Innovative Industrial Properties Inc (IIPR) 2023 Q1 法說會逐字稿

Good day, and welcome to the Innovative Industrial Properties, Inc., First Quarter 2023 Earnings Conference Call. (Operator Instructions)

Please note this event is being recorded. 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 Regin, Chief Investment Officer.

Before we begin, I'd like to remind everyone that statements made during today's conference call may be 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, 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 FFO, normalized FFO and adjusted FFO. You can find this information, together with reconciliations to the most directly comparable GAAP financial measure, in our earnings release issued yesterday as well as in our 8-K filed with the SEC.

I'll now hand the call over to Alan. Alan?

Thank you, Brian, and welcome, everyone. We are pleased to report another solid quarter of operations and financial results, especially in the context of 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 of 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 Regin to Chief Investment Officer, both 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 IIP'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.

While 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 the overall macroeconomic headwinds, I wanted to highlight our transaction with our new tenant, Battle Green, during the quarter, where we acquired a 157,000-square foot industrial facility under development in Ohio and executed a long-term lease with Battle Green. Battle Green 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 continue 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 I mentioned, will highlight our positive portfolio statistics, including rent collection from the first quarter and for the first 2 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 and 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 that can manage their businesses successfully through inevitable ups and downs of this industry.

We have engaged local counsel and other advisers in these situations, commenced legal proceedings for damages and possession and are in discussions with applicable regulatory agencies. With our veteran team internally, in combination with our advisers 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 regained possession of 2 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 Harvest Park cultivation and processing facility and 4 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 are actively exploring all options for these properties, including speaking to a number of interested parties. As we noted previously, Parallel is current on the other 2 properties we lease to them in Florida.

And for Kings Garden, they continue to pay rent at the 4 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 projecting a doubling of annual sales from 2023 to 2030, to 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 nonlicensed cannabis sales by state and local enforcement authorities, taxation and general macroeconomic conditions.

Reflecting that continued price compression, in combination with the continued inflation on input and labor costs, we note that consensus analyst 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 persistency 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 Viridian Capital Advisors reporting that U.S. operator capital raises were down 86% in Q1 versus the prior year period; and of those raises, nearly 90% was in the form of debt.

From our perspective, 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. 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 $2.5 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 1. 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 were introduced 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. Two, a version of SAFE has passed the House 7 times now. And three, the Senate Bill has 40 total sponsors, including 7 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 numerous sets of competing interests.

We also want to note some of the recent commentary by federal officials and commercial organizations which we believe show the continued momentum forward for change. In late March, the Wine & Spirits Wholesalers of America issued a letter to Congress calling for cannabis to be regulated on the federal level like alcohol, advocating for comprehensive 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 cannabis means to Americans over the last several decades.

Also last month, in testimony to the Senate, Attorney General Merrick Garland provided an update on the DOJ's potential establishment of a Cole Memo 2.0. While the timing and scope of federal reform continues to be uncertain, we see the reintroduction of the SAFE Act in both the House and Senate and these positions as incrementally positive steps in the road to reform.

I'd like to now turn the call over to Ben to discuss our investment and portfolio activity in the first quarter and year-to-date. Ben?

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, 157,000-square foot, 2-story industrial building and executed a long-term lease with a new tenant, Battle Green. Battle Green's leadership team includes Joe Caltabiano, Co-Founder and Former President of Cresco Labs; Chad Wise, co-founder of North American Dental Group; David Ellis, former Chief Operating Officer of Cresco; and Deanna Mettler, former CFO of Equifax Canada.

We acquired the development property in mid-construction, and our total investment is expected to be $42 million. Ohio's medical cannabis program has well over 300,000 registered patients, and Ohio 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 a sale-leaseback transaction for a 58,000-square foot, fully operational cannabis facility with Tilt in Pennsylvania for $15 million and an additional $34 million for improvements at 3 projects, each of which resulted in a corresponding adjustment to base rent that started immediately. Those included $15 million in additional funding for Ascend at its New Jersey facility, an additional $15 million for PharmaCann at its New York property and an additional $4 million to Goodness Growth at its New York property. We also negotiated cross-default provisions on all leases for each of those 3 tenants as well as for Tilt.

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 Bernadino property, the property we took back from Kings 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 where Parallel defaulted, as Paul noted, we took back the Texas property in mid-March and are currently 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's licensing dynamics, and we will provide updates as we can.

With that, I'll turn it over to Catherine. Catherine?

