Good day and welcome to the Innovative Industrial Properties Q1 2024 Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to Brian Wolfe, General Counsel. Please go ahead.

Thank you for joining the call. Presenting today are Alan Gold, Executive Chairman; Paul Smithers, President and Chief Executive Officer; David Smith, Chief Financial Officer; Catherine Hastings, Chief Operating Officer; and Ben Regin, Chief Investment Officer. Before we begin, I'd like to remind everyone that statements made during today's conference call may be deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995 and actual results may differ materially due to a variety of risks, uncertainties and other factors. Please refer to the documents filed by the company with the SEC, specifically the most recent reports on Forms 10-K and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, on today's call, we 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. We are pleased to discuss our results here today as we enter into our eighth full year of operations. The first four months of 2024 have been very productive for our team, with our focus on driving leasing activity and monitoring the completion of significant development projects at our properties along with continued support of our tenants and funding critical infrastructure improvements to both further enhance production capacity and efficiency and activate significant projects under development. In the first four months of 2024, the company executed new leases at four properties representing $69 million of invested capital and completed construction on three fully leased properties totaling 732,000 square feet. We also strategically divested our Los Angeles, California property, which was leased until the closing, with a combined consideration exceeding our carrying value of the property. As you may recall, that property was never fully built out for cannabis operations. Ben and Catherine will discuss this progress in more detail. The company notched another solid quarter in Q1, generating $2.21 in AFFO per share and further enhancing the company's liquidity position in the first four months of the year, with the upsizing of our revolving credit facility from $30 million to $50 million. While AFFO per share was down modestly quarter-to-quarter, we note that rents for the new leases we executed in late 2023 and year-to-date are not expected to commence for some months to come, as new tenants need time to obtain the requisite approvals to operate and transition into these properties, in addition to certain pre-leased properties under development, where construction needs to be completed. As we have reiterated in the past, we are really pleased with our capital position, especially in light of the macroeconomic environment impacting real estate companies and the cannabis industry in general. Our total available liquidity exceeded $200 million as of the quarter end and fully funds any remaining development commitments we have along with providing ample dry powder for additional strategic investments. As Ben will share in more detail, we are evaluating a number of promising new investments in several state markets. Additionally, we have one of the lowest levered balance sheets in the REIT industry at 11% debt-to-total gross assets. No variable rate debt, no debt maturities until May 2026. David will provide more detail as well as our financial results for the quarter and capital position. From a regulatory perspective, all eyes continue to be focused on potential rescheduling of cannabis from Schedule I to Schedule III under the Controlled Substances Act, with recent media reports indicating that the DEA is expected to agree with the HHS recommendation on this matter. Paul will discuss our thoughts in more detail on this rescheduling process, pending federal legislation and state level dynamics that we are seeing. I will now turn the call over to Paul to discuss market dynamics and regulatory developments. Paul?

