Innovative Industrial Properties, Inc.

Good morning and welcome to Innovative Industrial Property Second Quarter 2020 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Brian Wolf, General Counsel. Please go ahead.

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 Regan, Vice President of Investments. 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. For a detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the news release issued yesterday and filed with the SEC on Form 8-K as well as the company's reports filed periodically with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. I'll now hand the call over to Alan. Alan?

Thank you, Brian, and welcome, everyone, to our second quarter earnings call. First and foremost, we want to express our deep appreciation to all of our medical professionals, caregivers, and researchers who are on the front lines fighting the coronavirus pandemic we are experiencing across the globe. It has been a trying time over these many months, as we continue to battle this health crisis and its resulting extreme economic disruption. But we are heartened by the advancements our health and science community has made in such a short period of time to understand this disease and formulate highly effective treatment plans for our patients, and what we hope is a highly effective vaccine. As we discussed on our last call in May, the regulated cannabis industry, both medical and adult use, was deemed an essential service by the vast majority of state and local jurisdictions in the United States. And our tenant operators have answered that call, adapting their operations in ways to ensure continued, compassionate, individualized service to their patients and customers and an environment designed to maximize the safety and health of patients, customers, and employees. And to recap, on our investments in support of the tremendous future of this industry, during the second quarter of 2020, we acquired eight properties totaling over 775,000 square feet in five states and amended leases with our existing tenants for additional property improvements. collectively representing over $225 million of investments. These investments were comprised of both follow-on transactions with our existing tenant partners to facilitate their continued expansion, including industry-leading operators Ascend Wellness, Cresco, Holistic, and King's Garden, and new tenant relationships, including Cura Leaf and ColumbiaCare. Ben Regan, our Vice President of Investments, we'll discuss our recent acquisitions in more detail and our overall portfolio. As of today, we own 61 properties in 16 states, totaling 4.5 million square feet, which are over 99% leased on a long-term basis to high-quality licensed cannabis operators. The one property that is not leased in our portfolio is our Los Angeles, California property with a tenant under receivership. As noted in our press release issued yesterday, Holistic Industries, our long-term tenant partner in Massachusetts, Maryland, and Pennsylvania, has entered into a definitive agreement to acquire the operational licenses for this property, and we are optimistic regarding the completion of this transaction and partnering with Holistic again on a long-term basis for this property, though it remains subject to customary closing conditions and final receivership court approval. As we noted in our press release issued yesterday, aside from our Los Angeles property, our tenants have paid 100% of contractually due rent for each of the months of April, May, June, and July, including the three tenants from which we provided temporary rent deferral in Q2. As of today, we have no other tenants under a rent deferral program, which we believe is a testament to the quality of our tenant base and their ability to adapt to this new normal. Reflecting the strength and resilience of our tenant partners, we paid a quarterly common stock dividend of $1.06 per share to stockholders on July 15th, representing a 77% increase over our second quarter 2019 dividend, driven as well by our continued execution on our pipeline of acquisitions. This dividend was also supported by our tremendous 180% plus growth year over year in rental revenue, net income, and AFFO. which to note does not take into account at all the three acquisitions we completed after quarter end, constituting $49 million of additional investments. The COVID-19 pandemic and severe economic disruption constitute the first recession faced by the regulated cannabis industry, and we believe our tenants have adapted exceptionally well to new ways of serving their patients and customers, which Paul will touch on later. On the financing front, I also would like to personally thank all of our stockholders, our long-term company owners, for their steadfast support, providing us over $370 million in gross proceeds over the last three months to support our long-term tenant partners in their continued expansion initiatives, while forging additional partnerships with the top-tier operators in the industry. Catherine will also provide more detail regarding our financial results and capital raising activity. As always, we are focused on continuing to be long-term stewards of your investment in our company and navigating through the immense challenges posed by the health crisis and economic disruption. Despite these challenges, we continue to be strong believers in the resilience and potential of this still quite young industry and being a key real estate capital provider to enable its continued growth for many years to come. With that, I'd like to turn the call over to Paul. Paul?

