Modern Industrial Properties (IIPR 8.04%)
Q3 2022 Earnings Name
Nov 03, 2022, 1:00 p.m. ET
Contents:
- Ready Remarks
- Questions and Solutions
- Name Members
Ready Remarks:
Operator
Good day, and welcome to the Modern Industrial Properties, Inc. Q3 2022 earnings convention name. [Operator instructions] Please observe, as we speak’s occasion is being recorded. I would now like to show the convention over to Brian Wolfe, common counsel.
Please go forward, sir.
Brian Wolfe — Normal Counsel
Thanks for becoming a member of the decision. Presenting as we speak are Alan Gold, govt chairman; Paul Smithers, president and chief govt officer; Catherine Hastings, chief monetary officer; and Ben Regin, vp of investments. Earlier than we start, I would prefer to remind everybody that statements made throughout as we speak’s convention name could also be deemed forward-looking statements inside the that means of the protected harbor of the Personal Securities Litigation Reform Act of 1995 and precise outcomes could differ materially resulting from a wide range of dangers, uncertainties and different elements. Please consult with the paperwork filed by the corporate with the SEC, particularly the latest experiences on Types 10-Ok and 10-Q, which determine essential threat elements that would trigger precise outcomes to vary from these contained within the forward-looking statements.
We’re not obligated to publicly replace or revise any forward-looking statements, whether or not because of new info, future occasions or in any other case. As well as, on as we speak’s name, we’ll talk about sure non-GAAP monetary info comparable to FFO, normalized FFO and adjusted FFO. Yow will discover this info along with reconciliations to probably the most instantly comparable GAAP monetary measure in our earnings launch issued yesterday, in addition to in our 8-Ok filed with the SEC. I am going to now hand the decision over to Alan.
Alan?
Alan Gold — Government Chairman
Thanks, Brian, and welcome, everybody. We’re happy to report one other stable quarter of operations and monetary outcomes, particularly within the context of the difficult macroeconomic situations throughout industries that we’re all experiencing. We consider we now have positioned ourselves nicely on this context with one of many strongest and most skilled groups or actual property professionals within the hashish business with a high-quality portfolio and are arguably one of the crucial conservative, versatile steadiness sheets throughout the true property sector. Now to recap the quarter, we generated whole revenues of $71 million in Q3, with progress in extra of 30% over the prior 12 months’s third quarter.
Hire assortment for IIPs working portfolio was 97% for the 9 months ended September 30, 2022, with solely tenants Kings Backyard and vertical not paying their full contractual lease. As we famous in our 8-Ok filed in September, we entered right into a confidential conditional settlement settlement with Kings Backyard. We’re restricted at this juncture as to what we will talk about. However we count on to offer additional info within the coming months as we will.
For now, Kings Backyard continues to occupy 4 of the properties underneath that settlement, whereas relinquishing two of the properties which can be underneath improvement again to us. We’re happy to report that we now have an LOI, letter of intent for a long-term lease at one of many properties in simply over a month of promoting the property for lease and stay up for finalizing the association with that operator. With respect to the San Bernardino property underneath improvement. With the present California market atmosphere, we’re evaluating all doable makes use of for that property, together with non-cannabis makes use of.
And earlier this week, we executed on our first property disposition, promoting a property in Pennsylvania that will likely be acquired in 2019 and leased to Maitri, a non-public single-state operator, we offered the property for $23.5 million or about $461 per sq. foot, which was above our foundation within the property, together with all funded enhancements. We’re happy to execute on this transaction and with our pipeline of potential extra investments, we see a chance to recycle that capital into superior risk-adjusted returns for our stockholders. We proceed to see vital alternatives to position capital. Nevertheless, we proceed to be extremely selective and affected person in our course of with the tightening of monetary situations additionally having a big affect on our personal price of capital.
That mentioned, we’re happy with the progress we now have made in putting capital over the course of the 12 months with slightly below $370 million of latest acquisitions and extra investments within the 9 months ended September 30. After all, we proceed to keep up one of the crucial conservative steadiness sheets within the industrial actual property business with 12% debt to whole belongings, no materials maturities till 2026 and a debt service protection ratio in extra of 15 instances. As we now have famous all through our six years of reporting our outcomes to you all, we proceed to have a deep conviction within the long-term progress prospects of the regulated hashish business and are positioned because the preeminent supplier of actual property capital for operators mission-critical actual property. I’ll now flip the decision over to Paul to debate business dynamics.
Paul?
