Innovative Industrial Properties Inc

NYSE:IIPR

Earnings Call Transcript 2022-Q2

[Operator]

Hello, and Welcome to the Innovative Industrial Properties Inc. Q2 2022 Earnings Conference Call [Operator Instructions]. Please note, today's event is being recorded. I now would like to turn the conference over to your host today, Brian Wolfe.

Mr. Wolfe, please go ahead.

[Brian Wolfe, General Counsel]

Thank you for joining the call. Presenting today are Alan Gold, Executive Chairman; Paul Smithers, President and Chief Executive Officer; Catherine Hastings, Chief Financial Officer; and Ben Regin, Vice President of Investments.

Before we begin, I'd like to remind everyone that statements made during today's conference call maybe deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors. Please refer to the documents filed by the company with the SEC, specifically the most recent reports on Forms 10-K and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in the forward looking statements. We are not obligated to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. In addition on today's call, we will discuss certain non-GAAP financial information, such as FFO, normalized FFO and adjusted FFO. You can find this information together with reconciliations to the most directly comparable GAAP financial measure in our earnings release issued yesterday as well as in our 8-K filed with the SEC.

I'll now hand the call over to Alan. Alan?

[Alan Gold, Executive Chairman]

Thank you, Brian and welcome, everyone. I know one of the biggest questions for today's calls has to do with Kings Garden and what happened. To recap, Kings Garden leased six properties. The total base rent of which was approximately $5.5 million for the second quarter or approximately 8% of our base rents collected for the quarter. Of these six properties, four were operational with a ground up expansion project also at one of those properties, which we will call the 19 Street expansion. The other two properties were in development or redevelopment [Adell] Street and Inland Center Dr. On July 13th, Kings Garden defaulted on their lease obligations and on July 14th, we filed an 8-K regarding that default.

Later in July, we filed a suit with the state court asking for immediate access to our properties among other demands. Today, Kings Garden remains in default and on August 2nd, we amended our suit making further claims regarding construction at the properties, among other things. Okay that is what happened. And unfortunately, we will not be able to answer any questions regarding the legal proceedings. I ask for your understanding. And please note, we are doing all that we can to pursue our interest.

Now with that said and before we start with the great results for our second quarter, I want to spend a few minutes reminding all of us of our vision and why we remain excited and resolute in our belief in the future success of Innovative Industrial Properties. Our vision has always been to create a company that would profit from a nascent emerging and fast growing industry using a straightforward business model that consists of, one, the US legal cannabis industry in which legal sales are expected to top $52 billion by 2026, nearly doubling 2021 total of $27 billion. Two, the acquisition of real estate that is critical to the operations of the industry. There can't be legal sales cannabis, unless the cannabis has grown in a secured, licensed, specifically designed facility or property. In our business model, the acquisition of their real estate comes from a long term lease with rental income commensurate with the risks. Three, a portfolio with geographic diversification and a focus on limited license states and careful investments in other states with strong growth possibilities. And four, a tenant roster of professionally managed operators with strategic footprints, strong growth potential. And since no tenants or legal growing facilities existed prior to the individual state implementing a regular cannabis program, we focused on investing with multi-state operators. Today, over 80% of our committed capital is invested with multi-state operators.

With this vision, we bring together a team of experienced real estate and industry professionals. We now have what we believe to be one of the strongest and most experienced team of real estate professionals in the cannabis industry, a high quality portfolio and most importantly, a strong and flexible balance sheet, producing strong and consistent cash flows. We plan to review our strong second quarter results and to provide what we can about recent developments in our portfolio. We are proud to provide you all our quarterly financial supplement that we published for the first time yesterday, and expect to continue to publish on a quarterly basis. As we are constantly monitoring our markets and our tenants, we will provide information regarding the general industry dynamics, our overall portfolio metrics and our recent investments.

In broader microeconomic terms, in recent months, we have seen a broad based tightening of the financial conditions across the US economy generally, and in the capital raising market for the regulated cannabis industry as well. Total capital raising activity for the regular cannabis industry in the US is down over 60% in the first six months in comparison to the prior year period. Inflation has also impacted operators’ cost structure, including labor, production inputs and construction costs. At the same time, we are seeing general unit pricing in the cannabis industry declining, which is further driving operators to continue to focus on efficiency in their operations. We continue to be resolute believers in the long term growth and prosperity of the regulated cannabis industry. As with any industry undergoing rapid growth and change, we expect to experience headwinds along the way. That said, this team will continue to be focused on positioning at the company in the best possible way for long term success and value creation.

