Innovative Industrial Properties, Inc.

Hello, and welcome to the Innovative Industrial Properties Inc. FYQ4 2020 Earnings Conference Call. All participants will be in the Sonali mode. Should you need assistance, please schedule a conference specialist for 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, today's event is being recorded. Now I'll turn the conference over to your host today, Ryan Wolf. Mr. Wolf, 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 8K, 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. Today, we look forward to providing a recap of our results through the back half of 2020 and into 2021 and our views on the continued evolution of the industry we are so proud to serve. There is certainly a lot to recap, both from our company's activities and the regulated cannabis industry as a whole. First and foremost, we are thrilled to see on display the great minds of our country and the world achieving what many believe to be the impossible. Multiple sets of highly effective vaccines ready for distribution in less than one year from the onset of this pandemic. A truly remarkable testament to the ingenuity of our scientists and one which we hope brings the light at the end of the tunnel that much quicker. With all the challenges that we have faced as a society over the last year, the regulated cannabis industry has demonstrated a strong and sustained resilience across the United States, in arguably the first major economic disruption that this very young industry has faced. As we have highlighted on prior calls, with the regulated cannabis industries designated as essential services in the vast majority of state and local jurisdictions, Our tenant operators have been particularly adept at modifying their operations in this new environment in ways to ensure continued, compassionate, individualized service to their patients and customers in an environment designed to maximize the safety and health of patients, customers, and employees. And as the country and the world as a whole has suffered through not only a health crisis, but also one of the quickest and deepest economic contractions in recent history, the United States regulated cannabis industry continued on its tremendous growth path, growing over 50% annually from just over $13 billion in sales in 2019 to an estimated $20 billion in 2020. And while the vast majority of businesses were retrenching in this unprecedented time, experienced well-positioned regulated cannabis operators continue to expand their footprints and deepen their operations we were proud to continue to partner with them in 2020 as their go-to real estate partner a year in which we made 20 new property acquisitions and additional investments in our existing portfolio totaling over 620 million dollars as of today we own 67 properties in 17 states totaling 5.8 million square feet, which are 100% leased on a long-term basis to high-quality licensed cannabis operators. Now, the one property that was not leased in our portfolio at year-end was our Los Angeles, California property. And as noted in our press release issued yesterday, Holistic Industries, our long-term tenant partner in Massachusetts, Maryland, Michigan, and Pennsylvania, acquired the operational licenses for this property in early January, and we executed a long-term lease with them for the entire property. Aside from our Los Angeles property, our tenants have paid all contractual rent due in the fourth quarter 2020 and the first two months of 2021, other than one tenant in our Southern California portfolio having paid partial rent through that period. And we have executed no rent deferrals for any tenants since July of last year, which we believe is a testament to the quality of our tenant base and their ability to adapt to this new normal, in addition to the exceptional resiliency of the regulated cannabis industry as a whole. Reflecting the strength and resiliency of our tenant partners, we paid a quarterly common dividend of $1.24 per share to stockholders on January 15th, representing a 24% increase over fourth quarter 2019 dividend and our ninth dividend increase since our IPO in December 2016. On the financing front, I would also like to personally thank all of our stockholders, our long-term company owners, for their steadfast support, providing us over $1 billion in net proceeds over the last year to support our tenant partners in their continued expansion initiatives. while forging new tenant partnerships with top-tier operators in the industry. Catherine will also provide more detail regarding our financial results and capital raising activity. And of course, regulatory developments in the cannabis industry are also top of mind. With the continued strong majority support across nearly every demographic for legalizing cannabis, In November, the momentum we have seen over the past decade on the state level continued as five new states passed measures to legalize medical or adult-use cannabis, resulting in 36 states having legalized medical-use cannabis and 15 states also having legalized adult-use cannabis. We are closely monitoring the many proposals in Congress regarding cannabis legislation, and Paul will provide additional detail on that front. Now, before I turn the call over to Paul, I want to reiterate our deep appreciation for you, our long-term owners, for your support throughout these four transformative years of our company. And we look forward to serving you and this amazing high growth industry for many years to come. With that, I'd like to turn the call over to Paul, who will provide additional detail on the recent legislative developments of the cannabis industry. Paul?