Paul Smithers — President and Chief Government Officer
Thanks, Alan. I’d first like to emphasise, as Alan famous, that our conviction of the long-term progress of the regulated hashish business is unabated, with expectations from business analysts that U.S. regulated hashish gross sales will proceed its annualized double-digit progress over the approaching years. As we famous on our final name, we now have seen unit pricing for regulated hashish merchandise declined in sure states on the wholesale degree prior to now months, reflective of what we consider to be plenty of elements, together with primary provide demand dynamics, pushed by licensing buildings, lack of significant enforcement in sure states on illicit non-licensed hashish gross sales by state and native regulation enforcement authorities, taxation and common macroeconomic situations.
We’ve got seen and do count on to proceed to see value compression on hashish unit pricing throughout states to various levels relying on that state’s market dynamics and program specifics. That mentioned, we’re carefully monitoring the affect that California Legal professional Normal Rob Bonta’s latest announcement could have on the very giant, comparatively uninhibited illicit market within the state of California. In October, the California legal professional common introduced that California would develop its enforcement efforts in opposition to illicit hashish grows with its eradication and prevention of illicit hashish activity drive shifting the seasonal 90-day deal with eradicating illicit grows to a year-round observe with considered one of its targets to assist the authorized market. As we famous earlier than, we consider this continued value compression would require operators to proceed to deal with the twin points of name energy by way of product high quality and effectivity of operations and that our mission-critical amenities are nicely designed to attain each targets for our tenant companions.
As we must always observe, after all, that whereas wholesale common value compression offers some informative worth, pricing is closely dependent with extensive ranges based mostly on product high quality and licensing buildings with greater high quality, vertically built-in operators have distinct benefit over others by way of pricing dynamics. Capital availability. As we famous on our final name, monetary markets have grow to be more and more unstable and restrictive over the previous months for the reason that U.S. Federal Reserve started tightening financial coverage in March and pursuit of path of accelerating rates of interest on a time line that we frankly have by no means witnessed a rustic.
That volatility and restrictive atmosphere has not dissipated in any method from what we now have seen. And we see the battle in Ukraine, different geopolitical tensions and provide chain points, including to the unsure financial outlook and persevering with to stoke inflationary expectations. As with different industries, the price of capital and capital availability has essentially modified for hashish operators over the course of this 12 months. As we famous beforehand, capital elevating throughout the hashish business continues to be very subdued versus the relative energy of 2021, and debt continues to be the main target for many hashish operators this 12 months, with minimal fairness raised.
The truth is, in accordance with Viridian Capital Advisors, whole capital raised for U.S. regulated hashish operators was down by greater than two-thirds throughout the first three quarters of 2022 versus 2021. And by way of fairness capital raised down 96% from the prior-year interval. I would additionally observe that capital elevating has noticeably diminished within the public REIT markets as nicely throughout Q3, with whole capital elevating by way of each debt and fairness being the bottom since This autumn of 2009, the depth of the — nice Recession.
Whole capital elevating for Q3 was $6.2 billion, in comparison with $29.4 billion raised within the third quarter of final 12 months. Inflation and provide chain points. As we famous in our prior name, inflation continues to affect our operators by way of labor and enter prices along with driving up the price of development for improvement and redevelopment actions versus authentic budgets. As well as, continued provide chain points and labor shortages are leading to sure tasks being delayed of their completion.
After all, these developments have the impact of requiring the operator to place up extra capital to finish the challenge and/or leading to delays in income era as tasks take longer to finish. Together with the present atmosphere of restricted capital availability, these might be vital obstacles for sure operators. Federal laws. By way of latest federal developments, whereas there isn’t a substantive motion to report because it pertains to federal laws, we do need to contact on President Biden’s announcement to pardon prior federal offenses for easy hashish possession and the directive to the HHS secretary and legal professional common to provoke a evaluation of how hashish is scheduled underneath federal regulation.
Whereas this was actually an attention-grabbing announcement, the pardon for federal defenses itself impacts a really small cohort we now have just a few thousand as a overwhelming majority of convictions for easy hashish place are made on the state degree. Nevertheless, pardons represent an motion that can’t be undone by subsequent administrations. And so, in a way, that is the primary everlasting change to the federal hashish panorama in a really very long time, and there have been some who postulate this motion as a possible issue contributing to the argument for notification of federal legal guidelines pertaining to hashish with the premise being that the federal authorities has not strictly enforced hashish legal guidelines for years, and due to this fact, it must be left to the stage to determine. We discover this an attention-grabbing viewpoint.
And finally, it’s unclear what, if any, affect this announcement could have on the assorted federal legislative efforts in course of. By way of President Biden’s directive to the HHS secretary and AG to provoke a evaluation of present hashish scheduling, whereas this does signify a possible highway to rescheduling or descheduling — we predict it’s a highway that can take years to journey, requiring vital scientific analysis and, after all, time-consuming litigation alongside the way in which. I would prefer to now flip the decision over to Ben to debate our portfolio and funding exercise within the third quarter and 12 months up to now. Ben?