With that, I will now turn the call over to Paul to discuss industry dynamics. Paul?

[Paul Smithers, President and Chief Executive Officer]

Thanks, Alan. I would first like to emphasize, as Alan noted, that industry wide sales revenue continues to increase and legal sales of cannabis are expected to top $52 billion by 2026, nearly doubling 2021’s total of $27 billion. As far as recent state level market developments, in recent months, we have seen unit pricing for regulated cannabis products decline in certain states at the wholesale level reflective of what we believe to be a number of factors, including basic supply demand dynamics driven by licensing structures, lack of meaningful enforcement in certain states on illicit non-licensed cannabis sales by state and local enforcement authorities, taxation and general macroeconomic conditions. We have seen and do expect to continue to see price compression on cannabis unit pricing across states to varying degrees, depending on the state's market dynamics and program specifics. This price compression will require operators to continue to focus on the dual aspects of maintaining and enhancing brand strength through product quality and efficiency of operations. We believe our facilities provide exactly these key capabilities for efficient production at scale in a highly controlled environment that maximizes yield and product quality. Over 97% of our revenue comes from production facilities or facilities that have combined production and retail capabilities. Also, we recently published our 2022 ESG report, which describes our mission critical facilities with specialized buildouts designed for environmental controls that are a priority for production of high quality, consistent cannabis products at scale.

Capital availability. As we have all witnessed financial markets have been volatile in the last few months since the US federal reserve began tightening monetary policy in March. That volatility has not dissipated in our view with the war in Ukraine, other geopolitical tensions and supply chain issues adding to the uncertain economic outlook, as well as the uncertain outlook on monetary policy given the persistent inflation, we’ve all been witnessing. We believe these factors have contributed to a drop off in capital availability for regulated cannabis operators, both on the debt and equity sides. Larger MSOs that have taken advantage of more open capital markets last year are in better positions to weather this volatility in our view. Though, from our discussions in the industry, regulated cannabis operators across the board are generally focused now on efficiency in their operations and taking a more cautious approach to expansion. As Alan noted, over 80% of our committed capital is invested with MSOs.

Inflation and supply chain issues. Inflation, broadly speaking, has run higher for a longer period of time than I think most would've anticipated. While this has impacts across almost all industries, in the regulated cannabis industry, this is also impacting labor and input costs for operators, in addition to driving up the cost of construction for development and redevelopment activities. In addition, continued supply chain issues and labor shortages are resulting in certain projects being delayed in the completion. Of course, these developments have the effect of requiring the operator to put up more capital to complete the project and/or resulting delays in revenue generation as projects take longer to complete. In combination with the current environment of limited capital availability, these can be significant obstacles for certain operators. Federal legislation. Finally, I'd like to note that SAFE Banking was removed from the competes bill recently. However, with the house having pass SAFE six times, there are some expectations that SAFE maybe introduced into a larger scale budget spending bill like the Annual Defense Bill. We will continue to monitor these developments closely. Should SAFE pass, this may be in avenue for greater access to capital for many operators.

I'd like to now turn the call over to Ben to discuss our portfolio and investment activity in the second quarter. Ben?

[Ben Regin, Vice President of Investments]

Thanks, Paul. We are proud to introduce our financial supplement this quarter, which provides details regarding our property portfolio, consolidates our financial reporting. As Alan noted, this is our first financial supplement and we would appreciate your feedbacks, we continue to refine the supplement for future periods. For this call, I'd like to cover certain characteristics of our property portfolio and tenant roster in addition to discussing our recent investments during the quarter. As you know, we own 110 properties across 19 states, comprising 8.6 million rentable square feet. During the six months ended June 30, 2022, we collected approximately 99% of contractually due rent and property management fees from our portfolio.

