Innovative Industrial Properties Inc

NYSE:IIPR

Earnings Call Analysis

Innovative Industrial Properties Achieves Strong Growth and Expands Portfolio

Innovative Industrial Properties reported a robust Q2 with $80 million in revenues and AFFO of $2.29 per share, enabling a 4.4% dividend increase to $1.90. The acquisition of a Florida property for redevelopment brings the total investment to $43 million. Their capital position remains solid with $210 million in liquidity, bolstered by upsizing their credit facility to $50 million. The company's portfolio spans 108 properties across 19 states, achieving a 95.6% lease rate. Market dynamics show high growth in new states like Maryland and Missouri, while mature markets face competition. Future expansion focuses on states like Ohio and Pennsylvania as potential areas for growth.

A Strong Quarter with Steady Growth

In the second quarter, Innovative Industrial Properties (IIP) reported total revenues of $80 million, reflecting a 4% increase year-over-year. This growth was bolstered by prior acquisition activities and enhancements made to existing properties. Additionally, the company announced an impressive $2.29 in Adjusted Funds From Operations (AFFO) per share, marking a 1% increase from last year. The strong performance allowed for a 4.4% increase in the common stock dividend to $1.90, continuing the company's streak of annual dividend increases since its inception in 2016.

Strategic Investments and Development

IIP has strategically expanded its portfolio with a noteworthy acquisition in Florida, entering a long-term lease agreement with Ayr Wellness for a property that will serve as a regulated cannabis cultivation facility. This acquisition comes with a total expected investment of approximately $43 million for redevelopment. As of the end of June, IIP's liquidity stood at over $210 million, complemented by a robust balance sheet with only 11% debt relative to total gross assets, providing a strong footing for future growth.

Market Dynamics and Tenant Diversification

The cannabis industry is witnessing varying performance across states. While states like Missouri and Maryland are experiencing high growth rates and substantial regulated sales, mature markets face intense competition and challenges from illicit markets. With 91% of IIP's revenue sourced from multistate operators, the company remains well-positioned, showcasing a diversified tenant base, which prevents any single tenant from exceeding 18% of annualized base rent.

Anticipating Regulatory Changes

Much attention is on potential regulatory changes with the possible rescheduling of cannabis under the Controlled Substance Act. This could significantly impact the company's operations and revenue potential. Recent discussions indicate strong public support for rescheduling, with significant anticipation for the potential 280E tax relief, which would allow cannabis operators to deduct ordinary business expenses more effectively. This pivotal change could enhance operators' profitability and foster a more favorable investment climate.

Future Guidance and Expectations

Looking forward, IIP expects continued growth in rental revenues as re-leasing efforts bear fruit. Although some timelines for rent stabilization depend on state and local approvals, management is optimistic about achieving substantial leasing activity by late 2024 to early 2025. The company remains focused on maintaining a conservative financial approach while seeking new strategic investments, supported by a strong capital position and ongoing relationships with established operators in the cannabis sector.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the Innovative Industrial Properties Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Brian Wolfe, General Counsel.

[Brian Wolfe, executive]

Thank you for joining the call. Presenting today are Alan Gold, Executive Chairman; Paul Smithers, President and Chief Executive Officer; David Smith, Chief Financial Officer; Catherine Hastings, Chief Operating Officer; and Ben Regin, Chief Investment Officer. Before we begin, I'd like to remind everyone that statements made during today's conference call may be deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors.

Please refer to the documents filed by the company with the SEC, specifically the most recent reports on Forms 10-K and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, on today's call, we will discuss certain non-GAAP financial information, such as FFO, normalized FFO and adjusted FFO. You can find this information, together with reconciliations to the most directly comparable GAAP financial measure in our earnings release issued yesterday as well as in our 8-K filed with the SEC.

I'll now hand the call over to Alan.

