Q2 2023 Innovative Industrial Properties Inc Earnings Call
[music].
Good day.
And welcome.
To the innovative industrial properties, Inc, second quarter 'twenty to 'twenty three.
Earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
I would now like to turn the conference over to Brian Wolfe General Counsel. Please.
Please go ahead Mr Walsh.
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 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 refer to the documents filed by the company with the SEC spin.
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 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.
In our 8-K filed with the SEC.
Ill hand, the call over to Alan Alan.
Thank you, Brian and welcome everyone.
We're pleased to report another solid quarter of operations and financial results.
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 a 12% debt to total gross assets no variable rate debt and no meaningful debt maturities.
For 2026.
To recap the quarter, we generated total revenues of $76 million in Q2, and adjusted funds from operations of $64 million.
Rent collection for Ips operating portfolio was 97% for the quarter.
That financial performance continue to drive the dividend returns to our investors with $7.20 of dividends declared per share in the past 12 months alone an increase of 11% over the prior 12 month period.
This quarter was was it quiet one for us in terms of additional acquisitions and investment activity and as we've noted for several quarters, we expected a significantly lower pace of investment activity given the significant adjustments to cost of capital since the fed began aggressively raising rates last year.
That said, we are pleased to announce the pre leasing of a project under construction in Cathedral City, California, which was one of the projects that we took back from King's Garden late last year.
Don will provide more detail on that project and the status of leasing for other projects in our portfolio.
We continue to strive as we have from the very beginning to be as transparent and detailed as we can about our business and prospects, especially in the context of ongoing challenges in the macro economy that we're all experiencing and then the regulated cannabis industry in particular, which we have noted in the past several calls.
We also want to note the green shoots that we're seeing in the industry with the ongoing potential for passage of the Safe Banking Act state level momentum for additional programs and tax relief.
And unit price stabilization trends, we are seeing in certain markets, which probably will spend more time discussing.
Well the vast majority of our tenant base continues to perform as we have previously discussed our tenants parallel in green peak are experiencing difficulties and defaulted on their obligations to pay rent for certain properties.
Paul will provide an update on the status of those situations and as always we're here to answer your questions to the extent we can.
I will now turn the call over to Paul to discuss licensing and industry dynamics Paul.
Thanks, Alan before discussing overall market developments I'd like to provide an update on the properties. We previously disclosed where tenants parallel green peak have not paid rent.
As we noted then and I think it's 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 the inevitable ups and downs of this industry.
We have engaged local council and other advisors in these situations commenced legal proceedings for damages in possession and are in discussions with applicable regulatory agencies with our veteran team internally in combination with our advisers across the spectrum of specialties I am confident in our ability to successfully navigate these sit.
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In 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 regained possession of two small retail locations in Michigan previously leased to Green peak 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 harvests 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 on 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 March we're parallel failed to pay rent for the first time in February we are actively exploring all options for these properties, including speaking to a number of interested parties.
As we noted previously parallel continues to be current on their obligations for the two other properties, we leased to them in Florida.
Late last month parallel announced that it is ending its Pennsylvania operations on September 15th including at our facility and at its medical cannabis dispensaries in the towns of friendship and here. We are closely monitoring the situation and continue to be in active discussions with a number of parties.
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.
Projecting a doubling of annual sales from 2023 to 2032 over $70 billion, representing a double digit compound annual growth rate the.
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 had been challenged in certain states at the wholesale level.
<unk> 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 cannabis sales by state and local enforcement authorities taxation and general macroeconomic conditions.
<unk> that continued price compression in combination with the continued inflation on input and labor cost. We note that consensus analysts expectations for 2023, and 2020 for sales and EBITDA growth 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, and Michigan, maybe showing signs of price stability after months of declines while new adult use states like Missouri, and Maryland are seeing very healthy wholesale price.
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According to cannabis benchmarks there has been stabilization in average wholesale pricing nationwide after significant declines last year with recent nationwide wholesale price and even showing a modest uptick in July versus pricing in December of last year.
Capital availability.
Another continuing theme from our protocols is the tightening of financial conditions and the impact it continues to have on capital availability for the cannabis industry.
So with other industries, the cost of capital and capital availability have fundamentally changed for cannabis operators over the course of the past year plus.