As we have noted in prior calls, Vertical, a tenant of ours in Southern California, continues to make partial payments. As noted in our 8-K filed in July, Kings Garden defaulted in July on its rent at the six properties at leases from us in Southern California. We have commenced legal proceedings against Kings Garden. And while we cannot comment on these legal proceedings, we will keep you updated to the extent we are able. In regard to Parallel, they continue to pay rent in full and are continuing their confidential strategic review process. Again, we will provide you a meaningful update on that operator when we are able. Our property portfolio's total cost basis, including commitments to fund future improvements, equates to approximately $274 per square foot, which we believe is substantially below current replacement costs. Our portfolio is split between 68 cultivation and/or processing facilities, representing 90% of our invested capital, 33 retail locations, representing 3% of our invested capital and nine facilities conducting combined cultivation and/or processing and retail activities, representing 7% of our invested capital. No one state accounts for more than 17% of our total invested capital, and no one of our 30 tenants accounts for more than 14% of our total invested capital.

Across our portfolio properties with multi-state operators as tenants make up more than 80% of our invested or committed capital, and properties with public company tenants make up approximately 52% of our invested or committed capital. Of our 110 properties, 23 are under either partial or full redevelopment or development, or approximately 21% of our properties, as of June 30th, constituting approximately 2.5 million rentable square feet, with a weighted average lease length of 16 years for the entire portfolio. We continue to believe in the tremendous value for our mission critical real estate portfolio, as well as our operators and their ability to weather the current conditions and will continue to monitor their progress closely in the coming months. In terms of investment activity.

During the quarter, we acquired four properties and executed lease amendments to provide reimbursement for improvements at five properties, representing a total investment commitment of about $240 million. In these transactions, we establish new tenant relationships with Maryland Cultivation and Processing, Texas Original and TILT Holdings, while expanding existing relationships with Curaleaf, Green Thumb, PharmaCann, Trulieve and Sozo, with these investments spread across several states, including Pennsylvania, New York, Illinois, Texas, Maryland, Massachusetts, Arizona, and Michigan. In terms of expected additional investment activity, as always, forecasting investment activity in this industry is challenging. That said, we do expect the pace of activity to be lighter than prior quarters as we focus on the ability to raise additional capital on terms we determine to be reasonably favorable in light of the opportunities to place that capital. I would note in closing that we anticipate total 2022 investment activity of approximately $400 million.

With that, I will turn it over to Catherine. Catherine?

[Catherine Hastings, Chief Financial Officer]

Thank you. We generated total revenues of approximately $70.5 million for the quarter, a 44% increase from Q2 of last year. The increase was driven primarily by the acquisition and leasing of new properties. Additional building infrastructure allowances provided to tenants at certain properties that resulted in base rent adjustments and contractual rent escalations at certain properties. And as we've indicated in the past, our Q2 revenue reflects only partial quarters of revenues from the acquisitions and investments executed during the quarter. And our revenues for the quarter were also impacted by scheduled rent phase ins under certain leases, which will continue to phase in over the next six to nine months, as we continue to account for all of our leases on a cash basis.

For the three months ended June 30, 2022, we recorded net income of $39.9 million or $1.42 per diluted share. Adjusted funds from operations for the quarter, which adds back non cash stock based compensation and non cash interest expense related to our unsecured senior notes to normalized FFO, was approximately $60.1 million or $2.14 per diluted share. On July 15, we paid our quarterly dividend of $1.75 per share to common stockholders of record as of June 30th, equivalent to an annualized dividend of $7 per common share. As we noted in our prior press releases, our Board of Directors generally evaluates adjustments to the level of our quarterly common stock dividend every six months with any adjustments expected to be declared in Q1 and Q3 of each year. The board continues to target a dividend payout ratio of 75% to 85% of AFFO on a stabilized portfolio basis. For Q2, that payout ratio was 82%. We also continued to issue draws for improvement allowances or construction development to our operators under our leases. As we've previously noted, these improvements are critical to the efficient production of quality cannabis products at scale.

In Q2 of 2022, we funded approximately $162 million in draws submitted for improvements in construction activity at our properties. As Paul mentioned, inflation is impacting labor and input costs for operators. In addition to driving up the cost of construction for development and redevelopment activities. We're also seeing construction delays in certain development and redevelopment projects in our portfolio, similar to other construction projects generally with longer lead times for materials, given the ongoing supply disruptions, which the broader economy continues to face, which we believe may have been further amplified in recent months by the war in Ukraine and rolling economic lockdowns in certain countries in response to continued COVID outbreaks. At quarter end, we had approximately $2.5 billion in total gross assets and a total of about $306.5 million in debt, consisting solely of unsecured debt with no maturities this year or next year and $300 million of that debt not maturing until 2026. Our debt to total gross assets ratio decreased to 12% at quarter end and our total fixed cash interest obligation on an annual basis was $16.7 million or a little over $4 million per quarter.

