Modern Industrial Properties (IIPR) Q1 2024 Earnings Name Transcript

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I’ll now hand the decision over to Alan. Alan?

Alan Gold — Govt Chairman

Thanks, Brian, and welcome, everybody. We’re happy to debate our outcomes 12 months up to now as we enter into our eighth full 12 months of operations. The primary 4 months of 2024 have been very productive for our staff with our concentrate on driving releasing exercise and monitoring the completion of serious growth tasks at our properties, together with continued assist of our tenants and funding vital infrastructure enhancements to each additional improve manufacturing capability and effectivity and activate vital tasks underneath growth. Within the first 4 months of 2024, the corporate executed new leases at 4 properties, representing $69 million of invested capital, and accomplished development on three totally leased properties totaling 732,000 sq. ft.

We additionally strategically divested our Los Angeles, California, property, which was leased till the closing with a mixed consideration exceeding our carrying worth of the property. As it’s possible you’ll recall, that property was by no means totally constructed out for hashish operations. Ben and Catherine will talk about this progress in additional element. The corporate notched one other stable quarter in Q1, producing $2.21 in AFFO per share and additional enhancing the corporate’s liquidity place within the first 4 months of the 12 months, with the upsizing of the revolving credit score facility from $30 million to $50 million.

Whereas AFFO per share was down modestly quarter to quarter, we notice that rents for the brand new leases we executed in late 2023 and 12 months up to now are usually not anticipated to start for some months to return as new tenants want the time to acquire the requisite approvals to function and transition into these properties along with sure pre-leased properties underneath growth the place development must be accomplished. As we’ve got reiterated up to now, we’re actually happy with our capital place, particularly in mild of the macroeconomic setting impacting actual property firms and the hashish trade as a basic matter. Our complete obtainable liquidity exceeded $200 million as of the quarter finish and totally funds any remaining growth commitments we’ve got, together with offering ample dry powder for extra strategic investments. As Ben will share in additional element, we’re evaluating plenty of promising new investments in a number of state markets.

Moreover, we’ve got one of many lowest levered steadiness sheets within the REIT trade at 11% debt to complete gross belongings, no variable-rate debt, no debt maturities till Might 2026. David will present extra element, in addition to our monetary outcomes for the quarter and capital place. From a regulatory perspective, all eyes proceed to be centered on potential rescheduling of hashish from schedule one to schedule three underneath the Managed Substances Act, with the current media reviews indicating that the DEA is anticipated to agree with the HHS advice on this matter. Paul will talk about our ideas in additional element on this rescheduling course of pending federal laws and state-level dynamics that we’re seeing.

I’ll now flip the decision over to Paul to debate market dynamics and regulatory developments. Paul?

Paul Smithers — President and Chief Govt Officer

Thanks, Alan. I wish to begin with some basic macroeconomic observations from our perspective which are impacting the regulated hashish trade. 2023 was one other 12 months of sturdy development when it comes to general unit quantity for regulated hashish gross sales throughout the USA. Nevertheless, general regulated hashish gross sales development from a {dollars} perspective was extra subdued, given the value compression that continued by way of the 12 months in lots of states.

Though a few of that worth compression was pushed by oversupply of regulated merchandise in a specific market, we see a lot of that compression persevering with to return from the illicit market. Specifically, illicit grows in California to each compete inside the state and have merchandise which are transported throughout the nation. All that mentioned, the outlook for general development of the regulated hashish trade stays strong, with MJ Enterprise’ most up-to-date factbook posted late April projecting general US regulated gross sales to develop from $32 billion in 2024 to $58 billion by 2030. On the similar time, we’re seeing some aid on these pricing pressures, which supplies us extra optimism for 2024 and past as operators concentrate on the energy of their manufacturers, pushed largely by the standard and consistency of their merchandise.

We additionally consider that the push by lots of the multi-state operators to develop into extra environment friendly and value acutely aware on this setting ought to bode effectively for his or her future monetary outcomes. From a state market perspective, we proceed to see divergence in efficiency and dynamics, with new markets experiencing excessive development whereas some mature markets develop into more and more aggressive, particularly after the aforementioned prolonged interval of worth compression and the challenges in competing with the illicit markets. For instance, as we famous on our final name, 2023 noticed sturdy rollouts for adult-use gross sales in Missouri and Maryland, each of which additionally benefited from cross-border buying by residents in neighboring states with both medical-use-only program or no program in any respect. Ohio, which legalized grownup use in November, is anticipated to start gross sales this 12 months and sooner than initially anticipated maybe in June.