As we noted previously capital raising across the cannabis industry continues to be very subdued with meridian capital advisors reporting that U S. Operator capital raises were down more than three quarters in the first half of 2023 versus the prior year period, and if those raises over 85%.
<unk> was in the form of debt.
The continued focused on debt in combination with ongoing pressure on equity valuations with cannabis equities seeing further significant drawdowns in pricing over the first half of 2023 have driven a handful of publicly traded msos to that debt to market cap ratio in excess of five times.
We noted from our prior call. We believe the present macroeconomic challenges of unit pricing compression and cost inflation in 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.
Certainly appear to continue to be the case through the first half of this year, where we saw just over $1 billion in U S. M&A transactions versus $2 billion in the first half of 2022 and $6 billion in the first half of 2021.
State programs shifting to state specific programs as noted in prior calls we continued to see momentum for both adult use and medical use adoption and rollout.
Missouri officially launched its adult use program in February with regulated cannabis sales in March totaling over $126 million alone.
Maryland's adult use cannabis program saw first legal sales on July 1st including over $10 million in sales in the first weekend alone and in April Delaware became the 22nd state to legalize adult use cannabis with the licensing process. They are expected to commence in 2024.
In Minnesota, a bill legalizing adult use cannabis was passed by both chambers with a launch of the market projected in 2020 pipe.
In March Kentucky lawmakers overwhelmingly passed legislation to establish a medical cannabis program, which is also expected to launch in 2025 in Florida of legalization campaign has already collected in excess of 1 million signatures to put on it recreational use referendum on the ballot next year with Florida.
Having the largest medical cannabis program already in the country, including more than 830000 enrolled patients.
We're also tracking other potential referendums or legislation regarding establishing regulated cannabis programs, including for adult use in Ohio, and South Dakota, and medical cannabis programs in Nebraska, Idaho and Wyoming.
Federal legislation.
On the federal legislation front as you know versions of the Safe Act had been introduced numerous times over the last several years in both the house and Senate believe it or not we are at the 10th anniversary for when the first version of the Safe Act Bill was introduced in four years. After first pass the house with more than 100 Republican votes.
Well Senate majority leader Chuck Schumer's recent comments places a priority on cannabis banking legislation. It remains highly uncertain, whether such a bill could make it into the National Defense Authorization Act one of the few bills passed each year on a bipartisan basis, and one which has been in targeted repeatedly as a vehicle to pass safe.
As in calls past, we also want to note some of the recent legislative movement and commentary by federal officials and commercial organizations, which we believe show the continued momentum forward or change in June the House Armed Services Committee approved a version of the N D. A a with provisions to create a medical marijuana pilot program.
To examine the health impacts of marijuana use by veterans and service members, who are D. O D veteran affair beneficiaries, they're diagnosed with PTSD depression, or anxiety or have been prescribed pain management.
Also in June the Senate Appropriations Committee approved a spending bill that includes a provision, allowing V. A positions to recommend medical cannabis as a potential treatment option sports veteran patients.
Finally also in June the president of one of the largest labor unions in the country wrote to the Biden administration urging comprehensive cannabis reform, including full de scheduling of cannabis from the controlled substances Act and provisions to protect state based industries from monopolization.
I like to now turn the call over to Ben to discuss our investment and portfolio activity in the second quarter then.
Thanks, Paul.
It was a relatively quiet quarter in terms of acquisitions and additional investments in our portfolio. As we've noted for several quarters now given the significant adjustments to cost of capital across industries, including our own cost of capital and the macroeconomic uncertainties. The regulated cannabis industry has been facing we made the strategic decision to reduce our overall investment activity.
We continue to be extremely selective and patient in evaluating potential investment opportunities.
As Alan noted, we executed a lease for the Perez Road property and Cathedral City property under development that we took back from King's Garden some months ago.
We look forward to completing that project is a cannabis facility and having the tenant occupy pursuant to a long term lease.
Regarding our San Bernardino property, our property, we took back from King's Garden late last year, we continue to explore a potential mixed use development of the property, which may include a self storage component pursuant to an LOI executed with a potential joint venture partner.
As previously noted this project is in its early stages and we expect the process to take many months, but we'll continue to report on progress as we can.