[Alan Gold, executive]

Thank you, Brian, and welcome, everyone. Q2 was another solid quarter for IIP, generating $80 million in total revenues and $2.29 in AFFO per share. That performance enabled us to sequentially increase our Q2 common stock dividend by 4.4% to $1.90, continuing our track record of increasing our dividend every year since our inception in 2016. We achieved these results without the full impact of the rents for new leases that we executed in late 2023 and year-to-date, in addition to certain preleased properties under development, where construction needs to be completed. Ben and Catherine will provide further updates on our progress here. On the investment front, in June, we announced our newest acquisition and long-term lease with Ayr Wellness for our Florida property, which will undergo redevelopment for use as a regulated cannabis cultivation facility with an expected total investment upon completion of $43 million. Ayr is an existing tenant partner of ours in Ohio, and we are excited to expand our long-term partnership with them.

As we have reiterated in the past, we are really pleased with our capital position, especially in light of the macroeconomic environment impacting real estate companies in the cannabis industry. Our total available liquidity exceeded $210 million as of quarter end, including another upsizing capacity under our revolving credit facility in Q2 to $50 million and fully funds any remaining development commitments we have along with providing ample dry power for additional strategic investments.

Additionally, we have one of the lowest levered balance sheets in the REIT industry at 11% debt to total gross assets. No variable rate debt, no debt maturities until May 2026, and David will provide more detail as well as our financial results and capital position for the quarter. From a regulatory perspective, all eyes continue to be focused on a potential rescheduling of cannabis from Schedule 1 to Schedule 3 under the Controlled Substance Act. Paul will discuss our thoughts in more detail on this rescheduling process and state level dynamics that we are seeing in addition to some green shoots that we are seeing regarding a potential strengthening of capital availability for cannabis operators.

I will now turn the call over to Paul to discuss market dynamics and regulatory developments.

[Paul Smithers, executive]

Market developments. As we have noted for some time now, from a state market perspective, we continue to see divergence in performance and dynamics with new markets experiencing high growth, while some mature markets become increasingly competitive, especially after the extended period of price compression and the challenges in competing with the illicit markets that we have highlighted in past calls. For example, as we noted in our last call, 2023 saw strong rollouts for adult-use sales in Missouri and Maryland, both of which also benefited from cross-border purchasing by residents in neighboring states with either a medical use only program or no program at all. In fact, from July 2023 through June 2024, Maryland's first year total adult-use cannabis sales topped $1.1 billion and Missouri's annual regulated cannabis sales for 2023 totaled over $1.3 billion. Ohio, which legalized adult-use in November, began issuing operational licenses for adult-use cannabis cultivation last month. Ohio is expected to be one of the fastest-growing markets in the near future and follows on the heels of very successful adult-use introductions in Missouri and Maryland.

As we have discussed on other calls, while New York has struggled since adoption of its adult-use program, we are seeing some level of turnaround in the New York regulated market with the increased pace of licensed dispensary openings for the adult-use program and increased enforcement on stores operating illicitly. Regulated sales in New York have increased from about $150 million for all of 2023 to over $260 million in the first 6 months of 2024. While this progress and the associated increase in regulated sales is welcome, this still represents just a fraction of the NYS Office of Cannabis Management's projection for the regulated cannabis industry in New York to generate $4.2 billion in revenue annually with 63,000 jobs.

With regard to state-level legislative developments, I would also like to provide a further update from our prior call on 2 other states that are in the running for adoption of adult-use programs in the near term, Florida and Pennsylvania. In Florida, we continue to monitor support levels for Amendment 3, which is expected to appear on the November ballot to legalize adult-use cannabis. While the threshold for approval of the measure is 60%, recent polling from Florida Politics and Fox News has support above that threshold. And just last month, the Libertarian Party of Florida announced its support of the initiative. In Pennsylvania, lawmakers have been signaling that a bill to legalize marijuana could be advanced shortly with an added sense of urgency as more neighboring states markets come online like Ohio. Lawmakers also touted a recent study conducted by advocacy organization Responsible PA in consultation with FTI Consulting, which estimated that the state could generate upwards of $1.7 billion to $2.8 billion in adult-use sales in the first year of rollout alone, creating an estimated 26,250 to 44,500 jobs for Pennsylvanians.