Ben Regin — Vice President, Investments
Thanks, Paul. For this name, I would prefer to cowl sure traits of our property portfolio and tenant roster along with discussing our investments 12 months up to now. As , we personal 111 properties throughout 19 states, comprising 8.7 million rentable sq. ft. Starting this quarter, we now have bifurcated our portfolio between our working portfolio, consisting of 109 properties and development in progress or CIP, comprising the 2 improvement tasks beforehand leased to Kings Backyard and the enlargement challenge at one property the place Kings Backyard continues to occupy the property pursuant to our settlement settlement with them.
For the 9 months ended September 30, 2022, we collected roughly 97% of contractually due base lease and property administration charges from our working portfolio. The Kings Backyard defaults in July contributed to a big majority of that 3% of uncollected lease. And as we have famous in prior calls, vertical, a tenant of ours in Southern California that represents lower than 1% of our whole invested capital and contractual rents has been making partial funds over time. As Alan famous, pursuant to the settlement settlement with Kings Backyard, we regained possession of two properties that had been underneath improvement.
We signed an LOI for a lease at one of many properties in a little bit over a month of promoting and stay up for working with that potential tenant towards finalizing the lease. For our San Bernardino property, given the dimensions and site of the asset, we’re exploring all doable makes use of, together with noncannabis to maximise worth of the asset within the present California market atmosphere. Our working portfolio’s whole price foundation, together with commitments to fund future enhancements, equates to roughly $272 per sq. foot, which we consider is considerably under substitute prices. Our working portfolio is break up between 67 cultivation in ore processing amenities, representing 90% of our invested capital, 33 retail areas, representing 3% of our invested capital and 9 amenities conducting mixed cultivation and processing and retail actions, representing 7% of our invested capital.
Nobody state accounts for greater than 17% of our whole invested capital and no considered one of our 30 tenants accounts for greater than 14% of our whole invested capital. Throughout our working portfolio, properties with multistate operators as tenants make up 85% of our invested or dedicated capital and properties with public firm tenants makes up 55% of our investor committee capital. Of our 109 properties in our working portfolio, 15 had been underneath both partial or full improvement or redevelopment or roughly 14% of our working portfolio as of September 30, constituting roughly 1.6 million rentable sq. ft with a weighted common lease size of 15.5 years for the working portfolio. We proceed to consider within the great worth for our mission-critical actual property portfolio, in addition to our operators and their skill to climate the present situations and we’ll proceed to observe their progress carefully in coming months.
By way of funding exercise, within the first three quarters of this 12 months, we acquired 9 properties and executed lease amendments to offer funding for enhancements at 9 properties, representing a complete funding dedication of about $369 million. As well as, as Alan famous, we executed on our first property disposition earlier this week, promoting a Pennsylvania property that we initially acquired in 2019 and leased to Maitri, a non-public single-state operator for $23.5 million or roughly $461 per sq. foot, which is, after all, the worth per sq. foot, nicely above our working portfolio common of $272 per sq. foot and above what we initially paid for the property, together with funded enhancements. Whereas we’re agency believers within the Pennsylvania market, in our view, this transaction offered a lovely alternative to strategically recycle capital into different alternatives with superior risk-adjusted returns. Whereas we’re, after all, centered on long-term possession of our properties, we’ll proceed to judge our portfolio and make strategic selections based mostly on the evolution of the person state markets and alternatives that current themselves.
By way of anticipated extra funding exercise, as at all times, forecasting funding exercise on this business is difficult. And as we famous on our final name, we proceed to count on the tempo of capital deployment to be considerably lighter than prior quarters as we deal with the flexibility to lift capital on phrases that we decide to be moderately favorable in mild of the alternatives to position that capital. With that, I am going to flip it over to Catherine. Catherine?
Catherine Hastings — Chief Monetary Officer
We generated whole revenues of $71 million for the quarter, a 32% improve from Q3 of final 12 months. The rise was pushed primarily by the acquisition and leasing of latest properties, extra constructing infrastructure allowances supplied to tenants at sure properties that resulted in base lease changes and contractual lease escalations at sure properties. Throughout the quarter, we didn’t gather contractual rents totaling $5.7 million from Kings Backyard and vertical, which incorporates roughly $5.3 million in base rents and property administration charges and $369,000 in tenant reimbursements for property taxes and insurance coverage. Nevertheless, we did apply roughly $2.6 million from safety deposits held by us for defaults by Kings Backyard in its obligations to pay lease to partially offset this lower.
