Q4 2021 Innovative Industrial Properties Inc Earnings Call
Good day and welcome to the innovative industrial properties, Inc. Fourth quarter 2021 earnings Conference call.
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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 1095.
And actual results may differ materially.
A variety of risks uncertainties and other factors.
For a detailed discussion of some of the ongoing risks and uncertainties of the company's business I refer you to the news release issued yesterday and filed with the SEC on form 8-K, as well as the company's reports filed periodically with the SEC.
The company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
I'll now hand, the call over to Alan Alan.
Thank you, Brian and welcome everyone. Today, we look forward to providing a recap on our business for 2021 and our views on the ever changing landscape is still very young industry.
We have an ambitious agenda, we will of course save time at the end to answering 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 market's optimism waned a bit as we move further into 2021 is the prospect for near term adjustments to the federal regulatory position on the industry demand.
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 Cora.
Use programs.
In Alabama legislature for medical use.
Momentum continues in 2022 with the latest southern States, Mississippi legalizing cannabis for medical use earlier this month, becoming the 37th state to do so.
2021 also continue the trend 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.
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 continues to be robust throughout 2021.
2021 was the highest year of investment activity in our company's history.
Shifting over $700 million during the year.
Dan will also provide an update on our acquisitions and investments in 2021 and year to date.
As of today, we own a 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% increase from the prior years 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 the federal regulatory developments, Paul will provide additional insight on the federal regulatory landscape in the cannabis market dynamics.
Before I turn the call over to Paul I want to again reiterate our entire team's appreciation for.
Our long term owners for your support throughout these years of growth and transformation of IP in 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.
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 legislature's.
Past 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 and medical use cannabis program.
Earlier this month Mississippis Governor signed legislation legalizing medical cannabis, becoming the 37th state to have adopted a program.
Interestingly, Mississippi by an overwhelming majority voting in favor of a broader legalization of medical cannabis and the November 2020 elections, but that 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 D. C have legalized cannabis for medical use in 18 States and Washington D. C 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, Philadelphia.
Yeah.
Second our views on the current federal regulatory environment.
Building on our discussion from August we continued 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 and serving state compliant licensed cannabis operators was reintroduced for the sixth time as an amendment to the America can.
Peach Act earlier this year the weather 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 Inexpungible Act was first introduced in summer of 2019 and passed the house and the prior to legislative session in December of 2020.
And was reintroduced last year and the current legislative session.
<unk> focus is on schedule and cannabis from the controlled 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 one controlled substance under the CSA.
Difference to stage to determine their own cannabis policies transfer all our regulatory responsibility of canvas 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.
The proposed federal excise tax of 25%.
Proposed tax structure of any of the builds we've seen.
This of course would have various implications to the states regarding their own taxation systems and further challenge the industry as you compete with a much larger unregulated and untaxed elicited industry.
For now the comments have been taken under advisement.
And once the Bill has 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 state's Reform Act similar to the more act and a C E O.
The state's reform Act with decriminalize cannabis and provide retroactive expunged meant for nonviolent federal cannabis offenses.
However, there is limited federal oversight and the SRA desk to the individual stage the authority to determine what level of cannabis reform, including outright prohibition.
Notably the SRA also has the lowest tax structure of all of 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 mid term 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 continued 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 strapped.
Ill being further down the road.
Finally regarding industry dynamics in 2021 and 2022.
Notwithstanding 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 feeding mulch.
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 are 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 for cannabis is of course multiple times the current legalized cannabis market and.
In fact, new frontier data estimates, approximately 25 billion and global spending and 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.
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 waste and encourage the growth of the regulated industry.
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 a brisk pace, we saw starting in late 2020 <unk>.
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.
We continued 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 Pronto announced the execution of a definitive agreement to buy our tenants goodness growth in an all stock transaction valued at around $413 million.
As a reminder, we have been goodness gross real estate capital partner since 2017 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 far Mccann and live well, which was announced in October of last year.
And which once consummated will once again make farmer Mccann, our largest tenants 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 our capital allocation net when utilized appropriately further enhances the credit quality of our tenant roster.
And our underwriting our proposed transactions we are taking a close look at the overall debt profiles of the operators, including assessments of the risk 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.
Thanks, Paul since October one, we made 31 acquisitions and 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 a 105 properties across 19 states, representing approximately 8 million square feet.
<unk>, 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've 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.
We plan to provide some additional detail on our tenant roster and overall portfolio.
In December we continue to support our long term tenant partner live well, 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 <unk>.
<unk> to 205000 square feet.
