Q1 2022 Innovative Industrial Properties Inc Earnings Call

Hello Muslims the innovative industrial properties in Q1, 2022 earnings call.

All participants will be in the Saddam any mode should you need assistance. Please signal a 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 one on your question on the phone.

Your question. Please press Star then two please note today's event is being recorded.

Now I'd like to turn the conference over to Brian Wolfe Mr. 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, Ben Regin, Vice President of investments.

Griffin Mark Court.

Director of construction management.

Before we begin I'd like to remind everyone that many of the 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 due to a variety of risks uncertainties and other factors.

Please refer to the documents filed by the company with the SEC.

Specifically the most recent reports on forms 10-K and 10-Q.

Which identify important risk factors that could cause actual results to differ from those contained in the forward looking statements we.

We are not obligated to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.

In addition on today's call, we will discuss certain non-GAAP financial information.

<unk> normalized <unk> and adjusted <unk> you can find this information together with reconciliations to the most directly comparable GAAP financial measure.

In our earnings release issued yesterday as well as in our 8-K filed with the SEC.

I'll now hand, the call over to Alan Alan.

Thank you, Brian and welcome everyone.

As you know our general approach has been to host an earnings call every other quarter.

With our next regularly scheduled earnings call being to report the second quarter results in early August .

That said, we wanted more time to discuss with you all as the owners of our company about how we evaluate our investment opportunities and walk through some of the analysis, we employed uncertain investments we've made to date.

We felt this is the best venue to discuss with all of our stockholders and to answer any additional questions that you may have on these topics or any other topic that we can address.

Since we began with our initial public offering and the first real estate transaction in 2016, we have always strive to be as transparent as we can about our business and the industry, we serve and we continually review our communications with our stockholders.

Cleaning feedback on information that stockholders request.

With that in mind, we are working on creating an investor supplement to our quarterly earnings, which we expect to introduce in connection with our second quarter earnings and conference call. We will provide more property level detail describing the real estate we invested.

For our call today, we plan to focus on two of our tenant partners parallel and Kings Gardner.

And do a deeper dive into our underwriting fundamentals as applied specifically to these two private company tenants.

Paul will touch on the evolution of market dynamics of the states, where these properties are located Florida, Texas, Pennsylvania and California.

Ben will provide detail regarding tenant and project underwriting as applied to these two tenants and Griffin our director of construction management will take a deeper dive into each property's improvements.

Griffin, who worked with me of Biomed Realty Trust is joining us for the first time on this call and is one of our team of construction management professionals, who are charged with oversight of the evaluation of existing real estate, we are evaluating for purchase and review our plans and progress for properties that we acquire with ongoing.

Our future improvement plans.

Now finally cat will review our financial results for the quarter.

Which we are very proud to report consists of another quarter of successful execution.

A strong capital position and strong investment activity.

In terms of both new property acquisitions and additional investments in key improvements at certain properties that are critical for our tenant partners as they ramp production to meet demand.

Now before I turn the call over to Paul I want to reiterate our appreciation for you all as a long term owners of our company and we are confident in our belief that through our thoughtful analysis and underwriting we can continue to place your capital with Prime real estate opportunities in this nascent.

High growth industry.

I'd like to turn the call over to Paul Paul.

Thanks, Alan before I discuss the state dynamics that Alan alluded to just a brief update on the federal regulatory landscape.

I think it's fundamentally changed in our view since our last discussion in February other than Senate majority leader Chuck Schumer delaying the release of his revised cannabis legalization Bill until July <unk>.

Opinion. This may indicate a potential movement on a more limited safe act on cannabis banking in the near term, but such legislation is still competing with numerous other congressional priorities and a mid term election cycle.

Now I'd like to turn to our state level analysis for the properties, where we have leases with parallel and Kings Garden, namely, Florida, Texas, Pennsylvania and California.

Florida by way of background, Florida passed a constitutional amendment to legalize medical use cannabis in November 2016, garnering over 70% of the vote.

Since the program was introduced growth has been tremendous with over 700000 active quality qualified patients served by over 2400 physicians qualified under the program generating an estimated $1 3 billion in regulated medical use sales in 2021 alone.

The medical use cannabis program is vertically integrated with 22 total licenses issued as of now as of late April there are 16 licenses and operation and 420 operating dispensaries, New frontier data estimates that Florida will be the fourth largest legal cannabis market by 2020.

Five.

The rules governing the medical cannabis program provides for the issuance of an additional four vertically integrated medical licenses for every 100000, new medical marijuana cardholders and so we expect a controlled issuance of additional licenses to be issued over time.

Interestingly the vertically integrated nature of the licensing structure requires that operators cultivate and process cannabis further dispensaries and so investments in cultivation and processing facilities that can deliver scalable production and quality products are a necessity for all license holders parallel.

Holds one of the 22 licenses and as two cultivation properties, along with 44 dispensaries.

Texas.

Texas is the second most populous state with 30 million residents passed the Texas compassionate use program in 2015, which is currently a limited CBD program with a low THC content threshold.

Texas is estimated to account for more than one third of the U S population currently without access to a full medical or adult use cannabis program.

Well, Texas remains restrictive it has slowly opened the program expanding the list of qualifying medical conditions and modestly increasing in the THC limit.

Well in the immediate term the program remains highly restrictive we believe that the medium and long term prospects in the Texas market are very significant for these simple reasons. One a recent survey by the University of Houston, finding that two thirds of Texans support the sale and use of adult use cannabis to neighboring states.

New Mexico, and Oklahoma are expanding their regulated cannabis programs and three there already exists and illicit market in Texas estimated by some to be a multibillion dollar market.

A significant part of which we believe can be effectively transitioned to regulated sales with sensible legislation.

For now there are only three license holders for vertical integration in the entire Texas market one of them being parallel.

Pennsylvania.

With first sales in 2018, the Pennsylvania medical cannabis market has witnessed strong growth entering its fifth year with over 700000 registered medical cannabis patients and caregivers and regulated sales expected to reach $2 2 billion to $2 $7 billion by 2026.

Many expect Pennsylvania to be in a position to legalize adult use cannabis in the relatively near term, particularly now that both New Jersey, and New York have done so.