As we have indicated prior to now, our Q3 income displays solely partial quarters of revenues from the acquisitions and investments executed throughout the quarter. And our revenues for the quarter had been additionally impacted by scheduled lease phase-ins underneath sure leases, which can proceed to part in over the subsequent six to 9 months as we proceed to account for all of our leases on a money foundation. For the three months ended September 30, 2022, we recorded web revenue attributable to frequent stockholders of $37 million or $1.32 per diluted share. Internet revenue for the quarter was impacted by $2 million in litigation-related bills incurred associated to Kings Backyard and the shareholder lawsuit filed earlier this 12 months.
You may observe that for this quarter, we have added again this expense from our calculation of FFO to normalized FFO. Adjusted funds from operations for the quarter, which provides again noncash stock-based compensation and noncash curiosity expense associated to our unsecured senior notes to normalized FFO was $60 million or $2.13 per diluted share. On October 14, we paid our quarterly dividend of $1.80 per share to frequent stockholders of report as of September 30, equal to an annualized dividend of $7.20 per frequent share. As we famous in our prior press releases, our board of administrators usually consider changes to the extent of our quarterly frequent inventory dividend each six months with any changes anticipated to be declared in Q1 and Q3 of every 12 months.
The board continues to focus on a dividend payout ratio of 75% to 85% on AFFO on a stabilized-portfolio foundation. For Q3, our payout ratio for the quarter was 84.5%. We additionally proceed to concern attracts for enchancment allowances or development improvement to our operators underneath our leases. As we beforehand famous and mentioned extensively on this name, these enhancements are crucial for the environment friendly manufacturing of high quality hashish merchandise at scale.
In Q3 of 2022, we funded roughly $35 million in attracts submitted for enhancements in development exercise at our properties. As Paul talked about, inflation is impacting labor and enter prices for operators along with driving up price of development for improvement and redevelopment actions. We’re additionally seeing development delays with sure improvement and redevelopment tasks in our portfolio, just like different development tasks usually with longer lead instances for supplies, given the continuing provide disruptions, which the broader financial system continues to face, which we consider could have been additional amplified in latest months by the battle in Ukraine, enrolling financial lockdowns in sure nations in response to continued COVID outbreaks. As only one instance of those delays, we have seen electrical swap gear for properties underneath improvement or redevelopment, take as much as a 12 months, plus for supply to the property after an order is positioned.
At quarter finish, we had roughly $2.6 billion in whole gross belongings and a complete of about $306 million in debt, consisting solely of unsecured debt with no maturities this 12 months or subsequent 12 months and $300 million of that debt not maturing till 2026. Our debt to whole gross belongings ratio was 12% at quarter finish, and our whole fastened money curiosity obligation on an annual foundation was $16.7 million or a little bit over $4 million per quarter. We have maintained investment-grade credit standing and have a debt service protection ratio in extra of 15 instances. Lastly, we might like to notice that our ideas are with these impacted by Hurricane Ian.
We have saved in shut contact with our tenant operators in Florida, main as much as landfall of the hurricane and thru the aftermath and our properties sustained minimal harm. And with that, I am going to flip it again to Alan. Alan?
Alan Gold — Government Chairman
Thanks, Catherine. I would like to notice the next is closing. Our conviction is as robust as ever within the long-term progress and promise of the regulated hashish business. And our workforce’s dedication to serving you all as homeowners of the corporate on daily basis to successfully handle the corporate by way of the inevitable flows of the regulated hashish business.
We actually admire and worth all of our long-term homeowners and our workforce is singularly centered on the safety and enhancement of the worth of this firm on your profit. With that, I would prefer to open it as much as questions.
Questions & Solutions:
Operator
Thanks. [Operator instructions] Our first query comes from Tom Catherwood from BTIG. Please go forward.
Tom Catherwood — BTIG — Analyst
Thanks, and good morning. Possibly beginning with the Maitri asset sale. Very attention-grabbing to see that this quarter. Are you able to present some extra coloration across the transaction? Sort of what I am getting at is, was this a reverse inquiry? Was this one thing that you just had been evaluating your portfolio and type of determined to type of prune a few of your belongings? What was the motive force behind this transaction?
Alan Gold — Government Chairman
All proper. Thanks, Tom. It is a very attention-grabbing query or a superb query. Preserving in thoughts that 85% of our tenants are MSOs and solely 15% are single-state operators and Maitri being a type of single state operators.
So we’re in fixed contact with all of our tenants, however primarily extremely centered, given the dynamics of the business and our single state operators. And a chance took place between Maitri traders and homeowners, the place it was a useful win-win state of affairs for them and for us to have the ability to transact. And we took it upon ourselves to maneuver ahead with the transaction, which I do assume is a win-win construction in that they’ve lowered the necessity for the long-term lease or they get rid of their long-term lease. And we get the capital again to redeploy in even greater yielding, higher high quality operators.
