Q2 2022 Innovative Industrial Properties Inc Earnings Call
Hello, and welcome to the innovative industrial properties, Inc. Q2, 2022 earnings conference call.
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Please note today's event is being recorded.
Now I'd like to teleconference over to your host today, Brian Wolfe with Wolfe. Please go ahead.
Thank you for joining the call presenting today are Alan Gold Executive Chairman, Paul Smithers, President and Chief Executive Officer, Catherine Hastings, Chief Financial Officer, and Ben Regin, Vice President of investments.
Before we begin I would like to remind everyone that statements made during today's conference call maybe deemed forward looking statements within the meaning of the safe Harbor of the private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks uncertainties and other factors. Please.
Her to the documents filed by the company with the SEC specifically the most recent reports on forms 10-K, and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in the forward looking statements.
We are not obligated to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise in.
In addition on today's call, we will discuss certain non-GAAP financial information.
<unk> normalized <unk> and adjusted <unk>.
You can find this information together with reconciliations to the most directly comparable GAAP financial measure in our earnings release issued yesterday as well as in our 8-K filed with the SEC.
I'll now hand, the call over to Alan Alan.
Thank you, Brian and welcome everyone.
I know one of the biggest questions for today's call has to do with teens garden and what happened.
To recap King's Garden lease six properties. The total base rent of which was approximately $5 5 million for the second quarter.
Or approximately 8% of our base rents collected for the quarter.
Of these six properties former operation.
With a ground up expansion project also had one of those properties, which we will call the 19th Street expansion.
The other two properties were in development or redevelopment.
Credit Street, and inland Center right.
On July 13th King's Garden defaulted on their lease obligations and on July 14th we filed an 8-K regarding that default.
Later in July we filed a suit with the state court asking for immediate access to our properties among other demands.
To date kidneys garden remains in default and on August 2nd we amended our suit, making further claims regarding construction at the properties among other things.
Okay that is what happened.
Unfortunately, we will not be able to answer any questions regarding the legal proceedings.
I ask for your understanding and please know we are doing all that we can to pursue our interests.
Now with that said and before we start with the great results for our second quarter I want to spend a few minutes reminding all of us of our vision and why we remain excited and resolute in our belief in the future success of innovative industrial properties.
Our vision has always been to create a company that would profit from a nascent emerging and fast growing industry using a straightforward business model that consists of.
One.
The U S legal cannabis industry, which legal sales are expected to top $52 billion by 2026, nearly doubling 2021 total of 27 billion.
To your acquisition of real estate that is critical to the operations of the industry.
There can't be legal sales with canvas.
Unless the cannabis is grown in a secured license specifically designed facility our property.
In our business model.
The acquisition of the real estate comes from a long term lease with rental income commensurate with the risk.
Three a portfolio with geographic diversification and a focus on limited license states and careful investments in other states with strong growth possibilities.
And for.
A tenant roster of professionally manage operators with strategic footprints strong growth potential and since no tenants or legal growing facilities existed prior to the individual states implementing irregular academies program with.
We focused on investing with multistate operators today over 80% of our committed capital is invested with multistate operators.
With this vision, we bring together a team of experienced real estate it and industry professionals.
We now have what we believe to be one of the strongest and most experienced team of real estate professionals in the cannabis industry.
A high quality portfolio, and most importantly, a strong and flexible balance sheet, producing strong and consistent cash flows.
We plan to review, our strong second quarter results and to provide what we can about recent developments in our portfolio. We are proud to provide you all of our quarterly financial supplement that we published for the first time yesterday and.
And expect to continue to publish on a quarterly basis.
As we are constantly monitoring our markets and our tenants we will provide information regarding the general industry dynamics, our overall portfolio metrics and our recent investments.
And broader macroeconomic terms in recent months, we have seen a broad based tightening of the financial conditions across the U S economy, generally and in the capital raising market for the regulated cannabis industry as well.
Total capital raising activity for the regulated cannabis industry in the U S is down over 60% in the first six months in comparison to the prior year period.
Inflation is also impacted operators cost structure, including labor production inputs in construction costs at the same time, we are seeing general unit pricing in the cannabis industry declining which is further driving operators to continue to focus on efficiency in their operations.
We continue to be resolute believers in the long term growth and prosperity of the regulated cannabis industry as with any industry undergoing rapid growth and change we expect to experience headwinds along the way.
