Innovative Industrial Properties (IIPR) Q1 2023 Earnings Call Transcript

Innovative Industrial Properties (IIPR 0.06%)
Q1 2023 Earnings Call
May 09, 2023, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Innovative Industrial Properties, Inc. first quarter 2023 earnings conference call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions.

[Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Wolfe, general counsel. Please go ahead.

Brian Wolfe -- General Counsel

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?

Alan Gold -- Executive Chairman

Thank you, Brian, and welcome, everyone. We are pleased to report another solid quarter of operations and financial results, especially in the context of ongoing challenges in the macro economy that we are all experiencing. We believe we have positioned ourselves well in this context with one of the strongest and most experienced teams, our real estate professionals, in the cannabis industry, a high-quality portfolio, and arguably, a conservative and flexible balance sheet.; With that, I'm also pleased to introduce our newest member of the management team on this call, David Smith, who joined us in late March, as our new chief financial officer. David brings a wealth of senior management experience in the real estate industry, including cannabis real estate and publicly traded REITs, in particular, and we look forward to his insight and contributions to our company for many years to come.

With David's appointment, we also promoted Catherine Hastings to chief operating officer and Ben Regin to chief investment officer, both seasoned executives that have been with us nearly from the start of the company. We are truly fortunate to have such a dedicated team and to expand our team with David's caliber of talent. To recap the quarter, we generated total revenues of $76 million in Q1. Adjusted funds from operations of over $63 million.

Rent collection from IIP's operating portfolio was 98% for the quarter. The financial performance combined to drive dividend returns to investors with a $7.15 of dividends declared per share in the past 12 months alone. While we've noted for the past several quarters that we expect investment activity to slow given the significant increases to funding costs that have taken place and overall macroeconomic headwinds. I wanted to highlight our transaction with our new tenant, Battle Green, during the quarter where we acquired a 157,000-square-foot industrial facility under development in Ohio and executed a long-term lease with Battle Green.

Battle Green has a great leadership team in place, and we see Ohio being one of the states poised to adopt an adult-use program in the near term. Including that transaction, we've committed over $90 million in additional investments year to date. Ben will provide further detail on our Battle Green transaction and other investment activities year to date. We continue to strive, as we have from the very beginning, to be as transparent in detail as we can about our business and prospects and hope all our shareholders feel the same.

On the positive side, we are seeing green shoots in the industry, such as the reintroduction of the SAFE Banking Act, which Paul will spend more time discussing. Catherine Hastings, as I mentioned, will highlight our positive portfolio statistics, including rent collection from the first quarter and for the first two months of this quarter. I will now turn the call over to Paul to discuss licensing industry dynamics. Paul?

Paul Smithers -- President and Chief Executive Officer

Thanks, Alan. Before discussing overall market developments, I'd like to provide an update on the properties we previously disclosed last quarter where tenants Parallel and Green Peak have not paid rent. As we noted then and I think it is worth repeating here, we are, 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 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.

With our veteran team internally, in combination with our advisors across a spectrum of specialties, I am confident in our ability to successfully navigate these situations. As noted during our prior earnings call, we commenced litigation against Green Peak at our Summit property in Michigan. In early March, as many of you may know, Green Peak was placed into receivership. And in mid-March, we regained possession of the Summit building.

In addition, we regained possession of two small retail locations in Michigan previously leased to Green Peak for which our total investment is less than $3 million. Receivers paying rent on all other remaining properties leased to Green Peak, including the harvest part cultivation and processing facility and four other retail locations, and we are closely monitoring the situation and receivership process. We are currently in the process of discussing and touring the Summit property with interested cannabis operators. As noted in our prior call, we also filed actions against Parallel for possession and damages at our Pennsylvania property and our Texas property which is in the early stages of development.

We regained possession of the Texas property in mid-March, where Parallel failed to pay rent for the first time in February. We are actively exploring all options for these properties, including speaking to a number of interested parties. As we noted previously, Parallel is current on the other two properties we leased to them in Florida. And for Kings Garden, they continue to pay rent at the four properties they occupy and continue to explore a potential merger transaction.

Market developments. While it is clear that the regulated cannabis industry has experienced in the past several months and continues to experience a set of challenging circumstances, I would like to note that the growth of the overall cannabis industry in the United States is expected to continue to be strong. With industry research group, New Frontier Data, projecting a doubling of annual sales from 2023 to 2030 to over $70 billion, representing a double-digit compound annual growth rate. The regulated cannabis industry remains an exceptional case of industry size and growth potential.

