Innovative Industrial Properties, Inc.

Good day, and welcome to the Innovative Industrial Properties, Inc. Fourth Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchdown clown. To withdraw yourself from the question queue, press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Brian 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 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.

Thank you, Brian, and welcome everyone. Today, we look forward to providing you a recap on our business for 2021 and our views on the ever-changing landscape of this still very young industry. We have an ambitious agenda, but we'll, of course, save time at the end to answer your questions. As we all know, The end of 2020 and the start of 2021 witnessed a tremendous amount of optimism in the wake of the new election cycle and tremendous 50% plus growth in 2020, sustained by the regulated cannabis industry over what was a very challenged period for nearly every other industry. The capital markets optimism waned a bit as we moved further into 2021 as the prospect for near-term adjustments to the federal regulatory position on the industry dimmed. However, the industry continued to see strong growth throughout 2021, driven in part by the continued march of new states adopting and rolling out both medical use and adult use programs, including unprecedented legislative action with New York, Virginia, Connecticut, and New Mexico legislating for adult use programs and Alabama legislating for medical use. That momentum continues in 2022, with the latest southern state, Mississippi, legalizing cannabis for medical use earlier this month, becoming the 37th state to do so. 2021 also continued the trend of ever-increasing consolidation in the industry, with over 210 mergers and acquisition transactions totaling over $10 billion in value in the United States alone. We also witnessed consolidation within our tenant base during 2021 and into 2022, and Ben will provide more detail regarding those developments. Of course, with the growth of the industry and the rollout of new programs, demand for real estate capital continued to be robust throughout 2021. 2021 was the highest year of investment activity in our company's history, eclipsing over 700 million during the year. Ben will also provide an update on our acquisitions and investments in 2021 and near today. As of today, we own 105 properties in 19 states, totaling approximately 8 million square feet, which are leased on a long-term basis to high-quality, licensed cannabis operators with a weighted average lease term of over 16 years. We are by far the largest real estate company focused on the regulated cannabis industry. Reflecting the performance of our property portfolio and continued execution on our acquisition and investment pipeline, 2021 revenues grew 75% and adjusted funds from operations grew 78% from the prior year. With the financial performance as a background, we continue to grow our quarterly common stock dividend at a healthy clip. With our most recent Q4 dividend of $1.50 per share representing a 21 percent increase from the prior year's fourth quarter dividend. Please remember that our Board's policy of reviewing any dividend increases is on a biannual basis, with the next review coming shortly in the first quarter. Catherine will also provide more detail regarding our financial results and capital activity. Regarding federal regulatory developments, Paul will provide additional insight on the federal regulatory landscape and the cannabis market dynamics. Before I turn the call over to Paul, I want to again reiterate our entire team's appreciation for you, our long-term owners, for your support throughout these years of growth and transformation of IIP and the industry we serve. With that, I'd like to turn the call over to Paul, who will provide additional detail on the recent legislative and market developments of the regulated cannabis industry. Paul?

