Innovative Industrial Properties Inc Q3 FY2022 Earnings Call

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.

Thank you, Brian, and welcome, everyone. We are pleased to report another solid quarter of operations and financial results, especially in the context of the challenging macroeconomic conditions across industries that we are all experiencing. We believe we have positioned ourselves well in this context with one of the strongest and most experienced teams of real estate professionals in the cannabis industry with a high-quality portfolio, and arguably one of the most conservative and flexible balance sheets across the real estate sector. Now to recap the quarter, we generated total revenues of $71 million in Q3 with growth in excess of 30% over the prior year's third quarter. Rent collection for IIP's operating portfolio was 97% for the nine months ended September 30, 2022, with only tenants Kings Garden and Vertical not paying their full contractual rent. As we noted in our 8-K filed in September, we entered into a confidential conditional settlement agreement with Kings Garden. We are limited at this juncture as to what we can discuss, but we expect to provide further information in the coming months as we can. For now, Kings Garden continues to occupy four of the properties under that agreement, while relinquishing two of the properties that are under development back to us. We are pleased to report that we have an LOI, letter of intent, for a long-term lease at one of the properties in just over a month of marketing the property for lease and look forward to finalizing the arrangement with that operator. With respect to the San Bernardino property under development, with the current California market environment, we are evaluating all possible uses for that property, including non-cannabis uses. Earlier this week, we executed our first property disposition, selling a property in Pennsylvania that we acquired in 2019 and leased to Maitri, a private single-state operator. We sold the property for $23.5 million or about $461 per square foot, which was above our basis in the property including all funded improvements. We are pleased to execute on this transaction. And with our pipeline of potential additional investments, we see an opportunity to recycle that capital into superior risk-adjusted returns for our stockholders. We continue to see significant opportunities to place capital. However, we continue to be highly selective and patient in our process, with the tightening of financial conditions also having a significant impact on our own cost of capital. That said, we are pleased with the progress we have made in placing capital over the course of the year, with just under $370 million of new acquisitions and additional investments in the nine months ended September 30. Of course, we continue to maintain one of the most conservative balance sheets in the commercial real estate industry, with 12% debt to total assets, no material maturities until 2026, and a debt service coverage ratio in excess of 15x. As we have noted throughout our six years of reporting our results to you all, we continue to have a deep conviction in the long-term growth prospects of the regulated cannabis industry and our position as the preeminent provider of real estate capital for operators' mission-critical real estate. I will now turn the call over to Paul to discuss industry dynamics.