Thanks, Alan. For this call, I plan to provide an update on the regulated cannabis industry, including, one, state developments from the most recent election cycle, two, our views on the federal regulatory environment, and three, recent dynamics of the industry during this health crisis and in conjunction with recent election results. 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 with a general current landscape, there can be no assurance that this landscape will not significantly change. First, state results from the most recent elections in November. As we discussed in prior calls, pre-pandemic, 2020 was shaping up to be another watershed year on the state legalization front. However, shelter-in-place orders greatly impacted the ability of organizers to gather sufficient signatures in person, and as a result, a number of initiatives had to be postponed. Even in the face of such challenges, five new state measures to legalize medical or adult use cannabis passed in November, with approvals of adult use programs in Arizona, New Jersey, and Montana, as well as approval of a medical use program in Mississippi. And noteworthy, South Dakota voters approved both adult use and medical use programs in November, a first for a state to approve both programs at the same time. In just a few years' time, these programs alone are expected to add over $3 billion in revenues to the U.S. totals. Furthermore, with numerous adult use and medical use programs in place across the United States, States with new programs have several models from which to choose, and we expect that these experiences will enable new states to effectively implement new programs over significantly shorter time periods than has been historically the case. In 2021, we're tracking no less than 11 additional states that may potentially move forward towards establishing new programs, including on the medical side, Texas, South Carolina, Alabama, Kentucky, Kansas, and Nebraska. And on the adult side, New York, Connecticut, New Mexico, Rhode Island, and Virginia. Of course, these include some of the most populous states and tremendous future potential for the industry. With 36 states and D.C. having legalized cannabis for medical use and 15 states having legalized cannabis for adult use, this continued rapid adoption across states is reflected of the 90% plus support seen among U.S. citizens for medical use cannabis and the overwhelming majority support of U.S. citizens for adult use cannabis legalization, as shown in poll after poll. Second are views on the current federal regulatory environment. With the clear dramatic shift of popular opinion in the last decade, years of experience of state-run medical and adult use programs, and continued rollouts of new state programs, we are of the opinion that national cannabis reform is that much nearer. And as we all know, the most recent federal election cycle brought a changing of the guard in terms of a Democratic White House, a 50-50 Senate, with a tiebreaker to Vice President Kamala Harris, along with a continuing majority Democratic control of the House. That said, there are numerous competing agenda items of the new administration and Congress in 2021, most notably getting the COVID health crisis under control, accelerating vaccine administration, and supporting the economy and working families. There are numerous cannabis-related bills pending in Congress at different stages of review. A few of the more notable bills include the Moore Act, passed by the House in December, with a focus on descheduling cannabis and social equity, the Safe Banking Act, which would provide additional safety to financial institutions in serving state-compliant licensed cannabis operators, the States Act, which would protect states to enact their own cannabis policies free from federal interference, and bills focused on mitigating the draconian tax impact of IRS Code Section 280E for cannabis operators. It goes without saying that predicting federal legislation, including both the content and timing, as it pertains to any topic is challenging, and in particular with respect to cannabis. That said... with the near universal designation of cannabis across the state programs as essential during this COVID pandemic, in combination with popular support that really spans all types of demographics and party affiliations, we do believe that there will be changes on the horizon. We are closely monitoring the status of the bills in Congress and the evolving dynamics of both Congress and the administration, including the Senate voting dynamics. In our view, and of course this is just our view, we see certain bills, like the SAFE Act, or bills that address the 280 tax issue, as perhaps near term, and bills such as the States Act, further on the horizon. Finally, regarding industry dynamics in the second half of 2020 and continuing into this year. The cannabis industry in general, and our tenants in particular, continue to exhibit a unique resiliency throughout the health and economic challenges we have faced as a country over the past year. In 2020, a year unprecedented in recent U.S. history in terms of economic decline, the legal cannabis market was projected to have grown over 50%. from the prior year, fueled by the introduction of new state programs, sustained growth and continued transition from the illicit market to the regulated market in established state programs, and continued acceptance and adoption by residents, including a strong and growing recognition of cannabis' therapeutic value across a wide array of medical conditions. With the sustained growth in demand, the expansion across states of regulated cannabis programs and the recent results of the federal election cycle, best-in-class operators, including many of our tenants, have focused in recent months on additional capital raising and M&A activity to position themselves to take full advantages of the opportunities that they see in the months and years ahead. On the M&A side for our tenants, We are tracking numerous recent announcements since early December, including deals like our tenant Cresco's $213 million announced plan to acquire Bluma Wellness and our tenant Columbia Care's announcement to acquire our other tenant, Greenleaf, for $240 million in cash and stock. This has been the trend of the last several months. which included our tenant Curelease acquisition of our other tenant Grassroots in Illinois, North Dakota, and Pennsylvania, and our tenant Columbia Cares acquisition of our other tenant, The Green Solution, in Colorado in 2020. We have seen this trend really accelerate in December and January, and we expect to see this continued consolidation as the top operators continue to gain market share. We are also seeing a tremendous level of capital raising activity, which we believe is a reflection of the resilience and amazing growth of this industry, the broad-based public acceptance and support of the regulated cannabis industry, especially medical-use cannabis, across the United States, and changes in the composition of the federal government in this election cycle that may hasten federal regulatory changes. In fact, in January alone, North American cannabis companies closed or announced more than $1.6 billion in capital raises in an amount that is almost double the previous record for that time period. And of course, the lion's share of that capital raising went to top tier operators, including many of our tenants, which we believe provides a meaningful further enhancement to the credit quality of our tenant base. I'll now turn the call over to Ben, who will walk you through our recent acquisitions and follow on investments, as well as some additional color on our overall portfolio. Ben,