Thanks, Ben. For this call, I will describe our property portfolio and tenant roster in addition to our rent collection 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 1 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 our previously disclosed defaulted tenants, Parallel and Green Peak, 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 the leases and agreed to apply security deposits for the rent payments to the Michigan and California properties through September 30, with pro rata payback of these security deposits starting in January 2024. For Q1 2023, we applied $1.1 million of security deposits for these 2 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 other properties.

This quarter, we also applied in full the security deposits we held for Parallel Texas and Pennsylvania and for Green Peak at our Summit 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 2 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 cannabis 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 delay 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'm pleased to be here for my first earnings call with the IIP 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 IIP, as the only publicly traded cannabis REIT on the New York Stock Exchange, is best positioned to continue to capitalize on this unique opportunity by providing growth capital to the industry.

Moving on to 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 contractual rental escalations at certain properties.

As Catherine noted previously, the $76 million of revenue for the first quarter included $4.2 million of security deposits applied for payment of rents, with $1.1 million or $0.04 per share, of that amount related to our Holistic leases in Michigan and California and the remaining $3.1 million or $0.11 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 3 months ended March 31, 2023, we recorded net income attributable to common stockholders of $41 million or $1.43 per share.

AFFO 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 AFFO generated in the first quarter of 2022.

In addition to adding back noncash stock-based compensation and noncash interest expense related to our unsecured senior notes, AFFO 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 we'll continue to recognize this interest income for AFFO as it is received, going forward.

On April 14, we paid a quarterly dividend of $1.80 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 AFFO 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 AFFO.

At quarter-end, we had approximately $2.6 billion in 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 that 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 16x. 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 rating.

With that, I will turn it back to 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-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, our 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?

(Operator Instructions) Our first question comes from Tom Catherwood from BTIG.

Let's stick with state legalizations for a second. You mentioned Maryland sales starting in the near term and Delaware flipping and then obviously the expectation that Ohio is next. But we used to see this kind of material pickup in activity when we had the med-to-rec shift. We saw it in Illinois, in Massachusetts and New Jersey, but recent legalizations seem to have kind of languished, whether it's New York or Virginia. Do you think that this medical-to-recreational kind of shift has permanently changed, we're not going to get the upside? Or is it really state-by-state specific? And kind of what gives you confidence in a place like Ohio?

Tom, thanks. This is Paul. No, I don't think that momentum -- it may have slowed, but I don't think it's a paradigm type of shift. I think if you look historically, certainly, a med-to-rec 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, we've seen some hurdles in New York rolling out their rec program, but that's really done at the legislative level and the governor's office. I think people want it and the operators want it. 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 I think this is just more kind of a speed bump than something that's going to stick around for a long time.

I would also add that probably what you're noticing is more related to the capital markets and access to the capital markets that the industry has been going through over the last similar period of time that you're referencing.

Alan, you mean as far as...

The activities that the companies don't have access to capital, so they can't expand and grow in those markets. And I think what you're -- when you start out saying that the positive sales and activities that occur from going from medical cannabis to adult-use are still there and continue to be there, but maybe are slightly muted because of the capital markets.

Got it. Understood. That makes sense. And then kind of sticking with tenants for a second, Ben, I appreciated the background on the founders of Battle Green Holdings, and that's probably going to go a long way towards answering my question. But we see the fierce competition out there for capital in the cannabis sector. When you're evaluating a new tenant to potentially bring them into your portfolio, how has your evaluation process or your underwriting or those key performance indicators that you're looking for, how has that evolved as capital has become more constrained?

Tom, thanks. I'd say we've taken a similar approach that we've always taken. I think we have been able to leverage the experience that the team here has being in this industry over the last 6.5 years and seeing how these markets play out as we've seen it time and again and as different markets have gone from a new medical program to the adult-use program. So we'll be able to leverage, in the Battle Green example, what we're expecting out of Ohio. We certainly 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. We 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. It's management team, it's capitalization, it's markets we like, quality real estate still all goes into it today.

Got it. Appreciate that, Ben. And then last one for me. Paul, I appreciated your comments about larger MSOs focusing more on 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?

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 in, look at redundancies. So we're seeing quite a bit of that. And obviously, we think that's good for the industry overall, because efficiency is good.

As far as have we had any other indications, no, nothing that we're certainly aware of. So we're very happy about the rent collection this quarter and going forward. And as we've 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 will be any future difficulties with rent collection.

And not to mention the fact that if you just think about our portfolio, as described by Catherine, over 89% of our tenants are MSOs, very strong tenants. So we think we have, 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-default and single-tenant leases. We think the strength of our tenant continues to strengthen or grow. And it comes from the green shoots that we're seeing with the strength of some of the -- the resurgence of some of the stock prices in our public company tenants, which represent 58% of our portfolio.