As we've noted for some time now, unit pricing for regulated cannabis products have been challenged in certain states at the wholesale level, reflective of what we believe to be a number of factors, including basic supply/demand dynamics, lack of meaningful enforcement in certain states on illicit, non-licensed cannabis sales by state and local enforcement authorities, taxation, and general macroeconomic conditions. Reflecting that continued price compression, in combination with the continued inflation on input and labor costs, we note that consensus analyst expectations for 2023 EBITDA have fallen significantly for publicly traded U.S. operators nearly across the board. That said, this price compression dynamic is certainly not uniform across states, and we are cautiously optimistic that certain states like California may have turned the corner on the persistency of unit pricing declines, while new adult-use states, like Missouri, are seeing very healthy wholesale pricing dynamics.

Capital availability. Another continuing theme from our prior calls is the tightening of financial conditions and the impact it continues to have on capital availability for the cannabis industry. As with other industries, the cost of capital and capital availability have fundamentally changed for cannabis operators over the course of the past year or so. As we noted previously, capital raising across the cannabis industry continues to be very subdued with rating and capital advisors reporting that U.S.

operator capital raises were down 86% in Q1 versus the prior-year period and of those raises nearly 90% was in the form of debt. From our perspective, we believe the present macroeconomic challenges of unit pricing, compression, and cost inflation, in combination with depressed valuations and capital availability, have translated into the larger MSOs focusing more on efficiency of existing operations and generating positive free cash flow versus growth through M&A. That certainly appear to be the case in Q1 of this year, where we saw a little over $815 million in M&A transactions versus over $2.5 billion from Q1 of last year. State programs.

Shifting to state-specific programs, as noted in prior calls, we continue to see momentum in states that span the political spectrum. Missouri officially launched its adult-use program in February with regulated cannabis sales in March totaling over $126 million alone. Maryland's adult-use program is also expected to see first legal sales in July 1. And just last month, Delaware became the 22nd state to legalize adult-use cannabis.

Meanwhile, adult-use legislation is progressing through the Minnesota legislature, and there are expectations that Ohio and Pennsylvania could legalize adult-use cannabis this year. Federal legislation. On the federal legislation front, as you know, versions of the SAFE Act were introduced again in both the House and Senate late last month. There are some reasons to be optimistic on potential passage: one, this bicameral push on its face appears to signal that this legislation could be a priority; two, a version of SAFE has passed the House seven times now; and three, the Senate bill has 40 total sponsors, including seven Republicans.

That said, as we have stated for years now, getting a version of this bill through the process and into law continues to be daunting and will require significant time spent by Congress and an alignment of numerous sets of competing interests. We also want to note some of the recent commentary by federal officials and commercial organizations which we believe show the continued momentum forward for change. In late March, the Wine and Spirits Wholesalers of America issued a letter to Congress calling for cannabis to be regulated on the federal level, like alcohol, advocating for comprehensive federal legalization. Also in March, U.S.

Health and Human Services Secretary Xavier Becerra provided an update on his agency's role and status of the ongoing cannabis scheduling review and while not providing a definitive timeline for completion of the review did note the process will take into account shifts and what cannabis means to Americans over the last several decades. Also, last month in testimony to the Senate, Attorney General Merrick Garland provided an update on the DOJ's potential establishment of a Cole Memo 2.0. While the timing and scope of federal reform continues to be uncertain, we see the reintroduction of the SAFE Act in both the House and Senate and these positions has incrementally positive steps in the road to reform. I'd like to now turn the call over to Ben to discuss our investment and portfolio activity in the first quarter and year to date.

Ben?

Ben Regin -- Chief Investment Officer

Thanks, Paul. As Alan noted, year to date, we have closed on approximately $91 million of additional investments, including follow-on transactions to fund additional infrastructure at our existing properties, as well as new acquisitions. In March, we closed on the acquisition of an under-development, 157,000-square-feet, two-story industrial building and executed a long-term lease with a new tenant, Battle Green. Battle Green's leadership team includes Joe Caltabiano, co-founder and former president of Cresco Labs; Chad Wise, co-founder of North American Dental Group; David Ellis, former chief operating officer of Cresco; and Deanna Mettler, former CFO of Equifax Canada.

