Modiv Industrial - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered $11.7M total income and AFFO of $4.1M ($0.37 per diluted share), with AFFO per share beating consensus by 22% and GAAP EPS for common shareholders at $0.07, up from $(0.30) in Q4 2023.
• Rental income of $11.7M declined year over year on prior asset sales, but operating income rose to $5.3M as expenses fell; Adjusted EBITDA was $9,984K in Q4.
• Management set a 2025 AFFO baseline of $1.37 per diluted share vs. Street $1.15 and executed rate hedges fixing the 2025 term loan at 4.25% (≈$0.7M cash interest savings) and reduced the revolver to $30M (≈$0.3M annual fee savings).
• Dividend annualized to $1.17 for 2025 (monthly $0.0975), implying ~7.5% yield at the stated reference price; selective capital allocation and UPREIT Jacksonville development optionality are key near‑term catalysts.

What Went Well and What Went Wrong

• What Went Well

  • AFFO beat: Q4 AFFO $4.1M and $0.37 per diluted share, beating consensus by 22%; full‑year AFFO $14.99M ($1.34) exceeded Street by $0.08 per share.
  • Cost discipline and de‑risking: “achieving well over $1.4 million in cash savings for 2025,” rightsized revolver (saving ~$300K) and fixed 2025 term loan rate to 4.25% (saving ~$700K).
  • Strategic selectivity: Small sale (Endicott, NY) and UPREIT Jacksonville acquisition with adjacent parcel development opportunity; “Prudent and disciplined activity – nothing more”.
  • Alignment: “for the next five years, I personally will not receive any salary or bonus” enhancing alignment with shareholders.

• What Went Wrong

  • Top‑line pressure: Rental income declined YoY on prior dispositions ($11.664M in Q4 2024 vs $12.289M in Q4 2023).
  • EPS volatility: Q3 2024 GAAP basic EPS was $(0.18) driven by swap valuation impacts; while Q4 recovered to $0.07, non‑cash hedge effects create quarterly noise.
  • ABR trend: Annualized Base Rent modestly decreased to $39.638M as of Dec 31, 2024, and Costco/Solar expirations in 2025 weigh on forward ABR until recycled or sold.

Transcript

Operator (participant)

Please note this conference is being recorded. I would now like to turn the conference over to your host, John Raney, Chief Operating Officer and General Counsel. Please go ahead, sir.

John Raney (COO and General Counsel)

Thank you, Rob, and thank you, everyone, for joining us for Modiv Industrial's fourth quarter and full year 2024 earnings call. We issued our earnings release before market open 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 then we'll 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 is contained in our SEC filings, including our reports on Form 10-K and Form 10-Q. With that said, I would like to turn the call over to Aaron. Aaron, please go ahead.

Aaron Halfacre (CEO)

Thanks, John. Hello, everyone. Welcome. What a great day to come out with earnings, the same day we got tariffs going. We timed these things perfectly for your entertainment. I am going to have some comments this time, but let's first jump to Ray, and then I'll make comments after that, and then we'll do Q&A. Ray?

Ray Pacini (CFO)

Thank you, Aaron. I'll begin with an overview of our fourth quarter operating results. Revenue for the fourth quarter was $11.7 million. Fourth quarter adjusted funds from operations, or AFFO, was $4.1 million. On a per-share basis, AFFO was $0.37 per diluted share for this quarter, which is $0.08 above the average of the analyst estimates, compared with $0.40 per diluted share in the prior year period. I'll now discuss our full year operating results. Rental income for the full year was $46.5 million. AFFO for the full year was $14.99 million, and AFFO for a fully diluted share was $1.34 for 2024. The $400,000 revenue decrease from two properties sold in the first quarter of 2024 was offset by a corresponding decrease in straight line rents.

The increase in AFFO reflects the full year of decreased property expenses following the disposition of 14 properties in late 2023, many of which were not triple-net leases, and a $300,000 decrease in G&A, primarily due to reduced employee compensation. Now turning to our portfolio, annualized base rent from our 43 properties totals $39.6 million as of December 31, 2024, with 39 industrial properties representing 78% of ABR and non-core properties representing 22% of ABR. Our portfolio has an attractive weighted average lease term of 13.8 years, and approximately 32% of our tenants or their parent companies have an investment-grade rating from a recognized credit rating agency of BBB or better. Now turning to our balance sheet and liquidity.