For our properties in Texas, and Pennsylvania, We're parallel defaulted as Paul noted, we took back the Texas property in mid March and exploring options for that site.
In Pennsylvania parallel continues to occupy that property, while we work through the process to regain possession in the context of Pennsylvania is licensing dynamics and will provide updates as we can.
With that I'll turn it over to Kathryn Kathryn.
Thanks, Ben for this call I'll describe our property portfolio and tenant roster. In addition to our rent collection statistics and updates on our development projects.
As of June 30, 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.
Polio 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, where they're leased 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 second quarter, we collected approximately 97% of contractually due base rent and property management fees from our operating portfolio.
3%, we did not collect related to contractual rent in excess of security deposits applied for a previously disclosed defaulted tenant parallel at one of our Pennsylvania properties.
During the quarter for Green peak I'd like to note that we did collect an additional $305000 in rent and operating expense reimbursements for the stomach building and the two small retail locations that the receivership turned back to us.
Collecting an additional $118000 subsequent to quarter end in July .
Petitioning the court for payments during the receiver ships occupancy.
The receiver continues to pay rent in full for the remaining locations. It continues to occupy which are the harvest part cultivation and processing facility and the remaining four retail locations.
Our revenue and rent collection for the quarter included the application of approximately one and a half million dollars in security deposits.
As we previously disclosed we amended our leases with holistic in exchange for the inclusion of cross default provisions and extension of terms for all of the leases and they agreed to apply security deposits for rent payments to the Michigan and California properties through September 30th with pro rata payback as these security dip.
Starting in January 2024.
Similarly, as disclosed last quarter, we amended our lease with tennis go in Massachusetts, a property that experienced delays in completion of construction pursuant to which we extended the term of at least temporarily reduced base rents for April through January and then increase the base rent for the remainder of the term with application of secure.
Deposits for certain rent payments.
And July is similar to our second quarter stats, we collected approximately 97% of contractually due base rent and property management fees from our operating portfolio with the 3% we did not collect relating to our previously disclosed defaulted tenant parallel in Pennsylvania.
We also continued to fund draws for improvement allowances, our construction development tour operators under our leases.
As we previously noted on prior calls these improvements are critical for the efficient production of quality cannabis products at scale.
In Q2 of 2023, we funded a net $45 million for building improvements and construction activity at our properties.
As in prior quarters, we continue to see construction delays related to the delivery of electrical infrastructure, specifically switch gears, which is a common delay that we've 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.
For the second quarter, we generated total revenues of $76 million.
8% increase from Q2 of last year.
The increase was driven primarily by prior periods acquisition.
And leasing of new properties additional funding of building improvements provided to tenants at certain properties that resulted in base rent increases contractual rental escalations at certain properties and higher tenant reimbursements.
As Katherine noted the $76 million of revenue for the second quarter included $1 $5 million of security deposits applied for payments of rents or <unk> <unk> per share.
Relating to the holistic leases in Michigan, and California, and the domestic lease in Massachusetts that we previously disclosed.
For the three months ended June 32023.
Recorded net income attributable to common stockholders of $41 million or $1.44 per diluted share.
Adjusted funds from operations for the second quarter was $64 million or $2 26 per diluted share.
An increase of 5% compared to the $2 15 per share of <unk> generated in the second quarter of 2022.
Our second quarter <unk> was up <unk> <unk> compared to the first quarter <unk> of $2 25.
Which included an 11 nonrecurring benefit.
From the application of security deposits for Green peak in parallel as I mentioned on the call in May.
<unk> for the second quarter benefited from a full quarter's impact of our first quarter investment activity totaling $91 million.
A full quarter of rent in our Calix peak property, which had a previously disclosed rent deferral and on March 31.
And rent Escalations.
On July 14th we paid a quarterly dividend of $1 80 per share to common stockholders of record as of June 30th.
Equivalent to an annualized dividend of $7 20 per common share.
Our dividend remained covered by our <unk> during the quarter with a payout ratio of 80%.
Which is in line with the 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 of debt.
Importantly, all of which is at a fixed rate.
Our debt consists solely of unsecured debt with a majority of this or $300 million not maturing for roughly three years until may 2026.
At quarter end, our credit metrics remain strong and among the best in the entire publicly traded REIT industry with a debt to gross assets ratio of less than 12%.