Thanks, Alan. For this call, I plan to provide an update on the regulated cannabis industry with a focus on the COVID-19 pandemic, including one, the current regulatory environment for cannabis operators during this crisis, and two, the dynamics of the industry during this crisis and developments that we continue to monitor closely. As mentioned on our last call, I'd like to also preface this discussion, noting that regulations and industry developments are evolving rapidly. And while we want to provide you a general landscape as of now, there can be no assurance that this landscape will not significantly change. First, regarding the current regulatory environment as it pertains to the COVID-19 pandemic. As noted on our previous call, we continue to be in touch with each of our tenants during this pandemic and we monitor state and local developments closely. In the vast majority of states, medical use and adult use cannabis have been determined by applicable government authorities to be essential businesses that can continue to operate as an exception to general state and local shutdown orders. The essential designation has generally been applied throughout the supply chain, including cultivation, processing, packaging, distribution, and dispensing. There have been certain exceptions, however, such as in Massachusetts, where the governor permitted medical use cannabis businesses to continue to operate as essential, but shut down adult use cannabis businesses as not essential for a period of time, allowing them to reopen in late May. As noted previously, over the long term, we see the clear, nearly uniform designation of medical use cannabis businesses as essential during this crisis as a very positive point for the industry. and offering further validation of the key importance of medical cannabis for patients in managing their medical conditions. And as we touched on in prior calls, pre-pandemic, 2020 was shaping up to be another watershed year on the state legalization front, with as many as 11 states residents expected to vote on medical or adult use cannabis legalization. However, shelter in place orders greatly impacted the ability of organizers to gather sufficient signatures in person, and as a result, a number of the initiatives have been postponed. Even in the face of such challenges, a number of initiatives are moving forward, including voter approval of an adult use program in New Jersey, where we acquired three properties after the quarter end, and in Arizona, where we own two properties. It appears likely that adult use legalization will be on the ballot for November, with organizers having collected over 420,000 signatures, over 180,000 more than was required. Post-pandemic, we expect the strong, long-term momentum of both medical use and adult use legalization across states to continue, if not increase, in line with the clear shifts of opinions of citizens nationwide and the importance of supporting an industry that will serve as a key source of good-paying jobs, tax revenues, and ancillary economic growth in communities for many years to come. Finally to note, while there have been put in place a number of federal assistance programs to support a wide range of businesses during this pandemic, and despite the efforts of industry groups and certain congressional leaders, cannabis businesses are still not able to avail themselves of the benefits of the federal EIDL, PPP, or agricultural support programs. given the status of cannabis as a Schedule I controlled substance. Secondly, regarding the industry dynamics during this pandemic. First off, our tenants and their dedicated teams have done tremendous work day in and day out, providing access to cannabis for patients and consumers while working tirelessly to implement protocols and procedures designed to protect the health of patients, consumers, and employees. Our tenants were able to quickly adapt to this new environment, instituting social distancing and further enhanced sanitation procedures, as well as implementing online ordering, advanced scheduling, curbside pickup and delivery, to name just a few of these changes. And while there certainly have been significant disruptions on state and local levels, such as with the Massachusetts shutdown of adult use cannabis operations, the industry as a whole has demonstrated tremendous resilience in the face of one of the greatest health and economic challenges our country has faced. On a macro level, legal cannabis is one of the very few sectors in the economy that has held up well in this current environment, notwithstanding the complete lack of federal support that is afforded to nearly all other industries. That said, there certainly has been a good amount of variation in performance across states. driven by a number of factors, including the adaptability of state and local governments to accommodating curbside pickup and delivery, the breadth and duration of stay-at-home orders, and COVID infection rates, among others. For example, the state of Nevada has experienced a precipitous decline in tourism, which has had a significant dampening effect on the state's adult-use cannabis market. And of course, in Massachusetts, adult-use stores were required to close for a few months by state authorities, which had a very significant impact on sales. At the same time, states like Maryland and Pennsylvania continue to exhibit tremendous growth and resiliency each month in service of patients. We also continue to see consolidation of the industry, which has been a theme for a number of months now, and continued challenges in the capital markets for cannabis operators. Within our portfolio, we have seen some of that consolidation play out, with Curaleaf's closing on its acquisition of Grassroots late last month and ColumbiaCare's pending acquisition of the Green Solution, all of whom are our tenants. We also expect that strong brands and strong balance sheets will provide further differentiation in this environment in the months to come. We are certainly proud to work with many of the best-in-class operators, and we have continued our strategy of focusing on developing and expanding our real estate partnerships with strong, well-positioned multi-state operators, as Ben will describe in some detail. While this is an extremely challenging time for our country and our world, we believe that the regulated cannabis industry has exhibited exceptional resilience in this crisis to date and will continue to thrive and be one of the top long-term drivers of growth and good jobs across the country. And it bears repeating again what an exceptional growth opportunity the US regulated cannabis industry represents. RPU and BDS forecast growth from $9.1 billion in 2018 to over $31.4 billion in 2024, a compound annual growth rate of nearly 23%. It is really difficult to draw a comparison to any industry in the world that represents such an opportunity. I'll now turn the call over to Ben, who will walk you through our recent acquisitions and follow-on investments in our property portfolio. Ben? Thanks, Paul.