We've maintained our investment grade credit rating and have a debt service coverage ratio of 15.7 times. Also in order to reconcile our current cash and investment position as of June 30th with our existing commitments to fund improvements, we have approximately $20 million of uncommitted capital as of today, i. e. capital available for future acquisitions. This subtracts among other balance sheet items remaining unpaid improvement allowance balances of approximately $194 million as of June 30th, which we’ll hold on our balance sheet until requested for funding by our tenants. As we've indicated in the past, these balances tend to be requested and funded over a period of time that's expected to be over the next year or so. In our pipeline, we have under PSA approximately $36 million of new investments. Assuming we close on those transactions, which may or may not occur, of course, we will have successfully placed the capital we've raised, including the proceeds from our common stock offering completed just four months ago.

And with that, I'll turn it back to Alan. Alan?

[Alan Gold, Executive Chairman]

Thanks, Catherine. I'd like to note the following in closing. We are a 100% committed to working for you all as owners of the company. Every day to protect and enhance the value of our company and our property portfolio for the long term. In my 30 plus years in the commercial real estate industry, I've seen and managed through numerous ebbs and flows in industries that utilize mission critical specialized real estate. I firmly believe that we have the best team assembled of highly skilled experienced professionals to manage the company through the ebbs and flows of this industry, and a Board of Directors with decades upon decades of experience in real estate, finance and executive leadership, to effectively oversee our company in all environments.

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

[Operator]

Yes, thank you [Operator Instructions]. And the first question comes from Tom Catherwood with BTIG.

[Tom Catherwood, BTIG]

I am going to walk a bit of a fine line here. Let me know if I hit the third rail, and I will move on. But I'm thinking through process here and if memory serves me, when Dime went into receivership back at the end of 2019, you had inbound interest right away. But California courts were overwhelmed by the pandemic and the process dragged on though, it was eventually resolved in your favor. Has that court backlog or other overwhelming factors resolved, or is the potential that the lawsuits that you filed could drag on because of pandemic related issues in the court?

[Alan Gold, Executive Chairman]

Well, I know that's a pretty interesting question. We haven't tested the courts before our current court filings. So I don't have any actual evidence or anything to really say that it has or hasn't. But I think, in general, we're all seeing that pandemic related excuses for delays have significantly declined, and I would think that the California state courts that would be the same.

[Tom Catherwood, BTIG]

And then going over to Vertical and maybe California as a whole. California's always been hypercompetitive and you've always spoken about that. And kind of one of your key strategies was to find the best operators, concentrate your investments with them, because they would be able to ride out cycles. Kind of two part question. Has California eroded to the point where even the best operators can't make it, maybe it's illicit market taking share, maybe it's the not enforcement of rules, Paul, like you mentioned. And then can you provide a little bit more color on the resolution or workout plans with Vertical for the portion of the rent they're not paying?

[Alan Gold, Executive Chairman]

So I mean, obviously, there's a lot in that question. First, California, in general, while there has been and using your words, an erosion or let’s say some of the unit pricing, the growers who are efficient and continue to drive efficiency, are doing very well, making lots of money, continuing to make money. In California, you can make money, knowing that the illicit market is still there, knowing that it is a high tax state, knowing that you have to be very efficient to be able to accomplish those goals and you need to be effectively capitalized. All those factors continued to give us positive feelings about the growers, the successful and efficient growers in California.

Now with Vertical, in particular, so each tenant has unique aspects to it and unique ways that they think that they can address and attack a market. Vertical was focused primarily on the wholesale side of the business. And their ability to drive efficiencies has taken longer than they wanted. But recently, they have refocused and have brought in new and higher quality growing expertise. And we believe based on that and it looks like it is coming to fruition that Vertical, which like we've said multiple times, is less than 1% of our revenue, will and continue to be successful and will continue to pay rent or pay most of the rent or pay all the rent. And we believe -- we're hoping and we believe that they will pay all of their rent over time.