As you May know live well founded in 2009 and farm Mccann long term tenant partner of ours since 2016 announced their planned merger in October of last year and pro forma for their combination farm Makena live world will become our single largest tenant.
Earlier. This month, we also committed an additional $18 million to skyman tenant partner of ours since 2018, and one of the largest vertically integrated operators in Michigan as they continue to build out their capacity in one of their cultivation and processing facilities.
<unk> recently announced our pending acquisition of another operator in Michigan, which would add another dozen dispensaries disguised in the operating portfolio in the state.
Now on to New Jersey.
Earlier this month, we extended our real estate partnership with ascend wellness acquiring 114000 square foot industrial property in New Jersey, with a long term lease to AWH.
Together with our property is leased on a long term basis securely and Columbia care, 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 tenants go wellness, providing an additional $8 $7 million for improvements of the property and in January we closed on the purchase of a 57000 square foot industrial property and lease with forefront ventures, a tenant partner of ours for another property in Massachusetts and properties.
Illinois and Washington.
Including these transactions, we own eight properties in Massachusetts, representing a total investment of $227 $8 million comprising.
Comprising 775000 square feet with tenants far Mccann holistic true leave ascend Chriscoe labs forefront in terms of scope.
In October we closed on a 201000 square foot industrial property in southern California, and entered into a long term lease with gold Florida.
Assuming full reimbursement for improvements we expect our total investment in the facility to be $60 million.
Gold, Florida 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 <unk> side.
Gulfport 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 to properties in North Dakota, and one property in Pennsylvania.
These properties 16 or at least to Colombia care for our lease to schwab's three our lease securely three year lease to live well and one is leased to kayak 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 candidates 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 pharma can parallel ascend wellness Columbia care King's Garden truly green thumb, Crestwood labs holistic industries and <unk>.
Just to note for purposes of tenant concentration calculations, we've calculated our total investment in pharma, Kansas properties pro forma for its pending merger with live well, which I'll discuss in more detail.
As noted earlier in our prepared remarks farmer Mccann and Liberal announced the planned merger in October and so we are presenting information on pharma can pro forma for this combination in.
In total we own and leased to far Mccann and live well 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 in accomplishing approximately 600.
30000 square feet.
After the live well merger farm Mccann is expected to operate more than 60 dispensaries in 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.
And 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 895000 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 is 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 curtain.
<unk> continues its evolution as one of the top performing msos with the highly strategic footprint across Illinois, Massachusetts, Michigan, New Jersey, and Ohio and.
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 Columbia care in Colorado, New Jersey, Pennsylvania, and Virginia, representing a total commitment of about $148 million.
As we've previously noted in line with the industry consolidation, we have seen Columbia care required the green solution in 2020, and Green leaf 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 Columbia here.
He cares footprint includes licenses in 18 U S jurisdictions jurisdictions in the EU with 32 cultivation and processing facilities in 99 dispensaries in operation or under development.
Earlier, this month, Columbia care announced the closing of $185 million debt offering with a term of four years.
On the King's Garden.
Just 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 500000 square feet of space upon completion of development and redevelopment at certain properties Kings.
King's Garden has developed a truly distinguished brand in California, and consistently ranked as a top producer and sales in our state that represents the largest market in the world.
As Kings Garden ramps production capacity, they expect to be generating approximately 140000 to 150000 pounds of finished cannabis per year. In addition to concentrates.
With their brand reputation and operational expertise driving financial results King's Garden team has also been one of the uniquely position 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 King's gardens that complete full build out of their production capacity in the months to come.
Truly is our tenant partner of ours at five properties in Florida, Maryland, Massachusetts, and Nevada, representing a total commitment of a little over a $141 million.
Truly with over 9000 employees nationwide closed on its acquisition of harvest Health <unk> 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 truly have 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.
Truly followed on with an additional $75 million debt raise at the end of last month.
Green thumb as a tenant partner of ours in Illinois, Ohio, and Pennsylvania, representing a total commitment of about $122 million.
<unk> is one of the largest msos in the United States employing 3800 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 <unk> 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 improvement is expected to be made by GTI at the property and for which GTI may request reimbursement in a single lump sum anytime between June <unk> and July 31 with any.
Resulting in adjustments to the property is base rent.
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 Chriscoe labs real estate partners since 2019, and a partner with Crestone five properties in Illinois, Massachusetts, Michigan, and Ohio, representing a total commitment of about $121 million.
<unk> was founded in 2013 and now employs over 3500 people with 28 cultivation processing facilities and 49 operating retail locations across 10 states.