Capital raising and M&A. From a capital raising and M&A perspective, the regulated cannabis industry continues to be challenged, though we are seeing some recent encouraging developments. According to [ Meridian ], the regulated cannabis cultivation and retail operators closed on 44 capital raises for approximately $870 million year-to-date through July 19, with both the number of capital raises and total amount raised, down over 40% from the prior year's period. M&A for regulated operators for that same time period are no better. With the total number and dollar amount of M&A transactions down 37% and 66% from the prior year's period, respectively. That said, we are seeing signs of more acceptance in the debt markets for MSO refinancing, most notably evidenced by our tenant Ascend's recent closing on a private placement of $235 million of senior secured notes due in 2029, representing the first MSO to raise more than $100 million in debt since 2022.

Federal legislation. From the federal perspective, we are, of course, tracking closely the DEA's progress for rescheduling cannabis from Schedule 1 to Schedule II. Process-wise, the DEA received tens of thousands of submissions through late July during the public comment period on its rescheduling proposal. The process from here is hardly clear and a large part up to the discretion of the federal government, which could include DEA responses to certain of these comments and/or holding an administrative hearing before any potential final rule is published in the Federal Register. If and when such a final rule is published, is then subject to a 30-day period for opponents to file suit against the move, which had also served a significantly delayed or altogether prevent the final rule from taking effect. So while we remain optimistic on rescheduling, there remains some very significant hurdles and if rescheduling occurs, there is a great deal of uncertainty as to when that may actually happen.

I'd like to now turn the call over to Ben to discuss our investment and leasing activity in Q2 and year-to-date.

[Ben Regin, executive]

We've been very pleased with the activity we have seen in recent quarters, both on new investment opportunities as well as re-leasing of our vacant assets. Year-to-date, we have retenanted 4 properties covering $69 million in invested capital and selectively closed on new investments of just over $65 million. As we noted on our prior call, in April, we committed $6.1 million across 2 existing projects. We provided an additional allowance to Battle Green in Ohio to complete construction and expand their production capacity in advance of Ohio's adult-use rollout and provided an additional allowance to forefront in Illinois to round out development of our 250,000 square foot production facility.

And in June, we closed on the acquisition of 145,000 square feet of industrial space on 16 acres in Florida, executing a long-term lease with Ayr Wellness, a publicly traded MSO with operations across 8 states. We acquired the property for $13 million or $90 per square foot and committed an additional $30 million for Ayr to redevelop the main 98,000 square foot industrial building for use as a regulated cannabis cultivation facility. Ayr maintains a strong presence in Florida, operating more than 60 dispensaries with 745,000 square feet of production capacity, excluding our property. As Paul discussed, we are closely watching the developments in Florida with regards to the November election and potential adoption of adult-use cannabis.

Also in Q2, we closed on the disposition of our property in Los Angeles, which was leased up until the sale for total consideration between the sales price and lease termination fee exceeding the property's net carrying value. This property was never fully built out for cannabis use, and the sale provides us additional capital to recycle into other opportunities that we believe will provide superior risk-adjusted returns. And we continue to track an active pipeline across markets, actively evaluating opportunities and look forward to executing on new investment opportunities on a very selective, disciplined basis.

With that, I will turn it over to Catherine.

[Catherine Hastings, executive]

We've made a lot of progress in 2024 year-to-date on closing out or nearing completion on many of our tenants remaining development projects. From our last call, we highlighted completion of 3 leased projects totaling $200 million of invested committed capital, Vireo's 325,000 square foot expansion in New York, 4Front's 250,000 square foot ground-up development in Illinois and Battle Greens' 157,000 square foot ground-up development in Ohio. In Q2, we completed development of the 23,000 square foot Perez Road development project in California, which is fully leased and operational and just completed the 104,000 square foot cultivation component of our Summit building in Michigan in July. As you may recall, the 97,000 square foot processing section of that building was previously approved for operations and the entire project is leased.

We're also pleased to note that Loom, the new tenant at our Harvest Park facility has received approvals to operate and is now occupying that facility. While we agreed to provide Loom up to $2 million in qualifying infrastructure enhancement to the facility, we see this new lease as a good example of the general reusability of our facilities that have been built out for cannabis use. The overall layout and build-out of the facility has worked for the replacement tenants we've brought in with very little change to the overall design of the facility. Regarding our portfolio, as of June 30, we own 108 properties across 19 states, comprising 9 million rentable square feet, including 722,000 square feet under development or redevelopment. Of these 108 properties, 104 properties are included in our operating portfolio, which was 95.6% leased at quarter end with a weighted average remaining lease term of 14.4 years. Of the 4 properties under [ development, redevelopment ], 2 were pre-leased at quarter end.