Thanks, Alan. I would first like to emphasize as Alan noted that our conviction of the long-term growth of the regulated cannabis industry is unabated, with expectations from industry analysts that U.S. regulated cannabis sales will continue its annualized double-digit growth over the coming years. As we noted on our last call, we have seen unit pricing for regulated cannabis products decline in certain states at the wholesale level in the past months, 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 law 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 that state's market dynamics and program specifics. That said, we are closely monitoring the impact that California Attorney General Rob Bonta's recent announcement may have on the very large relatively uninhibited illicit market in the State of California. In October, the California Attorney General announced that California would expand its enforcement efforts against illicit cannabis grows, with its eradication and prevention of illicit cannabis task force shifting the seasonal 90-day focus on eradicating illicit grows to a year-round practice with one of its goals to support the legal market. As we noted before, we believe this continued price compression will require operators to focus on the dual aspects of brand strength through product quality and efficiency of operations, and that our mission-critical facilities are well-designed to achieve both goals for our tenant partners. As we should note, of course, that while wholesale average price compression provides some informative value, pricing is heavily dependent with wide ranges based on product quality and licensing structures, with higher-quality, vertically-integrated operators having distinct advantages over others in terms of pricing dynamics. Capital availability: as we noted on our last call, financial markets have become increasingly volatile and restrictive over the past months since the U.S. Federal Reserve began tightening monetary policy in March and pursued a path of increasing interest rates on a timeline that we frankly have never witnessed as a country. That volatility in a restrictive environment has not dissipated in any way from what we have seen, and we see the war in Ukraine, other geopolitical tensions, and supply chain issues adding to the uncertain economic outlook and continuing to stoke inflationary expectations. As with other industries, the cost of capital and capital availability has fundamentally changed for cannabis operators over the course of this year. As we noted previously, capital raising across the cannabis industry continues to be very subdued versus the relative strength of 2021. And debt continues to be the focus for most cannabis operators this year, with minimal equity raised. In fact, according to Viridian Capital Advisors, total capital raised for U.S. regulated cannabis operators was down by more than two-thirds during the first three quarters of 2022 versus 2021. And in terms of equity capital raised, down 96% from the prior year period. I'd also note that capital raising has noticeably diminished in the public REIT markets as well during Q3, with total capital raising in terms of both debt and equity being the lowest since Q4 of 2009, the depth of The Great Recession. Total capital raising for Q3 was $6.2 billion compared to $29.4 billion raised in the third quarter of last year. Inflation and supply chain issues: As we noted in our prior call, inflation continues to impact our operators in terms of labor and input costs, in addition to driving up the costs of construction for development and redevelopment activities versus original budgets. 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 are resulting in 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: In terms of recent Federal developments, while there is no substantive movement to report as it pertains to Federal legislation, we do want to touch on President Biden's announcement to pardon prior Federal offenses for simple cannabis possession and the directive to the HHS Secretary and Attorney General to initiate a review of how cannabis is scheduled under Federal law. While this was certainly an attention-grabbing announcement, the pardon for Federal offenses itself impacts a very small cohort of a few thousand, as a vast majority of convictions for simple cannabis possession are made at the state level. However, pardons constitute an action that cannot be undone by subsequent administrations. And so in a sense, this is the first permanent change to the Federal cannabis landscape in a very long time. There have been some who postulate this action as a potential factor contributing to the argument for notification of Federal laws pertaining to cannabis, with the basis being that the Federal government has not strictly enforced cannabis laws for years, and therefore it should be left to the states to decide. We find this an interesting viewpoint. Ultimately, it is unclear what, if any, impact this announcement will have on the various Federal legislative efforts in process. In terms of President Biden's directive to the HHS Secretary and AG to initiate review of current cannabis scheduling, while this does represent a potential road to rescheduling or de-scheduling, we think it is a road that will take years to travel, requiring significant clinical research and, of course, time-consuming litigation along the way. I'd like to now turn the call over to Ben to discuss our portfolio and investment activity in the third quarter and year-to-date.

Thanks, Paul. For this call, I'd like to cover certain characteristics of our property portfolio and tenant roster, in addition to discussing our investments year-to-date. As you know, we own 111 properties across 19 states, comprising 8.7 million rentable square feet. Beginning this quarter, we have bifurcated our portfolio between our operating portfolio consisting of 109 properties and construction in progress or CIP, comprising the two development projects previously leased to Kings Garden, and the expansion project at one property that Kings Garden continues to occupy pursuant to our settlement agreement with them. For the nine months ended September 30, 2022, we've collected approximately 97% of contractually due base rent and property management fees from our operating portfolio. The Kings Garden defaults in July contributed to a large majority of that 3% of uncollected rent. As we've noted in prior calls, in Vertical, a tenant of ours in Southern California that represents less than 1% of our total invested capital and contractual rents, has been making partial payments over time. As Alan noted, pursuant to the settlement agreement with Kings Garden, we regained possession of two properties that were under development. We signed an LOI for lease at one of the properties in a little over a month of marketing and look forward to working with that prospective tenant towards finalizing the lease. For our San Bernardino property, given the size and location of the asset, we are exploring all possible uses, including non-cannabis, to maximize the value of the asset in the current California market environment. Our operating portfolio's total cost basis, including commitments to fund future improvements, equates to approximately $272 per square foot, which we believe is substantially below replacement costs. Our operating portfolio is split between 67 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, 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 operating portfolio, properties with multi-state operators as tenants make up 85% of our invested or committed capital, while properties with public company tenants make up 55% of our invested or committed capital. Of our 109 properties in our operating portfolio, 15 were under either partial or full development or redevelopment or approximately 14% of our operating portfolio as of September 30, constituting approximately 1.6 million rentable square feet, with a weighted average lease length of 15.5 years for the operating 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'll continue to monitor their progress closely in the coming months. In terms of investment activity, in the first three quarters of this year, we acquired nine properties and executed lease amendments to provide funding for improvements at nine properties, representing a total investment commitment of about $369 million. In addition, as Alan noted, we executed our first property disposition earlier this week, selling a Pennsylvania property that we originally acquired in 2019 and leased to Maitri, a private single-state operator, for $23.5 million or approximately $461 per square foot, which is, of course, the price per square foot well above our operating portfolio average of $272 per square foot and above what we originally paid for the property including funded improvements. While we are firm believers in the Pennsylvania market, in our view, this transaction presented an attractive opportunity to strategically recycle capital into other opportunities with superior risk-adjusted returns. While we are, of course, focused on long-term ownership of our properties, we will continue to evaluate our portfolio and make strategic decisions based on the evolution of the individual state markets and opportunities that present themselves. In terms of expected additional investment activity, as always, forecasting investment activity in this industry is challenging. And as we've noted on our last call, we continue to expect the pace of capital deployment to be significantly lighter than prior quarters as we focus on the ability to raise capital on terms that we determine to be reasonably favorable, in light of the opportunities to place that capital. With that, I'll turn it over to Catherine.