Thanks, Alan. For this call, I plan to provide an update on the regulated cannabis industry, including continued state developments, our views on the federal regulatory environment, and an overview of recent dynamics of the industry. As mentioned on prior calls, 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, in our opinions, there can be no assurance that this landscape will not significantly change. First, a little detail on continued momentum from states on legalization. As Alan alluded to in his opening remarks, we continue to see great progress being made on the state level, including establishment and rollout of both adult use and medical use programs. As we noted in our past call, 2021 saw unprecedented steps by state legislatures to pass new programs by legislative action, including Connecticut, New York, Virginia, and New Mexico passing legislation for adult-use cannabis programs and Alabama adopting by legislative action a medical-use cannabis program. Earlier this month, Mississippi's governor signed legislation legalizing medical cannabis, becoming the 37th state to have adopted a program. Interestingly, Mississippi, by an overwhelming majority, voted in favor of a broader legalization of medical cannabis in the November 2020 elections, but that vote was thrown out by the Mississippi Supreme Court for not following the state's signature requirements for ballot measures. As a result, 37 states and Washington DC have legalized cannabis for medical use, and 18 states and Washington DC have legalized cannabis for adult use. We are also tracking several other states that we believe have a strong likelihood of legalizing either medical use or adult use cannabis in 2022 alone, such as Nebraska and Idaho for medical use, and potentially Oklahoma, Arkansas, Missouri, Ohio, North Dakota, and Maryland for adult use. Second are views on the current federal regulatory environment. Building on our discussion from August, we continue to see some movement on national cannabis reform. However, those reform proposals also are continuing to compete for space on the congressional agenda, with 2022, of course, also being a midterm election year. There are numerous cannabis-related bills pending in Congress at different stages of review, which we have touched on in prior calls. The Safe Banking Act, which would provide additional safety to financial institutions in serving state-compliant, licensed cannabis operators, was reintroduced for the sixth time as an amendment to the America Competes Act earlier this year, though whether the Safe Banking Act language will be included in the final bill remains to be seen. In addition, the MORE Act, short for the Marijuana Opportunity Reinvestment and Expungement Act, was first introduced in summer of 2019 and passed the House in the prior legislative session in December of 2020 and was reintroduced last year in the current legislative session. The MORE Act focuses on de-scheduling cannabis from the Control of Substances Act and includes strong social equity provisions. In July of last year, Senator Schumer released an initial draft of the Cannabis Administration and Opportunity Act, which provides for, among other things, removal of cannabis as a Schedule I controlled substance under the CSA, deference to states to determine their own cannabis policies, transfer of regulatory responsibility of cannabis to the U.S. Food and Drug Administration, and certain other federal agencies, and the establishment of a federal taxation framework for regulated cannabis sales. The Act was subject to a review period with requested comments by September of last year and received numerous comments both for and against. Perhaps one of the most significant criticisms, which we agree with, would be the proposed federal excise tax of 25%, the highest proposed tax structure of any of the bills we've seen. This of course would have various implications to the states regarding their own taxation systems and further challenge the industry as it competes with a much larger unregulated and untaxed illicit industry. For now, the comments have been taken under advisement And once the bill is formally filed, it will be sent to committee for continued discussions and revisions before any potential Senate floor vote. Also late last year, House Republican Nancy Mace introduced the States Reform Act. Similar to the Moore Act and the CAO Act, the States Reform Act would decriminalize cannabis and provide retroactive expungement for nonviolent federal cannabis offenses. However, there is limited federal oversight, and the SRA vests to the individual states the authority to determine what level of cannabis reform, including outright prohibition. Notably, the SRA also has the lowest tax structure of all the bills at 3%, which cannot be increased for at least 10 years. Notably, this bill does carry some bipartisan appeal, including the support of four Republican representatives. As we have said before, predicting the timing or substance of federal legislation is exceedingly difficult, and perhaps even more so in today's political environment. Any reform bill would have to compete with other legislative priorities of the country as we emerge from this unprecedented pandemic and into a midterm election cycle. We continue to closely monitor the status and progress of the numerous bills in Congress and surrounding discussions. Strictly speaking, From our own view, we continue to see certain more limited bills like the SAFE Act gaining traction in the near term, while more comprehensive far-reaching bills like Senator Schumer's draft bill being further down the road. Finally, regarding industry dynamics in 2021 and 2022. Notwithstanding the unprecedented challenges experienced in the country from the pandemic, the cannabis industry continued its strong growth trajectory in 2021. after having exhibited a resiliency and strength that was truly unique versus other industry categories. While there has been some offsetting slowing of the industry's sales growth due to the fading of multiple rounds of fiscal stimulus and the general loosening of pandemic related restrictions, annual U.S. legal cannabis sales are still estimated to have grown to $25 billion in 2021, up from a tremendous year in 2020 at about $20 billion. And that factors in only a small portion, if any, of the expected economic impact of the several states that have authorized the establishment of programs by ballot measures in the past few years and through legislative action in 2021, as we noted previously. Finally, I would note, as we have in the past, that the total addressable market per cannabis is of course multiple times the current legalized cannabis market. In fact, New Frontier data estimates approximately $25 billion in global spending in legal cannabis markets for 2020, while the total annual spending in both legal and illicit markets combined exceeded $400 billion globally, with the U.S. of course constituting a very significant percentage of that amount. Of course, that illustrates the continued tremendous opportunity to transition that illicit activity to the legal cannabis market. And while we are encouraged by certain state and local governments for their pragmatic approach to regulating and taxing cannabis under their established programs to promote that transition, we believe there is still much work to be done, most notably in California, to modify programs in ways that encourage the growth of the regulated industry and encourage the continued transition away from illicit markets. As Alan alluded to in his opening remarks, M&A in the regulated cannabis space continues at the brisk