Whereas Ohio is anticipated to be one of many quickest rising markets within the close to future and follows on the heels of very profitable adult-use introductions in Missouri and Maryland, New York’s adult-use program, which was launched greater than a 12 months in the past in December of 2022, has struggled. With complete illicit and authorized demand estimated in extra of $5 billion, New York’s regulated gross sales in 2023 got here in at effectively beneath $1 billion for the 12 months. Nevertheless, there have been sure current developments that make us considerably extra optimistic on the prospects for New York market, together with the ramping up of licensing for retail shops, stronger enforcement towards illicit operations, and regulatory authorities permitting earnings at medical use operators to start wholesaling. I might additionally like to the touch on two different states which are within the working for adoption of adult-use packages within the close to time period, Florida and Pennsylvania.

In Florida, earlier this month, the Florida Supreme Court docket cleared the way in which for a legalization initiative on the November poll. The edge for approval of the measure was 60%, a comparatively excessive bar, though I might notice that Florida’s medical-use program handed with 72% assist. Whereas polling has been each above and beneath that threshold, we will likely be carefully following the progress there, noting that at previous, Florida legalization is projected to offer the biggest incremental income and revenue alternative for MSOs in comparison with any prior state conversion. In Pennsylvania, adult-use hashish laws has bipartisan assist and can be supported by the Pennsylvania governor, having been famous as a precedence within the governor’s February 2024 finances tackle.

We’re hopeful that motion will likely be taken within the coming months, additionally given the truth that Pennsylvania is essentially surrounded by adult-use states at this level, with West Virginia because the exception. Federal laws. From the federal perspective, we’re, after all, happy to listen to, per the current media reviews, that the DEA is anticipated to take up the prior advice from HHS to reschedule hashish from schedule one to schedule three. As we famous beforehand, crucial impression of that reclassification is anticipated to be the elimination of the 280E tax remedy with a direct vital increase to operator financials throughout the board.

President Biden has made this an vital challenge for his administration heading into the election, and he was the primary president in the USA to deal with hashish reform in his state of the union tackle. So we consider there may be vital momentum on this challenge. That mentioned, the DEA’s proposed rule, when issued, will likely be adopted by a public remark interval earlier than it points a ultimate rule. In that timeline, election timing and any corresponding potential administration change can also come into play.

Legislatively, we additionally proceed to trace that proposed safer banking laws which might enable, amongst different issues, expanded lending alternatives for operators. Although a model of this invoice has handed the Home seven occasions and has been round for the higher a part of a decade, current commentary makes us suppose there’s some potential for motion right here, together with commentary from Senate Majority Chief, Chuck Schumer, that the Senate is working very laborious to enact this invoice later this 12 months. Treasury Secretary, Janet Yellen, additionally lately commented in a Home committee listening to on the significance of passing reform laws to deal with the banking points introduced by the present regulatory construction, which we expect additionally might some sway in stressing the significance of resolving these points. I might wish to now flip the decision over to Ben to debate our portfolio and leasing exercise to begin the 12 months.

Ben?

Ben Regin — Chief Funding Officer

Thanks, Paul. For my ready remarks, I plan to focus on our continued leasing progress for our vacant and underdevelopment belongings. Yr up to now, we have made substantial progress on this entrance, executing 4 new leases masking $69 million of invested capital in California and Michigan. California, we have executed new leases for our nineteenth Avenue and McLane Avenue properties in Palm Springs with Gold Flora, an current tenant of ours and a number one vertically built-in operator in California.

And in Michigan, as we famous final quarter, we executed an LOI for our Harvest Park facility previous to the move-out of the previous tenant and, earlier this quarter, executed a lease with Lume Hashish Firm, one of many largest operators within the Michigan market. We additionally signed a lease in January for considered one of our three small retail vacancies within the state. We have been very happy with the demand we noticed for these belongings, the velocity at which we executed new leases, and the comparatively minimal quantity of incremental capital required for retenanting. We consider our ongoing execution on our leasing initiatives helps our underlying thesis concerning the high-quality, purpose-built, mission-critical nature of our actual property portfolio.

Shifting on to our growth portfolio. As famous on earlier calls, we proceed to discover potential growth choices for our San Bernardino property, specializing in self storage. And we’ll proceed to offer updates on progress on future calls. For our land website in San Marcos, Texas, we executed an LOI for a short-term lease with considered one of our current tenant companions in anticipation of potential new licenses being issued.