As Alan noted, since April 1st, we have acquired eight properties in five states, representing a mix of expansion of our existing real estate partnerships with top operators and establishment of new tenant relationships. As of today, we own 61 properties across 16 states, representing approximately 4.5 million square feet, including approximately 1.5 million square feet under development or redevelopment. Similar to past calls, I plan to touch on each of our acquisitions by state and also provide some information about each tenant and our portfolio overall in the state. As we previously announced just last month, we entered into our 16th state, acquiring three properties in New Jersey. We acquired a 111,000 square foot industrial property and entered into a long-term lease with Curaleaf. with our total investment in the acquisition and tenant improvements at the property expected to be $35 million in the aggregate. Curaleaf is a leading multi-state operator and late last month announced the closing of its acquisition of Grassroots, another tenant of ours in Illinois, Pennsylvania, and North Dakota. Curaleaf and Grassroots together have a presence in 23 states with over 135 dispensary licenses, 88 operational dispensary locations, and over 30 processing facilities and 22 cultivation sites, comprising 1.6 million square feet of cultivation capacity. In total, we have long-term leases at four of our properties with Keerleaf and Grassroots, representing a total investment of a little over $100 million, including commitments to fund future tenant improvements. Shortly after our Keerleaf transaction, we completed the acquisitions of two properties in sale-leaseback transactions with ColumbiaCare, another strong multi-state operator. As you may know, ColumbiaCare is in the process of acquiring The Green Solution, a tenant of ours in Colorado. ColumbiaCare and The Green Solution together are expected to operate in 18 jurisdictions with over 70 U.S. dispensary locations, 22 cultivation and processing facilities, 1 million square feet of cultivation production capacity, and over 1,300 employees. These three transactions in New Jersey represent a total investment of just under $50 million, including commitments to fund future tenant improvements. New Jersey represents the 16th state where we own properties, and we are excited about the market potential for both the current medical use program and the prospects for introduction of an adult use program. Governor Phil Murphy has taken important steps to improve and expand access for patients under the medical use program, and legalization of adult-use cannabis is on the ballot this November for residents of New Jersey, with recent polling showing strong majority support. Now to Massachusetts. As we discussed on our last call, in April we acquired a 199,000-square-foot industrial property and entered into a long-term lease with Ascend Wellness, with our total investment in the acquisition and tenant improvements at the property expected to be $49 million in the aggregate. Ascend is a vertically integrated MSO with retail and cultivation operations in Massachusetts, Illinois, Ohio, and Michigan. This transaction represented our third acquisition and lease with Ascend, having previously acquired and entered into long-term leases with Ascend for their cannabis cultivation and processing facilities in Illinois and Michigan. And at the very end of the quarter, we closed on a 118,000 square foot industrial property and executed a long-term lease with Cresco Labs. with our total investment in the acquisition and tenant improvements at the property expected to be a little under $29 million. This transaction marked the fifth acquisition and lease with Cresco, having previously entered into acquisitions and leases for Cresco's cannabis cultivation and processing facilities in Illinois, Michigan, and Ohio. As of today, we own five properties in Massachusetts, and our total investment, including committed funding for future tenant improvements, is $166 million, including the additional $17 million which may be requested by Trulieve at our Holyoke property. These five properties are also leased to some of the top regulated cannabis operators in the United States, including Ascend, Cresco, Holistic Industries, Pharmacan, and Trulieve. As Paul previously noted, Massachusetts determined to keep medical use cannabis businesses open as an essential service and to close adult use cannabis stores for approximately two months with adult-use cannabis stores reopening in late May. Now for Michigan. As discussed on our last call, in April we acquired a 115,000 square foot industrial property