Thanks Paul. Since October 1st, we made five acquisitions in four 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 67 properties across 17 states representing approximately 5.8 million square feet, including approximately 2 million square feet under development or redevelopment with a weighted average remaining lease term in excess of 16 years. 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. I also plan to provide some additional detail on our tenant roster and overall portfolio. We have been fairly active in California in recent months with our two transactions with Kings Garden and the re-leasing of our Los Angeles property, the one property that was not leased on our overall portfolio. California's regulated cannabis market is one of the largest in the world with approximately $5.6 billion in sales in 2020 and is expected to continue to represent over 20% of the overall U.S. market in 2025. Kingsgarden is one of the top operators in California, consistently ranking in the top five of flower and concentrate sales in the state, and as you may recall, was one of the first cannabis operators to commence regular quarterly dividends to its shareholders in June 2020, a remarkable achievement for a company continuing on its rapid expansion path. With our two transactions in November 2020 and earlier this month, we now lease six properties to Kings Garden, representing well over half a million square feet, including projects under development, and a total investment of nearly $150 million, including commitments to fund future development and redevelopment. We are proud partners of Michael King and his great team and look forward to supporting them through the development and redevelopment of state-of-the-art facilities to dramatically expand production capacity and continue to deliver the highest quality product that they are known for. And as we previously announced, we are thrilled to team with Holistic Industries as our new tenant partner at our property in Los Angeles. Holistic has been a tenant partner of ours since 2017, and I'll go into more detail on our footprint with them a little later. Moving on to Florida, we acquired a property comprising approximately 295,000 square feet of industrial space and entered into a long-term lease with Harvest Health and Recreation, with our total investment in the acquisition and tenant improvements of the property expected to be about $35 million in the aggregate. Harvest is a leading vertically integrated U.S. multi-state operator with licensed operations in nine states, including 38 retail locations, 12 cultivation and processing locations, and over 1,100 employees across its operations. We are thrilled to add Harvest to our tenant roster and look forward to supporting them in their expansion of production capacity at this facility. Florida is the largest medical use cannabis market in the United States, closing in on half a million qualified patients. Including the Harvest property, we own and lease four properties in Florida, totaling about 1 million square feet to tenants Trulieve, Parallel, and Harvest, representing a total investment of a little over $150 million, including commitments to fund future improvements. We could not be more thrilled with our tenant base and the overall opportunity in Florida. Now to Massachusetts. In December, we expanded our footprint in Massachusetts with the acquisition and lease to Forefront Ventures of an industrial facility for cultivation, processing, and dispensing. Concurrently with that close, we acquired another property and executed a long-term lease with Forefront in Washington, with our total investments across both properties being $33 million and comprising about 181,000 square feet. We are excited to bring Forefront in as a new tenant partner, a leading MSO with licensed operations and services in California, Illinois, Massachusetts, and Washington. Including our Forefront transaction, we own six properties in Massachusetts, representing a total investment of a little over $185 million, comprising approximately 647,000 square feet, with tenants Forefront, Ascend Wellness, Cresco Labs, Holistic, Pharmacan, and Trulieve, an exceptional roster of leading MSOs. As noted, our Forefront transaction marks our first acquisition and lease in the state of Washington. Washington is a relatively well-developed, mature market with recreational cannabis sales of over a billion dollars in 2019, and we believe that Forefront has differentiated itself in its cost-effective, high-quality cultivation and manufacturing. We are excited to partner with a tenant of this quality in this state. Finally, on the investments front, I would like to touch on the follow-on investments we've made in our existing properties, which we believe is a key differentiator of our model with the flexibility to grow to meet our tenant partners' needs to expand at the appropriate times. Since October of last year, we have executed a $25 million follow-on investment with Green Thumb in Ohio, a $31 million follow-on investment with Pharmacan in New York, follow-on investments with Holistic totaling $7 million in Massachusetts and Pennsylvania, and a $7 million follow-on investment with LiveWell in Michigan in addition to others. This exemplifies our mission to be the key provider of growth capital to our tenants, being there to offer funding solutions for their expansion at the time and on the terms that provide them optimal, non-dilutive capital to capture that market opportunity. Finally, I would like to touch on our most significant tenants as a brief update. These top 10 tenants account for over three quarters of our contractual rent as of today. Those tenants in order of concentration include Pharmacan, Kings Garden, Ascend Wellness, Cresco Labs, Green Thumb Industries, Holistic, Parallel, Curaleaf, Greenleaf, and Trulieve. As you know, Pharmacan is where we started, having executed our sale lease back with them for their property in New York in December 2016, shortly after we completed our IPO. Since then, we have partnered with Pharmacan in numerous transactions to facilitate their continued expansion, with five properties located in Illinois, Massachusetts, New York, Ohio, and Pennsylvania, with our total investment including future commitments to fund additional improvements totaling about $167.5 million. With licenses in eight states and one of the largest privately owned vertically integrated cannabis companies in the U.S., we are proud to partner with Pharmacan over the four plus years and support them in their strategic growth in markets representing tremendous growth opportunities. Kingsgarden. I discussed in some detail our tenant partner, Kingsgarden, as it relates to recent investment activity, so I won't go into much additional detail here, but needless to say, we are thrilled to team with Kingsgarden in California, one of the top operators in the largest regulated cannabis market in the world. Ascend Wellness. We have been Ascend's real estate partner since 2018 and have partnered with Ascend on three properties in Illinois, Massachusetts, and Michigan, representing a total commitment of nearly $120 million. Ascend, which is led by Abner Curtin, is a vertically integrated MSO with assets in Illinois, Michigan, Ohio, Massachusetts, and New Jersey. Abner has developed a tremendous footprint with a world-class team to execute on these key strategic markets and continues to effectively fund strategic initiatives throughout this pandemic, including a $68 million capital raise in August of last year to execute on additional expansion opportunities in Illinois. Fresco Labs. We have been Cresco's real estate partner since 2019 and have partnered with Cresco on five properties in Illinois, Massachusetts, Michigan, and Ohio, representing a total commitment of $121 million. Cresco is the largest wholesaler of branded cannabis products in the U.S. and, as mentioned previously, recently announced a transaction to acquire Florida's Bluma Wellness for $213 million in an all-stock transaction and closed on a $125 million stock transaction last month. We see Cresco is extremely well positioned to continue to gain market share throughout its states of operation with an enviable liquidity position to take advantage of these opportunities. Green Thumb Industries is a tenant partner of ours in Illinois, Ohio, and Pennsylvania, representing a total commitment of about $122 million. Led by Ben Kovler, Green Thumb is one of the largest MSOs in the United States with licenses for 97 retail locations, 13 cultivation and manufacturing facilities, and operations across 12 states. Earlier this month, they raised $100 million of equity capital from a single institutional investor, which we view as a real testament to the success of their business and future opportunities. Holistic. We own five properties leased to Holistic in California, Maryland, Massachusetts, Michigan, and Pennsylvania, representing a total commitment of about $108 million. Our Maryland property represented our second property acquisition in our history, and we are truly grateful to have partnered with Josh Genderson and his team since that time in a number of transactions, as Josh has led his team in the highly successful expansion across the Northeast and Midwest, and now out to California with our most recent lease executed last month in Los Angeles. Holistic, originally founded in 2011, is one of the largest privately owned vertically integrated MSOs with operations in California, Maryland, Massachusetts, Michigan, Pennsylvania, and Washington, D.C., Holistic closed on an oversubscribed debt financing in September of last year for $35 million, led by Altmore Capital. Parallel. We own two properties leased to Parallel in Florida, representing nearly 600,000 rentable square feet and a total commitment of approximately $100 million. With a great footprint in Florida, Massachusetts, Nevada, Pennsylvania, and Texas, Parallel operates 50 retail locations nationwide and continues to look at further strategic expansion opportunities. Parallel is led by Bo Wrigley, who previously served as the chairman and CEO of global gum and confectionery leader the William Wrigley Jr. Company, which was acquired by Mars in 2008 for $23 billion. Having previously raised over $400 million in capital, Parallel announced earlier this week a pending merger with Ceres Acquisition Corp, a SPAC, with a closing expected this summer. The transaction includes a commitment by investors for an additional investment of $225 million, with an implied valuation of about $1.9 billion. I want to congratulate Bo and his team for all of their success, and we look forward to tracking the close of this transformational transaction for Parallel. Cureleaf. We own four properties leased to Cureleaf in Illinois, New Jersey, North Dakota, and Pennsylvania, representing a total commitment of nearly $103 million. These include the properties leased to Grassroots, which, as Paul mentioned, was acquired by Cureleaf in 2020, and for which we received corporate lease guarantees from Cureleaf. Curaleaf has developed a tremendous footprint with operations in 23 states, over 100 dispensaries, 23 cultivation sites, 30 processing sites, and over 1,150 employees. Last month, Curaleaf closed on a capital raise in excess of $300 million Canadian dollars, one of the largest capital raises for a publicly traded operator in this industry's history. Greenleaf We own two properties leased to Greenleaf in Pennsylvania and Virginia, representing a total commitment of about $63 million. Greenleaf is a market leader in the Mid-Atlantic region with cultivation, extraction, processing, and retail operations across Pennsylvania, Maryland, Ohio, and Virginia. As Paul alluded to in his remarks, at the very end of last year, ColumbiaCare announced that it had signed a definitive agreement to acquire Greenleaf for $240 million in cash and stock, and that transaction is expected to close in the summer of 2021. As you may recall, ColumbiaCare acquired one of our other tenants at one of our Colorado properties, The Green Solution, in 2020. We also leased to ColumbiaCare two properties in New Jersey. And pro forma for its acquisition of Greenleaf, we would expect to lease to ColumbiaCare, properties representing a total investment of about $88 million. ColumbiaCare is one of the largest and most experienced MSOs operating 108 facilities with licenses in 18 jurisdictions and the EU. Rounding out our top 10 tenants is Trulieve, a tenant partner of ours at properties in Florida and Massachusetts, representing a total commitment of a little over $60 million. Led by CEO Kim Rivers, Trulieve is the dominant cannabis operator in Florida, the largest medical cannabis market in the U.S., with 66 retail locations and 2 million square feet of cultivation. Trulieve also operates in California, Massachusetts, Connecticut, and Pennsylvania, and was recently awarded several dispensary permits for the new West Virginia medical cannabis program as it continues to expand its national reach. While we touched only on our top 10 tenants, we are proud of what all of our tenant partners have accomplished during this time and feel that we have established in a few short years, a tremendous tenant roster and property footprint that would be extremely challenging to replicate in coming years. With that, I'll turn it over to Katherine. Katherine?

