Advanced Flower Capital Inc (AFCG) 2022 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the AFC Gamma Third Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Gabriel Katz. Please go ahead.

Good morning, and thank you all for joining AFC Gamma's earnings call for the third quarter of 2022. I'm joined this morning by Leonard Tannenbaum, our Chief Executive Officer; Jonathan Kalikow, our Head of Real Estate; Robyn Tannenbaum, our Head of Originations and Investor Relations; and Brett Kaufman, our Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our October 20 press release and is posted on the Investor Relations section of AFC Gamma's website at afcgamma.com, along with our third quarter earnings release and investor presentation.

Today's conference call includes forward-looking statements and projections that reflect the company's current views with respect to, among other things, future market developments, anticipated portfolio yield and financial projections for 2022 and beyond. These statements are subject to the inherent uncertainties in predicting future results and conditions. Please refer to AFC Gamma's most recent periodic filings with the SEC for certain significant factors that could cause actual results to differ materially from these forward-looking statements and projections.

During this call, we will refer to distributable earnings, which is a non-GAAP financial measure. Reconciliations of net income, the most comparable GAAP measure to distributable earnings can be found in AFC Gamma's earnings release and investor presentation available on AFC Gamma's website.

The format for today's call is as follows. Len will provide introductory remarks and overview of our third quarter 2022 performance and strategic commentary. Jon will discuss AFC Gamma's portfolio. Robyn will discuss the origination pipeline. Brett will summarize our financial results, and we will then open the line for Q&A. With that, I will now turn the call over to our Chief Executive Officer, Leonard Tannenbaum.

Thank you, Gabe, and good morning, and welcome to AFC Gamma's earnings call for the third quarter of 2022. I would like to thank our analysts and investors for joining us today to discuss our results.

I am pleased to have continued to execute on our business plan during the third quarter. AFC Gamma generated distributable earnings of $0.59 per weighted average share of common stock, which does not include the earnings from our taxable REIT subsidiary. We view the core earnings power of AFC gamma to include the earnings of our taxable REIT subsidiary, although to date, none of the earnings have been recognized in our distributable earnings.

The taxable REIT subsidiary earned $1 million in the September quarter and $1.6 million year-to-date, which are excluded from our distributable earnings until distributed up to AFC Gamma. As a reminder, distributable earnings is the primary metric that the Board considers when declaring AFC's Gamma's quarterly dividend. The Board of Directors declared a $0.56 dividend per share in the September quarter, which was paid on October 14, 2022, to shareholders of record as of September 30, 2022.

Since going public, we have generated distributable earnings in excess of our dividend in each quarter. And since the IPO, we have paid out $2.98 in dividends per share. We currently have rollover income of approximately $6 million or $0.29 per share of snapping. We did not increase the dividend this quarter as we believe the quarterly dividend level of $0.56 is appropriate based on the core earnings of AFC Gamma's current portfolio. Given we are halfway through the quarter, we're making the statement that we are confident that our distributable earnings will meet or exceed the current dividend level in the fourth quarter of 2022.

Next, I would like to turn to the broader cannabis market from a macro perspective. As we discussed last quarter, the sector remains under pressure due to the uncertainty of regulatory change, pricing compression and longer lead times to raise equity. In certain states, the pricing environment for wholesale has declined below the marginal cost of production, which has caused undercapitalized operators to close or suspend their cultivation and production. We believe that as wholesalers exit the market, prices may rebound above the marginal cost of production in mid-2023, benefiting the better capitalized operators. In addition, as a result of a difficult capital market environment, many cannabis operators are focused on existing operations and generating earnings versus deploying additional capital in new states. With public cannabis company stocks trading year lows, many are reluctant to raise equity capital, which may open additional opportunities for debt providers, such as us, to fill the void and invest in deals with enhanced yields and strong risk-adjusted returns.

Given the market volatility, we are pleased with the quality of our portfolio. We believe that our focus on targeting operators in limited license states has set us up to mitigate risk and generate strong risk-adjusted returns. We actively manage our portfolio, having regular dialogue with many of our borrowers, and we are comfortable with the coverage of our loans on an enterprise value basis. 2 loans are ranked as Category 4 under our CECL analysis with no new additions during the quarter and no Category 5 loans in our portfolio. In addition, all of our borrowers are current with their payment obligations and no loans are on nonaccrual.