As it’s possible you’ll know, Texas presently has a restricted medical-use program, with solely three licenses issued up to now. Whereas we stay optimistic that Texas will finally undertake a extra open strategy to regulated hashish actions and challenge new licenses in that course of, it stays unsure. At our Pittsburgh, Pennsylvania, asset, we proceed to discover leasing choices for the property and are carefully watching developments because it pertains to potential adult-use laws, as Paul alluded to beforehand. Relating to new funding exercise, within the first 4 months of 2024, we executed three lease amendments to fund extra enhancements at properties totaling $22.1 million, together with $16 million for PharmaCann in New York, the place PharmaCann is targeted on increasing manufacturing capability after being awarded an adult-use manufacturing license late final 12 months.

In Ohio, we offered a further $4.5 million enchancment allowance to Battle Inexperienced to finish development and develop their manufacturing capability as Ohio will get set to roll out its adult-use program later this 12 months. We additionally offered a further $1.6 million to 4Front Ventures to spherical out growth of 4Front’s, 250,000-square-foot manufacturing facility in Illinois. Battle Inexperienced in Ohio and 4Front in Illinois each lately acquired their non permanent certificates of occupancy, as Cat will contact on, with operations anticipated to start within the close to time period. Lastly, earlier this week, we closed on the disposition of our property in Los Angeles, which was leased up till the sale.

We bought the property for $9.1 million and acquired a lease termination payment from the tenant of $3.9 million along with reimbursement of our closing prices in reference to the sale, with the entire consideration exceeding the web carrying worth of the property on our books. This property was by no means totally constructed out for hashish use, and we count on the sale to liberate extra capital to recycle into different alternatives that we consider will present superior risk-adjusted returns. Along with our leasing exercise, which has been off to a robust begin in 2024, we proceed to trace sturdy lively pipeline the place we’re seeing a notable uptick in exercise on the heels of among the market and trade developments that Paul described. We’re seeing demand for our capital throughout markets from these with near-term adult-use potential, akin to Florida and Pennsylvania, to extra established markets, akin to Maryland and Arizona.

We’re actively evaluating alternatives in these and different markets and look ahead to executing on new funding alternatives on a really selective disciplined foundation. With that, I am going to flip it over to Catherine. Catherine?.

Catherine Hastings — Chief Working Officer

Thanks, Ben. As Ben famous, we have made a number of progress over the previous couple of months on closing out or nearing completion on a number of of our tenants’ main growth tasks. Thus far, in 2024, we accomplished development on three leased tasks totaling $200 million of invested and dedicated capital: Vireo’s 325,000-square-foot growth in New York, 4Front’s 250,000-square-foot ground-up growth in Illinois, and Battle Inexperienced’s 157,000-square-foot ground-up growth in Ohio. We additional count on to considerably full the 23,000-square-foot Perez Highway venture in California shortly, which is pre-leased, and the 104,000 sq. foot cultivation element of our Summit constructing in Michigan in the summertime.

As it’s possible you’ll recall, the 97,000-square-foot processing part of that constructing is accrued for operations now, and all the venture is leased. In mild of the challenges introduced over the previous few years with actual property growth tasks nationwide, we’re very happy to get these tasks to the end line and permit our operators to begin producing revenues from these state-of-the-art amenities. Do not forget that underneath our lease construction, these tenants started paying hire throughout development, which we recorded in our revenues. However this is a vital milestone for our tenants to ramp operations and generate money flows within the amenities.

Relating to our portfolio as of March 31 and professional forma for growth properties positioned into service subsequent to quarter finish, we owned 108 properties throughout 19 states, comprising 8.9 million rentable sq. ft, together with 647,000 sq. ft of growth or redevelopments. Of those 108 properties, 103 properties are included in our working portfolio, which was 95.2% leased at quarter finish with a weighted common remaining lease time period of roughly 14.8 years. Of the 5 properties underneath growth — redevelopment, three have been pre-leased at quarter finish. Our portfolio continues to be effectively diversified, with nobody tenant representing greater than 17% of our annualized base hire and no state representing greater than 15% of our annualized base hire.

We’ve got relationships with among the largest and most skilled operators within the trade, with our leased working portfolio comprised of 90% multi-state operators and 60% leased to public firm tenants. The full quantity of capital invested and dedicated throughout our working portfolio equates to $277 per sq. foot, which we consider stays considerably beneath alternative value. And with that, I am going to flip it over to David. David?

