Q1 2023 Innovative Industrial Properties Inc Earnings Call
Good day and welcome to the innovative industrial properties, Inc. First quarter 2022 or three earnings conference call.
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I would now like to turn the conference over to Brian Wolfe General Counsel.
Please go ahead.
Thank you for joining the call presenting today are Alan Gold Executive Chairman, Paul Smithers, President and Chief Executive Officer, David Smith, Chief Financial Officer, Catherine Hastings, Chief Operating Officer, and Ben Regan Chief Investment Officer.
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.
But securities Litigation Reform Act of 1995, and 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're 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 F O 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.
Lynn.
Thank you, Brian and welcome everyone. We are pleased to report another solid quarter of operations and financial results, especially in the context of ongoing challenges in the macro economy that we are all experiencing.
We believe we have positioned ourselves well in this context with one of the strongest and most experienced teams our real estate professionals in the cannabis industry.
A high quality portfolio, and arguably a conservative and flexible balance sheet.
With that I'm also pleased to introduce our newest member of the management team on this call David Smith.
Who joined US in late March as our new Chief Financial Officer.
David brings a wealth of senior management experience in the real estate industry, including cannabis real estate and publicly traded Reits in particular.
And we look forward to his insight and contributions to our company for many years to come.
With David's appointment, we also promoted Catherine Hastings to Chief operating Officer, and Ben Regan to Chief investment Officer.
Seasoned executives that have been with us nearly from the start of the company.
We are truly fortunate to have such a dedicated team and to expand our team with David's caliber of talent.
To recap the quarter, we generated total revenues of $76 million in Q1.
Adjusted funds from operations of over $63 million.
Rent collection from Ip's operating portfolio was 98% for the quarter the financial performance combined to drive dividend returns to investors with a $7.15 of dividends declared per share in the past 12 months alone.
Well, we have noted for the past several quarters that we expect investment activity to slow given the significant increases to funding costs that have taken place and overall macroeconomic headwinds.
Wanted to highlight our transaction with our new tenant battle Green during the quarter, where we acquired a 157000 square foot industrial facility under development in Ohio, and executed a long term lease with <unk>.
Valerie and has a great leadership team in place and we see Ohio being one of the states poised to adopt an adult use program in the near term.
Including that transaction, we've committed over $90 million in additional investments year to date.
Ben will provide further detail on our battle Green transaction and other investment activities year to date.
We.
To strive as we have from the very beginning to be as transparent and detailed as we can about our business and prospects and hope all our shareholders feel the same.
On the positive side, we are seeing green shoots in the industry such as the reintroduction of the Safe Banking Act, which Paul will spend more time discussing.
Catherine Hastings as Ive mentioned, well highlight our positive portfolio statistics, including rent collection from the first quarter and for the first two months of this quarter.
I will now turn the call over to Paul to discuss licensing industry dynamics Paul.
Thanks, Alan before discussing overall market developments I'd like to provide an update on the properties. We previously disclosed last quarter, where tenants parallel in green peak have not paid rent as we noted then and I think it is worth repeating here. We are of course first and foremost focused on maximizing the value of each.
Of our properties and having tenants with strong teams. They can manage their businesses successfully through inevitable ups and downs of this industry.
We have engaged local council and other advisors in these situations commenced legal proceedings for damages and possession and are in discussions with likable regulatory agencies with.
With our veteran team internally in combination with our advisors across a spectrum of specialties I am confident in our ability to successfully navigate these situations.
As noted during our prior earnings call, we commenced litigation against Green peak at our summit property in Michigan in early March as many of you May know Green peak was placed into receivership and in mid March we regained possession of the summit building. In addition, we regain possession of two small retail locations in Michigan.
<unk> previously leased to green tea for which our total investment is less than $3 million.
The receiver is paying rent on all other remaining properties leased to green peak, including the harvest park cultivation and processing facility and for other retail locations and we are closely monitoring the situation and receivership process.
We are currently in the process of discussing and touring the summit property with interested cannabis operators.
As noted in our prior call. We also filed actions against parallel for possession and damages at our Pennsylvania property and our Texas property, which is in the early stages of development.