Subsequent to quarter end, AFC Gamma, its affiliates and Viridescent increased their commitment to acreage holdings by providing access to an additional $50 million, of which $13 million has been drawn. The amended credit facility now includes a floating interest rate equal to U.S. prime plus 5.75% per annum with a prime floor of 5.5%, an increase from the initial fixed coupon rate of 9.75%. We have further enhanced our collateral under the facility with a cash escrow of $28.5 million by a cannabis subsidiary.

Additionally, subsequent to quarter end, AFC Gamma was refinanced out of our $86.6 million position in Verano Holdings. In this volatile cannabis environment, we believe it's important to be agent in order to have substantial control over our deals. As of November 1, 2022, we agented 95% of our deals based on outstanding commitments. AFC Gamma did not participate in Verano's new financing, which was not fully real estate secured. Verano was among our lowest yielding investments, and we could potentially deploy the capital in higher-yielding assets.

As we have stated in the past, deals can take between 3 and 9 months to close. Therefore, we may have a cash balance at the end of the year as we look to deploy capital into deals with strong risk-adjusted returns. This cash balance may cause us to have an underleveraged balance sheet below our previously stated target of 0.5:1 debt-to-equity ratio, which may decrease return on equity in the medium term.

Turning to the macro lending environment, there has been a substantial rise in benchmark interest rates in the broader market as well as in the cannabis market. As of November 1, approximately 56% of our portfolio had a floating interest rate, increasing from 29% at the end of the second quarter of 2022. The weighted average yield of the portfolio was approximately 20% on November 1, up nicely from the 18% at the end of the second quarter of 2022.

We are also excited to discuss that we are exploring some attractive opportunities for the company. As Jon will describe, we are analyzing expanding our investment strategy utilizing our core competencies. Management and the Board are also exploring potential corporate opportunities for the company, including an internalization of our external manager. As we consider what is best for the company and its shareholders, a special committee of independent and disinterested members of the Board has been formed to meet the company's thinking around a potential internalization.

Looking ahead, I am excited about our market positioning, portfolio composition, our opportunity set and our available liquidity. I will now turn the call over to Jon.

Thank you, Len. As of November 1, 2022, AFC Gamma has 13 loans outstanding with $426.2 million in commitments and $368.6 million funded. The portfolio has a weighted average time to maturity of just under 3 years. In building our portfolio, we targeted borrowers with operational knowledge, cultivation experience in cannabis and significant equity invested in their enterprise. We have remained steadfast in our underwriting criteria and will not lend money to companies that don't meet our loan standards simply because we wish to deploy capital, even if this may result in a temporary cash trap.

In the current cannabis market, operators have encountered new or worsening challenges that have made deploying capital into loans with a favorable risk profile more difficult. Companies access to equity capital has virtually ceased. Cost increases for construction and personnel has not slowed while pricing pressure on cannabis itself continues. These factors, combined with the absence of regulatory reform, has caused a slowdown in the industry, making it more difficult to source cannabis opportunities with significant real estate coverage in limited license states. Add to this unknowns around the possible passage of the SAFE Act and whether valid legalization measures in states like Maryland and Missouri will succeed, and it is not surprising that we have increased our cash balances.

We believe that having capital available to take advantage of the opportunities that may be coming in this volatile environment is prudent. We see the possibility of the scenario in the near future where strong companies will once again seek our capital for distressed purchases, mergers or expansion into newly approved adult-use markets. We are therefore building cash reserves from the recent repayments we have received to be best positioned to invest in deals with strong near-term risk-adjusted returns while preserving the ability to take advantage of the next wave of cannabis M&A activity and growth.

I wanted to highlight another factor in our (inaudible). As a REIT, we generally require real estate as part of the collateral pool we receive from a borrower. While this requirement has eliminated some loan candidates, it has proven a vital part to ensure our loans remain fully collateralized. We do recognize that the necessity for real estate shrinks our pool of potential cannabis borrowers and as such, we are discussing solutions to increase our pool of potential borrowers, so we can continue to make the best investment decisions for our shareholders through different economic and market cycles. I will now turn the call over to Robyn.

