Innovative Industrial Properties Inc Q4 FY2022 Earnings Call

Good day and welcome to the Innovative Industrial Properties, Inc. Q4 2022 Earnings Conference Call. Please note that today's event is being recorded. I would now like to turn the conference over to Brian Wolfe, General Counsel. Please proceed.

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, Chief Investment Officer. Before we begin, I'd like to remind everyone that statements made during today's conference call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors. Please refer to the documents filed by the company with the SEC, specifically the most recent reports on Forms 10-K and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, on today's call, we will discuss certain non-GAAP financial information, such as FFO, normalized FFO and adjusted FFO. You can find this information, together with reconciliations to the most directly comparable GAAP financial measure, in our earnings release issued yesterday as well as in our 8-K filed with the SEC. I'll now hand the call over to Alan. Alan?

Thank you, Brian, and welcome, everyone. Today we are pleased to discuss our results for our seventh full year of operations and our recent activity. As reflected by our total revenue growth of over 35% over 2021, the company performed well in 2022, especially in the context of the significant macroeconomic headwinds experienced across industries and in the regulated cannabis industry in particular. That financial performance drove dividend growth per share of 24% over 2021, totaling $7.10 of dividends declared over the course of 2022. We also closed on a new acquisition with TILT in Pennsylvania earlier this month, as well as lease amendments for additional real estate improvements at our properties in New Jersey and New York with Ascend, PharmaCann and Goodness Growth. Ben will provide additional detail on those transactions, and on additional portfolio activity and statistics. As we enter 2023, we continue to see headwinds for the regulated cannabis industry, driven by a number of factors that Paul will touch on in detail. Price compression and a restrictive capital markets environment, along with inflation on inputs and construction costs, are driving many companies, including larger MSOs, to streamline their operations. This is no doubt a challenging time for the industry we serve. We are steadfast in our belief of the long-term growth prospects and future of the regulated cannabis industry, with longer-term projections still for double-digit growth and certain Eastern states driving growth well in excess of that average with expected introduction of adult use programs in the near future. In fact, notwithstanding the many challenges faced by the cannabis industry in recent months, U.S. legal cannabis sales are projected to grow 14% in 2023. As we noted in our January 2023 press release, certain tenants are experiencing difficulties and have defaulted on their obligations to pay rent. Paul will discuss the status of those situations. And we are here to answer any questions you have to the extent we can. That said, the vast majority of our tenant base continues to perform and we expect that these near-term challenges will contribute to driving operators to be more and more efficient. As with any industry, there will be ebbs and flows, and I'm proud of the way our dedicated and experienced team has responded and managed through the challenges that our industry has faced in recent months. I will now turn the call over to Paul to discuss licensing and industry dynamics. Paul?

