© Reuters.
Progressive Industrial Properties (NYSE:) Integrated (IIP), an actual property funding belief specializing within the hashish business, has reported a 12 months of progress in its fourth quarter and full-year 2023 earnings name.
The corporate, recognized by its ticker IIPR, achieved a 7% improve in annual adjusted funds from operations (AFFO) per share and a 12% rise in complete revenues in comparison with the earlier 12 months.
With a powerful stability sheet and a low debt profile, IIP stays optimistic about its future investments and leasing alternatives, regardless of acknowledging the present challenges within the hashish market.
Key Takeaways
- IIP reported a 7% progress in annual AFFO per share and a 12% improve in complete revenues for 2023.
- The corporate declared elevated annual dividends since inception, exhibiting constant monetary power.
- $119.5 million in capital was dedicated, with new leases and LOIs for 5 properties exceeding $140 million.
- A brand new $45 million revolving credit score facility was closed, enhancing the corporate’s liquidity.
- IIP maintains a sturdy liquidity place with over $175 million in complete liquidity and no debt maturities till Might 2026.
- The corporate is intently monitoring potential regulatory modifications in hashish classification, which may have an effect on federal taxes on hashish operators.
- 100% lease assortment was achieved in This fall, and the corporate funded $21 million for constructing enhancements and development actions.
Firm Outlook
- IIP anticipates cautious however opportunistic funding pursuits in 2024.
- The corporate sees potential progress in states like Florida and Pennsylvania and bettering sentiment within the New York market.
- There’s a concentrate on leasing efforts to scale back the elevated property bills incurred in This fall from properties taken again from Kings Backyard and Parallel.
Bearish Highlights
- Issues have been raised about facility efficiencies and pricing stability within the hashish market.
- The impression of recaptured areas on NOI stays unsure as a consequence of ongoing lease negotiations.
Bullish Highlights
- The corporate highlighted stabilization in markets like California and Michigan.
- Tenants, comparable to Holistic Forefront, have resumed money lease funds, offering a optimistic outlook on tenant relations.
Misses
- Particular numbers relating to the recaptured areas and their impression on NOI weren’t offered.
Q&A Highlights
- Questions have been raised in regards to the pricing dynamics of indoor versus out of doors hashish merchandise, with managed indoor rising being favored for its high quality and consistency.
- Discussions on lease assortment statistics revealed the necessity to distinguish between potential lease and precise lease collected, with additional particulars to be offered offline.
- Property bills and tenant reimbursements have been addressed, noting that whereas bills have risen as a consequence of inflation, reimbursements are mirrored in income and are anticipated to normalize as properties are re-leased.
IIP’s portfolio boasts 108 properties throughout 19 states, sustaining a excessive occupancy fee of 96% and a weighted common remaining lease time period of 14.6 years. The corporate’s management expressed gratitude to stakeholders and the crew for his or her assist through the name, underscoring their dedication to the corporate’s progress and stability within the evolving hashish business panorama.
InvestingPro Insights
Progressive Industrial Properties Integrated (IIPR) continues to display monetary resilience and progress potential, as mirrored within the firm’s latest efficiency metrics. In accordance with InvestingPro information, the corporate’s market capitalization stands at $2.69 billion, with a sturdy gross revenue margin of 93.02% for the final twelve months as of Q3 2023. This spectacular margin underscores the corporate’s effectivity and skill to handle prices successfully.
InvestingPro Suggestions spotlight IIPR’s dedication to rewarding shareholders, as evidenced by its monitor document of elevating dividends for 7 consecutive years. This constant improve in dividends displays a steady and assured strategy to capital distribution. Moreover, IIPR’s important dividend yield of seven.64% is a testomony to its dedication to offering worth to its buyers.
Furthermore, IIPR’s low EBITDA valuation a number of, which stands at 16.8 as per the adjusted P/E ratio for the final twelve months as of Q3 2023, means that the corporate is buying and selling at a horny valuation relative to its earnings earlier than curiosity, taxes, depreciation, and amortization. This monetary indicator, mixed with the corporate’s average degree of debt and liquidity that exceeds short-term obligations, positions IIPR as a doubtlessly profitable funding for these in search of publicity to the true property sector throughout the hashish business.
For buyers thinking about a deeper dive into IIPR’s financials and future projections, InvestingPro gives further insights and metrics. There are 11 extra InvestingPro Suggestions accessible, which could be accessed by visiting https://www.investing.com/professional/IIPR. To boost your funding analysis expertise, use the coupon code PRONEWS24 to get an extra 10% off a yearly or biyearly Professional and Professional+ subscription.
Full transcript – Progressive Industrial Properties (IIPR) This fall 2023:
Operator: Good day. And welcome to the Progressive Industrial Properties Integrated Fourth Quarter and Full Yr 2023 Earnings Name. All contributors will probably be in listen-only mode. [Operator Instructions] After at the moment’s remarks, there will probably be a possibility to ask questions. [Operator Instructions] Please word this occasion is being recorded. I’d now like to show the convention over to Brian Wolfe, Normal Counsel. Please go forward.