in a sale-leaseback transaction with Cresco, with our total investment in the acquisition and tenant improvements at the property expected to be $32 million in the aggregate after our recent amendment to increase the tenant improvement allowance by an additional $16 million. As of today, our total investment, including committed funding for future tenant improvements for the properties we own in Michigan, is about $131 million. Michigan has allowed both adult use and medical use cannabis businesses to remain open, and according to a Michigan Marijuana Regulatory Agency report, June 2020 total sales for medical use and adult use cannabis were approximately $90 million, or over a billion dollars on an annualized basis. compared to total regulated sales of about $35 million during January of this year. We believe these statistics demonstrate the resiliency of the cannabis industry against a backdrop of a very difficult economic environment. On to Pennsylvania. In early June, we closed on our third acquisition and lease with Holistic Industries for a 108,000 square foot industrial property in Newcastle, with our total investment in the acquisition and tenant improvements at the property expected to be a little over $15 million in the aggregate. We previously acquired and leased Holistic's cannabis cultivation and processing facilities in Maryland and Massachusetts. Holistic is one of the largest private vertically integrated MSOs in the US with operations in California, Maryland, Massachusetts, Michigan, Pennsylvania, and Washington DC. A little later in June, we expanded our investment with Greenleaf Medical at our Saxton facility a 266,000 square foot industrial facility. Greenleaf previously redeveloped 103,000 square feet of the facility for medical use cannabis cultivation and processing, and we are providing Greenleaf $30 million in funding for the redevelopment of the remaining 163,000 square feet. We also leased to Greenleaf our property in Richmond, Virginia, an 82,000 square foot cultivation, processing, and dispensing facility that we acquired earlier this year. Pennsylvania state authorities have done an excellent job of fostering the growth and expansion of access to patients throughout the state. As of the end of June, there were 330,000 registered patients, and according to Marijuana Business Daily, medical cannabis sales are expected to nearly double this year, approaching $400 million. With a large majority of Pennsylvanians polling in support of legalization of adult use as Last month, a majority of Pennsylvania state Democrats sent a letter to the governor and legislative leaders to pursue adult use legalization, in part to generate much needed tax revenue to help offset losses stemming from the current pandemic. Multiple bills legalizing adult use are pending in Pennsylvania's legislature. Now for California. In May, we acquired a 70,000 square foot industrial property in Southern California for $17.5 million and entered into a long-term lease with King's Garden. Including this property, we leased five properties to King's Garden, including the four-property industrial portfolio totaling 102,000 square feet that we acquired in April of last year. King's Garden is a leading cannabis cultivation, processing, and manufacturing operator, having developed a tremendous brand and reputation for consistent top-shelf quality. Notably and highly unique in this industry, Kings Garden declared its first quarterly dividend in June of this year to its equity investors. Finally, as Alan mentioned in the beginning of this call and as we disclosed in our press release yesterday, we are in advanced discussions with Holistic, our tenant partner in Maryland, Massachusetts, and Pennsylvania, to lease our Los Angeles property. Holistic has executed an agreement to acquire the Retail, Distribution, Cultivation, and Manufacturing Licenses from the former tenant of the property, which is in receivership. A court date has been established for approval of the sale of the licenses in the coming weeks, and we expect the transaction to close a few weeks after that approval. Nothing is certain at this point, but we are optimistic that we will be able to make a definitive announcement in the near future. In terms of overall pipeline, we continue to see a very strong demand for our real estate capital solutions and are in active negotiations with a number of top-tier operators. both existing tenants and new ones, and look forward to sharing additional transactions as we complete them in the months to come, continuing to utilize the strength of our balance sheet. With that, I'll turn it over to Catherine. Catherine?