Adult use now includes the support of Pennsylvania legislators, such as GOP Senator and former U S Marshal Mike Regan.

Pennsylvania's program provides for up to 25 cultivation and processing licenses all of which have been granted and up to 150 cannabis dispensary licenses parallel as license for one cultivation and processing facility and up to six dispensary locations in Pennsylvania.

California.

California is the largest regulated cannabis market in the United States generating approximately $5 2 billion in regulated cannabis sales in 2021, a 17% increase from the $4 4 billion of sales in 2020.

While California remains far and away the largest regulated cannabis market in the United States. The program has faced challenges since the formal adult use program was officially introduced in 2018.

These challenges include the heavy taxation piece by operators at all stages approaching 50% in some areas and the relatively uninhibited illicit market that continues to thrive which of course does not face the heavy tax and regulatory burdens of the state regulated operators.

In fact, the illicit cannabis market is estimated to be far larger than the regulated market with some estimates at approximately $8 billion annually.

California cannabis market is one of the largest single markets in the world, but it needs sensible tax regulation and enforcement policies at all levels of government in order to realize the potential of the regulated market.

While all state markets have their nuances I hope. This provides a good overview of these four programs and I will now hand, it off to men to discuss our overall underwriting process as applied to these properties Ben thanks.

Thanks, Paul.

Alan noted our plan today is to provide a glimpse into some of the factors we evaluate when we underwrite proposed transactions. While we were only able to provide a short overview of our process given the time constraints on this call are underwriting process for the transactions across our portfolio involves numerous elements of evaluation include.

Including this of course, not limited to our underwriting of the tenants, including in depth reviews of the <unk> management team capital position financial results operational footprint and financial projections, including assessments of their results versus prior projections.

With respect to the state.

View of the state's market dynamics and evolution. In addition to the existing regulatory framework and expectations for adjustments to that framework, including the forecast the timing for potential adoption of adult use programs and medical use only states.

And with respect to the property. In addition to detailed third party reports for property condition assessments zoning.

Zoning title and environmental review in depth review of the cost and quality of the improvements made to date. In addition to information regarding production and processing capacity and potential for additional improvements to enhance those capabilities.

Paul started his discussion with the industry dynamics of Florida, and that's where I'd like to begin with our initial acquisition leaseback of a property and why momma with parallel.

Rising approximately 373000 square feet of industrial and greenhouse space for $35 3 million or about $95 per square foot.

We closed on that acquisition in March of 2020, shortly before the full onset of the global COVID-19 pandemic.

In total we have invested $51 $5 million with two additional lease amendments.

Parallels management team at that time included CEO and Chairman Beau Wrigley Junior who was former chairman and CEO of the William Wrigley Junior Company, which was acquired by Mars in 2008 for $23 billion CFO .

CFO for Recon, whose prior 10 year included CFO positions with Kellogg Company and U S foods.

<unk> a director at Brown, who spent 20 years as CEO of patrolling Spirit's international in the petrol and spirits company Chief Marketing Officer, we appelbaum.

He previously served as global Chief marketing officer of the <unk> Tequila and Grey Goose vodka Bacardi.

Steven St Rose, former Chief Human Resources officer of use Walgreens and senior VP of HR at Coca Cola and.

And Kevin Fisher, an industry pioneer in the regulated cannabis industry and the cofounder and former CEO of new England treatment access.

Parallel had raised over $300 million in private capital prior to our first acquisition and as noted had assembled a team with deep management experience and success in a number of consumer packaged goods industries.

We also evaluated their footprint with licenses in Florida, Massachusetts, Pennsylvania, and Texas and their position as the second largest operator in Florida at the time in terms of operational dispensaries, which we believe provided them with a strong foothold on which to focus on growth and obtaining the appropriate market share commensurate with their dispensary count and one of the.

<unk> high growth cannabis markets in the U S.

At that time, they had 39 operating dispensaries and we're second in terms of production of smokable flower in the state that well behind the leading company.

I'll turn it over to Griffin, who can provide some color on the why momma projects.

Thanks, Ben by way of background on the property parallel originally purchased the property for $9 2 million.

September 2017, which required a substantial build out of the necessary infrastructure and additional improvements to convert the site and make it an operational cannabis facility.

Parallel invested an additional $29 million into the facility improvements after its acquisition, which we generally ascribed to the following areas.

One site work improvements, including security systems, electrical and gas utility enhancements water wells for potable water and irrigation.

Cultivation improvements, including upgrades for HBC for litigation control systems electrical distribution in lighting. In addition to a new dry house, ensuring warehouse three.

<unk> III production facility improvements, including new Venlo processing building plant tissue culture operations and lab upgrades.

While parallel has invested almost $38 million and the property in total with these investments in its initial purchase price with certain projects still underway our purchase price for the property was negotiated to a little over $35 million.

In connection with the closing we agreed to make up to $8 million available for reimbursement for future costs incurred with the connection with the completion of the build out of the property, which included reimbursement for parallels improvements made in accordance with the three areas noted previously, but no reimbursement for costs incurred prior.

Two our acquisition.

We amended our lease with parallel a bit later to increase the amount available for reimbursement by another $8 million based on changes to the real estate scope and resulting additional costs.

All major real estate construction work has been completed the parallel is completing a few minor upgrades to the fire suppression system and mechanical electrical and plumbing upgrades for their ethanol extraction lab.

To sum up the project comprises approximately 373000 square feet on 20 acres, including 15 greenhouse ranges dry house building, a trim and cure house and a new 36000 square foot Venlo processing building Needless to say, we also believe the replacement cost for this.

Property to be significantly higher than our current basis.

I will pass the call back to Ben who will now cover our acquisition of parallels other cultivation and processing assets in Florida in September 2020.

Thanks, Griffin and September 2020, we closed on our second transaction with parallel for its cultivation and processing facility in Lakeland, Florida at.

At the time parallel was continuing to ramp up in Florida, The Florida Department of health move to allow the production and sale of edible medical cannabis products.

At the time parallel company had over 600 employees and raised more than $400 million in capital to date.

Industry estimates for that the introduction of edible cannabis products will drive an additional $250 million in sales in 2021 alone.