Brian Wolfe: Thanks for becoming a member of the decision. Presenting at the moment are Alan Gold, Government Chairman; Paul Smithers, President and Chief Government Officer; David Smith, Chief Monetary Officer; Catherine Hastings, Chief Working Officer; and Ben Regin, Chief Funding Officer. Earlier than we start, I’d wish to remind everybody that statements made throughout at the moment’s convention name could also be deemed forward-looking statements throughout the that means of the Secure Harbor of the Non-public Securities Litigation Reform Act of 1995 and precise outcomes might differ materially as a consequence of quite a lot of dangers, uncertainties and different components. Please seek advice from the paperwork filed by the corporate with the SEC, particularly the latest stories on Types 10-Okay and 10-Q, which establish vital danger components that would trigger precise outcomes to vary from these contained within the forward-looking statements. We aren’t obligated to publicly replace or revise any forward-looking statements, whether or not because of new data, future occasions or in any other case. As well as, on at the moment’s name, we are going to talk about sure non-GAAP monetary data, comparable to FFO, normalized FFO and adjusted FFO. Yow will discover this data along with reconciliations to probably the most straight comparable GAAP monetary measure in our earnings launch issued yesterday, in addition to in our 8-Okay filed with the SEC. I’ll now hand the decision over to Alan. Alan?
Alan Gold: Thanks, Brian, and welcome, everybody. We’re happy to debate our outcomes for the complete 12 months 2023 and up to date exercise as we enter into our eighth full 12 months of operations. The corporate carried out properly in 2023 and has continued to execute year-to-date, demonstrated by one, annual AFFO per share progress of seven%. Two, growing our annual dividends declared every year since inception in 2016; three, committing capital totaling $119.5 million throughout 2023. 4, executing new leases and LOIs to launch 5 properties, representing over $140 million of invested capital and 5, additional enhancing our liquidity place and powerful stability sheet with the closing of a brand new $45 million revolving credit score facility. For the 12 months, IIP generated complete revenues of $310 million and adjusted funds from operations of $256 million, will increase of 12% and 10% over 2022, respectively. I’d word that these progress outcomes have been achieved throughout a time after we strategically decided to scale back our examine improve value of capital. That monetary efficiency allowed us to proceed to develop our dividend. With $7.22 of frequent inventory dividends declared over the course of 2023. Annual dividends growing every year since inception. Our most up-to-date dividend declared in This fall of $1.82 per share was on the midpoint of our Board’s goal dividend payout vary of 75% to 85% of AFFO. Now we have one of many strongest and most skilled groups of actual property professionals within the hashish business, a high-quality portfolio and a conservative and versatile stability sheet with a 12% debt to complete gross belongings. No variable fee debt, no debt maturities till Might 2026. We additional enhanced our stability sheet place throughout This fall with introduction of a revolving credit score facility after which not too long ago upsized that facility earlier this month, which David will contact on additional. On the investments entrance, we’re very happy with our execution on releasing initiatives in addition to the alternatives we’re seeing to selectively shut on new investments, which Ben will talk about in additional element. From a regulatory perspective, as we famous in our prior name, we proceed to comply with intently the potential rescheduling of hashish from Schedule 1 to Schedule 3 below the Managed Substance Act. In fact, there are important advantages to this, a very powerful of which, from our perspective, is the potential lifting of the confiscatory 280e federal taxes imposed on regulated hashish operators, and Paul will talk about our ideas in additional element. I’ll now flip the decision over to Paul to debate licensing, regulatory and business dynamics. Paul?
Paul Smithers: Thanks, Alan. Licensing. Earlier than discussing general market developments, I would like to supply an replace on the properties leased or beforehand leased to Parallel, Inexperienced Peak and Kings Backyard. As now we have famous previously, and I feel it’s value repeating right here, we’re in fact before everything targeted on maximizing the worth of every of our properties and having tenants with sturdy groups that may handle their companies efficiently by way of the inevitable ups and downs with the business. As we mentioned intimately beforehand, Inexperienced Peak was positioned into receivership in March of final 12 months, and we subsequently regained possession of the Summit Constructing, a cultivation and processing facility below redevelopment, and three small retail places. The receiver additionally determined to show again the Harvest Park cultivation and processing facility to us, however we count on the client of the remaining Inexperienced Peak receivership property to imagine the leases for the opposite three retail places with no modifications to phrases. As you additionally know, we filed actions towards Parallel for possession and damages at our Texas and Pennsylvania properties and regained possession of these two properties in March and October of final 12 months, respectively. We’re actively exploring all choices for these properties. With respect to the Pennsylvania property, a consent order was issued in October awarding us damages of $15.5 million, of which we collected $1.7 million in This fall. And in late September, as we beforehand disclosed, we regained possession of the remaining 4 properties beforehand occupied by Kings Backyard. As Alan famous, we’re happy with our releasing efforts thus far for these properties, and Ben will present additional element in his ready remarks. Market Developments. Progress of the general hashish business within the US continues to stay sturdy, with BDSA projecting hashish gross sales to extend roughly 10% in 2024. BDSA estimates US hashish gross sales have been $29.5 billion in 2023, representing roughly a 12% progress from 2022. Though unit pricing for regulated hashish merchandise has been below stress in sure states on the wholesale degree for a while now, indoor hashish cultivation continues to command important, sustained premiums versus greenhouse and out of doors counterparts. A number of components have an effect on unit pricing, together with fundamental supply-demand dynamics, lack of significant enforcement in sure states on illicit non-licensed hashish gross sales by state and native regulation enforcement authorities, taxation and normal macroeconomic situations. From a state market perspective, we proceed to see divergence in efficiency and dynamics with new markets experiencing excessive progress, whereas some mature markets change into more and more aggressive, particularly after an prolonged interval of value compression and the aforementioned challenges in competing with the illicit markets. For instance, 2023 noticed sturdy rollouts for adult-use gross sales in Missouri and Maryland and Ohio legalized adult-use in November. With gross sales anticipated to start this 12 months in Ohio anticipated to be one of many fastest-growing markets within the close to future. On the flip facet, whereas New York launched its adult-use program greater than a 12 months in the past, it stays constrained by restricted retail availability and a thriving illicit market, although there are efforts within the state to ramp up enforcement efforts. For extra perspective, BDSA put out latest estimates that illicit competitors drives greater than three quarters of complete gross sales within the New York market, and that there have been roughly 50 lively adult-use retailers within the state earlier this month versus over 2,000 illicit retailers. Capital availability. One other persevering with theme from our prior calls is the impression that the tightening of economic situations has had on capital availability for the hashish business. As with different industries, the price of capital and capital availability have essentially modified for hashish operators over the course of the previous few years. With Viridian Capital Advisors reporting that each U.S. operator, capital elevating, and mergers and acquisitions exercise in 2023, have been at their lowest ranges since earlier than 2018, the funding surroundings continues to be challenged proper now. That stated, we have seen a major stability in lots of publicly traded MSO inventory costs for the reason that announcement by the Division of Well being & Human Companies which might be really useful to the DEA a reclassification of hashish from Schedule I to Schedule III. Federal laws. On the Federal laws entrance, we’re intently awaiting progress on the DEA’s analysis of the HHS suggestion to reschedule hashish to Schedule III. Most significantly, such a reclassification is anticipated to finish the 280E tax remedy, which has imposed an excessive unsustainable tax burden on regulated operators for years. We count on such a change to be an excellent win and doubtlessly important optimistic catalysts for the business, instantly offering significant enchancment in lots of operators’ financials. To present you a way of the magnitude for this potential adjustment, a latest Viridian evaluation estimated that removing of 280E earns may cut back the 12 largest publicly-traded operators collective tax burden by $700 million yearly, offering for a rational tax construction for these operations, a lot of which confronted efficient tax charges of properly over 100% below the 280E regime. I would wish to now flip the decision over to Ben to debate our portfolio and leasing exercise within the fourth quarter and into 2024. Ben?
