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Operator: Good day, and welcome to the Innovative Industrial Properties, Inc. Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Brian Wolfe, General Counsel. Please go ahead, Mr. Wolfe.

Brian Wolfe: 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’ll 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?

Alan Gold: Thank you, Brian, and welcome, everyone. We are pleased to report another solid quarter of operations and financial results. We believe we have positioned ourselves well in this context with one of the strongest and most experienced teams of real estate professionals in the cannabis industry, a high-quality portfolio and arguably a conservative and flexible balance sheet with a 12% debt to total gross assets, no variable rate debt and no meaningful debt maturities until 2026. To recap the quarter, we generated total revenues of $76 million in Q2 and adjusted funds from operations of $64 million. Rent collection for IIPs operating portfolio was 97% for the quarter. That financial performance continue to drive dividend returns to our investors with $7.20 of dividends declared per share in the past 12 months alone, an increase of 11% over the prior 12-month period.

This quarter was a quiet one for us in terms of additional acquisitions and investment activity. And as we’ve noted for several quarters, we expected a significantly lower pace of investment activity, given the significant adjustments to cost of capital since the Fed began aggressively raising rates last year. That said, we are pleased to announce the pre-leasing of a project under construction in Cathedral City, California, which was one of the projects that we took back from Kings Garden late last year. Ben will provide more detail on that project and the status of leasing for other projects in our portfolio. We continue to strive as we have from the very beginning, to be as transparent and detailed as we can about our business and prospects, especially in the context of ongoing challenges in the macro economy that we are all experiencing and in the regulated cannabis industry in particular, which we have noted in the past several calls.

We also want to note the green shoots that we are seeing in the industry with the ongoing potential for passage of the SAFE Banking Act, state-level momentum for additional programs and tax relief and unit price stabilization trends we are seeing in certain markets, which Paul will spend more time discussing. While the vast majority of our tenant base continues to perform, as we have previously discussed, our tenants Parallel and Green Peak are experiencing difficulties and defaulted on their obligation to pay rent for certain properties. Paul will provide an update on the status of those situations. And as always, we are here to answer your questions to the extent we can. I will now turn the call over to Paul to discuss licensing and industry dynamics.

Paul?

Paul Smithers: Thanks, Alan. Before discussing overall market developments, I’d like to provide an update on the properties we previously disclosed, where tenants Parallel and Green Peak have not paid rent. As we noted then, and I think it’s worth repeating here, we are, of course, first and foremost focused on maximizing the value of each of our properties and having tenants with strong teams that can manage their businesses successfully through the 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.

In March, as many of you may know, Green Peak was placed into receivership. And in mid-March, we regained possession of the Summit building. In addition, we regained possession of 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 on our prior call, we also filed actions against Parallel for possession and damages at our Pennsylvania property and our Texas property, which is in the early stages of development.

We regained possession of the Texas property in March, 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 continues to be current on their obligations for the 2 other properties we leased to them in Florida. Late last month, Parallel announced that it is ending its Pennsylvania operations on September 15, including at our facility and at its medical cannabis dispensaries in the towns of and Erie. We are closely monitoring the situation and continue to be in active discussions with a number of parties. Market developments. While it is clear that the regulated cannabis industry has experienced in the past several months and continues to experience a set of challenging circumstances, I would like to note that the growth of the overall cannabis industry in the United States is expected to continue to be strong, with industry research group, New Frontier 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 and 2024 sales and EBITDA growth have fallen significantly for publicly traded U.S. operators nearly across the board.

That said, this price compression dynamic is certainly not uniform across states, and we are cautiously optimistic that certain states, like California and Michigan, may be showing signs of price stability after months of declines. While new adult-use states, like Missouri and Maryland, are seeing very healthy wholesale price dynamics. According to cannabis benchmarks, there has been stabilization in average wholesale pricing nationwide after significant declines last year, with recent nationwide wholesale pricing even showing a modest uptick in July versus pricing in December of last year. 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 plus. 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 more than 3 quarters in the first half of 2023 versus the prior-year period. And of those raises, over 85% was in the form of debt. The continued focus on debt in combination with ongoing pressure on equity valuations, with cannabis equities seeing further significant drawdowns in pricing over the first half of 2023, have driven a handful of publicly traded MSOs to have a debt-to-market cap ratio in excess of 5x.