We generated total revenues of $71 million for the quarter, a 32% increase from Q3 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 that resulted in base rent adjustments, and contractual rent escalations at certain properties. During the quarter, we did not collect contractual rents totaling $5.7 million from Kings Garden and Vertical, which includes approximately $5.3 million in base rents and property management fees and $369,000 in tenant reimbursements for property taxes and insurance. However, we did apply approximately $2.6 million from security deposits held by us for defaults by Kings Garden to partially offset this decrease. As we have indicated in the past, our Q3 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 September 30, 2022, we recorded net income attributable to common stockholders of $37 million or $1.32 per diluted share. Net income for the quarter was impacted by $2 million in litigation-related expenses incurred related to Kings Garden and the shareholder lawsuit filed earlier this year. You'll note that, for this quarter, we have added back this expense from our calculation of FFO to normalized FFO. 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 $60 million or $2.13 per diluted share. On October 14th, we paid our quarterly dividend of $1.80 per share to common stockholders of record as of September 30, equivalent to an annualized dividend of $7.20 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% on AFFO on a stabilized portfolio basis. For Q3, our payout ratio for the quarter was 84.5%. We also continue to issue draws for improvement allowances or construction development to our operators under our leases. As we have previously noted and discussed extensively on this call, these improvements are critical for the efficient production of quality cannabis products at scale. In Q3 of 2022, we funded approximately $35 million in draws submitted for improvements and construction activity at our properties. As Paul mentioned, inflation is impacting labor and input costs for operators, in addition to driving up costs of construction for development and redevelopment activities. We are also seeing construction delays with 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. That's just one example of these delays. We've seen electrical switchgear for properties under development or redevelopment take up to a year plus for delivery to the property after an order is placed. At quarter-end, we had approximately $2.6 billion in total gross assets, and a total of about $306 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 was 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 investment grade credit rating and have a debt service coverage ratio in excess of 15x. Finally, we'd like to note that our thoughts are with those impacted by Hurricane Ian. We've kept in close contact with our tenant operators in Florida leading up to the landfall of the hurricane and through the aftermath, and our properties sustained minimal damage. And with that, I'll turn it back to Alan.

Thanks, Catherine. 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, and our team's commitment to serving you all as owners of the company, every day, to effectively manage the company through the inevitable flows of the regulated cannabis industry. We certainly appreciate and value all of our long-term owners, and our team is singularly focused on the protection and enhancement of the value of this company for your benefit. With that, I'd like to open it up to questions. Operator, could you please open the call up for questions?

The first question comes from Tom Catherwood with BTIG.

Maybe starting with the Maitri asset sale. Very interesting to see that this quarter. Can you provide some more color around the transaction? What I'm getting at is, was this a reverse inquiry? Was this something you were evaluating your portfolio and decided to prune some of your assets? What was the driver behind this transaction?

It's a very interesting question or a good question. Keeping in mind that 85% of our tenants are MSOs and only 15% are single-state operators, with Maitri being one of those single-state operators. We are in constant contact with all of our tenants but primarily highly focused, given the dynamics of the industry and our single-state operators. An opportunity came about between my trader investors and owners, where it was a beneficial, win-win situation for them and for us to be able to transact. We took it upon ourselves to move forward with the transaction, which I do think is a win-win structure, in that they've reduced the need for the long-term lease or they eliminate their long-term lease, and we get the capital back to redeploy into even higher yielding, better quality operators.

