Q2 2021 Innovative Industrial Properties Inc Earnings Call
Good day and welcome to the innovative industrial properties second quarter earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 1 on a touchtone phone to withdraw your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to Brian Wolfe. 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 Regin, Vice President of investments.
Before we begin I'd like to remind everyone that statements made during today's conference call maybe deemed forward looking statements within the meaning of the safe Harbor of the private Securities Litigation Reform Act of 1995 and the.
Actual results may differ materially due to a variety of risks uncertainties and other factors for.
For a detailed discussion of some of the ongoing risks and uncertainties of the company's business I refer.
For 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 cash.
<unk> 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 you an update on our business since our last call in February and our views on the continued evolution of of truly dynamic industry. We are so proud to share.
And there's certainly a lot to recap from our company's activity on the regulated cannabis industry as a whole.
As we have noted on prior calls with all of the challenges that we face as a society over the last year and a half of the regulated cannabis industry has demonstrated a strong and sustained resilience across the United States.
And as the country and the world as a whole has suffered through not only the health crisis, but also 1 of the quickest and deepest economic contractions from recent history, the United States regulated cannabis industry continued on its tremendous growth path growing over 50% annually from just over $13 billion on sales in 2000.
19 to an estimated $20 billion in 2020.
That momentum has continued into 2021 with U S quarterly sales across regulated medical and adult use cannabis markets, reaching an all time high of 584 billion in the first quarter alone.
And as noted in our earnings press release yesterday, we continue to execute on our acquisition and investment pipeline executing on over $245 million of new transactions since the beginning of the second quarter.
Representing a good mix of new tenant relationships and follow on investments with our existing long term tenant partners.
Dan will provide an update on our acquisitions investments along with a survey of recent developments with our largest tenant partners.
Now as of today, we own 73 properties in 18 states totaling $6.8 million square feet, which are 100% leased on a long term basis to high quality licensed cannabis operators.
Afflicting, the strength and resiliency of our cash flows and continued execution on our acquisition of investment pipeline, we paid a quarterly common stock dividend of $1.40 per share to stockholders on July 15th.
Representing a 32% increase from the prior year's second quarter dividend.
And our 11th dividend increase since our IPO in December 2016.
On the financing front this past quarter has been a transformational 1 for this young company in May we obtained an investment grade corporate credit rating and shortly thereafter executed on a bond offering that generated $300 million in gross proceeds with a 5.5% coupon rate and of <unk>.
The 5 year maturity.
With a strong book of demand for these notes we are thrilled to further complement our strong balance sheet and liquidity profile with this new financing option.
Providing us with an attractively priced non dilutive capital source as we continue to grow.
Of course, we remain focused on maintaining a strong flexible and prudent leverage balance sheet.
And with this new offering we have a debt to total gross assets ratio of just 21% as of quarter end.
Catherine will also provide more detail regarding our financial results and capital raising activity.
And of course regulated developments in the cannabis industry continue at a brisk pace since our last call loan for States, Connecticut, New Mexico, New York, and Virginia passed the adult use cannabis programs by Legislative action, bringing that total to 18 and Alabama passed legislation.
<unk> in May to become the 38 states to establish a medical use cannabis program.
With these new programs coming on line, new frontier projects regulated cannabis sales, reaching $43 billion by 2025.
Representing the continued tremendous growth trajectory for the overall industry.
Regarding federal regulatory developments on the heels of the reintroduction of the Safe Banking Act earlier this year Senator Schumer introduced an extensive draft cannabis Bill last month, which seeks to address numerous items surrounding federal cannabis regulation, including the scheduling Canada criminal record.
For an expansion maintaining the authority of states to set their own cannabis policies and reform of federal taxation of cannabis businesses.
Paul will provide further detail on these and other developments we are closely monitoring.
Finally, I would like to note that in June we published our inaugural environmental social and governance report highlighting how we are addressing top ESG priorities of our stakeholders we.
We are proud of the work that we and our tenant partners have done so far on this front.
And we look forward to keeping you updated as we continue to execute on our ESG initiatives.
Before I turn the call over to Paul I want to reiterate our deep appreciation for you are long term owners for you.
Your steadfast support as we move through just our fifth year of operations and we look forward to serving you in 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 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 day 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 opinion there can be no assurance that this landscape will not significantly change.
The first a little detail on continued momentum from states on the legalization.
We continue to see great progress being made on the state level, including establishment and rollout of both the adult use and medical use programs are.
The recent trend of 2021 has been passage of new programs the legislative action and in just the past few months, we have seen 5 states take such steps with Connecticut, New York, Virginia, and New Mexico, passing legislation for it.
Don't use cannabis programs in Alabama, adopting by Legislative action the medical use cannabis program.
Of note those for states, which adopted adult use cannabis programs are expected to generate more than $4.5 billion.
And annual adult use sales and just their fourth year of operations. According to industry estimates.
As we noted in our last call on February these developments come on the heels of 5 other state measures, which passed by popular vote in November <unk>.
The establishment of adult use programs in Arizona, New Jersey, and Montana as well as approval of of medical use program in Mississippi.
As a result, 38 states and Washington D. C have legalized cannabis for medical use in 18 states have legalized cannabis for adult use with over 70% of the U S population residing in medical use cannabis states and over 40% residing in adult use cannabis states.