We regained possession of the Texas property in mid March where parallel failed to pay rent for the first time in February we're actively exploring all options for these properties, including speaking to a number of interested parties. As we noted previously parallel as current on the other two properties, we leased to them in Florida.
And for King's Garden, they continue to pay rent at the four properties, they occupy and continue to explore a potential merger transaction.
Market developments, while it is clear that the regulated cannabis industry has experienced in the past several months and continues to experience a set of challenging circumstances I would like to note that the growth of the overall cannabis industry in the United States is expected to continue to be strong with industry Research group New frontier data.
Checking a doubling of annual sales from 2023 to 2032 over $70 billion, representing a double digit compound annual growth rate.
The regulated cannabis industry remains an exceptional case of industry size and growth potential.
As we have noted for some time now unit pricing for regulated cannabis products have been challenged in certain states at the wholesale level reflective of what we believe to be a number of factors, including basic supply demand dynamics lack of meaningful enforcement in certain states on illicit non licensed canvas sales by <unk>.
And local enforcement authorities taxation and general macroeconomic conditions.
Reflecting that continued price compression in combination with the continued inflation on input and labor cost. We note that consensus analysts expectations for 2023, EBITDA have fallen significantly for publicly traded U S operators nearly across the board.
That said this price compression dynamic is certainly not uniform across states and we are cautiously optimistic that certain states like California may have turned the corner on the FERC assistance he of unit pricing declines, while new adult use states like Missouri are seeing very healthy wholesale pricing dynamics.
Capital availability another continuing theme from our prior calls is the tightening of financial conditions and the impact it continues to have on capital availability for the cannabis industry.
As with other industries, the cost of capital and capital availability have fundamentally changed for cannabis operators over the course of the past year or so.
As we noted previously capital raising across the cannabis industry continues to be very subdued with radian and capital advisors reporting that U S. Operator capital raises were down 86% in Q1 versus the prior year period, and if those raises nearly 90% was in the form of debt.
From our perspective, we believe the present macroeconomic challenges of unit pricing compression in cost inflation and combination with depressed valuations and capital availability have translated into the larger msos focusing more on efficiency of existing operations and generating positive free cash.
Flow versus growth through M&A.
That certainly appeared to be the case in Q1 of this year, where we saw a little over $815 million in M&A transactions versus over two $5 billion from Q1 of last year.
State programs shifting to state specific programs as noted in prior calls we continue to see momentum in states that span the political spectrum, Missouri officially launched its adult use program in February with regulated cannabis sales in March totaling over $126 million alone.
Maryland's adult use program is also expected to see first legal sales in July 1st and just last month, Delaware became the 22nd state to legalize adult use cannabis.
Meanwhile, adult use legislation is progressing through the Minnesota legislature, and there are expectations that Ohio, and Pennsylvania could legalize adult use cannabis this year.
Federal legislation.
On the federal legislation front as you know versions of the Safe Act reintroduced again in both the house and Senate late last month. There are some reasons to be optimistic on potential passage. One this bicameral push on its face appears to signal that this legislation could be a priority to a version of safe has.
Pass the house seven times now and three the Senate Bill has 40 total sponsors, including seven Republicans that said as we have stated for years now getting a version of this bill through the process and into law continues to be daunting and will require significant time spent by Congress and an alignment of newmar.
Sets of competing interests.
We also want to note some of the recent commentary by federal officials and commercial organizations, which we believe shows the continued momentum forward for change in late March the wine and spirits wholesalers of America issued a letter to Congress, calling for cannabis to be regulated on the federal level like alcohol advocating for copper.
Hence the federal legalization.
Also in March U S health and human services Secretary Xavier Becerra provided an update on his agency's role and status of the ongoing cannabis scheduling review and.
While not providing a definitive timeline for completion of the review did note the process will take into account shifts in what canvas means to Americans over the last several decades.
Also last month and testimony to the Senate Attorney General Merit Garland provided an update on the Doj as potential establishment of a cold memo to point out.
While the timing and scope of federal reform continues to be uncertain, we see the reintroduction of the Safe Act and both the house and Senate and these positions has incrementally positive steps and the road to reform.
Ill now turn the call over to Ben to discuss our investment and portfolio activity in the first quarter and year to date.
Thanks, Paul.