With Florida is authorization of edibles as well as its prior authorization of flower in 2019.

<unk> development plans were to construct an additional 150000 square feet of cultivation and production space to address the strong demand for flower expecting to result in approximately 215000 square feet of production area.

Original acquisition was a little under $20 million for the existing 65000 square feet of industrial and greenhouse space at 35 acres of land and we agreed to provide reimbursement for development of the additional 155000 square feet of up to $37 million or $242 per square foot.

I'll pass along the Griffin now for a short description of our Lakeland facility Griffin.

Thanks, Pam similar to the way Mama property parallel purchased a property from a third party for $2 4 million.

And proceeded to spend approximately $18 $3 million on improvements to the buildings with the bulk of that spending going towards development of an industrial indoor cultivation facility.

We purchased the property for an amount modestly below parallels historical investment.

As Ben mentioned, our improvement allowances for the construction of approximately 155000 square feet of brand new industrial space.

Completion. The property is expected to include 130000 square feet of cultivation and processing space 25000 square feet of office and warehouse 25000 square feet of kitchen space, where production of edibles, and 60000 square feet of mechanical rooms and supporting space.

<unk> to our other Florida real estate assets, we believe the replacement cost for this property to be significantly higher than our current basis.

Thanks Griffin, we next executed our Texas transaction in March of 2021, with our purchase price for the 12 acre property being $3 4 million, where we expect it parallel to construct three buildings, one retail into industrial comprising an aggregate of 63000 square feet on the property for which we agreed to provide re.

<unk> of up to $24 million.

Parallel is one of the three license holders for the entire state in the months prior to our acquisition parallel announced the execution of a definitive business combination agreement with series acquisition Corp, stack pursuant to which a group of investors that committed to participate in the transaction through an oversubscribed investment of $225 million.

With closing expected in the summer of 2021.

In this backed securities filings that transaction value parallel at approximately $1 9 billion.

With the stock reporting that additional $225 million in funds were intended to be used to fund parallels continued growth and market expansion.

Parallel through this fact securities filings was also projecting at the time net revenues of approximately $447 million and adjusted EBITDA of over $100 million in 2021 across its platform.

Ultimately in September of 2021 parallel in the spec mutually terminated their merger agreement.

Texas property is in its early stages of development, consisting of planning site preparation and the steel for two pre engineered metal buildings on site for which we have reimbursed less than $5 million.

Under Pennsylvania, where we purchased the 239000 square foot industrial facility in May of 2021.

Parallel had been a tenant of the prior owner of the property since October of 2020 and executed a purchase agreement with the prior owner to acquire the property for $22 million or about $92 per square foot.

In addition, during parallels eight months tenancy with the prior owner parallel invested approximately $20 million of its own funds and improvements to the building for which we agreed to provide reimbursement.

As a result, we acquired the property for approximately $41 8 million.

Consisting of the original purchase price for the standard industrial building to the prior owner and the cost reimbursed parallel so buildout of the facility for regulated cannabis cultivation and processing, while parallel was a tenant under the prior ownership.

We also agreed to provide additional funding for improvements of up to $26 million for the build out of the facility.

In the months prior to our acquisition parallel announced it entered into a definitive agreement to acquire certain operations of Windy city cannabis and adult use cannabis operator in Illinois, and a part cash part stock transaction and that wouldn't be city was expected to generate over $75 billion in annualized net revenue in 2021.

Closing in the second half of 2021.

At the time parallel was pre operational in Pennsylvania and opened its first dispensary location in July 2021 in that state.

I will pass along to Griffin to discuss more about the building Griffin. Thanks.

Thanks, Ben This Pennsylvania property is located on about eight acres and is a one storey industrial building.

As Ben noted, we purchased the base building for approximately $22 million, which.

Which was parallels purchase price from the owner or about $92 per square foot. In addition to reimbursing parallel for qualifying base building improvements designing and permitting electrical and other improvements totaling approximately $20 million that parallel have invested in the eight months prior to our acquisition of parallel.

Was a tenant of the prior owner.

Improvement allowance was utilized for further build out of infrastructure for this cultivation processing and lab space. In addition to office and mechanical support areas. After acquisitions as of today 124000 square feet is operational for cannabis cultivation and processing with 79000 square feet of space Sublease two.

Other tenants and approximately 30000 square feet under development or.

Pass the call now to Alan for final thoughts on parallel and these properties Alan.

Thank you Greg.

We do not have the hour it would take to fully discuss every nuance of our underwriting individual property characteristics and state level market dynamics.

Wanted to provide a brief overview to give you a sense of some of the considerations made over the course of our relationship with parallel and the strong opportunity. We continue to see in these markets and these properties over the long term.

As we indicated on our prior call in February parallel formed a strategic alternatives committee late last year to evaluate potential new capital and M&A options for the company.

We continue to be in close contact with parallel representatives.

And we will endeavor to share with you any update you can on the process as soon as we're able.

I'd like to now ask Ben to provide a brief overview of King's Garden, a top operator in California.

When a tenant partner of ours since early 2019 Ben.

Thanks, Alan we made our initial investment with King's Garden April 2019, acquiring a five property portfolio in southern California, consisting of approximately 102000 square feet of industrial space, all of which was operational at the time of our acquisition for approximately $27 million of roughly $266 per square foot.

At that time, we evaluated King's Garden is a leading indoor cannabis operator in California with profitable operations and a distribution agreement with one of the largest distributors in the state delivering king's garden products to over 60% of the state's regulated dispensaries.

In May of 2020, we followed with the acquisition of a fully operational property comprised of approximately 70000 square feet of industrial space for $17 $5 million or $250 per square foot.

Shortly after that closing King's Garden announced the initiation of a quarterly dividend to stockholders something that was and is considered highly unusual among any prominent brand in the industry and which demonstrates their belief in our long term prospects in the business.

In November of 2020, we made another investment with King's Garden agreeing to purchase 192000 square foot building from a third party and San Bernardino for approximately $25 million or approximately $130 per square foot.

And to provide reimbursement at Kings garden for improvements at that facility of another $25 million for key infrastructure requirements for the regulated cannabis cultivation or another $130 per square foot such that our total investment in this facility was expected to be $260 per square foot.