Our portfolio continues to be well diversified with no one tenant representing more than 18% of our annualized base rent and no state representing more than 15% of our annualized base rent. We have relationships with some of the largest and most experienced operators in the industry with our leased operating portfolio comprised of 91% multistate operators and 62% leased to public company tenants. The total amount of capital invested and committed across our operating portfolio equates to $279 per square foot, which we believe remains significantly below replacement costs.

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

[David Smith, executive]

For the second quarter, we generated total revenues of $79.8 million, a 4% increase from Q2 of last year. The increase was primarily driven by activity in prior periods for the acquisition and leasing of new properties, additional funding of building improvements provided to tenants at certain properties that resulted in base rent increases and contractual rental escalations along with a $3.9 million disposition contingent lease termination fee paid to us concurrently with the sale of our Los Angeles California property. This increase in total revenues was partially offset by a loss in revenue for properties we took back possession of since the second quarter of 2023 and $1.3 million in rent received during the quarter but not recognized in total revenues due to a reclassification of 2 leases as sales-type leases as of January 1, 2024, as we discussed in depth on last quarter's call. Revenues for the quarter were also up sequentially versus the first quarter of this year, primarily relating to the lease termination fee in addition to modest sequential increases in rental revenues and tenant reimbursements.

In the second quarter, we sold a property in Los Angeles, California for $9.1 million and recognized a loss on sale of $3.4 million. However, we also earned a $3.9 million disposition contingent lease termination fee. As a result, the total consideration received on the sale of $13 million exceeded our carrying value of the property as of the end of the first quarter, resulting in a net gain of $0.5 million. As disclosed in our second quarter earnings materials, I want to note that given the disposition contingent nature of the lease termination fee, we subtracted out the net positive impact of a loss on sale of real estate and lease termination fee when arriving at our FFO calculation for the quarter.

Interest income for the 3 months ended June 30, 2024, increased by $1.7 million to $4.0 million compared to $2.3 million for the 3 months ended June 30, 2023. The increase was primarily due to higher cash interest received on our secured construction loan for a property in California where we are the lender and included a low maturity extension fee paid to us of $0.3 million in the quarter to extend the maturity date of the loan from June 30 to the end of this year.

AFFO for the second quarter was $65.5 million or $2.29 per share, a 1% increase compared to the second quarter of 2023 and a 4% increase versus the first quarter of 2024, driven primarily by the increase in interest income associated with the construction loan that I just discussed. As we noted on our first quarter call, while we expect the re-leasing activity we achieved year-to-date to contribute meaningfully to our long-term earnings, the time line to rent stabilization may differ between the properties as there are state and local approvals needed for these transitions additional regulatory requirements to be completed at certain assets and some level of rent abatement is negotiated to allow for a ramping of our new tenants operations. That being said, we are very pleased with our substantial activity on the re-leasing front, as Ben discussed in detail and happy to see our tenant Loom receive its approvals for operation at our Harvest Park facility in Michigan.

As a result of our significant re-leasing progress to date and consistent earnings, our Board increased our quarterly dividend by 4% to $1.90 per share. The dividend was paid on July 15 to common stockholders of record as of June 28. As Alan noted, our dividend remained covered by our AFFO during the quarter with a payout ratio of 83%, which is in line with the Board's targeted payout ratio of 75% to 85% of AFFO. This dividend increase continued our track record of increasing the dividend every year since our inception in 2016. Our balance sheet remained strong during the quarter with $2.6 billion in total gross assets and our only debt consisting of $300 million in fixed-rate unsecured bonds not maturing until May 2026. Furthermore, we continue to maintain REIT industry-leading credit metrics with a net debt to EBITDA of less than 1x, debt to gross assets ratio of 11% and a debt service coverage ratio of 17x.