Ben Regin: Thanks Paul. For my ready remarks, I plan to spotlight our leasing progress for our vacant and under-development belongings. We took again possession of our Summit property in Michigan in March of 2023, whereas it was below redevelopment. We signed an LOI for the asset in Q3, lower than six months after repossession and executed a lease in This fall. We anticipate finishing redevelopment of the 201,000 sq. foot undertaking in This fall of this 12 months and are wanting ahead to our new tenant transferring in and activating the constructing. Along with the lease for the Summit constructing, we have additionally executed LOIs for each our McLane and nineteenth Avenue properties in Southern California. We’re working diligently by way of lease negotiations on these belongings and can present updates as we progress. These two belongings, together with Summit, symbolize over $120 million of invested capital and we’re very happy with the demand we noticed for the house and the velocity by which we have been in a position to get every asset below LOI or lease. Additionally, as Paul famous, Inexperienced Peak is anticipated to maneuver out of our Harvest Park property on March 1. We noticed important curiosity within the asset for the reason that announcement of Inexperienced Peak’s departure and executed a letter of intent earlier this month forward of Inexperienced Peak’s transfer out date. Lastly, we signed a lease final month for considered one of our three vacant retail belongings in Michigan. We’re persevering with to market to lease the remaining two retail belongings, in addition to our North Anza and Del Sol belongings in Southern California, a complete of which is lower than 1% of our complete invested capital. Relating to our San Bernardino property, as famous on earlier calls, we’re exploring a possible mixed-use improvement of the property, and we’ll proceed to supply updates on progress on future calls. For our land website in San Marcos, Texas, we proceed to discover choices for that website, the place vertical development has not but commenced. And at our Pittsburgh, Pennsylvania asset, Parallel wound down its operations in late October, and we have been awarded a consent judgment for possession and damages at the moment, as Paul famous, and picked up about $1.7 million on that judgment in December. As we now have management of the asset, we’re actively exploring leasing choices for the property. Relating to new funding exercise, now we have continued to selectively shut on new alternatives, supporting our tenant companions and their progress initiatives in key markets. As we beforehand reported, we amended our lease with Goodness Progress in New York in This fall, offering further funding to finish the event of the expanded cultivation and processing facility and growing lease accordingly. As Goodness Progress beforehand disclosed, and we famous in our final name, the corporate is exploring the sale of its New York operations, together with the operations at this facility. We additionally executed a lease modification with PharmaCann to supply further development funding of $16 million for our New York asset as PharmaCann executes on its technique to increase manufacturing capability after being awarded an adult-use manufacturing license late final 12 months. We’re happy with the demand we’re seeing for our belongings throughout markets and the numerous leasing progress now we have made within the final 12 months, whereas additionally persevering with to supply engaging new funding alternatives, which we are going to proceed to pursue on a really selective, disciplined foundation. With that, I will flip it over to Catherine. Catherine?