We acquired the development property in mid-construction, and our total investment is expected to be $42 million. Ohio's medical cannabis program is well over 300,000 registered patients, and Ohio is expected to decide on adult-use cannabis program adoption this year. As we noted on our last call, investment activity for 2023 also includes the sale-leaseback transaction for a 58,000-square-foot fully operational cannabis facility with TILT in Pennsylvania for $15 million and an additional $34 million for improvements at three projects, each of which resulted in a corresponding adjustment to base rent that started immediately. Those included $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 well as for TILT. We also closed on the sale of a property portfolio that we previously leased to Vertical in Southern California for a little over $16 million and executed a secured seller note for approximately that amount with the buyer with cash interest payable monthly. As you may recall, we announced the signing of that sale agreement in our last call and closed on the transaction shortly thereafter. Regarding our San Bernardino property, the property we took back from Kings Garden late last year, we executed an LOI with the group to explore a potential mixed-use development of the property, which may include a self-storage component.

While we are in the very early stages of this project and expect the process to take many months, we'll look to keep you updated on our progress. For our properties in Texas and Pennsylvania were Parallel defaulted. As Paul noted we took back the Texas property in mid-March and are currently exploring options for that site. In Pennsylvania, Parallel continues to occupy that property, while we work through the process to regain possession in the context of Pennsylvania's licensing dynamics, and we'll provide updates as we can.

With that, I'll turn it over to Catherine. Catherine?

Catherine Hastings -- Chief Operating Officer

Thanks, Ben. For this call, I will describe our property portfolio and tenant roster, in addition to our rent collections statistics and updates on our development projects. As of March 31, we owned 108 properties across 19 states, comprising 8.9 million rentable square feet. Of these 108 properties, 103 properties are included in our operating portfolio.

Our portfolio continues to be well diversified with no one tenant representing more than 14% of our total invested capital and no state representing more than 17% of our total invested capital. We have relationships with some of the largest and most experienced operators in the industry with our operating portfolio comprised of 89% multistate operators and 58% leased to public company tenants. In addition for operators with multiple leases with us, we have cross-default provisions included for 42% of our operating portfolio with another 14% of our operating portfolio leased to operators with just one lease with us. The total amount of capital invested and committed across our operating portfolio equates to $275 per square foot, which we believe remains significantly below replacement cost.

For the first quarter, we collected approximately 98% of contractually due base rent and property management fees from our operating portfolio. The 2% we did not collect related to contractual rent in excess of security deposits applied for our previously disclosed defaulted tenants, Parallel and Green Peak, and contractual rent not collected prior to the sale of the Vertical portfolio that Ben previously discussed. Our revenue and rent collection for the quarter included the application of approximately $4.2 million in security deposits. As we previously disclosed in last quarter, we amended our leases with Holistic in exchange for the inclusion of cross-default provisions and extensions of terms for all the leases and agreed to apply security deposits for their rent payments to the Michigan and California properties through September 30 with pro-rata payback of these security deposits starting in January 2024.

For Q1 2023, we applied $1.1 million of security deposits for these two Holistic properties, which represent less than 2% of our total invested capital, and we note that rent was paid in full by Holistic at all other properties. This quarter, we also applied in full the security deposits we held for Parallel, Texas, and Pennsylvania and for Green Peak at our Summit property in Michigan and recorded revenue totaling $3.1 million related to these previously disclosed defaults. We collected April and May rent from all tenants, other than Parallel for the Pennsylvania property, which Parallel continues to occupy, and the two small retail properties leased to Green Peak that Paul mentioned previously. We also continue to fund draws for improvement allowances or construction development to our operators under our leases.

As we've previously noted on prior calls, these improvements are critical for the efficient production of quality cannabis products at scale. In Q1 of 2023, we funded $66 million for building improvements and construction activity at our properties. As in prior quarters, we continue to see construction delays related to delivery of electrical infrastructure, specifically switchgear, which is the common delay seen across the entire construction industry. We continue to believe in the tremendous value of our mission-critical real estate portfolio, as well as our operators and their ability to weather the current conditions, and we'll continue to monitor their progress closely in the coming months.

And with that, I'll turn it over to David. David?

David Smith -- Chief Financial Officer

Thank you, Catherine. I'm pleased to be here for my first earnings call with the IIP team and appreciate everyone joining for today's call. I continue to be enthusiastic about the significant long-term growth of the cannabis industry and believe that IIP as the only publicly traded cannabis REIT on the New York Stock Exchange is best positioned to continue to capitalize on this unique opportunity by providing growth capital to the industry. Moving on to the quarter, we generated total revenues of $76 million, an 18% increase from $65 million generated in Q1 of last year.