As we noted from our prior call, we believe the present macroeconomic challenges of unit pricing compression and cost inflation, in combination with depressed valuations and capital availability, have translated into the larger MSOs focusing more on efficiency of existing operations and generating positive free cash flow versus growth through M&A. That certainly appeared to continue to be the case through the first half of this year, where we saw just over $1 billion in U.S. M&A transaction versus $2 billion in the first half of 2022 and $6 billion in the first half of 2021. State programs. Shifting to state-specific programs, as noted in prior calls, we continue to see momentum for both adult-use and medical-use adoption and rollout. Missouri officially launched its adult-use program in February, with regulated cannabis sales in March totaling over $126 million alone.

Maryland’s adult-use cannabis program saw first legal sales on July 1, including over $10 million in sales in the first weekend alone. And in April, Delaware became the 22nd state to legalize adult-use cannabis with the licensing process they are expected to commence in 2024. In Minnesota, a bill legalizing adult-use cannabis was passed by both chambers, with the launch of the market projected in 2025. In March, Kentucky lawmakers overwhelmingly passed legislation to establish a medical cannabis program which is also expected to launch in 2025. In Florida, a legalization campaign has already collected in excess of 1 million signatures to put on a recreational use referendum on the ballot next year, with Florida having the largest medical cannabis program already in the country, including more than 830,000 enrolled patients.

We’re also tracking other potential referendums or legislation regarding establishing regulated cannabis programs, including for adult use in Ohio, in South Dakota and medical cannabis programs in Nebraska, Idaho and Wyoming. Federal legislation. On the federal legislation front, as you know, versions of the SAFE Act have been introduced numerous times over the last several years in both the House and Senate. Believe it or not, we are at the tenth anniversary for when the first version of the SAFE Act bill was introduced in 4 years after it first passed the house with more than 100 Republican votes. While Senate Majority Leader, Chuck Schumer’s recent comments placed a priority on cannabis banking legislation, it remains highly uncertain whether such a bill could make it into the National Defense Authorization Act, one of the few bills passed each year on a bipartisan basis and one which has been targeted repeatedly as a vehicle to pass SAFE.

As in calls past, we also want to note some of the recent legislative movement and commentary by federal officials and commercial organizations, which we believe show the continued momentum forward for change. In June, the House Armed Services Committee approved a version of the NDAA with provisions to create a medical marijuana pilot program to examine the health impacts of Marijuana used by veterans and service members who are DoD veteran of fair beneficiaries that are diagnosed with PTSD, depression or anxiety or have been prescribed pain management. Also in June, the Senate Appropriations Committee approved a spending bill that includes a provision allowing VA physicians to recommend medical cannabis as a potential treatment option for its veteran patients.

Finally, also in June, the President of one of the largest labor unions in the country wrote to the Biden administration, urging comprehensive cannabis reform, including full descheduling of cannabis from the Controlled Substance Act and provisions to protect state-based industries from monopolization. I’d like to now turn the call over to Ben to discuss our investment and portfolio activity in the second quarter. Ben?

Ben Regin: Thanks, Paul. It was a relatively quiet quarter in terms of acquisitions and additional investments in our portfolio. As we’ve noted for several quarters now, given the significant adjustments to cost of capital across industries, including our own cost of capital, and the macroeconomic uncertainties the regulated cannabis industry has been facing, we made the strategic decision to reduce our overall investment activity and continue to be extremely selective and patient in evaluating potential investment opportunities. As Alan noted, we executed a lease for the Perez Road property in Cathedral City, a property under development that we took back from Kings Garden some months ago. We look forward to completing that project as a cannabis facility and having the tenant occupy pursuant to a long-term lease.

Regarding our San Bernardino property, a property we took back from Kings Garden late last year, we continue to explore a potential mixed-use development of the property, which may include a self-storage component pursuant to an LOI executed with a potential joint venture partner. As we’ve previously noted, this project is in its early stages, and we expect the process to take many months, but we’ll continue to report on progress as we can. For our properties in Texas and Pennsylvania, where Parallel defaulted, as Paul noted, we took back the Texas property in mid-March and exploring options for that site. In Pennsylvania, Parallel continues to occupy that property while we work through the process to regain possession in the context of Pennsylvania’s licensing dynamics, and we will provide updates as we can.