As Alan noted year to date, we have closed on approximately $91 million of additional investments, including follow on transactions to fund additional infrastructure at our existing properties as well as new acquisitions.
In March we closed on the acquisition of an underdevelopment a 157000 square foot two story industrial building and executed a long term leased to new tenants that'll green.
That'll Greens leadership team includes Joe Count the Viano co founder and former President of Chriscoe Labs, Chad Wise co founder of North American Dental group, David Ellis, former Chief Operating Officer, Chris Go, Indiana, Mettler, former CFO of Equifax, Canada.
We acquired the development property in mid construction and our total investment is expected to be $42 million.
<unk> medical cannabis program is well over 300000 registered patients and over.
<unk> is expected to decide on adult use cannabis program adoption this year.
As we noted on our last call investment activity for 2023 also includes the sale leaseback transaction for 58000 square foot fully operational candidates facility with tilt in Pennsylvania for $15 million and an additional $34 million for improvements at three projects each of which resulted in a corresponding adjustment to <unk>.
Base rent that started immediately.
Those included $15 million and additional funding for ascended its new Jersey facility.
An additional $15 million for farm Mccann, New York property.
An additional $4 million to goodness growth of its New York property.
We also negotiated cross default provisions on all leases for each of those three tenants as well as for til.
We also closed on the sale of a property portfolio that we previously leased to vertical in southern California for a little over $16 million and executed a secured seller note for approximately that amount with the buyer with cash interest payable monthly.
As you May recall, we announced the signing of that sale agreement in our last call and closed on the transaction shortly thereafter.
Regarding our San Bernardino property property, we took back from King's Garden late last year, we executed an LOI with a group to explore a potential mixed use development of the property, which may include a self storage component.
While we are in the very early stages of this project and expect the process to take many months, we will look to keep you updated on our progress.
For our properties in Texas, and Pennsylvania, We're parallel defaulted as Paul noted we took back the Texas property in mid March and are currently exploring options for that site and.
In Pennsylvania parallel continues to occupy that property, while we work through the process to regain possession in the context of Pennsylvania licensing dynamics and we will provide updates as we can.
With that I'll turn it over to Kathryn Kathryn.
Thanks, Ben for this call I will describe our property portfolio and tenant roster. In addition to our rent collections statistics and updates on our development projects.
As of March 31, we owned 108 properties across 19 states, comprising $8 9 million rentable square feet.
Of these 108 properties 103 properties are included in our operating portfolio.
Our portfolio continues to be well diversified with no one tenant representing more than 14% of our total invested capital and no state representing more than 17% of our total invested capital.
We have relationships with some of the largest and most experienced operators in the industry with our operating portfolio comprised of 89% multi state operators and 58% leased to public company tenants.
In addition for operators with multiple leases with US we have cross default provisions included for 42% of our operating portfolio with another 14% of our operating portfolio leased to operators with just one lease with us.
The total amount of capital invested and committed across our operating portfolio equates to $275 per square foot, which we believe remains significantly below replacement cost.
For the first quarter, we collected approximately 98% of contractually due base rent and property management fees from our operating portfolio.
The 2%, we did not collect related to contractual rent in excess of security deposits applied for a previously disclosed defaulted tenant parallel in Green peak <unk>.
And contractual rent not collected prior to the sale of the vertical portfolio that Ben previously discussed.
Our revenue and rent collection for the quarter included the application of approximately $4 $2 million in security deposits.
As we previously disclosed in last quarter, we amended our leases with holistic in exchange for the inclusion of cross default provisions and extensions of terms for all of the leases and agreed to apply security deposits further rent payments to the Michigan and California properties through September 30th with pro rata payback.
Back of the security deposits starting in January 2024.
For Q1, 2023 we applied $1.1 million of security deposits for these two holistic properties, which represent less than 2% of our total invested capital and we note that rent was paid in full by holistic at all of their properties.
This quarter, we also applied in full the security deposits, we held for parallel, Texas, and Pennsylvania and for Green peak at our Sun that property in Michigan and recorded revenue totaling $3 $1 million related to these previously disclosed defaults.
We collected April and May rent from all tenants other than parallel for the Pennsylvania property, which parallel continues to occupy.
And the two small retail properties leased to Green peak that Paul mentioned previously.
We also continue to fund draws for improvement allowances or construction development to our operators under our leases.