The increase was driven primarily by the acquisition and leasing of new properties, additional funding of building improvements provided to tenants at certain properties that resulted in base rent increases, and contractual rental escalations at certain properties. As Catherine noted previously, the $76 million of revenue for the first quarter included $4.2 million of security deposits applied for payment of rents with $1.1 million or $0.04 per share of that amount related to our Holistic leases in Michigan and California. And the remaining $3.1 million or $0.11 per share of security deposits fully applied related to lease defaults by Green Peak at one property in Michigan and Parallel at one property in each of Pennsylvania and Texas. For the three months ended March 31, 2023, we recorded net income attributable to common stockholders of $41 million or $1.43 per share.

AFFO for the first quarter was $63.4 million or $2.25 per share, an increase of 10% compared to the $2.04 per share of AFFO generated in the first quarter of 2022. In addition to adding back non-cash stock-based compensation and non-cash interest expense related to our unsecured senior notes, AFFO for this quarter also adds back the non-refundable cash interest payments we received on the seller financing provided to the buyer of our vertical portfolio. As those cash interest payments were not recognized as income for GAAP purposes. We included this add-back to give greater clarity on the cash flows of the company and we'll continue to recognize this interest income for AFFO as it has received going forward.

On April 14, we paid a quarterly dividend of $1.80 per share to common stockholders of record as of March 31, equivalent to an annualized dividend of $7.20 per common share. We have continued to share our growing cash flows with our investors as our dividends paid in the last year grew 16% over the prior year. Our dividend remain covered by our AFFO during the quarter was a payout ratio of 80% which is in line with the board's targeted payout ratio of 75% to 85% of AFFO. At quarter end, we had approximately $2.6 billion in total gross assets and roughly $304 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 2026.

At quarter end, our credit metrics remained among the best in the entire publicly traded REIT industry but that debt-to-gross assets ratio of less than 12% and a debt service coverage ratio in excess of 16 times. In addition, the company continues to generate significant cash flow from operations, which totaled nearly $240 million over the last 12 months. These excellent credit metrics and free cash flow generation have resulted in us continuing to maintain our investment-grade credit rating. With that, I will turn it back to Alan.

Alan?

Alan Gold -- Executive Chairman

Thanks, David. And I would like to note the following in closing. First and foremost, our conviction is as strong as ever in the long-term growth and promise of the regulated cannabis industry, and our team of highly experienced talented professionals will continue to work through the inevitable challenges of this rapidly evolving high-growth industry. With the quality of our team and strength of our balance sheet and the quality of our facilities, I believe we are well-positioned to meet these challenges and continue to focus on value creation for you all, our valued long-term owners.

With that, I'd like to open it up for questions. Operator, could you please open the call up for questions?

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Tom Catherwood from BTIG. Tom, please go ahead.

Tom Catherwood -- BTIG -- Analyst

Thank you, and good morning, everybody. I stick with state legalizations for a second. You mentioned Maryland sales starting in the near term and Delaware flipping and then obviously the expectation that Ohio is next. But we used to see this kind of a material pickup in activity when we had the Med-Direct shift we saw in Illinois and Massachusetts, New Jersey, but recent legalization it seem to have kind of languished, whether it's New York or Virginia.

Do you think that this medical-to-recreational kind of shift has permanently changed? We're not going to get the upside or is it really state-by-state specific and kind of what gives you confidence in a place like Ohio?

Paul Smithers -- President and Chief Executive Officer

Hey, Tom. Thanks. This is Paul. No, I don't think that momentum, it may have slowed, but I don't think, it's a paradigm type of shift.

I think if you look historically, certainly Med-Direct shift dramatically increases revenues, sales, taxes, et cetera. So there is a tremendous incentive I think for the states to facilitate the transition. So, yeah, we've seen some hurdles in New York, rolling out direct program but that's really done at the legislative level and the governor's office. I think people want it and the operators want it.

So I think, it's a learning curve with the state regulators figuring out how to balance some social equity demands with running the business. So I think, this is just more of kind of a speed bump than something that's going to stick around for a long time.

Alan Gold -- Executive Chairman

I would also add that probably what you're noticing is more related to the capital markets and access to the capital markets that the industry has been going through over the last, similar period of time that you're referencing.