Catherine Hastings: Thanks, Ben. For this name, I will describe our property portfolio and tenant roster along with a lease assortment statistics and updates on our improvement tasks. As of December 31, we owned 108 properties throughout 19 states, comprising 8.9 million rentable sq. toes, together with 1.4 million sq. toes below improvement or redevelopment. Of those 108 web properties, 103 properties are included in our working portfolio, which was 96% leased at year-end with a weighted common remaining lease time period of roughly 14.6 years. Our portfolio continues to be properly diversified with nobody tenant representing greater than 16% of our annualized base lease and no state representing greater than 15% of our annualized base lease. Now we have relationships with among the largest and most skilled operators within the business, with our leased working portfolio comprised of 90% multistate operators and 62% leased to public firm tenants. The whole quantity of capital invested and dedicated throughout our working portfolio equates to $275 per sq. foot, which we imagine stays considerably beneath substitute value. Transferring on to lease assortment. We collected 100% of contractually due base lease and property administration charges from our working portfolio in This fall. Lease collected for the quarter included roughly $800,000 of safety deposits utilized for the cost of lease in reference to an modification with forefront at considered one of our Illinois properties. As we indicated previously, this property has been below improvement since August of 2021 and has skilled important delays to get everlasting energy delivered to the constructing, which is required to get it operational. We acknowledged this hardship. And in January this 12 months, restructured 4Front Illinois rental obligation to scale back the bottom lease due by way of September 2024 and improve their obligation thereafter, permitting for higher alignment of 4Front’s future Illinois rental obligations with their capacity to generate income from the property, whereas additionally extending the time period of all 4 leases now we have with 4Front. We’re additionally happy to report that the constructing did lastly get everlasting energy in January, and we sit up for this undertaking’s completion within the close to future. This fall lease assortment included roughly $700,000 of the $1.7 million collected in December 2023 from Parallel pursuant to a consent judgment awarded in our favor, and utilized to lease due from Parallel for October 2023 at considered one of our Pennsylvania properties, which Parallel vacated on October thirty first. As David will describe subsequent, the complete $1.7 million from Parallel, elevated our income for the fourth quarter, however solely $700,000 impacted our This fall lease assortment statistics. Total, for the complete 12 months 2023, we collected 98% of our contractual lease on our working portfolio. As for the primary two months of 2024, we collected 100% of contractually due base lease and property administration charges from our working portfolio. We additionally continued to fund attracts for enchancment allowances or development improvement to our operators below our leases. As we beforehand famous on prior calls, these enhancements are crucial for the environment friendly manufacturing of high quality hashish merchandise at scale. In This fall of 2023, we funded $21 million for constructing enhancements and development actions at our properties. Lately, a number of tasks obtained their operational standing, together with Battle Inexperienced in Ohio, with a number of different tasks projected to finish this subsequent quarter. And with that, I will flip it over to David. David?
David Smith: Thanks, Catherine. For the fourth quarter, we generated complete revenues of $79 million, a 12% improve from This fall of final 12 months. The rise was pushed primarily by a rise in tenant reimbursements versus the prior interval, in addition to exercise in prior durations for the acquisition and leasing of recent properties, further funding of constructing enhancements offered to tenants at sure properties that resulted in base lease will increase and contractual rental escalations. The $79 million of income for the fourth quarter included roughly $0.8 million of secured deposits utilized for cost of rents or $0.03 per share and $1.7 million or $0.06 per share obtained as partial cost from the consent judgment towards Parallel for its failure to pay lease at considered one of our Pennsylvania properties beforehand leased to Parallel. For the three months ended December 31, 2023, we recorded web revenue attributable to frequent stockholders of $41 million or $1.45 per share. Adjusted funds from operations for the fourth quarter was $64 million or $2.28 per share, a rise of 8% in comparison with the fourth quarter of 2022, pushed by elevated tenant reimbursements, income generated by properties acquired in prior durations, contractual lease escalations and income earned on further CapEx investments at present properties. AFFO for the fourth quarter was down $0.01 per share versus the third quarter AFFO of $2.29, with a lower primarily as a consequence of our taking again the remaining 4 properties at Kings Backyard occupied till late September. Relating to Kings Backyard, as talked about on final quarter’s name, ends in the third quarter included $1.7 million or $0.06 per share of lease from Kings Backyard relevant to these 4 properties, which was partially offset by $0.4 million in funds made by Kings Backyard within the fourth quarter, pursuant to a consent judgment issued in our favor. On January 12, we paid a quarterly dividend of $1.82 per share to frequent stockholders of document as of December 29, a rise of $0.02 per share versus the third quarter dividend of $1.80. As Alan famous, our dividend remained coated by our AFFO through the quarter with a payout ratio of 80%, which is in step with the Board’s focused payout ratio of 75% to 85% of AFFO. Turning to the stability sheet. At year-end, we had roughly $2.6 billion in complete gross belongings and roughly $304 million in mounted fee debt. Our debt excellent as of at the moment consists solely of $300 million in unsecured bonds not maturing till Might 2026 with the holders of the remaining $4 million of exchangeable senior notes, having alternate their notes in full, Earlier this month for a mixture of money and customary inventory or obtain money cost at maturity. We proceed to take care of credit score metrics which might be among the many greatest in the whole publicly traded REIT business with a debt-to-gross belongings ratio of lower than 12% and a debt service protection ratio in extra of 16x. On the liquidity entrance, we ended the fourth quarter with over $175 million of complete liquidity and comprised of our money, short-term investments and availability below our revolving credit score facility. We closed on this credit score facility final October, which, at the moment, was a $30 million three-year facility. I am happy to report that simply this month, we have been in a position to improve our capability by $15 million to supply us $45 million in complete availability. We’re properly positioned as we proceed to take care of a conservative and low leverage stability sheet, generate optimistic free money move and have now added one other liquidity possibility for the corporate with the closing of this credit score facility within the fourth quarter. Lastly, because of the funding exercise that Ben talked about, we opportunistically tapped our ATM program on a restricted foundation, issuing 101,000 shares of frequent inventory for $9.6 million in web proceeds. With that, I’ll flip it again to Alan. Alan?
Alan Gold: Thanks, David. I would like to notice the next and shutting. Now, into our eighth 12 months of operations. I am pleased with what our crew of devoted professionals has completed over that point. With our property footprint, crew experience stability sheet place and strategic focus, I imagine we’re properly positioned for the journey forward, serving a dynamic business with a continued long-term progress trajectory. With that, I would wish to open it as much as questions. Operator, may you please open the decision up for questions.
Operator: Thanks. We’ll now start the question-and-answer session. [Operator Instructions] Our first query comes from Tom Catherwood from BTIG. Please go forward.