That said this team will continue to be focused on positioning the company in the best possible way for long term success and value creation.
With that I will now turn the call over to Paul.
Discuss industry dynamics Paul.
Thanks Alan.
First like to emphasize as Alan noted that industry wide sales revenue continues to increase and legal sales of cannabis are expected to top $52 billion by 2026.
[noise] doubling 2021 total of $27 billion as.
As far as recent state level market developments in recent months, we have seen unit pricing for regulated cannabis products decline.
Certain states at the wholesale level reflective of what we believe to be a number of factors, including basic supply demand dynamics driven by licensing structures lack of meaningful enforcement in certain states on illicit non licensed cannabis sales by state and local enforcement authorities taxation and general macro.
Economic conditions.
We have seen and do expect to continue to see price compression on cannabis unit pricing across states to varying degrees, depending on the stage market dynamics and program specifics. This price compression will require operators to continue to focus on the dual aspects of maintaining and enhancing brand strength.
Through product quality and efficiency of operations, we believe our facilities provide exactly these key capabilities for efficient production at scale in a highly controlled environment that maximizes yield and product quality.
Over 97% of our revenue comes from production facilities or facilities that have combined production and retail capabilities.
Also we recently published our 2022 ESG report, which describes our mission critical facilities with specialized build outs designed for environmental controls that are a priority for production of high quality consistent Canada's products at scale.
Capital availability.
As we have all witnessed financial markets have been volatile in the last few months since the U S. Federal Reserve began tightening monetary policy in March.
Volatility has not dissipated in our view with the war in Ukraine, other geopolitical tensions and supply chain issues, adding to the uncertain economic outlook as well as the uncertain outlook on monetary policy given the persistent inflation, we have all been witnessing.
We believe these factors have contributed to a drop off in capital availability for regulated cannabis operators, both on the debt and equity side.
Larger msos that have taken advantage of more open capital markets last year are in better position to weather. This volatility in our view, though from our discussions in the industry regulated cannabis operators across the board are generally focus now on efficiency in their operations and taking a more cautious approach to expansion.
As Alan noted over 80% of our committed capital is invested with Msos.
Inflation and supply chain issues inflation broadly speaking has run higher for a longer period of time.
Think most would have anticipated.
While this has impacts across almost all industries in the regulated cannabis industry. This is also impacting labor and input cost for operators. In addition to driving up the cost of construction for development and redevelopment activities.
In addition continued supply chain issues and labor shortages are resulting in certain projects being delayed and the completion.
Of course, these developments have the effect of requiring the operator to put up more capital to complete the project and our resulting delays in revenue generation as projects take longer to complete.
Combination with the current environment of limited capital availability. These can be significant obstacles for certain operators.
Federal legislation finally, I'd like to note that safe banking was removed from the competes Bill recently, however, with the house, having pass save six times. There are some expectations that safe may be introduced into a larger scale budget spending bill like the annual defense Bill We will continue to monitor these two.
Developments closely should say past this may be an avenue for greater access to capital for many operators.
I'd like to now turn the call over to Ben to discuss our portfolio and investment activity in the second quarter.
Thanks, Paul.
We are proud to introduce our financial supplement this quarter, which provides details regarding our property portfolio and consolidates our financial reporting.
Alan noted this is our first financial supplement and we would appreciate your feedback as we continue to refine the supplement for future periods.
For this call I'd like to cover certain characteristics of our property portfolio and tenant roster. In addition to discussing our recent investments during the quarter.
As you know we own a 110 properties across 19 states comprising $8 6 million rentable square feet.
During the six months ended June 32022, we collected approximately 99% of contractually due rent and property management fees from our portfolio.
As we have noted in prior calls vertical a tenant of ours in southern California.
<unk> to make partial payments.
As noted in our 8-K filed in July King's Garden defaulted in July on its rent at the six properties at leases from us in Southern California, We have commenced legal proceedings against King's Garden, while we cannot comment on these legal proceedings, we will keep you updated to the extent we are able.
In regard to parallel to continue to pay rent in full <unk>.
Continuing their confidential strategic review process again, we will provide you a meaningful update on that operator, when we are able.
Our property portfolio as total cost basis, including commitments to fund future improvements equates to approximately $274 per square foot, which we believe is substantially below current replacement costs.
Our portfolio is split between 68 cultivation and processing facilities, representing 90% of our invested capital 33 retail locations, representing 3% of our invested capital and nine facilities conducting combined cultivation in our processing and retail activities, representing 7% of our invested capital.