Tom Catherwood -- BTIG -- Analyst

Alan, you mean as far as --

Alan Gold -- Executive Chairman

You know, the activities that -- the companies don't have access to capital, so they can't expand and grow in those markets, but I think what you're -- when you started out saying that the positive sales and activities that occur from going from medical cannabis to adult use are still there and continue to be there, but maybe have -- maybe are slightly muted because of the -- of the capital markets.

Tom Catherwood -- BTIG -- Analyst

Got it. Understood. That makes sense. And then kind of sticking with tenants for a second.

Ben, I appreciated the background on the founders of Battle Green Holdings, that's probably going to go a long way toward answering my question, but we see the fierce competition out there for capital in the cannabis sector. When you're evaluating a new tenant to potentially bring them into your portfolio, how is your evaluation process or your underwriting or those key performance indicators that you're looking for, how has that evolved as capital has become more constrained?

Ben Regin -- Chief Investment Officer

Hey, Tom. Thanks. Yeah, I'd say we -- we've taken a similar approach that we've always taken. I think we have been able to leverage the experience that the team here has being in this industry over the last six-and-a-half years and seeing how these markets play out as we've seen it time and again as different markets have gone from new medical program to the adult-use program.

So we'll be able to leverage, in the Battle Green example, what we're expecting out of Ohio. We certainly focus very, very highly on the management team and making sure that we think that the group that they have in place is the right team to execute on their business plan through the inevitable ups and downs of the industry. We think we have that with Battle Green. We really like their management team, very excited about that transaction.

So I would say that our disciplined underwriting has not changed over the years. Its management team, its capitalization, its markets we like, quality real estate still all goes into it today.

Tom Catherwood -- BTIG -- Analyst

Got it. I appreciate that, Ben. And then last one for me. Paul, I appreciate your comments about larger MSOs focusing more efficiencies than growth or M&A at this point in time.

From your conversations with tenants, how far along are they in kind of gaining efficiencies in their operations? And have there been any more requests for deferrals thus far in the second quarter?

Paul Smithers -- President and Chief Executive Officer

Yeah. Well, I think what we're talking to and what we're seeing in these challenging times, it certainly makes sense for these operators to cut operational costs, really get efficient, look at the states they want to be in, look at what redundancy. So we're seeing quite a bit of that. And obviously, we think that's good for the industry overall because efficiency is good.

As far as have we had any indications, no, nothing that we're certainly aware of. So we're very happy about the rent collection this quarter and going forward. And as we said in the past, we strive to be as transparent as we can. So we will absolutely share with you if we have any indication that there'll be any future difficulties with rent collection.

Alan Gold -- Executive Chairman

And not to mention the fact that, if you just think about our portfolio, as described by Catherine, over 89% of our tenants are MSOs, very strong tenants. So we think we have, I think, very strong tenants that we have right now and as described earlier even on a percent of revenue, which if you look at it, 59% of our revenue comes from tenants with cross-default and single tenant leases. We think the strength of our tenant continues to strengthen our growth and that comes from the green shoots that we're seeing with the strength of some of the resurgence or some of the stock prices in our public company tenants, which represent 58% of our portfolio.

Tom Catherwood -- BTIG -- Analyst

Appreciate all the color. Thanks, everyone.

Paul Smithers -- President and Chief Executive Officer

Thanks, Tom.

Operator

And our next question comes from Scott Fortune from ROTH Capital. Scott, please go ahead.

Scott Fortune -- ROTH Capital Partners -- Analyst

Good morning, and thanks for the question. Kind of the follow-up there, can you provide a little color on the recent portfolio acquisitions in the amendments more specifically nature of these qualifying improvements, as I know you guys allocated $34 million in additional commitments. Are these clients are adding production capacity because of New Jersey and New York? Are these more project costs needed to kind of reach completion from that standpoint? And then thoughts of adding in Pennsylvania, a very challenging market, with tenants that have or have had tough time generating cash flow, kind of in that state. Just going -- get a sense of the continued addition for money going to these tenants and kind of the strategy there? Or is it kind of implications from that standpoint?

Brian Wolfe -- General Counsel

So thank you for the question, Scott. So before I turn it over to Ben to go into the details of the $34 million of amendments, just want to remind again what we said in our prepared remarks that the construction projects, in general, have because of the past issues with supply chain continue to be affected by the supply chain issues that are occurring. Development projects are for our tenants who are in the process of completing these projects are taking longer and the costs have increased significantly and that we don't see that abating anytime soon. But go ahead, Ben.