With that, I will turn it over to Catherine. Catherine?

Catherine Hastings: Thanks, Ben. For this call, I’ll describe our property portfolio and tenant roster, in addition to our rent collection statistics and updates on our development projects. As of June 30, we owned 108 properties across 19 states, comprising 8.9 million rentable square feet. Of these 108 properties, 103 properties are included in our operating portfolio. 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 leased operating portfolio comprised of 89% multistate operators and 58% leased to public company tenants.

In addition, for operators with multiple leases with us, we have cross-default provisions included for 42% of our operating portfolio, with another 14% of our operating portfolio leased to operators with just one lease with us. The total amount of capital invested and committed across our operating portfolio equates to $275 per square foot, which we believe remains significantly below replacement cost. For the second quarter, we collected approximately 97% of contractually due base rent and property management fees from our operating portfolio. The 3% we did not collect, is related to contractual rent in excess of security deposits applied for our previously disclosed defaulted tenant Parallel at one of our Pennsylvania properties. During the quarter for Green Peak, I’d like to note that we did collect an additional $305,000 in rent and operating expense reimbursements for the Summit building and the 2 small retail locations that the receivership turned back to us, plus collecting an additional $118,000 subsequent to quarter end in July by the court for payments during the receiverships occupancy.

The receiver continues to pay rent in full for the remaining locations that continues to occupy, which are the Harvest Park cultivation and processing facility and the remaining 4 retail locations. Our revenue in rent collection for the quarter included the application of approximately $1.5 million in security deposits. As we previously disclosed, we amended our leases with Holistic in exchange for the inclusion of cross-default provisions and extension of terms for all the leases, and they agreed to apply security deposits for rent payments to the Michigan and California properties through September 30, with pro rata payback of these security deposits starting in January 2024. Similarly, as disclosed last quarter, we amended our lease with Temescal in Massachusetts, a property that experienced delays in completion of construction, pursuant to which we extended the term of the lease, temporarily reduced base rent for April through January and then increased the base rent for the remainder of the term with application of security deposits for certain rent payments.

In July, similar to our second quarter stats, we collected approximately 97% of contractually due base rent and property management fees from our operating portfolio, with the 3% we did not collect relating to our previously disclosed defaulted tenant Parallel in Pennsylvania. We also continued to fund draws for improvement allowances or construction development to our operators under our leases. As we previously noted on prior calls, these improvements are critical for the efficient production of quality cannabis products at scale. In Q2 of 2023, we funded a net $45 million for building improvements and construction activity at our properties. As in prior quarters, we continue to see construction delays related to the delivery of electrical infrastructure, specifically switchgears, which is a common delay that we’ve seen across the entire construction industry.

We continue to believe in the tremendous value of our mission-critical real estate portfolio as well as our operators and their ability to weather the current conditions, and we’ll continue to monitor their progress closely in the coming months. And with that, I’ll turn it over to David. David?

David Smith: Thank you, Catherine. For the second quarter, we generated total revenues of $76 million, an 8% increase from Q2 of last year. The increase was driven primarily by prior period’s acquisition and leasing of new properties, additional funding of building improvements provided to tenants at certain properties that resulted in base rent increases, contractual rental escalations at certain properties and higher tenant reimbursements. As Catherine noted, the $76 million of revenue for the second quarter included $1.5 million of security deposits applied for payments of rents or $0.05 per share relating to the Holistic leases in Michigan and California and the Temescal lease in Massachusetts that we previously disclosed.

For the 3 months ended June 30, 2023, we recorded net income attributable to common stockholders of $41 million or $1.44 per diluted share. Adjusted funds from operations for the second quarter was $64 million or $2.26 per diluted share, an increase of 5% compared to the $2.15 per share of AFFO generated in the second quarter of 2022. Our second quarter AFFO was up $0.01 compared to the first quarter AFFO of $2.25, which included an $0.11 nonrecurring benefit from the application of security deposits for Green Peak and Parallel, as I mentioned on the call in May. AFFO for the second quarter benefited from a full quarter’s impact of our first quarter investment activity, totaling $91 million, a full quarter of rent on our Calyx Peak property, which had a previously disclosed rent deferral end on March 31 and rent escalations.