Tom Catherwood: Thanks, and good morning, everybody. Paul, you had beforehand talked about and type of talked about that you simply anticipated weaker operators to exit mature markets over time. And there was an article out this week that spoke to a year-over-year decline in lively US hashish licenses in 2023, regardless of expansions of states like Maryland, New Jersey and Illinois. How has this tightening impacted your markets and are you anticipating extra consolidation in 2024?
Alan Gold: So, Tom, that is Alan. First, I would wish to say that we’re actually very pleased with our present tenant base and our present portfolio and the geographic diversification of our properties. We predict that now we have among the strongest tenants within the business. And we imagine that the expansion that we exhibited in 2023 at 7% year-over-year progress is one thing that’s replicable and we sit up for continued progress in 2024. However now I will flip it over to Paul to reply the query.
Paul Smithers: Yeah, hey, Tom. So, yeah, I feel we have at all times found out that there can be some consolidation over time and now we have seen that. However I feel it is vital to notice that our tenant base is, as you realize, primarily indoor growers. So what we’re seeing a variety of the consolidation is among the states which have extra out of doors develop and greenhouse develop. So we’re very proud of the efficiency of our operators. And if we do see some consolidation in among the greater states with Michigan and California, as we have famous previously, we expect that is solely a optimistic. 90% of our tenant base are MSOs. So we expect we’re actually well-positioned going ahead.
Tom Catherwood: It is actually useful. Then we’re making an attempt to piece collectively a few objects. Since 3Q, you have put extra capital to work than you probably did over the prior two quarters. David, you talked about tapping the fairness markets opportunistically in 4Q and clearly, upsizing the credit score facility to $45 million. How do these things relate to your curiosity and possibly consolation degree in pursuing further investments this 12 months?
Alan Gold: So, once more, that is. Alan. I imply, I feel that we’re cautiously, as we have been in 2023, protecting the identical type of view in 2024, being very cautious however opportunistic. We imagine that now we have been in a position to drive sturdy returns for our shareholders and are going to proceed to take action. And that we imagine that the power of our present tenants continues to be distinctive. And we sit up for a brilliant 2024. However now I will let Ben speak about our portfolio and our pipeline.
Ben Regin: Hey, Tom, respect the query. The pipeline, we’re seeing a variety of engaging new alternatives. And we actually take into consideration driving income progress going ahead. There’s the pipeline the place we’re seeing opportunistic transactions on the market that we will benefit from and in addition need to spotlight the 460,000 sq. toes of leasing and LOI exercise we had out of our improvement portfolio, in addition to one other 128,000 sq. toes inside our working portfolio that now we have below lease or LOI within the final 12 months. So not solely the brand new transactions that we will pursue, however almost 600,000 sq. toes of leasing exercise between our new leases and LOI and final 12 months, I feel we’ll proceed to set us up properly for continued income progress going ahead.
Tom Catherwood: Admire that colour. After which final one for me. Ben, and Paul, I do know you each touched on New York and the challenges that it has had however sentiment from MSOs appears to be bettering out there. I feel PharmaCann introduced plans to extend headcount by almost 3x within the state and clearly, you have made incremental investments over the previous few months in New York. What are you seeing on the bottom within the state? And the way do you count on the market to evolve going ahead?
Ben Regin: Sure. Thanks, Tom. I feel we’re seeing — we’re blissful to see the extra retail licenses being issued. There is definitely been some historic challenges, however we very very similar to the place that our tenant companions are within the state. To your remark about PharmaCann, we do there is a large quantity of worth in that asset particularly. Plenty of the cultivation within the state is both out of doors greenhouse. As Paul touched on, that is likely one of the only a few high-quality indoor services within the state. I feel it units PharmaCann up very properly to benefit from the wholesale alternatives that we will see. It’s projected to be one of many high markets within the nation, maybe not rising as quick as some had hoped in earlier years, however we’re actually seeing some enchancment, seeing the improved sentiment from the MSOs, as you talked about, individuals which might be very bullish on the state need to get into the market. They acknowledge the potential there and we’re very blissful to assist our tenant companions on their progress initiatives in that state.
Tom Catherwood: Admire all of your ideas. That is it for me. Thanks, everybody.
Paul Smithers: Thanks, Tom.
Operator: The following query comes from Scott Fortune from ROTH MKM. Please go forward.
Scott Fortune: Thanks. Thanks for the questions right here. Simply type of need to dig a little bit deeper in that in all probability for Ben, in that, as you speak along with your tenant companions. We have seen most of them actually concentrate on value efficiencies and bettering yields inside type of the company services to drive their profitability and margins as the costs compress right here in a few of these markets. However two issues. One, higher off and enhance your tenants money move era, which is vital for the tenant well being. However extra importantly, a second, what’s IPA [ph] your assist or your involvement in bettering these facility efficiencies and bettering yields. And do you count on to see type of facility enchancment wanted extra transferring ahead right here to achieve success in a normalized decrease pricing surroundings for them? And just a bit follow-up on that may be type of whereas demand type of quantity for hashish stays very strong. Sort of the place you — are you seeing pricing stabilize in your likelihood in these key states to type of additional strengthen that to from that standpoint? Sorry, long-winded query there, however I simply need to dig deeper into that.
Alan Gold: So Scott, that is Alan. So first, from the very starting, our enterprise mannequin and marketing strategy was to supply capital to among the smartest and greatest growers within the nation. And we have achieved that. Now we have a really sturdy portfolio and as has been famous earlier, that over 90% of our portfolio are MSOs. And as a matter of reality, over 62% of our tenants are public — public tenants and the bulk, if not virtually all of them at the moment are money move breakeven and or EBITDA breakeven or optimistic. And the enterprise mannequin is to supply them capital, in order that they’ll create very environment friendly areas and that they’re those who’re targeted on the effectivity of their operations. And as you may see, that they have been those doing that work and proceed to do this work and are, I feel, doing an excellent job of maintaining with the expertise and the efficiencies to have the ability to cope with pricing pressures and the macroeconomic points that the broader economic system is exhibiting. So I feel that, that may be how we might have a look at it. Now as to — I do not know if Paul or Ben need to speak in regards to the general pricing pressures on the wholesale pricing, however simply remember the fact that, as each Paul and Ben have reiterated that, we cope with an indoor develop primarily services and merchandise and or have tenants that cope with these kind of merchandise versus the out of doors develop merchandise that’s exhibiting probably the most pricing stress.