Thanks, Ben. It's been yet another busy quarter, and the regulated Canada's market has really shown its resiliency during these unprecedented times, both of which are reflected in our financial results for the second quarter and six months year-to-date. We generated total revenues of approximately $24.3 million for the quarter, a 183% increase from Q2 of last year. The increase was driven primarily by the acquisition and leasing of new properties, additional tenant improvement allowances provided to tenants at certain properties that resulted in base rent adjustments, and contractual rent escalations at certain properties, offset by temporary rent deferrals. As we discussed on our last call, we've been in close discussions with each of our tenants during these unprecedented times and executed temporary rent deferrals for three of our 23 tenants, generally structured to apply a portion of the security deposit we hold under each lease to pay April rent in full, defer rent for May and June in full, and provide for the pro rata repayment of the security deposit and deferred rent over an 18-month time period starting July 1, 2020. Pursuant to these amendments, a total of $743,000 of security deposits that we hold in cash were applied to the payment of rent for April, and a total of $1.5 million in rent was deferred for May and June. The total amount of $2.3 million from these amendments represents approximately 2.5% of our total revenues annualized as reported for Q2. As Alan mentioned, we've collected 100% of contractually due rent across our total portfolio for the months of April, May, June, and July, other than for our Los Angeles property, including full repayment of July rent and pro rata repayments of the security deposit and deferred rent from the three tenants that were under the rent deferral program. We have also not executed rent deferrals for any additional tenants, other than these three tenants. As we've indicated in the past, our Q2 revenue reflects only partial quarters of revenues from the acquisitions and leases executed during the quarter and no revenues, of course, for the leases executed after the end of the quarter. And our revenues for the quarter were also impacted by rent abatements or deferrals under certain leases that are expected to burn off in the next few months as we continue to account for all of our leases on a cash basis. For the three months ended June 30, 2020, we recorded net income of $13 million. Funds from operations, which adds back property depreciation to net income, was $19.7 million. Adjusted funds from operations, which adds back non-cash stock-based compensation expense and non-cash interest expense related to our exchangeable senior notes, was $21 million. For the three months ended June 30, 2020, adjusted funds from operations grew 263% from the prior year period. On July 15, we paid our quarterly dividend of $1.06 per share to common shareholders of record as of June 30. The Q2 2020 common stock dividend reflects a 77% increase from the prior year's second quarter. As we've indicated in the past, the Board continues to target a dividend payout ratio of 75 to 85 percent of AFFO on a stabilized portfolio basis. During the quarter, we also continued to fund real estate improvements into many of our properties as offered in tenant improvement allowances or construction development to our operators under our leases. As we previously noted, these improvements are critical to either redeveloping an existing facility to a cannabis facility or funding expansion to address growing market demands As Ben previously mentioned, we've been proud to partner with many of our tenant operators and amend the leases to provide for additional expansion capital at our facilities for a corresponding increase in base rent. During the six months ended June 30, 2020, we capitalized costs of approximately $158.4 million and funded approximately $161 million relating to tenant improvements and construction activity at our properties. And with respect to financing activity, in May we completed a follow-on public offering of common stock, raising net proceeds of about $115 million, including the exercise in full of our underwriters' option to purchase additional shares. And in July, we completed another follow-on public offering of common stock, raising gross proceeds of about $259 million, including the exercise in full of our underwriters' option to purchase additional shares. This brings our total capital raised to approximately $1.4 billion from the IPO, follow-on common stock offerings, our Series A preferred stock, exchangeable senior notes, and our ATM program. To date, we've committed around 77% of our raised capital, or approximately $1.1 billion in the aggregate, under our leases. We are truly grateful for all of our stakeholders' continued support and we're focused on investing the proceeds from our recent equity raises with the best tenants and working closely with our tenants to navigate through these unprecedented times and come out even stronger on the other end. Finally, as highlighted on our last call, I'd like to note that we remain very conservatively leveraged with no secured debt and approximately 12% of our total gross assets consisting of our exchangeable senior notes at quarter end. a leverage rate and balance sheet composition that is truly unique among real estate companies. Those exchangeable notes have a fixed cash interest rate of 3.75%, equating to approximately $5.4 million of total cash interest payments per year and do not mature until 2024. Those exchangeable senior notes are the only debt we have on a balance sheet totaling $1.2 billion of assets as of quarter end. And with that, I'll turn it back to Alan. Alan?