We are also tracking several other states that we believe have a strong likelihood of legalizing either medical use for adult use cannabis in the next few years, which would bring those totals to 90% plus of the U S population and medical use cannabis states and a solid majority of the U S population residing.
In states with adult use programs.
We also see many states continuing to chip away at the illicit market for cannabis as regulated cannabis companies continue to improve the operational efficiencies strengthen their product offerings and experience for patients and customers and states continue to make adjustments to the regulatory frameworks overtime such as broadening.
Qualifying medical conditions and distribution options.
With the illicit cannabis market is still making up approximately $66 billion of overall sales in 2019.
There continues to be tremendous potential to move that activity into the regulated market and we see state and local governments as the general matter of being in line with that goal with the additional tax revenues contributions to local economic activity and job creation as a result.
In line with that new frontier data in fact estimates that by 2025, 42% of total annual U S. Cannabis demand will be met by legal purchases of cannabis and regulated marketplaces up from 24% in 2020 of.
Key drivers of the continued strong growth of the regulated market.
Second our views on the current federal regulatory environment.
Piggybacking on our comments from February we continued to see progression on national cannabis reform, reflecting clear and decisive shifts in popular opinion over recent years and the years of experience and results from state run medical and adult use programs.
However, those reform proposals also are continuing to compete for space on the congressional agenda with the numerous other pieces of proposed legislation on the infrastructure pandemic assistance and other priorities.
There are numerous cannabis related bills pending in Congress at different stages of review the <unk>.
The banking act, which which would provide additional safety to financial institutions and serving state compliant licensed cannabis operators was reintroduced in the current legislation session passed by the house and its now due for consideration by the Senate.
Similar safe banking language was also added to a draft version of the fiscal 2020 to financial.
Services in General government funding Bill released by the House Appropriations Bill in June so whether the language will be included in the final appropriations Bill remains to be seen.
In addition, the more act short for the marijuana opportunity reinvestment and expunge of NEC was first introduced in the summer of 2019 passed the house and the prior legislative session. In December of 2020 and was re introduced earlier this year and the current legislative session.
The more act focuses on D scheduling of cannabis from the control of Substances Act and strong social equity provisions.
Last month Senator Schumer released in the initial draft of the cannabis administration and opportunity Act, which provides for among other things removal of cannabis is a schedule 1 controlled substance under the CSA.
Giving of deference to states to determine their own candidates policies for.
Transfer of regulatory responsibility of cannabis to the U S food and drug administration and certain other federal the federal regulatory agencies and the establishment of the federal taxation framework for regulated cannabis sales.
As we have said before predicting the timing or substance of federal legislation is exceedingly difficult and perhaps even today more so in today's political environment and the numerous competing priorities of the country as we emerge from this unprecedented pandemic.
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 tend 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 strap bill being further.
They're down the road.
Finally regarding industry dynamics in the first half of 2021.
Notwithstanding the unprecedented challenges experienced in the country from the pandemic the remarkable resiliency and growth of the cannabis industry exhibited in 2020 has continued in 2021.
In fact, with new markets coming online and existing markets trading strongly upward annual legal cannabis sales in the U S are projected to surpass $30 billion by 2022.
And that factors in only a small portion if any of the expected economic impact of the several states.
Authorized the establishment of programs by ballot measures in November of last year and through the Legislative action. This year as we noted previously.
During the pandemic, many state and local authorities modified regulations to allow for different methods of purchasing cannabis designed in part to provide more reliable social distancing and to protect both the employees and customers of cannabis companies many of whom are patients with pre existing conditions that utilized canvas for men.
The goal of purposes.
Many customers also adapted they're more permanent references to such options as curbside delivery online ordering and home delivery.
As lockdowns in certain restrictions have gradually lifted many of those forms of purchasing remain and online ordering and home delivery, having particular grown at significant scale.
The regulated cannabis operators to reach customers in places, where they do not have the local dispensaries.
We have seen several of the national Msos keen on this approach to reaching customers, including our tenant Chriscoe labs acquisition of Florida medicinal cannabis Blum of wellness.
Home delivery operation earlier, this year as well as our tenant Columbia Care's acquisition of our other tenant Greenleaf medical in June which included on delivery services for Green lease operations in Maryland, and Virginia.
We see this development is just 1 of several factors.
To drive the growth of existing state programs and reached the residents throughout the particular state.
Capital raising and M&A in the regulated cannabis space continues at the brisk pace. We saw in late 2020, and early 2021 and noted in our last call.
2021 year to date U S cannabis companies raised about $5 billion in equity and debt capital for.
<unk>, surpassing any similar prior year's period.
Mergers and acquisitions, indicating of the space are also on our record setting pace with over $5 billion in total consideration across 130 targeted M&A transactions year to date also surpassing any years same time period.
As we noted on our last call and as Ben will touch on during his remarks, our tenant partners have also been significant participants and beneficiaries of this dramatic increase we have seen this year and both capital raising and strategic M&A activity.
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 April 1st we made 5 acquisitions in 4 states, representing a mix of expansion of our existing real estate partnerships with top operators and the establishment of new tenant relationships as of today, we own 73 properties across 18 states, representing approximately $6.8 million square feet, including approximately $2.4 million square feet under.
Our redevelopment with a weighted average remaining lease term the continues to be in excess of 16 years.
Similar to past calls the plane 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.