You want to talk about the details?

Ben Regin -- Chief Investment Officer

Yeah. Sure, Scott. So we evaluated these amendments like we would any amendment. It is typically for expansion of an existing facility.

These three were all in either New York and New Jersey, two markets that our tenants feel there's tremendous growth opportunities. They want to be ready to capture the market as it continues to grow. On our side, we also see it as a great opportunity to continue to support our tenants as well as make any other changes or amendments to leases that we think would be beneficial. We got cross-default language and all leases with the tenants that we executed these amendments with which we think adds additional value on our side while supporting our tenants and properties in states that we think will continue to grow going forward.

Brian Wolfe -- General Counsel

And then -- thank you, and thanks, Ben. And then as to Pennsylvania, I'm going to turn that over to Paul kind of just describe what we think is going on in the Pennsylvania market.

Paul Smithers -- President and Chief Executive Officer

Yes, thanks. So new bills have been filed to legalize cannabis through the state-run stores in May of this year, and it's interesting to note that the budget that was recently released by Governor Shapiro in March of this year assumes adult-use sales beginning on January 21 of '25. So could be earlier than that, but we look at those as very positive. If the governor is already writing in adult-use sales into the budget, that's an interesting sign.

Scott Fortune -- ROTH Capital Partners -- Analyst

Got it. Appreciate the color there. And then one other housekeeping item for me kind of on the opex side, which is still elevated versus 4Q. Help us understand kind of property expenses, that's a $5.6 million versus 4Q and kind of expectations of opex levels going forward from these levels, that would be helpful.

David Smith -- Chief Financial Officer

Yes, Scott. Hi. It's David. Great to speak with you.

That's just a unique aspect that we started this January were on the reimbursement side. Previously we bill our tenants as we receive the bill for insurance and taxes, which caused the revenue to be more episodic. At the beginning of this year, we started to bill the tenants on a monthly basis for both taxes and insurance. So as you know, there is a corresponding expense that is also being recognized.

So for those tenants that where we get reimbursed, that's just awash, so you'll see the income coming in on the revenue side and the outgoing expense.

Scott Fortune -- ROTH Capital Partners -- Analyst

Great. And so the level of opex kind of -- you know, without, you know [Inaudible] going forward, kind of expect it to kind of remain similar to the --

Alan Gold -- Executive Chairman

Correct. So Q1 will be more representative of a run rate with our change in the process here.

Scott Fortune -- ROTH Capital Partners -- Analyst

I appreciate, and I'll jump back in the queue.

Operator

Our next question comes from Alexander Goldfarb from Piper Sandler. Alexander, please go ahead.

Alexander Goldfarb -- Piper Sandler -- Analyst

Hey, good morning out there. And David, congrats. Welcome aboard. And Cat and Ben, congrats on the promotions.

So Alan sort of big picture, it would seem like with the pullback in capital, you guys would be in a much better market position given you're one of the few large players that can fund the turmoil in the industry. Again, should sort of raise risk premiums, which makes investing more attractive, I would think draws capital into the sector, especially outside of like states like California, which have seen a lot of issues. But obviously, the stock is depressed. And for the past few quarters, we haven't seen you guys be able to raise outside capital to invest.

So does the narrative or the investment thesis in cannabis changed from a few years ago? Or what do you explain as a disconnect because it would seem like your yields are getting better, there are fewer competitive capital people that you're fighting against, and yet, the stock hasn't reacted? And two, it does -- it sounds like it's still tough for you guys to source accretive capital which seems odd given the opportunity. So I'm just trying to understand where you think the disconnect is.

Alan Gold -- Executive Chairman

I mean, I don't know that there is a disconnect. I think that what you're seeing is something that is occurring in the broader real estate, and you know, market, especially with regards to our stock price. I mean, if you look at the broader real estate public company names, they've all had significant reductions in their stock price, and that theme is -- I think drives the stock price for all companies, including ourselves, and the concern in the -- from the general as to who typically drive stock price is higher or make moves and stock prices is one of -- a lot of cautious -- with caution with regards to real estate companies, in general, because of the significant and rapid increase in interest rates that have occurred by the Fed. And therefore the significant and rapid increase in and just the cost of debt that many of the real estate companies use and driving up I think cap rates and for general real estate companies, all of that affecting the broader real estate market.