Thanks, Alan. I would like to start with some general macroeconomic observations from our perspective that are impacting the regulated cannabis industry. 2023 was another year of strong growth in terms of overall unit volume for regulated cannabis sales across the United States. However, overall regulated cannabis sales growth from a dollar perspective was more subdued, given the price compression that continued through the year in many states. Although some of that price compression was driven by oversupply of regulated products in a particular market, we see much of the compression continuing to come from the illicit market. In particular, illicit grows in California that both compete within the state and have products that are transported across the country. All that said, the outlook for overall growth of the regulated cannabis industry remains robust, with MJ Business' most recent back book published in late April projecting overall U.S. regulated sales to grow from $32 billion in 2024 to $58 billion by 2030. At the same time, we are seeing some relief on those pricing pressures, which gives us more optimism for 2024 and beyond, as operators focus on the strength of their brands driven in large part by the quality and consistency of the products. We also believe that the push by many multistate operators to become more efficient and cost-conscious in this environment should bode well for their future financial results. From a state market perspective, we continue to see divergence in performance and dynamics with new markets experiencing high growth, while some mature markets become increasingly competitive, especially after the aforementioned extended period of price compression and the challenges in competing with the illicit markets. For example, as we noted on our last call, 2023 saw strong rollouts for adult-use sales in Missouri and Maryland, both of which also benefited from cross-border purchasing by residents in neighboring states, with either medical use-only programs or no program at all. Ohio, which legalized adult-use in November, is expected to commence sales this year and earlier than originally anticipated, perhaps in June. While Ohio is expected to be one of the fastest-growing markets in the near future and follows on the heels of very successful adult-use introductions in Missouri and Maryland, New York's adult-use program, which was introduced more than a year ago in December of 2022, has struggled. With total illicit and legal demand estimated in excess of $5 billion, New York's regulated sales in 2023 came in at well below $1 billion for the year. However, there have been certain recent developments that make us significantly more optimistic on the prospects for the New York market, including the ramping up of licensing for retail stores, stronger enforcement against illicit operations and regulatory authorities allowing incumbent medical use operators to begin wholesaling. I would also like to touch on two other states that are in the running for adoption of adult-use programs in the near term, Florida and Pennsylvania. In Florida, earlier this month, the Florida Supreme Court cleared the way for a legalization initiative on the November ballot. The threshold for approval of the measure is 60%, a relatively high bar, although I would note that Florida's medical-use program passed with 72% support. While polling has been both above and below that threshold, we will be closely following the progress there, noting that if passed, Florida legalization is projected to provide the largest incremental revenue and profit opportunity for MSOs compared to any prior state conversion. In Pennsylvania, adult-use cannabis legislation has bipartisan support and is also supported by the Pennsylvania governor, having been noted as a priority in the governor's February 2024 budget address. We are hopeful that action will be taken in the coming months, also given the fact that Pennsylvania is largely surrounded by adult-use states at this point with West Virginia as the exception. From the federal perspective, we are, of course, pleased to hear the recent media reports that the DEA is expected to take up the prior recommendation from HHS to reschedule cannabis from Schedule I to Schedule III. As we noted previously, the most important impact of that reclassification is expected to be the elimination of the 280E tax treatment, which would lead to an immediate significant boost to operator financials across the board. President Biden has made this an important issue for his administration heading into the election and he was the first President in the United States to address cannabis reform in the State of the Union address, so we believe there is significant momentum on this issue. That said, the DEA's proposed rule when issued will be followed by a public comment period before it issues a final rule. The timeline, election timing and any corresponding potential administration change may also come into play. Legislatively, we also continue to track the proposed Safer Banking legislation, which could allow, among other things, expanded lending opportunities for operators. Though a version of this bill has passed the House seven times and has been around for the better part of a decade, recent commentary makes us think there is some potential for movement here, including commentary from Senate Majority Leader Chuck Schumer that the Senate is working very hard to enact this bill later this year. Treasury Secretary Janet Yellen also recently commented in the House Committee hearing on the importance of passing reform legislation to address the banking issues presented by the current regulatory structure, which we think may also hold some sway in stressing the importance of resolving these issues. I'd like to now turn the call over to Ben to discuss our portfolio and leasing activity to start the year. Ben?