In February 2021, we acquired $3 five acres adjacent to one of our first acquisitions of King's Garden for approximately $1 4 million amending the lease for that property and providing for reimbursement at Kings garden of up to $51 4 million for the construction of two brand new facilities totaling 180000 square feet of <unk>.

Space or about $285 per square foot.

At that time King's Garden was projected to have approximately 665000 square feet of indoor operations and over $300 million in revenue starting in 2024 with the expectation that upon completion of all facilities under development or redevelopment at Kings Garden would be producing approximately 140000 pounds of finished cannabis product annually.

In California.

Finally earlier this year, we acquired a 23000 square foot facility in Cathedral city for $8 $2 million equating to about $353 per square foot.

A single storey building is being renovated from office space to a fully operational cultivation facility with a hold back in the purchase price to the seller until the seller completes the final improvements.

King's Garden continues to be one of the largest indoor cultivation operators in California with 3400, flowering lights producing in excess of 36000 pounds of indoor flower annually, which does not include at all of the approximately 395000 square feet of projects slated to come online in the coming months as Griffin will discuss.

I'll pass along the Gryphon to discuss our Kings garden property portfolio Griffin.

As Ben mentioned, we have a number of properties leased to teams garden of that portfolio six properties comprising of approximately 172000 square feet or operational with no additional improvements in process.

Of the properties under development or redevelopment I will touch on those individually.

And San Bernardino The 192000 square foot project is located on approximately seven acres.

As Ben mentioned, our base cost for the industrial building was roughly $130 per square foot and we have provided an improvement an allowance of an additional $130 per square foot for conversion of the facility to cannabis cultivation.

Of that $25 million allowance approximately $5 million relates to base building improvements $8 $7 million to electrical upgrades $8 2 million to mechanical systems, and a little over $3 million to plumbing and sprinklers.

The interior of the building has been demolished and a new second floor has been installed consisting of steel columns and decking and concrete deck topping that completion. The facility is expected to have 14 flower rooms for dry rooms, a mother room cone room trim room packaging room bedroom and small handheld <unk>.

For employees and security.

We have funded approximately $18 million of the $25 million and expect the remaining to be drawn over the coming months improvement disbursements have been made for design permitting interior demolition material procurement due to long lead times and the construction of a new steel structure and metal vacuum of the second floor.

For the 19th Street project as Ben mentioned, we acquired the land adjacent to our existing property and amended the existing lease with King's garden to incorporate that property and provide funding of up to $51 $4 million for two brand new industrial cultivation buildings expected to comprise 180.

Thousands square feet.

Together with the existing facility on the property. The completed site is expected to be 236000 square feet and project Scott costs are expected to be about $67 7 million.

Equating to about $287 per square foot.

The site is currently being graded with anticipated pad certification for all buildings and a few months King's Garden again as procuring the Lora long lead time items, given the supply chain challenges of the current environment, including many of the same items requested for San Bernardino that I mentioned previously.

At this point, we have funded approximately $27 million of the $51 $4 million allowance or improvements.

Completion, each building is expected to have 11 flower rooms for dry rooms, a mother room clone room trim room packaging room bedroom and small handheld space for employees and security.

With that I will turn it back over to Alan Alan.

Thank you Greg.

Again very challenging to convince.

Underwriting the property and market dynamics in the span of a few minutes.

And appreciate bends and griffin's detail and effort to do so.

We have been King's garden partner for three years, now and believe Michael Kim and his team and one of the best reputation for product quality and consistency and perhaps the single largest cannabis market in the world.

While we are disappointed in how the California state and local governments have performed in the rollout and administration of the regulated adult use cannabis program.

With continued heavy and even increasing tax burdens in certain jurisdictions.

And lack of enforcement for illicit activities by non licensed operators.

We believe King's guard is navigating this environment well.

And our firm believers that high quality producers like kindergarten will continue to effectively adapt to the changing landscape in California.

While we touched on just two of our tenants today, we apply similar multifaceted approach to underwriting our tenants the properties and the markets across our portfolio.

I would also like to point out that it is our belief that our portfolio has a replacement cost that is well above our current basis, driven by the significant and continuing increases across the board and building costs that we are all experiencing.

As one example, among men structural steel costs have increased by over 40% in just the last 15 months.

With that I will turn it over to Kathryn Kathryn.

Thanks Alan.

Start off we're focused as always on being as transparent as we can and providing the most valuable information that we can about our business and this industry to our stockholders.

In that light and in the context of recent discussions with our stockholders over the past few weeks, we will be working on a supplemental property level disclosure that we plan to issue in connection with our second quarter financial results.

As always we welcome the opportunity to discuss with you all are long term owners of our business and appreciate your feedback.

Including property level disclosures, we will look to provide additional detail regarding our tenant roster recognizing that a number of our tenants of course are private companies for this call. We wanted to touch on the top 10 tenants.

In the past we provided updated information about each of these tenants and here, we'd like to provide some consolidated metrics that provide a different perspective.

To frame the discussion our top 10 tenants represent 74% of our total committed capital and our total stabilized rents.

<unk> of our top 10 tenants became our top 10 tenants through M&A activity in the past few years acquiring other tenants in the portfolio.

Of those top 10 tenants six our public ascend wellness Columbia care, Julie's Greenbaum, Presque Isle and <unk>.

For the full year 2021, those six public companies on a consolidated basis reported revenues of $4 7 billion and adjusted EBITDA ranging from a low of $58 million to a high of $385 million and raise capital totaling approximately $3 billion.

These six public tenants accounted for 39% of our total invested capital and 37% of our stabilized rents.

The remaining four of our top 10 tenants are private companies accounting for approximately 36% of our invested capital and 37% of our stabilized rents.

Our top 10 tenants on a consolidated basis conduct operations in 31 states with approximately 190 production facilities and over 650 dispensaries.

And represents approximately 74% of both our invested capital and our stabilized trends.

I hope that gives a small glimpse into the scale of these tenants and the breadth of their operations.

Before I touch on our financial results I wanted to touch briefly on our process for evaluating and approving reimbursement for improvements at our properties, which is a uniform process across our portfolio.

All of our existing leases with any building infrastructure allowances required that the allowance is reimbursable only for qualifying improvements to the building.