Now, luckily, because we have a very strong balance sheet, we have -- we do have options. And we could have continued down the path of making, I think, accretive transactions, which we actually did do when we acquired two acquisitions for $57 million which were highly accretive and generated, I think, a portion of the positive revenues that we were able to report. Now the -- our desire is to move forward. I think the board and the management team came to the conclusion that it -- that being very cautious in this environment where our tenants are struggling with changes in the regulatory environment, changes with their own financial conditions, all were appropriate to let things settle and for us where we are 10 times larger than any other competitor.

We think we have time on our side to be able to appropriately evaluate the broader economy, the cannabis, and our acquisitions programs. And since we've -- are being very cautious on that the need for us to raise capital certainly at these prices, it doesn't make sense to us at this point. In the future, as things move to a more positive position as we're starting to see the green shoots in the industry pop up, we will reevaluate that on a continuous and constant basis.

Alexander Goldfarb -- Piper Sandler -- Analyst

OK. So what you're saying is the overall -- the investment universe continues to get better. You see targeted opportunities but again something that you guys have said which is not complicating the balance sheet and being smart with how you raise capital. So you're fine being patient.

The opportunity is still there. In fact, it's probably better. But that's just, I guess, what we have to wait out, right? That's what you're saying, Alan?

Alan Gold -- Executive Chairman

You could put those words in my mouth, if you'd like.

Alexander Goldfarb -- Piper Sandler -- Analyst

OK. I have a second question that you may not appreciate the words. But let me ask you this. The proxies, the neo tables that-- you know, proxies, sometimes those are quite different than reality.

Sometimes what's printed is not what you guys actually make. But in this year's proxy, it looks like the stock awards went up significantly, which is sort of in contrast again with the stock performance. So again, the stuff that goes into these comp tables is pretty scientific. So maybe you could just walk through sort of how the stock awards went up given the stock performance over the past year and if these are part of multiyear plans that were already in place.

Therefore, it's already sort of set versus something that was new as a reflection of how 2022 went.

Alan Gold -- Executive Chairman

All right. I think it's more of the latter. It is the -- these multi-year plans, the majority of what you're discussing comes from performance stock awards that only would happen and only be granted to the management team. Should we achieve the performance metrics associated with this long-term performance programs and that would be -- and those would be an outperformance in terms of, as compared to the broader real estate industry and in an outperformance within a group of what we -- what the program considered peers which was highly focused on single net leased entities and industrial reach.

And so if we outperformed and the stock had a significant outperformance, then a portion of that could -- that stock could be earned. But because of the way the proxies works and because of the way these complicated schedules are required, the full value that could be earned, if some miracles occur, have to be reported.

Alexander Goldfarb -- Piper Sandler -- Analyst

OK. So that's -- yeah, I don't know why these neo tables are like that because they're misleading, but I appreciate it. So basically, it's incentive for you guys to work hard. If you work hard to achieve, great.

If not, it's not -- these aren't the real numbers. That is what you're saying.

Alan Gold -- Executive Chairman

Yeah. These aren't the earned numbers today.

Alexander Goldfarb -- Piper Sandler -- Analyst

The earned numbers. OK, OK. And then just a final question. Getting back to the political scene, you mentioned potential for the SAFE Act.

We could have a debate as to whether that would pass the GOP and especially House and this time and especially because you still need another 20 more senators to get over the filibuster. But I'm curious on the Cole 2.0, Biden administration has been in office for two years. They certainly have been progressive enough. Why do you think they haven't had Cole Memo 2.0? And that part seems odd because that -- they could do unilaterally.

They wouldn't need Congress.

Paul Smithers -- President and Chief Executive Officer

Yeah, I think that's a fair question. You could certainly say that they've been distracted by other things. Cannabis is not the No. 1 issue in the White House or this Congress, but we look at the positive.

And it was certainly interesting last year when the administration talked about rescheduling. And by all accounts, that is moving forward. As far as the AG, on the 2.0, you're right. That could be done overnight.

Perhaps, he's waiting to try and see which way the wind's blowing with the rescheduling that the White House is spearheading, and it's also going through the AG's office. So they are political. They want to coordinate rescheduling conversation with the Cole Memo 2.0. But as far as SAFE banking, yes, it's still a hurdle.

