements, tenants are required to pay property operating expenses directly; however, some tenants reimburse all or a portion of the property operating expenses that they do not pay directly.

General and Administrative

General and administrative expenses were $6.3 million and $6.6 million for the years ended December 31, 2024 and 2023, respectively. The decrease of $0.3 million, or 5%, year-over-year primarily reflects reduced employee compensation and investor relations costs, partially offset by non-recurring legal and transfer agent costs related to the distribution of GIPR’s common stock to our stockholders in January 2024.

Stock Compensation

Stock compensation expense was $1.6 million and $11.2 million for the years December 31, 2024 and 2023, respectively. The significant decrease of $9.6 million, or 86%, compared to 2023 primarily reflects the change in stock compensation expense for our Class P OP Units and Class R OP Units which vested at the end of March 2024. Stock compensation expense in 2024 includes $1.2 million for our Class P OP Units and Class R OP Units for the first quarter, of which $0.7 million related to our achievement of management’s performance target for FFO of $1.05 per diluted share for the year ended December 31, 2023. Stock compensation expense for these units was $10.9 million in 2023, which included a one-time, non-cash catch-up adjustment of $8.6 million for performance-based stock compensation expense based on our determination that it was probable that we would achieve management’s performance target for FFO of $1.05 per diluted share for the year ended December 31, 2023. Amortization of the stock compensation expense related to our Class P OP Units and Class R OP Units was completed effective with their automatic conversion to Class C OP Units on the last business day of March 2024. From April 1, 2024 through December 31, 2024, there were no other stock incentive awards outstanding. In addition to the portion of independent directors' fees that are paid in common stock, stock compensation expense in future periods will include amortization for the Class X OP Units granted on February 3, 2025 as described in Note 14 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K.

Depreciation and Amortization

Depreciation and amortization expense was $16.6 million and $15.6 million for the years ended December 31, 2024 and 2023, respectively. The purchase price of properties acquired is allocated to tangible assets, identifiable intangibles and assumed liabilities, if any, and depreciated or amortized over their estimated useful lives. The increase of $1.0 million, or 7%, year-over-year primarily reflects a full year of depreciation of real estate properties acquired in the first seven months of 2023, and an increase due to an industrial manufacturing property acquired on July 15, 2024, partially offset by reductions due to properties sold in August 2023 and the first quarter of 2024, along with reductions in amortization of intangible lease assets for the year ended December 31, 2024, due to the disposition of properties with acquired leases rather than leases initiated by us.

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Property Expenses

Property expenses were $3.6 million and $5.2 million for the years ended December 31, 2024 and 2023, respectively. These expenses primarily relate to property taxes and repairs and maintenance expenses, the majority of which are reimbursed by tenants and included in rental income. The decrease of $1.5 million, or 30%, year-over-year primarily reflects decreases in repairs and maintenance and property taxes related to 14 properties sold during August 2023, which included modified gross leases and double-net leases, offset in part by an increase in non-recoverable environmental insurance expenses.

Impairment of Real Estate Investment Property

There was no impairment for the year ended December 31, 2024. Impairment of real estate investment property amounted to $4.4 million for the year ended December 31, 2023 related to our property in Nashville, Tennessee, which was leased to Cummins Inc. The impairment charge represents the excess of the property’s carrying value over the property’s contracted sale price less estimated selling costs for the sale that was completed on February 28, 2024.

Gain (Loss) on Sale of Real Estate Investments, Net

The gain on sale of real estate investments of $3.4 million for the year ended December 31, 2024 relates to the aggregate gain on sale of two properties (one industrial property with a lease expiration at the end of 2024 and one office property), which were sold during the first quarter of 2024 and the gain on sale of a land parcel in September 2024 (see Note 3 to our accompanying consolidated financial statements included in this this Annual Report on Form 10-K for more details). The loss on sale of real estate investments of $1.7 million for the year ended December 31, 2023 includes the $1.9 million loss on sale of the 13 non-core properties sold to GIPR on August 10, 2023, partially offset by the $0.2 million gain on sale of the office property sold on August 31, 2023. The loss included the $2.4 million difference between the $12.0 million liquidation value and the $9.6 million fair value of our investment in GIPR’s newly-created Series A Redeemable Preferred Stock received on August 10, 2023 as a portion of the sale proceeds (see Note 5 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for more details).