pace we saw starting in late 2020, progressing through last year and into 2022. With U.S. M&A activity in 2021, for regulated cannabis companies more than double the totals of either 2020 or 2019 in terms of transaction consideration, We continue to witness the advantages that many of the established public MSOs have in terms of scale and capital availability as they continue to build on their expansive footprints, primarily utilizing the debt markets to fund these initiatives. Ben will touch on some of the M&A activity in his discussion of our largest tenants, but I would also note that this consolidation march continues on in 2022. Earlier this month, Verano announced the execution of a definitive agreement to buy our tenant Goodness Growth in an all-stock transaction valued at around $413 million. As a reminder, we have been Goodness Growth's real estate capital partner since 2017 and and have long-term leases with them for two properties in Minnesota and New York. Also pending, of course, is the merger of our long-term tenant partners, Pharmacan and LiveWell, which was announced in October of last year, and which, once consummated, will once again make Pharmacan our largest tenant by investment. We believe that a significant driver of this M&A activity in general has been the relative availability of debt to finance acquisitions, which increased substantially over the course of 2021 as a percentage of the overall mix of capital in the industry. While we applaud the enhanced capital availability to many proven operators as part of a capital allocation that, when utilized appropriately, further enhances the credit quality of our tenant roster, in our underwriting of proposed transactions we are taking a close look at the overall debt profiles of the operators, including assessments of the risks related to refinancing that debt or repaying that debt by other means when it comes due. 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 31 acquisitions in seven 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 105 properties across 19 states representing approximately 8 million square feet, including approximately 2.4 million square feet under development or redevelopment with a weighted average remaining lease term that continues to be in excess of 16 years. The fourth quarter capped off a record year of investment activity for our company, during which we committed investments totaling $714 million, growing our total invested capital by more than 55%. As we have grown, we have continually diversified our portfolio, both in terms of geographic and tenant concentration, and as we stand today, no state and not one of our 27 tenants represents more than 15% of our total committed investments. Similar to past calls, I plan to touch on each of our recent 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. In December, we continued to support our long-term tenant partner, LiveWell, making a follow-on investment of $34.7 million at our property in Michigan, acquiring the central utility plant on-site, as well as making additional improvements and enhancements. to the existing infrastructure, increasing the total rentable square feet at this property to 205,000 square feet. As you may know, LiveWell, founded in 2009, and Pharmacan, a long-term tenant partner of ours since 2016, announced their planned merger in October of last year, and pro forma for their combination, Pharmacan and LiveWell will become our single largest tenant. Earlier this month, we also committed an additional $18 million to SkyMint, a tenant partner of ours since 2018 and one of the largest vertically integrated operators in Michigan, as they continue to build out their capacity at one of their cultivation and processing facilities. SkyMint recently announced their pending acquisition of another operator in Michigan, which would add another dozen dispensaries to SkyMint's operating portfolio in the state. Now on to New Jersey. Earlier this month, we extended our real estate partnership with Ascend Wellness, acquiring a 114,000 square foot industrial property in New Jersey with a long-term lease to AWH. Together with our properties leased on a long-term basis to Curaleaf and ColumbiaCare, we own four properties in New Jersey with our total investment expected to be about $90 million. New Jersey, of course, is on the cusp of launching its adult use cannabis program, which is expected to generate over $2 billion in annual revenues within four years of launch. In November, we executed a follow-on investment commitment with Temesco Wellness, providing an additional $8.7 million for improvements at the property, and in January, we closed on the purchase of a 57,000-square-foot industrial property and leased with Forefront Ventures, a tenant partner of ours for another property in Massachusetts and properties in Illinois and Washington. Including these transactions, we own eight properties in Massachusetts, representing a total investment of $227.8 million, comprising 775,000 square feet, with tenants Pharmacan, Holistic, Trulieve, Ascend, Cresco Labs, Forefront, and Temescal. In October, we closed on a 201,000 square foot industrial property in Southern California and entered into a long-term lease with Gold Flora. Assuming full reimbursement for improvements, we expect our total investment in the facility to be $60 million. Goldflora is a privately owned company with dispensary locations throughout the state, including the King's Crew Dispensary in Long Beach and the Higher Level Dispensary Chain serving Hollister and Seaside. Goldflora recently announced the acquisition of Airfield Supply Company, a vertically integrated cannabis company originally established in 2010 with premium brands and a strong established presence in Northern California. Finally in December, we acquired a fully leased portfolio of 27 properties for about $73 million, including 24 properties in Colorado, 2 properties in North Dakota, and 1 property in Pennsylvania. Of these properties, 16 are leased to Columbia Care, 4 are leased to Schwoz, 3 are leased to Curaleaf, 3 are leased to Livewell, and 1 is leased to Kaya Cannabis. This transaction represented a great way for us to efficiently acquire well-located retail assets with strong, established operator tenants in place, and we expect to opportunistically add to our portfolio of retail cannabis locations over time. Similar to prior calls, I would like to touch on our top 10 tenants as a brief update. Those tenants in order of total investment are Pharmacan, Parallel, Ascend Wellness, Columbia Care, Kingsgarden, Trulieve, Green Thumb, Cresco Labs, Holistic Industries, and Curaleaf. Just to note, for purposes of tenant concentration calculations, we have calculated our total investment in Pharmacan's properties pro forma for its pending merger with LiveWell, which I'll discuss in more detail. As noted earlier in our prepared remarks, Pharmacan and LiveWell announced their planned merger in October, and so we are presenting information on Pharmacan pro forma for this combination. In total, we own and lease to Pharmacan and LiveWell 11 properties located in Colorado, Illinois, Massachusetts, Michigan, New York, Ohio, and Pennsylvania. with our total investment including future commitments to fund additional improvements totaling about $261 million and encompassing approximately 630,000 square feet. After the LiveWell merger, Pharmacan is expected to operate more than 60 dispensaries and 11 cultivation and processing facilities across eight states, representing one of the largest privately owned vertically integrated cannabis companies in the U.S., and representing