[Tom Catherwood, BTIG]

I guess moving away from California a bit, Paul, both you and Alan mentioned, unit price compression, as well as increasing costs for producers. And I know this is going to be somewhat different, but industrial REITs sometimes give a stat where they say, what percent of either supply chain costs or production costs, their rent tends to be to show that transportation is substantially more and inputs is more and energy costs and all of that. Kind of two parts here. Do you have a sense, typically, in a typical set up, whether it's processing or cultivation, what percentage of production costs your rent end up being? And then second, is there a level of unit costs that you have a breakeven level that, at which point in time, you get worried about them having the margin to cover expenses including rent?

[Alan Gold, Executive Chairman]

We don't have the detailed statistics available to state a percentage, in general, of everybody's rent or what their rent is as a percentage of their overall operation cost. Because we have 30 different tenants and we have multi-state operators who are operating a variety of different states, and we have entities that are in growth modes and entities who are in operational mode, and entities who are in the start up phase. All those combined together make it very difficult to provide that statistic. But we do know that growers have target growth cost of trying to generate or trying to be at a cost level of no around $300 a pound for smokeable flower. And that we believe -- and we've seen that the spot price for that product in California and other locations exceeds a $1,000 or around a $1,000 panel. We believe that our highest and most efficient growers are in that or less than $300 a pound, and that's what I think we can provide to answer that question.

[Tom Catherwood, BTIG]

That's really helpful, Alan, thank you for that. And I totally understand the complexities between all the tenants and all the locals and the growth modes that they're in. And then maybe just last one from me here. Obviously, it was a record quarter for acquisitions. Cat, thanks for the stats on the putting the money to work in four months. In general, across the space, cost of capital is up for the operators, debt is less available for them than it was a year ago. It would make sense that they continue to turn to sale leasebacks. Do you see that continued demand there? And then I know you've got your PSAs lined up already. But as you think about allocating capital into that demand, how are you prioritizing it amongst larger MSOs, regional operators and then maybe between your current tenants or new tenants?

[Alan Gold, Executive Chairman]

Another very complex question, which I think we can answer. So first, we have been focused on allocating the majority of our capital to MSOs, and I think that when you look at our statistics that over 80% of our rent comes from MSOs, you can see that we've achieved that goal. And so that's, I think, part of our business strategy and we're successfully achieving it. And I appreciate you acknowledging the great quarter of over $240 million plus of acquisitions in the quarter and close to $349 million for the first half of the year. I mean, that’s -- yes, I'm just going to say kudos to our acquisition and investment team. The fact that we actually placed that capital that was raised in April and around or less than four months, you now is far faster than we projected and it goes to that team.

I think that you're -- so in questioning whether or not there's continued demand for sale leasebacks, really what you're asking is what's our pipeline and we have -- we believe that there is tremendous demand for sale leaseback opportunities and capital for the industry. Because as we indicated over the amount of -- the pace of capital raising in the cannabis industry has decreased about 60% since the beginning of the year. So there is a tremendous demand for capital and therefore, we believe a tremendous demand for sale leasebacks, and we can certainly place more capital. The real estate process is, by necessity, a long process. And because of that and because of the success that we've had and the turmoil that was occurring in the beginning or the latter part of the first half of this year, we strategically pulled back on our acquisition commitments to understand what our cost of capital is from debt equity, and to allow the market to adjust to what we think is higher yields that would be necessary for us to continue to make acquisition investments.

And because of that strategic decision, we are -- while we had indicated in the past that we would be doing between $125 million to $150 million of transactions a quarter or between $500 million and $600 million annually, we think we're going to be probably for this year closer to the $400 million and maybe if things evolve a little bit differently, maybe $500 million. And if you think about where we are already, we've already closed on $350 million, which is just a -- it's above that hundred $50 million per quarter pace. And if we were to go to another $50 million to get us to the $400 million range, well, we certainly have that capacity. And as we've described, we have assets under PSA already. And we have the capital to easily -- between our uncommitted capital and our free cash flow, we have the capital to achieve at the very minimum. Now the question then becomes how do we go beyond the $400 million, and that would require us to raise equity, raise debt, come up with new capital. And we think we could do that with variety of debt structures, including convertible debt and straight debt and other unique opportunities which we're exploring. And so we think we can easily achieve that, and believe that as long as the markets settle down and the environment for our tenants stabilizes, we think we'll be able to easily achieve that. Keep in mind that we are still very excited about the industry. As I think Paul noted that the revenues in the industry expected -- Paula, that they expected to get to…

[Paul Smithers, President and Chief Executive Officer]

Double by 2026…

[Alan Gold, Executive Chairman]

Doubled by 2026. So the industry continues to have very positive sales growth, and giving us the confidence that continuing to work with as we describe our business focus of MSOs that we'll be able to continue to provide very stable and strong cash flow. Long winded way to answer that question but hopefully that helps you.