David Smith — Chief Monetary Officer

Thanks, Catherine. For the primary quarter, we generated complete revenues of $75.5 million, a 1% lower from Q1 of final 12 months. Lower was primarily pushed by properties which have been leased for all or a part of the three months ended March 31, 2023, and properties which weren’t leased or have been launched, however hire had not but commenced, in the course of the three months ended March 31, 2024. As we famous in our earnings launch issued yesterday, complete revenues for Q1 additionally don’t embrace $1.5 million in hire acquired in the course of the quarter, however not acknowledged in complete revenues, as a result of a reclassification of two leases and gross sales sort leases beginning January 1, 2024, because of lease time period extensions that have been executed for each leases.

The modest decline in rental revenues was partially offset by exercise in prior durations for the acquisition and leasing of latest properties, extra funding and constructing enhancements offered to tenants at sure properties that resulted in base hire will increase, and contractual rental escalations. It is also noteworthy that no safety deposits have been utilized for cost of hire in the course of the three months ended March 31, 2024, whereas a complete of $4.2 million of secured deposits have been utilized for cost of hire for Q1 in 2023. Revenues for the quarter have been additionally down sequentially versus This fall of final 12 months, primarily associated to a This fall cost of $1.7 million acquired from a former tenant at considered one of our properties in Pennsylvania as a part of a judgment in our favor for unpaid hire and a beforehand disclosed non permanent discount in base hire for 4Front on the Illinois property beginning in January 2024, which was underneath growth and had skilled vital delays in development, primarily regarding bringing energy to the property. For the three months ended March 31, 2024, we recorded internet earnings attributable to widespread stockholders of $39.1 million, or $1.36 per share.

Adjusted funds from operations for the primary quarter was $63 million, or $2.21 per share, a lower of two% in comparison with the primary quarter of 2023, pushed primarily by the identical components that drove the 1% lower in revenues interval to interval. AFFO was additionally down sequentially from This fall, once more primarily pushed by the $0.06 attributable to the $1.7 million judgment paid to IIP in This fall. Trying forward, I might notice that whereas we count on the leasing exercise Ben mentioned to contribute meaningfully to our long-term rental revenues, the timeline to hire stabilization might differ between the properties as there are state and native approvals wanted for these transitions, extra regulatory necessities to be accomplished at sure belongings, and a few stage of hire abatements negotiated to permit for a ramping of our new tenant’s operations. That being mentioned, we’re very happy with our substantial exercise on the releasing entrance, as Ben mentioned intimately.

On April 15 , we paid a quarterly dividend of $1.82 per share to widespread stockholders of document as of March 28. As Alan famous, our dividend stay lined by our AFFO in the course of the quarter, with a payout ratio of 82%, which is according to the Board’s focused payout ratio of 75% to 85% of AFFO. Turning to the steadiness sheet. At quarter finish, we had roughly $2.6 billion of complete gross belongings and $300 million in mounted charge debt, consisting solely of $300 million in unsecured bonds not maturing till Might 2026.

We proceed to keep up credit score metrics which are among the many greatest in all the publicly traded REIT trade with a debt-to-gross-assets ratio of 11% and a debt service protection ratio in extra of 16 occasions. On the liquidity entrance, we ended the primary quarter with over $200 million of complete liquidity comprised of our money, short-term investments, and availability underneath our revolving credit score facility. We closed on this credit score facility final October at the moment was a $30 million three-year facility, subsequently upsized the ability to $45 million in February, and count on to extend the entire capability to $50 million by the tip of this month. Our revolver stays undrawn as of in the present day.

We’re additionally persevering with to supply new banking relationships to offer extra capital for the corporate. And with over 800 monetary establishments offering providers to the hashish trade, together with current reviews of one of many high 20 largest banks within the US coming into the trade, we stay inspired in our prospects to proceed to develop our banking relationships. We’re effectively positioned for development as we proceed to keep up a conservative and low-leverage steadiness sheet, generate constructive free money move, and have continued to boost our liquidity place by way of the closing of this new credit score facility in This fall and upsizing that facility within the first a part of 2024. Lastly, because of the funding exercise that Ben talked about, we opportunistically tapped our ATM program by issuing 123,000 shares of widespread inventory for $11.8 million in internet proceeds to additional bolster our sturdy liquidity place and make investments accretively into the alternatives that Ben mentioned in his remarks.

With that, I’ll flip it again to Alan. Alan?