As of December 31st, 2024, total cash and cash equivalents were $11.5 million, and we had $280 million of debt outstanding, which consists of $31 million of mortgages on two properties and $250 million of outstanding borrowings on our term loan. Based on interest rate swap agreements we entered into in January 2025, 100% of our indebtedness as of December 31, 2024, held a fixed interest rate with a weighted average interest rate of 4.27%, based on our leverage ratio of 47.6% at year-end. We also have $30 million of availability on a revolver, which we reduced from $150 million in December 2024 in order to save $300,000 per year in unused fees.

As previously announced, our board of directors declared a cash dividend for common shareholders of approximately $0.975 per share for the months of January, February, and March 2025, representing an annualized dividend rate of $1.17 per share of common stock. This represents a yield of 7.5% based on the $15.55 closing price of our common stock as of March 3, 2025. I'm now turning the call back over to Aaron.

Aaron Halfacre (CEO)

Thanks, Ray. I wanted to go over a couple of different areas that, you know, did not feel like writing them out extensively in the press release, but wanted to talk about them on the call, and it may either prompt following questions or preempt some preliminary questions. I think first, let's look at transactions, right? I think you clearly understand now that we do not feel compelled to do things just for the sake of doing them. We look at a lot of things, but we have been picking our spots. I would say when we released third quarter earnings in November to now, it has been quite an opaque economic landscape with a lot of vacillation between fear and euphoria. Just did not really see anything.

Usually, how it works in the property markets, the available inventory dies down sort of early December, and it starts picking back up sort of mid-later January. We saw some, we kicked the tires on some, but just did not see anything that said, "Oh, geez, let's go extend ourselves," or, "Let's do something just for the sake of doing it." Clearly, we have shown patience. Obviously, we are now probably a year away from the sort of $200 million of acquisitions we had done in aggregate in sort of a 12-month time frame, so we have kind of slowed it down. That does not mean we are not looking. It does not mean we will not do transactions. It is a real lesson in patience.

I think my points about maybe reach on growth stocks is the fact that at the end of the day, we have to grow really prudently, and each decision we make on the balance sheet, we're living with for a long period of time. We've all seen others out there who make decisions that are a little bit more near-term, and they will either issue out some costly preferred and public or private. They will unwind some of their portfolio to redeploy it into other areas, or they'll issue a large amount of equity that just doesn't really pencil. I'm faulting them. They all have their own reasons for doing such like that. For us, I just think any of those decisions would be a far greater drag on us than it would the benefit from buying a property. We're just being thoughtful about that.

As we look for the course of the year, I do not intend to stare at my navel. As most of you should know, we do not. It just means we are diligently working to try to get something up that makes sense for a couple of reasons. Pipeline-wise, you have noticed that we reduced the revolver, and that is material savings. We had contemplated doing it last year, but last year, early part of the year at least, we were contemplating. We thought about it, but we were not sure, and we wanted to hold off because there was a lot of battleship conversations, and would we need the revolver for those? I think as we worked through more of those battleship conversations, which I will touch on in a second, we realized that you probably would not need the revolver.

In fact, there would be other sources of debt that would probably be more favorable. The revolver was a nice-to-have, but you would not buy your car with a credit card, right? I actually look at the revolver kind of like a credit card. For me, for instance, personally, I put everything on my credit card for the month, and I pay it off at the end of the month. I always view it as it is going to be extinguished right away. At a $150 million revolver, I mean, that is 100% of our market cap. How am I supposed to pay it off if I have a dingling in front of me? We downsized it to what I thought was a reasonable amount, $30 million.

That's 20% of if we ever had to pull off and we found something that was super compelling, it's like, "Oh, geez, it's a nine-cap, and our revolver paper is only a six and a half, and we're going to get the spread," and then I got to backfill that somehow. I didn't want it to be too large of a backfill that caused us to choke on the chicken bone. We reduced the revolver. That saved money. That revolver is, I think, used for us to think about timing purposes, right? If it's a mismatch in timing, we could use that. We don't want to use the revolver for big acquisitions. Like I said, big acquisitions, there are other we've now identified plenty of other sources of financing that we could use that would be less costly.

It does not foretell that we're not able to grow or that we won't grow. It just means we won't grow with that mechanism. We'll use that mechanism for its intended purposes, which is a lot of times we see revolvers that are a billion or one and a half billion dollars, which is great, but I don't know if they're always used. We were paying, what, $300,000 a year for something that wasn't being used. We right-sized that. I right-sized it very specifically. We have probably comfortably $80 million worth of properties that are in the portfolio right now that we have the ability to recycle, and we would pick up at least 125 basis points on that $80 million in AFFO. That would be standstill, and that wouldn't require any change of things.