[Tom Catherwood, BTIG]

No, that makes total sense, really appreciate the candor and the insight, Alan. That's it for me.

[Operator]

And the next question comes from Harrison Vivas with Cowen.

[Harrison Vivas, Cowen]

Just one from me on the regulatory front. Paul, you offered some commentary around movement of the SAFE Act. If we were to assume that it gets passed in some form this year, maybe during the lame duck. Can you just refresh us on your latest thoughts around how it's passed it would affect your business and pipeline specifically? And then more broadly, can you just speak to how this would affect, or how you think it would affect cost of capital just giving the offsetting impacts of greater capital availability and tighter monetary policy?

[Paul Smithers, President and Chief Executive Officer]

I think first, Harrison, we have to think about what version of SAFE or SAFE plus would pass. And as you probably know, right now, that's being debated pretty heavily by Chuck Schumer and Corey Booker, they've done a nice pivot to support SAFE. But right now it's really being formulated in a way that says, how can we get it passed. Right now, there's 15 GOP senators that have indicated that they would support a basic SAFE. So that's when it gets complicated, if Corey Booker’s SAFE plus, which includes two 80E provisions, maybe some up uplifting language, veteran affairs language, maybe some SBA loan and a lot of equity provision. So it depends what that looks like. And I think certainly it's got a better chance of passing it did six months ago, now that Schumer and Booker are have pivoted.

But to your question, how does that affect us? I think it would be a positive. First of all, I think, whatever SAFE banking looks like, even if it's in a stripped down version, it'll be a benefit to the industry as a whole, and that would give operators other options for capital, certainly giving banking access. So with that, we have stronger credit with our existing tenants and tenants in the future. So we look at that as a positive. Also, certainly, they would give us access to capital in different options in raising debt, which we think would certainly lower our cost of capital. So we look at it as definitely a net plus. Some of the comments about well, gee, this is going to impact competition. We've always thought that, yes, maybe it -- again, depending what version of SAFE comes out, there may be a little more competition. But as you know, SAFE does not legalize cannabis or deregulate it. So there's still going to be, I think, a lot of the big national banks stay on the sidelines because it's still a schedule one substance. So if it happens, when it happens, we look forward to, and we think it'll be a net plus for us.

[Operator]

And the next question comes from [Indiscernible] from Craig-Hallum Capital Group.

[Unidentified Analyst]

Could you please expand just a bit more on the dynamic that you're seeing between the sort of sources and cost of capital available to you, and then the seemingly increasing demand for sale leaseback? I'm just sort of a bit unclear on sort of what the delay might be in drawing additional capital. If you could just kind of flesh out those dynamics. Is it really trying to get better turns from future tenants now that macro environment has changed, or is it more on your cost of capital side? If you could just expand a bit more on those dynamics, that would be great.

[Alan Gold, Executive Chairman]

And I think the answer is that it's both. I mean, look, things evolved -- were evolving and moving really quickly. When you go from 2% inflation to 6%, to 9%, 11%, when you go from a ed with a very accommodated stance to a very non-accommodated stance and increasing interest rates first, indicating that it would be in the 25 to 50 basis points and 50 basis points and maybe to 100 basis points. And finally, we end up with 275 basis points increases back to back and pretty rapidly, those are rapid changes. Those are things -- and they're happening in -- we're talking about them in real time, and they're happening in real time, very quickly. And even though we have 30 plus years in the real estate industry and we've gone through and we've seen other major financial condition or situation such as the great recession, and in other times when interest rates didn't move up, this has happened much quicker. And with things that were occurring that --honestly, I really just hadn't experienced. And as such, we took more of our time to really understand what was really happening and where we're going and what those external factors, how they were going to affect our cost capital, and we believe they absolutely have affected our cost of capital.