As required by our leases, we as landlord work closely with our tenant partners throughout the process.

<unk> are reviewing timelines engagement of architects engineers, and general contractors schematics construction plans and budgets and approvals of any substantive changes to the previously approved plans or budgets.

For draws are leases dictate the drop packages that our tenants need to submit in connection with any draw request, including detailed summaries of completed and prisoners attested to by the GC and architect and supporting invoices in.

In addition to the standard administrative items such as being releases.

Griffin is a member of our internal construction team and made together with our third party construction management consultants.

<unk> attempt to construction meetings.

Onsite visits to monitor progress and review and confirm improvements and cost information regardless of project size.

I would also like to note with all of the property in prison development projects and ground up construction that we have funded at our properties since our inception, we do not provide funding to tenants for us to purchase any any other personal property or to fund any general corporate expenses, which is made clear in the company's audited.

Financial statements by the fact that none of the company's leases have recorded lease incentives since inception.

Turning now to our results for the quarter, we generated total revenues of approximately $64 $5 million for the quarter, a 50% increase from Q1 of last year.

The increase was driven primarily by the acquisition and leasing of new properties additional building infrastructure 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 Q1 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 scheduled rent seasons under certain leases as we continue to account for all of our leases on a cash basis.

For the three months ended March 31, 2022, we recorded net income of $34 7 million or $1 32 per diluted share.

During the first quarter, we also exchanged approximately $24 million and principal amount of our.

Exchangeable senior notes for shares of our common stock pursuant to the holders' requests to exchange. The notes at the then current exchange rate under the indenture.

We did not pay any inducement related to these exchange requests.

Starting in Q4 in order to provide a meaningful comparison of our funds from operations between time periods.

<unk> can better compare operational performance on an apples to apples basis. We've included normalized funds from operations, which adds back to funds from operations transaction specific expenses, which we exclude from funds from operations to provide investors a better understanding of ongoing operational performance.

As a result of adding back acquisition related expenses and the noncash loss on exchange of our exchangeable senior notes normalized funds from operations was $49 1 million or $1 87 per diluted share for the first quarter.

Adjusted funds from operations for the first quarter, which adds back noncash stock based compensation and noncash interest expense related to our unsecured senior notes to normalized <unk> was approximately $53 8 million.

Or $2 <unk> per diluted share.

On April 14th we paid our quarterly dividend of $1 75 per share to common stockholders of record as of March 31st equivalent to an annualized dividend of $7 per common share and a 33% increase from the prior year's first quarter.

As we noted in our prior press releases, our board of directors generally evaluate adjustments the level of our quarterly common stock dividend every six months with any 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.

On a stabilized basis, which assumes a full quarter of rents for investments. We made during Q1 and the expiration of any scheduled rent seasons under existing leases relating to future improvements that we fund after those improvements have been constructed our payout ratio was 79% of <unk>.

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 and discussed extensively on this call. These improvements are critical to either redevelopment and existing facility to the Canada facility or funding expansion to address growing market demands.

In Q1 of 2022, we capitalized costs of approximately $127 million and funded approximately $129 million relating to improvements in construction activity at our properties.

At quarter end, we had $2 2 billion and total gross assets and a total of about $310 million in debt consisting solely of unsecured debt with no maturities this year or next year and $300 million of that debt not maturing until 2026.

Our debt to total gross assets ratio stood at 14% at quarter end.

Also in order to reconcile our current cash position with our existing commitments to fund improvements pro forma for our most recent stock offering and fundings to date, we have approximately $175 million of uncommitted capital as of today.

I E capital available for future acquisitions or expansions to existing properties.

And our pipeline, we have under PSA or LOI approximately $138 million.

Assuming we close on all of those transactions, which may or may not occur of course, we have a balance of approximately $37 million left for further investment absent any additional capital raising activity.

And with that I'll turn it back to Alan Alan.

Thank you Catherine.

We thought to provide you all are long term owners with as much meaningful detail that could be consolidated on this call as it relates to how we evaluate our investments and industry dynamics through the lens of the history of two of our tenant partner relationships.

I want to reiterate as well that we are very appreciative of your feedback on ways. We can continue to enhance our communications with you about our business and look forward to sharing with you the company's developments going forward.

Thank you sincerely for your long term commitment to our company and we will always do our very best to be long term responsible stewards of your capital.

With that I'd like to open it up to questions. Operator could you. Please open the call up for questions Yes.

Yes, certainly thank you and as mentioned that we will begin the question and answer session. Now I will ask a question you May Press Star then one on you touched on phone.

Speaker phone please pick up your handset before pressing the keys.

Just trying a question. Please press Star then two.

At this time, we will pause momentarily to assemble the roster.

And the first question comes from Tom Catherwood with <unk>.

Thanks, and good afternoon everybody.

So really appreciate the deep dive.

On the underwriting and the real estate is really helpful. One of the things that struck me though is.

Things, obviously change from initial underwriting and then that was kind of a thing that jumped out as I was thinking if you give me some of those examples.

Over the past five years you had tenants.

We have restructured that have sold individual state licenses that are sold themselves entirely when our tenants business changes from that initial underwriting what is <unk> role in the process.

Follow the studio tenants come to you, saying I can't pay these rents or do they look to re strike there are leases or do you have another kind of role in that process.

So Tom.

I mean, I think that is.

A good question, because we spend a lot of time dealing with our tenants and.

And understanding what they're trying to accomplish with either a sale or a license or.

On M&A transaction keep in mind.

All of our leases come with a corporate guarantee and that corporate guarantee gives us certain rights.

And we use those those rates to be able to review again advanced notice review and approve any transfers.

That occur.

At that time.

So we spend a great deal of time, we ask why are we consider our tenants.

Partners.

Because we are.

Our.

Intimately involved in things that they're trying to accomplish with their businesses.

Appreciate that.

Alan.

Maybe if we.

If we step back a bit.

And kind of look at the last.

Probably four to five years in the cannabis industry Theres been three to four downdrafts in sentiment and the first one was the RTL phase in the Vape crisis, and then the start of Covid.

And were in one right now but in each of those other phases. The industry came out proved more resilient.