We do not have that model that was not in the 137. I do not know that we will do that. We have had several unsolicited offers on some of these properties. One of the reasons why I have not sold now is I just think that the better clarity we have in the rate environment, the better pricing is across the board. That might mean that pricing is tighter on the purchases, but the pricing is also tighter on your sales. Our view, if any one of those properties that we wanted to recycle and we had a mismatch because we wanted to do a 1031, is that the revolver would be useful. We do think that we can use a revolver for acquisitions, but they would be ones that we would self-fund or could immediately fund and so that we would not put ourselves in any sort of leverage situation.

I've been pretty adamant that I don't want leverage to really go up unless it's something that was super significant and positive. I had a path of line of sight to retire it. As it relates to the battleship conversations, they're not over. I'm not going to get play-by-plays like I did. I think we were down the line on that one. They didn't get done. That portfolio is still out there. We have had other battleship conversations. I think collectively, us and the other parties all realized that we were in a super volatile market. Everyone had to roll into swaps or caps at the end of the year. They had to reset sort of their interest expenses. I think those portfolios are still there. I still think there's conversations to be had. Those are certainly a potentiality. I think we're receptive to them.

I think someone asked the question to me offline, "Well, it seems pretty straightforward. Why wouldn't you get one done? The sponsor would just need to take a mark-to-market hit, and then they get your equity and then have huge upside." I agree with that on paper, but you've got to get a sponsor to take a mark-to-market hit. I think it's a little bit of a time. We're obviously, if we were issuing out equity, would be doing so below NAV, so we would be taking out a hit. No one's going to take our equity at $24. At the same time, they have to. I think those could happen potentially, or one of them could happen, but I'm not cooking that number anywhere. It's not anywhere in our horizon other than it's a potentiality. I'd say that we want to acquire.

We just want to be really balanced because at some point here, I do not know when, and your guys' guess is as good as mine, we are going to move away from this risk-off trade in this asset class. It has been sort of volatile, on, off, on, off, on, off, given the day or given the hour. At some point, we will start to see activity. We are starting to see little tea leaves. You saw the BSR Blackstone thing. We have seen Ackman with Hughes. You are starting to see little rumblings of activity. Obviously, NAREIT wants to profess that IPOs are going to pick back up, even though I think Line choked on that one a little bit. I think once we see better activity and we are better poised and pricings are more normalized, I want to be in a position to act.

I don't want to act before that because think about it. What if we had pulled the trigger on something a year ago? We would just, again, absolutely drag through the mud and beat about, right? The market has been, and all of you have been very stern with your capital as it relates to other REITs who don't make good decisions. You punish them, right? We're still suffering from the same quagmire that we've suffered from for three years is that we don't trade a lot. We don't have a lot of following. We have not done a big issuance ever. We're okay with that. Our dividend's solid. Our investors who have been with us for a long time are there. We are adding new and new investors as time goes on. The volume is up probably.

I mean, if you go back, I mean, at one point in our history, public history, we were like $9 and change, right? And we were trading maybe 2,000 or 3,000 shares a day. Now we're consistently higher volumes, much more stable price, greater following, certainly a lot of potentiality in the name. We're comfortable with that. We recognize that by not making bad decisions, it preserves us to be able to make a good decision when the market environment is conducive to that. That's how we're thinking about that. That may be a little underwhelming for the machine in terms of we do not have X volume for the quarter, but I wanted to share that logic that that does not mean we're not doing anything.

It doesn't mean we're just going to sort of float around the ocean without a rudder or a motor. We have intent. That intent includes patience, though. I think one of the things I think it's important to talk about today, given the fact that we now officially have tariffs in place. I guess I don't fully understand it, but I guess I kind of understand it. There's been a lot of concern that, oh, tariffs are bad for someone like us. We've actually gone out and talked to our tenants. We get quarterly financials from them, so we use that opportunity to talk to CFOs. We've asked them how they think about tariffs and how the tariff rudder. Now, granted, up until now, we don't really have tariffs. All we've had is the threat of tariffs.

I would say that there were two instances where they said some of their metals' input costs would be higher because of tariffs, but they would simply pass those on. They were not concerned. They did note that some of their input costs as it relates to the metals that they are using would be higher, but they would have no problem passing those on in their contracts to their clients. There was not a concern. That was the only thing we found that anyone said negatively about tariffs. Some people have said, and to give you an example, some of our things are very domestic manufacturing productions, right? Guardrails and some precast concrete. They had no opinion. It does not affect them, right? They sell domestically. They source domestically. No problems there.

are others who have said that they have actually found quite a bit of pickup and inquiry. They have found, particularly some of them that manufacture some things that could be manufactured, for example, in Canada or Mexico. Some of those jobs have now, the people have been coming to them saying, "We want to source jobs from you domestically." There is a degree of optimism in that, that they think order pickups would come. Most of the people view that there will be either a slight benefit or are agnostic to the tariffs. We do not see any fear and loathing as it relates to tariffs. I do not think we are going to catch a massive wind from one of these things. I mean, I think that would take time. I think you would have to have real trade shutdown, which I do not expect to happen at all.