what we see as a great combination of best-in-class operational and financial expertise. We own four properties leased to Parallel in Florida, Texas, and Pennsylvania, with our total investment including commitments to fund improvements totaling approximately $203 million, encompassing approximately 895,000 square feet. As disclosed by Parallel previously, the company has formed a strategic alternatives committee of its board of directors to explore strategic options for the company. Parallel has developed a strong footprint in markets that we believe are or will become some of the largest and strongest growth markets in the United States, which includes 46 retail locations and cultivation and processing facilities in Florida, Massachusetts, Pennsylvania, and Texas. Parallel continues to pay their rent in full, and we look forward to supporting them through this process and as a long-term real estate capital partner at these locations for many years to come. We have been Ascend Wellness' real estate partner since 2018 and have partnered with Ascend on four properties in Illinois, Massachusetts, Michigan, and New Jersey, representing a total commitment of nearly $180 million. Led by founder and CEO Abner Curtin, Ascend continues its evolution as one of the top performing MSOs with a highly strategic footprint across Illinois, Massachusetts, Michigan, New Jersey, and Ohio. In Q3 of last year the company closed on a $210 million debt financing, ending Q3 with over $200 million in cash on its balance sheet. We own 21 properties leased to ColumbiaCare in Colorado, New Jersey, Pennsylvania, and Virginia, representing a total commitment of about $148 million. As we have previously noted, in line with the industry consolidation we have seen, ColumbiaCare acquired The Green Solution in 2020 and Greenleaf Medical this past June, two of our tenants in Colorado, Pennsylvania, and Virginia. In addition, our portfolio purchase in December added 16 properties to our portfolio leased to ColumbiaCare. ColumbiaCare's footprint includes licenses in 18 U.S. jurisdictions and the EU, with 32 cultivation and processing facilities and 99 dispensaries in operation or under development. Earlier this month, ColumbiaCare announced a closing of a $185 million debt offering with a term of four years. On to King's Garden. which is a tenant partner of ours across six properties in Southern California, representing a total commitment of about $148 million, and which is expected to encompass over 500,000 square feet of space upon completion of development and redevelopment at certain properties. Kings Garden has developed a truly distinguished brand in California and consistently ranks as a top producer in sales in a state that represents the largest market in the world. As Kings Garden ramps production capacity, they expect to be generating approximately 140,000 to 150,000 pounds of finished cannabis per year in addition to concentrates. With their brand reputation and operational expertise driving financial results, the Kings Garden team has also been one of the uniquely positioned operators to return capital to its long-term owners in the form of dividends, including $3 million each of the last two years. We're excited to be working closely with Kings Garden as they complete full build-out of their production capacity in the months to come. Trulieve is a tenant partner of ours at five properties in Florida, Maryland, Massachusetts, and Nevada, representing a total commitment of a little over $141 million. Trulieve, with over 9,000 employees nationwide, closed on its acquisition of Harvest Health and Recreation in October of last year and continues to expand its presence across 11 states with over 160 dispensaries opened. Shortly after the announced closing, Trulieve closed on a private placement of $350 million in senior secured notes, which was utilized in part to redeem certain debt of harvest after the combination. Trulieve followed on with an additional $75 million debt raise at the end of last month. Green Thumb is a tenant partner of ours in Illinois, Ohio, and Pennsylvania, representing a total commitment of about $122 million. Green Thumb is one of the largest MSOs in the United States, employing 3,800 people with 75 open retail locations and 17 manufacturing facilities across 15 U.S. markets. GTI continues to grow its footprint both organically and through acquisitions, including the recently announced opening of new dispensaries in Virginia, Massachusetts, Nevada, and New Jersey, in addition to the acquisition of Leafline Industries, one of the two vertically integrated license holders in Minnesota at the very end of last year. I would note that our total investment in GTI does not include the potential investment of up to $55 million at one of our Pennsylvania properties for improvements expected to be made by GTI at the property, and for which GTI may request reimbursement in a single lump sum any time between June 15th and July 31st, with any reimbursement resulting in adjustment to the property's base rent. If that investment were drawn in full on a pro forma basis, GTI would represent our fourth largest tenant in terms of total investment. We have been Cresco Labs' real estate partner since 2019 and have partnered with Cresco on five properties in Illinois, Massachusetts, Michigan, and Ohio, representing a total commitment of about $121 million. Cresco was founded in 2013 and now employs over 3,500 people with 28 cultivation processing facilities and 49 operating retail locations across 10 states. In August of last year, Cresco upsized its existing senior secured term loan by $200 million, maturing in August 2026. In addition to the continued ramping of its existing operations, which included the opening in November of Cresco's flagship Illinois dispensary near Chicago's Wrigley Field, Cresco also continued to make strategic acquisitions, including acquisitions of operators in Florida, Massachusetts, and Pennsylvania. We own five properties leased to Holistic Industries in California, Maryland, Massachusetts, Michigan, and Pennsylvania, representing a total commitment of about $116 million. Holistic, originally founded in 2011, is a privately owned, vertically integrated MSO with operations in California, Maryland, Massachusetts, Michigan, Missouri, Pennsylvania, West Virginia, and Washington, D.C. Holistic operates five cultivation processing facilities and has 18 operational dispensaries with licenses for operation in eight states, including a recently awarded medical use cannabis license for vertically integrated operations in New Jersey. In May 2021, Holistic raised an additional $55 million in capital through an oversubscribed convertible node issuance, which was led by Harvard Stoneview Fund. We own seven properties leased to Curaleaf in Illinois, New Jersey, North Dakota, and Pennsylvania, representing a total commitment of about $108 million. Curaleaf has operations in 23 states, 125 dispensaries, 25 cultivation sites, and approximately 4.4 million square feet of cultivation capacity. Curaleaf closed last month on its acquisition of Bloom Dispensaries, a vertically integrated single-state operator in Arizona, and in December of last year closed on an issuance of senior secured notes totaling $475 million. While we have time to touch on just our top 10 tenants, our other tenant partners continue to execute well, and we are very happy to note our growth of new tenant relationships since the beginning of 2021, including six new tenants, Gold Flora, Temescal Wellness, Sozo, Schwoz, Calyx Peak, and Kaya Cannabis. With that, I'll turn it over to Catherine. Catherine?