Tom Catherwood — BTIG — Analyst
Obtained it. Recognize that, Alan. That is actually useful. After which, possibly given the financial uncertainty, clearly, you talked about in your ready remarks, however are you seeing hashish operators pause or delay their capital spending plans?
Alan Gold — Government Chairman
I believe all industries and all corporations are utilizing this time or taking this time to reevaluate all of their operations. And I do not assume the hashish business is completely different in that sense. The one optimistic factor in regards to the hashish business is that revenues are persevering with to — are anticipated to proceed to develop. That is new states are coming on-line the income is predicted to double by, I do not know, 2026.
And in new states, there are — I believe there’s 4 new states that want to approve grownup use. And there are 5 states which can be anticipated — which can be on the poll coming this arising week. And with that progress and demand, I believe the business itself is whereas nonetheless nascent, nonetheless has great progress alternatives.
Tom Catherwood — BTIG — Analyst
Understood. And that is smart, particularly with the enlargement of state packages. I believe, Paul, you had talked about that as operators, hashish operators want to fund these expansions that they have been turning invariably to debt just lately. We have seen these yields push up 300-plus foundation factors.
That was earlier than the speed hike yesterday. Has there been an identical transfer in yields on sale leaseback transactions or offers that individuals are searching for out there?
Paul Smithers — President and Chief Government Officer
Sure. I believe, Tom, I believe usually, we now have seen an uptick commensurate with the remainder of the atmosphere. As we talked about that the pipeline nonetheless stays very robust, even at these elevated yields. I do not know, Ben, do you need to give any extra particular coloration on that?
Ben Regin — Vice President, Investments
Positive. I imply, as Paul mentioned, we’re seeing an identical uptick in yields for our capital. We’re seeing an amazing demand for the capital. And again to your earlier query as a part of why we had been so excited to execute on the Maitri transaction to recycle that capital into extraordinarily engaging, very high-quality alternatives.
Tom Catherwood — BTIG — Analyst
Recognize that coloration. After which, final one for me. Alongside those self same traces of pondering of accessible capital to place to work. On the 2 bigger Kings Backyard developments, it appears to be like like your foundation within the belongings is $10 million decrease than final quarter and the capital dedicated to the tasks is down nearly $28 million.
Are these quantities now a part of your uncommitted capital availability? Or are these type of quantities nonetheless earmarked to these developments?
Alan Gold — Government Chairman
I believe that — one money is type of-it goes on anyplace. It is money that is are available in and we will use it in any method we now have the — or any method we need to. The — I need to be very cautious that we do not speak in regards to the settlement in at this level. We nonetheless — there’s nonetheless issues that we’re working by way of, and we’ll look to speak about that within the months forward.
However we’re excited in regards to the — our availability of uncommitted capital. And the — actually, the alternatives we now have, as Ben mentioned, in our very robust pipeline with very robust operators.
Tom Catherwood — BTIG — Analyst
Obtained it. Actually admire the colour. Thanks, everybody.
Alan Gold — Government Chairman
Thanks, Tom.
Operator
The following query comes from Alexander Goldfarb with Piper Sandler. Please go forward.
Alex Goldfarb — Piper Sandler — Analyst
Good morning. Just some questions. First, possibly persevering with on that line of questions. Are you able to simply give a way of the economics of the backfill on the one warehouse and your ideas across the different simply — it is nice to see trades.
Clearly, the Pittsburgh one is nice, however simply could be helpful actually to get a way of the flexibility to reuse and whether or not or not the websites are price kind of.
Alan Gold — Government Chairman
OK. Nicely, first, on our — the Pittsburgh transaction, actually, we offered that at a better — or a better value than we initially paid for. So there’s one very robust knowledge level. Additionally, the — what we offered it for on a per-square-foot foundation is actually greater than we now have in a lot of our different belongings in that market and throughout the nation.
Third, on the asset — the event asset that we now have that we now have from Kings Backyard, we’re very, more than happy with the economics related to the LOI. This letter of intent is only a letter of intent, and we’re shifting as rapidly as we will to finalize lease. I simply need to be sure that folks perceive that nothing is completed till we even have a definitive settlement. However we’re very, more than happy with the economics related to that transaction.
Alex Goldfarb — Piper Sandler — Analyst
What in regards to the remaining one that you’ll reevaluate for different makes use of? How does your foundation evaluate to what different makes use of could be?