I think this is a lot of political positioning and alignment. I don't think this has anything to do with actual trade systems grinding to complete holes. Our tenant base does not seem to be bothered at all by tariffs and, in fact, expects sort of at least an interim uplift in order demand. We do have two tenants who have come to us and asked us to expand their footprints, to physically add on to their sites. We are talking to them about capping that out and providing dollars to them in a way that increases our rent at a favorable cap rate and allows them to consolidate. We think that's a positive. We are basically like a real hard rock. The rock doesn't move very fast, but it's really a rock hard and solid, and it's a good base and good foundation.

We feel good about that. We do not have much concerns about that, if any. The swap, let's talk a little bit about the swap. Three years ago, when we put the swaps in place, we elected to take this ability to do an option that could put it back to us. That put option saved us over 50 basis points in rate. If you look back, sort of our run rate was sort of 4.52. It would have been well over 5% on a locked basis. That would have been roughly $1.25 million-$1.3 million each year of added interest expense over the last three years. We saved that. It was with options, you are obviously going to take, you have got a delta to play with. I do not think anyone underwrote in early 2022 where rates would be.

As we rolled into third and fourth quarter last year, it was August when the Fed cut and rates got really low, there was a really good probability that one of our swaps was not going to get put back to us. We had to wait. We had established a budget. That budget was the 4.42. Actually, it was slightly more than that we had budgeted. That was for just rolling the swaps into flat, sort of the same sort of 4.53 blended. We sort of monitored it on a daily basis. I want to thank our banks who meticulously provided us daily quotes on these swaps. That was tedious. We monitored. Rates really, really ran up. The tenure was going crazy. SOFR was going crazy.

There was a sort of momentary dip in the rates. We elected to use our budget. By doing so, it allowed us to pay down a little bit to 4 and a quarter. I think in that regard, we benefited from it, but we had kind of underwritten this all the way. We only did a one-year. We could have done a two-year, but our view was the time we were doing this at the end of the year, beginning of January, that there was going to be more to shake out. Clearly, the tenure has receded quite a bit since then. That's a good sign. A lot more ground to cover before year-end. We'll evaluate fresh as it comes to next year. Our view was didn't want to float it. Wanted to hedge it. We told you prior that we would.

We had a little bit of our budget allowed for it. And so we took the benefit. I think that sort of shared. I think that decision, along with the revolver, was us just being really tight about the near-term winds and volatility in the market and just being smart about our balance sheet. As you saw, we did issue equity in the fourth quarter on the ATM. It does not sound like much compared to some of our peers at, I think, 287,000 shares. That was $4.6 million at 16.16. That is 3% of our market cap. Under the radar completely creatively at prices that we can comfortably the yield on that equity from a common is far below the yield that we could buy a property at. We knew we could do that.

We grew the market cap by 3% in a quarter with no one really even knowing the difference. That is something that we are proud of. We think that little tiny actions we are making, like last year when we bought the OP units back at $14.80 that we had issued at $25, we are doing little transactions like that that, again, are not headline-grabbing, are not big. Each dollar that we are accruing and accreting on that is money that is going into our investors' pockets. I think discipline-wise, we are excited about where we are at. I think there are going to be some opportunities here. I do not know when, but it feels like there are going to be some good action in the REIT land. I hope it is in this year. Maybe it rolls into 2026. The status quo, I do not see for the industry.

I think we're going to see a lot of change, and we're ready for it and receptive to it. With that, Operator, why don't we open up for Q&A?

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. One moment, please, while we poll for questions. Our first question comes from Rob Stevenson with Janney Montgomery Scott. Please proceed with your question.

Rob Stevenson (Managing Director and Senior Research Analyst)

Good morning. Aaron, any updates on the timing of the sale of the Costco asset and the Solar Turbines split and sale at this point?