As we've previously noted on prior calls these improvements are critical for the efficient production of quality candidates products at scale.
In Q1 of 2023, we funded $66 million for building improvements and construction activity at our properties.
As in prior quarters, we continue to see construction delays related to delivery of electrical infrastructure, specifically switch gears, which is a common delays seen across the entire construction industry.
We continue to believe in the tremendous value of our mission critical real estate portfolio as well as our operators and their ability to weather. The current conditions and will continue to monitor their progress closely in the coming months and with that I'll turn it over to David David.
Thank you Catherine I am pleased to be here for my first earnings call with the <unk> team and appreciate everyone joining for today's call.
I continue to be enthusiastic about the significant long term growth of the cannabis industry.
And believe that IAP as the only publicly traded cannabis read on the New York Stock Exchange is best positioned to continue to capitalize on this unique opportunity by providing growth capital to the industry.
Okay.
Moving onto the quarter, we generated total revenues of $76 million, an 18% increase from $65 million generated in Q1 of last year.
The increase was driven primarily by the acquisition and leasing of new properties.
Additional funding of building improvements provided to tenants at certain properties that resulted in base rent increases and.
And contractual rental escalations at certain properties.
As Katherine noted previously the $76 million of revenue for the first quarter included $4 2 million as a security deposit supplied for payment of rents.
With $1 1 million or <unk> <unk> per share of that amount related to our holistic leases in Michigan and California.
And the remaining $3 1 million or <unk> 11 per share of security deposits fully applied related to lease defaults by Green peak at one property in Michigan in parallel at one property in each of Pennsylvania and Texas.
For the three months ended March 31 2023.
We recorded net income attributable to common stockholders of $41 million or $1 43 per share.
<unk> for the first quarter was $63 4 million or $2 25 per share an increase of 10% compared to the $2.04 per share of <unk> generated in the first quarter of 2022.
In addition to adding back noncash stock based compensation and.
And noncash interest expense related to our unsecured senior notes.
<unk> for this quarter also adds back the nonrefundable cash interest payments, we received on the seller financing provided to the buyer of our vertical portfolio.
As those cash interest payments were not recognized as income for GAAP purposes.
We included this add back to give greater clarity on the cash flows of the company and will continue to recognize this interest income for <unk> as it is received going forward.
On April 14th we paid a quarterly dividend of $1 <unk> per share to common stockholders of record as of March 31.
Equivalent to an annualized dividend of $7 20 per common share.
We have continued to share our growing cash flows with our investors as our dividends paid in the last year grew 16% over the prior year.
Our dividend remained covered by our <unk> during the quarter with a payout ratio of 80%, which is in line with our board's targeted payout ratio of 75% to 85% of <unk>.
At quarter end, we had approximately $2 6 billion and total gross assets and roughly $304 million in debt consisting solely of unsecured debt with no maturities this year or next year and $300 million of bad debt not maturing until May 2026.
At quarter end, our credit metrics remained among the best in the entire publicly traded REIT industry with a debt to gross assets ratio of less than 12% and a debt service coverage ratio in excess of 16 times.
In addition, the company continues to generate significant cash flow from operations, which totaled nearly $240 million over the last 12 months.
These excellent credit metrics and free cash flow generation have resulted in us continuing to maintain our investment grade credit ratings.
With that I will turn it back to Alan Alan.
Alan.
Thanks, David and I would like to note. The following in closing first and foremost our conviction is as strong as ever in the long term growth and promise of the regulated cannabis industry and our team of highly experienced talented professionals will continue to work through the inevitable challenges of this rapidly evolving high <unk>.
Growth industry.
With the quality of our team and strength of our balance sheet and the quality of our facilities. I believe we are well positioned to meet these challenges and continue to focus on value creation for you all are valued long term owners.
With that I'd like to open it up for 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 your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
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Please press Star then two.
Yeah.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Tom Catherwood from B P. I G.
Tom Please go ahead.
Thank you and good morning, everybody.
Stick with <unk>.
State legalization for a second you mentioned, Maryland.
Sales starting in the near term in Delaware flipping and then obviously the expectation that Ohio is next but we used to see this kind of material pick up in activity. When we had the the med to rec shift we saw it in Illinois, and Massachusetts, New Jersey.