Ben Regin: Hey Scott, that is Ben. To comply with up on Alan’s feedback on pricing, I feel we have been very happy to see the stabilization particularly, among the markets individuals have been specializing in traditionally being California and Michigan. And the sentiment there has actually gotten higher, and I feel that is evidenced by the leasing success we have had in these two markets. I imply an excellent chunk of the almost 600,000 sq. toes of leasing exercise we talked about with each in Michigan and California. And most not too long ago, the Harvest Park facility that Inexperienced Peak intends to maneuver out of after they introduced that, we obtained an incredible quantity of curiosity, a number of gives, and we’re in a position to efficiently put that below LOI earlier than Inexperienced Peak even moved out of the constructing. So I feel that actually speaks to the best way operators on the bottom of these markets, their confidence going ahead and the pricing stability within the markets general.
Scott Fortune: Obtained it. I respect that colour. And possibly a follow-up on this dialogue. On ’23, we noticed a 12 months of retrenching by your tenants. Clearly, CapEx for a lot of the main MSOs that you simply work with got here off wherever from 30% to 50% and type of comparable expectations, though earnings are arising right here shortly type of for ’24 so far as the CapEx. However what are you listening to out of your tenants type of transferring ahead, if we get the federal aid. Clearly, you highlighted that the money move from the tax financial savings will probably be generated by the MSOs, that could possibly be handed by way of the pricing, but in addition they’re trying to develop, proper? And simply type of give a way that your tenants and what you are listening to from them, so far as relating to gross sales leaseback alternatives going into later in ’24 into ’25 in comparison with the final two, three quarters versus type of their CapEx expectations. Simply type of the temperature round your tenants from that standpoint bettering.
Alan Gold: All proper. So that is Alan once more. And to start with, I feel that I feel as we have said, we imagine that 2024 goes to look type of just like 2023. We imagine there may be nonetheless large demand for our capital and the kind of capital that we offer and there are important alternatives as we have additionally proven that we have been in a position to opportunistically benefit from some funding alternatives most not too long ago and which has allowed us to generate that above-average progress year-over-year. So, we nonetheless assume that that’s on the market. However we’re being cautious. And I feel Ben you’ll agree that we’re — I feel even the tenants on the market are remaining cautious.
Ben Regin: Sure, I feel that is honest. I feel we will probably be very strategic and disciplined in investing further capital. I feel, as Alan talked about, 2024 wanting like 2023, the place we have been in a position to supply very accretive, engaging alternatives, assist our tenants, develop our portfolio, and we intend to proceed to do this sooner or later.
Alan Gold: After which…
Scott Fortune: And one — go forward.
Alan Gold: I am sorry, possibly Paul, you talked in regards to the general business progress fee and–
Paul Smithers: Sure. I feel it is — after we speak about comparatively slower years in 2023 and possibly going ahead 2024, we won’t lose proven fact that we had a 12% improve within the general market in 2023 and looking out ahead in 2024, now we have a ten% improve. So, these usually are not insignificant numbers. And I feel we have a look at potential states approaching, primarily Florida and Pennsylvania, maybe with the adult-use applications this 12 months is actually thrilling. And I feel that is not misplaced on a variety of our operators, particularly in these states. So, they’re excited. And there is that pleasure, I feel, even should you put apart the rescheduling dialog. So, we see important progress with or with out rescheduling. And so our operators are enthusiastic about that. Additionally, now we have — 12 months final 12 months, Oklahoma, Minnesota, Delaware, Ohio, the sooner applications, and we’re taking a look at 2024 to have some improvement in these. So, these states — new potential states for adult-use are fairly thrilling for the business.
Scott Fortune: I agree fully Ohio, Minnesota and Virginia, are all anticipated to essentially come on board too. And final query actual fast, simply from a housekeeping facet of issues. Congrats on type of the pre-leases and LOIs in place. However only a follow-up on the amended leases you had from 2023, are these now being totally paid again as the rise towards the professional rata payback, we’re supposed to begin January 2024. Is that beginning going ahead right here?
Alan Gold: So, I will have Cath handle that. However simply — it goes to the power of our tenants and the way — whereas there was some want to supply some further aid, I feel issues appear to be continuing very properly. Cath?
Catherine Hastings: Sure. We have been happy to obtain the restricted deferrals that we had issued to a few of our tenants final quarter, they usually’ve all began paying rents, once more, money lease, holistic forefront have been the three tenants that we would supply that program to, and we’re blissful to see them begin paying money out once more.
Scott Fortune: Nice. Thanks for all of the element.
Alan Gold: Thanks Jeff. Operator: [Operator Instructions] The following query comes from Alexander Goldfarb from Piper Sandler. Please go forward.
Alexander Goldfarb: Morning on the market. A couple of questions for me. First, simply enthusiastic about the areas that you simply guys have recaptured after which re-letting, how a lot NOI is coming again on-line this 12 months from the areas that you simply recaptured final 12 months or earlier and that you’ve got now backfilled and have tenants which might be opening up this 12 months. Simply need to get a way for the way a lot NOI that’s on an annualized foundation after which when that NOI will come on-line this 12 months from an earnings perspective?