Thanks, Paul. For my prepared remarks, I plan to highlight our continued leasing progress for our vacant and under-development assets. Year-to-date, we've made substantial progress on this front, executing four new leases covering $69 million of invested capital in California and Michigan. In California, we've executed new leases for our 19th Avenue and McLean Street properties in Palm Springs with Gold Flora, an existing tenant of ours and a leading vertically integrated operator in California. In Michigan, as we noted last quarter, we executed an LOI for our Harvest Park facility prior to the move-out of the former tenant and earlier this quarter executed a lease with Lume Cannabis Company, one of the largest operators in the Michigan market. We also signed a lease in January for one of our three small retail vacancies in the state. We were very pleased with the demand we saw for these assets, the speed at which we executed new leases and a relatively minimal amount of incremental capital required for re-tenanting. We believe our ongoing execution on our leasing initiative supports our underlying thesis regarding the high-quality, purpose-built, mission-critical nature of our real estate portfolio. Moving on to our development portfolio. As noted on previous calls, we continue to explore potential development options for our San Bernardino property focusing on self-storage and we'll continue to provide updates on progress on future calls. For our land site in San Marcos, Texas, we executed an LOI for a short-term lease with one of our existing tenant partners in anticipation of potential new licenses being issued. As you may know, Texas currently has a limited medical-use program with only three licenses issued to date. While we remain optimistic that Texas will eventually adopt a more open approach to regulated cannabis activities and issue new licenses in that process, it remains uncertain. At our Pittsburgh, Pennsylvania asset, we continue to explore leasing options for the property and are closely watching developments as they relate to potential adult-use legislation, as Paul alluded to previously. Regarding new investment activity in the first four months of 2024, we executed three lease amendments to fund additional improvements at properties totaling $22.1 million, including $16 million for PharmaCann in New York, where PharmaCann is focusing on expanding production capacity after being awarded an adult-use production license late last year. In Ohio, we provided an additional $4.5 million improvement allowance to Battle Green to complete construction and expand their production capacity as Ohio gets set to roll out the adult-use program later this year. We also provided an additional $1.6 million to 4Front Ventures to round out the development of 4Front's 250,000 square foot production facility in Illinois. Battle Green in Ohio and 4Front in Illinois both recently received their temporary certificates of occupancy as Cate will touch on, with operations expected to commence in the near term. Finally, earlier this week, we closed on the disposition of our property in Los Angeles, which was leased up until the sale. We sold the property for $9.1 million and received a lease termination fee from the tenant of $3.9 million in addition to reimbursement of our closing costs in connection with the sale, with the total consideration exceeding the net carrying value of the property on our books. This property was never fully built out for cannabis use and we expect the sale to free up additional capital to recycle into other opportunities that we believe will provide superior risk-adjusted returns. In addition to our leasing activity, which has been off to a strong start in 2024, we continue to track a strong active pipeline where we are seeing a notable uptick in activity on the heels of some of the market and industry developments that Paul described. We are seeing demand for our capital across markets from those with near-term adult-use potential such as Florida and Pennsylvania to more established markets such as Maryland and Arizona. We are actively evaluating opportunities in these and other markets and look forward to executing on new investment opportunities on a very selective disciplined basis. With that, I'll turn it over to Catherine. Catherine?

Thanks, Ben. As Ben noted, we've made a lot of progress over the last few months on closing out or nearing completion on several of our tenants' major development projects. So far in 2024, we completed construction on three leased projects totaling $200 million of invested and committed capital: Vireo's 325,000 square foot expansion in New York, 4Front's 250,000 square foot ground-up development in Illinois and Battle Green's 157,000 square foot ground-up development in Ohio. We further expect to substantially complete the 23,000 square foot Corazon development project in California shortly, which is pre-leased, and the 104,000 square foot cultivation component of our Summit building in Michigan in the summer. As you may recall, the 97,000 square foot processing section of that building is approved for operations now, and the entire project is leased. In light of the challenges presented over the past few years with real estate development projects nationwide, we are very pleased to get these projects to the finish line and allow our operators to start generating revenues from these state-of-the-art facilities. Remember that under our lease structure, these tenants began paying rent during construction, which we've recorded in our revenues, but this is an important milestone for our tenants to ramp operations and generate cash flows in the facilities. Regarding our portfolio as of March 31 and pro forma for development properties placed in service subsequent to quarter end, we owned 108 properties across 19 states, comprising 8.9 million rentable square feet, including 647,000 square feet of development or redevelopment. Of these 108 properties, 103 properties are included in our operating portfolio, which was 95.2% leased at quarter end with a weighted average remaining lease term of approximately 14.8 years. Of the five properties under development or redevelopment, three were pre-leased at quarter end. Our portfolio continues to be well diversified with no one tenant representing more than 17% of our annualized base rent and no state representing more than 15% of our annualized base rent. We have relationships with some of the largest and most experienced operators in the industry, with our leased operating portfolio comprised of 90% multistate operators and 60% leased to public company tenants. The total amount of capital invested and committed across our operating portfolio equates to $277 per square foot, which we believe remains significantly below replacement cost. And with that, I'll turn it over to David. David?