In Pennsylvania, we acquired a property, which is expected to comprise approximately 239000 square feet of industrial space. Upon completion of redevelopment and entered into a long term lease with parallel with our total investment in the acquisition and tenant improvements of the property expected to be about $68 million in the aggregate.
In addition to this Pennsylvania property, we own at least the parallel to regulated cannabis cultivation and processing facilities in Florida, and 1 property in Texas is expected to be utilized for regulated cannabis cultivation processing and retail activities upon completion of development.
Assuming full reimbursement for tenant improvements under the leases our total investment in properties leased the parallel is expected to be approximately $203.1 million encompassing approximately 895000 square feet.
Including this property, we own 8 properties in Pennsylvania, comprising an aggregate of approximately $1.1 million square feet and a total investment of approximately $292.3 million with the other tenant partners being purely green thumb pharma can holistic Columbia of care Juicy and Mitra.
With the first sales in 2018, the Pennsylvania medical cannabis market continues to perform exceptionally well with 2020 medical use cannabis sales of approximately $545 million.
With limited licensing the state of allows for up to 25 growing and processing licenses and up to a 150 dispensary licenses and the state government continues to support the industry, including passage of recent legislation in June that loosened certain restrictions on programs.
<unk> increases in the days of supply that a patient can purchase maintaining curbside deliveries and continuing to allow patient certification by a physician remotely via telehealth.
Moving on to Illinois.
Wired of property earlier, this week, which is expected to comprise approximately 250000 square feet of industrial space. Upon completion of development and entered into a long term lease with forefront ventures with our total investment in the acquisition and construction expected to be about $50 million.
In addition to this Illinois property, we own and lease the forefront of regulated cannabis cultivation processing and dispensing facility in Massachusetts and of regulated cannabis cultivation and processing facility in Washington.
Assuming full reimbursement for tenant improvements under the Illinois lease our total investment in properties leased the forefront is expected to be about $83 million encompassing approximately 431000 square feet.
<unk> was founded in 2011, and as a vertically integrated multistate cannabis, operator with operations and strategic medical and adult use cannabis markets, including California, Illinois, Massachusetts, Michigan and Washington.
Including this property, we owned 7 properties in Illinois, representing a total investment of approximately $254.9 million with the other tenant partners being ascend wellness Chriscoe foreign Mccann <unk> and Green thumb.
Illinois, the 11th state to legalize cannabis for adult use commenced adult use cannabis sales at the beginning of last year in just its first year of adult use sales, Illinois regulated cannabis sales for over $1 billion, including $669 million of adult use sales and over 366 million of medical use sales that strength in sales continue.
Into 2021, including June 2021, adult use cannabis sales alone being in excess of $115 million and being the fourth month month on a row of sales in excess of $100 million.
Non of Massachusetts.
In May we expanded our footprint in Massachusetts, with the acquisition and leased to tenants go wellness of an industrial facility for cannabis cultivation and processing, which encompasses approximately 70000 square feet.
We are providing reimbursement to turn the scope for the redevelopment of the property and our total investment is expected to be about $18 million. We are excited to bring tenants go in as the new tenant partner of leading cannabis company in Massachusetts founded in 2015, which also operates on existing cultivation and processing facility and 3 dispensary locations in Massachusetts.
Yes.
Including our <unk> transaction, we owned 7 properties in Massachusetts, representing a total investment of over $200 million comprising.
The approximately 717000 square feet with tenants farm Mccann holistic true leaf ascend chriscoe forefront in tennis skull and exceptional roster of leading cannabis companies.
And on the Michigan.
In April we partnered again with our long term tenant Green peak industries, which is branded of skyman acquiring an industrial property expected to comprise of 175000 square feet. Upon completion of redevelopment as the cannabis cultivation processing and distribution facility.
In total with this newest property, we own and leased the skyman 8 properties in Michigan, including another cultivation and processing facility in 6 retail locations 1 of the largest vertically integrated operators in Michigan, we have been of real estate partner of Skyman since 2018, as skyman significantly expanded its production capability Brett.
For the product lines and reach throughout the state.
A month later, we closed on another transaction in Michigan with the purchase of an 85000 square foot industrial property and lease to so-so companies of vertically integrated cannabis company founded in 2018 and focused on the Michigan market with the.
With this latest acquisition, our total investment including committed funding for future tenant improvements for properties, we own in Michigan is a little less than $210 million.
Finally on the investments front consistent with our business strategy to be the go to long term real estate capital partner to our tenant partners, providing optimal non dilutive capital as they continue their expansion initiatives. We continued to execute on follow on transactions closing on a $30 million follow on investment with Juicy Holdings in Pennsylvania in April.
On $8 million follow on investment with parallel in Florida in June and the $7.1 million of follow on investment with harvest in Florida also in June.
I would like to also note the construction loan we executed with the developer for the ground up construction of a regulated cannabis cultivation and processing facility in California.
With this construction loan we teamed with the developer that we've known since early 2019, who has significant experience developing and delivering high quality cannabis real estate in the California market.
As we noted in our press release following development of the property, we have an option to purchase of the property and execute a pre negotiated lease with an affiliate of the developer or at least with another third party. Although the potential identified tenant is relatively early stage, we think highly of the management team they have assembled and that team's track record in the cannabis industry.
Finally, similar to prior calls I would like to touch on our most significant tenants as a brief update these top 10 tenants continue to account for well over 3 quarters of our contractual rent as of today.