Thanks, Ben. The fourth quarter capped off an exceptional year for IAP in the area of acquisitions and investments, and we were thrilled to continue to deepen our long-term real estate partnerships with our existing tenants while continuing to expand our tenant roster with strong management teams. The execution on the investment side and strong portfolio performance continued to drive our financial results for the fourth quarter and for the full year 2021. We generated total revenues of approximately $59 million for the quarter, a 59% increase from Q4 of last year. The increase was driven primarily by the acquisition and leasing of new properties, additional improvement allowances provided to tenants at certain properties that resulted in base rent adjustments, and contractual rent escalations at certain properties. And as we've indicated in the past, our Q4 revenue reflects only partial quarters of revenues from the acquisitions and investments executed during the quarter, and no revenues, of course, for the leases or lease amendments 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 continue to account for all of our leases on a cash basis. For the three months ended December 31, 2021, we recorded net income of $28 million, or $1.14 per diluted share. As noted in our earnings press release, our exchangeable notes were considered dilutive for purposes of calculating net income, FFO, and AFFO for the fourth quarter and full year 2021, and for the fourth quarter of 2020, but not for the full year 2020. We wanted to continue to highlight this item, especially as it makes an apples-to-apples comparison difficult between full-year 2021 and 2020 results as it relates to net income, FFO, and AFFO measures. Also during the fourth quarter, we privately negotiated with certain holders of our exchangeable senior notes representing a little over $110 million in principal amount to induce the exchange of these notes. pursuant to which we delivered shares to the note holders equal to the then current exchange rate under the indenture, along with accrued but unpaid interest through the date of the exchange, and a cash inducement fee equal to approximately 1% of the principal amount exchanged. We wanted to take a bit of time to explain this inducement and our rationale. The exchange rate for our exchangeable senior notes adjusts each quarter in part based on our current dividend rate, versus the reference dividend rate of 35 cents, which was the dividend in place when we initially issued these exchangeable notes in February 2019, meaning that on a quarterly basis, the common stock dividend declared results in an adjustment to the exchange rate, increasing the number of shares that were required to issue to note holders on their eventual exchange. By inducing the exchange now, we're able to eliminate this additional expected dilution from future dividends as it pertains to the notes exchanged, which we believe is in the best interest of our long-term stockholders. In connection with this inducement, we paid $1.2 million if we accrued an unpaid interest on these notes, a 1% cash inducement fee noted above, and transaction costs of $590,000. In addition to these cash payments, we also recorded during the quarter a non-cash loss on extinguishment of debt of approximately $2.4 million for the notes exchanged. As noted in our press release, in order to provide a meaningful comparison of our funds from operations between time periods so that investors can better compare our operational performance on an apples-to-apples basis, we've included normalized funds from operations, which adds back to funds from operations, transaction-specific expenses, which we exclude from funds from operations to provide investors a better understanding of ongoing operational performance. As a result of adding back acquisition-related expenses and the loss on inducement of our exchangeable senior notes, normalized funds from operations was $46.1 million, or $1.75 per diluted share, for the fourth quarter. Adjusted funds from operations for the fourth quarter, which adds back non-cash stock-based compensation and non-cash interest expense related to our unsecured senior notes to normalized FFO, was approximately $48.6 million, or $1.85 per diluted share. Total revenues for the full year 2021 grew 75%. to approximately $205 million, and adjusted funds from operations grew 78% for the same period to $175 million. That growth, as Alan mentioned in his opening remarks, was attributable to exceptional investment activity in 2020 and 2021, as well as the continued strength of our overall portfolio's performance. On January 14, we paid our quarterly dividend of $1.50 per share to common stockholders of record as of December 31, equivalent to an annualized dividend of $6 per common share and a 21% increase from the prior year's fourth quarter. As we noted in our prior press releases, our Board of Directors generally evaluates adjustments to the level of our quarterly common stock dividend every six months. with adjustments expected to be declared in Q1 and Q3 of each year. The Board continues to target a dividend payout ratio of 75 to 85 percent of AFFO on a stabilized portfolio basis. We also continued to fund real estate improvements into many of our properties as offered in 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. In 2021, we've capitalized costs of approximately $384 million and funded approximately $375 million relating to improvements in construction activity at our properties. Finally, with almost $2.2 billion in total gross assets and a total of about $334 million in debt consisting solely of unsecured debt with no maturities this year or next year and $300 million of that debt not maturing until 2026, our debt to total gross assets ratio stood at 15% at year end. We believe we continue to have one of the strongest balance sheets in the REIT industry. And with that, I'll turn it back to Alan. Alan?