We're not going to say it's going to happen as a done deal, but we look at the positive. When we look at Sherrod Brown, chairman of Senate banking, he's been an officer. He's head of chairmanship for two-and-a-half years, and this is the first time he's scheduled a hearing which could happen actually this week. So that's how it starts to get a hearing in Senate, then ask to go back to the House Financial Services Committee, and we'll have a little more pushback there.

But yeah, we realize it's -- we're not trying to communicate that we think is going to happen more likely than not, but we're looking to positive, and getting a hearing with Sherrod Brown's committee is definitely a positive.

Alexander Goldfarb -- Piper Sandler -- Analyst

OK. Thank you.

Operator

We have a question from Eric Des Lauriers from Craig-Hallum Capital. Eric, please go ahead.

Eric Des Lauriers -- Craig-Hallum Capital Group -- Analyst

Thank you for taking my questions. So a couple of ones from me, just to kind of better understand your thinking with respect to some of these headwinds facing cannabis operators. First one on the West Coast markets, just wondering how you are thinking about the tenants and properties in these markets. We've had some MSOs leaving these markets, some investors kind of looking at prices and saying, "No one can make a profit in these markets." And thus, you see a high probability of defaults in these markets going forward.

So just wondering, you know, do you agree or disagree with those sentiments? And just could you provide some more color on your thinking for these markets? Thanks.

Alan Gold -- Executive Chairman

I think from the very beginning, we've been very cautious about the West Coast markets, working with what we thought were very strong tenants. But I do believe, and as Paul mentioned -- Paul, maybe you want to continue to reiterate what we're seeing in California and the strengthening or tightening or --

Paul Smithers -- President and Chief Executive Officer

Yeah. I think it's -- especially the last I'd say six to 12 months, there's been quite a bit of activity in Sacramento, recognizing that the illicit market and the grey market are significantly hampering regulated sales. So budgets have been increased, taxation on cultivators has been decreased. So those are positive signs, and California is taking the situation seriously.

As you know, we've always recognized California is a challenged market. But at the same time, we understand how large the California market is and we strive to identify those operators. We feel that we have the best chance of success. So you can make money in California.

Many of our tenants are doing that. So we think it's a positive thing what the state is doing. It's not going to happen overnight. It's going to take significant budget to combat the black market and to put more administrative dollars to converting grey market operators into licensed operators.

So we still think that the size of California requires a lot of attention to the state, and it will balance. And I think we are seeing some indications of some price, especially on indoor-grown product which we are solely involved in. So we take these as positive signs.

Eric Des Lauriers -- Craig-Hallum Capital Group -- Analyst

All right. I appreciate that color. And the next one from me on the same lines here. So you've had some MSOs talking about potential M&A in negotiations now, some commentary that at least one of them is expecting the landlords to sort of potentially help chip in to help alleviate some of the costs going forward here.

Can you just talk about how the IIPR management team is kind of thinking about potentially chipping in or potentially helping to lower costs if some of these properties go from a distressed operator to a more financially sound operator? Just your overall thinking along those lines would be very helpful. Thanks.

Alan Gold -- Executive Chairman

So going back to our concept that we have, I think very strong portfolio statistics. Including that 42% of our revenue rents covered by cross-default, you can see where we're going -- where we're going with it is that anybody thinking that IIPR is -- want to be party to such a transaction, should probably rethink that through very quickly. We believe that we have very strong tenants. We believe that the industry has some positive things occurring in it.

We believe that it's -- that we're very well-positioned to continue to help the industry grow. But making sure that our shareholders are compensated for their investments and their risks that they're taking is our No. 1 -- our primary goal.

Eric Des Lauriers -- Craig-Hallum Capital Group -- Analyst

Thank you.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Alan Gold, executive chairman, for some final remarks.

Alan Gold -- Executive Chairman

Thank you. And once again, thank you all for joining us on this call today. Thank -- a big thank you to the team for all their hard and dedicated work to get us to where we are today. We look forward to better, and thank you for joining us on the call.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Brian Wolfe -- General Counsel

Alan Gold -- Executive Chairman

Paul Smithers -- President and Chief Executive Officer

Ben Regin -- Chief Investment Officer

Catherine Hastings -- Chief Operating Officer

David Smith -- Chief Financial Officer

Tom Catherwood -- BTIG -- Analyst

Scott Fortune -- ROTH Capital Partners -- Analyst

Alexander Goldfarb -- Piper Sandler -- Analyst

Eric Des Lauriers -- Craig-Hallum Capital Group -- Analyst

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