Thanks, Alan. Before I delve into our perspective on market dynamics, I'd like to touch on the properties where tenants have not paid rent. We're, 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 advisors in these situations, commenced legal proceedings for damages and possession, and are in discussions with applicable regulatory agencies. We expect each process to be different in both duration and complexity, depending on the nature of the state licensing program and the rules and regulations governing cannabis licensing, as well as the current and projected state market dynamics. In many states, re-leasing is a new concept for cannabis licensing authorities, with many programs launched only in recent years. With our veteran team internally, in combination with our advisors across a spectrum of specialties, we are confident in our ability to successfully navigate these situations. We have commenced litigation for recovery of damages and possession against Green Peak at our Summit property in Michigan. We have also filed two actions against Parallel for possession and damages at our Pennsylvania property, as well as an action at our Parallel Texas property, which is in the early stages of the development process. Parallel failed to pay rent on the Texas property for the first time in February, and we commenced an action against them as soon as they defaulted. Each of these situations is highly variable. But as we progress through re-leasing our properties, we will endeavor to share as much detail as we can. Green Peak is current on their rent obligations at all other properties that we leased to them and Parallel is current on the two other properties we leased to them in Florida. As for Kings Garden, as we noted in our operational update press release in January, they continue to occupy and pay rent on four properties and are exploring a potential merger transaction. Market developments. As we have discussed on past calls, we continue to see price compression on regulated cannabis products, with that compression more pronounced in certain states, driven by supply and demand dynamics, the relatively uninhibited illicit market, challenging taxation at all levels of government, and general macroeconomic conditions. To give a sense of the magnitude of the change, according to cannabis benchmarks, the volume-weighted average spot price of cannabis in the U.S. for the last week of 2022 was $967 per pound, down nearly 30% from the same period in 2021. As an example of the illicit market issues, it was reported recently that as many as 1,400 shops are operating in New York City alone, illegally selling cannabis products, while only one was actually licensed and open for adult use at the time the data was released in January. This gives you a sense of the issues surrounding illicit sales and the lack of meaningful enforcement, and the priority that we believe state and local governments need to place on supporting the regulated cannabis industry with more reasonable taxation and regulation frameworks, and by taking meaningful steps in tackling the illicit market. And this is certainly not a New York-specific issue; while the U.S. regulated cannabis market reached an estimated $26 billion in sales in 2021, New Frontier Data estimates the size of the U.S. illicit cannabis market in 2021 was approximately $70 billion, an order of magnitude nearly three times greater than the regulated market. Capital availability. As we have been reporting for some time now, financial markets have turned restrictive, with the rapid tightening of monetary policy that really accelerated through the back half of last year. The impact of that restrictive environment has not dissipated in any way, especially as it pertains to capital availability for the regulated cannabis industry. Capital raising across the cannabis industry continues to be extremely challenged, with total capital raised in 2022 down over two-thirds compared to 2021 for U.S. regulated cannabis operators, and the beginning of this year is showing little improvement, with capital availability remaining at multi-year lows. Cannabis equity prices, as measured by the leading cannabis ETF MSOS, were also down over 85% as of year-end 2022 since their February 2021 peak. This dynamic is also evident in M&A activity, with transaction volume for 2022 down over 70% versus 2021. As we noted on our prior calls as well, capital availability in the public REIT markets also diminished considerably in 2022, with the decline steepening through the back half of 2022. U.S. REITs raised $41.5 billion in debt and equity in 2022, compared to $133.6 billion in 2021, marking the lowest year since 2009 in the depths of the Great Recession. Inflation and supply chain issues are also continuing themes, as well as the impact of inflation on our operators' input costs and the cost per development projects. While we are seeing some loosening of supply chain issues and some limited relief on pricing, we still see extraordinarily long lead times for certain key inputs in our development projects, particularly electrical switchgear, which are causing significant delays in project completion. Of course, these challenges have the effect of requiring the operator to put up more capital to complete the project and/or resulting in delays in revenue generation as projects take longer to complete. In combination with the current environment of limited capital availability, this continues to be a significant obstacle for certain operators. With all of these dynamics in play, cannabis operators across the spectrum have been focused on efficiencies, including right-sizing in certain areas with prevailing market conditions. This includes some of the larger operators who have announced consolidation or reduction in operations in certain states, including layoffs. State programs. Shifting to the adoption of state programs, we continue to see momentum in states that span the political spectrum. In November of last year, Maryland and Missouri both adopted adult use programs by popular vote. Meanwhile, adult use legislation is progressing in the Minnesota Legislature and there are expectations that Ohio, Oklahoma and Pennsylvania could legalize adult use cannabis this year. In Florida, the Smart and Safe Florida organization supporting adoption of an adult use cannabis program in the state has collected sufficient signatures to trigger review of the proposal by the Florida Supreme Court in anticipation of putting it forth via constitutional amendment for voters in November of next year. Federal legislation. In terms of long-awaited federal legislation, the cannabis industry continues to experience roadblocks in achieving any meaningful progress. The SAFE Banking Act, of course, was blocked again from both the annual defense spending bill and the omnibus spending bill in recent months. With Congress now divided, with Republicans holding a slim majority in the House, and the Senate majority being Democrat, and with the factions squaring off within each party, we continue to see significant challenges in successfully bringing forth meaningful federal legislation addressing issues of the cannabis industry, even though there is bipartisan support on many of those issues. I'd like to now turn the call over to Ben to discuss our portfolio and investment activity for 2022 and year-to-date 2023. Ben?