But recent legalization seem to have kind of languished, whether it's new york or or or Virginia.
Do you think that this medical to recreational.
Kind of a shift is.
A minute lead change, we're not gonna get the upside, whereas it really state by state specific and kind of what gives you confidence at a place like Ohio.
Hey, Tom Thanks, This is Paul.
No I don't think that momentum.
It may have slowed but I don't think that's a.
Teradyne type of ship I think you know if you look historically certainly.
Med direct shift.
Dramatically increases revenues sales taxes et cetera. So there is a tremendous incentive I think for the states.
To facilitate the transition so yes.
Yes, we've seen some some hurdles in New York are rolling out the Rec program, but you know that's really done at the legislative level and the Governor's office I think people want it and the operators wanted so I think it's a learning curve with the state regulators figuring out how to balance some social equity.
Demands with running the business. So you know I think this is just more of a kind of a speed bump and then something that's going to stick around for a long time.
I would also add that probably what you're what you're noticing is more related to the capital markets and access to the.
Capital markets.
The industry.
It has been going through over the last similar period of time that youre referencing.
Oh, you mean as far as you know the activities that are they is that the companies don't have access to capital. So they can expand and grow in those in those markets, but I think what you're you know when you started out saying that the the.
Positive sales.
Sales and activities that occur from going from medical cannabis to adult use are still there and continue to be there, but maybe you have maybe a slightly muted because of the Uh huh of the capital markets.
Got it understood that makes sense.
<unk>.
And then.
Got it.
Sticking with tenants for a second then I appreciated the the background on the founders of Battle Green hold things Thats, probably going to go a long way towards answering my question, but you know we see the fierce competition out there for capital in the cannabis sector.
When you were evaluating a new tenant to potentially bring them into your portfolio.
How was your evaluation process or your underwriting or those key performance indicators that you're looking for how is that overall as capital has become more constrained.
Yeah, Hey, Tom Thanks.
Yeah, I'd say, we've taken a similar approach that we've always taken.
I think we have been able to leverage the experience of the team here has been in this industry over the last six and a half years and seeing how these markets play out as we've seen it.
Time, and again and as different markets have gone from you know.
New medical program to the adult use program, so we'll be able to leverage.
And the Battle Green example, what we're expecting out of Ohio.
We certainly are.
Focus very very highly on the management team and making sure that we think that the.
Group that they have in place is the right team to execute on their business plan.
Through the inevitable ups and downs of the industry.
I think we have that with battle Green really like their management team very excited about that transaction. So I would say that our disciplined underwriting has not changed over the years, our management team its capitalization its markets, we like quality real estate.
Bill all goes into it today.
Got it appreciate that Ben.
And then last one for me Paul I appreciate your comments about larger msos, focusing more efficiencies than growth or M&A at this point in time from your conversations with tenants how far along are they in.
Kind of gaining efficiencies in their operations and have there been any more requests for deferrals, thus far in the second quarter.
Yeah, well I think.
What we're talking to and what we're seeing in these challenging times. It certainly makes sense for these operators to cut operational costs.
Really get efficient look at the states they want to be and look at where redundancy. So we're seeing quite a bit of that and obviously, we think that's good for the industry overall because efficiencies good.
As far as have we had any indications no nothing that we are certainly.
I'm aware.
Aware of so we're very happy about the rent collection this quarter and going forward.
And as we said in the past, we strive to be as transparent as we can.
So we will absolutely share with you if we have any indication that there'll be any future.
All of these with rent collection.
And not to mention the fact that you know if you just think about think about our portfolio as described by Oh, Catherine over 89% of our of our tenants are msos very strong tenants. So we think we are we have a I think very strong tenants.
That we have right now and as described earlier.
Even on a percent of revenue, which if you look at it 59% of our revenue comes from tenants with cross the potent single single tenant leases.
We think the strength of our tenant continues to to.
To strengthen our growth and it comes from the Green shoots that we're seeing with the strength of some of the or the resurgence of some of the stock prices in our and our public company tenants, which represented 58% of our portfolio.
I appreciate all the color thanks, everyone.
Thanks, Tom.
And our next question comes from Scott Fortune from Roth Capital Scott. Please go ahead.
