Q3 2022 Innovative Industrial Properties Inc Earnings Call
Good day and welcome to the innovative industrial properties, Inc. Q3, 2022 earnings conference call.
Participants will be in a listen only mode should you need assistance. Please if we look conference specialist by pressing the star followed by diesel.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on I touched on phone to withdraw. Your question. Please press Star then two leased now what does a bank is being recorded I would now like to turn the conference Oh, What's O'brien General Counsel. Please go ahead Sir.
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'd 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.
Actual results may differ materially due to a variety of risks uncertainties and other factors.
Please refer 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 addition on today's call, we will discuss certain non-GAAP financial information, such as <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.
We are pleased to report another solid quarter of operations and financial results, especially in the context of the challenging macroeconomic conditions across industries that we are all experiencing.
We believe we have positioned ourselves well in this context.
With one of the strongest and most experienced teams or real estate professionals in the cannabis industry.
With a high quality portfolio.
And arguably one of the most conservative flexible balance sheets across the real estate sector.
Now to recap the quarter, we generated total revenues of $71 million in Q3.
With growth in excess of 30% over the prior year's third quarter.
Rent collection for Ip's operating portfolio was 97% for the nine months ended September 30th 2022.
With only tenants Kings garden, and vertical not paying their full contractual rent.
As we noted in our 8-K filed in September we entered into a confidential conditional settlement agreement with Kings Guard. We are limited at this juncture as to what we can discuss.
But we expect to provide further information in the coming months as we can.
We're now Kings Garden continues to occupy four of the properties under that agreement.
While relinquishing two of the properties that are under development back to us.
We are pleased to report that we have an LOI letter of intent for a long term lease at one of the properties in just over a month of marketing the property for lease and look forward to finalizing the arrangement with that operator.
With respect to same the San Bernardino property underdevelopment.
With the current California market environment, we are evaluating all possible uses for that property, including non cannabis users.
And earlier this week, we executed on our first property disposition.
Selling a property in Pennsylvania, there'll be acquired in 2019 and leased to matrix.
A private single state operator.
We sold the property for $23 5 million or about $461 per square foot.
Which was above our basis in the property, including all funded improvements we are pleased to execute on this transaction and with our pipeline of potential additional investments, we see an opportunity to recycle that capital into superior risk adjusted returns for our stockholders.
We continue to see significant opportunities to place capital.
However, we continue to be highly selective and patient in our process with the tightening of financial conditions also having a significant impact on our own cost of capital.
That said we are pleased with the progress we have made in placing capital over the course of the year with just under $370 million of new acquisitions and additional investments in the nine months ended September 30.
Of course, we continue to maintain one of the most conservative balance sheets in the commercial real estate industry with 12% debt to total assets no material maturities until 2026, and a debt service coverage ratio in excess of 15 times.
As we have noted throughout our six years of reporting our results to you. All we continue to have a deep conviction in the long term growth prospects of the regulated cannabis industry and our position as the preeminent provider of real estate capital for operators mission critical real estate.
I will now turn the call over to Paul to discuss industry dynamics.
Thanks, Allen I would first like to emphasize as Alan noted better conviction of the long term growth of the regulated cannabis industry is unabated with expectations from industry analyst at U S. Regulated cannabis sales will continue its annualized double digit growth over the coming years.
As we noted on our last call we have seen unit pricing for regulated cannabis products declined in certain states at the wholesale level in the past months reflective of what we believe to be a number of factors, including basic supply demand dynamics, driven by licensing structures lack of meaningful enforcement insert.
State on illicit non licensed cannabis sales by state and local law enforcement authorities taxation and general macroeconomic conditions.
We have seen and do expect to continue to see price compression on cannabis unit pricing across states to varying degrees, depending on that states market dynamics and program specifics that said we are closely monitoring the impact the California Attorney General Rob Montes recent announcement may have on the <unk>.
Large relatively uninhibited illicit market and the state of California.
October the California Attorney General announced that California would expand its enforcement efforts against illicit cannabis grows with its eradication and prevention of illicit cannabis task force shifting the seasonal 90 day focus on eradicating illicit grows to a year round practice with one of its goals to support the league.
Market.
As we noted before we believe this continued price compression will require operators to continue to focus on the dual aspects of brand strength through product quality and efficiency of operations and that are mission critical facilities are well designed to achieve both goals for our tenant partners.