Aaron Halfacre (CEO)

Yeah. Costco, we expect it to close on its original thing, which I want to say is, correct me if I'm wrong, right, July. They do have three options. And the three options, the first option, they get, I think it's split where half, if they pay the extension option, half of it goes towards their purchase price. The other half we keep. The other two options, we get to keep fully. We've had conversations with them a couple of weeks ago in fact. Look, everything looks like a go. The only reason they might delay a little bit would be just because of logistics with the city. Everything looks to be fine. In the scenario where they do extend, just to clarify, they're $1.7 million hard already, so they can't get that back. If they do hit their extensions, that's $650,000 additional in our pocket.

In some ways, we'd be fine if they extended, but I don't think they will. As it relates to Solar Turbines and WSP Global split, we're going through that with the city. That's been a long process. I think we're getting near and near that end. There is a potential. We don't know for sure, but Solar Turbines, they might want to have a little bit longer on the lease to clean things out. They might add three or four months to that lease just to kick it out a little bit longer for them to do what they need to do and then move out. We've had several actual unsolicited offers on that property, but we're waiting to get it split. We think there's going to be more value extraction from that because the Solar Turbines property would be an owner-user, most likely, a flex space.

Then the Woods, the WSP property, which already has an in-place lease that we recently renewed. We are moving forward with that. I'd like to see that happen in six months, but I do not know how to handicap municipalities. They are just a different beast.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. What about the.

Aaron Halfacre (CEO)

The scheduled closing date it is August 15th for Costco.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. I bet. What about the OES purchase option exercise? Is that increasingly likely given the commentary in the supplemental? How are you guys feeling about that? What would be the timing on that likely at this point?

Aaron Halfacre (CEO)

They have informed us that they started their process to get an appraiser, which is the first step. We have not gotten an update as to that. They would obtain a third-party appraiser service. They would get an appraisal.

They would evaluate that appraisal relative to the contractual prices set forth. If they're in parameters and they decide they want to purchase it, then they put it forward into their budget. That budget would get approved for the following year. This has always been contemplated as a long-tailed process. We knew they couldn't start the process in earnest last year until after their budget cycle had started. I think some of the wild cards that could go both ways, and this is, again, I'm trying to read tea leaves, is obviously the state of California has a fairly large budget deficit for, so does that weigh on their decision to purchase or the timing of when it? On the flip side, I think we just saw a Newsom mandate that government workers go back to their office, which is an interesting signal for that state.

The other thing is this is the Office of Emergency Services. This is the department that receives both state and federal funding for natural disasters, which we just got one done in the Palisades. There are quite a few of these at hand. If there are budget constraints in the broader California budget, this is one that probably is still well-funded because of the severity of natural disasters and the impact that they have on lives. We feel comfortable, but we are going to be flying blind because it is a government process, and they have their procedures that they can follow. My guess is we probably will not know anything, if we do know anything at all, until summer. Even if that was the case, it would probably be they always signaled that they were going to purchase it.

It would be within that first four-year window. That's how the right is to do so. Right now, nothing to suggest that they're not doing it. We're waiting to hear back from them on selecting their appraisal, which I think is a good sign because if they didn't want to do it, they wouldn't have engaged in that process. Okay. That's helpful. In Key, you guys indicated that Fujifilm exercised their lease option there. Is that just a standard increase, or is there anything abnormal about that option exercise that would impact earnings more than or less than what we would think? Yeah. They have two seven-year options. We have to establish mutually or we have to agree upon a rent. That rent is established at 95% of fair market value. That's the mechanism in that place.

It is not a contractually predefined dollar amount. The process will start; obviously, both sides have different opinions of what fair market value is, and we have to sort of come to a compromise, and there is a mechanism to do that. Once we do, that will be the rent going forward for the next seven-year option. They are a fantastic tenant. They have been in that building for a while. They have put a lot of their own capital into that. We would love nothing more than to see them stay longer. We would have loved to have a longer-term lease, but the option is seven-year, and I get it given the financial world and how most CFOs like seven or five years typically. We look forward to having that resolved here quickly.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. That will be a flat lease, no bumps once you establish a price off that.

Aaron Halfacre (CEO)

No. No. There is a mechanism for bumps as well.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. With that Fujifilm lease done, what are recent conversations with Northrop Grumman, who I think is the other significant expiration you have over the next couple of years that is not in the disposition pile?

Aaron Halfacre (CEO)

Yeah. I mean, too soon to have conversations about renewals or things like that. They are coming up. That said, you kind of look at what has been done. There was just $1 million put in to replace the generator into that property. They also went to us and told us that every time they make a change, they have to interior change, they have to notify us. They do not have to get our approval, but they have to notify us.