Those tenants in order of concentration include parallel farmer Mccann King's Garden Green thumb Chriscoe labs, the ascend wellness true leave holistic pure leaf in Colombia care.
Just to note for purposes of tenant concentration calculations, we've calculated our total investment and truly this property is pro forma for its pending acquisition of harvest, which I'll discuss in more detail.
Parallel.
We own 2 properties leased to parallel on Florida, and 1 property leased to parallel on Texas and as I noted previously acquired another property with parallel as our tenant partner in Pennsylvania.
The investments with properties leased to parallel including future commitments to fund improvements total approximately $203 million encompassing approximately 895000 square feet.
As we noted previously parallel is expected to close this year on its pending merger with series acquisition Corp of spec. The transaction includes the commitment by investors for an additional investment of $225 million with an implied valuation of about $1.9 billion.
Parallel also continues its strategic expansion and operational execution, including opening their first dispensary in Pennsylvania last months executing a definitive agreement in April to acquire Windy city cannabis of leading operator of 6 Illinois dispensary locations and launching the first CDN cannabis product line for medical cannabis patients in tech.
This in June.
Pharma can.
Having partnered with farmer Mccann for a sale leaseback of the first property, we acquired in New York in 2016, we now own and lease the farm Mccain 5 properties located in Illinois, Massachusetts, New York, Ohio, and Pennsylvania, with our total investment, including future commitments to fund additional improvements totaling about $170 million.
Farmer Mccann is 1 of the largest privately owned vertically integrated cannabis companies in the U S with dispensaries in cultivation and processing operations in 6 states.
In June pharmacy, and closed on a 4 year secured debt transaction raising nearly $80 million of net proceeds of the continued to pursue strategic growth opportunities that follows on the heels of a strategic investment by Kronos group announced earlier that months for an option to purchase of 10, 5% minority stake in pharma can for a little over 110 million.
<unk>.
We are excited to see the capital opportunities available for farm Mccann and strategic partnerships to continue to form with other leaders in the industry, which in our mind offers clear evidence validating the strength of farm accounts team in its operations and execution and the tremendous footprint they developed over the years.
On the King's Garden, which is the tenant partner of ours across 6 properties in southern California, representing a total commitment of nearly $150 million and which is expected to accomplish over 500000 square feet of space upon completion of development and redevelopment at certain properties.
King's Garden has developed a truly distinguished brand in California, and consistently ranked as the top producer in sales in the state that represents the largest market on the world.
Production of 40000 pounds of cannabis flower annually and continuing to ramp significantly as the leading top quality producer in the state King's Garden is also thinking long term about sustainable production.
Garden, recycles and reclaimed its water supply getting about 70% of what you have internally and what are the cannot be repurposed for cannabis cultivation has donated to local farmers for use on seasonable crops.
In addition, King's Garden has set a goal of fully transitioning to led lighting by the end of 2022 of light source doesn't that is environmentally friendly lasting longer and utilizing only a fraction of energy required it from other lighting options.
We highlighted a number of environmental initiatives of our tenant partners in their operations in our inaugural ESG report posted to our website and Kings garden as of yet. Another example of our tenant partners focus on long term responsible sustainable production.
Green thumb as the tenant partner of ours in Illinois, Ohio, and Pennsylvania, representing a total commitment of about $122 million led by the end Kobler Green thumb is 1 of the largest msos in the United States with licenses for 110 retail locations 15 cultivation and manufacturing facilities.
The operations across 13 states and employing over 'twenty 700 people green.
Green thumb continues to be a leader in the industry in both its operations and strategic expansion, which was facilitated earlier this year with an equity raise of $156 million and over $200 million of the secured debt a portion of which was utilized to retire existing higher rate debt.
Utilizing this capital in July Green thumb entered the Virginia regulated cannabis market with the acquisition of Dharma Pharmaceuticals, a limited license medical cannabis market that earlier, the sheer approved legislation to establish on adult use program.
Chriscoe lapse.
We've been <unk> real estate partner since 2019 and of partnered with Chris go on 5 properties in Illinois, Massachusetts, Michigan, and Ohio, representing a total commitment of about $121 million.
<unk> with 2700 employees as the largest wholesaler of branded cannabis products in the U S with 18 cultivation and processing facilities in 33 operating retail locations across 10 states crust.
<unk> continues to drive expansion through its mix of strong operational performance and selective acquisitions across key areas of focus including closing on its acquisition of Bloom of wellness in April of vertically integrated Florida, operator, acquiring for Ohio Dispensaries in February and announcing the agreement to acquire vertically integrated.
Its operator in March.
The ascend wellness.
We have been of sends real estate partners since 2018 and have partnered with ascend on 3 properties in Illinois, Massachusetts, and Michigan, representing a total commitment of nearly a $120 million.
Under founder and CEO Avner curtains leadership ascend continues its evolution as 1 of the top performing msos with a highly strategic footprint across the Illinois, Massachusetts, Michigan, New Jersey and Ohio.
Ascend earlier this year completed its initial public offering raising over 75 million of net proceeds and continues its strong growth trajectory reporting revenue growth of over 190% from the prior year in Q1.
Ascend also recently welcomed Joe Hinrichs to its board of directors and executive at the Ford Motor Company for 19 years, who most recently served as for as President automotive a Great addition to the <unk> team as they continue to execute on their strategy.
