Innovative Industrial Properties, Inc.

Welcome to the Innovative Industrial Properties and Q2 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. I now would like to turn the conference over to your host today, Ryan Wolfe. Mr. Wolfe, please go ahead.

Thank you for joining the call. Presenting today are Alan Gold, Executive Chairman, Paul Smithers, President and Chief Executive Officer, Catherine Hastings, Chief Financial Officer, and Ben Regan, Vice President of Investments. 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 8K filed with the SEC. I'll now hand the call over to Alan. Alan?

Thank you, Brian, and welcome, everyone. I know one of the biggest questions for today's call has to do with Kings Garden and what happened. To recap, Kings Garden leased six properties, the total base rent of which was approximately $5.5 million for the second quarter, or approximately 8% of our base rents collected for the quarter. Of these six properties, four were operational, with a ground-up expansion project also at one of those properties, which we will call the 19th Street Expansion. The other two properties were in development or redevelopment, Perez Street and Inland Center Drive. On July 13th, Kingsgarden defaulted on their lease obligations, and on July 14th, we filed an AK regarding that default. Later in July, we filed a suit with the state court asking for immediate access to our properties, among other demands. To date, Kingsgarden remains in default And on August 2nd, we amended our suit making further claims regarding construction at the properties, among other things. Okay, that is what happened. And unfortunately, we will not be able to answer any questions regarding the legal proceedings. I ask for your understanding, and please know, we are doing all that we can to pursue our interests. With that said, and before we start with the great results of our second quarter, I want to spend a few minutes reminding all of us of our vision and why we remain excited and resolute in our belief in the future success of innovative industrial properties. Our vision has always been to create a company that would profit from a nascent, emerging, and fast-growing industry using a straightforward business model that consists of 1. The U.S. legal cannabis industry, in which legal sales are expected to top $52 billion by 2026, nearly doubling 2021's total of $27 billion. Two, the acquisition of real estate that is critical to the operations of the industry. There can't be legal sales of cannabis unless the cannabis is grown in a secured, licensed, specifically designed facility or property. In our business model, The acquisition of their real estate comes from a long-term lease with rental income commencement with the risks. Three, a portfolio with geographic diversification and a focus on limited licensed states and careful investments in other states with strong growth possibilities. And four, a tenant roster of professionally managed operators with strategic footprints, strong growth potential, and since no tenants or legal growing facilities existed prior to the individual state implementing a regular cannabis program, we focused on investing with multi-state operators. Today, over 80% of our committed capital is invested with multi-state operators. With this vision, we bring together a team of experienced real estate and industry professionals. We now have what we believe to be one of the strongest and most experienced team of real estate professionals in the cannabis industry. a high-quality portfolio, and most importantly, a strong and flexible balance sheet producing strong and consistent cash flows. We plan to review our strong second quarter results and to provide what we can about recent developments in our portfolio. We are proud to provide you all our quarterly financial supplement that we published for the first time yesterday and expect to continue to publish on a quarterly basis. As we are constantly monitoring our markets and our tenants, we will provide information regarding the general industry dynamics, our overall portfolio metrics, and our recent investments. In broader macroeconomic terms, in recent months we have seen a broad-based tightening of the financial conditions across the U.S. economy generally, and in the capital raising market for the regulated cannabis industry as well. Total capital raising activity for the regulated cannabis industry in the US is down over 60% in the first six months in comparison to the prior year period. Inflation has also impacted operators' cost structure, including labor, production inputs, and construction costs. At the same time, we are seeing general unit pricing in the cannabis industry decline, which is further driving operators to continue to focus on efficiency in their operations. We continue to be resolute believers in the long-term growth and prosperity of the regulated cannabis industry. As with any industry undergoing rapid growth and change, we expect to experience headwinds along the way. That said, this team will continue to be focused on positioning the company in the best possible way for long-term success and value creation. With that, I will now turn the call over to Paul to discuss industry dynamics.