No one state accounts for more than 17% of our total invested capital and no one of our 30 tenants accounts for more than 14% of our total invested capital.
Across our portfolio properties with multi state operators as tenants make up more than 80% of our invested or committed capital and properties with public company tenants make up approximately 52% of our invested or committed capital.
Of our 110 properties 23 were under either partial or full redevelopment or development or approximately 21% of our properties as of June 30, constituting approximately $2 5 million rentable square feet with a weighted average lease length of 16 years for the entire portfolio.
We continue to believe in the tremendous value for our mission critical real estate portfolio as well as our operators and their ability to weather. The current conditions and we will continue to monitor their progress closely in the coming months.
In terms of investment activity during the quarter, we acquired four properties and executed lease amendments to provide reimbursement for improvements at five properties, representing a total investment commitment of about $240 million.
In these transactions, we established new tenant relationships with Maryland cultivation and processing, Texas original and tilt holdings.
Expanding existing relationships cure leaf green thumb pharma can truly and so-so.
With these investments spread across several states, including Pennsylvania, New York, Illinois, Texas, Maryland, Massachusetts, Arizona and Michigan.
In terms of expected additional investment activity.
As always forecasting investment activity in this industry is challenging that said, we do expect the pace of activity to be lighter than prior quarters as we focus on the ability to raise additional capital on terms, we determined to be reasonably favorable in light of the opportunities to place that capital.
I would note in closing that we anticipate total 2022 investment activity of approximately $400 million.
With that I will turn it over to Kathryn Kathryn.
We generated total revenues of approximately $75 million for the quarter, a 44% increase from Q2 of last year.
The increase was driven primarily by the acquisition and leasing of new properties additional building infrastructure allowances provided to tenants at certain properties that resulted in base rent adjustments and contractual rent escalations at certain properties.
And as we've indicated in the past our Q2 revenue reflects only partial quarters of revenues from the acquisitions and investments executed during the quarter.
And our revenues for the quarter were also impacted by scheduled rent phase ins under certain leases, which will continue to phase in over the next six to nine months as we continue to account for all of our leases on a cash basis.
For the three months ended June 32022, we recorded net income of $39 $9 million or $1 42 per diluted share.
Adjusted funds from operations for the quarter, which adds back noncash stock based compensation and noncash interest expense related to our unsecured senior notes to normalized <unk> was approximately $61 million or $2.14 per diluted share.
On July 15th we paid our quarterly dividend of $1 75 per share to common stockholders of record as of June 30th.
Equivalent to an annualized dividend of $7 per common share.
As we noted in our prior press releases, our board of directors generally evaluates adjustments to the level of our quarterly common stock dividend every six months with any adjustments expected to be declared in Q1 and Q3 of each year.
The board continues to target a dividend payout ratio of 75% to 85% of <unk> on a stabilized portfolio basis.
For Q2 that payout ratio was 82%.
We also continued to see draws for improvement allowances, our construction development to our operators under our leases.
As we've previously noted these improvements are critical to the efficient production of quality cannabis products at scale.
In Q2 of 2022, we funded approximately $162 million and draws submitted for improvements and construction activity at our properties.
As Paul mentioned inflation is impacting labor and input cost for operators. In addition to driving up the cost of construction for development and redevelopment activities.
We're also seeing construction delays in certain development and redevelopment projects in our portfolio. Similarly to other construction projects generally with longer lead times for materials, given the ongoing supply disruptions, which the broader economy continues to face, which we believe may have been further amplified in recent months by.
The war in Ukraine, and Rolling economic Lockdowns in certain countries in response to continued Covid outbreaks.
At quarter end, we had approximately $2 $5 billion in total gross assets and a total of about $306.5 million in debt consisting solely of unsecured debt with no maturities this year or next year and $300 million of that debt not maturing until 2026.
Our debt to total gross assets ratio decreased to 12% at quarter end.
And our total fixed cash interest obligation on an annual basis with $16 $7 million or a little over $4 million per quarter.
We've maintained our investment grade credit rating and have a debt service coverage ratio of 15.7 times.
Also in order to reconcile our current cash and investment position as of June 30th with our existing commitments to fund improvements, we have approximately $20 million of uncommitted capital as of today.
I E capital available for future acquisitions.