And then maybe given the economic uncertainty, obviously, you mentioned in your prepared remarks. But are you seeing cannabis operators pause or delay their capital spending plans?

I believe that all industries and companies are currently using this period to reassess their operations, and the cannabis industry is no exception. A positive aspect of the cannabis sector is that revenues are projected to keep growing, with new states coming online. The revenue is expected to double by 2026. There are four new states considering adult use approval, and five states that will have measures on the ballot this week. With such growth and demand, the industry, while still in its early stages, presents significant growth opportunities.

I understand, and that makes sense, especially with the expansion of state programs. Paul, you mentioned that cannabis operators are increasingly turning to debt to fund these expansions. We've seen those yields rise, over 300 basis points, prior to the recent rate hike. Has there been a similar increase in yields for sale leaseback transactions or other deals currently available in the market?

Yes, I think, Tom, I think generally, we have seen an uptick commensurate with the rest of the environment. As we mentioned, the pipeline still remains very strong even at these increased yields. And Ben, do you want to give any more specific color on that?

Sure. I mean, as Paul said, we are seeing a similar uptick in yields for our capital. We're seeing tremendous demand for the capital, and back to your earlier question — part of why we were so excited to execute on the Maitri transaction to recycle that capital into extremely attractive, very high-quality opportunities.

Appreciate that color. And then last one for me, along those same lines of thinking of available capital to put to work. On the two larger Kings Garden developments, it looks like your basis in the assets is $10 million lower than last quarter and capital committed to the projects is down almost $28 million. Are these amounts now part of your uncommitted capital availability or are those kind of amounts still earmarked to those developments?

I think that, one, cash is ubiquitous and it goes in anywhere. It's cash that's come in, and we can use it in any way we have or any way we want to. I want to be very careful that we don't talk about the settlement and work at this point. We still — there are still things that we're working through, and we will look to talk about that in the months ahead. But we are excited about our availability of uncommitted capital and certainly the opportunities we have, as Ben said, in our very strong pipeline, with very strong operators.

The next question comes from Alexander Goldfarb with Piper Jaffray. Please go ahead.

Good morning out there. Just a few questions. First, maybe continuing on that line of questions. Can you just give a sense of the economics of the backfill on the one warehouse, and your thoughts around the other? Just it's great to see trades. Obviously, the Pittsburgh one is great. But just would be useful certainly to get a sense of the ability to reuse and whether or not the sites are worth more or less?

Okay. Well, first, on the Pittsburgh transaction, certainly we sold that at a higher price than we originally paid for. So there is one very strong data point. Also, what we sold it for on a per square foot basis is certainly higher than we have in many of our other assets in that market and across the country. Third, on the asset — the development asset that we have from Kings Garden, we are very, very pleased with the economics associated with the LOI. This letter of intent is just a letter of intent, and we're moving as quickly as we can to finalize the lease. I just want to make sure that people understand that nothing is done until we actually have a definitive agreement. But we are very, very pleased with the economics associated with that transaction.

What about the remaining one that you're going to reevaluate for alternative uses? How does your basis compare to what alternative uses would be?

We think the basis in it is below what other industrial commercial buildings in the market traded for in the past. So that's one good thing. The fact that it's on the 215 Freeway, the fact that a freeway adjacent that has visibility all play to the quality of this asset. We are in the preliminary stages of trying to maximize that value for our shareholders, and we hope to have more information to come in the next 12 to 18 months.

Okay. Next question is on the security deposits, and just thinking about fourth quarter and going forward. Is there any security deposits left remaining? Or should we think about fourth quarter being down, sort of call it whatever roughly 3 million?

Can you clarify left in what are you referring to?

You used security deposits? Sorry about that. Landline, we still have. You guys have security deposits that you applied against the Kings Garden rent, I'm assuming that you've exhausted those security deposits? So, for the fourth quarter, it sounds like rents the quarterly episode will be going to be down by the amount of those security deposits that were applied in the third quarter, is that the case.

Yes. We have applied our full security deposit. But beyond that, we're not able to comment due to the conditional settlement.

And then just two other questions. One is going back to the comments that you guys talked about out in California. It's good to see the AG out there going after the illegal market. But just curious, do you have exposure in those markets, one or all the tenants current? Two, are these all markets that you would continue to expand in? Or is your view that as you grow the company, you're going to reduce exposure to the unlimited licensed markets?