Ben Regin: Hey, Alex, that is Ben. I’d simply say that every scenario goes to be totally different. A number of the offers that we talked about are below LOI. We’re diligently working by way of lease negotiations. However the true property firm that takes a while. So I can not offer you a precise quantity as to when that income will start given the standing of negotiations. However once more, I feel we, as an organization are very proud of not solely the quantity of leasing exercise, the tempo of leasing exercise, the standard of the tenants that we have been in a position to supply to backfill these properties in hand. I feel it has been an incredible quantity of progress that we have made. However as to particular timing, we are going to proceed to report and supply updates as we will all year long.
Alexander Goldfarb: Okay. However Ben, alongside these strains, is there a way of how a lot in combination NOI there may be? Or it seems like that is — this leasing that you simply guys have achieved actually is extra of a 2025 impression. Simply making an attempt to get a way, since you clearly have been busy, you spoke positively about among the markets which have stabilized and the depth of the leasing in California and Michigan, which is an efficient factor, or simply making an attempt to see after we ought to count on it to hit the underside line. And it virtually sounds prefer it’s a part of a 2025?
Ben Regin: With out — we do not need to get into offering steering. We do not need to get into particular deal phrases. I’d say that we’re very proud of the returns that we’re getting on our funding in every of those belongings in every case. Once more, this stuff take time, and we’ll work by way of LOIs and work by way of leases and get tenants within the house, get them up and operating, get them revenue-generating as quick as we will to proceed to drive income progress and supply worth to our shareholders.
Alexander Goldfarb: Okay. Subsequent query is, Paul, I feel it was you who spoke in regards to the distinction in pricing and the way your indoor product is commanding a premium out of doors and sizzling home product is below pricing stress. After which I suppose individually, there can be the illicit market. I am going to return to a theme that you simply and I’ve spoken about earlier than, particularly with fentanyl. Are you seeing — it sounds just like the market is lastly coming round to understanding the regulatory advantages of the product that is grown in your services? Is that the case? And do you assume that offers you a leg up versus the illicit market, or does the hashish market stay purely value pushed, and subsequently, individuals do not put a quantity premium on the standard that you simply guys present versus what is going on on in — from the illicit market or different sources?
Alan Gold: So Alex, that is Alan. Earlier than I flip it over to Paul, I simply need to simply remind you and all of the listeners that we do not contact the plant. We do not promote a single…
Alexander Goldfarb: Yeah, I did not — yeah, sorry about that, Alan. Sorry. Sorry.
Alan Gold: Yeah. And –However our tenants who do who’re working within the product are available, maybe, Paul, do you need to —
Paul Smithers: Yeah. So yeah, we have talked about this, Alex. And also you’re proper {that a} product rising in a managed surroundings, is vastly superior to a product that is grown outside and is topic to all the things outside, together with pests and variances within the climate. So are you able to simply begin with the concept when you may management the expansion, you get a greater product? And that is actually true for the medical product, which could be manipulated in centralizing the expansion to handle very sure medical situations. So medical product actually must be drawn indoors. If you speak in regards to the high quality of the grownup use product, it is usually comparable as a result of you may actually keep efficiency consistencies within the indoor surroundings. And that is crucial, I feel, for customers. And once you speak in regards to the illicit market, actually a danger that individuals do take, customers take, shopping for it off the road nook is you do not have consistency of product. And that is crucial. And you do not have the standard controls with the testing. So, sure, I do imagine that, knowledgeable customers actually are going to the regulated hashish surroundings for his or her product. However, individuals are individuals, and, there’s a price-driving quotient, too. And I feel, among the states that actually did create a synthetic pricing construction primarily based on taxing are coming round, and California is considered one of them, and determining that after they overtax a product, it makes it actually arduous for the buyer to purchase it. So we’re very optimistic that the states will come round and pricing will probably be extra in line the place it ought to be. And sure, the indoor product will stay the selection of knowledgeable customers.
Alexander Goldfarb: Okay. And simply…
Alan Gold: High quality and security.
Alexander Goldfarb: Okay. After which simply the ultimate query is, on the 280E, given the administration’s type of pro-cannabis mindset, is there something that is occurring throughout the discussions or the method that offers you pause that it could not occur? Or is that this merely going by way of a typical governmental timeline and it is acquired to undergo X months, X course of, no matter, however this may occur? I am simply making an attempt to determine if there’s any holdup or if that is simply typical authorities course of. And the information got here out some time in the past, and now we simply have to take a seat round and wait out the shot clock.
Alan Gold: That is Alan, and earlier than I flip it over to Paul, and I am positive Paul goes to say the identical factor. It is simply — our job is to not — we’re not politicians. We’re not within the authorities — we’re not within the authorities. The political course of takes a very long time, and we’re working our enterprise with a really sturdy and strong stability sheet that can enable us to cope with any totally different tailwinds or headwinds which will come from any actions that happen within the broader economic system or the broader market.
Paul Smithers: Yeah, clearly, we’re type of studying what you are studying, and there is a variety of guesswork occurring as to when there will probably be an announcement, what the announcement will probably be, nevertheless it’s guesswork. What we do know is the DEA did verify that it’s conducting its assessment. In order that’s a reality we all know. In order that’s a really optimistic factor, I feel. So we will keep tuned. And, you realize, if historical past is any indicator, you realize, the DEA does sometimes comply with HHS laws, however that actually does not imply they should. So we’ll see, however we’re optimistic like the remainder of the world, however something can occur.
Alexander Goldfarb: Okay. Thanks very a lot.
Paul Smithers –: Thanks.
Operator: The following query comes from Eric Des Lauriers from Craig-Hallum Capital Group. Please go forward.