On July 14, we paid a quarterly dividend of $1.80 per share to common stockholders of record as of June 30, equivalent to an annualized dividend of $7.20 per common share. 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, importantly, all of which is at a fixed rate. Our debt consists solely of unsecured debt, with a majority of this, or $300 million, not maturing for roughly 3 years until May 2026. At quarter end, our credit metrics remain strong and among the best in the entire publicly traded REIT industry, with a debt-to-gross assets ratio of less than 12% 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. With that, I’ll turn it back to Alan. Alan?

Alan Gold: Thank you, David. I’d like to note the following in closing. Our conviction is as strong as ever in the long-term growth and promise of the regulated cannabis industry. Our team of highly experienced talented professionals will continue to work through the inevitable challenges that rapidly evolving high-growth industries face. With the quality of our team and the quality of our facilities, I believe we are well positioned to meet these challenges and continue to focus on value creation for you all, our valued long-term owners. With that, I’d like to open it up to questions. Operator, could you please open the call up for questions?

Operator: [Operator Instructions]. And our first question comes from Tom Catherwood from BTIG.

William Catherwood: Paul, I appreciate the detail in your prepared remarks talking about the broader macroeconomic picture and how it’s mixed both on the negative side and on the green shoot side. But when you take a step back, what is your expectation or the company’s expectation for the cannabis industry through the rest of ’23? And how are your tenants positioned?

Paul Smithers: Yes. Thanks, Tom. So I think it’s no surprise that we’re not expecting any major turn, I think, for the next — for the rest of the year. I think with interest rates where they are, I think it’s going to remain a bit of a challenged market. But we are happy to report that our MSOs and our tenants are doing very well under the conditions they’re operating. And so I think overall for the industry it’s going to remain a bit of a challenged environment, but we’re very pleased with the way our tenants are performing.

Alan Gold: Yes, this is Alan. And as a matter of fact that over probably — I think it’s 86% of our portfolio, our tenants are adjusted EBITDA positive. And as you know that 58% of our portfolio is public, and of those public companies, 96% of those are adjusted EBITDA positive or better, with the balance expected to get to that metric end of this year or middle of next year. So I think very strong health of our tenants.

William Catherwood: Got it. Appreciate that. And then maybe, Paul, sticking with you again, you mentioned operators have retrenched and are prioritizing cash flow. Alan, that goes to what you mentioned as far as being adjusted EBITDA positive. But at the same time, new markets opening in Maryland and Missouri and obviously, other ones following close thereafter, what trends are you seeing, if any, in terms of new investments and expansion plans from cannabis companies?

Paul Smithers: I think we are when we say we’re seeing some retrenching. I think as you look at what happened with the Cresco and Columbia deal, there were some retrenching there, and they ran in some difficulty about trying to divest some of the assets in Florida and Ohio. So we look at that as perhaps a positive in the sense that these things are shaking out. So I think as these operators become more efficient, they are going to look to grow. And there are great opportunities, as you mentioned, in Missouri and Maryland, we look at Delaware. We’re going to launch next year. We’re looking forward to Minnesota, launching the REC program in ’25, and of course, all eyes on Florida to get that vote by the end of the year in November on the ballot.

So we think there’s tremendous opportunities in these large states that are getting ready or have converted from medical to adult use. So we think the operators that are increasing their efficiencies, we’ll look to expand in those states.

William Catherwood: And then last one for me, Ben. Could you provide some more detail the backfill of the Perez Road asset? And then, if you can maybe talk about the process and when the lease commences and how the rent compares to the prior agreement.

Ben Regin: Yes, sure, no problem. So that was a property, as you know, we took back from Kings Garden a number of months ago. We marketed it, and we’re very happy with how quickly we were able to put that under LOI. As you know, that property is still under development, so there will be a period of time where we wrap up construction, get the tenant in there before they’re starting to pay rent. That is a private California operator. And the returns we’re seeing on the deal are right at where we were with the previous tenant. So again, very excited to get the new — get the building done, get the new tenant in there and feel very, very good about where that’s going forward.

Operator: And we have a question now from Eric Des Lauriers from Craig-Hallum Capital.