Thanks, Paul. For this call, I'd like to cover certain characteristics of our property portfolio and tenant roster in addition to discussing our investment activity in 2022, and year-to-date. At year-end, we owned 110 properties across 19 states comprising 8.7 million rentable square feet. As noted on our prior calls, of these 110 properties, 108 properties are included in our operating portfolio. No one tenant represents more than 14% of our total invested capital, and no state represents more than 16% of our total invested capital. Multistate operators make up 85% of our total portfolio, and 55% of our operating portfolio is leased to public company tenants. The total amount of capital invested and committed across our operating portfolio equates to $272 per square foot, which we believe remains significantly below replacement costs. To note, these statistics do not include our additional investments this month, which I will discuss in some detail. For fiscal year 2022, we have 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. And as we noted in our update press release issued in January, Vertical, Parallel, one of our properties in Pennsylvania; and Green Peak, one of our properties in Michigan, constituted the remaining balance of uncollected rents in 2022. To recap, for the full year 2022, we acquired nine properties and executed lease amendments to provide funding for improvements at 12 properties, representing a total investment commitment of about $394 million. As you may know, we also executed our first property disposition in Q4 of last year, 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 well above our operating portfolio average of $272 per square foot and above what we originally paid for the property, including funded improvements. For this transaction, we recognized a gain on sale of approximately $3.6 million. We also then entered into an agreement to sell our properties previously leased to Vertical in Needles, California earlier this month with seller financing to a third-party that is taking over cannabis operations. This month, we closed on a sale leaseback transaction for a 58,000 square foot fully operational cannabis facility with TILT in Pennsylvania for $15 million. We acquired our first property with TILT in Massachusetts in May of last year. Concurrent with our closing of the Pennsylvania transaction this month, TILT refinanced or retired its legacy debt, substantially reducing its overall leverage and extending out the maturity on its primary debt obligations to 2026. Last week, we committed an additional $34 million of capital for improvements at three projects, each of which resulted in a corresponding adjustment to base rent that starts immediately. Those include $15 million in additional funding for Ascend at its New Jersey facility, an additional $15 million for PharmaCann at its New York property, and an additional $4 million to Goodness Growth at its New York property. We also negotiated cross-default provisions on all leases for each of those three tenants. As Paul discussed, we initiated litigation proceedings against Parallel at the properties in Pennsylvania and in Texas, and against Green Peak at one of our properties in Michigan. The timing for resolution or re-leasing of those properties is uncertain, but we will keep you informed as much as we can as we progress. We had committed approximately $158 million to these three properties, which together represent approximately 7% of our total invested and committed capital. However, Parallel’s Texas property has been under development and is yet to commence vertical construction, with only around $8 million funded to date, including the site acquisition, although they have been paying full rent on the full amount of committed capital to that project since October of 2021. Therefore, approximately $90 million that we previously committed to the Texas project, and approximately $12 million we previously committed to the Michigan project, has not been spent on those projects. In terms of expected additional investment activity, as always, forecasting investment activity in this industry is challenging. As we noted in our last few calls, we expect to continue to be opportunistic with our investments as we focus on the ability to raise capital in terms we determine to be reasonably favorable in light of the opportunities to place that capital. With that, I'll turn it over to Catherine. Catherine?

Thank you, Ben. For 2022, we generated total revenues of $276 million, an increase of 35% over 2021. The increase was driven primarily by the acquisition and leasing of new properties and additional real estate infrastructure allowances at our existing properties, totaling $394 million in 2022, as well as contractual rent escalations at certain properties, offset by the previously disclosed non-collection of rents primarily associated with the defaulted tenants. Rental revenues for 2022 also included $3.2 million of security deposits applied for payment of rent for leases with Kings Garden in California and Sozo in Michigan, which we previously disclosed. Although we have the right to draw upon the security deposits that we hold for any of the defaulted properties, we have not yet done so for Parallel or Green Peak. As we detailed in our earnings press release issued yesterday, rent collection for our operating portfolio was 92% for the first two months of 2023, 94% for Q4 of 2022, and 97% for the full year of 2022. In 2022, we recorded net income attributable to common stockholders of $153 million or $5.52 per diluted share. Net income for the year was impacted by $3 million in litigation-related expenses incurred primarily related to King's Garden and the shareholder lawsuit filed in 2022. Consistent with Q3, we've added back this expense from our calculation of FFO to normalized FFO. Adjusted funds from operations for 2022, which adds back non-cash stock-based compensation and non-cash interest expense related to our unsecured senior notes to normalized FFO, was $234 million or $8.45 per diluted share. Of course, FFO, normalized FFO and AFFO all exclude the $3.6 million gain on the sale of one of our Pennsylvania properties in Q4, which was previously leased to Maitri. On January 13th, we paid our quarterly dividend of $1.80 per share to common stockholders of record as of December 30th. The common stock dividends declared in 2022 totaled $7.10 per common share, and represented an increase of $1.38 or 24% over dividends declared in 2021. Our Board continues to target a dividend payout ratio of 75% to 85% of AFFO. For Q4, our payout ratio for the quarter was 85%. At year-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 May of 2026. Our debt to total gross assets ratio was 12% at quarter end, and our total fixed cash interest obligation was a little over $4 million per quarter. We've maintained our investment-grade credit rating and have a debt service coverage ratio of over 15x. And with that, I'll turn it back to Alan. Alan?