Moving on to liquidity. We finished the second quarter at over $210 million of total liquidity comprised of our cash, short-term investments and availability under our revolving credit facility. As Alan noted, we successfully increased our revolving credit facility during the second quarter to $50 million with the addition of a New York headquartered bank. We are continuing to have dialogue with numerous banks regarding their interest in joining our credit facility to continue to increase the overall capacity. Finally, we terminated our existing at-the-market equity offering program and entered into a new ATM program during the second quarter to provide for the issuance from time to time of shares of our common stock and Series A preferred stock. We also took this opportunity to add a forward component for our sales of our common stock, allowing us to more precisely match fund our investments with a goal of reducing the overall dilutive impact of future equity raises through the program. As you can see, we continue to be well positioned for continued growth with a conservative balance sheet, access to multiple capital markets and continued progress on expanding our banking relationships to increase the size of our credit facility.

With that, I'll turn it back to Alan.

[Alan Gold, executive]

I'd like to note the following in closing. Our team continues to execute on our plan to maximize the value of our portfolio for the benefit of our stockholders through our leasing, investment and disposition activities and to continually evaluate capital options with the goal of maintaining a strong balance sheet and liquidity position. I'm proud of this team's performance and believe this core focus will serve our stockholders well over the long term. With that, I'd like to open it up to questions.

Operator, could you please open the call up for questions?

[Operator]

Thank you. [Operator Instructions] The first question comes from Tom Catherwood with BTIG.

[William Catherwood, analyst]

And maybe starting with Paul, I appreciate the commentary on lower year-over-year capital formation trends in the cannabis sector so far year-to-date. Typically, CapEx spending for the operators follows capital availability, but in this case, are you seeing any positive movement on the CapEx side driven by new state adult-use program expansions despite tighter capital markets?

[Paul Smithers, executive]

There is a lot of enthusiasm in the industry, I think, as you know, built around the rescheduling issue. And we talk to lot of operators, and we think that there's a lot of excitement, but there is some wait and see about when is rescheduling going to happen? When is the 280E relief going to hit the bottom line? So I think there is a lot of built-up capital that's going to hit the market once there is more clarity on the timing and actually the effect of the 280E relief. So I think you're well aware of the schedule. And we're pretty pleased, Tom, about where we are today with the rescheduling process. It's gone as quick as we thought it would, but right now, it's, of course, in the hands of DEA. They received 40,000 comments on the rescheduling, over 90% positive. And in fact, a big percentage of those would wanted to go further than rescheduling and get it to descheduling. So we're waiting to see what the DEA is going to do next and issue their final order and final ruling, which we think could happen really any day. Once that happens, of course, there's a 30-day period that a lawsuit can be filed by any agreed party that wants to do so. So we're waiting and seeing. And we do think, as we've said in prior calls that once that 280E relief does hit the bottom line and for people that don't really follow it closely and understand the significance of it, when 280E goes away, if we get rescheduled to 3, I mean, there's a lot of things that operators now can't deduct such as rent, salaries and wages, utility costs, maintenance and repairs, marketing, advertising, health insurance, all these things add up, of course. And once those things hit the bottom line, we think there's going to be a lot more capital available for CapEx expansion.

[William Catherwood, analyst]

And Paul, maybe sticking with that item, could there be an impact on rescheduling from either the recent Chevron ruling or a potential change in administration that might either slow up or completely change the progress when it comes to rescheduling activity?

[Paul Smithers, executive]

Yes. So let's talk about the recent Supreme Court case that took away Chevron. I think actually it's a positive. And I know you're going to get people who'll say, no, it's going to complicate. So for people that aren't following the U.S. Supreme Court rulings closely, what that recent case did is get rid of Chevron Doctrine which says that when there's an ambiguity in a federal statute, the courts leave it up to the administrative body to interpret what the Congress meant. So in order to get to Chevron, you really have to have an ambiguity, in this case, it would be in the Controlled Substance Act. And I would certainly argue that there was no ambiguity in the CSA because the CSA explicitly allows the DEA to reschedule controlled substances at their discretion. So I don't think you even get to the Chevron. So I don't think it's going to happen.

Question about who's present in next year, I think, is a fair question. And we look -- so far, former President Trump has not updated his stance that I'm aware of, on cannabis. He has always been a supporter of medical cannabis and has supported research. So my thought is when we get rescheduling to 3, I expect him to be supportive of it because it does follow the thought of more support for medical and more research. So while yes, he could instruct the DEA to undo, I don't think it's going to happen because by then, I think it's a political issue. And as we've discussed in prior calls, certainly, the overwhelming majority of voters in this country support medical cannabis. So it could happen, but I would say not.