Eric Des Lauriers: First one, I figured it was just — since you brought up the Columbia Care and Cresco deal, I’m just wondering, how you’re looking at both those tenants? And if there’s any — if you’re starting to work with them on any potential flexibility? Or just kind of wondering, just how you’re looking at these two tenants in light of this combination not going through?

Alan Gold: I mean, I think we’re very happy with both the tenants. I think they’re very strong in their own behalf, and they continue to pay rent. And everything is good.

Eric Des Lauriers: All right. And then just in terms of New York, just kind of like as a case study, obviously, it’s a market that hasn’t had as robust of a start as many had expected, and you have illicit market competition kind of seeping in there. I’m wondering, how you’re looking at the New York opportunity here? There are more licensees coming online. Are those potential opportunities for you? Are you kind of — are you focused on New York? Is that a state that you’re avoiding? If you could just help us understand sort of how you’re thinking about potentially deploying capital in New York in light of how the market has rolled out.

Alan Gold: So I mean, first of all, New York is a very robust market just by the virtue of the number of nonlicensed sellers that are selling cannabis on a regular basis in that market and how the authorities are having to really focus on cracking down on that. So I think that’s a really strong thing. But Paul, what do you think about…

Paul Smithers: Yes, 100% because the headline last week, of course, was the authorities shut down 7 unlicensed operators Upstate New York, with promises of more to come. So as far as we look at the black market as an impediment to sales growth in New York, I think Albany has gotten the message, and they’re out there enforcing the unlicensed operators. So I think that’s a positive for the market in New York.

Eric Des Lauriers: And so New York remains a market that you are potentially looking to deploy capital into?

Alan Gold: Well, as we — as Ben and Paul had indicated, we’re being very cautious about deploying capital, certainly in the next couple of quarters. New York continues to have things that it’s going to work out. And as it continues to work out, we will be constantly evaluating not only the market, but any new potential growers and their financial strength and ability to really operate within what we think is a robust and competitive market.

Eric Des Lauriers: All right. That’s helpful. And then last question for me here. I’m just kind of wondering your comfort level with most of your tenants’ ability to raise capital. Obviously, you commented on something like the Viridian figures with obviously, capital raises are down pretty significantly this year and remains scarce in the industry. You highlighted the positive adjusted EBITDA with most of your tenants, obviously, with 280 , cash flow is kind of a whole another beast. And so I’m just wondering, how you’re sort of looking at that equation? I mean, it sounds like you’re very comfortable with some of the tenants that you have, even some of these with the Columbia and Cresco deal falling apart, for example. And so I’m just wondering, I guess if this is something that you’re kind of focused on and see the sort of light at the end of the tunnel or if it’s just that so far, so good, and we’re going to continue to try to support the highest quality ones we can?

Alan Gold: I think so far, so good. We’re supporting the highest-quality tenants that we have in our portfolio. We’re very, very proud of the tenants that we have in our portfolio. The market continues to be dynamic, especially in this — the issues with the broader macro economy. We are cautiously optimistic as to the future of the industry while it continues to grow very rapidly and with expected significant increases in revenue.

Operator: And we have a question from Alexander Goldfarb from Piper Sandler.

Alexander Goldfarb: And I guess maybe from California, your optimism for Albany doing something is impressive. New York, we have maybe a jaded view. But — so two questions here. The first is, Alan, you spoke about — or Paul, I forget, you spoke about 85% of your tenants being adjusted EBITDA positive. And obviously, adjusted stands out. And then, there’s the cost of financing. So when you look at your tenants on a cash — like bottom line cash profitability after they’ve paid their financing costs and everything else, would you stand by that 85% number? Or where does that number really shake out?

Alan Gold: I mean I think we’ve analyzed it, and we believe the 85% or 86% of our tenants are adjusted EBITDA positive. And moving towards, I think, full free cash flow is something that they’re all striving to do by reducing headcounts and focusing on expenses and driving revenues as best they can, knowing that cost of capital is significant and perhaps even increasing. So no, we’re very positive, and you shouldn’t be bringing up politics on a call like that. I mean, Alex, come on. No, I’m just kidding.