Paul? Thanks, Alan. I would first like to emphasize, as Alan noted, that industry-wide sales revenue continues to increase and legal sales of cannabis are expected to top $52 billion by 2026, nearly doubling 2021's total of $27 billion. As far as recent state-level market developments, in recent months, we have seen unit pricing for regulated cannabis products decline in certain states at the wholesale level, reflective of what we believe to be a number of factors, including basic supply-demand dynamics driven by licensing structures, lack of meaningful enforcement in certain states on illicit non-licensed cannabis sales by state and local enforcement authorities, taxation, and general macroeconomic conditions. We have seen and do expect to continue to see price compression on cannabis unit pricing across states to varying degrees, depending on the state's market dynamics and program specifics. This price compression will require operators to continue to focus on the dual aspects of maintaining and enhancing brand strength through product quality and efficiency of operations. We believe our facilities provide exactly these key capabilities for efficient production at scale in a highly controlled environment that maximizes yield and product quality. Over 97% of our revenue comes from production facilities or facilities that have combined production and retail capabilities. Also, we recently published our 2022 ESG report, which describes our mission-critical facilities with specialized build-outs designed for environmental controls that are a priority for production of high-quality, consistent cannabis products at scale. Capital availability. As we have all witnessed, financial markets have been volatile in the last few months since the U.S. Federal Reserve began tightening monetary policy in March. That volatility has not dissipated in our view with the war in Ukraine, other geopolitical tensions, and supply chain issues adding to the uncertain economic outlook, as well as the uncertain outlook on monetary policy given the persistent inflation we have all been witnessing. We believe these factors have contributed to a drop-off in capital availability for regulated cannabis operators, both on the debt and equity sides. Larger MSOs that have taken advantage of more open capital markets last year are in better positions to weather this volatility in our view, though from our discussions in the industry, regulated cannabis operators across the board are generally focused now on efficiency in their operations and taking a more cautious approach to expansion. As Alan noted, over 80% of our committed capital is invested with MSOs. Inflation and supply chain issues. Inflation, broadly speaking, has run higher for a longer period of time than I think most would have anticipated. While this has impacts across almost all industries, in the regulated cannabis industry this is also impacting labor and input costs for operators, in addition to driving up the costs of construction for development and redevelopment activities. In addition, continued supply chain issues and labor shortages are resulting in certain projects being delayed in their completion. Of course, these developments have the effect of requiring the operator to put up more capital to complete the project and or resulting delays in revenue generation as projects take longer to complete. In combination with the current environment of limited capital availability, these can be significant obstacles for certain operators. Federal legislation. Finally, I'd like to note that safe banking was removed from the competes bill recently. However, with the House having passed SAFE six times, there are some expectations that SAFE may be introduced into a larger-scale budget spending bill like the annual defense bill. We will continue to monitor these developments closely. Should SAFE pass, this may be an avenue for greater access to capital for many operators. I'd like to now turn the call over to Ben to discuss our portfolio and investment activity in the second quarter. Ben?