In August of last year, Crestwood 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 of <unk> in November of <unk> flagship, Illinois, Dispensary near Chicago Wrigley Field Chriscoe also continued to make strategic acquisitions, including acquisitions of operators in Florida, Massachusetts and Pennsylvania.
We own five properties leased to holistic industries, and 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 NSO 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 our recently awarded medical use cannabis license for vertically integrated operations in New Jersey in.
In May 2021, holistic raised an additional $55 million in capital through an oversubscribed convertible note issuance, which was led by Harberts don't view fund.
We owned seven properties leased securely in Illinois, New Jersey, North Dakota, and Pennsylvania, representing a total commitment of about $108 million.
<unk> has operations in 23 States 125, dispensaries 25 cultivation sites and approximately $4 4 million square feet of cultivation capacity.
Clearly if closed last month on its acquisition of Bloom dispensaries are 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 or 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, Florida, chemical wellness So-so, Schwab's, Calix peak and kind of candidates.
With that I'll turn it over to Kathryn Kathryn.
Thanks, Dan the fourth quarter capped off an exceptional year for IP 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.
<unk> 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 at approximately 59 million for the quarter.
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 continued to account for all of our leases on a cash basis.
For the three months ended December 30, <unk> 2021, we recorded net income of $28 million or.
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.
And <unk> 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 SSL and <unk> measures.
Also during the fourth quarter, we privately negotiated with certain holders of our exchangeable senior notes, representing a little over $110 million and principal amount to induce the exchange at these notes pursuant to which we delivered shares to the noteholders 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 exchangeable senior notes adjusts each quarter in part based on our current dividend rate versus the reference dividend rate of 35.
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.
Then adjustments to the exchange rate increasing the number of shares that were required to issue to note holders on their eventual exchange.
I mean do you see any 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 as being accrued and unpaid interest on these notes a 1% cash inducement fee noted above and transaction costs of $590000.
In addition to these cash payments. We also recorded during the quarter a noncash 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 our 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 investment 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 noncash stock based compensation and noncash interest expense related to our unsecured senior notes to normalized <unk> 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 performance.
On January 14th we paid a 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 evaluate 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% of <unk> on a stabilized portfolio basis.
We also continued to fund real estate improvements into many of our properties as offered an improvement allowances, our construction development to our operators under our leases as we've previously noted these improvements are critical to either redeveloped and existing facility to Canada facility or funding expansion to address growing.
Market demands.
2021 lease capitalized cost of approximately $384 million and funded approximately $375 million relating to improvements in construction activity at our properties.
Finally, with almost $2 2 billion and total gross assets and a total of about 303 4 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.
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 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 our 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 elicit 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 trusting 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.
Like to join the question queue Press Star then one.
If youre using a speakerphone please pick up your handset before pressing the keys.
You'd like to remove yourself from the question queue Press Star then two.
And the first question comes from Tom Catherwood with <unk>. Please go ahead.
Thank you and good morning, everyone.
Good morning, Tom.
You guys have talked in the past about.
No.
Kind of the timeline of medical and adult use state's evolving and eventually becoming attractive opportunities for real estate investments.
With the recent legalization in new Mexico in Mississippi, and eventual rollout programs in New York, New Jersey, and Maryland, and Delaware are 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.
I think thats 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 been.
Perhaps.
Directly answer which states go ahead Paul.
Thanks Tommy.
We look we love what's going on in New York.
And New Jersey, Despite new Jersey.
Missing a timeline.
Obligation they add.
We're pretty confident theyre going to get this thing together, we're really happy would happen with New York.
Opening up the medical conditions.
Requirements I think until New York does rollout the Ret program.
The opening up the medical is a great sign so we love those states.
I think very strong with Pennsylvania is still very strong there in Michigan, where various in Texas is one of the.
New states coming out with their medical program, we think there is tremendous opportunity there so.
Virginia of course, so yes, we're very very happy about what we're seeing in some of the states.
That have past adult use programs, what theyre doing to try and.
Move that timeline up we saw that with Virginia.
Passed a bill to kick start their rec program sales in September of course, that's still may not get through the Republican.
Controlled house in Virginia, but those are great signs I think.
You are right we have talked about.
There is a.
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.
That timeline that might be as much as 24 to 36 months, that's going to that's going to shorten because the states are getting it to understanding that the program needs to rollout they need the tax revenue they need the jobs. So we like what we're seeing.
Got it I appreciate that.