[William Catherwood, analyst]

And maybe on the last one for me, Ben, you had mentioned pursuing new investments on a highly selective basis. What characteristics does a sale leaseback or follow-on investment have to include to meet your underwriting? And have these requirements changed at all in recent quarters?

[Alan Gold, executive]

I think before Ben starts with that, I'd just like to remind not only Tom but everybody that the sale-leaseback concept is our basic business model that we've been following since for the last 8 years, and it seems to be -- it has continued to produce what we think are both below average risks with above average returns. Now with that, I'm going to turn it over to Ben to go ahead and describe that what we do in a sale-leaseback acquisition and underwriting.

[Ben Regin, executive]

Tom, I wouldn't say that our underwriting criteria has necessarily changed over the years. And I think we're still highly selective on the types of opportunities in markets we like with tenants we like as we have been since our inception. I think we're very pleased with the state of the pipeline. We're still seeing the low to mid-teens yields on the opportunities in the pipeline. I think we're cautiously optimistic that we will hit our goal of north of $100 million in investment activity this year as we did in 2023. On top of the investment activity that we've seen year-to-date and very pleased with the leasing activity as well and retenanting $69 million worth of assets year-to-date and over $125 million worth of assets over the last 3 quarters. So between that, executing on selective pipeline opportunities, we feel very good about the state of the pipeline and the portfolio overall.

[Operator]

The next question comes from Connor Mitchell with Piper Sandler.

[Connor Mitchell, analyst]

Maybe just continuing on that and really focusing on the tenants, I was just wondering how you guys think about balancing investments with the new external tenants and then the existing tenants in terms of additional investment commitments, retenanting, et cetera?

[Alan Gold, executive]

I think that's a really good question because throughout our history, we've spent a great deal of time in capital supporting our existing tenants and being what we believe is a very strong real estate partner for them in this industry. And we continue to believe that focusing on our tenants and giving them the greatest chance for success in a very competitive and as we've discussed, a difficult general macroeconomic environment is best. But maybe, Ben, you could -- you might want to talk about the -- how we look at new tenants and how we support our existing?

[Ben Regin, executive]

Alan's describing, I feel very good about our current tenant roster of our 30 tenants and north of 90% of our revenue comes from multistate operators, and we really feel that we have some of the best operators in the industry in our portfolio and have continued to support them over the years while also maintaining a well-diversified portfolio across our tenant base as well as across state markets. We, of course, will look at new opportunities to work with new operators as we see fit with management teams that we like that have strong financials, track record of performance in the same rigorous underwriting criteria that we've used historically for our existing tenants. [Audio Gap]

[Connor Mitchell, analyst]

And then you guys have done a pretty good job of re-leasing some spaces that have come available over the past 12 or 18 months. Just wondering if you could provide an update on any current spaces that are unoccupied and the leasing efforts or possibly like selling efforts of those properties?

[Alan Gold, executive]

No. I think before I turn it over to [indiscernible] to provide those details, I do, I really want to complement again our team for their unbelievable execution on re-leasing. As many people who have been involved with our company from the inception, it was a great belief that our properties would be very difficult to re-lease and they would be too specialized. And we continuously believe that we've underwritten them properly, that we have a very reasonable cost per square foot given the amount of infrastructure that goes into these facilities, and I think that's proven out with the re-leasing.

[Catherine Hastings, executive]

Connor, as Alan was talking about, I think the team is just really pleased with the success of our re-leasing and the attractiveness of the facilities to those new tenants really speaks to the general reusability of those facilities. And we plan to bring that same success to the remaining assets that we have, which are really just down to a handful of properties. We have 160,000 square feet of cannabis real estate in Pittsburgh, 238,000 square feet of warehouse space in California and a 12-acre parcel of land in Texas. We also have 2 small retail properties in Michigan that totaled about 6,000 square feet. And overall, we're really confident in the talent of our team to continue to position these assets in the future and hope to have additional updates as we work through those.