Thanks, Catherine. I'd like to note the following in closing. As we have highlighted, we are thrilled with the quality of our tenant roster and the continued demonstrated strength and resilience of our tenant partners and their execution on operations. We are well positioned to continue to execute on our business, providing non dilutive permanent growth capital to facilitate our tenant partners continued expansion as an important part of a prudently managed capital structure. The regulated cannabis space continues to be one of the fastest growing dynamic industries, and we believe we are still in the early innings of its maturity, especially as it pertains to continuing to transition illicit sales to the regulated market, ramping existing programs promoted by sensible state regulation and the launch of new programs in many states. As always, 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, can you please open the call up for questions?

We will now begin the question and answer session. If you'd like to join the question queue, press star, then one. If you're using a speakerphone, please pick up your handset before pressing the keys. If you'd like to remove yourself from the question queue, press star, then two. And the first question comes from Tom Catherwood with BTIG. Please go ahead.

Thank you, and good morning, everyone. Good morning, Tom. You guys have talked in the past about Kind of the timeline of medical and adult use states evolving and eventually becoming attractive opportunities for real estate investments with the recent legalizations in New Mexico and Mississippi and eventual rollouts programs in New York and New Jersey and Maryland and Delaware likely following behind. Which geographies do you think provide the most near-term opportunities for you, and which ones could provide growth kind of over the medium to longer term?

Well, you know, Tom, I think that's a really good question. I'm going to start with first that the cannabis industry continues to experience tremendous growth and is expected to double by 2025. And I'm going to turn it over to Paul and perhaps Ben to perhaps answer directly answer which states. Go ahead, Paul.

Thanks, Alan. We love what's going on in New York and New Jersey. Despite New Jersey missing a timeline or obligation they had, we're pretty confident they're going to get this thing together. We're really happy what happened with New York opening up the medical conditions requirements. I think until New York does roll out the REC program, you know, I think the opening up the medical is a great sign. So we love those states. You know, I think very strong with Pennsylvania still, very strong there. Michigan. We're very interested in Texas as one of the new states coming out with their medical program. We think there's tremendous opportunity there. So You know, Virginia, of course. So, you know, we're very, very happy about what we're seeing in some of the states that have passed adult use programs, what they're doing to try and, you know, move that timeline up. We saw that with Virginia. They passed a bill to kickstart their rec program sales in September. Of course, you know, that still may not get through the Republican-controlled House in Virginia, but You know, those are great signs, I think. You know, and you're right, we have talked about, you know, there is a transition time between medical and adult use. But I think as the states become more mature, they look at what other states have done, and they look at maybe some legislative fixes. We're confident that, you know, that timeline that might be as much as, you know, 24 to 36 months, that's going to shorten because the states are getting it. They're understanding that the program needs to roll out. They need the tax revenue. They need the jobs. So we like what we're seeing.

Got it. Appreciate that. Maybe if we look at the cannabis industry in general, public operators are seeing their cost of capital increase, especially at least on the equity side. And at the same time, investment opportunities seem to be accelerating and We saw a similar pattern to this in late 2019, and operators turned more towards their real estate as a source of growth capital. Have you seen an increase in demand for sale leaseback opportunities given this kind of recent market dislocation?

You know, I'm going to turn it over to Ben to really talk about our pipelines. But I think you have identified, I think, a unique aspect of the industry is that as there ebb and flows in our tenants' cost of capital, the demand for our unique and specific capital does ebb and flow. We've seen, obviously, 2021 was a tremendous year where we did over $700 million in acquisitions. Pretty fantastic. And that yields that we're, you know, we expected actually to be, you know, on average somewhat lower, and they were actually somewhat higher. So we think that in 2022, we have the same dynamics building, especially with the most recent disruption to the geopolitical world. So now I'm going to turn it over to Ben, then we'll let you go through our pipeline. Ben?

Yeah, sure. Thanks, Alan. Hey, Tom. Yeah, we are certainly seeing those dynamics. I think we've always continued to believe that this is the most efficient non-dilutive capital available in the industry, and I think that becomes even more pronounced as you see the fluctuations in the equity markets. We've seen, as Alan mentioned, equity markets go up and down, changes on the regulatory landscape or on the competitive landscape, and have been able to consistently succeed on placing capital, having our largest year ever by investment volume last year. I think we continue to be uniquely positioned with the strength of the balance sheet to capitalize on these opportunities as we see them pop up.

I appreciate that color, guys, Ben. That was really helpful as well. Kind of building off that, Ben, you've also talked in the past about M&A activity driving sale leasebacks. Alan, you mentioned it was a record year for those in cannabis in 2021. As you sit right now, how much of your identified pipeline is more M&A driven as compared to expansions of existing assets or construction of new facilities?