Thank you, Catherine. For the first quarter, we generated total revenues of $75.5 million, a 1% decrease from Q1 of last year. The decrease was primarily driven by properties that were leased for all or part of the three months ended March 31, 2023, and properties that were not leased or were re-leased, but rent had not yet commenced during the three months ended March 31, 2024. As we noted in our earnings release issued yesterday, total revenues for Q1 also do not include $1.5 million in rent received during the quarter, but not recognized in total revenues due to a reclassification of two leases as sales-type leases starting January 1, 2024, as a result of lease term extensions that were executed for both leases. A modest decline in rental revenues was partially offset by activity in prior periods for the acquisition and leasing of new properties, additional funding and building improvements provided to tenants of certain properties that resulted in base rent increases and contractual rental escalations. It's also noteworthy that no security deposits were applied for the payment of rent during the three months ended March 31, 2024, while a total of $4.2 million of security deposits were applied for the payment of rent for Q1 of 2023. Revenues for the quarter were also down sequentially versus Q4 of last year, primarily related to a Q4 payment of $1.7 million received from a former tenant at one of our properties in Pennsylvania as part of a judgment in our favor for unpaid rent and a previously disclosed temporary reduction in base rent for 4Front at the Illinois property starting in January 2024, which was under development and had experienced significant delays in construction, primarily relating to bringing power to the property. For the three months ended March 31, 2024, we recorded net income attributable to common stockholders of $39.1 million or $1.36 per share. Adjusted funds from operations for the first quarter was $63 million or $2.21 per share, a decrease of 2% compared to the first quarter of 2023, driven primarily by the same factors that drove the 1% decrease in revenues period-to-period. AFFO was also down sequentially from Q4, again primarily driven by the $0.06 attributable to the $1.7 million judgment paid to IIP in Q4. Looking ahead, I would note that while we expect the leasing activity Ben discussed to contribute meaningfully to our long-term rental revenues, the timeline to rent stabilization may differ between the properties as there are state and local approvals needed for these transitions, additional regulatory requirements to be completed at certain assets and some level of rent abatement is negotiated to allow for ramping of our new tenants' operations. That being said, we are very pleased with our substantial activity on the re-leasing front, as Ben discussed in detail. On April 15, we paid a quarterly dividend of $1.82 per share to common stockholders of record as of March 28. As Alan noted, our dividend remained covered by our AFFO during the quarter with a payout ratio of 82%, which is in line with the Board's targeted payout ratio of 75% to 85% of AFFO. Turning to the balance sheet. At quarter end, we had approximately $2.6 billion in total gross assets and $300 million in fixed-rate debt, consisting solely of $300 million in unsecured bonds not maturing until May 2026. We continue to maintain credit metrics that are among the best in the entire publicly traded REIT industry with a debt-to-gross assets ratio of 11% and a debt service coverage ratio in excess of 16 times. On the liquidity front, we ended the first quarter with over $200 million of total liquidity comprised of our cash, short-term investments and availability under our revolving credit facility. We closed on this credit facility last October, which was at that time a $30 million three-year facility. We subsequently upsized the facility to $45 million in February and expect to increase the total capacity to $50 million by the end of this month. Our revolver remains undrawn as of today. We are also continuing to source new banking relationships to provide additional capital for the company. And with over 800 financial institutions providing services to the cannabis industry, along with recent reports of one of the top 20 largest banks in the U.S. entering the industry, we remain encouraged about our prospects to continue to expand our banking relationships. We are well positioned for growth as we continue to maintain a conservative and low leverage balance sheet, generate positive free cash flow and have continued to enhance our liquidity position through the closing of this new credit facility in Q4 and upsizing that facility in the first part of 2024. Finally, as a result of the investment activity that Ben mentioned, we opportunistically tapped our ATM program by issuing 123,000 shares of common stock for $11.8 million in net proceeds to further bolster our strong liquidity position and invest accretively into the opportunities that Ben discussed in his remarks. With that, I'll turn it back to Alan. Alan?

