Executive Summary / Key Takeaways

• Modiv Industrial has successfully transformed into a focused, internally managed REIT specializing in single-tenant net-lease industrial manufacturing properties, significantly increasing its industrial core exposure to 80% of ABR by Q1 2025.
• The company's core competitive advantage lies in its specialized focus, disciplined underwriting, and relationship-based approach within the critical manufacturing niche, resulting in a portfolio characterized by long-term leases (14.2-year WALT) and stable cash flow.
• Recent financial performance demonstrates solid execution, with Q1 2025 AFFO increasing 18% year-over-year, driven by effective cost control and portfolio optimization, supporting a recently increased dividend.
• Management is pursuing a patient and disciplined growth strategy, prioritizing value creation through strategic asset recycling and exploring development opportunities on existing land parcels over external acquisitions in the current volatile market.
• Key opportunities and risks include the successful execution of planned non-core asset dispositions (Costco, OES, Kalera, Solar Turbine) to fund future growth, managing interest rate exposure through hedging, and navigating market volatility while seeking accretive growth opportunities.

Forging a Niche in American Manufacturing

Modiv Industrial, Inc. (MDV-PA) has undergone a significant metamorphosis since its inception in 2015. What began as a more diversified real estate holding company has strategically sharpened its focus, emerging as a specialized, internally managed REIT dedicated to the single-tenant net-lease industrial manufacturing sector. This transformation accelerated following the company's public listings in 2021 and 2022, marked by a deliberate pivot away from non-core assets, particularly office properties, towards critical industrial facilities that underpin the nation's supply chains.

This strategic evolution is clearly reflected in the portfolio composition. Industrial core properties, which represented just 41% of Annual Base Rent (ABR) at the end of 2021, now constitute a substantial 80% of the portfolio as of March 31, 2025. Concurrently, non-core assets have been reduced from 59% to 20% of ABR over the same period. This shift has dramatically increased the portfolio's weighted average remaining lease term (WALT) from 6.1 years at the end of 2021 to an impressive 14.2 years by March 31, 2025 (including recent lease extensions).

In a competitive landscape dominated by giants like Prologis (PLD), which commands a vast global logistics network, or diversified net-lease powerhouses like Realty Income (O) and NNN REIT (NNN) with broad retail and industrial holdings, Modiv Industrial has carved out a distinct identity. While these larger players benefit from scale and broader market penetration, Modiv's competitive edge lies in its specialized focus on the manufacturing segment within industrial real estate. This isn't a technology company in the traditional sense, but its "technology" is arguably its deep understanding, disciplined underwriting, and relationship-based approach within this specific niche.

This specialization allows Modiv to identify and manage properties that might be overlooked or mispriced by less focused competitors. The tangible benefits of this approach are evident in the portfolio's characteristics: long-term leases with tenants whose rent represents a very small percentage of their overall cost inputs, contributing to potentially more durable tenancy and higher rent coverage. Management's focus on "critical" manufacturing properties implies facilities essential to a tenant's core operations, further reducing the likelihood of relocation. Operational "innovations" for value creation within this niche include exploring development opportunities on existing land parcels and partnering with tenants on expansions, leveraging their understanding of tenant needs. This focused strategy contributes directly to portfolio stability, cash flow predictability, and risk management – foundational elements for an income-oriented REIT like Modiv.

Performance Reflecting Strategic Discipline

Modiv's financial performance in the most recent period underscores the benefits of its strategic transformation and disciplined management. For the three months ended March 31, 2025, the company reported total revenue of $11.793 million, relatively constant compared to $11.967 million in the prior-year period, reflecting balanced acquisition and disposition activity. More significantly, Adjusted Funds from Operations (AFFO) saw an 18% increase, rising to $3.9 million from $3.3 million in Q1 2024. On a per-share basis, AFFO grew to $0.33 per diluted share in Q1 2025, up from $0.29 in the comparable period. This builds on the full-year 2024 AFFO of $14.99 million, or $1.34 per diluted share.

This improvement in AFFO is primarily attributable to increased cash rental income, a decrease in cash interest expense, and lower property and general and administrative (G&A) expenses. Management has emphasized tight expense controls, noting that G&A is expected to be lower in future quarters compared to Q1 2025 due to headcount reductions and changes in executive compensation structures. Non-cash stock compensation is projected to have a stable run rate of approximately $800,000 per quarter going forward.

Operationally, the portfolio consists of 43 properties totaling approximately 4.5 million square feet, with a high occupancy rate of 98%. As of March 31, 2025, annualized base rent (ABR) was $39.4 million. While the majority of tenants are private, approximately 30% of the portfolio by ABR is leased by investment-grade tenants or their parent companies. Management monitors tenant credit through various means, including reviewing financials and market reports, and has expressed comfort with the performance of its middle-market credits.