Thanks, Ben. It's been yet another busy quarter and the regulated cannabis market has really continued to show its resiliency during these unprecedented times. both of which are reflected in our financial results for the fourth quarter and full year 2020. We generated total revenues of approximately $37.1 million for the quarter, a 110% increase from Q4 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. As Alan mentioned, we've collected 100% of contractually due rent across our total portfolio for the fourth quarter 2020 and the first two months of 2021, other than for our Los Angeles property and for one other tenant in Southern California that made partial payments during that timeframe and have no ongoing rent deferrals for any tenants. Regarding the tenant that made partial payments, we're closely monitoring that tenant's business and are in regular communications with their management. And I would note that the properties that they lease represent less than 1% of our total gross assets at year end. And as we have indicated in the past, our Q4 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 as we continued to account for all of our leases on a cash basis. For the three months ended December 31, 2020, we recorded net income of $21 million. As noted in our earnings press release, for the first time in the fourth quarter 2020, versus all other periods that we've reported to date, our exchangeable notes were considered dilutive for purposes of calculating net income, FFO, and AFFO. As a result, for the fourth quarter 2020 results, the exchangeable notes are treated as if they'd been exchanged for common stock at the then current exchange price, which resulted in adding back cash and non-cash interest expense for the exchangeable notes of approximately $1.9 million for the quarter to FFO diluted, and also adding approximately 2.2 million shares to the fully diluted share count. This essentially decreased our reported AFFO per diluted share by 7 cents, so we want to highlight this item, especially as it makes an apples to apples comparison difficult between the Q4 results and any other period as it relates to FFO and AFFO measures. As in all the other periods, the exchangeable notes were anti-dilutive for accounting purposes. To note as well, all years presented, including 2020, treat the exchangeable notes as anti-dilutive for purposes of FFO and AFFO measures. So for the fourth quarter, funds from operation, which adds back both cash and non-cash interest expense on the exchangeable notes and property depreciation to net income, was $31.6 million. Adjusted funds from operations, which adds back non-cash stock-based compensation to FFO, was $32.4 million. On January 15th, we paid our quarterly dividend of $1.24 per share to common stockholders of record as of December 31st. The Q4 2020 common stock dividend reflects a 24% increase from the prior year's fourth quarter. As we've indicated in the past, the Board continues to target a dividend payout ratio of 75 to 85% of AFFO on a stabilized portfolio basis. 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've 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 continue 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 year ended December 31st, 2020, we capitalized costs of approximately $301 million and funded approximately 290 million relating to the tenant improvements and construction activity at our properties. And with respect to financing activity. In November, we entered into a new at the market or ATM offering program, allowing us to sell up to 500 million shares of our common stock. During the fourth quarter, we raised net proceeds of approximately $263 million through our ATM program, bringing our total net capital raised to approximately $1.7 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 83% of our raised capital, or approximately $1.4 billion in the aggregate under our leases and have approximately $280 million of available capital to place today. Finally, as highlighted on our last call, I'd like to note that we continue to have one of the most conservatively leveraged balance sheets in the REIT space, with no secured debt and less than 8% of our total gross assets consisting of our exchangeable senior notes at year end. The 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. This is the only debt we have on a balance sheet totaling $1.8 billion of gross assets as of year-end. And with that, I'll turn it back to Alan. Alan?