Hey, as we should note of course that while wholesale average price compression provides some informative value pricing is heavily dependent with wide ranges based on product quality and licensing structures with higher quality vertically integrated operators have distinct advantage over others in terms of pricing dynamics.
Capital availability.
As we noted on our last call financial markets have become increasingly volatile and restrictive over the past months since the U S. Federal Reserve began tightening monetary policy in March and pursuit of path of increasing interest rates on a timeline that we frankly have never witnessed as a country.
That volatility and restrictive environment has not dissipated in any way from what we have seen and we see the war in Ukraine, other geopolitical tensions and supply chain issues, adding to the uncertain economic outlook and continuing to Stoke inflationary expectations.
As with other industries, the cost of capital and capital availability has fundamentally changed for cannabis operators over the course of this year as.
As we noted previously capital raising across the cannabis industry continues to be very subdued versus the relative strength of 2021 and that continues to be the focus for most cannabis operators this year with minimal equity raised.
In fact, according to Viridian capital Advisors total capital raise for U S regulated cannabis operators was down by more than two thirds. During the first three quarters of 2022 versus 2021 and in terms of equity capital raised down 96% from the prior year period.
I'd also note that capital raising has noticeably diminished in the public REIT markets as well during Q3 with total capital raising in terms of both debt and equity being the lowest since Q4 of 2009, the depth of the great recession.
Total capital raising for Q3 was $6 2 billion compared to 29.4 billion raised in the third quarter of last year.
Inflation and supply chain issues as.
As we noted in our prior call inflation continues to impact our operators in terms of labor and input costs. In addition to driving up the cost of construction for development and redevelopment activities versus original budget.
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 operators to put up more capital to complete the project and are resulting in delays in revenue generation as projects take longer to complete.
In combination with the current environment of limited capital availability. These can be significant obstacles for certain operators.
Federal legislation.
In terms of recent federal developments, while there is no substantive movement to report as it pertains to federal legislation, we do want to touch on President binds announcement, two pardon prior federal offenses for simple cannabis possession.
And the directive to the HHS Secretary and it and attorney General to initiate a review of how cannabis as scheduled under federal law.
While this was certainly an attention grabbing announcement the pardon for federal offenses itself impacts are very small cohort.
Well as a few thousand has the vast majority of convictions for simple cannabis possession are made at the state level.
Pardons constitute an action that cannot be undone by subsequent administrations and so in a sense. This is the first permanent change to the federal cannabis landscape in a very long time and there have been some who postulate. This action as a potential factor contributing to the argument for nullification of federal law is pretty.
Turning to cannabis with the basis being that the federal government is not strictly enforced cannabis laws for years and therefore, it should be left to the stage to decide.
We find this an interesting viewpoint and ultimately it is unclear what if any impact. This announcement will have on the various federal legislative efforts in process.
In terms of President Bidens directive to the HHS Secretary and a G to initiate a review of current cannabis scheduling. While this does represent a potential road to rescheduling or D. Scheduling. We think it is a road that will take years to travel requiring significant clinical research and of course time consuming litigation along the way.
Hey.
I'd like to now turn the call over to Ben to discuss our portfolio and investment activity in the third quarter and year to date.
Thanks, Paul.
For this call I'd like to cover certain characteristics of our property portfolio and tenant roster. In addition to discussing our investments year to date.
As you know we own 111 properties across 19 states, comprising $8 7 million rentable square feet.
Beginning this quarter, we have bifurcated our portfolio between our operating portfolio, consisting of 109 properties and construction in progress or CIP comprising the two development projects projects previously leased to Kings Garden and the expansion project at one property for Kings Garden continues to occupy the property pursuant to a settlement agreement with.
For the nine months ended September 32022, we collected approximately 97% of contractually due base rent and property management fees from our operating portfolio.
The Kings Garden defaults in July contributed to a large majority of that 3% of uncollected rent and as we've noted in prior calls vertical a tenant of ours in southern California that represents less than 1% of our total invested capital in contractual rents has been making partial payments over time.
As Alan noted pursuant to the settlement agreement with Kings Garden, we regain possession of two properties that were under development, we signed an LOI for lease at one of the properties and a little over a month of marketing and look forward to working with a prospective tenant towards finalizing the lease.