Thanks, Catherine. I'd like to note the following in closing. We are steadfast believers in the long-term growth and success of the regulated cannabis industry. As with any industry, there will be challenging times that will push industry participants to drive for further efficiency in their operations and strengthen their brand. We believe our facilities are well positioned to address those needs, with well-developed, highly-controlled environments for the production of distinguishing products that are the long-term driving force for brand recognition, and the capacity to produce efficiency at scale. And with our experienced team of dedicated professionals and advisors, I'm confident in our ability to successfully navigate the inevitable ups and downs of this industry. As always, we thank you sincerely as long-term owners of our company and for your steadfast support throughout these years. With that, I'd like to open it up for questions. Operator, can you please open the call up for questions?

First question comes from Tom Catherwood with BTIG.

Alan, I appreciate your comments at the outset. And then Ben, you touched on it as well about the complexities of the legal and re-tenanting process for both Parallel and Green Peak and how that really differs by state. Can you help us, though, understand, maybe the litigation process a bit better? Does eviction come first, and then there's hearings on damages or is the task intertwined, and therefore it could take even longer for you to potentially get the assets back under your control?

Yes, I think that's a very complex question. And since it's really complex, I'm going to turn it over to Paul, because he can handle those.

Well, thank you, Alan. So Tom, I think you're getting it. Typically, in jurisdictions when you file unlawful detainer, possession gets priority. And so that's what we're seeing in the three jurisdictions where we have filed in Texas, Pennsylvania and Michigan. The possession cases will be heard sooner than the damages cases. In each of those jurisdictions, they're separate. So we have filed in each of those jurisdictions for possession and we do have hearing dates coming up in the next two or three weeks in each of these jurisdictions for possession. We do anticipate that we will get a judgment in our favor for possession, and then we will execute immediately to get possession. I want to stress that we have moved as quickly as possible. We have retained local counsel who are experts in their jurisdictions and the local laws regarding unlawful detainer eviction. So we’re very pleased with the speed that we're able to file these actions and we look forward to getting possession of the assets as soon as possible. Then following those possession cases come the damages cases. Those typically follow a more typical timeline, probably 12 to 24 months before we get any resolution on those. So again, we're filing those with all due speed and obviously, we'll keep you advised as those matters develop.

And the company is using all its expertise and diligence to mitigate those damages through a variety of processes, including re-leasing, reselling, or selling any assets that we can.

Appreciate it. Really, really helpful to understand that. And then maybe Cat along the same topic, you mentioned not having to apply the security deposits from Parallel and Green Peak to the back rent. Are you restricted on that use or is there a different strategy and approach here?

Again, I think this is a complicated question. And it really has to do with the litigation for possession. Is that right, Paul?

Yes, it is, and each jurisdiction differs somewhat. But you want to be careful, especially when you're trying to get possession, because you don't want to complicate the case at all, since some judges will look for a reason not to grant eviction, as some jurisdictions are slanted in favor of tenancy. That's why we're being very cautious with regard to when we do reach the security deposits. But rest assured, the security deposits are 100% in our control. When we feel and local counsel feels it is appropriate to tap those security deposits, we will.

Got it. You've been incorporating cross-default provisions into your lease amendments recently. Can you explain how those provisions work and what portion of your leases currently includes them?

I mean, I think they work in such a way that if someone defaults on one lease, then they have basically defaulted on all their leases. So there's no picking and choosing which project they may be struggling with. All their leases are at risk, putting the entire company at risk. Companies that enter into those cross-default provisions do so very carefully, very consciously, and with a great deal of thought and negotiation. Right now, we believe that over 38% of our revenues are subject to cross-default provisions.

And then the last one for me. Just going back through the fourth quarter operating and investment recap that you put out in mid-January, it looks like there were roughly $157 million of transactions under PSA or LOI. So far, Ben, I think you have covered $49 million of transactions that have closed this year. Some of which seem to be above and beyond that original $157 million if I'm reading it correctly. How is your acquisition pipeline sizing up right now? And then what are your thoughts on funding that as we get through 2023?

Go ahead, Ben.