Thanks, David. I'd like to note the following in closing. We, as a company, are certainly not immune to the macroeconomic factors that have impacted the broader economy and the regulated cannabis industry in particular. But I am proud of our team and what our team has accomplished in continuing to execute on our plan to maximize the value of our portfolio for the benefit of our stockholders through our leasing, investment and disposition activities and to continually evaluate capital options with the goal of maintaining a strong balance sheet and liquidity position. We believe this core focus will serve our stockholders well over the long term. 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.

For the U.S. cannabis industry more broadly, I want to be cautious here and not sound too overly optimistic, but the bulk of operators reported an uptick in both retail sales and wholesale activity with their fourth quarter earnings and then there was kind of margin improvement across the board. How are you seeing operators respond to this modestly improved backdrop? And could we see a renewed cycle of CapEx spending on cultivation and manufacturing given the uptick in wholesale activity?

Yes. Thank you, Tom. It's a good question. And it really goes to our greater belief that while we've been going through some difficult macroeconomic environments that things are looking better, that there are green shoots and opportunities. But I'm going to turn it over to Paul and perhaps Ben to answer that question more directly.

Yes. It's Paul. So yes, I agree with Alan that when we talk to our operators, we are feeling a greater sense of optimism. And there are lots of discussions about expansion. And it's not only pricing stability, but I think we can't understate the excitement about the rescheduling likelihood and the potential impact on 280E tax treatment. So with those things combined, we are seeing a lot more interest and, of course, expansion conversations. I don't know, Ben, if you want to put some more color on what we're seeing pipeline-wise.

Yes, sure. And just, Tom, on your question about what the operators are doing, I think you can hear the optimism if you're listening to any of the earnings calls this quarter, whether that's Vireo focusing on their improved metrics or GTI yesterday talking about being able to play aggressive offense in the market given what they're seeing out there. I think a lot of these companies are poised to get back into expansion mode, accretive acquisitions, more M&A, and that's translating on our side to the uptick in the pipeline that we mentioned in the prepared remarks.

Got it. Appreciate those thoughts, everyone. And then maybe Ben and David, for the new leases, I know it's hard to predict when tenants will receive full regulatory approval and can take full possession and start paying rent. But at the same time, these are sophisticated operators that you've leased to, who are up and running in these states already. Are you able to maybe bucket the leases between those that are more likely to gain regulatory approval and have the tenant take occupancy in '24 versus those that are '25 or even beyond? Any thoughts would be helpful.

Yes. Tom, this is Alan. I mean, I'd first like to start with how we agree with you in your analysis that we have some very strong and sophisticated tenants and operators that are operating in a very unique environment, a difficult macroeconomic environment, and an environment where the regulatory agencies are still, believe it or not, working through a lot of their own processes. And with that, I'll turn it over to David and Ben.

Tom, just to echo what Alan is saying, I don't think we can really overstate how pleased we've been with the leasing activity. I mean, not just the speed at which we are able to re-tenant these properties, the relatively low amount of capital required to re-tenant these properties. But really, as you noted, the strength of the operators and the credit upgrades we feel we got in each of these cases, whether that's Gold Flora in California or a group like Lume in Michigan, who is the largest operator in the state there. So the regulatory aspects of rent commencement and starting operations is out of our hands and something that we're tracking, but we feel that we've partnered in each case with the group that can execute on that as best as they can.

Got it. Well, we will keep that on the front of our radar as we move through the year. And then maybe last for me, Paul, following up on your comments about operators being more opportunistic given the commentary about rescheduling. And also, you sounded somewhat more optimistic on the potential for Safer legislation than I've heard you in a while. I know the devil ultimately lays in the details for both of these pieces of legislation. But if we step back and think bigger picture, what risks could IIP's business model face over the near-to-medium term, if we get both rescheduling and more access to financial institutions and services at the same time?

Yes. I think Alan, go ahead.

Yes. No, I was going to say before Paul talks about the risks, I think there not only are there risks, but there are certainly opportunities. Every one of those risks is really a double-edged sword in that when there is a rescheduling and/or more positive regulatory environment, it also helps with our cost of capital and our ability to drive returns to our shareholders because, one, we have an extremely strong and well-established portfolio with a very long-term weighted average lease length and capital that is being deployed at north of mid-teen type area. Okay. But go ahead, Paul. Talk about the risk.