For our San Bernardino property, given the size and location of the asset we are exploring all possible uses including non cannabis to maximize value of the asset and the current California market environment.
Our operating portfolios total cost basis, including commitments to fund future improvements equates to approximately $272 per square foot, which we believe is substantially below replacement cost.
Our operating portfolio is split between 67 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 and 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 operating portfolio properties with multistate operators as tenants make up 85% of our invested or committed capital and properties with public company tenants makes up 55% of our investor committed capital.
Of our 109 properties in our operating portfolio 15 were under either partial or full development or redevelopment or approximately 14% of our operating portfolio as of September 30th.
Constant doing approximately $1 6 million rentable square feet with a weighted average lease length of 15, and a half years for the operating 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 coming months.
In terms of investment activity in the first three quarters of this year, we acquired nine properties and executed lease amendments to provide funding for improvements at nine properties, representing a total investment commitment of about $369 million.
In addition, as Alan noted we executed on our first property disposition earlier this week.
Selling a Pennsylvania property that we originally acquired in 2019 and leased to my tree, a private single state operator for 'twenty, three and a half million dollars or approximately $461 per square foot.
Which is of course, a price per square foot well above our operating portfolio average of $272 per square foot and above what we originally paid for the property including funded improvements.
While we are firm believers in the Pennsylvania market in our view this transaction presented an attractive opportunity to strategically recycle capital into other opportunities with superior risk adjusted returns.
While we are of course focused on long term ownership of our properties. We will continue to evaluate our portfolio and make strategic decisions based on the evolution of the individual state markets and opportunities that present themselves.
In terms of expected additional investment activity as always forecasting investment activity in this industry is challenging.
As we noted on our last call. We continue to expect the pace of capital deployment to be significantly lighter than prior quarters as we focus on the ability to raise capital on terms that we determined to be reasonably favorable in light of the opportunities to place that capital.
With that I'll turn it over to Kathryn Kathryn.
We generated total revenues of $71 million for the quarter of 32% increase from Q3 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 <unk>.
Contractual rent escalations at certain properties.
During the quarter, we did not collect contractual rents totaling $5 $7 million from Kings garden and vertical.
Which includes approximately $5 $3 million in base rents and property management fees, and 369000 and tenant reimbursements for property taxes and insurance.
However, we did apply approximately $2.6 million from security deposits held by us for defaults by Kings Garden, and its obligations to pay rent to partially offset this decrease.
As we've indicated in the past our Q3 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 seasons 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 September 30th 'twenty 'twenty. Two we recorded net income attributable to common stockholders of $37 million or $1 32 per diluted share.
Net income for the quarter was impacted by $2 million in litigation related expenses incurred related to Kings garden and the shareholder lawsuit filed earlier this year.
You'll note that for this quarter, we've added back this expense from our calculation of SSO to normalized SSO.
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 SSL was $60 million or $2 13 per diluted share.
On October 14th we paid our quarterly dividend of $1 80 per share to common stockholders of record as of September 30.
Equivalent to an annualized dividend of $7 20 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, but 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% on <unk> on a stabilized portfolio basis.
For Q3, our payout ratio for the quarter was 84, 5%.
We also continue to issue draws for improvement allowances, our construction development to our operators under our leases.
As we've previously noted and discussed extensively on this call. These improvements are critical for the efficient production of quality cannabis products at scale.
In Q3 of 2022, we funded approximately $35 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 cost of construction for development and redevelopment activities.
We're also seeing construction late delays with certain development and redevelopment projects in our portfolio similar 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 way in Ukraine, and Rolling economic Lockdowns in certain countries in response to continued Covid outbreaks.
That's just one example of these delays we've seen electrical switch gear for properties under development or redevelopment take up to a year plus for delivery to the property. After an order is placed.
At quarter end, we had approximately $2 6 billion and total gross assets and a total of about 306 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 was 12% at quarter end and our total fixed cash interest obligations on an annual basis was $16 $7 million or a little over $4 million per quarter.
We've maintained investment grade credit rating and have a debt service coverage ratio in excess of 15 times.
Finally, we'd like to note that our thoughts are with those impacted by hurricane in at least kept in close contact with our tenant operators and Florida, leading up to landfall of Hurricane Andrew the aftermath and our properties sustained minimal damage.