Thank you, Jon. Our origination platform is focused on both expanding loans with a variety of our existing borrowers and continually sourcing new borrowers. From January 2020, through November 1, 2022, we have sourced over $17 billion of transactions, which represents over 660 potential deals. As of November 1, for the same time period, our selectivity ratio was approximately 4.4%.

We have an active pipeline of $368 million, down from higher levels in the previous few quarters due to market factors that both Jon and Len described. Additionally, it remains difficult to predict both the timing of converting and closing those deals. At AFC Gamma, we are being prudent with our capital commitments and exhibiting a higher degree of selectivity as the market environment has been challenged.

During the third quarter, we closed on new commitments of $19 million and had gross funding of $24.8 million. We continue to remain disciplined in our approach to lending and implement stringent underwriting criteria to make prudent investment decisions. AFC Gamma has substantial liquidity and capacity to complete additional transactions that meet our lending criteria and have strong risk-adjusted returns.

Before turning the call over to Brett, as President of AFC Foundation, I'm excited to highlight another deserving organization that AFC Foundation donated to: Corners Outreach. Based in Atlanta, Georgia, corners outreach is a non-profit organization that strives to equip Metro Atlanta's underserved students of color and their families with the tools needed to lead full live through educational development and economic opportunities. AFC Foundation was pleased to make this donation as Corners Outreach continues to improve its nearby communities and invest in students to enact social change. I will now turn it over to Brett to review our financials.

Thank you, Robyn. We are pleased to report another quarter of solid financial performance, driven by strong growth in income during the quarter due to the growth in the loan portfolio versus the prior year comparable quarter. For the quarter ended September 30, 2022, we recorded GAAP net income of $11.5 million or earnings of $0.57 per basic weighted average common share; an increase to net income of 45% as compared to the third quarter of 2021, where we had GAAP net income of $7.9 million or earnings of $0.48 per basic weighted average common share.

For the third quarter of 2022, we generated net interest income of $18.1 million, an increase of 71% as compared to the third quarter of 2021, where we had interest income of $10.6 million. For the same time period, we generated distributable earnings of $11.8 million or $0.59 per basic weighted average common share, an increase to distributable earnings of 64% as compared to distributable earnings of $7.2 million or $0.44 per basic weighted average common share for the third quarter of 2021.

As of September 30, 2022, our total assets were $471.3 million as compared to $303.9 million on September 30, 2021. As of November 1, 2022, AFC Gamma's portfolio consisted of $426.2 million of current commitments with $368.6 million funded across 13 loans. As of November 1, 2022, year-to-date, we have closed on new commitments of $203.8 million; were repaid on $152.4 million from 5 investments; and we sold $25 million from 2 investments. The weighted average portfolio yield to maturity, which is measured for each loan over the life of such loan, was approximately 20% as of November 1, 2022, as compared to 18% as of June 30, 2022.

As previously mentioned, we believe providing distributable earnings is helpful to stockholders in assessing the overall performance of AFC Gamma's business. Distributable earnings represents the net income computed in accordance with GAAP, excluding noncash items such as equity compensation expense, any unrealized gains or losses, provision for current expected credit losses also known as CECL, taxable REIT subsidiary income or loss, or other noncash items recorded in net income or loss for the period.

As of September 30, 2022, the CECL reserve of our loans at carrying value represents approximately 1.8% compared to approximately 1.76% at June 30, 2022. On October 14, 2022, AFC Gamma paid a dividend of $0.56 per common share for the third quarter to shareholders of record as of September 30, 2022. Year-to-date, we have paid out dividends of approximately 90% of our distributable earnings. As a reminder, on an annual basis, our dividend policy is to pay between 85% and 100% of distributable earnings over the year.

Next, let's take a look at our balance sheet, which remains strong. I am pleased to report that Egan-Jones during the quarter affirmed our BBB+ investment-grade corporate and senior notes rating. Our $100 million senior notes, which have a 5.75% fixed rate, remain outstanding and are due in May 2027. Our leverage, as measured by debt-to-equity, was 0.29x to 1 as of September 30, 2022, and currently, there is no net leverage.