Thanks, Paul. We are proud to introduce our financial supplement this quarter, which provides details regarding our property portfolio and consolidates our financial reporting. As Alan noted, this is our first financial supplement, and we would appreciate your feedback as we continue to refine the supplement for future periods. For this call, I'd like to cover certain characteristics of our property portfolio and tenant roster, in addition to discussing our recent investments during the quarter. As you know, we own 110 properties across 19 states, comprising 8.6 million rentable square feet. During the six months ended June 30, 2022, we collected approximately 99% of contractually due rent and property management fees from our portfolio. As we have noted in prior calls, Vertical, a tenant of ours in Southern California, continues to make partial payments. As noted in our 8K filed in July, Kings Garden defaulted in July on its rent at the six properties it leases from us in Southern California. We have commenced legal proceedings against Kings Garden. While we cannot comment on these legal proceedings, we will keep you updated to the extent we are able. In regard to Parallel, they continue to pay rent in full and are continuing their confidential strategic review process. Again, we will provide you a meaningful update on that operator when we are able. Our property portfolio's total cost basis, including commitments to fund future improvements, equates to approximately $274 per square foot, which we believe is substantially below current replacement costs. Our portfolio is split between 68 cultivation and or processing facilities representing 90% of our invested capital, 33 retail locations representing 3% of our invested capital, and 9 facilities conducting combined cultivation and or processing and retail activities representing 7% of our invested capital. No one state accounts for more than 17% of our total invested capital and no one of our 30 tenants accounts for more than 14% of our total invested capital. Across our portfolio, properties with multi-state operators as tenants make up more than 80% of our invested or committed capital, and properties with public company tenants make up approximately 52% of our invested or committed capital. Of our 110 properties, 23 were under either partial or full redevelopment or development, or approximately 21% of our properties as of June 30, constituting approximately 2.5 million rentable square feet. with a weighted average lease length of 16 years for the entire portfolio. We continue to believe in the tremendous value for our mission-critical real estate portfolio, as well as our operators and their ability to weather the current conditions, and will continue to monitor their progress closely in the coming months. In terms of investment activity, during the quarter we acquired four properties and executed lease amendments to provide reimbursement for improvements at five properties, representing a total investment commitment of about $240 million. In these transactions, we established new tenant relationships with Maryland Cultivation and Processing, Texas Original, and Tilt Holdings, while expanding existing relationships with Curaleaf, Green Thumb, Pharmacan, Trulieve, and Sozo. with these investments spread across several states, including Pennsylvania, New York, Illinois, Texas, Maryland, Massachusetts, Arizona, and Michigan. In terms of expected additional investment activity, as always, forecasting investment activity in this industry is challenging. That said, we do expect the pace of activity to be lighter than prior quarters as we focus on the ability to raise additional capital on terms we determine to be reasonably favorable in light of the opportunities to place that capital. I would note in closing that we anticipate total 2022 investment activity of approximately $400 million. With that, I will turn it over to Catherine. Catherine?

Thank you. We generated total revenues of approximately $70.5 million for the quarter, a 44% increase from Q2 of last year. The increase was driven primarily by the acquisition and leasing of new properties, additional building infrastructure allowances provided to tenants of certain properties that resulted in base rent adjustments and contractual rent escalations at certain properties. And as we've indicated in the past, our Q2 revenue reflects only partial quarters of revenues from the acquisitions and investments executed during the quarter. And our revenues for the quarter were also impacted by scheduled rent phase-ins under certain leases, which will continue to phase in over the next six to nine months as we continue to account for all of our leases on a cash basis. For the three months ended June 30, 2022, we recorded net income of $39.9 million, or $1.42 per diluted share. Adjusted funds from operations for the quarter, which adds back non-cash stock-based compensation and non-cash interest expense related to our unsecured senior notes to normalized FFO, was approximately $60.1 million, or $2.14 per diluted share. On July 15, we paid our quarterly dividend of $1.75 per share to common stockholders of record as of June 30, equivalent to an annualized dividend of $7 per common share. As we noted in our prior press releases, our Board of Directors generally evaluates adjustments to the level of our quarterly common stock dividend every six months, with any adjustments expected to be declared in Q1 and Q3 of each year. The Board continues to target a dividend payout ratio of 75 to 85% of AFFO on a stabilized portfolio basis. For Q2, that payout ratio was 82%. We also continued to issue draws for improvement allowances or construction development to our operators under our leases. As we've previously noted, these improvements are critical to the efficient production of quality cannabis products at scale. In Q2 of 2022, we funded approximately $162 million in draws submitted for improvements in construction activity at our properties. As Paul mentioned, inflation is impacting labor and input costs for operators, in addition to driving up the cost of construction for development and redevelopment activities. We're also seeing construction delays in certain development and redevelopment projects in our portfolio, similar to other construction projects generally, with longer lead times for materials, given the ongoing supply disruptions, which the broader economy continues to face, which we believe may have been further amplified in recent months by the war in Ukraine and rolling economic lockdowns in certain countries in response to continued COVID outbreaks. At quarter end, we had approximately $2.5 billion in total gross assets and a total of about $306.5 million in debt, consisting solely of unsecured debt with no maturities this year or next year and $300 million of that debt not maturing until 2026. our debt-to-total gross assets ratio decreased to 12% at quarter end, and our total fixed cash interest obligation on an annual basis was $16.7 million, or a little over $4 million per quarter. We've maintained our investment-grade credit rating and have a debt service coverage ratio of 15.7 times. Also, in order to reconcile our current cash and investment position as of June 30th, With our existing commitments to fund improvements, we have approximately $20 million of uncommitted capital as of today, i.e., capital available for future acquisitions. This subtracts, among other balance sheet items, remaining unpaid improvement allowance balances of approximately $194 million as of June 30. which will hold on our balance sheet until requested for funding by our tenants. As we've indicated in the past, these balances tend to be requested and funded over a period of time that's expected to be over the next year or so. In our pipeline, we have under PSA approximately $36 million of new investments. Assuming we close on those transactions, which may or may not occur, of course, we will have successfully placed the capital we've raised including the proceeds from our common stock offering completed just four months ago. And with that, I'll turn it back to Alan. Alan?