And with that I'll turn it back to Alan Alan.
Thanks Katherine.
I'd like to note the following in closing.
Our conviction is as strong as ever in the long term growth and promise of the regulated cannabis industry.
And our team's commitment to serving you well as owners of the company every day to effectively manage the company through the inevitable flows of the regulated cannabis industry.
We certainly appreciate and value all of our long term owners and our team is singularly focused on the protection and enhancement of the value of this company for your benefit.
With that I'd like to open it up to questions. Operator could you. Please open the call up for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on the I touched on the phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
Dan Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Tom Catherwood with BPI. Please go ahead.
Thank you and good morning, everyone maybe.
Maybe starting with the my tree asset sale very interesting to see that this quarter.
Can you provide some more color.
We're around the transaction kind of what I'm getting at is was this a reverse inquiry was this something there you were evaluating your portfolio and kind of decided to kind of prune. Some of your assets what was the driver behind this transaction.
Alright. Thank you. Thank you Thomas.
Very interesting question and a good question.
Keeping them keeping in mind that you know that.
85% of our of our tenants are msos and only 15% of our single state operators and mitral being one of those single state operators. So.
We.
Are in constant contact with all of our tenants, but primarily.
Highly focused given the dynamics of the industry on our single state operators and an opportunity came about between my tree their investors.
And owners where.
It would it was a.
Beneficial a win win situation for them and for us to be able to transact.
And we took we took it upon ourselves to move forward with the transaction, which I do think is a win win structure in that.
They they've reduced the need for the long term lease or they eliminate their long term lease and we get the capital back to.
Redeploy in.
Even at a higher higher yielding better quality.
Operators.
Got it I appreciate that all of that that's really helpful.
And then maybe.
No.
Given the economic uncertainty obviously, you know you mentioned in your prepared remarks, but are you seeing.
Cannabis operators pause or delay their their capital spending plans.
I think all.
All industries and all.
All companies are using this time, we're taking this time to reevaluate all of their operations and and I don't think the cannabis industry is different in that sense. The one positive thing about the cannabis industry is that revenues are continuing to.
Are expected to continue to grow that new.
New.
States are coming online.
The revenue is expected to double by I don't know.
26, 2026 and.
And new states and there are I think there are four new states that are looking to approve.
Adult use.
And there are five states that are are expected are that are on the ballot coming into this coming week.
And with that growth in demand I think the industry itself is a while still nascent still has tremendous growth opportunities.
Understood and that makes sense, especially with the expansion of state programs.
Paul You had mentioned that you know as operators cannabis operators are looking to fund.
These expansions that they've been turning and variably to that recently, we've seen those yields push up 300 plus basis points that was before the rate hike yesterday.
Has there been a similar move in yields on sale leaseback transactions or deals that people are looking for in the market.
Yeah, I think John I think generally we have seen an uptick commensurate with the rest of the environment.
As we mentioned that the pipeline still remains very strong even at these increased yields.
Ben do you want to give any more specific color on that.
Sure I mean, as Paul said, we are seeing a similar uptick in yields.
For our capital, we're seeing a tremendous demand for the capital in and go back to your earlier question is part of why we were so excited to execute on the <unk> transaction to recycle that capital into extremely attractive very high quality opportunities.
I appreciate that color and then last one for me you know along those same lines of thinking of available capital to put to work.
On the two larger Kings garden developments it looks like your basis in the assets is $10 million lower than last quarter and the capital committed to the projects is down almost $28 million or these amounts now part of your uncommitted capital availability or are those.
Kind of amounts still earmarked to those developments.
I think that.
One cashes b.
Kind of ubiquitous it goes it goes anywhere it's cash that's come in and we can use it in any way.
We have.
Any way we want to the.
I wanted to be very careful that we don't talk about the settlement and what.
At this point, we still there's still things that we're working through.
And we will look to talk about that in the months and months ahead, but we're excited about the <unk>.
Our availability of uncommitted capital and the certainly the opportunities we have as Ben said and are a very strong pipeline.
With a very strong operators.
Got it really appreciate the color. Thank you everyone. Thanks, Tom.
The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Good morning, good morning, good morning out there.
Yeah, a few questions.