Yes, talking about the pipeline in general, obviously, there's always ebbs and flows. But just as a general comment, there continues to be a tremendous amount of demand for capital in the industry overall. So we feel the pipeline is very healthy and we're being very opportunistic and thoughtful in our approach as to which of these transactions we are evaluating that we ultimately want to move forward with.

The next question comes from Connor Mitchell with Piper Sandler.

So first, obviously, there are a lot of moving pieces here with different tenants and properties, either defaulting or maybe becoming current again. So would it be possible for you guys just to provide a brief update on the old back rent on situations such as Kings Garden or Sozo in the repayment of the security deposits?

We have around 28 to 30 tenants, so it's manageable. Regarding Sozo, they received some relief and we utilized three months of their security deposit for rent, so there isn’t any back rent owed from them. However, they are obligated to replenish that security deposit over the next year, and we anticipate they will fulfill that. The concept of back rent is unclear to me based on your perspective, and I would like to gain more insight into your reasoning, as we have been able to collect rents. The rents that have been collected are on track, and the ones not collected are in default. The tenants currently in default are Kings Garden, Green Peak, and Parallel, and we are actively addressing those cases. We need to determine what portion of our total revenue they represent and will follow up on that.

And then regarding Kings Garden, Parallel, they both defaulted on developments. So, I guess, is there any change in how you guys are approaching these investments or whether you're becoming more cautious about new development investments? At the same time, how do you compare that to the risk profile of funding incremental existing asset expansions and CapEx in that matter?

Yes, I mean, I think we're being opportunistic and cautious in evaluating every transaction. But our business is to provide capital for this industry. The way this industry works is that when a new state obtains permission to go ahead and do medical cannabis, or even adult use cannabis, those products, those buildings, those facilities didn't exist before. So there is an absolute need. And that is why we are in existence, and it is the opportunity for us to generate what we think are above-average returns for what we still believe is below-average risk. We still have five or six developments that are still being finished, and they are proceeding very well. We still believe that this is a good business line for us. And that's how we were able to generate with approximately 17% of our invested capital in 2022, a 35% year-over-year total revenue growth.

And then maybe just one more for me, regarding the definitive sale agreement for the Vertical property, it seems all in California, so I guess, just hoping you guys could give a little bit of insight into how you're viewing the California market nowadays compared to other markets? And whether there's any insight you can provide as to the transaction process, and the sale of the Vertical property? Whether it has to do with the previously disclosed defaulted, whether that had an impact?

Certainly it had an impact. We've been discussing and talking about Vertical for at least a year plus, and we've been trying to figure out the best approach to deal with the Vertical transaction and try not to commit further to it by providing more capital. We've been working with the tenant on a variety of bases, including helping them find alternative capital, and they found alternative capital. That capital came in at the facility, which needed some additional investment to fix some of the things that the previous owner didn't do properly. The new investor, in order to put in that capital, wanted to own the asset instead of being in a long-term sale leaseback transaction. So, we came up with what we thought was a very creative way for us to continue receiving a very attractive yield on our capital and allow this new investor to continue to invest in the property, making it a successful opportunity. Should something untoward continue to happen in that market, we'll have an asset that has additional investment that has been put in, not by us, and a lower basis, enhancing our ability to recover our investors' capital and a return on that capital.

The next question comes from Scott Fortune with ROTH Capital.

Just sticking on that note, can you provide color on the tenants or potential buyers out there who are looking to take over these California properties or potentially properties in Pennsylvania and Michigan? We take it that these are known existing tenants with solid balance sheets looking to add production and take market share in these tough markets. Just want to get a sense for the health of potential re-leasing or even buying assets and if you are considering selling properties in tougher markets or continuing to manage by re-leasing?

I think that goes to the back half of the question regarding what is going on in the California market. The California market remains difficult. Paul?

Yes, Scott, I know you know California well. It still remains a challenge. However, we have tenants in the portfolio that know how to navigate the California market. There is money to be made in the California market if you understand how to do it. So when we look at the global market, California can look bleak, but we do have some positive signs. Legislative reform in Sacramento regarding taxation has been a positive change. There's been more funding for enforcement of the illicit market; those are all positives. We've also seen some stabilization of the spot market pricing, which is a positive. However, it's still very much a black market in California, just as it is in New York, Michigan, and Massachusetts. Those are the challenges that all these large markets face. But, as I mentioned, if you know how to navigate those challenges, you can be very successful in each of these markets.

