Innovative Industrial Properties Inc Q2 FY2022 Earnings Call

Hello, and Welcome to the Innovative Industrial Properties Inc. Q2 2022 Earnings Conference Call. Please note, today's event is being recorded. I now would like to turn the conference over to your host today, Brian 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 Regin, 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 8-K 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 calls 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 19 Street expansion. The other two properties were in development or redevelopment at Street and Inland Center Dr. On July 13th, Kings Garden defaulted on their lease obligations, and on July 14th, we filed an 8-K regarding that default. Later in July, we filed a suit with the state court asking for immediate access to our properties, among other demands. Today, Kings Garden remains in default, and on August 2nd, we amended our suit making further claims regarding construction at the properties, among other things. That is what happened. Unfortunately, we will not be able to answer any questions regarding the legal proceedings. I ask for your understanding. Please note, we are doing all that we can to pursue our interest. Now with that said, and before we start with the great results for 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 one, the US legal cannabis industry in which legal sales are expected to top $52 billion by 2026, nearly doubling 2021 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 has 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 commensurate with the risks. Three, a portfolio with geographic diversification and a focus on limited license states and careful investments in other states with strong growth possibilities. And four, a tenant roster of professionally managed operators with strategic footprints and strong growth potential. Since no tenants or legal growing facilities existed prior to the individual states 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 teams 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 microeconomic terms, in recent months, we have seen a broad-based tightening of the financial conditions across the US 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 structures, including labor, production inputs, and construction costs. At the same time, we are seeing general unit pricing in the cannabis industry declining, 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 US 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’ve 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've 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 cost 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, 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 8-K filed in July, Kings Garden defaulted in July on its rent at the six properties that we lease 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 nine 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 are under either partial or full redevelopment or development, or approximately 21% of our properties as of June 30th, 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 of our mission-critical real estate portfolio, as well as our operators and their ability to weather the current conditions, and we 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, PharmaCann, 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 at certain properties resulted in base rent adjustments and contractual rent escalations at certain properties. 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. 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 30th, 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 and 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 available for future acquisitions. This subtracts among other balance sheet items remaining unpaid improvement allowance balances of approximately $194 million as of June 30th, which we’ll 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, we will have successfully placed the capital we've raised, including the proceeds from our common stock offering completed just four months ago. With that, I'll turn it back to 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 in 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. And the first question comes from Tom Catherwood with BTIG.

I am going to 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 the 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 there a potential that the lawsuits you filed could drag on because of pandemic-related issues in the court?

Well, I know that's a 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 the California state courts would be the same.

And then going over to Vertical and maybe California as a whole. California's 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 the illicit market taking share, maybe it's the non-enforcement of rules, Paul, like you mentioned. And then can you provide a little bit more color on the resolution or workout plans with Vertical for the portion of the rent they're not paying?

There are many aspects to your question. First, regarding California, while there has been a decline in unit pricing, the efficient growers are still performing well and making significant profits. In California, it's possible to be successful despite the challenges of the illicit market and high taxes, provided that growers operate efficiently and are well-capitalized. These factors lead us to have a positive outlook on the successful and efficient growers in the state. As for Vertical, each tenant has unique characteristics and strategies for tackling the market. Vertical has primarily concentrated on the wholesale segment, and their journey to drive efficiencies has taken longer than anticipated. However, they have recently redefined their approach and brought in new, higher-quality growing expertise. We believe that as this shift takes effect, Vertical, which represents less than 1% of our revenue, will continue to do well and will likely cover most of their rent. We are hopeful that over time, they will be able to pay all of their rent.

I guess moving away from California a bit, Paul, both you and Alan mentioned unit price compression as well as increasing costs for producers. I know this is going to be somewhat different, but industrial REITs sometimes give a stat where they say, what percentage 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. Kind of 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 costs that you have a breakeven level at which point in time you get worried about them having the margin to cover expenses including rent?