First maybe continuing on that line of questions.
Can you just give a sense of you know.
The economics of the backfill on the one warehouse and your thoughts around the other just it's great to see trades, obviously, the Pittsburgh one is great.
But just would be useful certainly.
To get a sense of you know the the ability to reuse and whether or not the sites are worth more or less.
Okay, well first you know on the Pittsburgh transactions, certainly we sold that at a higher for a higher price than we originally based paid for so there is one.
Strong data, but data point also the what we sold it for on a per square foot basis is certainly higher than we have in many of our other assets.
In that market and across the country.
Third.
On the.
The asset development asset that we have.
We have from Kings Garden, we are very very pleased with the economics associated with the LOI manner. This letter of intent is just a letter of intent and we're moving as quickly as we can finalize lease I just wanted to make sure that people understand that nothing is done until we actually have a definitive.
Agreement, but we're very very pleased with the economics associated with that.
Transaction.
What about the remaining one that youre going to reevaluate for alternative uses how does your basis compare to what alternative uses would be.
Well, we think the basis and it is is below what other industrial commercial buildings in the market.
Traded for in the past so that's one good thing.
The fact that it's on the $2 15 for you with the fact that it's a freeway adjacent it has freeway visibility.
<unk>.
All play to the quality of this of this asset.
We are are in the preliminary stages of trying to maximize that value for our shareholders and we hope to have more information to come in the next 12 to 18 months.
Next question is cat on the on the security deposit and just thinking about you know.
Fourth quarter and go forward.
Is there any security deposits left are remaining or should we think about fourth quarter being down sort of call. It whatever.
Roughly $3 million.
Can you clarify left in what.
What are you are referring to you use you used.
Security deposits sorry about that.
Landline, we still have.
Yes.
Alex its securities.
Yeah, you guys have security deposits that you applied against the.
The you'll kings garden, Brian I'm, assuming that you've exhausted the security deposit so for the fourth quarter. It sounds like you know right.
Quarterly episode was going to be down by the amount of the security deposits that were applied in the a and the third quarter is not the case.
Yeah, we have applied our full security deposit, but beyond that we're not able to comment.
Due to the conditional settlement.
Okay.
And then just two other questions one is going back to the comments that you guys talked about out in California.
Yeah.
Good to see the a G out there going after the illegal market, but just curious you got Michigan, Colorado, Oregon, Washington, California. All these markets that have either had tremendous price competition or unlimited licenses or et cetera.
Your exposure in those markets. One are all the tenant's current and two are these all markets that you would continue to expand in there or is your view that as you grow the company youre going to.
Reduce exposure to the unlimited license markets.
So.
As reported we have collected the rent that we collect the ransom and in those markets all of our tenants are current.
As of today.
But what I, what I want.
Are you focused on the geographic location of these of these tenants and I think that we want you to want to make sure that you understand is that when were.
Making these investments as we're making them in geographic locations, which we think are high quality locations and are mission critical for mission critical facilities, but their mission critical facilities, where the tenant operators and why we're so focused on the fact that 85% of arc our tenants are multistate operators.
Benefiting from.
A broader market than any one specific market.
We believe that.
That has helped us generate one of the highest quality portfolios of tenants as a matter of fact as you can see on page 14 of our financial supplement public tenants within our within our top 15.
Tennant's have come have a combined market cap.
Of over $9 $7 billion as of.
At the end of the third quarter.
And the public tenants within our top 15 times reported.
And at the end of the second quarter I.
I think revenue of over $1 4 billion and an annual run rate of over $5 9 billion.
And lastly, all of our top 15 tenants all of the public tenants reported positive adjusted EBITDA.
In the second quarter.
So what we're saying is that we have very strong tenants and why we focus on the.
Msos because of any individual market might have a up or down.
A period of time.
Okay, and then just a final question.
No it's been in the obviously the big issue had been in the news.
Is it are you seeing anything that whereby the licensed are you now.
Dispensaries are benefiting so your your tenants are seeing bigger demand because people trust the quality of the product, they're getting there versus buying on the street I'm. Just curious if there's been any sort of uptick because your tenants, obviously have extreme quality controls, whereas people who buy products on the street don't know whats getting.
Extend there have you seen any change in that or not really.
I think I'd say it.
Interesting data point in an interesting.