Well good morning.
Can you kind of a little follow up there can you provide.
A little color on the recent portfolio acquisition debt and the amendment.
Physically nature of these qualifying improvement.
I know you guys allocated 34 million in additional commitment are the clients are adding production capacity.
New Jersey, and New York or are these more project costs needed to kind of reach completion. So from that standpoint, and then thoughts of adding in Pennsylvania in very challenging market with painting.
That have or have had tough time generating cash flow.
In that sense.
The continued addition.
For money going to the tenant.
Strategy, there or does it kind of implications from that standpoint.
So thank you for the question Scott So on before I turn it over to Ben to go into the details of of the $34 million of the amendment just wanted to remind US again, what we said in our prepared remarks that the construction construction projects in general have because of our.
Past issues with supply chain continued to be affected by the supply chain are issues that are occurring development projects are our for our tenants who are in the process of completing these these projects are taking longer and the costs have increased significantly.
Yeah and.
And that we don't see that abating anytime soon but go ahead, Ben do you want to talk about the details yeah sure. It's Scott. So we evaluated these amendments like we would.
Any amendment it it is typically for expansion of an existing facility. These three were all either in New York and New Jersey are two markets that are tenants feel theres tremendous growth opportunities and they want to be ready to capture the market as it continues to grow on our side. We also see it was.
A great opportunity to continue to support our tenants as well as make any other changes or amendments to the leases that we think would be beneficial.
We got cross default language at all leases with the tenants that we executed these amendments with which we think adds additional value on our side, while supporting our tenants and properties in states that we think will continue to grow going forward.
And then I'm thinking of think span and then as to Pennsylvania.
Turn that over to Paul kind of just describe what we think is going on in the Pennsylvania market, yes. Thanks out so.
No new bills have been filed to legalize cannabis through the state run stores.
In may of this year.
And it's interesting to note that the budget that was recently released by Governor Shapiro in March of this year assumes adult use sales beginning on January 21 of 25, so it could be earlier than that but we'd look at those as you know.
Positive.
Governor's already writing in our adult use sales into the budget.
Sting sign.
Got it.
And then one other housekeeping item for me is on the Opex side.
So can you help us understand kind of property expenses of $5 6 million.
<unk> and kind of expectations of opex level going forward from the level would be helpful.
Yes, Scott it's.
It's David Great to speak with you.
That's just a.
Unique aspect that we started this this January where.
On the reimbursement side.
Previously, we would bill our tenants.
As we received the bill for insurance and taxes, which caused the revenue to be more episodic.
The beginning of this year, we started to billing to tenants on a monthly basis for both taxes and insurance.
And so <unk>.
As you know there is a corresponding expense that is also being recognized so for those tenants that.
Where we get reimbursed that's just a wash so you'll see the income coming in on the revenue side in the outgoing expense.
Great and so the level of Opex can you know without you know.
Poorly.
You can kind of remain.
Correct correct.
Q1, it would be more representative of a run rate with our are changing their process here.
Okay I'll jump back in the queue.
Yes.
Our next question comes from Alexander Goldfarb from Piper Sandler.
Xander. Please go ahead.
Hey, good morning out there and David Congrats welcome aboard and Cat Ben Congrats on the promotion.
So Alan sort of big picture.
It would seem like with the pullback in capital you guys would be in a much.
Better market position, given you're one of the few large players that can fund.
Yeah, the turmoil in the industry again should sort of raise risk premiums, which makes investing more attractive you know and I would think draws capital into the sector, especially in outside of like states like California, which have seen you know a lot of issues, but you know obviously the stock has done.
Kraft and you know for.
For the past few quarters.
Got it.
Yeah, we haven't seen you guys be able to raise.
Outside capital to invest so is has a narrative or the investment thesis in cannabis changed from a few years ago or what do you explain this disconnect because it would seem like your yields are getting better there are fewer competitive capital.
People that you're fighting against and yet the stock hasn't reacted and two it does it sounds like its still tough for you guys to source accretive capital, which seems odd given the opportunities. So I'm just trying to understand where you think the disconnect is.
Well I mean, I don't know that there's a disconnect I think that.
What you're seeing.
Is something that is occurring in the broader real estate and you know market, especially with regards to our stock price I mean aren't you.