Maybe if we look at the cannabis industry in general public operators are seeing their cost of capital increase, especially on at least on the equity side.
And at the same time investment opportunities seem to be accelerating we saw a similar pattern to this in late 2019 and operators turn more towards the real estate as a source of growth capital.
<unk> seen an increase in demand for sale leaseback opportunities given this kind of recent market dislocation.
Okay.
I'm going to turn it over to Ben to really talk about our pipeline.
Thank you you have.
Identified I think a unique aspect of the industry is that as their ebb and flows in.
Tenants cost of capital.
Demand for our unique and specific.
Capital.
It does ebb and flow we've seen obviously 'twenty.
21 was a tremendous year, where we get over $700 million of acquisitions.
Pretty fantastic and that yields that we earn.
We expect it actually to be.
On average somewhat lower than 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 well.
The geopolitical world.
But.
So now I'm going to turn it over to Ben they relate to go through our pipeline.
Yes, sure Thanks, Don Hey, Tom.
Yes.
Certainly seeing those dynamics I think we've always.
Continue 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.
The equity markets go up and down changes on the regulatory landscape 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.
Yes.
I appreciate that color guys spend that was really helpful as well kind.
Kind of building off of 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.
Yes.
Hi.
I was going to say.
I don't think we have bifurcated on pipeline in that way.
I think.
The real exciting aspect of our program is that it provides for.
And it allows companies to develop over time.
I know that they have the capital available to them when they work with us and I think that that will continue.
So I don't know Dan do you have any.
Do you have any further color as to kind of percentages yes.
That's right I mean, I think one of the strengths and the biggest benefits we provide is being able to 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 are working with an industry dynamics, but.
We're again feel very well positioned to support the groups that we partner with whatever form that takes.
Understood.
And then last one for me.
Headlines around record cannabis harvests in the Western U S. This fall and then how that put pressure on cannabis.
Pricing.
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.
<unk>.
Whether 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.
Yes, Tom This is Paul I think Thats, exactly where I would say at the end there is such a difference between as you know the outdoor grow product and the indoor grow product that our tenants.
Cultivate so when we see those headlines I think a lot of it is coming from outdoor grows in California, Oregon and Washington.
Really different of course from from our tenants grow so while we see those numbers, we're not seeing an impact on sales or.
Commodity pricing for the <unk> product.
I.
That color that's it for me thanks, everyone.
Thanks, Tom.
Yeah.
The next question comes from Scott Fortune with Roth Capital Partners. Please go ahead.
Good morning, and thank you for the questions.
Wanted to dig in a little bit more on the pipeline and what Youre seeing obviously, we've seen some delay in some of these new states coming on board I am pushing out and that puts a little bit pressured near term, especially for the MSL. It.
It seems like the NFL.
A little more competitive.
Debt financing down at 8% levels here and maybe not turning on to the real estate patents and Youre moving down to more the <unk> operators. How do you look at your pipeline evaluating interim from your existing establish pop here.
And the sales versus these new customers, providing some of the growth going forward for you. If you can kind of unpack that a little bit.
Okay.
Okay.
Yes.
Before I turn it over to Ken maybe to dig a little bit for the deeper.
First you got to remember that.
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.
Sure.
A single state operators that want to be.
Multistate operators.
Through a variety of paths, including M&A.
Yeah.
I mean, I think we continue to have great confidence in our ability to place between a 125 $150 million of transactions per quarter.
And I think because that's a pace that we've been.
Very successful that for the last couple.
All of the years.
Keeping in mind, if you think 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.
Okay.
I think that that's how I would think about our I would ask you to think about how our pipeline is growing.
Ben do you want to talk about the.
What.
Debt yields.
Paul you want to talk about the debt deals and how that might relate to our programs.
Yes sure. This is Ben Thanks Alan.
We are definitely seeing theres more that in the industry I think that as a result of the strength of the operators we feel we have.
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 only strengthens our existing portfolio.
That's not to say, we're not going to continue to work with the top operators in the country I think as evidenced by closing on a deal with ascend wellness here in New Jersey recently.
Again, we had our largest year last year by investment with with the debt markets opening up we're.
We're going to continue to support.
Our tenants.
Leveraging our balance sheet and continuing to grow the portfolio as Alison.
No that's great I appreciate the color and then kind of follow up on that.
<unk> is IP looking again at the capital market for your weighing on the different opportunities from.
Our capital raising financing side of things in this rising rate environment I appreciate the color Alan.
The consistency that you are able to hit your acquisition volume quarterly basis that here in 2550.