Uh huh.
Situation that.
That is out there yes are our tenants do go through a tremendous amount of of scrutiny and regulations to produce their products and making sure that not only the product as a as a pesticide free and has any environmental Uh huh.
Doesn't have any environmental factors associated with the product with our product so in that sense.
The that are that there there is a lot of confidence in the product that our tenants provide to specifically say that any one factor is increased revenues.
Don't think we can say that but what we can say is that revenues are expected to double by 2026.
Thank you.
Thanks, Alex.
Our next question comes from Scott Fortune with Roth Capital. Please go ahead.
Yeah. Good morning. Thanks for the question just wanted to follow up on some comments about the pipeline you know and we've seen the cost of capital for the cannabis industry increase here and many of the top msos are cutting around their their capex plans here you know cost of capital we thought two deals around 12 or 13% from that side that right but.
Overall, the demand is just causing more incoming calls for for your pipeline for sale leaseback.
For these well capitalized so just kind of quantify our overall interests in demand for potential sale leaseback opportunities your pipeline versus last year or couple of quarters ago.
Yeah, No I mean.
And all have been you know.
Blow up on this but yeah. The our pipeline is very strong it continues to be strong and it's strong for a number of factors one.
Uh huh.
When we commit to a transaction our tenant partners know that we.
We execute on that and so we have a great a.
Great reputation.
And that reputation stems from I think a very strong management team that has been in this industry for a very long period of time and actually we I think have the longest tenure in the in the cannabis real estate industry.
But.
I think the kantar.
Continued demand for capital.
<unk>.
Okay is there and at very attractive rates and we wanted to fall over Yep sure. It's Scott Yeah. I mean, we are continuing to see tremendous demand for our capital I think a lot of the top operators in the industry recognizes the value that we bring through our reputation and the value of being able to source non dilutive capital.
All in a very challenging environment and we're very excited about our ability to capitalize on that given as Alan mentioned the management team. We have in place extremely strong flexible balance sheet that we have.
There's a tremendous amount of opportunities in the industry.
Okay. I appreciate that color and then just kind of a follow up there on the health of the tenant base here in this type of capital market, you mentioned kind of single state operators or the smaller.
Tenants that are maybe under a little more pressure to meet debt obligations, obviously, Brian that here and potential defaults, there or do you work with the lenders with the companies to the <unk> companies potentially and what is the process of an operator defaulting on that outside of your Guys' Society.
And lenders.
Go down the process a forced liquidation the recourse for IP, there kind of step us through on those type of small tenants that you might have to work with.
You know I think.
No I mean, there isn't there isn't you know we don't somebody defaults on that alone isn't necessarily a default on our lease.
Long as they've continued to pay our rent now the I think many of the that lenders are really quasi partners with these are these tenants.
And they certainly look to.
The overall structure of the of any one of these these tenants to help them succeed and continue to payback.
They're not only their debt obligations, but continue the operations just in general.
And so so I think that that's how the the.
That said, how their relationships and their partnerships work.
And that works to our benefit.
Got it Okay and then last real quick question for me probably for Paul E. Can you provide a little color I need some nice steps by the by the by the administration right. There's federal efforts around potential seat plus coming on board here.
Free up potentially institutional capital in the capital markets to help your tenant base, but more specifically if I E P.
New York Stock exchange listing.
Are you seeing more discussions.
With the exchanges with potential up listings with the tenants in your portfolio and kind of in light of the can't be growth statement, you know with the USA structure. There can you provide maybe a little bit more color on what the exchanges need to.
Good too besides explicit safe Harbor language to move forward with uplifting the thief of a new call memo, providing enough cover for that or comfort definitely thank you Scott.
More color on your thoughts around the potential uplifting.
About your tenant base there sure. So yeah I think the short answer Scott is the exchanges have shed that unless there's until there is some significant movement at the federal level the scheduling of rescheduling, they're not going to open up the exchanges.
So the question then is what canopy is doing with the Toronto exchange that's interesting, but we did note that the NASDAQ did object to the canopy USA uplift to them.
That's the latest as of this week.
Fluid operation, but it is interesting to see if theres going to be any play to the Toronto exchange.
You know as far as safe you know I think obviously Senator Schumer said Sunday that they were quote very close and quote to passing shape, but.