As to our development asset that is subject to a letter of intent for a lease, it is proceeding very well. We hope to have a final lease in the near future. We're very positive about that situation. As for the other assets, certainly the Texas asset is one that we don't have control over and are going to be in the beginning process, but we do believe that the land site is in a quality industrial location, and has an Amazon distribution facility nearby. So there is value there. Additionally, we've collected approximately 81% of the asset value already in cash flow, not to mention the fact that we still have, if we regain control, the value of the asset to further enhance the return to our shareholders. We don't have control over the assets in Michigan or in Pennsylvania. However, we believe there will be a variety of opportunities for us to deal with those assets. Anything you want to add, Ben or Cat?

Yes, well, I would say, Scott, about your question regarding how to get some of these MSOs interested in these challenged markets, we look at it like it's almost a Monopoly board. These are strategic acquisitions by some MSOs that may not have a presence in a state and they want to establish one. They look at acquisition opportunities through M&A, perhaps to get into those markets. So, we're certainly aware of which players are looking for assets in these jurisdictions, and it's something we're actively working on.

And then one last quick one for me. Without providing guidance, you've highlighted the challenges in the near-term macro environment and uncertainty. You've gotten away from acquisitions more opportunistically. You're deploying capital around $25 million in the last couple of quarters, looks like $50 million this quarter to date. Is it fair to project a similar rate moving forward near-term? Just trying to understand when you might see strong demand or key factors for acquiring again for 2023?

It's extremely unfair to put any sort of budget or commitment, given that we've just spent a great deal of time describing the difficulties, not only with capital raising in the industry, but also for the real estate sector and how interest rates have significantly increased, which impacts our cost of capital. We have talked about a strong pipeline, but that pipeline is conditioned on our access to capital. We're exploring various avenues for capital, including secured and unsecured debt. We have other unique opportunities that we are looking into. As we progress down that path of exploring capital, we will match fund that with acquisitions as we have done in the past. Therefore, we won't provide guidance or indication regarding how many additional acquisitions we will make. Our management team remains highly focused on rent collections, recapturing value from transactions where we regain assets, and appropriately deploying capital when it makes the most sense.

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

So just kind of a high-level one for me. As we look out over the past year, it's clear that price compression risk and regulatory risk have increased. Looking at New York, it seems that a flip from medical to adult use doesn't always equate to outsized growth for existing operators. Can you speak to a high level on how these developments have influenced any changes to your capital allocation strategy? Or maybe it's changes to your lease terms? You’ve highlighted cross-default provisions, as we've mentioned. How have these developments influenced changes in which markets you're looking at and what kind of operators? Any high-level changes would be great.

We believe that the cross-default section is something that we are highly focused on. We haven't changed the length of our leases; we remain interested in new markets that limit licenses. Even if that change occurs in New York, we can't force the government to enforce the law on everyone. However, we are being opportunistic and focusing on the best operators with available capital. We've become much more cautious with new start-ups, hoping to grow into their space over time. Despite the cautionary tales, we still find this industry to be exciting. Even with all the challenges, we are still looking at new states such as Oklahoma, Ohio, Minnesota, Kentucky, New Hampshire, and possibly Pennsylvania with adult use. There are still great opportunities for us in this industry over the long term, as total revenue for the industry has increased by 13% to 14% for 2022 and is expected to continue growing in 2023 and beyond. We remain cautiously optimistic for 2023 while being very optimistic regarding the long-term aspects of this industry.

Appreciate that color. Lastly, regarding both cap rates and the annual step-up, some markets have seen pricing down around 50% year-over-year. Are there any prospects of those softening further in subsequent quarters if we do not see a material rebound? Wondering how you're weighing the pros and cons of attractive rates for you, but what's going on with your tenants in a challenging environment?

To remind everyone that we enter into sale leaseback transactions. We're focused on our yields, which remain accretive to our current cost of capital. As long as we maintain the ability to engage in accretive transactions, we are open to deploying capital in the future. We don't have a business model revolving around purchasing from current investors at whatever cap rate they prefer. We believe that cap rates for all real estate asset classes have increased with the U.S. economy's overall rise and the uptick in interest rates and cost of capital.

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. First, I want to thank the team for all their hard work. They have done a phenomenal job to get us to where we are today, and they have tremendous challenges as we move forward throughout 2023. I also want to thank our stakeholders and shareholders for their continued support. With that, I'd like to end the call. Thank you all.

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