Truly is the tenant partner of ours at properties in Florida, and Massachusetts, representing a total commitment of a little over $60 million pro forma for the acquisition of harvest, which is expected to be completed later this year subject to the satisfaction of closing conditions license transfer authorizations on harvest shareholder approval with the shareholder.
Scheduled for later this month, our total investment in property at least the Trulia and harvest combined is approximately $111.8 million.
Note also that this total investment includes our Nevada property or harvest is acquiring the business pending final approval of license transfers.
Led by CEO, Kim rivers with approximately 6200 employees nationwide truly of continues to be the dominant cannabis operator in Florida, the largest medical cannabis market in the U S. Capturing nearly 50% of the Florida market with 85 retail locations in Florida alone.
Truly of also as licenses to operate in California, Massachusetts, Connecticut, Pennsylvania, and West Virginia, and last week was awarded 1 of the 2 class 1 production licenses in Georgia.
In may of truly the announced it had entered into the definitive agreement to acquire harvest health <unk> recreation, another tenant partner of ours in Florida, and Nevada, representing a total transaction value of $2.1 billion at the time of signing.
The combination of true, leaving harvest would result in pro forma revenue of over $700 million and pro forma adjusted EBITDA of $266 million in 2020, making on 1 of the largest U S. Msos from a revenue generation perspective, and the largest U S. Cannabis operator on a retail on cultivation footprint basis.
Wording to harvest filings.
It's the holistic.
We own 5 properties leased the holistic in California, Maryland, Massachusetts, Michigan, and Pennsylvania, representing a total commitment of about $108 million holistic. Originally founded in 2011 is 1 of the largest privately owned vertically integrated msos with operations in California, Maryland, Massachusetts, Michigan, Pennsylvania.
West, Virginia, Missouri, and Washington D C.
Continuing to grow its presence in these states that looks at additional organic growth opportunities dependent on pending license applications in states like New Jersey, Virginia and Illinois.
With over 600 employees in over 500000 square feet of cultivation and processing facilities holistic raised an additional $55 million on capital through an oversubscribed convertible note issuance in May which was led by Harvard Stone view fund.
Clearly.
We owned for properties leased securely from Illinois, New Jersey, North Dakota, and Pennsylvania, representing a total commitment of nearly $103 million pure leaf has operations in 23 States of 108, dispensaries 22 cultivation sites 30 processing sites 2 million square feet of cultivation capacity and as the largest U S cash.
<unk> company by revenue, reaching $260 million in Q1 alone.
We've closed on a capital raise in excess of $300 million Canadian dollars earlier this year and in April completed its acquisition of <unk> Life Sciences Ltd. The largest vertically integrated independent cannabis company in Europe, extending share at least leadership position in the cannabis industry to the global Arena.
Rounding out our top 10 tenants, we own 5 properties leased to Columbia care on Colorado, New Jersey, Pennsylvania, and Virginia, representing a total commitment of about $88 million Columba.
Colombia cares footprint includes licenses in 18 U S jurisdictions in the EU with 31 cultivation and processing facilities and 95 dispensaries in operation or under development in.
In late June Columbia of care completed at $75 million capital raise in the convertible notes and also continues with its expansion into new states and deepening its presence in existing states, including last month's governmental approvals to commence cultivation in west, Virginia and announced closing on the acquisition of 4 dispensaries in Ohio.
As we noted on our prior call Columbia Care also completed the previously announced acquisition of Green leaf medical our tenant partner in Pennsylvania, and Virginia earlier this year as well as the Green solution 1 of our tenant partners in Colorado in September of last year and.
In connection with those acquisitions, we received corporate guarantees from the Columbia of care parent company with respect to our leases in place with Green leaf medical and T. G S.
While we have time to touch on just our top 10 tenants or other tenant partners continued to execute well and we are proud to introduce our new tenant partners chemical wellness in Massachusetts, and <unk> in Michigan as we continue on our path of growing with our existing tenant partners and establishing new long term real estate relationships with other strong operators.
With that I'll turn it over to Kathryn Kathryn.
Thanks, Dan.
And yet another busy quarter for acquisitions and investments in our tenant partners continue to execute with strength in their operations throughout the challenges presented over the past many months both of which continued to be reflected in our financial results for the first 2 quarters of 2021 the.
The generated total revenues of approximately $48.9 million for the quarter, a 101% increase from Q2 of last year.
The increase was driven primarily by the acquisition and leasing of new properties additional tenant improvement allowances provided to tenants at certain properties that resulted in base rent adjustments and contractual rent escalations at certain properties.
As we noted on our press release Q2.2021 revenue also includes $625000 paid to us in June which relates to the stipulated rent for 2020 I would buy the receivership at our Los Angeles, California property.
As we discussed on our prior call that receivership concluded in January 2021, when the cannabis licenses were sold to holistic industries of long term tenant partner and the number of other states and we executed a new lease with holistic for the entire property.
And as we reported in our press release as an update to the temporary rent deferrals that we granted to 3 of our tenants at the onset of the pandemic in Q2 of last year $1.3 million of that amount has been repaid with the remaining $1.2 million of deferrals scheduled for pro rata monthly payments until repaid.
Paul in December 2021.
And as we've indicated in the past our Q2 revenue reflects only partial quarters of revenues from the acquisitions and investments executed during the quarter and 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 3 months ended June 32021, we recorded net income of $29 million or $1.17 per diluted share.