Thanks, Catherine. As we have highlighted in prior calls, I'd like to note the following in closing. We are proud of everything that our tenants have accomplished and commend them in the way that they have adapted to this ongoing pandemic to continue to provide safe and reliable access to patients and consumers. We are well capitalized with strong, flexible balance sheet that we see as a tremendous asset to allow us to weather these uncertain times and continue to support our tenants and the industry as a whole in its continued expansion. And we believe the last few months have demonstrated the tremendous resiliency of this industry, and we are steadfast in our belief of its very bright long-term future. I want to personally thank our stockholders for your continued support and entrusting us as stewards of your investment. We have and will continue to do our very best in that role every day. With that, I'd like to open it up for questions. Operator, could you please open the call up for questions?

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question today comes from Tom Catherwood with BTIG.

Thank you and good morning, everybody. So I don't want to talk politics here, but taking a step back, the DNC voted down federal legalization from its 2020 platform recently, and instead it supports legalization. decriminalization and rescheduling through executive action primarily targeted at medical cannabis. So in relation to your portfolio, how could decriminalization or rescheduling impact your business and would it expose your tenants to competition from interstate commerce or import of cannabis from other countries?

Hey, Tom, it's Paul. Yeah, we're interested to see the DNC pretty much adopted the Biden-Sanders policy published. So that was no surprise there. But we were actually kind of pleased to see what the Biden-Sanders policy was and now the DNC. So as you know, what they're proposing is that medical cannabis be legal over 50 states, which means that doctors can recommend cannabis without any federal intervention. So we think that's a real positive for our business and the industry because that certainly opens up all states to medical cannabis without the necessity of a vote. What it does, too, it's not de-scheduling cannabis, which would not open up interstate commerce. So that's another net positive, we think. So, you know, if this... plan comes into fruition next year, Biden's elected, uh, and the Democrats take the Senate, uh, we could see some change, but we're all pretty positive about what that would look like. Uh, because, you know, we're not going to see, uh, a complete, uh, de-scheduling of cannabis. And it looks like Biden is really adapting, uh, the States Act as opposed to the Moore Act. So. that would put the decision to recreational cannabis to the individual states. So we see it as a net positive for the industry and certainly our tenant operators.

Got it. Thanks for that, Paul. And then next one is, this goes back a bit, but if I recall correctly, when MedMen was going to acquire Pharmacan, you had signed a triparty agreement to govern how Pharmacan's leases would be handled after that transaction. With CuraLeaf closing on grassroots, which you mentioned, and obviously ColumbiaCare with TGS, and even with the announced deal between Jushi Holdings and Vireo in Pennsylvania, how are you addressing your leases during changes in ownership? And do you get any additional credit enhancements, or increased corporate guarantees?

Just for clarification, there was no tri-party agreement with the amendment treehouse slash us back then. That didn't exist. But what we do do is all of our leases come with a corporate guarantee and give us the ability to review who the new entity is and that any guarantee wouldn't disappear if we don't believe that the new entity that is acquiring one of our transactions and one of our leases in a better financial position than the previous entity. So a lease is our subject to our approvals as to when an acquisition occurs. And then the corporate guarantees stay in place and then transfer. And then if we do come to an agreement, with the new entity, that new entity then is the new corporate guarantor of the leases that we have in place.

Got it. Okay. I guess I would assume then that if you approve and if that lease transfers over and you get the new corporate guarantee of the new entity, the rest of the terms remain the same, whether it's rents, whether it's rent increases up to that point in time, whether it's lease duration, all that remains from the previous, from the original agreement, correct?

Other than one lease where we have, the tenant has a right of purchase option, all of our lease terms, none of them are, there's no early termination rights, there's no changes, no pre-agreed modification to any lease.

Got it. Thank you for that. Thank you for that, Alan. Maybe for Paul here, in regards to your asset at 1500 Esperanza Street, great to hear that Holistic is under contract to acquire those licenses. It seems very similar to Holistic's first deal in California in 2018. But help me understand the receivership process. If I recall correctly – Throughout this process, it sounded like there was reverse inquiries and interest on your space, but at the same point in time, the licenses and the processing of the receiver held up agreements. Is the process that the licenses and the assets that are under receivership have to be resolved before you can lease the space, or is that just the process that you've decided to follow? How did that work exactly?

Yeah, so, you know, it's been a long process, certainly, and it hasn't been helped by the COVID shutdowns with some of the administrative offices in Los Angeles and with the receiver. So we've been working closely with the receiver, and we're very happy to see Holistic's interest in the property. But, you know, at this point, it's still not a done deal. We're optimistic it will close. But, you know, when the receiver gets final court approval, of the transfer of the licenses to holistic, we'll be in a position to talk about the lease, but it's premature for us now to discuss the lease terms.

And just to back up just a little bit on that specific transaction, it was further complicated by the fact that there was a Canadian owner that started the receivership process and the receivership process was started in Canada. And then when that receivership process was adjudicated, then the owner became the primary investor or capital source for the previous tenant. And then there was a second receivership process started in California and LA. So that further complicated the process on top of COVID, on top of the lack of access to the courts and administrative process in California. So just keeping all that in mind. Typically, we wouldn't see that type of complication.

Got it, got it. That's really helpful. And then last one for me, for Ben, you may not have this kind of at your fingertips right now, but you spoke a lot about kind of tenant expansions. So whether it's phase two or phase three of someone building out their space It obviously seems to be a great source of investment in your portfolio. Do you have a sense of how much expansion potential there is within the assets that you already own, whether it's sitting out space that already exists or greenfield expansion on additional acreage? Do you have any sense of that?