In 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.
That I will turn it back to Alan Alan.
Thank you David I'd like to note. The following <unk> closing our conviction is as strong as ever in our long term growth and promise of the regulated cannabis industry.
Our team of highly experienced talented professionals will continue to work through the inevitable challenges that rapidly evolving high growth industries face.
With the quality of our team and the quality of our facilities I believe we are well positioned to meet these challenges and continue to focus on value creation, where you all are valued long term owners.
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 your Touchtone Colin if you.
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And at this time, we'll pause momentarily to assemble our roster.
Yeah.
Yeah.
And our first question comes from Tom Kathy White from B P. I G. Tom Please.
Go ahead.
Thank you and good morning, everybody I'm, Paul I appreciate the detail in your prepared remarks.
Talking about the broader macroeconomic picture and you know how it's mixed both on the negative side on the green shoots side.
You know when you take a step back what is your expectation or the company's expectation for the cannabis industry through the rest of 'twenty three and how are your tenants positioned.
Yeah. Thanks, Tom So I think it's no surprise that we're not expecting any major turn I think for the next for the rest of the year I think our you know with <unk>.
Interest rates, where they are.
It's going to remain a bit of a challenged market but.
But we are happy to report that our Msos and our tenants are doing very well under the under the.
Conditions are operating and so I.
I think overall for the industry, it's going to remain a bit of a challenged environment, but we're very pleased with the way our tenants are performing.
This is Alan I mean, as a matter of fact.
Over probably 80, I think its 86% of our portfolio are our tenants are adjusted EBITDA positive in and and as you know that 58% of our portfolio is public and of those public companies, 96% of those are adjusted EBITDA positive or better.
With the balance expected to get to that metric a end of this year or middle of next year. So I think very strong strong health of our tenants.
Got it I appreciate that and then maybe Paul speaking with you again, you know you had mentioned.
Operators have retrenched and are prioritizing cash flow you know Alan that goes to what you mentioned as far as being adjusted EBITDA positive.
But at the same time, either new markets opening and in Maryland in Missouri, and obviously other ones. Following close thereafter, what trends are you seeing if any in terms of new investments and expansion plans from cannabis companies.
I think where we are.
Our accurate when we say we're seeing some retrenching you know I think you know as you look at what happened with the Presto in Colombia, a deal you know there were some retrenching there and they ran into some difficulty about trying to divest some of the assets in Florida, Ohio. So we look at that as perhaps a positive necessitate you know these things are.
Shaking out so I think as these operators become more efficient are they are going to look to grow and you know there are great opportunities that you mentioned in Missouri in Maryland, We look at Delaware.
It's Gonna watch next year, we're looking forward to Minnesota, all watching the Rec program in 'twenty five and of course, all eyes on Florida to get that vote.
By the end of the year in November on the ballot. So.
We think there's tremendous opportunities in these large states that are getting ready or have converted from medical to adult use. So we think you know.
The operators that are increasing their efficiencies, we'll look to expand in those states.
Thanks, Paul and then last one for me then could you provide some more detail on the backfill of the Perez Road asset and then if you can maybe talk about the process and when the lease commences and how the rent compares to the prior agreement.
Yeah sure no problem.
So that was a property as you know we took back from from Kingsguard, a number of months ago.
Marketed it we're very happy with how quickly we were able to put that under LOI.
That property is still under development. So there will be a period of time or we wrap up construction gets a tenant in there before they're starting to pay rent.
That is a private California operator.
And the returns we're seeing on the deal are right at where we were with the previous tenant. So again very excited to get the get the building done get the new tenant in there I feel very very good about where that's going forward.
Yeah.
Very helpful. That's it for me thanks al Thanks.
Tom.
Hum.
And we have a question now from Eric the laureate from Craig Hallum capital.
Rick Please go ahead.
Great. Thank you for taking my questions.
The first one I figured just since you brought up the Columbia caring crafts co deal I'm, just wondering you know how your how.
How are you looking at both of those tenants and then if there's any you know if you're if you're starting to work with them on any potential flexibility or just kind of wondering just how you are looking at these these two tenants in light of this combination not going through.