Alexander Goldfarb: And — but when you look at the profitability, I mean, that’s ultimately what we’re going for here, right? So how many of your tenants — when you move beyond the adjusted EBITDA and you say that the tenants are working towards cash flow profitability, where do your tenants stand right now? Do you think half of them are cash flow positive, so it’s really just, “Hey, we need another 50%”? Is it less than that? I’m just trying to get a perspective because, obviously, we’re all concerned about what’s going on in the industry. Tenants are having to renegotiate or use security deposits. So just trying to get a sense of where the profitability level of your tenants currently stands on a cash basis.

Alan Gold: Yes. I mean I think that we’re very comfortable with our tenants and their profitability status. We’re very comfortable with the program that we’ve used in the past for our tenants to bridge some of the supply chain issues in their completion of their — the developments that have allowed them to be successful and continue to pay rent after the deferrals have expired. We think that that’s been a very positive thing and something that we’ll continue to look at. No. I think in general, we are very, very positive with our tenants. And I think you can look at statistics in a lot of different ways. And keeping in mind that we have not only public companies, which you can have access to see what their financial strength is and where they’re financials are going because, as you know, and I mentioned 58% of our tenants are public. And then on our private, in general, our private tenants are doing very well.

Alexander Goldfarb: Okay. The second question is, one of the themes in the industry has been overcapacity that people invested and built for a bigger market than has actually occurred, whether it’s because slower rollouts or competition from the illicit market. As you guys assess your portfolio in the states within you operate, do you have a sense of how far overcapacity the markets are or some metric that sort of helps frame out maybe how much of a shakeout or how much consolidation needs to occur?

Alan Gold: Well, I mean, you could — I don’t know if I can answer it and answer your question on the way you’ve asked it. But look, the tenants are performing well. The markets are — they are — revenues are increasing. Sales are occurring. It’s really hard to say that there’s overcapacity and a bunch of new growers being funded, but — when we just talked about how there’s very little capital going into this market. So you can’t have it both ways, Alex. So it’s either — there’s very little capital and that’s a concern or there’s new growers and overcapacity. That just doesn’t make any sense.

Alexander Goldfarb: Yes, I wasn’t talking about new. I was talking about what was already built in the system. Clearly, I’m not talking about new.

Alan Gold: Yes. And then what’s already built in the system, as the market continues to grow as these — the states move to adult use, capacity will be used to deal with that increased usage of the product. As we indicated that by 2030, there is expected to be a doubling of the revenue sales of this product, not all of that’s going to be based on because of inflation, but actual additional use.

Operator: Our next question comes from Andrew Rosivach from Wolfe Research.

Andrew Rosivach: Andrew. So I apologize, I’m piling on with another tenant credit question. Here’s kind of maybe a way to frame it. I think the reason why my peers and I keep asking is these publicly traded names, we look at the credit math — something simple, just look at the market cap, some of these names are under $200 million. Some of them are under $100 million. And maybe to frame it, a lot of the guys that you’re hearing, we also cover retail REITs, and they’ll often talk about a credit loss reserve that the companies just kind of put in their guides. And have you guys ever thought of or would you potentially throw out when you look at your watchlist of tenants, what might be an appropriate credit watchlist — credit reserve to put in your model for the next 3 or 6 months?

Alan Gold: I mean I think that we’re reporting record revenues, we’re reporting revenues that have increased significantly year-over-year. We’ve a deep dive in all of our tenants. We’re watching our tenants. We’re doing what it’s necessary to make sure that the tenants continue to operate well and pay their rent. We don’t have a defined credit — loss reserve because we don’t believe that, that’s an appropriate way to look at it. We’ll take whatever situation, disclose it transparently to everybody, and everybody can focus in on the actual loss, if there is going to be one, from any one of those specific situations, which we think we haven’t — luckily, we haven’t had to announce anything for a long period of time. And we, again, remind everybody of the strength of our tenants and the good — and the high-quality health of our tenants.

So why would we look at a loss reserve? Now, our — the — anybody who underwrites the company — our company, can certainly use whatever metric they want and underwriting the information that we transparently and fully have disclosed.

Andrew Rosivach: I know I’m kind of throwing out an idea out of the blue. One — just two other things. When you’re 97% collected, what kind of payable period would that be, like 60 days, 90 days, before they would be outside of the 97%?

Alan Gold: That’s all current. That’s current pay. They’re currently — they paid the rent.

Andrew Rosivach: They paid August…

Alan Gold: On time. They paid the rent on time.