[Connor Mitchell, analyst]

And then maybe one more question for me. You guys have had a pretty good handle on correcting any issues or fixing any issues you've had with tenants in the system. Just wondering if you could provide an update on maybe a watch list or a tenant credit update, if anything might be brewing? Or you guys feel pretty good about the environment as it is?

[Alan Gold, executive]

So I think the statement that we talk about when we talk about a watch list is that we watch all of our tenants. And even with 30 tenants, we think we have that pretty well in hand. We've reminded the [ audience ] about the difficult macroeconomic environment and in general and particularly in the cannabis industry and we are still working -- the industry is still working through some of those issues and we believe that there are tenants that because of supply chain issues or getting up to speed with the changing environment that there will be some difficulties. But in general, we're very – as Ben and Cat has indicated, we're very pleased with the quality and strength of our tenants.

[Operator]

The next question comes from Scott Fortune with Roth Capital Partners.

[Scott Fortune, analyst]

Just a follow up, maybe, Cat, on the properties that you're looking to re-lease, obviously, regulations and getting those licenses in place, that kind of developing them out, is the timing still in place where we expect this to happen towards the end of the year, early next year? Just an update on the timing for these turning into rent lease revenue moving forward and the progression there with the regulation side of it?

[Alan Gold, executive]

Perhaps Ben, you might want to address the timing associated with the assets that are already built out in the cannabis facilities.

[Ben Regin, executive]

Again, talking about the leasing activity, which, again, we've been very pleased with, over $125 million worth of investments that we've retenanted over the last 3 quarters and I just want to remind everyone that the time lines can vary state by state, market by market for any build-out that might be required, any licensing that might be required. So that can take anywhere from a relatively short period of time to 12-plus months, again, depending on the municipality in that particular situation. So knowing that a lot of this activity has happened in Q4 last year and into the first half of this year, we would expect rent to commence depending on the asset, more likely into 2025, late 2024, but it's really an asset-by-asset basis on that.

[Scott Fortune, analyst]

And then Ben, just a little more color, obviously, the health of the cannabis industry as we've seen early 2Q reporting being very positive from a revenue growth, margin expansion and these operators continue to focus on cash flow generation to operate in this environment without 280E benefit from that standpoint, we're seeing some M&A pick up here in environment. So it seems like some capital is starting to go to work. But just a question on expanding your portfolio in different states, with large markets, Ohio coming onboard, you guys were positive on New York saying to ramp up more there and adult-use and the potential capacity as we're seeing a lot of the operators add capacity in Florida, with this backdrop, can you call out states where you're seeing a pickup in discussions or potential opportunities to be added to the portfolio there?

[Ben Regin, executive]

So yes, Scott, I know you follow this closely, but today could be really kind of a special day in Ohio. And I'm waiting to see if the stores actually open today, if not today, probably tomorrow when Ohio actually rolls out sales in the adult-use. So that could be a really great example of a new state that's going to do it right. And we're really excited in the way Ohio did it by co-licensing the existing medical operators with the adult-use license so they could hit the ground running. So absolutely, Ohio is exciting. I remember a year ago talking about New York, and then we just got disappointed about the rollout, but boy, there's some really positive news coming out of New York with the governor finally making some really concrete moves. And she had reported that just last month as a result of issuing new licenses and I think, more importantly, as a result of actually padlocking some of the illegal stores, that sales have been up as much as 50% in New York City. So is New York turning around? Boy, it sure looks like it. So we get excited about that. In Florida, we can't really, I think, overstate how we think if Florida hits, what amazing market that can be. We have talked in detail about the 60% threshold for the vote and certainly, it's in the news about the opposition is well funded and picking up more but the polling still remains positive. So we think that's got a good shot at hitting. Pennsylvania, we like Pennsylvania, and that's in the legislature right now, and there's some, I think, horse trading going on in the legislation in Pennsylvania between the Republicans and the Democrats in the assembly. The governor of course, is very pro adult-use. So we think that will get across the finish line before not too long. So those states, we think -- we continue to be really excited about what's going on there.

[Scott Fortune, analyst]

Obviously, VP Harris is now the Democrat elect. There's been this view that the Democrats look to differentiate by moving forward cannabis policy ahead of election, and that seems that now that's moving forward on the rescheduling process. I know you provided an update there, but anything new about VP Harris being on the ticket now that, that will kind of help get the final draft rule over the finish line here in the coming months ahead of the election or just thoughts around that with the new Democratic elect here?