I mean, I think we're we're very happy with both of the tenants I think they're very strong in their own behalf and they continue to pay rent and.
Yeah.
Or everything is good.
Alrighty.
And then just in terms of New York, you know just kind of like as a as a case study you know obviously, it's a it's a market. That's you know hasn't I had as robust of a start as many had had expected an.
Illicit market competition kind of.
Seeping in there.
I'm wondering how you're looking at.
The New York opportunity here, you know there are more licensees coming online are those.
Potential opportunities.
For you are you are you kind of are you are you focused on new Yorkers I'd say that you're avoiding a if you could just help us understand sort of how youre thinking about potentially deploying capital in New York in light of how the market is rolled out thanks.
So I mean first of all New York is a very robust market.
Just by the virtue of the number of our non licensed sellers that are selling cannabis on a regular basis in that market and how the and how the authorities are are are having to really focus on cracking down on that so I think that's a really strong thing, but Paul what do you think about it.
100% because you know the headline last week of course was the.
The authorities shut down seven unlicensed operators upstate New York with promises of more to come So you know.
As far as we look at the black market.
As an impediment to sales growth in New York, I think albani's gotten the message and they're out there enforcing.
The unlicensed operator, so I think that's a positive for the for the market in New York.
And so New York remains.
A market that you are potentially looking to deploy capital into.
Well as we as Ben and Paul has indicated we're being very cautious about deploying capital certainly in.
The next couple of quarters, our New York continues to have things that it's going to work out and as it continues to work out we will be.
We are constantly evaluating.
Not only the market, but any new potential growers and their financial strength and ability to really operate within what we think is a robust and competitive market.
Alright Thats helpful.
And then last question for me here I'm, just kind of wondering.
Your comfort level with you know most of your tenant's ability to raise capital you know obviously you you you you commented on something like the viridian figures with you know obviously, our capital raises are down pretty significantly this year and you know it remains scarce in the industry.
You highlight the positive adjusted EBITDA with but most of your tenants, obviously with two way to eat taxes cash flow, there's kind of a whole another beast and so on.
Wondering how you're sort of looking at that equation I mean, it sounds like you're very comfortable with some of the tenants.
That you have you know even maybe even some of these with.
Columbia Aircrafts go deal.
And apart for example, and so I'm just wondering like if this is something that you're kind of focused on and see the sort of light at the end of the tunnel or if it's just that so far so good and you know we're going to continue to try to support the highest quality ones. We can thank you.
Oh I think so far so good we're supporting the hottest highest quality tenants.
That we have in our portfolio, we're very very proud of the tenants that we have in our portfolio.
The market continues to be dynamic spec.
Especially in this Oh, you know the issues with the broader macroeconomic Ah economy, we are.
Cautiously optimistic as to the future of the industry, while it continues to grow very rapidly.
And with.
You know X are expected a significant increases in revenue.
Yeah.
Alright. Thank you I appreciate the insights thank.
Thank you Eric.
We have.
Have a question from Alexander Goldfarb from Piper Sandler Alexandra. Please proceed.
Good morning out there and.
I guess, maybe from California, your optimism for for Albany doing something.
Impressive.
New York, we are have a maybe a jaded but.
So two questions here. The first is Alan you spoke about or Paul I Forget you you spoke about you know 85% of your tenants being adjusted EBITDA positive.
Obviously, adjusted yes stands out and then there's the cost of financing. So when you look at your tenants on a cash like Bottomline cash prop.
Profitability after they paid their financing costs and everything else.
Would you stand by that 85% number or where does that number really shake out.
I mean, I think we've analyzed it and we believe that 85% or 86% of our tenants are adjusted EBITDA positive in and moving towards I think full are you know are a free cash flow.
<unk> is something that they're all striving to do by reducing head counts and where you're you know focusing on expenses and are driving revenues as as best they can they can knowing the cost of capital is significant and perhaps even an increasing so no we're <unk>.
Very positive and you shouldn't be you know, bringing our politics on a call like that I mean, Alex come on.
[laughter].
And but.
But when you when you when you look at the profitability I mean, that's ultimately what we're going for here right. So how many of your tenants.
When you move beyond the adjusted EBITDA and you say that the tenants are working towards cash flow profitability.