Yeah, so we're continuing to see a real nice mix in the pipeline between expansion and our existing facilities and new investments. It's similar to many aspects of the business. It's very much driven by the state by state markets. And as we continue to see specific states, we saw a lot in Illinois as an example late last year. I think we'll see a lot of that in the Midwest East Coast medical states continuing this year. The increase in the market is driving a lot of demand for the real estate capital to expand these facilities, and it is part of our underwriting going in on the acquisition that the site or the building itself will be able to support where we see the market going over the long term.

Got it. Appreciate that. Thanks, everyone.

Thanks, John.

Our next question comes from Scott Fortune with Ross Capital Partners.

Good afternoon or morning and congrats on the quarter and working through this COVID environment. I just want to get a sense of kind of the velocity of the pipeline. I know you've acquired about $387 million year to date, but since COVID has come on board, can you provide the timeline of placing or deploying capital, normalized You said it's about three to six months. Are we seeing delays or expectations of that extending out in this environment going forward?

So, Scott, when we raised the capital, our last two capital raises, we made it very clear that we could place that capital in a six to nine month time frame. And we believe that we're right on that path and that or slightly ahead of that schedule. We don't believe that COVID, well, COVID does make it a little bit more difficult for us to transact our businesses in any specific location. We are, the team has done a fantastic job of overcoming those issues and continues on pace to deploy the capital that we've raised in that six to nine month time frame.

Okay, great. And then a quick follow-up on that, kind of, Paul, you mentioned about the legalization front. It seems like there's a lot more momentum on federal legalization and potential descheduling, which changes the dynamics a little bit and more competitors can come on board. But with the portfolio, are you still seeing yields in the 13% range and remain high, or are you seeing tenants kind of holding off since – ahead of potential federal legalization and policy reform? Just kind of talk about that as we look forward into November here.

Yes, so I don't think we've seen any real hesitancy on any of our potential acquisitions to wait and see what's going to happen in November because, you know, I think people understand that there's a lot of moving parts in what could happen, you know, who takes the White House, who takes the Senate. But, you know, as we talked about earlier, we're If Biden takes the White House and we see some congressional action, it'll be mostly states' rights type movement. And I think that's going to be a slower process than some people might think. But I do believe that we're not going to see a de-scheduling of cannabis from the CSA. So it's still going to remain a controlled substance, whether it's a Schedule II or III. So we're not seeing a huge shift immediately one way or the other, whatever happens in November. If we do see more legislation towards the state's rights, we think that's really great for the industry. We're not anticipating interstate commerce with the State's Rights Act, so we're not seeing tremendous differences in what we have today as far as the each of the operators being able to operate within their state boundaries. We'll have to wait and see what happens, but we're very optimistic for the industry and for our operators.

To be clear, we're not predicting federal legalization or seeing federal legalization on the horizon right now. We are seeing a Both party platforms having a preference to states' rights, and that's what we're seeing.

I agree. And then a real quick one from last time. As far as the pipeline, it's probably a big question. Obviously, you guys have continued to move up into the top MSOs. They're out there and have done a nice job expanding with them. But underneath the pipeline, are you seeing more smaller regional profitable players coming on board to start discussing potential deployment of capital for these new and upcoming players?

Yeah, I think we're still seeing a nice mix of both. We have established relationships with a lot of the top groups. I think we'll continue to look to expand those relationships through their organic growth or through any M&A activity that they might pursue. And in a lot of these markets, to your point, we are also taking a look at smaller private or single state operators that are successful in the markets that they're in with perhaps a smaller footprint. And if the underwriting makes sense and we like the investment, we're taking a look at those as well.

Okay, I appreciate it. Thanks for the cover, and I'll jump back in the queue.

Thanks, Jeff.

Our next question comes from Eric Delorior with Craig Hallam Capital Group.

All right, thanks for taking my question, guys. A little follow-up on Scott's question there, but perhaps more from a risk management perspective. So, you know, it's great to see that your three tenants with rent deferrals for full rental payments through July. And you guys have also obviously done a great job increasing your exposure to your tier one tenants. My question for you is, how do you guys kind of think about diversifying your tenant base versus increasing your exposure to existing tier one tenants? And then as a bit of a follow up, can you help us understand how much exposure you're willing to take on with any individual operator? For example, would you ever want to get to 100% of a company's production assets? Just trying to get a sense of the runway you guys have within your existing tenants. Thanks.

