Good day, and welcome to the Innovative Industrial Properties Fourth Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.I would now like to turn the conference over to Brian Wolfe, General Counsel. Please go ahead.

Thank you for joining the call. Presenting today are Alan Gold, Executive Chairman; Paul Smithers, President and Chief Executive Officer; Catherine Hastings, Chief Financial Officer; and Ben Regin, Vice President of Investments.Before we begin, I'd like to remind everyone that statements made during today's conference call maybe deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995 and actual results may differ materially due to a variety of risks, uncertainties and other factors.For a detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the news release issued yesterday and filed with the SEC on Form 8-K as well as the company's reports filed periodically with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information future events, or otherwise.We will open up the line for questions after our prepared remarks.I will now turn the call over to Alan.

Thank you, Brian and welcome everyone. Today, we look forward to recapping what has really been a transformational year for our company. First, please remember that 2019 represented just our third year of operations. At the end of 2018, we started with a base of 11 properties. We then acquired 35 new properties in 2019 in addition to five properties in the first two months of 2020. These transactions represented both follow-on transactions with our existing tenant partners to facilitate their continued expansion and new tenant relationships.From January 1, 2019 through today, we have grown our total portfolio in terms of committed investments by well over 300%. As of today, we own 51 properties in 15 states, totaling 3.2 million square feet, which are 99% leased on a long-term basis to high-quality licensed cannabis operators. Our current blended yield on these properties is 13.3% with a weighted average remaining lease term of 15.6 years. Ben Regin, our Vice President of Investments will discuss our recent acquisitions in more detail in our overall portfolio.We paid a quarterly common stock dividend of $1 per share to stockholders on January 15, representing 186% increase over our fourth quarter 2018 dividend. This is a testament to our portfolio's operating performance, and our confidence in the strength of our existing portfolio, and our pipeline of acquisitions.This dividend was also supported by our tremendous 250-plus percent growth year-over-year in rental revenue, net income and AFFO during the fourth quarter, which to note only partially reflects the 15 acquisitions completed during the quarter and does not take into account at all the five acquisitions we completed in the first two months of 2020, which together with lease amendments for additional tenant improvements at existing properties, during that time represent over $300 million of additional investments.Catherine Hastings, our…

Thanks Alan. As with prior calls, we'll try to provide as effective an overview as we can focusing in on two main topics; one, the current regulatory environment; and two, the dynamics of the industry and developments that we continue to monitor closely.First, regarding the current federal regulatory environment and legislative developments. Of course, cannabis remains a Schedule I controlled substance which generally prohibits all cannabis use and cannabis-related commercial activity in the United States. That said, Congress has continued to enact Spending Bills since 2014 with a provision that has been interpreted by courts as preventing the Department of Justice from using funds to interfere with the implementation of state medical-use cannabis laws. That provision was again included in this year's Congressional Spending Bill passed in late December which carries through to September 30th, 2020.In addition as we reported earlier, the Secure and Fair Enforcement Banking Act also known as the SAFE Banking Act was passed by the House in late September with resounding support in a vote of 321 to 103. The legislation is now with the Senate Banking Committee where it has been for some months and facing more opposition.As we noted previously, the SAFE Banking Act, if it became law, would provide greater federal protection to banks servicing state license, compliant operators, and may also result in banks being more open to providing debt capital to these operators.In other Congressional developments, the House Judiciary Committee in November approved the Marijuana Opportunity Reinvestment and Expungement Act or the MORE Act by a vote of 24 to 10. The MORE Act would de-schedule cannabis from the Controlled Substances Act, require Federal Courts to expunge prior cannabis-related convictions, and establish a Federal Sales Tax on cannabis products with proceeds to fund certain social justice initiatives.The MORE Act is the…

Thanks, Paul. As Alan alluded to our acquisition momentum continued to accelerate in the fourth quarter of 2019 and into this year capping off a truly transformational 2019 for our company.Since October 1, we have acquired 20 properties in eight states and executed five lease amendments with tenet existing properties as they continue to build further capacity to meet demand for their products. As of today, we own 51 properties across 15 states representing approximately 3.2 million square feet including approximately 871,000 square feet under development or redevelopment.Consistent with our prior call, I plan to touch on each of our recent acquisitions by state and also provide some information about each tenant in our portfolio overall in that state. Starting with Illinois. We were very active over the last four months originally entering the state with our acquisition and lease to Ascend Wellness in late 2018 and then further amending our lease with them in September to provide an additional $8 million in capital for tenant improvements at the property, which was partially in anticipation of required additional capacity to meet demand for the Illinois adult-use cannabis program that commenced sales last month.As discussed on our last call as well, in October we acquired two more properties in Illinois, totaling 90,000 square feet of industrial space and entered into long-term leases for each property with Cresco Labs, with our total investment in the acquisition and tenant improvements at the property is expected to be $46.6 million in the aggregate.Cresco Labs is one of the largest vertically integrated cannabis operators in the United States. Last month, Cresco executed on a senior secured term loan for an initial principal amount of $100 million and closed on its acquisition of Origin House, making Cresco one of the largest wholesale distributors in California, selling…