I don't know if senator Schumer has a tremendous amount of credibility when he's talking about what can host bills are going to pass or not pass, but along with the buy ins announcement.
To reexamine.
The scheduling.
And some movement on safe, we think shape, where shape plus does have a better chance.
The lame duck.
As far as any safe Harbor language for the exchanges.
We don't think that's going to be part of shape or shape plus right now because if we dig down deep and.
And look at the path to getting C plus with.
Some type of protection for the exchanges, it's got to go through.
Shared Browns Committee and he has said he does not want to put any language that would favor banking I mean, unless there's significant social equity language. So we're back to that same old battle. We've had for the last two years, the social equity versus the capital market access So I think.
Smart money Scott says that.
If something gets done in lame duck is going to be very simple.
Without.
Capital market access.
I appreciate your thoughts on that I will jump back in the queue and pass it on thanks. Thanks Scott.
As a reminder, if you have a question. Please press star then one to be joining the queue. The next question comes from Eric des <unk> with Craig Hallum Capital. Please go ahead.
Great. Thank you for taking my questions.
First one is a follow up on the Pennsylvania disposition.
Just wondering how youre thinking about other potential properties that might be available for sale you guys, obviously sort of called out how they are one of the single state operators in your portfolio that represents 15% of the overall capital should we think of potential properties for sale is only those belonging to <unk>.
Allstate operators.
Any additional color on sort of what you consider as potentially available for sale for your properties.
Yeah, I mean, I think that we don't.
We're not looking at trying to sell anything that we've recently just required a unless there's a strategic reason behind it.
I think that you could.
We have our San Bernardino asset that is.
Hell then we have held in development and we could be looking at are developing that.
Or we could be looking at selling that asset but in general.
I think we're very pleased with the quality of our AR of our assets on our tenants.
To date.
And.
Hum.
We'll look at.
One or two assets strategically for sale if it makes sense.
Alright does that answer your question do you have more questions yes.
Yes. It does thank you I was on mute. Thank you.
You've previously described your Oh, sorry, the decreased acquisition activity.
Despite your strong pipeline is essentially a widening of the bid ask spreads.
As these markets sort of you know.
Readjust to higher rates.
Are you seeing a bit more of a you know.
And agreements on potential cap rates for these properties and then the second question would you characterize the negotiations with your potential investors in the same way as sort of strong demand, but a bit of widespread here. Thanks.
Well I mean I think.
The best way to pay.
To answer that is that we've gone from.
And acquisition.
Program of.
Consistent consistent quarter over quarter acquisitions to a very opportunistic.
Model, where we're where we're being very.
<unk> and deploying the capital that we do have available to us too.
To the best operators.
That we can and being very careful.
As to.
Our thoughts on future capital.
Even though that we do have access to capital.
<unk>.
So that our investors are.
<unk> positively.
Looking at the way, we are deploying the capital in and being a steward of their capital.
But there is that the general market.
Requires us to I think as I said become be more opportunistic.
Okay, that's fair.
It makes sense, so I suppose.
Some of us thinking about.
2023, and 2024 et cetera, not that you're giving guidance or anything like that but you know I guess needs the proper way to be thinking about this as more of a you know probably this continued opportunistic.
Our acquisition pace as opposed to Okay. We have maybe.
234 quarter.
Kind of lull, but then we get cashed up and gone sort of continue our normal acquisition pace. It should be more of the former than the latter if I'm understanding correctly right unless your crystal ball is much clearer than mine and you can actually tell me what you know what's going to happen in you know in 2023 and in the first quarter.
Because if you can take that offline and have a really good conversation.
But we.
We just believe that there is a lot of uncertainty in the market.
And we.
We think that there is going to take some time for that uncertainty to to become.
More clear.
And then once that happens we can we can certainly.
It.
Discuss our acquisition pace at that point.
It makes sense I appreciate you sharing your insight thank you.
This concludes our question and answer session I would like to turn the conference back over to Alan Gould for any closing remarks.
Thank you and and I would certainly want to thank all our stockholders for the your support and your continued support.
All the all of the people who have asked questions on the call. Thank you very good questions and most importantly, I want to thank our.
The team for all their continued hard and dedicated work. During these of these interesting times that we're in and so with that thank you all and we sign off.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.