Thanks, Catherine. I'd like to note the following in closing. We are 100% committed to working for you all as owners of the company every day to protect and enhance the value of our company and our property portfolio for the long term. In my 30 plus years in the commercial real estate industry, I've seen and managed through numerous ebbs and flows of industries that utilize mission-critical specialized real estate. I firmly believe that we have the best team assembled of highly skilled, experienced professionals to manage the company through the ebbs and flows of this industry, and a board of directors with decades upon decades of experience in real estate, finance, and executive leadership to effectively oversee our company in all environments. Now with that, I'd like to open it up to questions. Operator, could you please open the call up for questions?

Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To try your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Tom Catherwood with PTIG.

Thank you, and good morning, everybody. Gonna walk a bit of a fine line here. Let me know if I hit the third rail and I will move on. But I'm thinking through process here, and if memory serves me, when Dime went into receivership back at the end of 2019, you had inbound interest right away, but California courts were overwhelmed by the pandemic and the process dragged on, though it was eventually resolved in your favor. Has that court backlog or other overwhelming factors resolved, or is the potential that the lawsuits that you filed could drag on because of pandemic-related issues in the court?

I don't know. Pretty interesting question. We haven't tested the courts before our current court filings, so I don't have any actual evidence or anything to really say that it has or hasn't. But I think in general, we're all seeing that pandemic-related excuses for delays have significantly declined. And I would think that in the California state courts, that would be the same.

Got it. Appreciate that, Alan. And then going over to vertical and maybe California as a whole, California has always been hyper-competitive and you've always spoken about that. One of your key strategies was to find the best operators, concentrate your investments with them because they would be able to ride out cycles. Two-part question, has California eroded to the point where even the best operators Can't make it? Maybe it's illicit market taking share. Maybe it's the not enforcement of rules, Paul, like you mentioned. And then can you provide a little bit more color on resolution or workout plans with vertical for the portion of the rent they're not paying?

So, I mean, obviously there's a lot in that question. First, California in general. While there has been, in using your words, an erosion of the unit pricing, the growers who are efficient and continue to drive efficiency are doing very well, making lots of money, continuing to make money. In California, you can make money. knowing that the illicit market is still there, knowing that it is a high-tax state, knowing that you have to be very efficient to be able to accomplish those goals, and you need to be effectively capitalized. All those factors continue to give us positive feelings about the successful and efficient growers in California. With Vertical in particular, each tenant has unique aspects to it and unique ways that they think that they can address and attack a market. Vertical is focused primarily on the wholesale side of the business. Their ability to drive efficiencies has taken longer than they wanted. But recently, they have refocused and have brought in new and higher quality growing expertise. And we believe, based on that, and it looks like it is coming to fruition, that vertical, which like we've said multiple times is less than 1% of our revenue, will continue to be successful and will continue to pay rent or pay most of the rent or pay all the rent. We're hoping and we believe that they will pay all of their rent over time.