Our share price has dropped whatever, 60% plus, and that's a big thing for us to swallow and understand. Our cost of debt just by the increases in the -- from the fact has certainly increased 200, 300 basis points. And when you tie that together with the acquisition process and how sourcing deal can take anywhere from six to nine months from start to close, there's -- that time doesn't match how fast things are moving. And as such, we've had to mix -- we’ve made some strategic decisions to pull back. But we are now seeing, and I think that many of MSOs have really come to the conclusion that their costs of capital, their availability of capital has really been impacted, and it is not coming back as quickly as they thought it might. And because of that, they're adjusting their growth plans and their tolerance for a higher cost of new capital, which we could potentially provide. And we believe that we are going to be able to achieve that with any new acquisitions that we source in the next six to nine plus months.

[Unidentified Analyst]

Just last one from me here, leaving any commentary on the -- of the lawsuit aside here. Are you seeing any demand for those properties?

[Alan Gold, Executive Chairman]

I'm trying to decide whether or not I can say anything or not. I think the answer is we are. And we are because the efficient growers in the industry really understand the opportunity to make money and to be able to do that, they need to be able to have assets that are already growing and have proven to grow, proven to grow product very efficiently. Now Kings Garden brand is a high quality brand and it's well recognized in the industry as something of -- that is of high quality. And others have been certainly envious of their position and their ability to provide product -- with their facilities, others know of their brand and of their facilities and where they're growing, and we have had inquirers.

[Operator]

And the next question comes on John Massocca with Ladenburg Thalmann.

[John Massocca, Ladenburg Thalmann]

Just kind of a straightforward starting question. Is every tenant outside of Kings Garden and Vertical 100% on the rent as of July, or to the extent you have the data August?

[Alan Gold, Executive Chairman]

As of July, yes. And as of their obligations in August, yes.

[John Massocca, Ladenburg Thalmann]

And then outside of Kings Garden and Vertical, what's the outlook for the other California tenants or investment -- construction loan and the affiliate property tied to that loan?

[Alan Gold, Executive Chairman]

So that project is the construction loan of $18.5 million. I'm going to turn that over to Ben, if you want to just describe where we're at. I think that's pretty much done, right?

[Ben Regin, Vice President of Investments]

We're very close to the -- construction itself is very close to wrapping up, which we've been monitoring. Certainly, monitoring the market overall and evaluating our options on how we'll continue to proceed and potentially work with the operator that will be growing out to that facility going forward.

[John Massocca, Ladenburg Thalmann]

And then in terms of the kind of liquidity position and/or kind of deploy cash position, let's say, and/or external growth. How should we think about the view on cash versus kind of committed cash in terms of doing future investments or kind of committing to future investments? And I guess, under maybe some limited kind of commentary you can give on this. How should we think about the remaining kind of committed funding to Kings Garden in terms of its impact on your deployable liquidity?

[Alan Gold, Executive Chairman]

Well, I'm going to leave Kings Garden alone, because I just don't think that that's something that we should talk about. So we've disclosed that we have around $20 million of uncommitted capital and we certainly have free cash flow that's generally running anywhere from $20 million to $30 million annually. So that certainly gives us the capital to close on anything that we currently have already and to add some more. And then for any future external growth, that will come -- and we believe that there's plenty of opportunity for external growth, because of the demand for, say, a leaseback capital. And we believe that we have access to additional capital sources, including debt and convertible debt. And as I mentioned, some unique opportunities that we are exploring. But one thing you didn't ask about is what our internal growth opportunities are? And as we've described and discussed many times that we have very strong rent adjustments annually, which are in -- on average around 3%. And that the phase in of rent from our construction projects as those construction projects complete continues to happen. And that as I mentioned before, 80% of our rents come from MSOs. And I'll tell you right now that over 70% of our assets under development are leased to MSOs. So we have tremendous amount of internal growth in addition to the possibility for external.

[John Massocca, Ladenburg Thalmann]

And then I'm going to try one on Kings Garden, if you can't answer, that's totally fine. But as you think about the properties, is it fair to assume the two that were kind of ongoing development projects are tools down at this point? And then are either of those two anywhere close to being kind of usable in their intended form, if it came to that today?

[Alan Gold, Executive Chairman]

I think we can describe the facts. And the facts are that of the three development projects -- why don't -- Ben, why don’t you go through that?