Alan Gold — Govt Chairman

Thanks, David. I might like to notice the next in closing. We, as an organization, are definitely not resistant to the macroeconomic components which have impacted the broader economic system and the regulated hashish trade particularly. However I’m pleased with our staff and what our staff has completed in persevering with to execute on our plan to maximise the worth of our portfolio for the advantage of our stockholders by way of our leasing, funding, and disposition actions and to repeatedly consider capital choices with the objective of sustaining a robust steadiness sheet and liquidity place.

We consider this core focus will serve our stockholders effectively over the long run. With that, I might wish to open it as much as questions. Operator, might you please open the decision up for questions?

Questions & Solutions:

Operator

[Operator instructions]. The primary query comes from Tom Catherwood with BTIG. Please go forward.

Tom Catherwood — BTIG — Analyst

Thanks, and good morning, everybody. For the US hashish trade, extra broadly, I wish to be cautious right here and never sound too overly optimistic. However the bulk of operators reported an uptick in each retail gross sales and wholesale exercise with their fourth-quarter earnings. After which, there was margin enchancment throughout the board.

How are you seeing operators reply to this modestly improved backdrop? And will we see a renewed cycle of capex spending on cultivation and manufacturing given the uptick in wholesale exercise?

Alan Gold — Govt Chairman

Yeah. Thanks, Tom. It is a good query. And it actually goes to our larger perception that the — whereas we have been going by way of some tough macroeconomic environments, that issues are wanting higher, that there are inexperienced shoots and alternatives.

However I’ll flip it over to Paul and, maybe, Ben to reply that query, extra instantly.

Paul Smithers — President and Chief Govt Officer

Yeah. Hey, John. It is Paul. So yeah, I agree with Alan that after we discuss to our operators, we’re feeling a larger sense of optimism.

And there are many discussions about growth. And it is not solely pricing stability, however I feel we will not understate the thrill in regards to the rescheduling chance and the 280E aid. So with these issues mixed we’re seeing much more curiosity and, after all, growth conversations. I do not know, Ben, if you wish to put some extra shade on that, principally in pipeline smart.

Ben Regin — Chief Funding Officer

Yeah, positive. And simply — Hey, Tom. In your query about what the operators are doing, I imply, I feel you’ll be able to hear the optimism for those who’re listening to any of their earnings calls this quarter, whether or not that is Vireo specializing in their improved metrics or GTI yesterday speaking about with the ability to play aggressive offense out there, given what they’re seeing on the market. I feel a number of these firms are poised to get again into growth mode, accretive acquisitions, extra M&A.

And that is translating on our aspect to the uptick within the pipeline that we talked about within the ready remarks.

Tom Catherwood — BTIG — Analyst

Obtained it. Admire these ideas, everybody. Then perhaps Ben and David, for the brand new leases, I do know it is laborious to foretell when tenants will obtain full regulatory approval and may take full possession and begin paying hire. However on the similar time, these are subtle operators that you’ve got leased to who’re up and working in these states already.

Can you perhaps bucket the leases between these which are extra more likely to achieve regulatory approval and have a tenant take occupancy in ’24 versus these which are a ’25 occasion? Or are there some that might even prolong past that? Any ideas can be useful.

Alan Gold — Govt Chairman

Yeah. Tom, that is Alan. I imply, I first like to begin with how we agree with you in your evaluation that we’ve got some very sturdy and complicated tenants and operators which are working in a really distinctive setting, a tough macroeconomic setting, and an setting the place the regulatory companies are nonetheless, consider it or not, working by way of a number of their very own processes. And with that, I am going to flip it over to David and Ben.

Ben Regin — Chief Funding Officer

Yeah. Hey, Tom. Simply to echo what Alan’s saying, I do not suppose we are able to actually overstate how happy we have been with the leasing exercise, not simply the velocity at which we’re in a position to retenant these properties; the comparatively low quantity of capital required to retenant these properties; however actually, as you famous, the energy of the operators and the credit score upgrades we really feel we obtained in every of those instances, whether or not that is Gold Flora in California or a bunch like Lume in Michigan, who’s the biggest operator within the state there. So the regulatory facets of hire graduation and beginning of operations is out of our fingers and one thing that we’re monitoring.

However we really feel that we have partnered in every case with the group that may execute on that as greatest as they will.