Thanks, Catherine. I'd like to note the following in closing. In just over four years of our company's operations, we have developed what I think is a truly exceptional property footprint and tenant roster. With tenant partners that continue to execute exceptionally well in one of the most challenging years we have experienced as a society. We continue to be well capitalized with a strong, flexible balance sheet that we see as a tremendous asset for future opportunities. And we believe that in each year, in the last four years, has progressively validated our core belief of the tremendous future of this very young industry, which has demonstrated a truly unique resilience throughout this health and economic crisis that sets it apart from nearly any other industry. 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 to questions. Operator, could you please open the call up for questions?

Yes, certainly. Thank you. 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're using a speakerphone, please cover your handset before pressing the keys. To try your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Tom Catherwood with BTIG.

Thank you and good morning, everyone. You know, just building off of what you kind of, Paul, you touched on it and Ben touched on it as well. the capital raising and access to capital for cannabis operators in the US. Obviously really positive news, speaks to investor interest. Stock prices have absolutely improved along with that. But from your standpoint, given this increased access to capital, how are your tenants viewing real estate sales as part of their capital stack going forward?

So Tom, this is Alan. You know, I mean, we are really very excited about all the interest in the industry by investors and providing greater and much stronger balance sheets for our public-related tenants. But in the end, we are still the best and most cost-effective non-diluted capital for this industry. The cost of capital that the company's are incurring when they sell a piece of their business is significantly higher and more diluted than what we are providing. So we're seeing a very strong and continued interest in what worked in our program. We believe that the industry overall is growing much larger. creating greater opportunities for us to provide more of our capital and to be able to place it very accretively.

I appreciate that. Thanks, Alan. Along those lines, in terms of acquisitions, 2021 is ahead of your pace in 2020 through the same period of time. And some of these new deals, look a little bit chunkier. So, you know, larger deals, spaced out a little bit more, but also still with, you know, the best operators. Can you give us a sense of how your pipeline right now compares to 2020?

Certainly. And, you know, I think you've hit on a couple of points. First of all, these transactions are very chunky and And they're chunky because by design, I mean, we think we have a very strong business model, and a business model that focuses on the larger size type tenants with the larger size type projects, creating chunky acquisitions. The average deal, our average deal size is north of the $30 million range, and because of that, We are a unique organization in the industry that has the capacity to do those size type transactions. There are competitors and there are ways for our tenant partners to raise capital in the smaller range, but to do large size type transactions, sale-leaseback transactions, north of that $30 million, I think we think we're a unique organization. and well-positioned it to be able to provide that capital. We think that our pipeline, and, you know, I know that I'm going to have, you know, probably spend a little bit to talk about our pipeline, but it continues to be robust. We think that we believe that we've been able to place capital on a very efficient basis, especially after raising the capital. We've been able to consistently place that capital six to nine month time period after raising the capital. And we're highly confident that we can continue on that pace. Ben, do you want to add something?

Sure. Hey, Tom. Just echoing what Alan said, we are continuing to see tremendous growth in the industry overall, which is very exciting. The addressable market continues to increase. And again, as Alan mentioned, we are uniquely well-positioned and feel that we are the best proven cost-effective source of non-dilutive capital to the industry.

Appreciate that. Appreciate that outlook. And, you know, kind of tying that together with something that Paul had said, and Ben, I think you mentioned it as well, just the increase in M&A activity in the industry is Are you seeing any companies looking at utilizing some real estate sales as part of a way to finance some of these transactions, sort of like Blackstone pre-selling some of the equity office assets back in 2007? Is that something that's made its way into the market yet, or is it still too early for that?

We think the M&A activity is continuing to grow. be robust. We think that, as Paul has described, that many of our large tenants have been on the outlook or have been looking for unique acquisition targets, and we think that will continue. We think our capital, which is still the most effective and non-dilutive capital out there, is a key component to the way our large tenants are looking at their balance sheet and using that to help them with acquisitions.

Got it, and just one last quick one for me, just on vertical. Kat, I appreciated your commentary there. If memory serves me, this is one of the companies you gave a deferral to in 2Q, and the idea back then is they were diversifying their wholesale business, moving away from kind of one key client that was having some trouble and bringing some new ones, which they were able to do. Is the kind of partial payment still tied to that diversification of clients, or is this something new that they're working through?