Is there something different this time or are your tenants fishing pressures that could really up and their business models. This go round.

And we don't see anything that is different than any of the other previous.

Downturns other than the fact that.

The gross revenues are achieved.

Think a reported loss of $25 billion and Theyre expected to get to.

<unk> $46 billion by 2025, so the I think.

The reason that everytime users.

You've come out of those industries because the.

The broader industry continues its rapid growth.

And a new state gets approved or news and.

New programs get approved programs.

More from in addition to just having a medical cannabis to adult use Canada, Canada.

All of those are.

Things that occur and have occurred over the last four years to five years.

And I think what you're you're.

You're seeing and it's the only thing you really have a sense to see is that the stock prices of these tenants have come under significant pressure and theres a variety of reasons.

Generalists moving out of the different sectors.

General is moving into the sectors.

The fact that the majority of those are those public companies that you are reviewing are all on a very small exchange up in up in Canada.

But.

What we were what we're focused on is the overall health of the industry and our tenants.

And from everything that we're seeing.

Sales are continuing to grow year over year sale.

The sales are projected to grow significantly year over year.

And.

And that I think this current downturn.

Provides greater opportunity reduction because of the reduction in values for mergers and acquisitions and therefore greater.

Greater.

The opportunities for the very strong tenants.

That's helpful and that's actually kind of the next thing I want to talk about which the flipside to those prior.

Downturns.

Was it seemed to create opportunities.

Whether it was higher deal volumes or transactions with larger operators and in effect. It seemed like operators that had been resistant to sale leasebacks in the past then began to accept it more as part of their capital stack and your volumes, obviously increased as did as did the strength of your tenant roster.

Are you seeing a similar trend. This go round as kind of pressure remains on your tenants.

Well I think because of the industry continuing to have very positive outlook.

Alex we are seeing.

Increased demand.

For the sale leaseback type trends transaction.

Is just one tool that.

That are healthy tenants have.

And.

They have not only access to <unk>.

We're raising capital from the private sector, but raising capital from a in the form of debt, which has been <unk> been very prolific are doing.

Raising debt.

And.

There is a variety of other sources of capital for them, including our.

Specialized single purpose program of of a sale leaseback, where we acquire real estate that they already own and then lease it back to them on a long term basis.

Got it and then last for.

Me.

Going back to tenant underwriting and the outlook for your tenants kind of two part questions. The first is when you've talked in the past about how as you do additional tranches of investments in buildings, you get a chance to.

Re underwrite you obviously get regular financials from the tenants. The two part question is do you make any.

Changes in any of the collateral that's required whether it's security deposits.

Or letters of credit or anything of those nature, if the underwriting does change in those later phases or yields.

And then along that with your thinking of underwriting as well.

As you're we're now through April and so you have a read on April rents are all of your tenants current through this most recent months.

So.

If you think about if you think about the question and the question is is when there is a request for additional capital well, that's usually because the tenant is growing there is a good thing occurring.

So the.

We are adding enhancing and developing creating new real estate or.

Our new improvements to the facility.

And and so.

The answer is yes, we we typically get.

Oh.

Some sort of.

Modifications to the terms like an extension of the lease term.

We.

We make sure that the.

The financial statements are updated each.

Even from the last quarter, which we've reviewed them.

Get a deep dive into what the tenant is doing and why they need growth capital we get.

Better understanding of what's going on with the.

Demand for the product that they are selling so all that comes into.

And to plan.

So.

Okay. So that I think thats. The first the first answer in a second is we've collected all the all the rents.

We have got scheduled to collect keeping in mind that we worked with three three tenants during.

During the pandemic.

Did that did struggle in and ask for support and we've provided support which has all been paid back one of those tenants does which represents less than 1% of our portfolio is continuing to have some struggles.

While we have collected partial rent we haven't collected full rent from them.

Got you and is that is that first quarter or is that is that April .

Both both.

Got it.

I appreciate the time everyone. Thank you so much thanks, Tom Thank you.

Okay.

Thank you and the next question comes from Alexander Goldfarb with Piper Sandler.

Good morning, good morning, I apologize if there's some background noise.

So one appreciate the the AD hoc conference call definitely definitely a good good good thing and certainly the depth of information provided if we can boil it down just a few I probably have maybe three or four questions. So apologies.

But if we could just boil it down in the most simple terms.

And if you have to replace that tenant b at a grower or retail.

Much of the existing investment building improvements that you guys have funded how much of that can be reused so such that you know and.

And we'll do simple terms, if you buy the building is half the value of them I'd say the other half of the improvement.

You basically get dollar for dollar back when you.

Re candidate or is some of that stuff that you have to junk and throw away. The way, we see like office, guys, who rip out floors when they re tenant the building.

Yeah.

These are mission critical facilities, they're complex expensive facilities that have.

Dedicated hvac's electrical security plumbing lab drive rooms care rooms, packaging inventory storage shipping and receiving and storage.

And a little tiny bit of space office space.

A little tiny bit of office space.

Keeping also online than we do.

Five vacant buildings, and then fix them up and then re lease them and that in our last.

Six years of experience, we've only had two.

<unk> tenant one property. So that's our that's our experience keep in mind that during this last six years there have been.

Countless number of license sales tenant a mergers and acquisitions were new.

New owners have come in and we have not had too.

Scrap lose anything.

Our belief is that a that these facilities have long term generic reusable value.

Especially are the improvements that we pay for.

And then lastly, keeping in mind that.

We believe and I think it's.

In fact, if you speak to any anybody out there who is developing anything that replacement cost today are significantly higher than our current basis, and then any historical basis in any of these.

These builders or developers, who are creating any type of product is experiencing today right.

Alright, so simply put if it kind of had a you know whenever if for whatever reason close down and moved out.

Any replacement tenant.

Would you use basically the entire set out as it is because of all the capital that's been invested that's a fair statement absolutely could.

Second the second question is on the licenses how many of these licenses are tradable meeting if a tenant closes is that the end of the license or is the license sort of separate vehicle that remains in effect.

If the whole portfolio, if that is true of the whole portfolio or it's different by state, but just sort of curious how many of the licenses are sort of independent of the operator in a sense.