Appreciate that, Alan. Because moving away from California a bit, Paul, both you and Alan mentioned unit price compression as well as increasing costs for producers. And I know this is going to be somewhat different, but industrial REITs sometimes give a stat where they say what percent of either supply chain costs or production costs their rent tends to be. to show that transportation is substantially more and inputs is more and energy costs and all of that. Two parts here. Do you have a sense typically in a typical setup, whether it's processing or cultivation, what percentage of production costs your rent end up being? And then second, is there a level of unit cost, a break-even level at which point in time you get worried about them having the margin to cover expenses, including rent?

We don't have the detailed statistics available to state a percentage of, in general, of everybody's rent. or what their rent is as a percentage of their overall operational cost. Because we have 30 different tenants and we have multi-state operators who are operating in a variety of different states and we have entities that are in growth modes and entities who are in operational mode and entities who are in the startup phase. All those combined together make it very difficult to provide that statistic. But we do know that growers are, you know, have target growth costs of trying to generate or trying to be at a cost level of around $300 a pound for smokable flour. And that we believe, and we've seen that the spot price for that product in California and in other locations exceeds $1,000 or around $1,000 a pound. We believe that that are highest and most efficient growers are in that or less than $300 a pound. And that's what I think we can provide to answer that question.

That's really helpful, Alan. Thank you for that. And I totally understand the complexities between all the tenants and all the locales and the growth modes that they're in. And then maybe just last one for me here. Obviously, it was a record quarter for acquisitions. Kat, thanks for the stat on putting the money to work in four months. In general, across the space, did it cost the capitals up for the operators? Debt is less available for them than it was a year ago. It would make sense that they continue to turn to sale leasebacks. do you see that continued demand there? And then, I know you've got your PSAs lined up already, but as you think about allocating capital into that demand, how are you prioritizing it amongst larger MSOs, regional operators, and then maybe between your current tenants or new tenants?

Another very complex question, which I think we can answer. So first, you know, we have been focused on allocating the majority of our capital to MSOs. And I think that when you look at our statistics that over 80% of our rent comes from MSOs, you can see that we've achieved that goal. And so that's, I think, part of our business strategy and we're successfully achieving that. And I appreciate you acknowledging the the great quarter, over $240 million plus of acquisitions in the quarter and close to $349 million for the first half of the year. I'm just going to say kudos to our acquisition investment team. The fact that we actually placed that capital that was raised in April in around or less than four months is far faster than we expected. and then we project it, and it goes to that team. I think that you're, so in questioning, you know, whether or not there's continued demand for satellite specs, really what you're asking is, you know, what's our pipeline, and, you know, we have, if, We believe that there is tremendous demand for sale-leaseback opportunities and capital for the industry, because as we indicated, the pace of capital raising in the cannabis industry has decreased about 60% since the beginning of the year. So there is a tremendous demand for capital. And therefore, we believe a tremendous demand for sale leasebacks, and we can certainly place more capital. You know, the real estate process is a, by necessity, a long process. And, you know, because of that and because of the success that we've had and the turmoil that was occurring in the beginning of the latter part of the first half of this year, we strategically pulled back on our acquisition commitments to understand what our cost of capital is from debt, equity, and to allow the market to adjust to what we think is higher yields that would be necessary for us to continue to make acquisition investments. And because of that strategic decision, while we had indicated in the past that we would be doing between $125 to $150 million of transactions a quarter or between $500 million and $600 million annually. We think we're going to be probably for this year closer to the $400 million, maybe if things evolve a little bit differently, maybe $500 million. And if you think about where we are already, we've already closed on $350 million, which is just a... And it's above that $150 million per quarter pace. And if we were to go to another $50 million to get us to the $400 million range, well, we certainly have that capacity. And as we've described, we have assets under PSA already. And we have the capital to easily, between our uncommitted capital and our free cash flow, we have the capital to achieve at the very minimum that. Now the question then becomes, how do we go beyond the $400 million? And that would require us to raise equity, raise debt, come up with new capital. And we think we could do that with a variety of debt structures, including convertible debt and straight debt and other unique opportunities which we're exploring. And so we think we can easily achieve that and believe that as long as the markets settle down and the environment for our tenants stabilizes, we think we'll be able to easily achieve that. Keep in mind that we're still very excited about the industry. As I think Paul noted that the, you know, revenues in the industry are expected to, Paul, are they expected to get to? We're going to double by 2026. Double by 2026. So the industry continues to have very positive sales growth and giving us the confidence that continuing to work with, as we described, our business focus of the MSOs, we'll be able to continue to provide very stable and strong cash flows. long-winded way to answer that question, but hopefully that helps you.