Thank you. So I think we're really very comfortable with our tenants that we currently have in our portfolio. And the business model has always been one of growing with our cadre of tenants and being a partner with them in their growth plans moving forward. We believe that gives us the greatest ability to attract the top quality tenants and to be able to support those top quality tenants as they expand throughout the states that they're in. We remind everybody that this is a nascent industry and that this is a an industry that has been emerging over the last several years, and that it only has a certain amount of high quality or a certain number of growers that are of the size that we wish to do business with. And we are very excited about the team that we have, and we continue to add new ones as they emerge. that it is a relatively small segment or a small industry to begin with. We think that supporting the tenants in their growth facilities is appropriate and it is risk adjusted in the sense that we don't have all of their real estate. and nor do we provide all of their capital. We do provide a significant portion of it, and I'm very pleased to be partnered with those tenants that we're doing that with.

Okay, that's helpful. Thank you.

Our next question comes from John Masoka with Ladenburg-Fallman.

Good morning.

Hi, John.

So I'm touching on Esperanza a little bit more. Assuming things go as planned, am I correct in that you're negotiating a new lease at the property with Holistic rather than Holistic taking over the existing lease?

That's correct.

And I know you might be a little bit restricted in terms of what you can say on this, but could you provide maybe any color with regards to where potential future cash rents with Holistic would be versus what Dione Med was paying prior?

We aren't in a position to do that because the transaction hasn't been approved by the courts, and it's still subject to court approval and confidential. So we aren't prepared to be able to talk about that today.

Okay, that's perfectly understood. And then as I maybe think about cadence of acquisition volume, particularly in the near term, There were a couple of things in the pipeline at the time of the most recent equity raise. Some of those closed, but there was in particular one big transaction in Florida that was kind of in the pipeline. Is that still in the pipeline today? And has that maybe moved from LOI to PSA or something slightly more solid?

So when we did the capital raise, we indicated that we had about $131 million between PSAs and LOIs. We have closed on approximately $78 million of that, leaving one large transaction still that is now under PSA, and a total PSA total of about $83 million today. in addition, no, not in addition, including that one large transaction.

We believe that. And then, you know, maybe a little bit bigger picture. We talked a little bit about, you know, legalization versus kind of decriminalization in terms of what it does for your tenants. But I guess how might that potentially affect your ability to access capital, particularly on the debt side? I mean, is that as – will you have as much access to debt capital with decriminalization as you would with kind of full legalization?

That's hard to tell because we don't know what decriminalization might mean in terms of the banking side of the business. But whether it's decriminalization or decriminalization legal, full legalization or whatever, whatever you want it, whatever, whoever has access to capital or debt capital, we will have the greatest access and the lowest cost of capital given the size of our balance sheet and the expertise that this management team has built up over the, over the, uh, the last five or four, four and a half plus years. Uh, that's, that's where.

And then certainly back to one more on, on the portfolio side of things. Um, sorry, a little bit roundabout here.

um you know what kind of drove the additional funding at the at the cresco property in michigan just any color there would be helpful yeah sure hey john this is ben i can speak to that so similar to many of our other transactions we will close on an initial transaction where the tenant will look to build out a portion of the facility as they continue to look to grow in a particular market they'll oftentimes come back to us We'll discuss an amendment where we'll provide additional capital to build out the balance of the facility if they feel the market is right for it. And that is what happened with the Cresco building in Michigan. They wanted the additional capacity to meet the demand that they're seeing in the market right now.

And I guess they hadn't originally planned for that capacity. It wasn't essentially that they were looking for other capital sources to and didn't get it and came back to you, it was they were going to build a smaller facility and realize a larger facility is necessary and went back to you for more capital. Is that a correct way of kind of framing it?

Well, there's another way to frame it, too, in that when we – and it's a unique position we're in – is that when we provide capital, we expect a definitive timeframe in which rent to start. And so they are – They may have the plans for growth, but if they take the capital up front, they're going to be paying rent on it up front. So it behooves them to take just what they need when they need it, and then after we own the facility, they absolutely need to come back to us for additional growth capital.

Understood. That's it for me. Thank you all very much.

Thanks, John.

If there are any further questions, please press star one at this time. Seeing no further questions, I would like to hand the call back over to Alan Gold for any closing remarks.

Thank you. And thank you all for joining us today. And I'd also like to again thank our stakeholders and our stockholders for your continued support. And very importantly, to also thank all the employees for all their hard work in getting it and having such a successful quarter and the growth of this company. So thank you. And with that, we will sign off.

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