I'm going to turn that over to Paul let Paul handle that one yes. So thanks, Alex for the question. So yeah, I think youre right. When you notice it is varies from state to state, but as a general statement.

These licenses I think for the most part our tradable, but that being said as these date Commission cannabis Commission.

It also has to approve.

The transfer to the new operator so.

There are transferable, but generally need to be approved by the state. Okay. Okay. And then in that you know I know, obviously, we're familiar with health care, where a facility closes down and there is downtime when licenses or transferred but also their states that allow operations to continue with the sort of piece of paper in the window that says you know under review.

The process for re tendering and transferring the license is that it doesn't sound like you're really done that a lot, but it is not an arduous process or.

It's maybe you know.

Short term I'm trying to figure out if it's government bureaucracy or it's pretty efficient to complete that process.

So I think the only anecdotal anecdotal away for us to respond to that is that these mergers and acquisitions, which occur regularly where licenses R. R.

Are transferred from one.

Ownership to another ownership do take.

A tremendous amount of time.

You're talking 12 to 24 months.

Okay and then final question is for Cat.

On the G&A, obviously, you guys have payroll pressure that every other REIT has theres also there is annual comp and such what should we expect for the balance of the year and then as we think about 2023 should we think about sort of a big <unk> is that sort of how we should think about it that <unk> is always the big G&A quarter and then it stable.

License from there I just wanted to obviously better get our G&A.

In line with how you guys look at it.

And I appreciate that and generally we do have I think like most companies.

Increases for our entire salary base.

Higher employee base at the beginning of the year.

To reset our salaries.

For that year, and we typically disclose that.

Especially for the executive offers officers in the 8-K.

Measures.

Do have some corporate level.

Activity that tends to hit hard in the first quarter related to the.

The audits.

Proxy reporting.

So those tend to be more heavily weighted towards the first and second quarters.

But we.

Continued to grow our team.

We've added.

Some additional positions and some expanded our space here. So we do tend to see a little bit of our and increase.

But had been a very scalable and.

Lean team that continues to execute really well and I do think you can use the first quarter run rate.

Good proxy for going forward, yes.

<unk>, we should use that for the balance of the year <unk> will be the same as for the next three quarters. Yeah. There's nothing in there that is.

At one time item.

Okay. Thank you very much thank you.

Yeah.

Thank you thank.

Thank you and last question, how is American <unk> from Craig Hallum capital.

Alright, great. Thanks for taking my questions and.

I appreciate all that underwriting color on your prepared remarks.

<unk>.

I guess along those same lines.

Can you kind of give us some more color on not the underwriting process, but just sort of your your continuous kind of checking in on your tenants' financial health.

Kind of give us a sense of how often what you look forward and then as a follow up.

Can you help us understand what it takes for you guys to defer rent or adjust terms.

Just kind of what kind of financial distress that would that would take basically just kind of some more color on that.

Follow up process basically thank you.

Yes.

I appreciate the question so.

We do do.

<unk>.

Then in cap.

Described in the prepared remarks.

Great deal of analysis of the tenant's financial conditions, and we do get.

Annually annual and quarterly quarterly financial information from from our tenants and we can check in with them.

And we do check in with them quarterly with R.

Our review processes and certainly win.

When we're being asked to fund any portion of the improvement dollars that had been allocated for it.

<unk> in the real estate debt.

That we've agreed to.

So that's that.

Remember number one and the second question.

Remember, we had a second question would be different.

Oh, yes, yes, yes, basically just kind of what it takes for you guys to actually defer rent I mean, yeah. There is pretty much all of these msos are facing some pricing pressures and then of course inflationary pressures. So we're seeing you know margins.

Get impacted here and just wondering sort of where the line is to getting some relief on the rent side of things I think.

We typically defer rent every time there is a global pandemic.

Uh huh.

That's been the only time that we've actually even thought about it and it was a reaction to something that obviously was unprecedented in.

And we were trying to be.

Our proactive at the time that it was done but as I as I mentioned and I.

I think one of the last answers.

We have received all of that deferral has been has been repaid.

Repaid.

We in our transactions themselves, we do phase in rent based on the.

Stage of the development of the project to a certain period of time.

Sure.

Some on some projects.

But that isn't our.

We have a unique ability to demand full rent payments.

And for every dollar that we've invested and we use that as.

In our in our business.

Business today.

Okay great.

And I guess, maybe another way to think of it as a.

Pretty much pretty much bankruptcies is what it's going to take for you to not collect your rent I guess, it's sort of a.

Fair enough and or some other thing.

And minus <unk>.

Tenants are not able to access federal bankruptcy because they are.

There is no federal law, allowing the sale of.

Candidates at this point.

All subject to state laws.

And so.

Because these facilities are mission critical because these facilities are complex and expensive because they can operate their business. They can produce product without the business. It sounds like they can.

Move it out in one day and keep building.

The complexity of growing a high quality plant that delivers a high quality product in the end.

<unk> is enormous and which is why it costs so much to develop these facilities. So.

If any tenant decided to not pay rent.

What we have before us is no different than and.

All landlords.

But with the fact that they can't use.

Bankruptcy to delay it we can require.

Require them to our issue with a notice of a three day notice or to pay rent or vacate.

I can assure you that theres nothing that a tenant would hate most has to lose access to all of the plant and products that they have.

Yeah.

If they didn't pay rent.

And just remembering too that we report our revenue on a cash basis. So 100% of the revenue that we've reported we've received in cash we do not recording straight line rent or have other receivables to write down.

Okay great.

Great that color as well and then just last question from me here.

As you guys think about.

Your tenant concentration.

And you look at your pipeline, how do you sort of.

What's your feeling on kind of going deeper expanding relationships with your current tenants versus looking for some diversification in getting some new tenants in there.

Any thoughts on that would be great. Thanks, sure. So no I think.

As we've described over over the past our business model.

Is focused on supporting our existing tenant relationships and helping those tenant relationships grow.

It is.

That is our that is the business thesis and it is what we intend to do.

Or have done and we.

Having only I think 29 different tenant tenant relationships today.

It isn't it isn't a lot and we do look to.

Carefully.

Span those tenant relationships.

So that we have a continued.

Source and demand for new capital.