You know if you look at the broader real estate a public company names, they've all had significant reductions in their stock price and yeah and it isn't.
In that theme.
As you know I think drives drives the stock price for all companies, including ourselves.
The the concern in the.
From the general as to who you.
No typically drive.
Our stock price is higher or make moves in and stock prices is one of very a lot of cautious with caution with regards to real estate companies in general because of the significant and rapid increase in interest rates that are that are have occurred by the fed and therefore.
For the significant and rapid increase in and just that the cost of debt and many of the real estate companies use and driving up our I think cap rates and for general real estate companies all of that affecting the bra.
Real estate market.
Now Luckily because because we have a very strong balance sheet.
And we have we do have options and we could we could have a continue down the path of making I think accretive transactions, which we actually did do when we acquired the two acquisitions for $57 million, which were highly accretive and.
<unk> I think.
A portion of the AR positive revenues that we were able to report.
Now.
The our desires to move forward I think Oh, the board and the management team came to the conclusion that that I'm being very cautious in this environment, where our tenants are or are struggling with the changes in the regulatory environment.
<unk> with their own financial conditions are all where appropriate to let things settle and ER and for US where we are 10 times larger than any other competitor. We think we have time on our side to be able to.
Lately evaluate.
The broader the broader economy the cannabis.
Cannabis industry and our acquisitions program.
<unk>.
And since we've we've are being very cautious on that the need for us to raise capital certainly at this.
These prices it doesn't make sense to us at this point in the future.
As things are.
<unk> moved to a more positive position as we're starting to see the green shoots in the industry pop up.
We will reevaluate that on a continuous and constant basis.
Okay. So what you're saying is the overall the investment universe continues to get better you see targeted opportunities, but again, it's something that you guys have said, which is not complicated the balance sheet.
And being smart with how you raise capital so your five being patient the opportunity is still there in fact, it's probably better but that's just I guess, what we have to wait out right, that's what you're saying Alan.
You could you could put those words in my mouth, if you'd like okay [laughter].
Yes.
Second I have a second question that you may not appreciate the words, but let me ask you. This yeah. The proxies the D O tables that appear in the proxy sometimes those are quite different than reality, sometimes with printed is not what you guys actually make but in this year's proxy it looks like the stock awards went up significantly.
Which is sort of in contrast, again with the stock performance. So again, yeah. The stuff that goes into these comp tables is pretty scientific.
So maybe you could just walk through.
Sort of how the stock awards went up given the stock's performance over the past year and if these are part of a multi year plans that were already in place. Therefore, it's already sort of set versus something that was new as a reflection of how 2022 wet right I think it's more of the latter it is the most.
Multiyear plans the the majority of what you're discussing.
Discussing comes from performance stock.
<unk> awards that only would happen and only be granted to the is it the management team should we achieve the performance metrics associated with this long term performance.
Programs and that would be.
This would be an outperformance in terms of as compared to the broader real estate industry and in an outperformance within a.
A group of what we can what the program considered peers, which was highly focused on a single and at least entities in an industrial REIT.
And so if we outperformed.
And and the stock had a significant outperformance.
Outperformance than than.
A portion of that could that stock could be earned but because of the way the.
The proxy works and because of the way these complicated.
Schedules are required the full value that could be earned.
Hum.
You know miracles occur.
It has to be reported.
Okay. So that's it yes, it's I don't know why these these neo tables or like that because they're misleading, but appreciate it. So basically its incentive for you guys to work hard if you work hard and achieved rate if not it's not these aren't the real numbers that is what you are saying that these arent the earned numbers today the yarn numbers okay. Okay.
And then just the final question getting back to the political scene.
You mentioned a potential for.
Safe Act, we could have a debate as to whether that would pass yeah. When a G O P, especially house in this time and especially because you still need another 20 more senators to get ever the.
Filibuster, but I'm curious on the cold to point out by the administration has been in office for two years, they certainly have been progressive enough.
Why do you think they haven't had a KOL memo to point out.
And that part seems odd because that they can do unilaterally they wouldn't need Congress.
Yeah, I think Thats a fair question.
You could certainly say that they've been distracted by other things cannabis is not the number one issue in this white house or this Congress, but we look at the positive and it was certainly interesting last year when the administration talked about.