And our next question comes from Scott Fortune from ROTH Capital.

Kind of a follow-up there. Can you provide a little more color on the recent portfolio acquisitions and the amendments and, more specifically, in nature of these qualifying improvements, as I know you guys allocated $34 million in additional commitments? Are these clients that are adding production capacity in the case of New Jersey, in New York? Or are these more project costs needed to kind of reach completion from that standpoint? And then thoughts of adding in terms of a very challenging market with tenants that have or have had a tough time generating cash flow kind of in that stage. Just kind of get a sense of the continued addition for money going to these tenants and kind of the strategy there or the kind of implications from that standpoint.

Thank you for the question, Scott. So before I turn it over to Ben to go into the details of the $34 million of amendments, I just want to remind again what we said in our prepared remarks, that construction projects in general, because of the past issues with supply chain, continue to be affected by the supply chain issues that are occurring.

Development projects for our tenants who are in the process of completing these projects are taking longer and the costs have increased significantly. And we don't see that abating anytime soon. But go ahead, Ben. Do you want to talk about the details?

Yes, sure. Scott, we evaluated these amendments like we would any amendment. It is typically for expansion of an existing facility. These 3 were all in either New York or New Jersey, 2 markets that our tenants feel there's 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 as a great opportunity to continue to support our tenants as well as make any other changes or amendments to leases that we think would be beneficial. We got cross-default language in 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 as to Pennsylvania, I'm going to turn that over to Paul kind of to just describe what we think is going on in the Pennsylvania market.

Thanks, Alan. So 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 very positive. If the governor is already writing in adult-use sales into the budget, that's an interesting sign.

Got it. I appreciate the color there. And then one other housekeeping item for me, kind of on the OpEx side, which was a little elevated versus 4Q. Help us understand kind of property expenses, that's up $5.6 million versus 4Q, and kind of expectations of OpEx level going forward from these levels, would be helpful.

Scott, it's David. Great to speak with you. That's just a unique aspect that we started 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. At the beginning of this year, we started billing the tenants on a monthly basis for both taxes and insurance. And so as you note, there is a corresponding expense that is also being recognized. So for those tenants where we get reimbursed, that's just a wash. So you'll see the income coming in on the revenue side and the outgoing expense.

Great. And so the level of OpEx, kind of without -- assuming you (inaudible) is kind of expected to kind of remain kind of similar to the (inaudible)?

Correct. So Q1 would be more representative of a run rate with our change in the process here.

Our next question comes from Alexander Goldfarb from Piper Sandler.

David, congrats. Welcome aboard. And Cat and Ben, congrats on the promotions. 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. The turmoil in the industry again should sort of raise risk premiums, which makes investing more attractive and, I would think, draws capital into the sector, especially outside of states like California, which have seen a lot of issues.

But obviously, the stock is depressed, and for the past few quarters we haven't seen you guys be able to raise outside capital to invest. So has the narrative or the investment thesis in cannabis changed from a few years ago? Or what do you explain as the 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 sounds like it's still tough for you guys to source accretive capital, which seems odd given the opportunity. 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 market, especially with regards to our stock price. I mean, if you look at the broader real estate public company names, they've all had significant reductions in their stock price. And that theme, I think, drives the stock price for all companies, including ourselves.

The concern from the generalists who typically drive stock prices higher or make moves in stock prices is one of a lot of caution with regards to real estate companies in general because of the significant and rapid increase in interest rates that have occurred by the Fed, and therefore the significant and rapid increase in just the cost of debt that many of the real estate companies use and driving up, I think, cap rates for general real estate companies. All of that affecting the broader real estate market.

Now luckily, because we have a very strong balance sheet, we do have options and we could have continued down the path of making, I think, accretive transactions, which we actually did do when we acquired 2 acquisitions for $57 million, which were highly accretive and generated, I think, a portion of the positive revenues that we were able to report.

Now our desire is to move forward. I think the board and the management team came to the conclusion that being very cautious in this environment, where our tenants are struggling with changes in the regulatory environment, changes with their own financial conditions, all were appropriate to let things settle. And for us, where we are 10x larger than any other competitor, we think we have time on our side to be able to appropriately evaluate the broader economy, the cannabis industry and our acquisitions programs.

And since we are being very cautious on that, the need for us to raise capital, certainly at these prices, doesn't make sense to us at this point. In the future, as things move 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, overall, the investment universe continues to get better. You see targeted opportunities. But again something that you guys have said, which is not complicating the balance sheet and being smart with how you raise capital. So you're fine 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 put those words in my mouth, if you'd like.