So maybe as reported, we've collected the rent, we've collected the rents, and in those markets, all of our tenants are current as of today. But what I want you to focus on is the geographic location of these tenants. And I think that we want you to understand is that when we're making these investments, yes, we're making them in geographic locations, which we think are high-quality locations and mission-critical facilities. They are mission-critical facilities for the tenant operators. Why we're so focused on the fact that 85% of our tenants are multi-state operators, benefiting from a broader market than any one specific market. We believe that has helped us generate one of the highest quality portfolios of tenants. As a matter of fact, as you can see on Page 14 of our financial supplement, public tenants within our top 15 tenants have a combined market cap of over $9.7 billion as of the end of the third quarter. The public tenants within our top 15 tenants reported at the end of the second quarter revenue of over $1.4 billion and an annual run rate of over $5.9 billion. Lastly, of our top 15 tenants, all the public tenants reported positive adjusted EBITDA in the second quarter. So what we're saying is that we have very strong tenants, and why we focus on the MSOs, because any individual market might have up or down periods at any time.

And then just a final question, Sentinel, obviously, is a big issue that's been in the news. Are you seeing anything whereby the licensed dispensaries are benefiting, so your tenants are seeing bigger demand because people trust the quality of the product they're getting there versus buying on the street? I'm just curious if there's been any sort of uptick because your tenants obviously have extreme quality controls, whereas people who buy products on the street don't know what's getting mixed in there. Have you seen any change in that or not really?

Well, I think that's an interesting data point and an interesting situation that is out there, and yes, our tenants do go through a tremendous amount of scrutiny and regulation to produce their products and make sure that not only the product is pesticide-free and has any environmental factors associated with the product. But the product, in that sense, we think that there is a lot of confidence in the product that our tenants provide. They specifically say that any one factor has increased revenues. I don't think we can say that, but what we can say is that revenues are expected to double by 2026.

Our next question comes from Scott Fortune with ROTH Capital.

Just want to follow up on some comments about your pipeline. We've seen the cost of capital for the cannabis industry increase here and many of the top MSOs are cutting around their CapEx plans here, cost of capital. We saw two deals around 12%, 13% from that side, that rate. But overall the demand, is this causing more incoming calls for your pipeline for sale leaseback for these well-capitalized operators? Can you just quantify or overall interests in demand for potential sale leaseback opportunity pipeline versus kind of last year or a couple quarters ago?

Yes, our pipeline is very strong and continues to be strong for several reasons. When we commit to a transaction, our tenant partners know we follow through, which has built our great reputation. This reputation comes from a very experienced management team that has been in the cannabis real estate industry for a long time, and we actually have the longest tenure in that field. The demand for capital remains robust and at attractive rates. Ben will provide further details.

Yes, sure. Scott, I mean, we are continuing to see tremendous demand for our capital. I think a lot of the top operators in the industry recognize the value that we bring through our reputation, the value of being able to source non-dilutive capital in a very challenging environment. We're very excited about our ability to capitalize on that given, as Alan mentioned, the management team we have in place, extremely strong, flexible balance sheet that we have, and just tremendous amount of opportunities in the industry.

I appreciate the color. And then just kind of a follow-up on the health of the tenant base here in this type of capital market. You mentioned kind of single-state operators or the smaller tenants that are maybe under a little more pressure to meet debt obligations, obviously, the drawn debt here and potential defaults there. Do you work with the lenders with the companies two of the account companies potentially? And what is the process of an operator defaulting on debt outside of your side, and lenders kind of go down the process of forced liquidation? Is there recourse for IIP there? Can you kind of step us through on those types of small tenants that you might have to work with?

If someone defaults on a loan, it doesn’t necessarily mean there’s a default on our lease as long as they continue to pay our rent. Many of the debt lenders act almost like partners with these tenants, taking into account the overall structure of each tenant to support their success in repaying their debts and continuing operations. This partnership approach ultimately benefits us.

Got it. And then last real quick question for me, probably for Paul. Can you provide a little color? I mean, some nice steps by the Biden administration, right? There are federal efforts around potential C plus coming on board here, to free up potentially institutional capital in the capital markets to help your tenant base. More specifically, with your New York Stock Exchange listing, are you seeing more discussions with the exchanges with potential uplisting with the tenants in your portfolio and kind of in light of the Canopy Growth statement with the USA structure there? Can you provide maybe a little bit more color on what the exchanges need to get to besides the explicit Safe Harbor language to move forward with uplifting? Does SAFE with a new Cole Memo provide enough cover for that or comfort that for listing? Just kind of little more color on your thoughts around if it's a job listing to help out your tenant base there?