[Ben Regin, Vice President of Investments]

We have three development projects, a little over a $100 million committed to those three, of that, north of 75% of that capital has been invested, and has been drawn towards the completion of those projects towards their intended use. I think, those, along with all of our assets there and elsewhere, we're continuing to evaluate options to maximize value of our entire portfolio.

[Operator]

And the next question comes from Alexander Goldfarb with Piper Sandler.

[Alexander Goldfarb, Piper Sandler]

And thank you for all the information so far. Certainly, I think, everyone appreciates it’s a nascent industry and there's always ups and downs. But I think, you guys have done a good job discussing it. Along those lines, if I can just make sure that I understand a few things. It sounds like in answering the questions, one, it doesn't sound like this is a California issue. Paul, you said that people can make money in California. And doesn't sound based on all tenants being current, doesn't sound like you're seeing any other states with operational issues. So I guess, obviously, can't really ask you directly about Kings. But I guess as far as security deposits and your typical underwriting, I think, you guys used part of a security deposit to pay month rent on Kings. But can you just give us an update on how you underwrite with security deposits? And as far as earnings go Cat, should we just take pro rata 8% out of the balance of the year in our [FFO]?

[Catherine Hastings, Chief Financial Officer]

So Kings Garden is 8%. I think, in our prepared remarks, we had disclosed that $5.5 million of Q2 revenues were related to Kings Garden, and we've talked about that Vertical is less than 1% of the portfolio.

[Alexander Goldfarb, Piper Sandler]

But as far as -- we should just take out then the balance, from a GAAP perspective, our earning should -- we should take that $5.2 million out of quarterly earnings. Correct?

[Catherine Hastings, Chief Financial Officer]

Remembering that we record only cash that we receive as revenue, we have no straight line rent that is impacting revenue. Yes, if we're not collecting revenue on that, we're not recording -- if we're not collecting cash, we're not recording revenue.

[Alan Gold, Executive Chairman]

In your model you have reported you're expected to revenue -- if your revenue was expected to be a portion of the Kings Garden, you should take that out.

[Alexander Goldfarb, Piper Sandler]

And then as far as security deposits, do you have those for all tenants or maybe you could just talk a little bit about corporate guarantees or letters of credit, security deposits, et cetera.

[Alan Gold, Executive Chairman]

So we, in general, require security deposits on every one of our transactions. Now, if we have a -- we do multiple transactions with our tenant base and our strongest tenants who have put up security deposits and other transactions may give us comfort to not require security deposits in a more recent transaction. But certainly for any new tenant relationship or a tenants that isn't in MSO, we absolutely require security deposits in range -- and those security deposits, depending on the quality of the tenant, size of the tenant, can range anywhere from one to six months.

[Alexander Goldfarb, Piper Sandler]

And then just the final thing is, I think, if my math is right, you guys have done about $150 million of acquisitions, maybe I'm off. But I think you said you're looking at doing $400 million in total, you've got 50 million lined up. And then Paul, you said, you have or Cat, you said there's $20 million uncommitted of capital and I see you also have $45 million in total of cash. So maybe just sources and uses and then thoughts around acquisitions, because it sounds like maybe you won't get to $400 million given where the stock is, or you think we should be modeling towards 400 million?

[Alan Gold, Executive Chairman]

I think you've got it all confused…

[Alexander Goldfarb, Piper Sandler]

That's why I asked…

[Alan Gold, Executive Chairman]

So what I would -- I think it would be better for us to go over something that we've gone over three or four times already on this call, for you for us to have an offline conversation, and we can make sure that your thoughts are accurate.

[Catherine Hastings, Chief Financial Officer]

And I will point you to our financial supplement, Slide 19, which walks through the reconciliation of cash on the balance sheet and subtracting out cash that's not available for investments to get to that $20 million that we quoted.

[Operator]

And this concludes the question and answer session. Now I'd I turn to call over to Alan Gold for any closing comments.

[Alan Gold, Executive Chairman]

Thank you. And once again, look, I want to congratulate this team for all the hard work and efforts that they've taken, to get us to where we are today. We are absolutely committed to supporting our investments and making sure that all -- everything that we do is in the best interest of our shareholders. And we certainly want to thank all our shareholders for their continued support and commitment to this company. Thank you all.

[Operator]

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.