How where do your tenant stand right now do you think half of them are cash flow positive. So it's really just hey, we need another you know another 50% is it is it less than that I'm, just trying to get a perspective, because obviously, we're all concerned about what's going on how the industry. You know tenants are having to renegotiate or you.
Security deposits, so just trying to get a sense of where the profitability level of your tenants currently stands on a cash basis.
Yeah, I mean, I think that.
We are very comfortable with our tenants and their profitability.
We're very comfortable with the program that we used in the past for our tenants to bridge. Some of there are some of the supply chain issues in their completion of their developments. That's all now have allowed them to be success.
Asphalt and continue to pay a pay rent.
After the deferrals of have expired.
We think that that's been a very positive thing and something that we'll continue to look at.
No I think in general we are very very positive with our tenants and I think you could look at statistics and then yeah.
A lot of different ways and and are keeping in mind that we have not only public companies, which you can have access to to see what their their financial strength is and where their financials are growing because as you know I mentioned, 58% of our our tenants.
Public.
And then on a private in general are private tenants are doing very well.
Okay. The second question is one of the themes in the industry has been overcapacity that people.
<unk> invested in and built for a bigger market than has actually occurred whether it's because slower rollouts or competition from the illicit market as you guys assess your portfolio in the states within you operate.
Do you have a sense of how far overcapacity.
You know the markets are or some metric that sort of helps frame out maybe how much of a shake out or how much consolidation needs to occur.
Well I mean, you could.
I don't know if I can answer it in the world.
To answer your question on the way you've asked it but oh.
Look the the tenants are performing well the markets are there are revenues are increasing sales are occurring.
It's really hard to say that there is overcapacity in a bunch of new new growers being being funded when we just talk about how there's very little capital going into this market.
So you can't have it both ways Alex So it's either there's very little capital and that's a that's a concern or there's you know new growers in overcapacity.
That just doesn't make any sense, yes, I wasn't I wasn't talking about new I was talking about what was what was already built in the system really I'm not talking about Neil Yeah, and then what's already built in the system as the market continues to grow as these are the.
States move to adult use our capacity will be used to deal with that increased our usage of the product as we as we indicated that by 2030, where the nerve is expected to be a doubling of the revenue. Our sales of this product are and not all of that's going to be it is based on.
Because of inflation, but actual additional use.
Okay. Thank you Alan.
Okay.
Yeah.
Our next question comes from Andrew Ross from.
From Wolfe Research Andrew go ahead.
Hi, guys, how are Ya alright, Andrew.
So I I apologize piling on with another tenant credit question here, just kind of maybe a way to frame. It I think the reason why my peers and I keep asking is these publicly traded names E. We look at the credit match something as simple as just look at the market cap.
Some of these names are under 200 million.
Some of them are under 100 million and and maybe to frame. It a lot of the guys that youre hearing we we also cover retail reach in the law. So they'll often talk about our credit loss reserve. The company is just kind of put it in their guides and and have you guys ever thought of or would you potentially throw.
Oh out you know when you look at your watch list of tenants what might be a inappropriate credit watchlist credit reserves to put in your model for the next three or six months.
I mean, I think that we're.
Were reporting record revenues are for reporting our you know.
<unk> revenues increased significantly year over year were.
Are we very deep dive in all of our tenants, we're watching our tenants, where we're doing what is necessary to to make sure that our tenants continue to operate well and pay their rent.
We don't have a defined credit of our.
Loss reserve, because we don't believe that that's an appropriate way to look at it well you know, where we will take our whatever situation and disclose it transparently to everybody and everybody can can focus in on the actual loss. If there is going to be one from any one of those specific situations, which we think we havent you know Luckily we.
Haven't had to announce anything for a long period of time and and we again remind everybody of the strength of our tenants in the good and the high quality health of our tenants. So why would we.
Look at our loss reserve now or are the anybody who underwrites the company our company considerably use whatever metric they want and underwriting the information that we've transparently in and fully disclosed.
No. They they shouldn't answered I know I'm kind of throw out an idea out of the blue one just two other things when you you're 97% collected what kind of payable period would that be like 60 days 90 days before they would be outside of the 97.
Yeah, that's all correct current pay.
Currently.
They paid the rent.
They pay at August <unk>.
On time, they paid their rent on time in August kind of time okay.