So, you know, so Tom, I'll have – answer that, or maybe even Ben, but we're really very proud of our overall portfolio. And to say that we're 100% leased is a remarkable feat for a very young industry in general. The industry continues to evolve. Our tenants continue to look at look at different business models to maximize their opportunity. And we are really excited about the fact that we've been able to generate 180% year-over-year AFFO growth with a portfolio that has been 100% leased. So Kat or Ben, who would like to?

Yes, so thanks, Alan. You know, Vertical was one of those three operators that we did provide that limited COVID rent relief program to back in April. You know, we feel that those assets are really well positioned there. We continue to work with Vertical to try and get them current. They are continuing to operate from the facility today. And, you know, as I remarked, you know, they are less than 1% of our total portfolio.

Got it. Thank you for all your time, guys.

Thanks, Seth. Thank you. And the next question comes from Daniel Santos with Piper Sandler.

Hey, thanks for taking my question. So I'll just keep with the tenant health sort of theme and kind of dig into that a bit more. If I understand the situation correctly, it isn't all of their assets that's an issue, which sort of indicates that the issue is sort of location-dependent. You know, we've talked in the past about the limitations you guys have on what you can disclose about your tenants, but how can we, you know, in the investor community in general, get more comfortable with the idea that there aren't more tenants to follow? I mean, I appreciate that in some ways for a cash business, cash collection is the most important metric, but there has to be some other metrics that we can sort of look at qualitatively or quantitatively to kind of get comfortable with your specific portfolio.

So, you know, and I appreciate the question. And while we try to, you know, we say we have a very simple and I think a very strong business model of providing, you know, non-dilutive and cost-effective capital to this industry, it is a – we are providing it to a variety of different type of tenants that have a variety of different type of business models. And to say that this one – this one – issue is location specific. I don't think it has really anything to do with the location of the asset, but more of the specific business model that this one tenant focused on, being more focused on the wholesale side of the business as opposed to, you know, creating their own brand and focusing on that brand and growing that brand over time. Because of that, they were, I think, more affected by what was going on in the broader industry, including what was happening because of COVID. And I think that that's the primary effect of the business. They're working through it. We're doing our best to help them. But once again, I mean, we're... We have $1.8 billion worth of real estate over 67 different properties. This is one property, one tenant that represents less than 1% of our revenue.

Right. And I totally appreciate that it is a sort of small piece of the portfolio, but I guess As we sort of look forward, right, I mean, this year you've now had sort of two tenants that you've had to disclose. And, again, I get that you've had 100% rent collections. But are there some metrics or some things that, you know, we can look at to get a little bit more comfortable with the sort of underlying health of your tenants?

So other than that we've collected 100% of our rent, other than the fact that we've had 180% year-over-year growth on our AFFO, I'm trying to figure out a metric here as I'm talking. Other than the fact that we have the top ten tenants in the entire country, other than the fact that tenants have been able to raise capital not only from private investors and family offices, but also through the public market. I mean, I think maybe perhaps that's the one metric that you could focus on that really gives the state of health of the industry, and it's just their ability to raise capital. And we can focus in on that. You could also focus in on the fact that in the industry itself, the year-over-year growth of sales is still growing north of 30%. That's a really strong thing. You know, I think that, uh, Ben mentioned that over 75% of our revenue comes from, you know, the top 10 tenants in the, in the entire country. There's another very strong metric. Um, and Paul, do you want to.

Yeah, I would, you know, just to go further on that, I would just look at the industry itself and, you know, you know, 2020 was a pandemic year and we see tremendous performance of our tenant operators. and the tremendous growth of the industry. And most importantly, I think, is the early designation of cannabis industry as essential services in those states we operate, which really allowed our operators to excel and, you know, produce the results they did. So, yeah, I would just add that on top of the things that Alan enumerated.

Okay. That's helpful. And then my next question is sort of on the balance between ATM dilution and acquisitions. Like you said, in a lot of ways, you have a pretty simple business model. You raise equity, you buy assets, but unless those things are sort of perfectly timed, you're going to take the dilution hit before you get the benefit of the income. So, you know, without being too long winded, I guess, A, is there a way that we can kind of close that gap between the dilution and the earnings or, you know, how could we be thinking about it as we model you in the full fit going forward? And then I guess, B, given that you ended the quarter with cash, which presumably funded your 21 acquisitions, how should we be thinking about ATM in the future?

So, Dan, I think if you recall or you remember that we don't have access to a credit facility. We don't have access to that kind of the ability to warehouse capital on a credit line or warehouse acquisitions on a credit line and then raise capital later to pay down the credit line. So you can think about our excess capital as our credit facility that we created for ourselves. And the cost of that capital is really the cost of our dividend as we go forward. I think that it's important to note that we've been very consistent in our ability to be able to place that capital in a six to nine month period of time after raising it. We believe that raising the capital you know, through the ATM at the end of, you know, 2020 really gives us the strength and ability to continue to move through our pipeline and give our tenant partners the confidence that when they need the capital, we have the capital available. It gives the new tenant partners the confidence that when we commit to do a transaction that we can accomplish that, remembering, again, that we don't have the, you know, access to a credit facility to be able to warehouse those type transactions. I think the best way to model it is to assume that the capital that is put on the balance sheet will get placed in that six to nine month period of time. And that dilution that we do take when we do raise that capital we believe is well taken care of with very accretive type transactions we're doing as, you know, we did over $600 million worth of transactions in 2020, all within our targeted acquisition yield range of between, you know, 11 and 15 percent, and we believe that we'll be able to continue to do that as we move forward.