As noted in our earnings press release, our exchangeable notes for considered dilutive for purposes of calculating net income SSO and <unk> for Q2, and the first 6 months of 2021.
This has been the case starting in the fourth quarter of 2020 as.
As a result for the second quarter 2021 results. The exchangeable notes are treated as if they had been exchanged for common stock at the then current exchange price.
Which resulted in adding that cash and noncash interest expense for the exchangeable notes of approximately $1.9 million for the quarter <unk> <unk> diluted and on.
Also adding approximately $2.2 million shares to the fully diluted share count.
Similar to Q4.2020 in Q1.2021, we wanted to highlight this item, especially as it makes an apples to apples comparison difficult.
The Q2 and first half of 2021 results in the prior year periods as it relates to <unk> and <unk> measures as in the prior year periods of the exchangeable notes were anti dilutive for accounting purposes.
So the for the second quarter of funds from operations diluted which adds back both cash and noncash interest expense on the exchangeable notes.
Property depreciation to net income was $40.7 million or of $1.56 per diluted share.
Adjusted funds from operations, which adds back noncash stock based compensation and noncash interest expense related to our newly issued unsecured senior note 2 of SSL was approximately $43 million or $1.64 per diluted share.
On June 15th we paid our quarterly dividend of $1.40 per share to common stockholders of record as of June 30 the.
Q2, 2021 common stock dividend reflects a 32% increase from the prior year's second quarter.
As we've indicated in the past the board continues to target a dividend payout ratio of 75% to 85% of aceto on a stabilized portfolio of basis.
We also continued to fund real estate improvements into many of our properties as offered in tenant improvement allowances, our construction development tour operators under our leases.
As we've previously noted these improvements are critical to either redevelopment of existing facility to the cannabis facility.
Funding expansion can you address growing market demand and the.
Non 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 6 months ended June 32021, we capitalized costs of approximately of $176 million and funded approximately $152 million relating to tenant improvements and construction at our properties.
And with respect to financing activity.
As Alan mentioned in his opening remarks, the IAP team is proud to announce its execution on obtaining an investment grade corporate credit rating followed by its debut unsecured bond offering of $300 million of 5 year notes.
We focused over the years on maintaining a strong flexible balance sheet and in combination with a tremendous tenant roster and the proven the ability of our tenant partners to execute on their businesses. Throughout this unprecedented pandemic, we were thrilled to expand the breadth of our capital options with the that's the attractively priced non dilutive capital.
The notes bear interest at 5.5% per annum mature in May of 2026, and along with our exchangeable senior notes due in 2024 are the only debt. We have outstanding we continue to have no secured debt and as of quarter end, our total debt to total gross assets with approximately 21.
Per cent with total gross assets in excess of $2.1 billion.
And with that I'll turn it back to Alan Alan.
Thanks, Catherine I'd like to note the following the closing.
As Ben highlighted we are thrilled with the quality of our tenant roster and the continued demonstrated the strength and resilience of our tenant partners and their execution on operations.
We reached another significant milestone for our company with our investment grade credit rating and our ability to raise attractively priced non dilutive capital through the unsecured bond market, which we view as a clear demonstration of our tenants partners success, the strength of our property portfolio and the strength of our.
On sheet.
The regulated cannabis industry continues to be 1 of the fastest growing dynamic industries, and we believe still and that we're in the early innings of its maturity.
The best is yet to come for this industry and we look forward to continuing our work as the go to long term real estate capital partner for best in class operators across the United States.
And 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 could you. Please open the call up for questions.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up of your handset before pressing the keys if at any time of your question that's been addressed and you'd like to withdraw. Your question. Please press Star then 2 at this time, we will pause momentarily to assemble our roster.
Our first question will come from Tom Catherwood with B T. I G. Please go ahead.
Good morning, everyone and thank you for all the all of the color on the prepared remarks. It was very helpful.
1 we're looking at 2021 acquisitions. The average deal size has increased materially over 2020, I think so far this year of the average deal size is roughly $26 million and last year. It was something in the $16 million range.
So kind of 2 questions from that first how was your acquisition pipeline looking right now kind of compared to previous quarters.
2 you know how is that pipeline breaking down in terms of larger deals with existing tenants kind of follow on the issuances and then maybe bringing new operators into the portfolio as well.
Okay well thanks.
Tom.
Let's see how to answer for that.
The complex on large questionnaire.
1 of the pipeline is looking fantastic, we continue to be able and we continue to be able to place.
Our capital in that 6 to 9 month time frame of when we think that are of that will occur.
Continues and that will continue as we move through the balance of of 2021 and into 2022 seconds.
Secondly, as to the deal size is I think what you're what you where you are seeing a change in deal size and the reason you're seeing a deal of change in deal sizes that the.
The.
Bifurcation of the quality of the credits within the industry is occurring that those are large high quality.
Higher credit type tenants are able to Ah Ah.
Start and develop and own a larger type transactions.
And and we with our access to capital I've been able to meet those needs we.
We are in our pipeline and what we're seeing we continue to see them of a wide variety of.
Of different types of tenants from these high quality.
Hi, Hi credit type tenants to.
The emerging and entities.
Such is the entity that we are contemplating are working with that.
In California, where we have where we of issued a construction loan.