We don't have the specific statistics to provide a percentage of everyone's rent in relation to their total operational costs. Since we have 30 different tenants, including multi-state operators in various states, it complicates the ability to offer a clear statistic. Our tenants vary from those in growth stages to those in operational and startup phases. Despite this, we know that growers aim for growth costs around $300 per pound for smokable flower. However, the current market price for this product in California and other areas is around $1,000 per pound. We believe that our most efficient growers manage to keep their costs at or below $300 per pound, which is the information we can provide to address that question.

That's really helpful, Alan, thank you for that. I totally understand the complexities between all the tenants and all the locals and the growth modes that they're in. And then maybe just last one from me here. Obviously, it was a record quarter for acquisitions. Cat, thanks for the stats on putting the money to work in four months. In general, across the space, the cost of capital is up for the operators, and 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 continuing 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?

We can definitely address that complex question. Our primary focus has been on directing most of our capital toward MSOs, and our statistics show that over 80% of our rent stems from those MSOs, which indicates we've met that objective. I appreciate your recognition of our impressive quarter, with acquisitions exceeding $240 million in this period and nearly $349 million for the first half of the year. I want to commend our acquisition and investment team; the quick placement of capital raised in April within about four months is a testament to their efforts. Regarding the query about ongoing demand for sale leasebacks, what you’re essentially asking about is our current pipeline. We believe there is significant demand for sale leaseback opportunities and capital within the industry. However, the rate of capital raising in the cannabis sector has declined by approximately 60% since the start of the year. This indicates a strong need for capital and consequently for sale leasebacks, and we are certainly capable of deploying more capital. The real estate process tends to be lengthy by nature. Given our success, we've strategically reduced our acquisition commitments to better understand our cost of capital from debt equity and to allow the market to adjust to what we believe are higher yields that will be necessary for us to proceed with further acquisitions. We have previously stated our intention to engage in transactions worth between $125 million to $150 million each quarter, aiming for an annual total of $500 million to $600 million. This year, we anticipate being closer to the $400 million mark, with a possibility of reaching $500 million, should circumstances change favorably. We have the capacity to generate an additional $50 million to meet the $400 million target, as we already have assets under PSA and the necessary capital to achieve at least that minimum.

No, that makes total sense, really appreciate the candor and the insight, Alan. That's it for me.

And the next question comes from Harrison Vivas with Cowen.

Just one from me on the regulatory front. Paul, you offered some commentary around the movement of the SAFE Act. If we were to assume that it gets passed in some form this year, maybe during the lame duck, can you just refresh us on your latest thoughts around how it's passed 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 the cost of capital, just giving the offsetting impacts of greater capital availability and tighter monetary policy?

I think we first need to consider which version of SAFE or SAFE plus might pass. As you may know, this is currently a topic of significant debate between Chuck Schumer and Corey Booker, both of whom have shifted their support towards SAFE. The focus now is on how to get it approved. At the moment, 15 GOP senators have expressed their willingness to back a basic SAFE, which complicates the situation. If Corey Booker’s SAFE plus includes certain provisions like the 80E provisions, uplifting language, veteran affairs language, or some SBA loan elements, its details will matter. I believe it has a better chance of passage now than it did six months ago due to the pivot from Schumer and Booker. Regarding how this would affect us, I think it would be beneficial. Whatever form SAFE banking takes, even if simplified, it will positively impact the industry overall by providing operators with additional capital options and banking access. This would enhance our credit standing with both current and future tenants, which we view positively. It would also provide us with alternative capital sources for raising debt, potentially lowering our cost of capital, making it a definite advantage for us. Some concerns have been raised about increased competition as a result of this, and while there might be some increase depending on the version of SAFE that emerges, it’s important to note that SAFE does not legalize or deregulate cannabis. Consequently, many large national banks are likely to remain on the sidelines since cannabis is still classified as a Schedule One substance. When and if this happens, we look forward to the benefits it could bring us.

And the next question comes from Craig-Hallum Capital Group.

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 the seemingly increasing demand for sale leaseback? I'm just a bit unclear on what the delay might be in drawing additional capital. If you could just kind of flesh out those dynamics. Is it really trying to get better turns from future tenants now that the macro environment has changed, 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.