And Dan, I just wanted to also point out too that we tend to hold cash on our balance sheets that's already been committed. So remember that when we're making a commitment for construction, we have that cash available. It sits on our balance sheet until we actually fund it out over time as improvements are going into the properties. So I think in my prepared remarks, remarks, we'd indicated that today we have about $280 million of cash for those future investments that have not been committed today.

Perfect. That's super helpful. I'll leave some questions for other people.

Thank you, Danny. Thank you. And the next question comes to Scott Fortune with Roth Capital.

Good afternoon. Thanks for taking the questions. I wanted to kind of follow up a little bit on the pipeline outlook and kind of breakdown percentage of the existing tenants that are moving forward with new facilities or tenant expansions and kind of the new tenant opportunities. The beauty of the space is that a lot of these limited licenses are capped, and so it's going to provide a lot more tenants over the long run for these states to to do well within each state from that standpoint. But if you could provide a little more color on kind of the percentage of the existing tenant pipeline and potential new ones as these operators are getting flushed with more capital here, that'd be great.

Sure. I mean, I think the best way to look at a very strong pipeline in our business model is that when we bring in a new grower and we have 22 grower growers now that are part of our tenant base. And that we commit to not only helping them with the current transaction, but helping to support them to grow as they move forward. As you can see from our historical acquisitions, probably I would say, you know, greater than 60 percent of our transactions were repeat business with existing growers. And we tend to add new growers very carefully and with a lot of consideration because of that commitment to be able to provide them future capital. So with that, maybe I'll turn it over to Ben to talk about what we see in our pipeline.

Yeah, sure. Hey, Scott. So we continue to see a nice mix of business with our existing tenants, it becomes a very mutually beneficial relationship, really, I think, proven out by the fact that we've closed on follow-on transactions with the vast majority of our current partners. And then on top of that, with the new markets coming online, with the expansion in the industry overall, there is also a lot in the pipeline and a lot of business and a lot of capital needs really across the industry, inside and outside our portfolio.

Right. And Scott, I also remind you that the market or the availability of capital for our tenants, even four or five months ago, was very challenging for them. And while they're enjoying it now, we all know that what comes up sometimes goes down, and there could be different market conditions as we move forward. Cass, do you want to?

Yeah, Scott, I just wanted to, I think this is a very unique industry, too, where in addition to acquisitions for our capital, having these markets, these state markets grow their programs, when the operators are identifying a facility that they want to have operations in, much of that includes expansion opportunities. And so we've seen a great use of our capital on amendments to existing properties that we already own. We did last year 160 million of amendments for that expansion growth for properties that were already in our portfolio. And that's a great opportunity for us to continue to get an increase in base rent, as well as our lease extension. And I think looking at our weighted average lease length today, of well over 16 years, that's a great testament to the interest in our portfolio.

And, hey, Scott, this is Paul. I appreciate the color. It makes a lot of sense, especially as new states are coming on board here. We see every day states looking to legalize here. You know, New Jersey and New York are only 3%, 4% of the portfolio. And those states are very undersupplied, so it seems like your large tenants will move that way. One last question for me from a competitive landscape. You know, we see Power Reit, we see PW, a new AFC gamma, although a little different model. What are you seeing from a competitive standpoint, and how is that potentially compressing some of the cap rates there? with also the debt offerings or the debt raises that some of the tenants have done? Are you seeing any cap rate compressions starting to occur here?

I think we have continuously seen potential competitors that pop up because of the strong business that we've been able to put together. But we haven't actually seen any of them really succeed in the long run. They raise some amount of capital and then they burn through that capital pretty quick and then are stymied. We think we still have and continue to be the only REIT focused on the medical cannabis industry on the New York Stock Exchange. And we think that our Our size, having a market cap in excess of $4.5, $5 billion is a pretty strong lead. We do think that there is, maybe not from other competitors, but from other capital, there is competition. There always has been and will always continue to be. But we're, I think, a very strong real estate team. that has been able to adapt and will be able to compete quite effectively. We've been able to grow this company from, you know, in a very short, very short four-year period of time from, you know, less than $70 million to, as I said, north of, you know, $4.5 billion.

So you're seeing same cap rate, same cap rates holding up, the 11% to 15% that you guys stated?

Well, I think that our pipeline continues to be in that range, and we continue to believe that that's the appropriate kind of range for our portfolio at this point. We do think that there are certain tenants that are very, very strong and have access to perhaps a little bit more competitive capital. in that, but we're confident that we can continue to grow with those type of yields.

Thanks. I'll pass it on. Appreciate the cover.

Thank you. Thank you, Scott.

Thank you. And the next question comes from Craig Howard from Capital.

Okay, great. Thanks for taking my questions. First one, just kind of a bit of housekeeping. So understand that the broader portfolio is very much so healthy and that these You know, rent, you know, the property in LA and vertical, you know, their partial rent, less than 1% of your assets. So understanding this is small. Could you guys quantify how much of an impact that had on your rental revenues in Q4?

So we disclosed in the press release that about $424,000 was used from Vertical's available security deposit for rent for 2020.

Okay, great. And then just a bit of a follow-up on the previous question. So it's good to hear that rates aren't really budging in your pipeline from what you can see right now. Where do you think competition will impact your pipeline? I mean, you know, obviously if we get safe banking and these companies can access banking debt, you know, it's pretty logical that cap rates would come down. Obviously you guys could kind of lever up and offset that. But just wondering sort of where you envision competition sort of impacting your pipeline, you know, whether it be sort of fewer opportunities, maybe just lower rates, maybe also lower durations, maybe some buyback provisions in there. Just kind of help us understand what are the factors that you're seeing potentially being impacted by increased competition or perhaps that your tenants are starting to get a bit more tough on in negotiations. That'd be great. Thanks.