Looking at your cash level would be <unk>.
230 billion line available and what's the commitment there and maybe the cash needs.
You look out the different financing options.
Yes, I think we still have one of the strongest balance where we have a extremely strong balance sheet with less than 15% debt to total total.
Yes.
Gross assets.
We have obviously access to the equity markets.
John .
We have a variety of other.
<unk> forms of capital debt.
Sure.
Convertible debt.
Straight.
Equity issuance is uneven.
Some recent interest from from.
Preferred side of the.
Preferred investors.
We are we are.
Looking at all of those on all of those options and we will certainly do.
What is the best.
For the company given how choppy the markets are.
How it 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.
Okay, and then one quick follow on price from Catherine Kathryn kind of Youre committed short term cash needs and the cash here that's committed for your acquisitions in Ti going forward.
Leaving you.
As far as the balance for two acquisition transactions going forward from the cash level.
Yes, Scott so we have over $400 million of cash on the balance sheet.
He said.
About $300 million of that is earmarked for.
Eventual tenant improvements and redevelopment at the projects.
That's especially in these large projects that we've entered into over the last several years are sit.
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.
Between nine and 12 months to Chipotle.
Request those reimbursement plan.
Okay 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.
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 <unk>.
Preferred unsecured bonds, where do you see the best opportunity and how do you guys think about.
Sort of the capital cost because obviously as the exchangeable notes played out.
Initial coupon and then there is the reality over time as as.
As things can happen as the exchangeable notes demonstrate.
No.
Sure I'll turn it over to cat.
Yeah.
The market is choppy, we're going to we are navigating what I think is one of the.
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 cost of capital still provide for very accretive transactions.
And and and.
So we are still we're still excited about.
That opportunity.
I think the.
The pullback that we've seen in one field allows.
Another an opportunity in another.
So even with the.
The convert.
Which.
We sold equity at that time, I think up 20 plus percent.
So it was still a an accretive transaction very accretive accretive in a long period of time now for obviously accounting purposes, and the way it worked out because of those investors.
Fantastic bet in our share price certainly increased significantly.
There was a accounting dilutive impact to our to what we were doing.
Okay.
Keeping in mind, so we keep all those options and we are looking at all of those options.
As we make as we move forward.
And make those capital decisions I don't know cat is there anything else you want to add to that.
Yeah.
That's exactly right.
<unk>.
I am happy with all of the options that we do have I mean looking at the balance sheet with only 15% debt to total gross assets. We have a portfolio of strong cash flows and are growing our <unk>, 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 with Schumer and bunker that killed safe banking at the end of the year and the defense budget because they wanted to have full legalization and obviously with everything that's going on that doesn't look as likely.
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 IPR, the current situation or one in which you either have legalization or safe banking.
[laughter].
That's an interesting.
A question.
It's a double edged sword I mean, it is right now things are fantastic. We have got great pricing power. We are the only New York stock exchange traded.
REIT with a.
Our balance sheet really super strong balance sheet that exists out there.
We are probably 10 to 20, maybe more times, our nearest competitor and have the greatest opportunity to raise capital to that.
As you know if something changes in the <unk>.
The.
Regulatory environment, we still have the strongest balance sheet.
At this time.
The greatest portfolio, a weighted average lease length in excess of 16 years.
I'm very.
Great group of.
Tenants.
And.
We would have been certainly.
I think greater access to even.
All sorts of different capital markets opportunities 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 certainly has made it much more difficult for our competitors to to do that.
Catch up or even.
Compete with us on a long term basis.
Okay. Thank you.
The next question comes from Eric <unk> with Craig Hallum Capital. Please go ahead.
Great. Thanks for taking my question.
So with more debt capital entering the space.
Mentioned, you're going to look more closely at MSR debt profiles.
We 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.
Okay.
Another another interesting question I mean, yes, I mean I think that.
Yes.
Look we are at.
Ignostic as to really how much.
How we generate great returns, if we can generate great trends great returns with a.
Different tenant mix.
Certainly going to go down that path.
We can continue to generate.
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.
Is to make money for our stakeholders and make as much as we can.
Alright that makes sense. Thank you.
This concludes our question and answer session I will turn the conference back over to Allen for any closing remarks.
Well, thank you operator, and thank you all for joining us today and certainly.
One comment is to send prayers out to those that are in harm's way in today's.
Geopolitical issues and and for.
Thank you.
Our stakeholders and our team for all the stakeholders for really sticking with us and for our team for all your continued hard work. Thank you all.
To conclude our call.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Great.
Yes.
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