You know, I was going to say, you know, I don't think we have bifurcated our pipeline in that way. I think the real exciting aspect of our program is that it provides for and allows companies to develop over time and know that they have the capital available to them when they work with us. And I think that that will continue. I don't know, Ben, do you have any further color as to kind of percentages?

Yeah, no, I mean, I think that's right. I mean, I think one of the strengths and the biggest benefits we provide is being able to offer creative and tailored real estate solutions to the groups we work with, whether that's M&A, construction, existing facilities. So that will shift over time depending on the particular groups we're working with and industry dynamics. But, you know, we're, again, we feel very well positioned to support the groups that we partner with, you know, whatever form that takes.

Understood. And then the last one for me, a lot of headlines around record cannabis harvests in the Western U.S. this fall and how that put pressure on cannabis pricing. I know your exposure is small in these markets. I think it's less than 20% of your portfolio overall. But can you talk a bit about that? whether kind of that cannabis pricing pressure impacted your tenants, and maybe does the focus on indoor cultivation and maybe premium flower insulate your tenants from some of those pricing shocks that we read about and hear about in the news?

Yeah, Tom, this is Paul. I think that's exactly right what you said at the end. There is such a difference between, as you know, the outdoor grow product and the indoor grow product that our tenants purchase. to cultivate. So when we see those headlines, I think a lot of it is coming from outdoor grows in California, Oregon, and Washington, which are really different, of course, from our tenants' growth. So while we see those numbers, we're not seeing an impact on sales or, you know, commodity pricing for the indoor product.

Appreciate that, Collar. That's it for me. Thanks, everyone.

Thanks, Tom. The next question comes from Scott Fortune with Roth Capital Partners. Please go ahead.

Good morning, and thank you for the questions. I want to dig in a little bit more on the pipeline and what you're seeing. Obviously, we've seen some delay in some of these new states coming on board and pushing out, and that puts a little bit of pressure in the near term, especially for these MSOs. But it seems like the MSOs have a little more competitiveness debt financing down 8% levels here and maybe not turning on to the real estate side as much, and you're moving down to more the single-state operators. How do you look at your pipeline, kind of evaluating it from your existing established top-tier MSLs versus these new customers providing some of the growth going forward for you, if you can kind of unpack that a little bit, like the great near-term especially? Okay.

Yeah, I mean, before I turn it over to Ben to really maybe dig a little bit further and deeper, you know, first you've got to remember that, you know, real estate transactions in general are very lumpy. And we had a banner year closing a lot of transactions, specifically closing a couple of transactions at the end of the year. We think our pipeline is very strong. We think we have continued demand from our existing MSOs and continued demand from single-state operators that want to be multi-state operators through a variety of paths, including M&A. I mean, I think we continue to have great confidence in our ability to place between $125 million, $150 million of transactions in And I think that that's a pace that we've been very successful at for the last couple of years. Keeping in mind, if you back up and remember that we have a very unique offering, we're only doing one type of product, which is the sale-leaseback transaction, where we're looking for 15- to 20-year lease terms. which allows us to have that weighted average lease length in excess of 16 years. So I think that that's how I would think about, or I would ask you to think about how our pipeline is going. Ben, you want to talk about what debt yields, or Paul, you want to talk about the debt yields and how that might relate to our programs? Yeah.

Yeah, sure. This is Ben. Thanks, Alan. You know, we are definitely seeing there's more debt in the industry. I think that is a result of the strength of the operators. You know, we feel we have, you know, over 90% of who we think are the top operators in the country in our portfolio, and their financial strength is such that they can command lower rates. This only strengthens our existing portfolio. You know, that's not to say we're not going to continue to work with the top operators in the country. I think it's evidenced by closing on a deal with Ascent Wellness here in New Jersey recently. Again, we had our largest year last year by investment with the debt markets opening up. We're going to continue to support our tenants, you know, leveraging our balance sheet and continuing to grow the portfolio, as Alan said.

That's great. I appreciate the color. And then kind of follow up on that, how is IIP looking at the capital markets here weighing on the different opportunities from the capital raising or financing side of things in this rising rate environment. I appreciate the color, Alan, on the consistency that you are able to hit with your acquisitions on a quarterly basis, you know, that 125, 150 million. But looking at your cash level with the ATM, you know, about 230 million line available, kind of what's the commitment there and maybe the cash needs as you look out the different financing options going forward here.

Yeah, I know. I think we still have one of the strongest balance. We have an extremely strong balance. We have less than 15% debt to total gross assets. We have, obviously, access to the equity markets, and we have a variety of other forms of capital debt, sort of a convertible debt situation. uh, straight, uh, you know, uh, equity issuances, and even, uh, you know, some recent, uh, interest from, uh, from the, um, preferred, uh, side of the, or preferred, uh, investors. Uh, we are, uh, we are looking, uh, at all those, at all those options. And, uh, we will certainly do, uh, what is the best, uh, the best for the company, given how choppy the markets are, how, uh, how impacted they are by the geopolitical events that have gone on. But our company continues to perform extremely well, and we think we have tremendous access to capital as we move forward.