This subtract among other balance sheet items remaining unpaid improvement allowance balances of approximately $194 million as of June 30, which well hold on our balance sheet until requested for funding by our tenants as we've indicated in the past these balances tend to be requested and funded over.
For a period of time, that's expected to be over the next year or so.
And our pipeline, we have under PSA approximately $36 million of new investments.
Seemingly close on those transactions, which may or may not occur of course, we will have successfully placed the capital we've raised including the proceeds from our common stock offering completed just four months ago.
And with that I'll turn it back to Alan Alan.
Thanks Catherine.
Like to note the following closing.
We are 100% committed to working for you all as owners of the company.
Every day to protect and enhance the value of our company and our property portfolio for the long term.
In my 30, plus years in the commercial real estate industry I've seen and managed through numerous ebbs and flows in industries that utilize mission critical specialized real estate I.
I firmly believe that we have the best team assembled of highly skilled experienced professionals to manage the company through the ebbs and flows of this industry.
And our board of directors with decades upon decades of experience in real estate.
Finance and executive leadership to effectively oversee our company in all environments.
Now with that I'd like to open it up to questions. Operator could you. Please open the call up for questions. Yes. Thank you at this time, we will begin the question and answer session to ask a question you May Press Star then one on your house on a phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To try your question. Please press Star then two.
We will pause momentarily to assemble the roster.
And the first question comes from Tom Catherwood with P. I G.
Thank you and good morning, everybody.
I'll walk a bit of a fine line here, let me know if that's a third rail and I will I will move on.
But I'm thinking through process here and if memory serves me when a dime went into receivership back at the end of 2019.
You had inbound interest right away, but California courts were overwhelmed by the pandemic.
And the process dragged on though was eventually resolved in your favor.
Has that court backlog or other overwhelming factors resolved.
Or is the potential that the lawsuits that you fired filed could drag on because of pandemic related issues in the court.
No.
Pretty interesting question.
Yeah.
We haven't we haven't tested been courts.
Before.
Or a current.
Current court filings, so I don't have any.
Actual evidence or anything.
To really say that it has or hasn't.
But I think in general.
We're all seeing that.
And then.
Related.
Excuses for delayed significantly.
And I would think that in the California State court that would be the same.
Got it appreciate that Alan and then.
Went over to to vertical.
And then maybe California as a whole at California has always been hyper competitive and you've always spoken about that and then it kind of one of your key strategies was to find the best operators concentrate your investments with them.
Cause that they will be able to ride out cycles.
Has kind of two part question you know has the California eroded to the point, where even the best operators can't make it is at all you know maybe it's illicit market taking share maybe it's the not enforcement of rules. Paul like you mentioned and then can you provide a little bit more color on resolute.
<unk> or workout plans with vertical for the portion of the rent they're not paying.
So.
I mean, obviously there is a walk in that question.
For California in general.
Uh huh.
While there has been and you're using your words and erosion.
Awesome.
The unit pricing.
Uh huh.
Growers, who were efficient and continue and can continue to drive efficiency.
We are doing very well, making lots of them continuing to make money in California, you can make money.
Knowing that the illicit market is still there knowing that it is a high tax day, knowing that you have to be very efficient at being able to accomplish those goals.
And you need to be.
Effectively capitalized.
All of those factors continue to.
Positive feelings about that.
The growers, the successful and efficient growers in California.
With vertical in particular.
So.
Each tenant has.
Unique aspects to it.
Neat ways that they think that they can address and attack a market.
Vertical they are.
With focus primarily on the wholesale side of the business.
And.
And their ability to drive efficiency.
And taken longer than than they wanted.
And but recently they have.
We focused and have brought in new.
A new and higher quality.
Growing expertise and we believe based on that.
It looks like it is.
Coming to fruition.
That vertical which likely like we've said multiple times is less than 1% of our revenue.
Will.
Continue to be successful and will continue to.
Hey, rent or most of the rest of world and we believe we're hoping and we believe that they will pay all of their rent overdone.
I appreciate that Alan.
Yeah.
Cause moving away from California bet, Paul because as you know both you and Alan mentioned unit price compression as well as increasing costs.
For producers.
And I know this is going to be somewhat different but industrial Reits you, sometimes give a stat, where they say what percent of either supply chain costs or production costs their rent tends to be to show you now the transportation a substantially more than that and put this more in energy.
And all of that.
Kind of two parts here do you have a sense.