Eric Des Lauriers: Nice. Thanks for taking my questions. First one, a little bit of a high-level query from me, simply type of understanding the mechanics behind the lease assortment statistics. So I am simply type of questioning should you may also help me perceive what occurs type of mechanically to these statistics when a tenant stops paying. Now we have some defaulted properties, some improvement properties, some operational properties not totally leased, some safety deposits being utilized in the direction of lease. However then lease assortment statistics stay at 100%. So may you possibly simply stroll us by way of the mechanics of what occurs to your lease assortment statistics when a tenant stops paying? After which possibly to assist with modeling, is there a easy option to quantify the distinction between the lease you are amassing from tenants in a given quarter versus what you’ll be amassing in case your portfolio was 100% operational, 100% leased, 100% lease assortment? Yeah, there is a option to quantify type of the lease that you simply’re truly amassing versus the full potential lease to be collected. I feel that’d be useful. Thanks.
Paul Smithers: So, I imply, normally, I imply, we expect that now we have a really sturdy portfolio. One, we’re working similar to what different actual property corporations do. If a property and among the properties that we occur to present again have been in a improvement state, we put them in a improvement portfolio as a result of there’s work that needs to be achieved. It’s totally arduous to lease a property that isn’t accomplished or wanted or wants further work to truly get it in a leased state. But when it was a completely accomplished asset, then it might keep in our working portfolio and it might have an effect on our leasing statistics. An instance of an asset not – that went into our improvement portfolio was the San Marcos, Texas asset, which was actually simply land of the — and to notice, I feel, Ben, what did we accumulate on that?
Ben Regin: Yeah. So our foundation in that asset is about $8 million, and we collected over $6 million in rents from the tenant throughout their occupancy.
Paul Smithers: But it surely’s nonetheless simply land, and to ensure that us to launch it, we might should both construct it out or discover a tenant who wished to truly full the totally designed undertaking that was designed by Parallel on the time. In order that’s why that is in our improvement portfolio and never a part of our working statistics.
Eric Des Lauriers: Okay. And is there a option to type of assist us calculate or quantify the distinction between type of complete lease potential after which what you are amassing, particularly with a few of these improvement properties and different lease properties doubtlessly begin amassing income or, I suppose, amassing rents in 2024, simply type of making an attempt to assist quantify the potential impression right here, given lease assortment statistics stay at 100%?
Paul Smithers: It’s one thing that we’ll should get again to you offline, should you do not thoughts, on that, should you can — that may be the most effective. All proper. Thanks.
Eric Des Lauriers: No drawback. After which simply final query for me is simply type of a little bit of a housekeeping one to the property bills and tenant reimbursement. Is that this nonetheless — these property bills, are they nonetheless being 100% reimbursed. And so within the occasion the place there’s a distinction between property expense and the quantity of reimbursed, it is simply type of a timing subject. In order that’s, I suppose, my first query right here. After which the second is, how ought to we take into consideration this going ahead? It is elevated every quarter for the previous two years right here. Is that this associated to a selected tenant or a selected property? Will this start to lower at any time? Simply any type of perception can do mannequin these property bills can be nice. Thanks.
David Smith: Sure. Certain, Eric. That is David. So one merchandise I will simply make clear in your remark for the online expense that we have had all through this 12 months from Q1 to Q3 has truly gone down, not gone up versus what you stated. However individually, I feel you are alluding to going from Q3 to This fall, we did see a rise within the general web expense and so in different phrases, a reimbursement we obtained from tenants much less say taxes insurance coverage that we paid. That was pushed by the properties we took again from Kings Backyard in September and Parallel, Pennsylvania in October. So we did have elevated property bills in This fall simply because we’re on the hook for these bills. That being stated, given what Paul and Ben talked about on the re-leasing exercise that we have had, these will go down over time, simply given within the substantial releasing efforts that we have introduced at the moment with our outcomes.
Eric Des Lauriers: Sorry, possibly simply to make clear right here. So I am referring to the primary line merchandise within the bills, the property bills, which have elevated every quarter right here. And my understanding was that these have been principally — these are additionally mirrored in income and that they have been merely type of reimbursement that you simply acknowledge the bills after which get reimbursed. So I do not know if that helps make clear my query, however I used to be simply taking a look at that first line merchandise I although it might…
David Smith: Sure. Sure, should you’re taking a look at simply that line merchandise, that is appropriate. However these may also go up. You are going to see inflationary will increase in insurance coverage and property taxes. However to your level, Eric, the precise reimbursement from the tenants, that is coming by way of the income line as properly. So you really want to web these two collectively. However they’ll – they are often episodic, to your level, relying on when these come by way of for the taxes of insurance coverage. So there generally is a timing distinction as properly.
Eric Des Lauriers: Okay. After which I suppose simply type of last item on this, like general, I imply, these have been growing every quarter. Is that this what we must always count on to proceed going ahead simply I imply assuming inflation — a gradual inflationary surroundings, I suppose, I am simply making an attempt to grasp that first expense line merchandise and the way that going ahead.
David Smith: Certain. I’d simply return to my prior touch upon that, Eric, the place you probably did see the bills improve from Q3 to This fall. And once more, that was pushed by taking again properties between Kings Backyard and Parallel. In order these properties get launched, with the re-leasing actions that Ben had talked about, you will see a few of these come down over time.
Eric Des Lauriers: Thanks.
Paul Smithers: Thank, Eric.
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: Thanks. And I would wish to thanks all of the stakeholders in your continued assist. I thank all of the crew right here at Progressive Industrial Properties for his or her continued arduous and unbelievable work. Thanks all. With that, we’ll log off. Thanks all.
Operator: The convention has now concluded. Thanks for attending at the moment’s presentation. Chances are you’ll now disconnect.
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