They have been expanding and doing more build-out. They do classified primary electronics in there. They have expanded some of their—they have retrofitted additional space. Originally, I think when we bought it—well, we did not buy it. The legacy team had bought it. It was largely an engineering office/HR/it was kind of like an office. During COVID, they cleared all that out. Increasingly, what they have been doing is putting lab space in there. They will get a contract, add 10,000 sq ft, retrofit that for a lab, do more, and then more. They have increasingly added more and more lab space into that space. We are not even allowed to go in. We do not know what they are doing exactly because you have to have top secret clearance.

They have put in quite a bit of money in the last 12 months into their property, and they recently expanded some more. Those suggest to us that they probably are here to stay. We're going to have a very open conversation with them as we get closer to that. That's probably not going to be until end of year or early next just by the nature of how these work. Other than that, we don't see, candidly, if they left, we wouldn't be, we won't cry. We've had a lot of interest. Believe it or not, someone would like to develop that whole space into apartments. We're okay, but we think they're staying.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. That's helpful. Last one for me, Ray, how should we be thinking about G&A in 2025?

You've got especially, I guess the first place to start is the non-cash G&A. You've got these class X OP units to management. Is that just being ratably amortized there over the next five years? What should I be looking for versus the $1.6 million that you did in non-cash or stock compensation expense in 2024 for 2025, given that?

John Raney (COO and General Counsel)

Yeah. Those will be amortized over the service period. In round numbers, I think it's around $2.5 million a year. The cash G&A will go down because I don't know if you saw it in the 10-K, but Sandra Suto, our Chief Accounting Officer, is going to retire at the end of this month. She'll be leaving, and then her financial reporting person is also going to be leaving at the end of the month.

We have one other person leaving at the end of April. We are going to reduce the staff size by three. We will have nine employees. That will provide savings on the G&A front as well.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. I assume that Aaron not getting a salary or bonus will also sort of go to subtract out from the $6.3 million that you guys had this year?

Aaron Halfacre (CEO)

Okay. Non-cash goes up $2,500,000 per year to call it in the neighborhood of four-ish, and then cash goes down.

John Raney (COO and General Counsel)

No, you misinterpreted me. $2,500,000 is the absolute number, not the increase.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. Okay. That is $2,500,000, and then the cash will go down for the departures and for Aaron moving from cash to non-cash stock.

John Raney (COO and General Counsel)

Correct. Yes.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. Then the last one on that, are you guys still running sort of 30% of the year in the first quarter? Is that still the way that all of it sort of flushes out with this stuff in terms of the accruals and everything, that it all is going to still happen in the first quarter? A big number and then subsequently smaller numbers throughout the year?

John Raney (COO and General Counsel)

Yeah. I mean, the first quarter includes the bulk of the audit expense, and then it includes a lot of tax consulting because we have to issue K-1s this month and get ready to substantially file the tax return. Yeah, it will be promoted again. I'm not sure if it's exactly 30%, but it'll include those additional professional fees, which are higher than the rest of the year.

Rob Stevenson (Managing Director and Senior Research Analyst)

Okay. Thanks, guys. Appreciate the time this morning. Thanks.

Operator (participant)

Our next question comes from Gaurav Mehta with Alliance Global Partners. Please proceed with your question.

Gaurav Mehta (Managing Director, Senior Equity Research Analyst)

Thank you. Good morning. I wanted to ask you on the $6 million acquisition that I think you have under contract. I think in the press release, you talked about identifying a development opportunity in a land parcel. Is that something you guys plan to do yourself, or is that something for the future?

Aaron Halfacre (CEO)

Yeah. Just to give clarity, obviously, we had alluded to this upreach transaction prior quarter. We had signed an agreement. We were going through due diligence. When we got there, we were like, "Well, there's a very large attached parcel to it." We wanted a little bit more time to explore. We actually had a conversation with the tenant.

The existing tenant on the built portion has expressed an interest to take down a, we could build approximately a 60,000-100,000 sq ft facility next door. They expressed an interest in having some of that space so that they could consolidate their operations in one location because they have their leasing somewhere else. We spent time talking to them. We spent time talking to some local industrial brokers in the market. We also spent some time looking at sort of developers. We definitely think there's an opportunity there. It does not mean we're going to pull it today. How we would do that, we have experience in here. We would typically work with a turnkey builder that would work with us all the way through. We are not the contractor on this, obviously, and have it developed concurrent with leasing activity.

We think that's something that we'll do. When we do it, we're going to have to huddle. We're having an offsite strategic team meeting here in April. We're going to discuss that and some other ones. It also highlights we actually have four of those, three others of those types of possibilities because a lot of the properties we've acquired have large land footprints. For instance, we have an asset in the Carolinas. We've been approached for a carve-out to build an industrial facility. We're looking at those. Those are ways to obviously generate FFO growth without necessarily simply buying something. We'll look at those strategically over the course of this year for sure and decide which ones we want to pull the trigger on.