That makes total sense. Really appreciate the candor and the insight, Alan. That's it for me. Thanks, everyone. Thanks, Tom.

Thank you. And the next question comes from Harrison Vivas with Cowan.

Great. Thank you so much for taking the question. Just one for me on the regulatory front. Paul, you offered some commentary around movement of the SAFE Act. If we were to assume that it gets passed in some form this year, maybe during lame duck, can you just refresh us on your latest thoughts around how its passage would affect your business and pipeline specifically? And then more broadly, can you just speak to how this would affect or how you think it would affect cost of capital? just given the offsetting impacts of greater capital availability and tighter monetary policy. That's my question. Thanks.

Sure. So thanks for the question.

You know, I think first, you know, Harrison, we have to think about what version of SAFE or SAFE Plus would pass. And as you probably know right now, that's being debated pretty heavily by Chuck Schumer and Cory Booker. They've done a nice pivot to support SAFE. But right now, it's really... being formulated in a way that says, how can we get it passed? Right now there's 15 GOP senators that have indicated that they would support a basic SAFE. So that's when it gets complicated if Cory Booker's SAFE Plus, which includes 280E provisions, maybe some uplisting language, veteran affairs language, maybe some SBA loan and a lot of equity provisions. So it depends what that looks like. And, you know, I think certainly it's got a better chance of passing than it did six months ago now that Schumer and Booker have pivoted. But to your question, you know, how does that affect us? I think it would be a positive. First of all, you know, I think whatever safe banking looks like, even if it's in a stripped-down version, it'll be a benefit to the industry as a whole. And that would give operators other options for capital, certainly giving them banking access. So with that, we have stronger credit with our existing tenants and tenants in the future. So we look at that as a positive. Also, certainly, that would give us access to capital and different options in raising debt, which we think would certainly lower our cost of capital. So we look at it as definitely a net plus. you know, some of the comments about, well, gee, this is going to impact competition. You know, we've always thought that, yeah, maybe, again, depending what version of SAFE comes out, there may be a little more competition. But as you know, SAFE does not legalize cannabis or deregulate it. So there's still going to be, I think, a lot of the big national banks stay on the sidelines because it's still a Schedule I substance. If it happens, when it happens, we look forward to it. I think it will be a net plus for us.

Understood. Thanks very much. I'll hop back in the queue. Okay. Thank you.

Thank you. And the next question comes from Eric DeLalle from Craig Hallam Capital Group.

Great. Thank you for taking my questions. Could you please expand just a bit more on the dynamic that you're seeing between the sort of sources and cost of capital available to you and then the seemingly increasing demand for sale leasebacks. I'm just sort of a bit unclear on, you know, sort of what the delay might be in drawing additional capital. If you could just kind of flesh out those dynamics of, you know, is it really trying to, you know, get better terms from future tenants now that macro environment has changed? Is it, Or is it more on your cost of capital side? If you could just expand a bit more on those dynamics, that would be great. Thank you.