The balance sheet reflects a focus on managing debt and liquidity. As of March 31, 2025, the company held $6.165 million in cash and cash equivalents and had total debt outstanding of $280 million, comprising $30.647 million in mortgage notes payable and $249.102 million under its credit facility. The credit facility includes a $250 million term loan and a $30 million revolving line of credit, with no debt maturities until January 2027. The company has actively hedged its interest rate exposure, entering into swap agreements effective December 31, 2024, to fix SOFR on the $250 million term loan at 2.45% for the year ending December 31, 2025, resulting in a fixed rate of 4.25% based on the leverage ratio. The company paid a $4.2 million premium to buy down this rate, which is being amortized to interest expense. This hedging strategy provides certainty in borrowing costs amidst rate volatility.

Capital allocation has been strategic and opportunistic. The company utilizes an At-the-Market (ATM) offering for incremental equity capital, selling 98,261 shares in Q1 2025 at an average price of $15.86 for $1.5 million in net proceeds. From November 2023 through March 2025, total net proceeds from the ATM reached $9.8 million. A Preferred Stock Repurchase Program was authorized in March 2025, allowing repurchases up to the amount of Class C Common Stock sales proceeds over the trailing twelve months. Through March 31, 2025, the company repurchased 205,000 shares of Series A Preferred Stock for $4.9 million at an average cost of $23.66 per share, effectively delevering and improving AFFO by reducing preferred dividends. The company also increased its common stock dividend by 1.7% to an annualized rate of $1.17 per share, effective January 2025, signaling confidence in its cash flow generation and expense control.

Strategic Patience and Future Opportunities

Management's outlook is characterized by a commitment to patience and discipline in the current market environment. They acknowledge the significant uncertainties related to inflation, interest rates, tariffs, and supply chain disruptions, which create volatility and make external acquisitions challenging unless they are truly compelling. The focus remains on risk management and adhering to their specific criteria for manufacturing properties.

Instead of pursuing growth at any cost, the company is prioritizing value creation from its existing portfolio and strategic initiatives. This includes actively recycling non-core assets, such as the Costco office property held for sale (expected to close by August 15, 2025, subject to extensions), the OES office property with a potential purchase option exercise, the vacant Kalera industrial property being marketed for sale, and the Solar Turbine office property expected to be vacated and marketed following a parcel split. These dispositions are intended to provide capital for redeployment into core industrial manufacturing assets or other strategic uses.

Management is also exploring development opportunities on existing land parcels within the portfolio, viewing this as a potential avenue for accretive growth without immediate external acquisition costs. They have identified several specific assets with development potential and are actively evaluating these opportunities.

While external acquisitions are being approached with caution, the company remains open to opportunities, particularly those that align with its manufacturing focus and can be executed accretively. The recent acquisition of an industrial property in Jacksonville, Florida, via an UPREIT transaction in March 2025, demonstrates their willingness to transact when the terms are favorable and strategic.

The company's hedging strategy provides stability in interest costs for 2025, mitigating one significant source of market uncertainty. However, refinancing risk on the credit facility in January 2027 remains a key consideration, influencing current balance sheet management decisions.

Risks to the outlook include potential delays in planned dispositions, challenges in finding suitable accretive acquisition opportunities in a competitive market, and the broader impact of macroeconomic conditions on tenant performance, particularly for private credits. Geopolitical factors, such as the implementation of tariffs, could impact supply chains, although management's conversations with tenants suggest many are able to pass on increased costs or may even benefit from onshoring trends.

Conclusion

Modiv Industrial has successfully executed a strategic transformation, establishing itself as a focused player in the single-tenant net-lease industrial manufacturing sector. The company's disciplined approach to portfolio management, emphasizing long-term leases with durable tenants and shedding non-core assets, has resulted in a stable portfolio with a strong WALT. Recent financial performance, marked by solid AFFO growth and a dividend increase, demonstrates the team's ability to deliver results and control costs in a challenging market.

While the current environment necessitates patience in pursuing external growth, Modiv is actively creating value through strategic asset recycling, exploring development opportunities, and managing its balance sheet prudently. The company's specialized focus and disciplined underwriting serve as a competitive moat, positioning it to capitalize on opportunities within the manufacturing niche as market conditions evolve. For investors seeking exposure to this critical sector through an income-focused REIT with a clear strategy and demonstrated execution, Modiv Industrial presents a compelling case, albeit one that requires acknowledging the inherent risks of market volatility and the challenges of scaling in a competitive landscape.