Typically in a typical set up whether it's processing or cultivation.
What percentage of production costs, you rent to end up being.
And then second is there a level of unit cost that you have a break even level that at which point in time, you get worried about them, having the margin to cover our expenses, including rent.
Yeah.
We don't have the detailed statistics available to state a percentage of.
In general every.
Everybody is wind.
With the rent as a percentage of their overall operation cost.
The because we have 30 different tenants and we have multiple.
Multistate operators, who are operating in a variety of different states and and.
We have and entities that are in growth mode.
Who are in operational mode and entities you are in.
Ah the startup phase all of those all of those combined together make it very difficult to provide that statistic.
But.
We do know that.
Our.
Target growth.
Cost.
Trying to generate a or trying to be at a cost level no around between 300 around $300 a pound for.
Smokable flower.
And.
And that we believe and we've seen that the spot price for that product in California, and another location exceed the 1000 $1000 or around $1000.
Our panel.
We believe that.
Our highest and most.
Most efficient growers are in that or less than $300 a pound.
That's what I I think we can provide to answer that question.
That's really helpful. Thank you for that I totally understand the complexities between all the tenants and all of the locales in the growth mode that they're in and then maybe just last one for me here.
Obviously, it was a record quarter for acquisitions Kat. Thanks for the staff on the putting the money to work in four months.
You know in general across the space.
Get a cost of capital is up for the operators that.
That is less available for them than it was a year ago. It would make sense that they continue to turn to sale leasebacks.
Do you see that continued demand there and then I know you've got your PSA is lined up already but you know as you think about allocating capital into that demand. How are you prioritizing amongst larger msos regional operators and then maybe between your current tenants or new tenants.
Yeah.
Another very complex question, which I think we can.
So first you know we.
We have been focused on allocating the majority of our capital to MSR and I think that.
When you look at our statistics that over 80% of our rent comes from MSR and you can see that we've achieved that goal.
And.
So that's I think you know.
Part of our business strategy and we are successfully.
And I appreciate you acknowledging the.
<unk>.
Quarter over 240 million plus of acquisitions in the quarter and.
Close to $349 million for.
For the first half of the year.
Yeah.
Yeah, Yeah, I'm, just going to say kudos to our acquisition and investment team. The fact that we actually place that capital that was raised in April in and around or less than four months.
Far and far faster than we are.
Than we projected and it goes to the goes to that team.
Uh huh.
Right.
Thanks, Ed.
Your.
So I'm questioning.
Whether or not there's continued demand for our sale leasebacks really what youre asking is what's our what's our pipeline in yen.
We have it.
We believe that there is.
Tremendous demand.
For sale leaseback.
Opportunities in capital for the industry began as you know.
We indicated over you know the.
The amount of.
The pace of capital raising in the cannabis industry.
As you know decreased about 60% since the beginning of the year. So there is a tremendous demand for capital and therefore, we believe the tremendous demand for war were sale leasebacks, and we can certainly place or not.
No.
The real estate process is by necessity a long process.
And.
Because of that and because of the success that we've had and the.
Turmoil there was occurring at the beginning of or the latter part of the first half of this year.
We strategically.
<unk> pulled back on our.
On our acquisition.
Commitment.
To understand what our cost of capital.
Yes.
Ed.
Glen.
And to allow the market.
Two.
Adjusted to what we think is.
Higher yields that would be necessary for us to continue to make acquisitions.
Acquisition investments.
Yeah.
Because of that strategic decision.
While we had indicated in our in the past that we would be doing you know between $125 million to $150 million.
Transaction to Florida or between five and $600 million annually.
We think we're gonna be probably for this year closer to the 400 and maybe.
Maybe if things evolve.
Evolve a little bit differently.
Maybe $500 million.
And if you think about where we are already.
We've already we've already closed on $350 million, which is.
Yeah.
It's above that $150 million per quarter pace.
And if we were to go to you know another another $50 million to get us to the $400 million range well, we certainly have that capacity and as we've described we have assets under under PSA all right.
And we have the capital to easily.
Between our uncommitted capital and our free cash flow, we have the capital to to achieve at the very minimum that.
Now the question then becomes how do we how do we go beyond the $400 million and that would require us to.
Raise equity raise that come.
Come up with new capital and we think we can do that with a variety of debt structures are including the convertible debt and a strength.
And the other unique opportunities, which we're exploring.
And so we think we can easily achieve that.