Sure. The short answer is that the exchanges have stated that unless there is significant movement at the federal level regarding de-scheduling or re-scheduling, they will not open up. The question then is what Canopy is doing with the Toronto Exchange, which is interesting. However, we noted that NASDAQ has objected to Canopy USA uplisting. That’s the latest development. It's a fluid situation, and it will be interesting to see if there is any movement towards the Toronto Exchange. Regarding SAFE, Senator Schumer mentioned on Sunday that they were 'very close' to passing it. However, his credibility on whether those bills will pass is questionable. With Biden’s announcement to reexamine the scheduling and some progress on SAFE, we believe that SAFE or SAFE Plus has a better chance in the lame duck session. But concerning any Safe Harbor language for the exchanges, we do not believe that will be included in SAFE or SAFE Plus at this time. If we consider the process for getting SAFE Plus with some protection for the exchanges, it must go through Sherrod Brown’s committee, and he has expressed that he does not want to include any language favoring banking unless it includes significant social equity components. We find ourselves back at the same issue we have faced for the last two years, balancing social equity with capital market access. Thus, if something gets done in the lame duck session, it will likely be a very straightforward SAFE without capital market access.

The next question comes from Eric Des Lauriers with Craig-Hallum Capital.

First one as a follow-up on the Pennsylvania disposition. Just wondering how you're thinking about other potential properties that might be available for sale. You guys obviously sort of called out how they are one of the single-state operators in your portfolio that represents just 15% of the overall capital. Should we think of potential properties for sale as only those belonging to single-state operators? Just any additional color on sort of what you consider as potentially available for sale for your properties?

I mean, I think that we don't, we're not looking at trying to sell anything that we've recently acquired unless there's a strategic reason behind it. I think that you could be, we have our San Bernardino asset that we have held in development, and we could be looking at developing that. Or we could be looking at selling that asset. But in general, I think we're very pleased with the quality of our assets on our tenants to date. We'll look at one or two assets strategically for sale if it makes sense.

Eric, does that answer your question? Do you have more questions?

Yes, it does. Thank you. I was on mute. Thank you. You've previously described your sort of the decreased acquisition activity, despite your strong pipeline, as essentially a widening of the bid and ask spreads. I guess first question, are you noticing that spread narrowing at all as these markets sort of readjust to higher rates? Are you seeing a bit more of an agreeance on potential cap rates for these properties? And then, second question, would you characterize the negotiations with your potential investors in the same way as sort of strong demand, but a widespread here?

I think the best way to answer that is that we've gone from an acquisition program of consistent quarter-over-quarter acquisitions to a very opportunistic model. Where we're being very judicious in deploying the capital that we do have available to us to the best operators that we can and being careful a bit as to our thoughts on future capital, even though that we do have access to capital from that our investors are positively looking at the way we're deploying the capital. They’re being a steward of that capital, but the general market requires us to, I think, become more opportunistic.

Okay, that certainly makes sense. So I suppose, you know, in terms of us thinking about 2023, 2024, etc., not that you're giving guidance or anything like that, but I guess the proper way to be thinking about this is more of a probably discontinued opportunistic acquisition pace as opposed to, okay, we have maybe a two, three, four-quarter kind of wall, but then we get cashed up and go on, sort of continue our normal acquisition pace. It should be more the former than the latter, if I'm understanding correctly?

Right. Unless your crystal ball is much clearer than mine, and then you can actually tell me what's going to happen in 2023 in the first quarter, because if you can, we should take that offline and have a really good conversation. But we just believe that there's a lot of uncertainty in the market, and we think that it's going to take some time for that uncertainty to become more clear. And once that happens, we can certainly discuss our acquisition pace at that point.

This concludes our question-and-answer session. I would like to turn the conference back over to Alan Gold for any closing remarks.

Thank you, and I'd certainly want to thank you all, our stockholders for your support and your continued support. All the people who have asked questions on the call, thank you. Very good questions. Most importantly, I want to thank the team for all their continued hard and dedicated work during these interesting times that we're in. And so with that, thank you all. We sign off.

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