Okay. I have a second question that you may not appreciate the words, but let me ask you this. The proxies, the NEO tables that appear on the proxy, sometimes those are quite different than reality. Sometimes what's 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, 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 multiyear plans that were already in place, therefore, it's already sort of set, versus something that was new as a reflection of how 2022 went.

Right. I think it's more the latter. It is these multiyear plans. The majority of what you're discussing comes from performance stock awards that only would happen and only be granted to the management team should we achieve the performance metrics associated with those long-term performance programs. And those would be an outperformance in terms of as compared to the broader real estate industry and an outperformance within a group of what the program considered peers, which was highly focused on single-net-leased entities and industrial REITs.

And so if we outperformed and the stock had a significant outperformance, then a portion of that stock could be earned. But because of the way the proxies works and because of the way these complicated schedules are required, the full value that could be earned if some miracles occur have to be reported.

Okay. So that's -- I don't know why these NEO tables are like that, because they're misleading, but appreciate it. So basically, it's incentive for you guys to work hard. If you work hard and achieve, great; if not, it's not -- these aren't the real numbers then, is what you're saying.

These aren't the earned numbers today.

The earned numbers. Okay. Okay. And then just a final question. Getting back to the political scene, you mentioned potential for a SAFE Act. We could have a debate as to whether that would pass in a GOP and especially House this time and especially because you still need another 20 more senators to get over the filibuster. But I'm curious on the Cole 2.0. The Biden administration has been in office for 2 years. They certainly have been progressive enough. Why do you think they haven't had a Cole Memo 2.0? And that part seems odd, because that they could do unilaterally, they wouldn't need Congress.

I think that's a fair question. You could certainly say that they've been distracted by other things. Cannabis is not the #1 issue in this White House or this Congress.

But we look at the positive. And it's 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. Perhaps he's waiting to try and see which way the wind is blowing with the rescheduling that the White House is spearheading, and it's also going through the AG's office. So they're political. They want to coordinate a rescheduling conversation with a Cole Memo 2.0.

But as far as SAFE banking, yes, it's still a hurdle. We're not going to say it's going to happen as a done deal. But we look at the positive, and we look at Sherrod Brown, Chairman of the Senate Banking. He's been in office -- he has had that chairmanship for 2.5 years, and this is the first time he's scheduled a hearing, which could happen actually this week. So that's how it starts. You get a hearing in Senate. Then it has to go back to the House Financial Services Committee, and it'll have a little more pushback there.

But yes, we realize it's -- we're not trying to communicate that we think it's going to happen more likely than not. But we're looking at the positive and getting a hearing with Sherrod Brown's committee is definitely a positive.

We have a question from Eric Des Lauriers from Craig-Hallum Capital.

So a couple of ones for me, just to kind of better understand your thinking with respect to some of these headwinds facing cannabis operators. The 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 markets, 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 defaults 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?

I think from the very beginning we've been very cautious about the West Coast markets, working 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 the strengthening or tightening or...

I think it's, especially the last, I'd say, 6 to 12 months, there's been quite a bit of activity in Sacramento, recognizing that the illicit market and the gray market are significantly hampering regulated sales. So budgets have been increased. Taxation on cultivators has been decreased. So those are positive signs that California is taking the situation seriously.

We've always recognized California is a challenged market, but at the same time, we understand how large the California market is. And we have strived to identify those operators we feel that have the best chance of success. So you can make money in California. Many of our tenants are doing that.

So we think it's a positive thing what the state is doing. It's not going to happen overnight. It's going to take significant budgets to combat the black market and to put more administrative dollars to converting gray market operators into licensed operators. So 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.

All right. 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 at least one of them is expecting the landlords to sort of potentially help chip in to help alleviate some of the costs going forward here. Can you just talk about how the IIPR management team is kind of thinking about potentially chipping in 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.

So going back to our concept that we have, I think, very strong portfolio statistics, including that 42% of our revenue rents are covered by cross-defaults. You can see where we're going with it is that anybody thinking that IIPR is going to be a party to such a transaction should probably rethink that thought very quickly.

We believe that we have very strong tenants. We believe that the industry has some positive things occurring in it. We believe that we're very well positioned to continue to help the industry grow, but making sure that our shareholders are compensated for their investments and their risks that they're taking is our #1 and primary goal.

And this concludes our question-and-answer session. I would like to turn the conference back over to Alan Gold, Executive Chairman, for some final remarks.

Thank you. And once again, thank you all for joining us on this call today. 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 thank you for joining us on the call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.