But being very cautious in doing so because we only have access to so much capital.

So that's that so that's that's the.

Matrix that we look at.

Thank you for taking my questions.

Thank you.

Thank you and then ask Mr. Scott Fortune with Roth capital.

Got you for me in very thoughtful discussion here.

Our most cannabis companies selling at Panther.

Jimmy currently.

Sure.

Pete.

Real quick can you provide color on the challenges and pressures facing some new smaller tenants.

Dominion capital there the cost of capital going up and how is that affecting your underwriting now for some of the smaller tenants and how do you view kind of the social equity.

Licenses are being pushed through or trying to trying to go down that Avenue, if you're underwriting an unlimited amount of capital you can for the different states.

And into that area potentially.

I believe it or not I think new town license, our licensees are able to raise equity capital.

There is still.

A lot of capital that exists in the market today.

Especially on the private and private side and that.

I would I would.

Certainly.

Good concur with your question that.

The way you presented the question that cost for these those startup tenants.

Because of the cost of equity capital have increased.

But that's their business and that's if they wish to give a greater piece of the ownership of the company to two equity investors. That's what is going to be required in order for them to raise the money necessary to.

To move forward with a new license.

On a new business.

I think that the.

The cost to create a new business in this in this industry have increased significantly and they are increasingly efficiently because of inflation and the inflationary pressures to build out a new facility.

So the amount of capital that a new entity would have to raise today as compared to somebody who had raised capital or started businesses than in the past.

Is greater.

That's what we're seeing.

Now.

In the terms in terms of social equity I think that we have.

We have a we.

We believe we're have a very strong ESG report that we have.

We have posted and continue will continue to review and evaluate.

We we focus in on our tenant underwriting and we are.

We look to support.

Are the communities in which we're involved with.

And we'll certainly evaluate any any opportunity from any.

Part of the World and Ah NL and look to look to do that.

Keeping in mind that our our our job is to protect our shareholders and and provide.

Returns for our shareholders.

Okay, Great and one last question real quick just kind of big picture longer term as you see additional consolidation with the potential that you're seeing it until you've continued to shuttering them for higher cost facilities.

Oversupplied market, let's say federal organization comes onboard Interstate commerce comes about globalization.

And you're able to supply from lower cost.

<unk>, how does that affect potentially your portfolio, if let's say a tenant wants to control they are shut down.

Some of their facilities.

From a standpoint.

Well I mean.

The impact to cut a lot of issues in that question one we get.

Corporate guarantees of tenant can't just say Hey, you know.

The power over here cost me twice as much as the power over there so I'm going to move my facility. So that means like let me, let me say I'm going to.

I'm going to build a new building.

Which takes 12 to 18 months I'm going to.

Put in new HAC, which now costs, 30% to 40% more I'm going to.

Put in new plumbing.

All of the save a few pennies on on electricals on electrical cost.

And I still have an obligation to pay the rent on the other side.

I'm not going to happen and then concept that.

Facilities are shutting down or closing down.

We're not seeing that.

We don't we don't see that we haven't seen that.

So I don't know where youre getting that from but we haven't seen that.

I'm not thinking termed as long term.

It's built out.

Globally.

Our monetization Atkins for lower costs.

Outdoor greenhouse facilities.

Sure.

Scott I mean I think.

Again.

Okay.

Very unique.

And we we have focused specifically on indoor growth facilities.

So now.

We are protecting our shareholders and their investment because these facilities in order to produce the highest quality product it has to be produced indoors.

We are not our growers, who are doing indoor grow are not competing with outdoor grow.

Product, that's not that's not who's what they're not.

The product that they are competing against competing against other indoor growth facilities that are producing high quality product.

Okay, Great I appreciate the color. Thanks.

For all the detail that's helpful.

Alright, thanks, guys.

Thank you and next question comes from John Masako with Ladenburg Thalmann.

Good morning, Scott.

Scott.

And you provided some good color on the economic reasons your facilities are sticky.

Currently hypothetical perspective, if you saw a tenant default is there anything legally binding rather than economic the type a license from the operation at one of your properties to the property itself.

So <unk>.

Legally binding the license itself.

It requires a location in order for it to be issued.

So the license has.

Our location associated with it.

Legally that's where they can grow.

Does that answer the question.

So let's say it's in the hypothetical world you have a default some purchases the defaulting companies assets and they decide maybe.

They want to they want to grow.

To build a new facility somewhere else nearby and grow their instead, I mean is that a potential option at all for that.

For that company do they have to go back into your property.

They can do whatever they want they've got a corporate guarantee we're going to go after them and we're going to we're going to pay the rent.

Okay.

The only thing, but I mean, I guess as long as they pay there, but I think we're happy.

And.

This company right.

I'm just thinking do you.

Earlier right.

The court you can go if they don't want to pay the rent you can throw all the county sheriff locks on the doors and events.

But if their assets get distributed however, they may get distributed.

And default.

Would that person who purchased the license has to come back into your property.

No no, but let's let's think about it in reality. So the person has a license is the license in order for them to utilize the license that they've just paid for that they have an available they would have to alright.

<unk> piece of land.

Build a building.

Or by a piece of land with a building on it.

Improve it with three to $500 of.

Square foot and.

And an improvement in and good state approval for this new location and be in the right zoning and have local approval.

For all of this stuff.

Or.

So they could just paying the rent on the facility that the licenses are already licensed for.

Yes that makes sense, that's very helpful. I, just kind of wanted to go through very granular level.

Of how things are kind of tied or not.

And then.

You mentioned earlier that one tenant was paying a very small tiny California was paying partial rents I mean is that the only tenant in the portfolio.

Currently not painful that yes.

Yes.

Okay, and then do you have color or kind of.

Insight into if parallel paid it may rent and have you had any conversations or requests from parallel about rent relief.

They paid me.

Rent and then there has been no discussions about rent relief.

Okay.

That's it for me I appreciate the color on the call. Thank you very much thanks John .

Thank you and this concludes our question and answer session I would like to turn the floor to Alan gold for any closing comments.

Well, thank you and thank you all for joining us on the call today really appreciate all the hard work from the fire.

Our employees in <unk>.

Staff and all the support from investors. Thank you.

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

Yeah.