Other (Expense) Income

Interest income was $0.5 million and $0.3 million for the years ended December 31, 2024 and 2023, respectively. Interest income for 2024 primarily reflects interest earned on the proceeds from the sale of two properties (one industrial and one office) sold during the first two months of 2024 and higher interest rates earned on available cash and cash equivalents. Interest income for 2023 primarily reflects interest earned on cash proceeds from the April 2023 draws on the Term Loan, prior to utilizing such cash to acquire industrial manufacturing properties.

Dividend income was $0.1 million and $0.5 million for the years ended December 31, 2024 and 2023, respectively, reflecting dividends received on our investment in GIPR preferred stock for August through December 2023 and in January 2024, along with dividends received prior to the sale of 171,444 shares of common stock issued by GIPR and retained by us as described in Note 5 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K.

Income from unconsolidated investment in a real estate property, which reflects our approximate 72.7% TIC Interest in the Santa Clara, California property’s results of operations, remained relatively constant at $0.3 million for the years ended December 31, 2024 and 2023.

Interest expense, including unrealized gain or loss on interest rate swaps and net of derivative settlements, was $16.2 million and $13.8 million for the years ended December 31, 2024 and 2023, respectively (see Note 7 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for details of the components of interest expense, net). The increase of $2.4 million, year-over-year primarily reflects (i) a $0.9 million increase in unrealized losses, net on valuation of interest rate swaps, and (ii) a $2.2 million net increase in interest expense and unused commitment fees incurred on our Credit Facility due to larger balances outstanding during 2024, since the Term Loan was not fully drawn until April 2023. This increase was partially offset by greater derivative cash settlements of $0.5 million and a reduction of $0.3 million in mortgage notes interest expense year-over-year as a result of paying off the mortgage on the property leased to OES in December 2023.

The year ended December 31, 2023 includes a gain of $1.4 million for the fair value adjustment of the GIPR preferred stock for the period from August 10, 2023 (when the GIPR preferred stock was acquired) through December 31, 2023.

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Critical Accounting Policies and Estimates

The policies and estimates discussed below reflect those that management believes are or will be critical in affecting the preparation of our consolidated financial statements. We consider these policies critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our consolidated financial statements. Management evaluates these estimates based upon information currently available and on various assumptions that it believes are reasonable on an ongoing basis. Additionally, other companies may have utilized different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. See “Note 2 – Summary of Significant Accounting Policies” to our consolidated financial statements of this report on Form 10-K for additional discussion of our significant accounting policies.

Real Estate Investments

Real Estate Acquisition Valuation

In connection with our acquisition of properties, we allocate the purchase price, including transaction costs, to the tangible and intangible assets and liabilities acquired based on their respective estimated fair values. Tangible assets consist of land, buildings, fixtures and tenant improvements. Intangible assets consist of above- and below- market lease values and the value of in-place leases. Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require us to make significant assumptions to estimate market lease rates, market land and building values, discount and capitalization rates, and future cash flows. The use of different assumptions could impact the timing of recognition of related revenues and expenses.

Impairment of Investment in Real Estate Properties

We monitor events and changes in circumstances that could indicate that the carrying amounts of real estate properties may not be recoverable. These indicators include, but are not limited to: changes in real estate market conditions, our ability to re-lease properties that are vacant, reclassification of properties to held for sale, and tenants in bankruptcy. Identification of such events may involve certain assumptions, estimates, and significant judgment. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management assesses whether the carrying value of the real estate properties will be recovered through the future undiscounted operating cash flows expected from the use of and eventual disposition of the property. The undiscounted operating cash flows are based on estimated market lease rates, property-operating expenses, carrying costs during lease-up periods, estimated hold periods, discount rates, and capitalization rates. If, based on the analysis, we do not believe that we will be able to recover the carrying value of the real estate properties, we will record an impairment charge to the extent the carrying value exceeds the estimated fair value of the real estate properties. The use of different assumptions could have a material impact on our results of operations.

Recent Accounting Pronouncements

See Note 2 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K.

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