Alan Gold — Government Chairman
Nicely, we predict the premise and it’s under what different industrial industrial buildings out there have traded for prior to now. In order that’s one good factor. The truth that it is on the 215 free weight the truth that it is a freeway adjoining, it has freeway visibility, all play to the standard of this asset. We’re within the preliminary levels of attempting to maximise that worth for our shareholders.
And we hope to have extra info to come back within the subsequent 12 to 18 months.
Alex Goldfarb — Piper Sandler — Analyst
OK. Subsequent query is, Pat, on the safety deposits and simply excited about fourth quarter and go ahead, is there any safety deposits left remaining? Or ought to we take into consideration fourth quarter being down, kind of, name it, no matter, roughly $3 million.
Paul Smithers — President and Chief Government Officer
Are you able to make clear the final? And what are you referring to?
Alex Goldfarb — Piper Sandler — Analyst
You used safety deposits, — sorry about that. Land line, we nonetheless have. Safety. You guys have safety deposits that you just utilized in opposition to the Kings Backyard lease.
I am assuming that you’ve got exhausted these safety deposits. So for the fourth quarter, it appears like rents — the quarterly FFO was going to be down by the quantity of these safety deposits that had been utilized within the third quarter. Is that the case?
Catherine Hastings — Chief Monetary Officer
Sure. We’ve got utilized our full safety deposit. However past that, we’re not in a position to remark because of the conditional settlement.
Alex Goldfarb — Piper Sandler — Analyst
OK. After which, simply two different questions. One goes again to the feedback that you just guys talked about out in California, — good to see the AG on the market going after the authorized market. However simply curious, you bought Michigan, Colorado, Oregon, Washington, California, all these markets which have both had great value competitors or limitless licenses or and many others., your publicity in these markets, one, are all of the tenants present? And two, are these all markets that you’d proceed to develop in? Or is your view that as you develop the corporate, you are going to scale back publicity to the limitless license markets.
Alan Gold — Government Chairman
In order reported, we have collected the lease we gather the rents. And in these markets, all of our tenants are present as of as we speak. However what I need to — you centered on the geographic location of those tenants. And I believe that we wish you to need to just be sure you perceive is that once we’re making these investments, sure, we’re making them in geographic areas, which we predict are high-quality areas and mission-critical amenities, however they’re mission-critical amenities for the tenant operators.
And why we’re so centered on the truth that 85% of our tenants are multistate operators, benefiting from a broader market than anyone particular market. We consider that that has helped us generate one of many highest high quality portfolios of tenants. As a matter of truth, as you’ll be able to see on Web page 14 of our monetary complement, public tenants inside our prime 15 tenants have a mixed market cap of over $9.7 billion as of the top of the third quarter. And the general public tenants inside our prime 15 tenants reported on the finish of the second quarter, I believe income of over $1.4 billion and an annual run price of over $5.9 billion.
And lastly, of our prime 15 tenants, the entire public tenants reported optimistic adjusted EBITDA within the second quarter. So what we’re saying is that we now have very robust tenants and why we deal with the MSOs due to any particular person market might need a up or down in any time frame.
Alex Goldfarb — Piper Sandler — Analyst
OK. After which, only a remaining query. Sentinel has been within the — clearly, is a giant concern you’ve got been within the information. Is it — are you seeing something that whereby the licensed dispensaries are benefiting.
So your tenants are seeing greater demand as a result of folks belief the standard of the product they’re getting there versus shopping for on the road. I am simply curious if there’s been any kind of uptick as a result of your tenants, clearly, have excessive qc, the place individuals who purchase merchandise on the road do not know what’s getting combined in there. Have you ever seen any change in that or not likely?
Alan Gold — Government Chairman
Nicely, I believe that is an attention-grabbing knowledge level and an attention-grabbing state of affairs that’s on the market. Sure, our tenants do undergo an amazing quantity of scrutiny and laws to provide their product and ensuring that not solely the product is pesticide-free and has an environmental — would not have any environmental elements related to the merchandise. So in that sense, we predict which can be — that there’s a lot of confidence within the product that our tenants present. To particularly say that anyone issue is elevated revenues.
I do not assume we will say that, however what we will say is that revenues are anticipated to double by 2026.
Alex Goldfarb — Piper Sandler — Analyst
Thanks.
Alan Gold — Government Chairman
Thanks, Alex.
Operator
Our subsequent query comes from Scott Fortune with ROTH Capital. Please go forward.
Scott Fortune — ROTH Capital Companions — Analyst
Yeah, good morning. Thanks for the query. I simply need to observe up on some feedback in regards to the pipeline. We have seen the price of capital for the hashish business improve right here.