And such as the the mid tier type companies that are multistate operators, but emerging multistate operators. So we're seeing all of those things.
I think we're very very excited about our prospects for through 2021, and see continued demand for our capital into 2020, 1 and 'twenty 1 'twenty 2.
Thank you for that Alan the truly helpful and you mentioned, new entities and Bernard talked about the.
The addition of <unk> and domestic coal into the portfolio of this past quarter.
How do you go about the.
Evaluating these early stage companies and determining whether or not to make investments in the real estate assets and along with that.
How large of an opportunity could there be for with these early stage companies.
Well.
So our underwriting process really hasn't hasnt.
<unk> for the for.
For these younger startup type entities, we spend a great deal of time.
The focus not only on the real estate the proposed real estate transaction that brings those tenants to the company.
But we spent a lot of time with the management team.
The evaluating their skills and expertise in running not only of business, but in marketing and then most the most specifically and growing and we you will utilize our existing network of of growers.
To do background checks on on these tenants understanding where they've come from and their reputations in the specific state or just in the industry in general.
So all of that goes into underwriting startup tenants.
Along along with our last analysis for probably 1 of the most important is is their their financial wherewithal, where the cap how much capital. They have already raised where the capital is that that the that they raised came from and.
And how strong those investors are just.
And how committed they are are they to supporting the growth of of what we what we believe.
As a what we think is going to be a hell of an exciting opportunity for these companies, but 1 that has many potential pitfalls and requires you know a very strong financial backing.
Got it okay. Appreciate the Alan and then finally for me.
Either Paul or for for Alan you. Both mentioned states that are rolling out new recreational programs.
We hear a lot of discussion about that especially in New York, New Jersey, and Connecticut, but theres not as much discussion about what happens after the initial stage. For example, we know that New Jersey is going to expand beyond 12 licenses in New York is kind of expand beyond their pen.
And when they do the people the windows are kind of rushing to get up and running as soon as possible. So in your experience what typically happens when limited license states expand their licensing programs and is there more opportunity for IP or maybe with the new license holders that are coming in and there may be with the legacy operators.
Hey, Thomas Paul Yes, so we've certainly seen net.
When a when the medical program.
Morphs into a medical and Rec program, there's a lot of excitement a lot of.
Need for capital as these operators wanted to expand the facility and we certainly seen that in New York is of Great example, but along with the there is some frustration because of the program usually doesn't go as quickly as people would like and you know if we look historically, there's been you know.
The lawsuits there's been other things to slow down the development, but I think every state.
Adopts a new program I think they learn on what has gone before them. So we're really.
Pretty encouraged about the Rollouts and you know we look the Illinois is a great example of really the rec rollout that has just had tremendous success. So yeah, we just think that.
There'll be a tremendous demand for capital.
As the states the newer states rule at the end of the Rec program and we're seeing that from our existing tenants and certainly you know as these states do mandate debt a certain amount of the new licenses.
Will be reserved for single state operators.
We're in that space real quick because we've made a great business out of being able to spot those single state operators of become the capital partner early on and watch them develop into those successful multi state operators that.
That are really make up or the majority of our portfolio of today.
Got it that's all for me thanks, everyone. Thanks, Tom.
Our next question will come from Scott Fortune with Roth Capital. Please go ahead.
Good morning afternoon. Thank you for taking the question just 1 more follow up on that you've got it.
<unk> done a lot of detail on the states and people see the operators yes.
New Jersey, New York, They are coming on board with a lot more social equity licenses the wording there.
How is the IPR kind of looking at the total flow equity compensation, although smaller in size and potentially working with some of your larger tenants that are helping out the the emerging social equity program for the state as we seek on part of initiatives on that side of things.
Hey, Scott. This is Paul yes, we're working with them and very excited too about the opportunities of some of these new operators will have and you know depending on the state of the state's going to be able to provide some financial assistance similar to an SBA program.
But not the SBA program at the federal level, but.
So we're looking at the opportunities to have some some state money come in to help some of these new operators and that could provide a good opportunity for us we get a little more comfortable if we think there's a little more finer.
Financial support at the state level so.
We're excited about these opportunities.
On the social equity tenants and we think you know again, we're going to be very disciplined in our approach of underwriting them and we're confident that we'll be able to find it.
Certainly some operators that will fit nicely into the program.
Perfect.
A little different question from a competitive landscape, we see lower cost of capital options coming on board for for a lot of larger unnecessarily tenant and also seeing some more competitive companies public and private starting to offer.
Similar lease back option.
What are you seeing from Mccann tenant standpoint, and how.
The large operators looking at this is as far as the stack.
Now on the real estate versus debt opportunity for <unk>.
And then what type of cap rates or are you guys still experiencing currently expect going forward into 2021'twenty 2.
So we.
We are seeing.
Additional competitive capital coming into the industry in general and remember that this industry in general.
Has has a wide range of of.
Credits and size of organizations and.
And and so what we're seeing is that yes. The the very large operators that are that are we've grown with.
Or are able to obtain a more competitive capital from a variety of different sources.
And and we are we are working with them. We think the we continue can continue to be a very.
A very good source of non dilutive capital.
To them, while at the same time that they can.
The continued to strengthen their balance sheet with what I considered dilutive capital you know selling equity indoor potentially raising of convertible debt. So a.
Net and so we are seeing that but we are also seeing.