I appreciate that. And I think the answer is that it's both. I mean, look, things were evolving and moving really quickly. When you go from 2% inflation to 6%, 9%, and 11%, when you go from You know, a Fed with a very accommodative, you know, stance to a very non-accommodative stance and increasing interest rates first, you know, indicating that it would be in the 25 to 50 basis points and 50 basis points and maybe to 100 basis points. And finally, you know, we end up with two 75 basis point increases back to back and, you know, pretty rapidly. Those are rapid changes. Those are things, and they're happening, and we're talking about them in real time, and they're happening in real time very quickly. And even though we have 30-plus years in the real estate industry, and we've gone through and we've seen other major financial... conditions or situations such as the Great Recession and other times when interest rates didn't move up. This has happened much quicker and with things that were occurring that honestly I really just hadn't experienced. And as such, we took more of our time to really understand what was really happening and where we're going and what those external factors, how they were going to affect our cost of capital. And we believe they absolutely have affected our cost of capital. Our share price has dropped whatever, 60 plus percent. And that's a big thing for us to swallow and understand. Our cost of debt, just by the increases from the Fed, has certainly increased 200, 300 basis points. And when you tie that together with the acquisition process and how sourcing deals can take anywhere from six to nine months from start to close, there's that time doesn't match how fast things are moving. And as such, we've had to make, we made some strategic decisions to pull back. But we are now seeing, and I think that many of the MSOs have really come to the conclusion that their cost to capital, their availability of capital has really been impacted. And it is not coming back as quickly as they thought it might. And because of that, they're adjusting their growth plans and their tolerance for a higher cost of new capital, which we could potentially provide. And we believe that we are going to be able to achieve that with any new acquisitions that we source in the next six to nine plus months.

Thank you. I appreciate that, Colin. Yes, yes, that was very helpful. I appreciate that, Colin. Just last one from me here, leaving any commentary of the lawsuit aside here. Are you seeing any demand for those properties?

You know, I'm trying to decide whether or not I can say anything or not. I think the answer is we are. We are because the efficient growers in the industry really understand the opportunity to make money and to be able to do that, they need to be able to have assets that are already growing and have proven to grow product very efficiently. Now, you know, Keynes Gardens brand is a high-quality brand, and it's well-recognized in the industry as something that is of high quality. And others have been certainly envious of their position and their ability to provide product with their facilities. Others know of their brand and of their facilities and where they're growing. And we have had inquiries.

I appreciate that call, too. Thank you. Thank you.

And the next question comes from John Masaka with Leidenberg Thomas.

Good morning out there. Just kind of a straightforward starting question. Is every tenant outside of Kings Garden and Vertical 100% on the rent as of July or to the extent you have the data, August?

As of July, yes. And as of their obligations in August, yes.

Okay. And then outside of Kings Garden in Vertical, what's the outlook for the other California tenants on investment, including the construction loan and the affiliate property tied to that loan?

So that project is the construction loan of $18.5 million. I'm going to turn that over to Ben if you want to just describe where we're at. I think that's pretty much done, right?

Yeah, we're very close. The construction itself is very close to wrapping up, which we've been monitoring, certainly monitoring the market overall and evaluating our options on how we'll continue to proceed and potentially work with the operator that will be growing out of that facility going forward.

Okay. And then in terms of the kind of liquidity position and deploy cash position, let's say, and for external growth, how should we think about your view on cash versus kind of committed cash in terms of doing future investments or kind of committing to future investments? And I guess, you know, maybe some limited kind of commentary you can give on this due How should we think about the remaining kind of committed funding to King's Garden in terms of its impact on your deployable liquidity?

Well, I'm going to leave King's Garden alone because I just don't think that that's something that we should talk about. So we've disclosed that we have around $20 million of uncommitted capital. And we certainly have free cash flow that's generally running anywhere from $20 to $30 million annually. So that certainly gives us the capital to close on anything that we currently have already and to add some more. And then for any future external growth, that will come, and we believe that there's plenty of opportunity for external growth. because of the demand for, say, a leaseback capital. And we believe that we have access to additional capital sources, including debt and convertible debt, and as I mentioned, some unique opportunities that we are exploring. But one thing you didn't ask about is what our internal growth opportunities are. And as we've described, and discussed many times that we have very strong rent adjustments annually, which are on average around 3%, and that the phase-in of rents from our construction projects, as those construction projects complete, continues to happen, and that, as I mentioned before, 80% of our rents come from MSOs, And I'll tell you right now that over 70% of our assets under development are leased to MSS. So we have tremendous amount of internal growth in addition to the possibility for external growth.

Okay. And then I'm going to try one on Kings Garden. If you can't answer, that's totally fine. As you think about the properties, is it fair to assume the two that were kind of ongoing development projects are tools down at this point? And then are either of those two, you know, anywhere close to being kind of usable in their intended form? You know, it came to that today.