Andrew Rosivach: August, on time. Okay. And then one other, your construction loan, is that — does that loan operate — that’s on the balance sheet, does that operate as a in kind?

Ben Regin: There — Andrew, this is Ben. They’re making cash payments as well towards that loan as they’re wrapping up construction there.

Andrew Rosivach: Got it. Okay. So that’s — what’s the cash payment, the rate they’re paying now?

Ben Regin: That’s a private company and — details of which we have not disclosed. But we are very happy with the progress that we made on construction and the payments that we’ve received and feel very good about that, going forward.

Operator: We have a question from Scott Fortune from ROTH MKM.

Scott Fortune: Let me summarize it this way differently, maybe I can ask Ben because as Chief Investment Officer, you’re talking with a lot of these tenants. It seems to getting beyond the major concern of the tenants, as Alan and Paul have indicated, right? We still — it’ll be helpful to get federal legislation from that standpoint. But most of the tenants have extended debt, they’ve made meaningful cuts to their OpEx and CapEx. And we’re expecting to see significant cash flow generation here. And that should bode well for the industry as we’re seeing green shoots, kind of the fundamentals start to stabilize and improve. But I just want to get a sense, Ben, from your discussions with your strong — these large MSO operators have solid balance sheet and potential green shoots coming here, are you discussing like new states like Maryland and New Jersey, where there’s limited — or you have more opportunities there to grow with them?

And part of this discussion, too, is that there’s still a very highly illicit market out there that needs to be converted to the regulated side, which there’s not enough supply for that. But just your sense been in talking to the operators and tenants, their health overall and kind of some new opportunities that you’re talking with them, obviously cautious and still a challenging year, but looking into 2024 potentially.

Ben Regin: Yes. Scott, sure. So yes, we do talk to all of our tenants on a regular basis. We are seeing the green shoots that you mentioned, whether that’s pricing stabilization and even increasing in wholesale pricing in markets like Michigan, where they have started to crack down on the illicit market. The adult-use rollout in states like Missouri or Maryland, many of our tenants have exposure to those markets. As we mentioned before, we are being very selective and patient in terms new opportunities. We think that’s the right thing to do, given current market conditions. But all — I would say, all of our tenants are — they do feel the same way, and they see opportunities in a lot of these markets. And you have tremendous potential in a state like Pennsylvania, Florida, potentially converting to adult-use market.

We usually see 2 to 3x revenue increase when something like that happens. So I think there’ll be some great opportunities in those states and elsewhere, going forward. And we will be there to support our tenants, if they’re looking to expand in those markets.

Scott Fortune: I appreciate the color. And then one last question for me, bigger picture, can you provide a little color on kind of the broader real estate market overall? Obviously, we’ve seen an acceleration in the volatility of interest rates. You have a strong balance sheet and various options that remain cautious here towards potentially raising capital. But what are you looking for to kind of address and capitalizing on these kind of new accretive opportunities that you would see? And what do you need to see kind of more interest rate stabilization, more — further fundamentals of the industry or meaningful green shoots to come about? Kind of just your sense and thoughts of looking at the individual positive investment opportunities that present themselves and the ability to deploy cash into these opportunities from that standpoint overall?

Alan Gold: All right, Scott. I wish I could answer that. I wish I had the clearest crystal ball. And if I did, I certainly wouldn’t be sitting here, I’d be on some island with — on a big yacht or something. I mean, no, we don’t have — we don’t — our crystal ball is as fuzzy as everybody else’s. We would like to see the broader macro economy continue to stabilize. They — we would like to see inflation to be brought under control, and we’d love to see interest rates perhaps start coming back down, which would drive the broader economy, which, as you know, if you — the broader economy is being increasing, then consumers would have greater confidence and spend more. And if consumers have greater confidence and spend more, one of the things that consumers may do is be clients of our tenants, and that’s what we would like to see.

Operator: And this concludes our question-and-answer session. I would like to turn the conference back over to Alan Gold for any closing remarks. Please, Mr. Gold.

Alan Gold: And certainly, thank you all for joining us on the call today. I really want to thank the entire IIPR team for their tremendous work and for a fantastic quarter. And with that, thank you all for joining, and we’ll sign off.

Operator: The conference has concluded. Thanks for attending today’s presentation. You may now disconnect.