In addition to the substantial cash and liquidity, partially provided by the Verano loan repayment, we have an undrawn $60 million revolving credit facility. As of September 30, 2022, our total stockholders' equity was $347.4 million, and our book value per share was $17.06 as compared to $16.61 as of December 31, 2021, an increase of 3%. With that, I will now turn it back over to the operator to start the Q&A.

(Operator Instructions) Our first question will come from Gaurav Mehta from EF Hutton.

First question on your comments on internalization. I was hoping if you could provide some more color on what factors you're going to consider? And then I think in the past you talked about considering iteration when equity equals $1 billion or more. Is that still a target? Or is there any change in that at all?

So we're still relatively early, I think, in the discovery that the Board is doing and the committee was just formed, as I said. So I think there's not much to talk about. Of course, you can go back and see in the proxy it was very detailed out, as you point out, that $1 billion, this is a certain formula and thought process around it. It will differ from that, but I think that's at least a good starting point to understand what we're talking about. And yes, the Board is considering doing it earlier, asking us to do it earlier, than the $1 billion. Were they to have the right to internalize the manager, they're asking the manager: In this case, would you consider doing it earlier? But yet the discussions are very preliminary.

Okay. Second question on your repayments, your comments on substantial repayments in Q4. I'm wondering if you maybe talked about this, but was that sort of expected? Or was that a surprise the increase in repayments that you guys saw in Q4?

No, it was expected. In fact, I think I talked about it on previous calls: that a large borrower could repay and that Verano happened to be our lowest yielding loan, et cetera. So we did expect it. It was actually due the following May. So they have to refinance certainly by then. And we received some additional income because of that; because they're early repayment.

And our next question will come from Harrison Vivas from Cowen and Company.

Len, I just wanted to start maybe taking a step back and looking at the broader economic environment. Understanding you've talked about and sort of studied rate cycles in the past, I would appreciate your perspective on where you think we are in the current rate cycle and do you think your borrowers in your pipeline have the flexibility to wait for rates to soften before executing on new loans?

So I think that we're going to find out in the CPI print this week, but I think most estimates are that inflation will stay persistent. The interest rates will stay high for a period of time. And we found it really important to switch to migrate a lot of our portfolio to floating rates and fix, which we were very successful moving it to 56%. We hope to move it higher, obviously, but 56% up from 20-something-odd percent. Robyn? 29%. So we're going to benefit as rates continue to rise. Obviously, the Feds indicated a slower rate of rise.

The borrowers are already paying quite a bit in terms of interest, I'm not sure 100 or 200 basis points, it's going to tilt the apple cart one way or another. Much more important is the supply-demand equation in the macro environment in cannabis, which could get better by mid next year because of people coming out of the market, the weaker players, at least we hope that, at least we hope for some price stabilization, but it certainly has compressed margins across the board.

As for the country's macro environment, I think everyone realizes it's slowing across the board. It's a question of what the pace of how fast it will slow and where it bottoms out.

Okay, makes sense. Thank you. Shifting to guidance you previously offered. Obviously, the expectation has been for $300 million to $500 million in gross originations. You're at around $200 million as of November 1. So do you kind of expect to still land somewhere within that gross origination target? Obviously, on the repayment front, you're sort of at the midpoint of your guide, so curious to hear what you're thinking about gross originations.

Yes, the problem is it's very difficult to time originations. But my guess is if we do hit the $300 million to $500 million, it will be the low end at best. So it's going to be challenging to hit that range. And the same thing for next year. I think I made some forward-looking comments regarding leverage. I think it will be difficult to get to our previously stated 0.5x lever target next year. We're going to be under-levered for the medium term and I'm not sure what the medium term means in terms of months, but a lot of people are anticipating us taking leverage. And by the way, I'm not quite sure it's prudent to take leverage in this volatile environment either. We do want to see things bottom in cannabis before we're more aggressive in terms of loans. So we're pretty happy about having such a nice liquidity position.

For sure. Makes sense. Last one for me. Would love some more color on the public company deal. I guess how long did that deal take to complete? And obviously, given you acquired that loan, do you think acquiring loans will become a bigger part of the capital deployment strategy?

The $10 million one?

Yes, that's the $10 million loan acquired...