[Paul Smithers, executive]

Yes. So it is fun to watch. And just this morning, of course, she announced the Minnesota Governor, as her running mate, and he has a very strong history of being pro cannabis which we're very happy to see, of course. So I think between the 2 of them on the Democratic ticket, it's very pro cannabis. And I think that we will see possibly an acceleration, but certainly stay the course. I cannot see the Democratic ticket with Harris at the top, doing anything but supporting the rescheduling and getting it before the voters in November. So we think it's a positive. And as I talked earlier, the idea about if Trump gets elected, will he undo these things? I don't see it. I just think it's too -- they'll have too much momentum by then, and he won't risk that with the voters. So to answer your question, we think that Harris and her new VP running mate are nothing but a positive for rescheduling.

[Operator]

The next question comes from Eric Des Lauriers with Craig-Hallum Capital Group.

[Eric Des Lauriers, analyst]

First one for me in terms of your pipeline. Can you talk about the mix of demand you're seeing from existing tenants versus new tenants? It's nice to see this lease with Ayr, of course but wondering if there's sort of a longer-term natural trend of decreasing demand from existing operators and increasing demand from new tenants just given the relatively fixed number of industrial properties with existing tenants and sort of the more sale leasebacks you do, the less that remain. How should we think of this longer term? And kind of where are you now in this trend?

[Alan Gold, executive]

Yes. Ben can take that. But just keep in mind that opportunities come not only from existing tenants growing in existing markets but when new markets and new approvals occur, that there's additional demand.

[Ben Regin, executive]

Yes, sure. Eric, I mean, I think it is a mix, as you mentioned, of our 30 tenants, as we've said, 91% of the revenue comes from multistate operators. We have a lot of the largest and kind of best-in-class MSOs in our portfolio. So it's natural that there will be follow-on opportunities as we continue to support those tenants with their growth initiatives. That said, we are always sourcing additional opportunities. We're very pleased with the state of the pipeline as it is today between a mix of existing opportunities with existing tenants as well as potential new tenants into the portfolio that we are underwriting. And this really goes across markets, some established markets as well as some of these that we've been describing on the call. Long term, I think it will continue to be a mix as we look to balance continuing to support our existing tenants as we've done since our inception as well as continuing to diversify our tenant base, both across tenants and markets as we continue to grow the portfolio.

[Eric Des Lauriers, analyst]

And then my last question just on New York State. So nice to see the improvement in that market. Obviously, as you mentioned, still sort of a fraction of its potential. I'm wondering if these improvements are having a material impact on the profitability of some of your tenants there or at least the serviceability of these leases? Obviously, you have 2 of your largest leases are in New York. Just wondering how you view that risk in relation to this current ramp? It seems like if the ramp continues at a slow pace, perhaps there's a possibility that something has got to give. I'm just wondering how comfortable you are with those leases and how we should think about your willingness to potentially help your tenants through slow ramp period if they are, in fact, still feeling any pressures?

[Alan Gold, executive]

[indiscernible] Paul or Ben, I think you've talked about how strong the New York market is, but we're not giving any indication of anybody looking for any rent relief in New York. But go ahead.

[Paul Smithers, executive]

So that's correct. We're very pleased with the performance of our New York tenants. And I think this whole idea, when we talk about a 50% bump in sales, that's at the retail level, of course, and I think that's going to carry through and really get that demand up. And taking away the illicit market in New York is huge. And that, along with issuing these new licenses is such a positive. And I think as I mentioned, our New York leases are performing very well. So just with this added positive news, I think it's just more of a positive indicator that the potential for New York market, which is huge, is definitely turned the corner and is on its way to realizing just how big that market can be and our tenants are well positioned to take advantage of that market. So we think they're in a great position.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Alan Gold for any closing remarks.

[Alan Gold, executive]

Thank you, and thank you all for joining us here today, and thank you to the team for your continued hard work and efforts. And with that, we conclude the call. Thank you.

[Operator]

This concludes today's conference. Thank you for attending today's presentation. You may now disconnect.