Gaurav Mehta (Managing Director, Senior Equity Research Analyst)

Okay. Great. Second question, Aaron, I wanted to ask you around your comments on the acquisition market.

I guess what are some of the indicators you're looking at to get more active in the acquisition market? Is it like you need better cap rates or more product floor, maybe better cost of capital to do accretive acquisitions?

Aaron Halfacre (CEO)

Yeah. I think we've honed and rehoned our strategy as time goes on. I think now, whereas before we bought some smaller assets, $5 million, $6 million assets, I think now you have to be really sterling white for me to get smaller. Not because I don't have a problem with smaller assets. It's because I think just generally speaking, they don't appear as institutional. So we're sort of looking more for that $10 million to, I would say, $30 million size. I mean, you get above $30 million, if it's a single asset, it feels just way too big. Candidly, $30 million is probably too big unless it's something beneficial.

If it's a portfolio of assets, like our Lindsay has multiple assets, and so they all break up. That 10-25, I guess, would probably be the sweet spot. That's been a filter that we've kind of looked at. Right now, in this environment, looking at some of the deals that are coming out, they're PE-led. You're like, "Okay. Why are you selling this in such a shitty rate environment?" The answer probably is they don't care. They just want the money, and they're going to do something else with it. That's not necessarily a good reason for a landlord to buy, right? I think that's motivation is a big part of it. It's like, "Okay. Why are you selling at probably one of the darkest hours?

You have the absolute most clarity, and you're wanting to try it. You're just really you just bought this company. I get it. It's a cash-out strategy, but it could be a very expensive one. We think, worry about, "Hey, that might be on the, that might be, they might price talk a seven and a half or seven and a quarter, but that might really be a nine cap, and you won't find out until afterwards." We want to be careful of that because you have to be cognizant that in the manufacturing space, the binary risk is much larger than it is in, say, a Walgreens, right? Reletting is going to be a lot harder. You have to be more scrutiny. I think some of the, candidly, the inventory we've seen just hasn't been super compelling that says, "Yeah, screw it.

We're going to go get it. If there's one that looks good, and we want to buy, we're willing to buy. It's just that there's no sense in just buying something that doesn't seem really compelling because I'm not buying this. Look, my net worth is tied to this. All our investors' net worth is tied to this. There's a lot of people who aren't institutional, who aren't owner name, who don't pay attention to what you publish, and they don't look at the stock market, but they care very deeply about the sanctity of what they own. That's how we got to we're going to be mindful of, right, that this is real people's money and that we have to protect it. Protecting it is not the same necessarily as always growing it for the sake of growth. We do want to grow it.

We do want to make it more valuable, but we have to protect the house. Sometimes the best way to do that is not put new shit in the house that isn't good or isn't really compelling. Look, cost of capital certainly matters. I think right now it's been a thin pipeline of activity. I think we'll see it more robust, and there'll be a lot more choice because the really smart folks who want to sell their properties are going to wait a little bit if I were them, just like we're waiting a little bit. That's kind of how we think about it.

Gaurav Mehta (Managing Director, Senior Equity Research Analyst)

All right. Thanks for that, Color. That's all I had.

Operator (participant)

Thank you. Our next question comes from. Yes. Our next question comes from Steve Chick with Sabas Garden Capital. Please proceed with your question.

Steve Chick (Chief Investment Officer)

Hey, thanks. Aaron, we appreciate the patience, and I'm glad you discussed the upreach transaction head-on in the press release. That was helpful. I just had some questions, numbers questions, maybe for Ray. The ABR for at the end of the year was a little lower than last quarter despite the same number of properties. I'm assuming there's kind of some assumptions in there for maybe Costco and Endicott, but can you just kind of reconcile that? That'd be helpful. Actually, what you're anticipating within your AFFO guidance for 2025 for ABR.

Aaron Halfacre (CEO)

The decrease reflects the fact that Costco, their lease expires at the end of July, and Solar's lease also expires at the end of July. Those are the things that are driving the decrease. They're partially offset by ongoing rent bumps, but that's basically the driver. What was the other part of your question?

John Raney (COO and General Counsel)

I don't know that we've given ABR for guidance.

Aaron Halfacre (CEO)

Yeah. We have.

Steve Chick (Chief Investment Officer)

Just, I guess, is Endicott in there as well, the small sale?