Look, I think that was a deal with a company that we're actually working on another deal with that's in the pipeline. It's one of the better operators in the space. We don't name it, but this one is not an agent deal. So as I said 95% of our deals are agented. It was a public company and not an agency deal as did by a different agent. We're part of a much larger loan, and we did it not only because we think the company is good, but we did it to build the relationship with the company, which we hope to do some more business with.

And our next question will come from John Hecht from Jefferies.

You talked about the Verano payoff and I know you talked about gross commitments this quarter. I'm just trying to, as best possible, think about the near-term loan book for a modeling perspective, and I understand you're not giving any guidance there, but any other kind of meaningful pipeline playoffs we should think about that you're aware of over the next couple of months? And then maybe can you just characterize the kind of... Yes, I know things take longer and there's no certainty about closing deals, but maybe can you just characterize the opportunities you have that may kind of come to fruition by the end of the year?

That's a great question. We are working on some deals that could happen by the end of the year, or they could slip into early next year. It's very hard to tell. But we have signed term sheets we're working on. It doesn't mean they always complete. I do think we're going to have cash drag for a bit. I do think that this is not necessarily a bad environment to have it. We are, as we've said on the prepared remarks, considering expanding our universe of things that we're looking at that are real estate secured. And I think that's preliminary, too.

So I don't intend to have cash drag over the long term. I think having it now is not necessarily a bad thing given the uncertainty in the environment and the need for capital as these cannabis providers start running out of capital and having to make stellar notes and having to make payments on things, they certainly need debt capital. The challenge that we're facing is real estate security. A lot of these, including the Verano loan, the restated one after we got out, wasn't real estate secured; it was very little real estate secured. And that really messes up your retests when you have that much money in a loan, which isn't primarily real estate secure.

There's 2 retests that are really important, as you know, which is the ICA test, that's your Company Act Test and of course, your normal income from retests. And so you have 2 different considerations. And one very important one is 55% or more of our loans have to be fully real estate secured. Like 100%. And of course, we aim for much higher than that, but that's at a minimum to maintain a very important thing, our REIT status. So we're finding cannabis challenging in terms of, I think John said that, in terms of finding the appropriate real estate security, which we do view as a very important component in our overall security.

I think everybody concurs that being selective and holding extra liquidity is a smart call in this environment. But maybe that does dovetail to the next question. You commented on this loan that the TRS had a bigger impact this quarter. What assets go into the TRS? And I guess just how do we think about that in the works in the P&L?

That's a good question. And I'm glad you mentioned it because really, what I realized as I look through our numbers and I look through the analyst estimates for this past quarter: Where were some of the discrepancies? And one of the things is we had to drop one of our assets. I think we said that last quarter, right, Brandon? Brett?

Yes, we put it in -- we dropped it in this quarter.

We dropped it in this quarter. So we dropped a substantial asset into the TRS. And the way REITs work is for about a year after you do capital raising, you can match your assets against it and have a count for your retest, but after a year, that's not real estate secured, and this asset isn't. In fact, there's very little real estate coverage.

It had some real estate coverage, but not enough, so it has to be dropped into the taxable REIT subsidiary so that the income test is preserved. So therefore, all of the earnings of that asset, all of the interest that pays goes into the taxable REIT subsidiary, which is why you saw a big jump in that income. Now it's at our discretion to dividend that up to parent. So when that dividend is up, then we have more distributable earnings. And if we leave it there, and we have less distributable earnings. But I just wanted to point out that we're still earning it, and it's real cash. It's showing up in a wholly owned subsidiary. And so I'm not sure when we decide to dividend it up, but I did want to point out that we did earn the money.

Okay. That's helpful. And is there any other assets in the near term that will either come in or go out of that? Or should we think that at least for the visible future that, that should be consistent in terms of the level of impact on the P&L?

I think there's another asset in the medium term that may drop in, which means in the 6-month-ish time frame that I can think of. yes. But right now, I don't see anything in the next quarter. It doesn't mean we're not going to put something in there, but I don't see anything in the next quarter.

Okay. That's very helpful. And then last question is: I think there are 5 state double ballot issues today, then I even think you commented maybe on one of the opportunities. I mean are you eyeing these? Is there any update on the outcome of these and how it may allow you to expand geographically or increase your appetite to expand? Or any comment about national legislation as well?