Yes. Regarding rescheduling, we don't anticipate any significant risk to our operations if it happens. In fact, the contrary is true because if we were to reschedule to three, there would still be a disconnect between state law and federal law. Licensed operators in the states would remain in conflict with federal law since they would be selling cannabis without a prescription. This disconnect still presents an opportunity for us, and we don't expect many new players to enter the market amid the federal prohibition. As for the Safer Banking Act, there's some optimism since it is gaining traction in the Senate. A committee is involved, and Schumer has indicated plans for a floor vote, which is encouraging. However, it will likely face challenges in the House due to the speaker's lack of support, so a vote there seems unlikely. Nevertheless, there is optimism because it could be included in a larger negotiated bill, generating renewed energy around it. Currently, the Safer Banking Act does not provide access to capital markets; it primarily aims to facilitate cash withdrawal from the banking system. Therefore, if it passes in its current form, we don't foresee an impact on our business. On the contrary, it could benefit our operators by allowing them to take cash out. In summary, we view any risks associated with rescheduling or the Safer Banking Act as minimal, if they exist at all.

The next question comes from Scott Fortune with ROTH MKM.

Just kind of a follow-up on that and the risk side of things. You guys have mentioned strong and sophisticated operators. And we're now seeing the top MSOs with significant cash levels and that could be additional cash flow if we get rescheduling there. So just wanted to get a sense for the tenants with those strong cash levels on the balance sheet. And those discussions, I'm not sure if rescheduling progress now has opened up more discussions with them. But the opportunity for them to really tap into markets for lower cost of capital, obviously, there's a spread here. But just kind of going forward with some of these bigger operators who want to expand the sale-lease model regarding the cap rates and working with IIP and what you can offer those top MSOs versus kind of their now lower cost of capital? Just how you kind of look at that risk with lower cap rates and the spread going forward, kind of address that a little bit, that would be great.

So before I turn it over to Ben to kind of talk about our pipeline and how strong our pipeline is, I would, Scott, ask you to really think through, just because they have more capital on their balance sheet does not necessarily mean that the cost of capital has gone down. I think that their cost of capital remains elevated. I think they're still struggling with accessing the broader capital markets. Clearly, here in the U.S., maybe not so much or maybe they have better access up in Canada, where you all have operations also. But here in the U.S., their access to capital remains limited, which, well, it goes to the quality and size of our pipeline, which I'll let Ben discuss.

This is Ben. So yes, just a follow-up on Alan's comments, we noted the real uptick in activity we're seeing in the pipeline, which has been great to see. It's very active across multiple markets and these are at the same cap rates that we've been seeing for the last few years. So we have not seen any downward pressure on those rates. And I think if cost of capital generally is going down, that typically impacts us as well and we can maintain our same spread, potentially at lower cap rates in that environment. But as of today, with the increased activity in the pipeline, we've not seen any downward movement in any material way on our cap rates.

Real quick, Ben, have you seen a pickup in discussions since kind of the rescheduling news has hit 1.5 weeks ago here?

Yes. I mean, I wouldn't say necessarily just rescheduling though that certainly has, I think, improved some sentiment in the industry in general. We're seeing a lot of state-level dynamics driving activity in the pipeline. So that could be potential adult-use rollouts in Ohio, Pennsylvania, Florida and also just the industry overall continues to grow even in more established markets. So we're seeing activity in states like Arizona, California and Michigan. So it's really varied. And I think it's the strength and the health that we're seeing in the industry overall, the recovery and wholesale pricing in many markets, the optimism around rescheduling and potential adult-use markets rolling out all contributes to the strength of the pipeline that we're seeing.

I appreciate that insight. I have one more quick follow-up regarding the Los Angeles property. Could you provide more detail on how the sale unfolded with Holistic and what type of buyer acquired the property? Additionally, do you disclose the net carry value of that property?

Yes, I believe our supplement contains some information, and we are quite enthusiastic about our continued ability to recycle capital. Ben or Cate, would you like to provide further details?