And believe.
We believe that as long as the markets settle down in the environment for our tenants stabilizes.
And we.
We think we have been able to easily achieve that.
Yeah.
Now keep in mind that we're still very excited about the industry and I think Paul noted that the.
Revenues in the industry are expected to Paul are they expected to be within the goal by 2020 to double by 2020.
So the industry continues to have very positive sales growth.
And giving us the confidence that continuing to work with as we describe R. R.
Our business focus of the Msos.
We will be able to continue to provide very stable in Shanghai.
Long winded way to answer that question, but hopefully that helps.
That does it.
Makes total sense really appreciate the candor and the insight Allen that's it for me thanks, everyone.
Thanks, Tom.
Thank you and the next question comes from Harrison Vivas with Cowen.
Alright, well. Thank you so much for taking the question just one from me on the regulatory front, Paul you offered some commentary around the movement of the.
The Safe Act.
If you were to assume that it gets passed in something for this year they'd be maybe during the lame duck can you just refresh us on your latest thoughts around how its passage would affect your business and pipeline specifically.
And then more broadly can you just speak to how this would affect or how you think you would as far as the cost of capital.
Just given the offsetting impact so great with capital availability.
Monetary policy.
That's that's that's my question. Thanks.
Sure. So thanks for the question.
First we have to think about what version of C or C plus with patch and as you probably know right now that's being debated pretty heavily by Chuck Schumer and Cory Booker they've done a nice pivot.
To support safe, but right now.
It's really being formulated in a way that says how can we get a patch right now there's 15.
GOP Senators that have indicated that they would support a basic C. So that's when it gets complicated.
Cory Booker safe plus.
No.
This includes 280 <unk> provisions maybe.
Maybe some uplifting language veteran affairs language, maybe some SBA loan and a lot of equity provision so.
It depends on what that looks like and I think.
Certainly it's got a better chance of passing they did six months ago, now that schumer and bulker of dividend.
But to your question, how does that affect us I think it would be a positive.
First of all.
Whatever state banking it looks like even if it's in a stripped down version it will be a benefit to the industry as a whole.
And that would give operators other options for capital certainly give them banking access so with that we have a stronger credits with our existing tenants and tenants in the future. So we look at that as a positive.
Also certainly that would give us access to capital and different options and raising debt, which we think would certainly lower our cost of capital. So we look at it is definitely a net plus some of the comments about won't see this is going to impact.
Competition.
We've always thought that yes, maybe it again pending what version of save comes out there may be a little more competition, but as you know say theres not legalized cannabis.
Our deregulated so.
Still going to be I think a lot of the big National banks stay on the sidelines, because it's still scheduled one.
Substance so.
If it happens when it happens we look forward to I think it'll be a plus for us.
Understood. Thanks, very much I'll hop back in the queue.
Thank you.
Thank you and that's how she got tired of all the <unk> from Craig Hallum Capital Group.
Great. Thanks for taking my questions could you. Please expand just a bit more on the dynamic that you're seeing between the sort of sources and cost of capital available to you and then the.
Seemingly increasing demand for sale leasebacks I'm just.
Sort of a bit unclear on.
Sort of what the delay might be in drawing additional capital.
If you could just kind of flesh out those dynamics.
Is it really trying to.
Get better terms from future tenants now that macro environment has changed has it or.
Or is it more on me.
On your cost of capital side, it could be just expand a bit more on those dynamics that'd be great. Thank you.
I appreciate that and I think the answer is that it's both I mean, what kind of.
Things have evolved we're evolving and moving really quickly.
You go from you know.
2% inflation.
Six nine and then a lot of them. When you go from you know.
With a very accommodative.
Stan to a very non accommodative stance and increasing interest rates first.
You know are indicating that they would be in the 25 to 50 basis points and 50 basis points and maybe get to a 100 basis points and finally, we ended up with 275 basis point increase in back to back and you know pretty rapidly.
Those are rapid changes those are things and they're happening.
I mean, we're talking about them in real time and are happening in real time very quickly.
And.
Uh huh.
For even though.
I have 30 plus years in the real estate industry.
And we've gone through and we've seen other.
Other Oh.
Major financial.
Condition are our situations such as the great recession.
Uh huh.
In other other times when interest rates didn't move out.
It has happened much quicker.
And with things that we.
We are occurring.
Honestly I haven't I really just been it hadn't experience.
And as such.