Look, I mean, I've been saying SAFE Act passing is a laying duck. I'm less excited about it today because I think debate, depending what happens today on the elections of the Republicans take both houses, I don't think they have the stomach to push SAFE Act plus through. I think Schumer's messed this up entirely. I think that he's telegraphed it days ago, it created a rally, which he did for political purposes. They should have pushed harder earlier. They should have cleared this out of Senate Committee earlier. This is a very important thing for the industry. I think if it's not done soon, it's not going to be done anytime soon. So I'm not looking for any national legislation.

And I think this whole idea of decriminalization is ridiculous because it needs to be accompanied with major legislative action in order to do things like that if you're going to deschedule cannabis. So we're talking about 6 to 8 years from now, maybe. And with the Republican-led House and Senate, very unlikely that you're going to get the legislative support. As to the states, it's those same Republican states that are proving legal cannabis, which is kind of interesting. And I think we're very optimistic that Maryland approves, and we're looking at a deal in Maryland. We're very optimistic that Missouri approves it and we have a lot of exposure in Missouri. We consciously took a disproportionate amount of exposure in Missouri, given that dynamic.

There's some other states that we're not really into, which is Arkansas, North Dakota, South Dakota, but what I continue to be excited about from a build-out standpoint, and you're hearing some of the big MSOs slowing their building, slowing their CapEx, and that's true. I think everybody is being more cash conserving, and they also have a bunch of seller notes that they have to pay off, the larger MSOs.

But if you think about states with the most potential that are still getting reconciled that's Georgia. I mean, Georgia is going to be amazing, not in the next year but in the next 3. I think it's another Florida type state. It's about 2/3 of the size is the state of Florida. There's only going to be 6 or so operators. The top 2 licenses got cleared, the bottom 4 haven't. But we're very excited to... We're actively looking at partnering with those builders in Georgia.

And our next question will come from Aaron Hecht from JMP Securities.

When you talked about investment requirements to maintain REIT status, the Verano loan, obviously, the largest in your portfolio, I think you said had limited real estate coverage. This is one of those major requirements. I would think that would give you significant runway to invest in non-real estate secured loans given that was your biggest loan. But then you also made the comment about expanding the investment strategy to other core competencies. So does that imply that you're looking to invest to a level where you change the structure of the organization? Or just kind of walk me through those dynamics.

So I think we got it backwards. The Verano loan, when we did the loan, was real estate secured. The Verano loan refinanced was not real estate secured. In fact, it had a little bit of real estate coverage, but less than 30% of the loan was real estate secured, if that. And so it became not REIT eligible. So in order to maintain even our B-bucket - that was what they call an A-bucket loan, as you know, that would have become a B bucket loan, but we need A-bucket loans to meet our CA test and have our B-bucket.

So that's the problem: even if we wanted to go back in the loan, and we also chose not to because we weren't agenting a very large loan bid, we believe that you should have agent control over your investments, it wasn't really real estate eligible. And ultimately, those types of things, even if we do a small piece would have to be dropped into the taxable REIT subsidiary. So that's the problem. So we do need to think about how do we do more real estate loans. That's what we're thinking about. It's really making sure that we have the real estate coverage for REIT.

Okay. And then when you define core competencies, does that mean that you stay in the cannabis realm? And for non-real estate loans, if you're doing some more of those, what does the return profile look like versus a secured loan, and then just the opportunity set? How much bigger does your world get with this non-real estate secured type of loans?

So I think, again, we're backwards. We're looking for real estate secured loans not non-real estate secured loans. So we're want to stay with the real estate secured loans. We've built in-house expertise in construction. We built in-house expertise in managing industrial property underwriting. And so that's what we've become very good at it. And Martin does a good job leading those teams, but also helping in the building, understanding all the hurdles when you want to build out a cultivation and when you want to build up dispensaries.

I'll even point out that a big internally managed peer is going to lease their property to a non-cannabis provider. And so there are a lot of tangential expertise in our core competencies that we could explore while still really maintaining what we're really good at. By the way, we have 100% of our deals in cannabis today. And right now, we have nothing to talk about besides that. But we do need to continue to find real estate secured funds and I think that's our primary focus.