Sure. Yes, I can give a little more color. As we mentioned, that was not built out for cannabis and I think it really showed our ability to work positively with our tenant partners on a solution that we felt was a win-win. We're able to take that capital and recycle it into other opportunities that we've been describing in our pipeline that we think will provide superior risk-adjusted returns. So very, very happy, I think, on both sides on that deal with the execution, the ability to recycle that capital into other deals.

The next question comes from Alexander Goldfarb with Piper Sandler.

The first question relates to your comment about a top 20 bank entering the cannabis sector, which seems to support the involvement of the courts. Can you provide an update on that? It appears the government is in a strong position by maintaining the federal illegality of cannabis while still permitting larger banks and states to participate. Paul, you previously mentioned potential court cases; could you give us an update on that?

Paul, go ahead.

Sure. So there is an ongoing case. As you know, we talked about it last quarter about challenging the federal government's position and basically saying that since the government has failed to actively enforce the prohibition and let states get away with it as you described, that they've waived the rights. And that's probably going to get a hearing, we think, within the next six to nine months. At the trial level, then we'll probably go right up to the DCA and eventually up to the Supreme Court. So they've got a very experienced legal team and it's a legitimate case. So that's that. But in the meantime, the better solution, of course, would be a legislative solution. So why is rescheduling important? I think it does create that momentum to get to a de-scheduling position maybe in the next two to three years. And that will take at least that long for the court case to get its way through the Supreme Court.

I was going to ask what district is this out of the D.C. courts or what district is this in?

I think it's Maryland. Though I have to get back to you on that.

So it's in the court?

I believe so. I'll get back to you on that.

Okay. No, I mean that's a favorable district, I would think, for this stuff. And then can you talk a little bit, we all see the new states, obviously live here in New York. We can see what's going on with the attempted rollout here. But as you look at the market, what is your experience on the conversion of illicit to the regulated market? Meaning people are already using cannabis across the country; a state legalizes. How many incremental users does your experience show that the states get? And then what's the conversion ratio of people who switch from the illicit to the regulated because that's ultimately what the industry needs is for more people in the regulated to then the regulated to grow users. And I'm just trying to understand what your experience so far from the operators has shown as far as, one, conversion of illicit buying from their guy, no longer doing that, supplying legally; and then two, new people who weren't users before, but are now coming in.

Alex, this is Alan. Before Paul perhaps addresses that question directly, I just want to remind everybody that we're a real estate provider; we're not a direct operator. And so our commentary really stems from the industry in general. And perhaps talking about the growth in total revenue, things like that might have relevance to answer your question. Go ahead, Paul.

Yes. Well, it's right. I mean, I am not aware of any data that talks about when you put a legal program in place in the state how many new users are there because, of course, you'd have to get a base of how many illicit users there were to begin with. But we can tell you that history has shown that when a medical program converts to a medical and adult-use, revenues go up significantly, as much as three times. And the difference between medical and adult-use is one-third medical and two-thirds recreational. So when a state does adopt adult-use, it's a significant impact on revenues for the operators. And that's why so many of the operators gravitate towards adult-use states. But as far as the illicit users, we just don't have that data to talk to.

Okay. And just a final question for David. I don't want to overlook the CFO. Sale-type accounting and lease accounting are important goals for us. Do you anticipate this approach will apply to other properties as you renegotiate leases? Or do you consider the two leases involved in this situation to be quite unique compared to the other assets in your portfolio?

Yes, Alex, this is David. I appreciate your note, and it indicates you've gained quite a bit of experience in this area. However, I want to point out that these are just two properties out of 108, making them a very small part of our portfolio. While it's possible for this situation to arise again, it's not very likely and would be on a limited scale. Given the strong yields we achieve in this sector, it could have an impact, but it's a favorable situation since our portfolio generates yields that are double those of typical commercial real estate. This could be a factor in this matter. Ultimately, although it's not reflected in our GAAP revenues, as you know, we consider our AFFO, which includes cash rent received. As you mentioned, the IRS recognizes this as good REIT income, and it contributes to our taxable income, which we distribute from.

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

Well, thank you and thank you all for joining us today. Again, I'd like to thank our team for such hard and dedicated work over the last quarter and certainly the last six-plus years. Thank you all. With that, the call should end. Thank you.

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