I think we can describe the facts. The facts are that Of the three development projects, why don't, Ben, why don't you go through that?

Sure. We have three development projects, a little over $100 million committed to those three. Of that, north of 75% of that capital has been invested and has been drawn towards the completion of those projects towards their intended use. I think those, along with all of our assets there in elsewhere, we're continuing to evaluate options to maximize value of our entire portfolio.

Okay. That's it for me. Thank you very much for the time. Really appreciate it. Thank you.

Thank you. And the next question comes from Alexander Goffar with Piper Sandler.

Hey, good morning. Morning out there. And thank you for all the information so far. Certainly, I think everyone appreciates it's a nascent industry and there's always ups and downs. But I think you guys have done a good job discussing it. Along those lines, if I can just make sure that I understand a few things. It sounds like in answering the questions, one, it doesn't sound like this is a California issue. Paul, you said that people can make money in California. And doesn't sound, based on all tenants being current, doesn't sound like you're seeing any other states with operational issues. So I guess, obviously, can't really ask you directly about Kings, but I guess as far as security deposits and your typical underwriting, I think you guys use part of a security deposit to pay a month's rent on Kings. But can you just give us an update on how you underwrite with security deposits? And as far as earnings go, Kat, Should we just take Pro Rata 8% out of the balance of the year in our SSL?

Yeah, so Kingsgarden is 8%. I think in our prepared remarks we had disclosed that $5.5 million of Q2 revenues were related to Kingsgarden. And we've talked about that vertical is less than 1% of the portfolio.

Okay. But as far as we should just take out then the balance, right, from a GAAP perspective, we should take that 5.2 out of quarterly earnings, correct?

Remembering that we record only cash that we receive as revenue. We have no straight line. rent that is impacting revenue. Yes, if we're not collecting revenue on that, we're not recording, if we're not collecting cash, we're not recording revenue.

Well, yeah, if in your model you have recorded, you know, you're expected to revenue, if your revenue was expected to be a portion of the Kingsgarden, you should take that out.

Okay, and then as far as security deposits, Do you have those for all tenants, or maybe you could just talk a little bit about, you know, corporate guarantees or letters of credit, security deposits, et cetera?

Yeah, so we have, we in general require security deposits on every one of our transactions. Now, you know, if we have a, we do multiple transactions with our tenant base, And our strongest tenants who have put up security partners in other transactions may give us comfort to not require security partners in a more recent transaction. But certainly for any new tenant relationship or tenant that isn't in the PIN or so, we absolutely require security deposits in range. And those security deposits, depending on the size of the tenant, can range anywhere from one to six months.

Okay, and then just the final thing is, I think if my math is right, you guys have done about 150 million of acquisitions. Maybe I'm off, but I think you said you're looking at doing 400 million in total. You've got 50 million lined up. And then Paul, you said you have, or Kat, you said there's 20 million uncommitted of capital. And I see you also have 45 million in total of cash. So maybe just sources and uses, and then, you know, thoughts around acquisitions, because it sounds like maybe you won't get to 400 million given where the stock is, or you think we should be modeling towards 400 million?

You know, I think you've got it all, you know, confused. That's why I asked, that's why I asked, that's why I asked. All right, so what I would, I think it would be better then for us to go over something that we've gone over three or four times already on this call for you, for us to have an offline conversation and we can make sure that your thoughts are accurate, okay?

And I will point you to our financial supplement, slide 19. which walks through the reconciliation of cash on the balance sheet and subtracting out cash that's not available for investments to get to that $20 million that we quoted.

Okay. Thank you, Kat. Thank you. All right. Thank you.

Thank you. And this concludes the question and answer session. Now I'd like to turn the call to Alan Gold for any closing comments.

Thank you. And once again, look, I want to congratulate this team for all the hard work and efforts that they've taken to get us to where we are today. We are absolutely committed to supporting our investments and making sure that everything that we do is in the best interest of our shareholders. And we certainly want to thank all our shareholders for their continued support and commitment to this company. Thank you all.

Thank you. The conference is now concluded. Thank you for attending today's presentation.