Sure. And I think that, you know, I think that Competition comes from other real estate competitors and from the industry's access to capital. And we do believe that industry's access to capital can and does have an effect. And perhaps it creates the opportunity for some of our most the largest type tenants in the industry to ask for lower yields. But it doesn't mean that our business model has really changed much. We're still very focused on sale-leaseback transactions. We're not modifying the lengths of our lease. We've actually increased the average length of our lease from the average 15 years that we were doing early on to now average of 20 years. We've actually, you know, I think we've seen some modest modification of our annual cost increases, which were 3% to 4%, and now they're probably 2.5% to 3.5%. We are, you know, we started out and looked at, you know, focusing on a certain class of tenants. that have grown significantly, and now we need to bring in another group of those tenants that are underneath our current crop of tenants, and we're focused very highly on that. We are quite pleased with the yields of the transactions we've recently closed, which are right down the middle of our of our expected or anticipated acquisition yields. And we think that we'll be able to be very close to that as we move forward throughout the year. I think the year is, we still have a long time left in this year. We still have a lot of acquisitions to do. And we think we're going to be right there between the, on average, between 11 and 15%.

Okay, good. That's great. Good to hear. Um, I suppose last one for me here, um, uh, just kind of given all the potential puts and takes, uh, with the industry, um, you know, some of your larger tenants, maybe, uh, having less of a dependence on, um, on alternative capital while at the same time, um, you know, presumably more and more licensed growers, um, kind of entering the space and potential tenants entering the space. Um, So when you kind of look at all those different puts and takes, increased competition, et cetera, do you envision any shift in your strategy as it relates to production assets versus retail assets? Any reason for any of those changing dynamics to impact that strategy of sort of favoring large production assets over sort of more traditional retail assets? No.

never shied away from doing retail assets with any one of our existing growers. But the average size of a retail asset has not changed from that $1 to $2 to $3 million in size. And we're focused and staying focused on the larger size transactions. And as I described earlier, our average transaction size is in that $30 million size range. So we don't see any need to change our business model from where we are. I did indicate just in my last answer to the last question that we are again looking at a group of tenant growers that are not the same as the current top 10 that we have in our portfolio. I want to be very careful to say that they're not the same quality. They are very high-quality growers. They just aren't public or at the same financial level as our current growers because they've grown so significantly over the last couple of years. Perhaps that might be the area where you might see some new grower names that aren't as familiar as the current ones that we've been growing with in the past, you know, 18 to 24 months.

Okay, great. Thank you. Appreciate the call.

Thank you. And the last question comes from John Masaka from Latterwood, Thalma.

Most of my questions have already been answered, but I have a couple quick ones. I guess, are cap rates any different for de novo transactions versus some of the recent lease amendment deals? Essentially, do you have some advantage by being the landlords that would allow you to facilitate pushing higher yields on some of those deals?

I don't think that you can go down that path, that a de novo transaction would have a different yield and a lease amendment, we evaluate and underwrite every single one of our transaction individually. We underwrite the quality of the tenant, the quality of the location, you know, the deal terms and the complexity of the transaction. And that all goes into helping us create what we think is an appropriate yield for the capital that we intend to offer. If you were thinking more of de novo, perhaps new growers that aren't multi-state operators, that have received a license but haven't really grown in the past, those type of transactions aren't what we're focused on, if that's what you're asking.

No, it was more the first part of the answer, which I think explained it pretty succinctly. And then understanding each transaction, as you said, is kind of bespoke in the space. Is there a good rule of thumb for us to follow with regards to trying to think about the impact that kind of starting deferrals and abatements might have on kind of quarter-to-quarter rent? If one quarter has a particularly robust amount of investment activity, how that's going to affect you know, quarter-to-quarter rent either in the next quarter or three quarters out or whatever you think is maybe the best kind of way we should think about it, particularly from a modeling perspective.

Okay. So I think where you're going with is that, you know, perhaps the number of transactions in our pipeline or that we do on an average quarter that have some sort of a rent deferral because of construction that has to be completed or development that is ongoing. And I think that... That's correct. Is that the question?

You know, I think that's... Yeah, yeah. Just kind of maybe what's a good rule of thumb for when to think about that rent impact?

Yeah, so, John, I think we've described in the past that if there's typically a large construction project, so if we're offering, you know, large tenant improvements or elements of construction, that there tends to be a longer abatement period before rent is beginning fully on that committed capital. And I think in the past, before this past year, many of our projects were smaller tenant improvement projects. We typically had maybe between three to six months, maybe nine months tops if it were maybe $10 million of tenant improvements. This year in 2020, we've really seen a large, acceleration of big TI projects. And many of those, you know, are taking between three and 12 months before the, you know, to complete that construction. And some of our abatements will mirror that period of that three to 12 months before we're earning rent on the full amounts of the capital we've committed.

That's very helpful.

I would just add to what Kat said, that I think at any given time, it could be upwards of 75% of our pipeline will have some sort of development or significant build-out component to it.

Great. That's very helpful, and that is it for me. Thank you very much.

Thanks, John. Thanks, John.

Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to Alan Gould, Executive Chairman, for any closing remarks.

Thank you. And once again, I'd like to not only again thank our stockholders for their support, but certainly for the team here for your unbelievable hard work in 2020 and the first part of here of 2021. It's been a very challenging period of time, not only for the world and the industry, but I think we continue to be very hopeful and positive about innovative industrial properties and our prospects as we move forward. Thank you all.

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