We took the we took more of our time to really understand what was really happening and where we're where we're going and what and what those are.
External factors, how they were going to affect our cost of capital and we believe they absolutely have affected our cost of capital our share prices drop you know whatever 60.
60% in <unk> and that's a that's a big that's a big thing for us to swallow and understand our cost of debt. Despite the increases in the from the fed has.
Certainly increased.
200 300.
Basic basis point.
And when you tie that together with the acquisition process and how.
Our sourcing deals can take anywhere from six to nine months from start to close.
There's that time.
It doesn't match the how fast things are moving and and as such we've had to make we made some strategic decisions to pull back, but we are now seeing and I think that.
Many of the Msos have really come to the conclusion that their cost of capital.
There was availability of capital has really been impacted and it is not coming back as quickly as they thought in mind.
And because of that they're adjusting their their.
Their growth plans.
And their tolerance for higher cost of new capital, which we with which we could potentially provide and we believe that we are going to be able to achieve that with any new acquisitions.
That we are sourcing in the next six to nine nine plus months.
That if you can thank you I appreciate that color, yes, yes that was very helpful. I appreciate that color.
Just last one for me here I'm, leaving any commentary on the <unk>.
The lawsuit aside here are you seeing any demand for those properties.
Uh huh.
I'm trying to I'm trying.
Trying to decide whether or not I can say to anything.
You know I think the answer is.
And and we are because.
The efficient growers in the industry.
Really understand the the opportunity to make money and being able to to be able to.
To do that they need to be able to.
<unk>.
Have.
<unk>.
Assets that are.
Already growing and improving the growth to be proven to grow product very efficiently.
Yeah, Keith Gardens brand and the high quality brand and its well recognized in the industry is something that.
Got it.
And that is of high quality.
And others have been certainly envious of their their.
Their position and their ability to.
Provide a product and with their facilities, others know of their of their brand and of their facilities and where they're growing.
And.
And we have and we have had inquiries.
I appreciate that color. Thank you.
Thank you and the next question comes from John Masako with Ladenburg Thomas.
Good morning out there.
Just kind of a straightforward starting question.
Every tenant outside of King's starting and vertical 100 per se on their way as of July or to the extent you have the data August .
As of July yes.
And as of their obligations in August yes.
Okay.
And then outside of King's Garden Inn, and vertical what's the outlook for the other California 10 insulin investments.
Construction loan on the property side of that one.
So.
That project is the construction of one of 18 and a half million dollars I'm going to turn that over to Ben If you want to just describe where we got worse and I think that's pretty much done right. Yeah, we're very close or the construction itself is very close to wrapping up.
Which we've been monitoring.
Certainly.
Monitoring the market overall.
And evaluating our options on how we will continue to proceed and potentially work with the operator that'll be growing out of that facility going forward.
Yeah.
Okay.
And then in terms of what kind.
The liquidity position and in kind of the.
Please ask the additional let's say.
And.
Or external growth how should we think about.
Our view on cash versus kind of convenient cash in terms of doing.
Future investments or kind of committing to future investments and I guess maybe.
It may be somewhat limited.
Commentary you can give on this thing.
How should we think about the remaining.
Kind of committed funding to king start and in terms of its impact on your deployable liquidity.
Yeah.
Well I'm going to leave King's Garden alone because theyre just they just don't think that that's a something.
Something that we should talk about but Uh huh.
We've disclosed that we have around $20 million of uncommitted capital.
And we certainly have a free cash flow nexgen, you're running anywhere from 20% to $30 million annually.
So that certainly gives us the capital to close on anything that we currently have.
Already.
And to add some more.
And then for any.
Future external growth.
That will come.
And we believe that there's plenty of opportunity for external external growth because of the demand for sale leaseback Cabo.
And we believe that we have access to additional capital sources, including debt and convertible debt and as I mentioned some unique opportunities that we are exploring.
But one thing you didn't ask about is you know what our internal growth opportunities are and you know.
As you know.
Described in.
And discuss many times that we have a.
Very strong.
Rent adjustments annually determined that I don't know.
It was around 3%.
And that the.
Phase end of rents from our construction projects as those construction projects complete.
Continues to happen and that as I mentioned before 80% of our rents come from Msos and I'll tell you right now that over 70% of our of our.
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Of all of our.
Assets under development or are at least 10 myself. So we have tremendous amount of internal growth. In addition to the possibility of quake stronger.