Okay. And then on potential internalization, what changed from your perspective for the Board to consider an early internalization? And you do have some extra liquidity right now. Will you be holding on to liquidity until that process is figured out to give yourself options for anything that may come up?

I think there's lots of liquidity. We have an undrawn credit line and I think we're sitting in a net debt equal position today. And so I mean, in my mind, that's much more liquidity than any internalization would require. As for why the Board is considering early, I mean, we're just in the preliminary discussions of it, I think part of it is cost of capital. As we've spoken to even our bankers at your firm and others, there are a number of investors that don't invest in externally managed companies. The external manager has different cost structures than the internal manager. And we want our stock to continue to trade well. We're trading on book, but we wanted to trade very well. And we look at IPR as an internally managed entity and see how well it trades. So at least the board does so.

This is still very preliminary. Once we have more, we're definitely going to talk about it. But I think there's a lot of considerations around it. And ultimately, it's up to our shareholders because any internalization to me would require a shareholder vote.

Our next question will come from Mark Smith from Lake Street.

First one for me, just broadly as we look at the industry and weakness out there. Have you seen any changes in the states where you are operating, in some of these limited license states, maybe this weakness kind of expanding into some of those states?

You mean the weakness that's in the unlimited license states expanding into limited license states? I think a good example of that is Arizona. Arizona is a great limited license state. So you want to be on the dispensary side. It's unlimited license from a cultivation standpoint. And Arizona cultivation prices have crashed with wholesale prices down to the $350-ish. It's one of the states that you can easily say is below marginal cost of production for greenhouse product, especially. And so that's really unfortunate. It's the worst I've seen in Arizona. I mean, Colorado is... I view it as an unlimited license. We don't do business there, but that price is crushed there for sure. And so look, it is spilling.

You're seeing a price compression in Pennsylvania seeing price compression in Massachusetts pretty much across the board because as much as they don't want cannabis to spill across borders, magically, it does. And so it's a little bit of a flow, especially with greenhouse products spilling cross-borders and outdoor gross spilling cross borders.

The one bright light, I would say, in general, is high end. So the high-end premium product and brands have held up and held up well. We do have one company in Michigan, which is an extremely tough state and the prices: greenhouse has crashed, but the indoor product that they're selling really has held up to nice prices. And so that's a good example of a premium provider still doing okay in this environment.

Okay. And then Robyn talked a little bit about... I don't want to mischaracterize it, but it sounds like kind of a squeezed pipeline. Is that the big kind of leading indicator and then a few months to kind of get these deals over the finish line once they come into the pipeline? Any insight into kind of what you're seeing as you're out there in the early stages looking for deals? Have you seen any capitulation yet and people that look like they're getting ready to start dumping capital and invest in more?

So how we view the active pipeline is just as it sounds: opportunities that are actionable, either term sheets issued heading towards the term sheet issued or farther down the diligence process to make a decision on whether or not we want to issue a term sheet. So I think from that standpoint, it's definitely come down, as Len and Jon talked about, the environment for cannabis in general is making us more selective in terms of the deals that we're looking at, in terms of opportunities that we're willing to invest in.

There is still definitely a need for capital from operators and providers. Some of the larger MSOs aside from the Verano refinancing, as we discussed, have really focused on their existing operations and generating cash flow versus the expansion that we saw last year. So the expansion of those large MSOs and those bigger tickets are really what drove the pipeline up. And focusing on the mid-tier and midsized operators as part of what's driven it down along with a lack of real estate collateral that's been tough to find.

Okay. And in the same vein, as you're looking at and need that real estate collateral, as you look to move more towards floating, do you feel like there's pushback on kind of the switch over to floating rate loans? Or is that not as big of an issue?

I mean all the new things we're looking at are floating just by standard. And when we have the opportunity in a renegotiation to modify a loan from fixed to floating, we're taking advantage of that because we clearly believe that floating with a good floor is the way to go in this increasing interest rate environment.

Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Lynn Tannenbaum for any closing remarks.

Thank you all for listening, and we look forward to reporting another quarter next year. So if we don't talk to you, have a great rest of the year.

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.