Tom Catherwood — BTIG — Analyst

Obtained it. Nicely, we’ll maintain that on the entrance of our radar as we transfer by way of the 12 months. After which, perhaps final for me, Paul, following up in your feedback about operators being extra opportunistic, given the commentary about rescheduling. And in addition, you sounded, I feel, considerably extra optimistic on the potential for safer laws that I’ve heard you shortly.

I do know the satan will in the end be within the particulars for each of those items of laws. But when we step again and suppose greater image, what dangers might IIP’s enterprise mannequin face over the close to to medium time period if we get each rescheduling and extra entry to the monetary establishments and providers on the similar time?

Paul Smithers — President and Chief Govt Officer

Alan, go forward.

Alan Gold — Govt Chairman

Yeah. No, I used to be going to say earlier than Paul talks in regards to the dangers, I feel they’re — not solely are there dangers, however there are definitely alternatives. Each a type of up — dangers actually is a double-edged sword in that when there’s a rescheduling and/or a extra constructive regulatory setting, It additionally helps with our — our value of capital and our capacity to drive returns to our shareholders. As a result of when we’ve got a particularly sturdy and well-established portfolio, we’ve got a really long-term weighted common lease size and capital that’s being deployed that is north of the mid-teens sort space.

OK. Go forward, Paul. Discuss in regards to the dangers.

Paul Smithers — President and Chief Govt Officer

Yeah. So so far as rescheduling, Tom, we do not see any vital threat to our operations ought to rescheduling go ahead. The other is true. As a result of bear in mind, we nonetheless — if we rescheduled the three, there’s nonetheless a federal disconnect between state legislation and fed.

So it is nonetheless state’s working license. State operators would nonetheless be in battle with federal legislation as a result of they’d be promoting hashish with no prescription. So we nonetheless have that disconnect that creates alternative for us. So we do not see a number of gamers coming into the market if you nonetheless have that federal prohibition.

So far as the SAFE Banking Act, there may be some optimism as a result of it is getting traction within the Senate, and you have a committee, and Schumer says he will placed on a ground vote. That is the excellent news. It is going to nonetheless be a problem within the Home as a result of a speaker has mentioned he isn’t a fan. So it in all probability will not get a vote on the Home.

However why there’s motive for optimism is it may very well be a part of a negotiated greater invoice, and that is why there may be some renewed vitality. However in its present type, SAFER doesn’t tackle any capital market entry. It is purely getting the money out of the banking system. So if SAFER passes as is, we do not see it affecting our enterprise.

On the contrary, it might be higher for operators to take the money out. So to reply your query, we simply see very minimal threat, if in no way, ought to the rescheduling happen and/or SAFER.

Tom Catherwood — BTIG — Analyst

I respect all these responses. That is it for me. Thanks everybody.

Paul Smithers — President and Chief Govt Officer

Thanks, Tom.

Operator

The subsequent query comes from Scott Fortune with Roth MKM. Please go forward.

Scott Fortune — ROTH MKM — Analyst

Sure, and thanks for the query. Only a comply with up on that and the danger aspect of issues. You guys have talked about sturdy and complicated operators. And we’re now seeing the highest MSOs with vital money ranges, and that may very well be more money move if we get a rescheduling there.

So simply needed to get a way for the tenants with these sturdy money ranges on the steadiness sheet and people discussions. I am undecided if rescheduling progress now has opened up extra discussions with them. However the alternative for them to actually faucet into markets for decrease value of capital, clearly, there is a unfold right here. However simply going ahead with a few of these greater operators who wish to develop the gross sales lease mannequin concerning the cap charges and dealing with IIP and what you’ll be able to provide the highest MSOs versus their now decrease value of capital.

Simply the way you take a look at that threat of decrease cap charges and the unfold going ahead, tackle that just a little bit. That might be nice.

Alan Gold — Govt Chairman

So earlier than I flip it over to Ben to speak about our pipeline and the way sturdy the pipeline is, I might simply ask you to actually suppose by way of. Simply because they’ve extra capital on their steadiness sheet doesn’t essentially imply that their value of capital has gone down. I feel that their value of capital stays elevated as a result of they’re nonetheless fighting accessing the broader capital markets. Clearly, right here within the US, perhaps not a lot.

Or perhaps they’d higher entry up in Canada, the place you all have operations additionally. However right here within the US, their entry to capital stays restricted, which — it goes to the standard and measurement of our pipeline, which I am going to let Ben talk about.

Ben Regin — Chief Funding Officer

Yeah. Hey, Scott. That is Ben. So simply to comply with up on Alan’s feedback, we famous the true uptick in exercise we’re seeing within the pipeline, which has been nice to see.