John Raney (COO and General Counsel)

Yes, it was. It really is a small number.

Steve Chick (Chief Investment Officer)

Yeah. Yeah. Okay. Right. Can you remind me, is this kind of steady-state ABR number, it doesn't include kind of rent bumps or it's not forward-looking. Is it an ABR kind of?

John Raney (COO and General Counsel)

It's the next 12 months. It's the rent we expect to receive from January 1st to December 31st of this year.

Aaron Halfacre (CEO)

Yeah. Any bumps that come into play this calendar year are reflective because what we're basically taking is a 12-month rent roll based on how the contractual rent is, right?

Steve Chick (Chief Investment Officer)

Yep. Okay. All right. That's helpful. In the assets held for sale at year-end on the balance sheet, it looks like I think it is somewhere in like $22 million. Is Endicott in there, and what is in that number?

John Raney (COO and General Counsel)

It is just Costco. Endicott did not have to come along until after the year-end had closed. The way the GAAP rules work is you have to be committed to a sale as of the balance sheet date to include it in assets held for sale. We did not have discussions with the buyer did not come to us until January. That is why Endicott is not in that number. It is just Costco.

Gaurav Mehta (Managing Director, Senior Equity Research Analyst)

Gotcha. Yeah. Okay. That is helpful.

Aaron Halfacre (CEO)

I would point out that for first quarter, in January this year, we have taken Kalaro to market. That is out in the process right now. That will show up for held for sale on first quarter numbers.

It's early. I mean, we just took it to market less than a month ago.

Gaurav Mehta (Managing Director, Senior Equity Research Analyst)

Oh, gotcha. Okay. That was actually my follow-up on that. Do you have a, I mean, are we able to say with the Cushman valuation that was the appraisal recently done, how did Kalaro come out within that, I guess, relative to its book value? Can you speak to that?

Aaron Halfacre (CEO)

No. If you're asking if there was an impairment, there was no related impairment associated with the valuation. The valuation that Cushman did remains above book value. The marketing process that we're having is first focused on strategic growers of sort of the same ilk. From there, the second round is marijuana growers, which are legalized in Minnesota. From there, it would be just general industrial use.

We're running through that process right now. Our broker advised it's probably a six- to nine-month sales process. It's hard right now in the winter, obviously, there. It's sort of been a little bit of soft marketing. Look, I don't know what the outcome will be on that. What I can tell you is that whatever dollar value we get out of that, that is dollars that aren't earning AFFO right now. We look forward to getting that redeployed and putting that money to work. We have not made any assumptions in our numbers of that happening, just so you know. No, that's good. It's fair. I think the book value is somewhere in the area of $9 million-$10 million.

It sounds like you'd be expecting north of that sometime over the next six to nine months, assuming the process goes this year. I don't have any expectations right now until the market's weird. We're going to see what we get, and then we'll go from there. Look, my only desire is to get the most we can get. I don't know. I don't have an expectation of what we're going to get. Okay. A couple more, if I could. I'm wondering if it makes sense with the preferred coming up in a callable in 2026. You don't want to advertise in advance, I guess. Does it make sense at some point, if it's below par value, to pick off some of that in the open market? I saw in the credit agreement with the K, it looks like you released some commentary on that.

You could do that if it was funded by the common stock. I'm just curious if you could speak to that and any future refinancings as you look out into 2026 and 2027. I think in the third quarter commentaries, and either on the call or commentary, I alluded to a lot of our thinking is going towards that preferred that becomes callable in September of 2026 and our debt maturing in January 2027. We are very much thinking about decisions today that impact those. I think in an ideal context, should we have the means, which candidly is going to probably be equity. If we had the means to retire the preferred, I would. It was good for us. It served its purpose. I think it could be priced better if you ever wanted to do one.

In my ideal context, in a world that does not currently exist, I would be like Public Storage used to be. I would have preferred as my sort of first lien position, and I have common. I would not have any other debt. That would de-risk the nature of this asset class considerably, and it would make it very much a perpetual income vehicle. I am not there. To even get there, though, if we were ever to be there, we would have to retire this preferred. I think you are right. We would not want to advertise in advance if we are going to be taking things out. We have the flexibility to do so, and we will see. All right. Great. Thanks, guys. I appreciate it. Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad.

One moment, please, while we poll for questions.

Operator (participant)

There were no further questions at this time. I'd like to turn the call back over to management for closing comments.

Aaron Halfacre (CEO)

All right, everyone. Thanks so much. Let's talk again soon, and we'll keep our nose to the grindstone and keep working things out. Appreciate your support. Take care.

Operator (participant)

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.