Most of the prime MSOs are slicing round their capex plans right here. Value of capital, we noticed two offers round 12%, 13% from that aspect debt price. However total, the demand — is that this inflicting extra incoming calls on your pipeline for gross sales leaseback for these nicely capitalized within the so — simply type of quantify our total curiosity in demand for potential gross sales leaseback alternatives in your pipeline versus type of final 12 months or a few quarters in the past?
Alan Gold — Government Chairman
Yeah, no, I imply — and I am going to have Ben observe up on this. However sure, our pipeline could be very robust. It continues to be robust, and it is robust for plenty of elements. One, once we decide to a transaction, our tenant companions know that we execute on that.
And so, we now have an ideal fame. And that fame stems from, I believe, only a very robust administration workforce that has been on this business for a really lengthy time frame. And really, we, I believe, have the longest tenure within the hashish actual property business. However — and I believe the continued demand for our capital is there and at very engaging charges.
Ben, do you need to observe up on —
Ben Regin — Vice President, Investments
Yeah, certain, Scott. I imply, we’re persevering with to see great demand for our capital. I believe, loads of the highest operators within the business acknowledge the worth that we convey by way of our fame, the worth of having the ability to supply nondilutive capital in a really difficult atmosphere. And we’re very enthusiastic about our skill to capitalize on that given, as Alan talked about, the administration workforce we now have in place an especially robust and versatile steadiness sheet that we now have and only a great quantity of alternatives within the business.
Scott Fortune — ROTH Capital Companions — Analyst
OK. I admire the colour. After which, simply type of a follow-up on the well being of the tenant base right here in such a capital market. You talked about type of single-state operators or the smaller tenants which can be possibly underneath a little bit extra strain to satisfy debt obligations, clearly, we convey debt right here and potential defaults there, do you’re employed with the lenders with the businesses of the challenged corporations doubtlessly? And what’s the technique of an operator defaulting on debt exterior of your guys aspect and lenders type of go down the method of pressured liquidation.
Is there a recourse for IIP there? Sort of step us by way of on these sort of small tenants that you just might need to work with?
Alan Gold — Government Chairman
I believe — no, I imply, there’s not there. We do not — if someone defaults on the mortgage is not essentially a default on our lease so long as they proceed to pay our lease. Now the — I believe most of the debt lenders are actually quasi companions with these tenants. And so they actually look to the general construction of any considered one of these tenants to assist them succeed and proceed to pay again not solely their debt obligations however proceed the operations simply typically.
And so, I believe that that is how the — how their relationships and their partnerships work and that works to our profit.
Scott Fortune — ROTH Capital Companions — Analyst
Obtained it. OK. After which, final actual fast query for me, in all probability for Paul. Are you able to present a little bit little bit of coloration? I would like some good steps by the bit administration, proper? There’s federal efforts round potential States approaching board right here that unlock doubtlessly institutional capital and the capital markets to assist your tenant base.
However extra particularly of IIP, together with your New York Inventory Trade itemizing, are you seeing extra discussions with the exchanges with potential uplisting with the tenants in your portfolio? And type of in mild of the Campygrowth assertion with the usA. construction there. Are you able to present possibly a little bit bit extra coloration on what the exchanges have to get to moreover specific protected harbor language to maneuver ahead with uplifting? — does save with a brand new coal memo present sufficient cowl for that or consolation that for factor. Simply type of a little bit extra coloration in your ideas across the patio itemizing for — to assist out your tenant base there?
Paul Smithers — President and Chief Government Officer
Positive. So yeah, I believe the brief reply, Scott, is the exchanges have mentioned that except there’s — till there’s some vital motion on the federal degree, descheduling or rescheduling, they are not going to open up the exchanges. So the query then is what Cover is doing with the Toronto Trade, that is attention-grabbing. — however we did observe that NASDAQ did object to the Cover USA up listed them.
That is the most recent as of this week. That is a fluid operation. However it’s attention-grabbing to see if there’s going to be any flight to the Toronto Trade. So far as SAFE, I believe, clearly, Senator Schumer mentioned Sunday, that they had been very near passing Protected.
However I do not know if Senator Schumer has an amazing quantity of credibility when he is speaking about what Canada’s payments are going to cross or not cross. However together with the bans announcement to reexamine the scheduling and a few motion on SAFE. We expect Protected or Protected Plus does have a greater likelihood within the lame duck. However so far as any protected harbor language for the exchanges, — we do not assume that is going to be a part of Protected or Protected Plus proper now as a result of if we dig down deep and take a look at the trail to getting Protected Plus with some sort of safety for the exchanges.