It’s totally lively throughout a number of markets, and these are on the similar cap charges that we have been seeing for the previous couple of years. So we’ve got not seen any downward strain on these charges. And I feel if value of capital typically goes down, that usually impacts us as effectively. And we are able to keep our similar unfold, probably, at decrease cap charges in that setting.

However as of in the present day, with the elevated exercise within the pipeline, we’ve got not seen any downward motion in any materials method on our cap charges.

Scott Fortune — ROTH MKM — Analyst

Thanks. Actual fast, then. Have you ever seen a pick-up in discussions for the reason that rescheduling information has hit every week and a half in the past right here?

Ben Regin — Chief Funding Officer

Yeah. I imply, I would not say essentially simply rescheduling, although that definitely has, I feel, improved some sentiment within the within the trade. Normally, we’re seeing a number of state stage dynamics driving exercise within the pipeline. In order that may very well be potential grownup use rollouts in Ohio, Pennsylvania, Florida.

And in addition simply the trade general continues to develop even in additional established markets. So we’re seeing exercise in states like Arizona, states like California and Michigan. So it is actually assorted. And I feel the energy and the well being that we’re seeing within the trade general, the restoration and wholesale pricing in lots of markets, the optimism round rescheduling, and a possible grownup use market rolling out all contributes to the energy of the pipeline that we’re seeing.

Scott Fortune — ROTH MKM — Analyst

Admire that shade. After which, another fast one for me. Simply present just a little shade on that Los Angeles property. I do know it wasn’t totally constructed out.

However the disposition there, how that took place with holistic, and what sort of purchaser of the property, just a bit bit extra shade on that. And do you guys do you disclose what the web carrying worth was of that property?

Paul Smithers — President and Chief Govt Officer

Yeah. I imply, I feel our complement has a few of these info. However we’re fairly enthusiastic about our capacity to proceed to recycle capital. Ben, why do not you — Ben or Cat, do you guys wish to elaborate?

Ben Regin — Chief Funding Officer

Certain. Yeah, I may give just a little extra shade. As we talked about, that was not constructed out for hashish. And I feel it actually confirmed our capacity to work positively with our tenant companions on an answer that we felt was a win-win.

We’re in a position to take that capital and recycle it into different alternatives that we have been describing in our pipeline that we expect will present superior risk-adjusted returns. And so, we’re very, very completely satisfied, I feel, on each side on that cope with the execution, the power to recycle that capital into different offers.

Scott Fortune — ROTH MKM — Analyst

Thanks. I respect it. Thanks for all the colour.

Alan Gold — Govt Chairman

Thanks, Scott.

Operator

The subsequent query comes from Alexander Goldfarb with Piper Sandler. Please go forward.

Alexander Goldfarb — Piper Sandler — Analyst

Hey. Good morning on the market. So first query is your remark a couple of high 20 financial institution getting concerned in hashish results in — continues the, I suppose, assist for some — for the courts to get entangled. What’s an replace on there? I imply, it looks like the federal government’s in a reasonably indefensible place of, on one hand, persevering with to make hashish federally authorized, however clearly permitting bigger banks to get entangled, letting the states get entangled and take part.

So what’s the — I feel, Paul, some time again, you talked about about potential court docket instances. Simply needed to get an replace there.

Alan Gold — Govt Chairman

Paul, go forward.

Paul Smithers — President and Chief Govt Officer

Certain. Hello, Alex. There may be an ongoing case, as you already know — we talked about it final quarter — about difficult the federal authorities’s place and principally saying that for the reason that authorities has did not actively implement the prohibition and let states get away with it, as you described, that they’ve waived their rights. And that is in all probability going to get a listening to, we expect, inside the subsequent six to 9 months on the trial stage.

Then we’ll in all probability go proper as much as the DCA and finally as much as the Supreme Court docket. So they have a really skilled authorized staff, and it is a respectable case. In order that’s that. However within the meantime, the higher resolution, after all, can be a legislative resolution.

So why is rescheduling vital? I feel it does create that momentum to get to a descheduling place perhaps within the subsequent two to 3 years. And that can take no less than that lengthy for the court docket case to get its method by way of the Supreme Court docket.

Alexander Goldfarb — Piper Sandler — Analyst

Yeah. No, I used to be going to ask. What district — is that this out of the DC courts? Or what district has this been?

Paul Smithers — President and Chief Govt Officer

I feel it is Maryland, although I’ve to get again to you on that.