Well, Scott, and one quick follow-on, probably for Catherine, kind of your committed, your short-term cash needs and cash here that's committed for your acquisitions and TI going forward, kind of what's leaving you as far as the balance for potential acquisition transactions going forward from the cash level?

Yeah, Scott, so we have over $400 million of cash on the balance sheet, and as you said, you know, about $300 million of that is, earmarked for eventual tenant improvements and redevelopment at the projects. But that, especially these large projects that we've entered into over the last several years, sit on our balance sheet for an extended period of time. So that allows us to be strategic on when we think we can raise capital. We've talked in the past that those projects typically Take between nine and 12 months to fully request those reimbursements for us.

Jessica, I appreciate all the color, and I'll jump back in the queue. Thanks. Thanks, Scott.

The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, good morning. Good morning out there. Kat, maybe just sticking with that, if I heard you correctly, you guys have $400 million of cash, but $300 million is earmarked. So it sounds like capital markets activity is definitely on the horizon. You mentioned preferred. There was also that debt offering that you guys were contemplating earlier this year. So as you look at ATM, preferred, unsecured bonds, where do you see the best opportunity and how do you guys think about uh sort of the capital cost because obviously as the uh exchangeable notes uh played out you know there's the initial coupon and then there's the you know reality over time as as uh as things can can happen uh as the exchangeable notes uh demonstrate you know uh before i turn it over to kat uh look uh the

The market is choppy. We are navigating what I think is one of the unprecedented periods of time where a lot of things are changing and changing rather rapidly, and we're looking at all our options moving forward. We think our costs of capital still provide for very accretive transactions, and so we're still excited about that opportunity. You know, I think the pullback that we've seen in one field allows another an opportunity in another. And also, even with the convert, which we sold equity at that time, I think, up 20 plus percent. And so it was still an accretive transaction, very creative, but creative in a long period of time. Now, for, obviously, accounting purposes and the way it worked out, because those investors made a fantastic bet and our share price certainly increased significantly, there was an accounting dilutive impact to what we were doing. keeping in mind so we keep all those options and we're looking at all those options as we move forward and make those capital decisions. I don't know, Kat, is there anything else you want to add to that?

No, I mean, Al, that's exactly right. And, you know, we are happy with all the options that we do have. I mean, looking at the balance sheet with only 15% debt to total growth assets, We have a portfolio of strong cash flows and are growing our AFFO 70%, 78% year over year. It gives us a lot of options, both for equity and debt. And we continue to be strategic as to when we want to raise additional capital.

Okay. And then the second question is, Alan, you mentioned all the stuff going on in Congress, different ways that people are trying to either reintroduce the SAFE Act or maybe full legalization. And it's interesting because you look last year, and it was Schumer and Booker that killed safe banking at the end of the year in the defense budget because they wanted to have full legalization. And obviously, with everything that's going on, that doesn't look as likely. So in the current environment, it actually seems like the ideal situation for you guys, right? Meaning... that no legalization, no safe banking, that makes your business model continue to be very attractive? Or is your view that with legalization or safe banking that you would see better opportunities? I'm just curious which you think is better for IIPR, the current situation or one in which you either have legalization or safe banking?

That's an interesting question. It's a double-edged sword. I mean, right now things are fantastic. We have got great pricing power. We're the only New York Stock Exchange-traded REIT with a balance sheet, a really super strong balance sheet that exists out there. We are probably 10, 20, maybe more times our nearest competitor and have the greatest opportunity to raise capital today. As you know, if something changes in the regulatory environment, we still have the strongest balance sheet, the greatest portfolio, a weighted average lease length in excess of 16 years, a great group of tenants, and we would have then certainly I think greater access to even all sorts of different capital markets opportunity and be able to drive our cost of capital down even lower. So right now I think we're comfortable where it is. It certainly has made it much more difficult for our competitors to catch up or even compete with us on a long-term basis.

Okay.

Thank you.

The next question comes from Eric Dolores with Craig Helm Capital. Please go ahead.

Great, thank you for taking my question. So with more debt capital entering the space, you mentioned you're going to look more closely at MSO debt profiles. You also brought on six new tenants in 2021. My question is, as more capital comes online and naturally weighs on cap rates, Would you guys prefer to be flexible on the lease terms in order to sort of preserve your mix of top MSOs? Or would you prefer to be a bit more flexible on the tenant mix in order to preserve your attractive lease terms? Thank you.

Another interesting question. I mean, yeah, I mean, I think that... Look, we're... agnostic as to really how much or how we generate great returns. If we can generate great returns with a different tenant mix, you know, we're certainly going to go down that path. If we can continue to generate great returns, providing capital to our existing tenant mix, we're going to do that. And that's how we're looking at that. We look at it. Our job is to make money for our stakeholders and make as much as we can.

All right, that makes sense. Thank you.

This concludes our question and answer session. I'll turn the conference back over to Alan for any closing remarks.

Thank you, Operator, and thank you all for joining us today. And certainly my one comment is to send prayers out to those that are in harm's way in today's geopolitical issues. and thank our stakeholders and our team for, well, the stakeholders for really sticking with us and for our team for all your continued hard work. Thank you all. That'll conclude our call.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.