Innovative Industrial Properties, Inc. (NYSE:IIPR) Q3 2023 Earnings Call Transcript

But it would be definitely a positive for the operators to have better access and cheaper. And then we always go back to what we were talking about earlier about the whole rescheduling idea, which we think is certainly more of an impactful to the industry than SAFER Banking would be right now because of the potential for 280E relief. So that’s what we are really keeping our eye on. But SAFER Banking would be good. But it’s — Schumer says he’s going to get it to the floor vote before the end of the year. We will see with all the competition with having to fund the government and is the various war fundings and it’s probably not going to get space this year. So, I think, if SAFER gets some floor time in the Senate, Q1 next year, it can get over the house, where I think we all understand it’s going to have some resistance at the house.

So all eyes on rescheduling for next year.

Alexander Goldfarb: Okay. The second question is, and yeah, I mean, especially given Mike Johnson’s view is hard to imagine the house passes, but who knows. But the second question is, on — as we look at the industry, one of the key issues that you guys have grappled with, although, you have managed through it is, every quarter there’s like a new tenant that comes up as a credit issue. So you guys are steadily resolving legacy credit issues, but then a new one pops up. So it’s like a conveyor belt, right? And ideally, it doesn’t…

Alan Gold: There’s no conveyor belt. Let’s not — don’t put those words in our mouth or out there. That’s not a fact that’s occurring. But we have dealt with some legacy credit issues. Maybe in your other companies or in your own personal life you have a conveyor belt of problems, but not in ours. So what’s your question again?

Alexander Goldfarb: Yeah. My question though is for the past few quarters, in fairness, there have been a number of tenant issues that have come up. So, historically, you are right, it hasn’t been a conveyor belt. But recently, we have been having that issue. So my question is, what is the key to getting the operators on a better footing? Is it the 280E tax burden going away? Is that the big solution? Is it better, stay crackdown on the illicit? What I am trying to do is understand what gets the current situation to resolve such that rent collections go back to 100% and you guys can regain a competitive cost of capital to continue to grow the way historically you have?

Paul Smithers: Yeah. Hey, Alex. This is Paul. So I think as we have said in prior calls and I know you and I have talked about it, it’s a combination of many things. Certainly, crackdown on the illicit market is one, price stabilization across the Board is another, and certainly, better access to capital for the operators, and that would probably mean stability in interest rates. So there’s a lot of macro factors that would come into play, I think, that would certainly improve the credit health of the operators. But again, 280E relief would be the number one and the quickest solution. I have been looking at various legal opinions and I think that if 280E — if we have a rescheduling during next year, that it would be retroactive to January 1, 2024.

So even if we get it sometime before the election, August, September, that would get relief for the whole tax year, most likely for these operators. So that’s something that could be an immediate relief and really move money down to the bottomline.

Alexander Goldfarb: Okay. Thank you.

Operator: The next question comes from Eric Des Lauriers with Craig-Hallum Capital. Please go ahead.

Eric Des Lauriers: Great. Thank you for taking my questions. First of all, just a bit of a housekeeping question. I was hoping you can help me understand the lease amendment with Goodness Growth a bit more. In the press release, it states that the improvement allowance has increased by $14 million to now about $67 million, but if I look at the property list from previous quarters, the amount of committed capital was already $67 million. So I am just wondering, is this just the difference between committed capital and tenant improvement allowance and that now post lease amendment, the committed capital for this property is now roughly $81 million?

Catherine Hastings: Yeah. Eric, that’s correct. The financial supplement is through September 30th. So we would adjust that with the amendments for this next quarter, but $81 million is the new committed capital.

Eric Des Lauriers: Got it. Thank you. And I guess just more broadly, can you just kind of talk about how you are viewing the risks associated with New York, obviously, it’s been a slower market to start. Illicit market is pretty entrenched there. Was a bit surprised to see more capital being allocated to that state. So, I guess, could you just kind of give us your updated thoughts on New York?

Paul Smithers: Yeah. So, obviously, New York has had some struggles, but the size of New York market is compelling and we do believe that it will get through these growing pains. And the big thing we really need to see, of course, is crackdown on the black market, but also open some more stores. And I think we are going to see that starting this quarter or next quarter, but we are going to see an emphasis on getting more retail stores open that can handle the supply. I don’t know, Ben, do you have any other thoughts on that?

Ben Regin: Yeah. And I would just add to that, I mean, even with all the historical issues that we might have seen in New York, it is still projected to be a top five market by 2027. So we do think there is a lot of long-term value in the state. Apart from state-specific dynamics and we felt that this was a good investment. This is an underdeveloped property — under development property that we wanted to make sure was completed on time. We felt that this adds value to the property for the long-term. So we like where this sets this particular asset up for a market that while has seen some challenges has a tremendous amount of growth potential.

Eric Des Lauriers: That’s helpful. I appreciate that. And then last for me, I am just hoping that you can help me kind of understand a bit more what’s going on with the Skymint assets and potential impacts to your rental revenues and overall portfolio. So a couple of weeks ago Sundial issued a press release announcing that their bid to takeover receivership of those Skymint assets was approved and that a part of that receivership process on economic leases representing more than $12 million of annual fixed obligations were rejected. So I guess just a few questions. What is the impact to your rent collection of this $12 million? Would you look to restructure this lease? How might a restructuring look? And then, I guess, just more broadly speaking, how do you kind of look at the risk of other leases of yours potentially being deemed uneconomical? Thanks.