Alexander Goldfarb — Piper Sandler — Analyst

So it is within the fourth.

Paul Smithers — President and Chief Govt Officer

I consider so. I am going to get again to you on that.

Alexander Goldfarb — Piper Sandler — Analyst

OK. No, I imply, that is a good district, I might suppose, for these items. After which, are you able to discuss just a little bit — all of us see the brand new states. We clearly dwell right here in New York.

We will see what is going on on with the tried rollout right here. However as you take a look at the market, what’s your expertise on the conversion of illicit to the regulated market? Which means, persons are already utilizing hashish throughout the nation. A state legalized this. What number of like incremental customers have — does your expertise present that the states get? After which, what is the conversion ratio of people that change from the illicit to the regulated? As a result of that is in the end what the trade wants is for extra individuals within the regulated after which the regulated to develop customers.

And I am simply attempting to grasp what your expertise so removed from the operator has proven so far as, one, conversion of illicit, shopping for from their man, not doing that, to purchasing legally; after which, two, new individuals who weren’t customers earlier than however at the moment are coming in.

Alan Gold — Govt Chairman

Alex, that is Alan. Earlier than Paul maybe addresses that query instantly, I simply wish to remind everyone that we’re an actual property supplier. We’re not a direct operator. And so, our commentary actually comes from the trade normally.

And maybe speaking in regards to the development in complete income, issues like that, might need relevance to reply your query. Go forward, Paul.

Paul Smithers — President and Chief Govt Officer

Nicely, it is proper. I imply, I am not conscious of any information that is on the market that talks about if you put a authorized program in place within the state, what number of new customers are there? As a result of, after all, you’d need to get a base of what number of illicit customers that have been to start with. However we are able to inform you that historical past proven that when a medical program converts to a medical and grownup use, revenues go up considerably, as a lot as 3 times. And the distinction between medical and grownup use is one-third medical and two-thirds leisure.

So when a state does undertake grownup use, it is a vital impression on revenues for the operators. And that is why so lots of the operators gravitate towards grownup use states. However so far as the illicit customers, we simply haven’t got that information to speak to.

Alexander Goldfarb — Piper Sandler — Analyst

OK. And only a ultimate one for David. I do not wish to go away the accounting man, the CFO, behind. Sale sort accounting, lease accounting, clearly, that is what all of us aspire to and practice for.

Do you see this as arising with different properties as you restrike leases? Or do you view that this — the 2 leases that obtained caught up on this are very distinctive relative to the opposite belongings in your portfolio?

David Smith — Chief Monetary Officer

Yeah. Certain, Alex. That is David. I feel in your notice, it sounds such as you’ve gotten very skilled on this.

However I would just say it is two properties out of 108. So it is a very, very immaterial piece of our portfolio. It could actually occur, however I feel it is not very more likely to occur sooner or later. If it does, once more on a really restricted foundation.

So I feel it is one thing that, given the very sturdy yields that we’ve got on this sector, can impression that. However once more, clearly, that is a great drawback to have that our portfolio generates twice the yields of typical business actual property. So that may be one of many gadgets that that journeys that. However yeah, look, on the finish of the day, whereas it is not in our GAAP revenues, as you already know, we’re together with our FFO.

It is money hire acquired. It is — as you famous, the IRS thought of it a great studying covenants. It is in our taxable earnings, and that is what we distribute off of.

Alexander Goldfarb — Piper Sandler — Analyst

OK. Pay attention, thanks. Thanks, David.

David Smith — Chief Monetary Officer

Thanks, Alex.

Operator

This concludes our question-and-answer session. I wish to flip the convention again over to Alan Gold for any closing remarks.

Alan Gold — Govt Chairman

Nicely, thanks, and thanks all for becoming a member of us in the present day. Once more, I might wish to thank our staff for such laborious and devoted work over the past quarter and definitely, the final six-plus years. Thanks all. With that, the decision ought to finish.

Thanks.

Operator

[Operator signoff]

Length: 0 minutes

Name contributors:

Brian Wolfe — Normal Counsel

Alan Gold — Govt Chairman

Paul Smithers — President and Chief Govt Officer

Ben Regin — Chief Funding Officer

Catherine Hastings — Chief Working Officer

David Smith — Chief Monetary Officer

Tom Catherwood — BTIG — Analyst

Scott Fortune — ROTH MKM — Analyst

Alexander Goldfarb — Piper Sandler — Analyst

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