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%, 11%, when you go from a federal reserve with a very accommodated stance to a very non-accommodated stance and increasing interest rates, first indicating that it would be in the 25 to 50 basis points, then 50 basis points, and maybe 100 basis points. We end up with 275 basis points increases back to back and pretty rapidly. Those are rapid changes. Those are things – and we're talking about them in real time, and they're happening in real time very quickly. 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, this has happened much quicker. We've had to mix, and we've made some strategic decisions to pull back. But we are now seeing, and I think that many MSOs have really come to the conclusion that their capital costs and availability have been impacted, and it's not coming back as quickly as they thought it might. They're adjusting their growth plans and their tolerance for a higher cost of new capital, which we could potentially provide. We believe that we will be able to achieve that with any new acquisitions that we source in the next six to nine plus months.

Just last one from me here, leaving any commentary on the lawsuit aside here. Are you seeing any demand for those properties?

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. To do that, they need to have assets that are already growing and can grow product very efficiently. Kings Garden's brand is a high-quality brand and is well recognized in the industry as something that is of high quality. Others have been envious of their position and their ability to provide product. With their facilities, others know of their brand and facilities, and we've had inquiries.

And the next question comes from John Massocca with Ladenburg Thalmann.

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 for August?

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

What is the outlook for the other California tenants or investment construction loan and the affiliate property tied to that loan, aside from Kings Garden and Vertical?

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?

We're very close to completing the construction, which we've been closely monitoring. We're assessing the market and exploring our options for how we will proceed and potentially collaborate with the operator that will be developing that facility in the future.

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

Well, I'm going to leave Kings Garden alone, because I just don't think that that's something 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 million to $30 million annually. That certainly gives us the capital to close on anything that we currently have already and to add some more. For any future external growth, we believe that there's plenty of opportunity for external growth because of the demand for say leaseback capital. We believe that we have access to additional capital sources, including debt and convertible debt. 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. We have very strong rent adjustments annually, which are on average around 3%. The phase in of rent from our construction projects as those projects complete continues to happen. 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 MSOs. We have a tremendous amount of internal growth in addition to the possibility for external.

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

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

We have three development projects, a little over a $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 and elsewhere, we're continuing to evaluate options to maximize the value of our entire portfolio.

And the next question comes from Alexander Goldfarb with Piper Sandler.

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. It doesn't sound based on all tenants being current. It 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 used part of a security deposit to pay month rent on Kings. But can you just give us an update on how you underwrite with security deposits? And as far as earnings go, Cat, should we just take pro rata 8% out of the balance of the year in our ?

So Kings Garden is 8%. I think, in our prepared remarks, we had disclosed that $5.5 million of Q2 revenues were related to Kings Garden, and we've talked about that Vertical is less than 1% of the portfolio.

But from a GAAP perspective, our earnings should reflect that we need to take the $5.2 million out of quarterly earnings. Correct?

We only recognize cash that we receive as revenue, so there is no straight-line rent affecting our revenue. If we are not collecting revenue, then we are not recording it. If your revenue forecast includes a portion from the Kings Garden, you should exclude that amount.

In your model, if you expected revenue from Kings Garden, you should take that out.

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

We, in general, require security deposits on every one of our transactions. If we have stronger tenants who have put up security deposits in other transactions, we may give comfort to not require them in a recent transaction. But certainly for any new tenant relationship or a tenant that isn't an MSO, we absolutely require security deposits in a range that can be from one to six months.

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. Cat, 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 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?

I think you've got it all confused. It would be better for us to go over something that we've gone over three or four times already. We can have an offline conversation to ensure your thoughts are accurate.

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

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

Thank you. I want to congratulate the team for their hard work and efforts that have brought us to this point. We are fully committed to supporting our investments and ensuring that everything we do serves the best interests of our shareholders. We appreciate all our shareholders for their ongoing support and dedication to this company. Thank you all.

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