And then one other you your construction loan is that does that loan operators. That's on the balance sheet is that operators are pik.
And then kind of thing.
They're there Andrew this is Ben, though they're making cash payments as well.
Towards that long as they're wrapping up construction there.
Got it okay. So then that that's what what's the cash payment the rate they're paying now.
Oh, that's a a private company and details of which we have not disclosed but we are very happy with the progress that has been made on construction.
The payments that we've received and feel very good about that going forward.
Got it thanks, a lot guys. Thank you Andrew.
We have a question from Scott Fortune from Roth.
Yeah Scott. Please proceed.
Yeah. Thank you for the upcoming let me summarize it this way it differently and maybe I can ask Ben because you know as chief investment officer, you're talking with a lot of these tenants who that it seem to again beyond the major concern are the 10th as Alan and Paul have indicated right well, we we still it would be helpful to get it.
Federal legislation from that standpoint, but most of the tenants that you know of extended debt they've made meaningful cuts to their opex and capex and and we're expecting to see significant cash flow generation here and that should bode well for the industry has we're seeing green shoots kinds of fundamentals start to stable.
Does it improve but just wanted to get sense, Dan from from your discussions with with you. Your strong you know in these large M. S O operators as a solid balance sheet and you know potential green shoots coming here or are you discussing like our new states like Maryland, and New Jersey, where there's limit.
Did you say or you have more opportunities there to grow with them and you know part of this discussion too is that it's still a very highly illicit market out there that needs to be converted to the regular they decide which you know there's not enough supply for that but just your sense been and talking to the operators.
And tenants their health overall and kind of some new opportunities that you're talking with him, obviously cautious and it's still a challenging year, but looking into 'twenty 'twenty four potentially.
Yeah sure. So yeah, we do talk to all of our tenants on a regular basis, we are seeing the green shoots that you mentioned.
Whether that's pricing stabilization and even increasing in wholesale pricing in markets like Michigan, where they have started to crack down on the illicit market are the adult use rollout.
States like Missouri, Maryland, many of our tenants have exposure to those markets.
As we mentioned before we are being very selective and patient in terms of new opportunities.
We think that's the right thing to do given current market conditions.
But all I would say all of our tenants or are they do feel the same way and they see opportunities in a lot of these markets and you have a tremendous potential in a state like.
Pennsylvania, Florida potentially converting to adult use market, we usually see two to three times.
Revenue increase when something like that happens.
There'll be some great.
Great opportunities in those states and elsewhere going forward.
We will be there.
Our tenants if they're if they're looking to expand in those markets.
I appreciate the color and then one last question for me you know bigger picture can you provide a little color on kind of the broader real estate market. Overall, obviously, we see an acceleration in the volatility of interest rates.
The strong balance sheet and various options to remain cautious here towards you know opinion T raising capital, but what are you looking forward to kind of addressed in capitalizing on these kind of new creative opportunities that you that you would see and what do you need to see kind of more interest rate stabilization.
More further fundamentals of the industry or a meaningful green shoots that come about kind of just your sense of thoughts of looking at the individual positive investment opportunities that present themselves and the ability to deploy cash into these opportunities from that standpoint overall right Scott.
I wish I could answer that I wish I had the the clearest crystal ball and if I did I certainly wouldn't be sitting here it would be and you know.
Some island with a.
Big yacht or something I mean, no. We don't have a we don't or our crystal ball is as fuzzy as everybody else's, we would like to see you know the broader the broader macroeconomic economy.
Continue to stabilize there we'd like to see inflation to be brought under control and we'd love to see our interest rates are perhaps start coming back down.
Which would drive that.
The broader economy.
As you know if they.
The broader economy as dry as being increasing and consumers would have greater confidence in and spend more and if consumers have greater confidence and spend more one of the things that consumers may do is the a.
Clients of our of our tenants in and that's what we'd like to see.
Got it I appreciate the color. Thanks.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Alan Gold for any closing remarks. Please Mr. Gong.
And certainly thank you all for joining us on the call today I really want to thank our.
The entire IPR team for their tremendous.
Work.
And for a.
At quarter end with that thank you all for joining and we'll sign off.
The conference has concluded thanks for attending today's presentation you may now disconnect.