It is obtained to undergo Sherrod Brown’s committee, and he has mentioned he doesn’t need to put in any language that will favor banking. I imply, except there’s vital social fairness language. So we’re again to that very same previous battle we have had for the final two years, the social fairness versus the capital market entry. So I believe good cash, Scott says that if one thing is completed in lame-duck it should be a quite simple, protected with out capital market entry.
Scott Fortune — ROTH Capital Companions — Analyst
I admire your ideas on that. I’ll leap again within the queue and pas it on. Thanks.
Alan Gold — Government Chairman
Thanks, Scott.
Operator
[Operator instructions] The following query comes from Eric Des Lauriers with Craig-Hallum Capital. Please go forward.
Eric Des Lauriers — Craig-Hallum Capital Group — Analyst
Thanks for taking my questions. first one is a follow-up on the Pennsylvania disposition. Simply questioning the way you’re excited about different potential properties that is perhaps accessible on the market. You guys, clearly, kind of referred to as out how they’re one of many single-state operators in your portfolio that represents simply 15% of the general capital.
Ought to we consider potential properties on the market as solely these belonging to single-state operators? Simply any extra coloration on kind of what you contemplate as doubtlessly accessible on the market on your properties? Thanks.
Alan Gold — Government Chairman
Yeah, I imply, I believe we do not — I imply, we’re not attempting to promote something that we have just lately simply required except there is a strategic purpose behind it. I believe that you could possibly — we now have our San Bernardino asset that’s held — that we now have on held in improvement, and we could possibly be creating that or we could possibly be promoting that asset. However typically, I believe we’re more than happy with the standard of our belongings and our tenants up to now. And we’ll take a look at one or two belongings strategically on the market if it is smart.
Does that reply your query? Do you will have extra questions?
Eric Des Lauriers — Craig-Hallum Capital Group — Analyst
Sure, that does. Thanks. I used to be on mute. Thanks.
You beforehand described your — kind of the decreased acquisition exercise regardless of your robust pipeline as basically a widening of the bid and ask spreads. I suppose, first query, are you noticing that unfold narrowing in any respect? As these markets kind of readjust to greater charges? Are you seeing a bit extra of an agreeance on potential cap charges for these properties? After which, second query, would you characterize the negotiations together with your potential traders in the identical method as kind of robust demand however a widespread right here? Thanks.
Alan Gold — Government Chairman
Nicely, I imply, I believe one of the simplest ways to reply that’s that we have gone from an acquisition program of constant quarter-over-quarter acquisitions to a really opportunistic mannequin, the place we’re being very considered in deploying the capital that we do have accessible to us to the very best operators that we will and being very cautious as to our ideas on future capital regardless that that we do have entry to capital from — that our traders are, I believe, positively wanting on the method we’re deploying the capital and being a steward of that capital. however that the overall market requires us to, I believe, as I mentioned, grow to be — be extra opportunistic.
Eric Des Lauriers — Craig-Hallum Capital Group — Analyst
OK. That actually is smart. So I suppose by way of us excited about 2023, 2024, and many others., not that you just’re giving steering or something like that. However I suppose, the right strategy to be excited about that is extra of a in all probability this continued opportunistic acquisition tempo versus, OK, we now have possibly a two-, three-, four-quarter type of low, however then we get money up and gone and kind of proceed our regular acquisition tempo.
It must be extra of the previous than the latter, if I am understanding accurately.
Alan Gold — Government Chairman
Proper, except your crystal ball is far clearer than mine and that you could possibly truly inform me what is going on to occur in 2023 within the first quarter. As a result of should you can, we must always take that offline and have a very good dialog. However we simply consider that there is loads of uncertainty out there and we predict that it should take a while for that uncertainty to grow to be extra clear. After which, as soon as that occurs, we will actually talk about our acquisition tempo at that time.
Eric Des Lauriers — Craig-Hallum Capital Group — Analyst
Is sensible. Recognize you sharing your perception.
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 — Government Chairman
Thanks. And I would definitely need to thank all our stockholders on your assist and your continued assist. All of the individuals who have requested questions on the decision. Thanks, excellent questions.
And most significantly, I need to thank the workforce for all their continued onerous and devoted work throughout these attention-grabbing instances that we’re in. And so, with that, thanks all, and we log out.
Operator
[Operator signoff]
Period: 0 minutes
Name individuals:
Brian Wolfe — Normal Counsel
Alan Gold — Government Chairman
Paul Smithers — President and Chief Government Officer
Ben Regin — Vice President, Investments
Catherine Hastings — Chief Monetary Officer
Tom Catherwood — BTIG — Analyst
Alex Goldfarb — Piper Sandler — Analyst
Scott Fortune — ROTH Capital Companions — Analyst
Eric Des Lauriers — Craig-Hallum Capital Group — Analyst