Rescheduling.
And by all accounts that is moving forward as far as the AG on the 2.0, you're right that could be done overnight.
<unk>, she's waiting to try and see which way the wind's blowing with the.
Rescheduling, that's the White house is spearheading and it's also going through the Ags office. So.
Yeah. They are political they want a coordinate rescheduling conversation with a core amount of 2.0.
But as far as say banking, yes, it's still a hurdle, where we're not going to say, it's going to happen.
Is it as a done deal, but we look at the positive when we look at.
Shared brown chairman of the Senate banking he's been in office. So he said that chairmanship for two and a half years and this is the first time. He has scheduled a hearing which could happen to actually this week. So that's how it starts to get a hearing in Senate.
Didnt asked to go back to the House Financial Services Committee.
Have a little more pushback there but.
Yes, we realize we're not trying to.
Communicate that we think is going to happen more likely than not but we're looking to positive and getting getting hearing with shared browse committees are definitely a positive.
Okay. Thank you.
We have a question from Eric the Laurier from Craig Hallum Capital Hey, Eric. Please go ahead.
Thank you for taking my questions.
So a couple of ones from me just to kind of better understand your thinking with respect to some of these headwinds faced in cannabis operators first one on the west coast markets.
Just wondering.
How you are thinking about the tenants and properties in these markets. We've had some msos, leaving these market some investors kind of looking at prices and saying no. One can make a profit in these markets and thus you see a high probability of default in these markets going forward. So just wondering do you agree or disagree with those sentiments and just could you provide some more.
Color on your thinking for these markets. Thanks.
Well I think from the very beginning we've been very cautious about the the west coast markets.
No.
Working with.
With what we thought were very strong.
Tenants.
But I do believe and as Paul mentioned, Paul maybe you want to continue to reiterate what we're seeing in California and.
And the strengthening or tightening or.
Yeah, I think yeah I think it's.
Especially the last I'd say six to 12 months, there's been quite a bit of activity in Sacramento.
Recognizing that the illicit market in the grain market.
Significantly hampering regulated sales.
So budgets have been increased.
<unk> on cultivators has been decreased.
So those are positive signs of California's taking this situation seriously.
You know, we've always recognized California's a challenged market, but at the same time, we understand how large the California market is and we strive to identify those operators, we feel that have the best chance of success. So you can make money and in California.
Many of our tenants are doing that so we.
We think it's a positive thing with the state's doing it's not going to happen overnight, it's going to take significant Budd.
Budgets to to come.
Combat.
The black market and to put more administrative dollars to converting gray market operators into licensed operators.
So are we.
We still think that the size of California requires a lot of attention to the state and it will balance and I think we are seeing some indications of some price stability.
Especially on indoor grow product, which we are solely involved in so.
We take these as positive signs.
Alright, I appreciate that color and then next one from me on the same lines here. So you've had some msos.
Talking about potential M&A.
They're in negotiations now some commentary that you know at least one of them is expecting the landlords to sort of potentially help chip in to.
To help alleviate some of the call.
Costs going forward here can you just talk about.
How the IPR management team is kind of thinking about potentially chipping in them or potentially helping to lower costs.
If some of these properties go from a distressed operator to a more financially sound operator, just your overall thinking along those lines would be very helpful. Thanks.
So going.
Going back to <unk>.
Our concept that we have I think a very strong and strong.
Portfolio statistics, including.
42% of our revenue.
Revenue rents rents are covered by a cross default you can see where we're going where we're going with it is that.
Anybody.
Thinking that IPR is.
Gonna be party to such a transaction should probably rethink that.
Uh huh.
Very quickly we we believe that we have a very strong tenants we believe there.
The industry has some positive things occurring in it we believe that our.
It's.
We're very well positioned to continue to help the industry grow.
But.
Making sure that our shareholders are compensated for their investments and they're risks that they're taking.
Number one our primary goal.
Thank you.
And this concludes our question and answer session I would like to turn the conference back over to Alan Gould Executive Chairman for some final remarks.
Thank you and once again, thank you all for joining us on this call today. Thank a big thank you to the team for all their hard and dedicated work.
To get us to where we are today, we look forward to.
Better things and and thank you for joining us on the call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.