Okay, and then one on Kings Garden, if he can't answer that's totally fine but.
As you think about the properties is it fair to assume the two that were kind of ongoing development projects are told down at this point.
And then are either of those two.
Anywhere close to being kind.
Kind of usable when theyre intended form.
It came to that.
Today.
I think we can describe the facts and the facts are that the of the three development projects.
Well why don't you.
I'm wondering if you go through that.
Sure Yeah, we had three development projects.
A little over $100 million committed to those three of that north of 75% of that capital has been invested.
And had been drawn.
Towards the completion of those projects towards their intended use.
I think those along with all of our.
Assets that are held for where our value continuing to evaluate options to maximize value of our entire portfolio.
Yeah.
Okay.
That's it for me thanks, very much for the time really appreciate it.
Thank you Scott.
Thank you and the next question comes from Alexander Goldfarb with Piper Sandler.
Hey, good morning, good morning out there.
And thank you for all the information so far certainly I think everyone appreciates its a nascent industry and there's always ups and downs, but I think you guys have done a good job discussing it along those lines. If I can just make sure that I understand a few things it sounds like in answering the questions. One it doesn't sound like this is a California.
If you Paul you said that people can make money in California and doesn't sound based on all kind of being current does it sound like you're seeing any other states with.
Operational issues.
So I guess you know obviously I can't really ask you directly about kings, but I guess as far as security deposits and your typical underwriting I think you guys used part of the security deposit to pay you know a month rent I'm kings, but can you just give us an update on how you underwrite the security deposits and as.
Far as earnings go Cat should we just take pro rata, 8% out of the balance of the year and our SSL.
Yeah. So.
King Garden is 8% I think in our prepared remarks, we had disclosed that.
$5 million of Q2.
Revenues were related to King Garden.
So and we've talked about that vertical is.
Less than 1%.
The portfolio.
Okay.
But as far as we used to just take out the balance right from a GAAP perspective, you are earning should we should take that $5 two out of quarterly earnings correct.
Remembering that we recorded only cash that we received as revenue we have no straight line rent them and that is impacting revenue, yes, if we're not.
We're not collecting revenue on that we're not recording.
If we're not collecting cash we're not recording revenue.
In your model you have reported.
You know you're expected to.
Revenue if your revenue was expected to be a portion of the King's Garden, you should take that out.
Okay, and then as far as security deposits do you have those for all tenants or maybe you could just talk a little bit about our.
Corporate guarantees or letters of credit security deposits et cetera.
Yeah. So.
We have we in general require security deposits on every every one of our transactions now.
If we have.
Hey, Mark we do multiple transactions with us.
Tenant base.
And our strongest tenants.
Who have the who have put up a security environment.
Sanctions.
May give us comfort to not require security department and a more recent transaction.
But certainly for any new new tenant relationship or.
Tenants that isn't in there so we absolutely require security deposits and range.
Those security deposits, depending on the quality of them.
The size of the tenant can range anywhere from one to six months.
Okay and then just the final thing is I think if my math is right you guys have done about 150 million.
And are acquisitions, maybe I'm off but I think you said, you're looking at doing $400 million in.
In total you've got 50 million lined up and then Paul you said you have a cat you said, there's $20 million uncommitted of capital. Let's see you also have a $45 million in total of cash. So maybe just sources and uses and then thoughts around acquisitions because it sounds like maybe you won't get to $400 million, given where the stock is.
Or do you think we should be modeling towards $400 million.
Yeah.
You've got it all.
Confused that's why that's why Yep that's right.
Alright, so what I would I think it would be better for.
And for Us to go over something that we've gone over three or four times already on this call for you for us to have a.
An offline conversation and we can make sure that your thought.
Thoughts are accurate okay.
Okay.
I will point, you to our financial supplement slide 19, which walks through the reconciliation of cash.
On the balance sheet and subtracting out cash that's not available for investments to get to that $20 million that we quoted.
Okay. Thank you Kat thank you.
Alright, thank you.
Thank you and.
And this concludes our question and answer session now I'd like to turn the call of island gold for any closing comments.
Thank you.
And once again look I want to congratulate this team for all the hard work and efforts that they've taken to get us to where we are today.
We are absolutely committed to.
Supporting our investments and making sure that all everything that we do is in the best interest of our shareholders and we certainly want to thank all our shareholders for their continued support and commitment to.
This company. Thank you all.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.