A great a large number of new emerging msos that are kind of that need our capital need access to our capital and don't quite have the same access to.
The that very competitive capital of that debt I just spoke about.
In addition to.
We believe that there are emerging.
Emerging.
New entities that are spinning out of existing large large growers that are 1.
Our ideal for our programs and allow us to.
To continue to.
The provide capital of them and I think very attractive yields.
The yields are.
We are in.
Then on top of all of that you are seeing on the bifurcation tube of between you know retail type spaces.
And industrial.
Growth facilities.
The there we are seeing is that becoming out of wider.
The wider hum.
Bifurcation of of yields.
And and so.
You know we think that are that we are still providing very very.
Very competitive and high quality capital and our capital is going to be in demand for a long period of time.
Yeah.
Lots of real quick on the cap rate that you guys are funding most recently and then kind of on.
As you look out kind of 1 of the range for for the yield.
<unk> come from.
Forward.
Thank our our yields per.
Perhaps given the quality of our of the.
The big of a credits and the access to all of our credits having access to more competitive capital probably have lowered at the at the lower end. So we're you know before.
Before we talked about 11 to 15, and perhaps now where part we're seeing opportunities in that.
9 of half to still 15.
The size range.
I think when you add retail.
Retail type of opportunities in there.
That lower end could go even lower into you know closer to that 8.8% range, but we maintain our.
That there's a wide range of of.
Of growers is a wide range of opportunities and we believe that.
The business as you know those 2 transactions are chunky. So we're going to see some of the Lora and we're going to see some of the at the upper end overtime.
I appreciate the color thanks, I'll jump back in the queue.
Scott.
Our next question will come from Daniel Santos with Piper Sandler. Please go ahead.
Hey, Thanks for taking my questions.
Just kind of continue along that line you talked about the yield compression I guess could you comment on you know.
How quickly and how much yields have compressed relative to what you were expecting and is that is that timing of the velocity of deals on how much are yields are compressing surprising you would certainly 9 of half or even into the eights is probably lower than I think.
We're used to hearing.
Yeah. So you use the word yield compression on.
I don't see I don't think yields have compressed I mean, I think that.
That are the a variety of of the tenants and variety of of the investment opportunities of have.
Have.
Come into the industry that we didn't have before.
When we started doing transactions, we didn't have these high quality credits and now we do.
So I don't think yields have compressed and that in that sense, and I and I wouldn't characterize there being any yield compression I think theres been an expansion of the industry that this industry is continuing to Oh, well, it's very young its continuing to mature and we're seeing some very strong credits that are.
Deservedly so.
Have a very competitive capital, but for for I think a you know of risk adjusted basis.
I think theyre getting the they are achieving net yields were still seeing on a risk adjusted basis yields and in on in the same range that we've seen in the past, we're just seeing more and different types of opportunities.
And that's what we're trying to that's what we're trying to describe here today.
Okay. That's helpful and then Allen as someone who's sort of invested across different REIT sectors, who do you think whether it's the type of REIT or maybe of REIT sub sector. That's probably the best prepared the kind of hit the ground. The bonding once we do get legislative reform or do you think that you will continue to sort of be the only REIT in the space for a while.
Well I don't you know I think we do have competitors out there and I don't think that there is there we're going to be the only 1 I think that this is a specialized industry and it will continue to be specialized for.
Forever.
You know whenever you use you focus in on 1 the industry product type you become experts on it and it does take time for that to occur. We do believe that there are others that do have.
You know a lower cost of capital than other than us.
In the future and they they could enter the business.
And but we believe that we have a enormous a lead on understanding the credits of underwriting and evaluating the opportunities.
That oh debt.
That we garner garnered over many years of the of working in this industry.
Got it and 1.1 last 1 if I may you know I appreciate the commentary in the prepared remarks.
The timing of when Congress will or won't pass something it's probably impossible, but at the same time, you know tumor of sort of put out his wish list of what he by you can see you already kind of know what's on the table, presumably any bill that comes after this is probably going to have less T..1 of the negotiation process starts I guess could you comment on you know specifically.
On how that compares to what you were sort of expecting and if that has impacted your your thoughts on timing.
The runway over the next day call. It 12 months to 18 months.
Yeah, Dan This is Paul.
We're actually pretty happy with the Senator Schumer's Bill as its outlined in certainly the is correct that he put it out there I think without a real wishlist of what he wants with the understanding of <unk> does not have the votes, even on the Democratic side to get everything wanted so he put it out there.
Using September through September to get comments on the Bill and then we expect it will go for a substantial rewrite.
Won't be reintroduced until the beginning of next year.
So we're happy with it I think of many of the operators in the portfolio. We've spoken with are equally happy because they do like the idea that states will be able to direct their own program and we were happy to see that.
So what are we continuing to keep a close eye on it.
And we're not surprised and it really doesn't change any of our timing.
We have since day 1.
Always been of the opinion that Lee.
Legislative reform at the federal level will be of slow process, and we have not changed our opinion on that.
Got it that's it for me thanks, guys. Thanks, Dan.
Due to time constraints. This concludes our question and answer session I would like to turn the conference back over to Alan Gold for any closing remarks.
Thank you and now we'd certainly like to thank everybody for joining us on the call today I'd like to once again, thank our stockholders for their support and most importantly, thank our.
On the innovative industrial properties team for their very hard work and achieving these phenomenal results and we look forward to more of the thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.