Thanks Ben. It's been a very busy year capping off a tremendous year of growth for our company which is reflected in our financial results for the fourth quarter and full year. We generated total revenues of approximately $17.7 million in Q4, an increase of nearly 270% from the prior year's fourth quarter and $44.7 million for the full year, an increase of 202% from 2018.The increases in both periods were driven primarily by the acquisition of leasing of new properties, additional tenant improvement allowances provided to tenants of certain properties that resulted in base rent adjustments, and contractual rent escalations at certain parties.As strong as this growth was, please note as well that this reflects only partial quarters of revenues from the numerous acquisitions and leases executed during the fourth quarter and no revenues, of course, for the five leases and five lease amendments we executed after the end of the quarter.Our revenues for the quarter were also impacted by rent abatements or deferrals under certain leases that are expected to burn off in the next few months as we continue to account for all of our leases on a cash basis.For the three months ended December 31st, 2019, we recorded net income of approximately $9.6 million, funds from operations, which adds back property depreciation to net income, was $13.1 million.Adjusted funds from operations which adds back noncash stock-based compensation expense and non-cash interest expense related to our exchangeable senior notes was $14.3 million.For the three months ended December 31st, 2019, adjusted funds from operations nearly tripled from the prior year period. For the year, we recorded net income of $22.1 million, funds from operations of $30.7 million, and adjusted funds from operations of $34.9 million. Adjusted funds from operations for the year increased by 259% from 2018.As Alan mentioned, on January 15, we paid our quarterly dividend of $1 per share to common stockholders of record as of December 31st. The Q4 2019 common stock dividend reflects a 28% increase from the prior quarter, and a 186% increase from the prior year's fourth quarter. This serves as a reflection of our strong growth and operational performance over the past year and our confidence in our acquisition pipeline including the post December 31 acquisitions completed that Ben discussed earlier.And with respect to financing activity in September 2019, we established an aftermarket equity offering program or ATM program with three sales agents and raised net proceeds under the program through today of about $185 million. And last month, we completed an underwritten public offering of common stock raising gross proceeds of $250 million.As we previously reported, taking into account this financing activity as of today, we have over 17 million shares of common stock outstanding. We are truly grateful for all of our stakeholders' continued support, and we are focused exclusively on investing the proceeds from our recent equity raises with the best tenants.And with that, I'll turn it back to Alan. Alan?

Thanks, Catherine. We had a truly remarkable 2019 far outpacing our expectations. With that, we are very excited about the opportunities to come in this fast-growing industry, and we remain focused on executing our business plan. I want to personally thank the team for their outstanding work and dedication, and most importantly, our stockholders for your continued support as we aim to continue to create sustainable and long-term value for you.With that, I'd like to open it up for questions. Operator, could you please open the call up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Tom Catherwood with BTIG. Please go ahead.

Thank you, and good morning, everyone.

Good morning.

Hey, John.

So, a strong finish to 2019 in terms of acquisitions and 1Q 2020 looks strong as well. And then on top of that, it looks like yields picked up maybe 100-plus basis points between 4Q and 1Q. How is your pipeline sizing up for the balance of 2020? And how sustainable are the higher yields?

Well, Tom, I think we had just an unbelievably strong 2019, and it was a very exciting year and the team was performed extremely well. 2020 looks to be as strong as 2019 or even stronger. And so our pipeline is very large, and we continue to have very strong growth prospects within the pipeline, once again being able -- we think that we're going to be able to provide between 60% and 70% of our capital to our existing growers and the balance going to potentially some new growers that are looking to join our tenant base. Keeping in mind that we have a tenant base right now of about 20 different very large and strong growers.

Got you. Got you, and then in terms of yields then that kind of pick up from 4Q to 1Q, that's kind of how 2020 is shaping up so far at least?

Yes. I mean I think we can say, it's stabilized in the sense that the increase from mid last year of about 100 to 150 basis points is what we're -- is what we've been able to achieve, and we believe we'll be able to maintain that going forward given where we are with the financial markets in the industry today.

Understood. And then, I know this is about the Canadian markets, which are very different from your markets. But up in Canada, there's this kind of persistent fear of oversupply. It hasn't necessarily played out that way yet, but it's a real concern. What's the status of supply and demand in your states? And have you seen any early indicators of oversupply that give you some concerns?

I think from our perspective, we're not seeing anything that approaches an oversupply condition, other than perhaps maybe in California a little bit. The other states that are new to the program, obviously, there's still a lot of growth happening. We're seeing year-over-year growth in the states and just in the demand, well over 30%. And so, oversupply has not been the issue. It's just as a matter of fact than the opposite.

Got you. What about outdoor growth? I think, Arizona, maybe Colorado and California allow them, are they allowed in states that have a limited license provisions? And could that impact pricing due to lower production costs?

So, keep in mind that we are focused on licensed medical cannabis growers. And the concept of an outdoor grow just doesn't work with trying to provide a consistent pure product or high-quality product that can't be done with an -- in an outdoor grow.An outdoor grow situation can be contaminated with pesticides and fungus and pests from a variety of other crops and -- which requires that the high-quality medical cannabis product and even high-quality adult-use product, be grown indoors in a controlled environment, which drives a long-term value of our real estate.

Got it, got it. And then, last one for me. Paul, your commentary on the cannabis capital markets was very helpful. And along those lines, yesterday's press release noted that the tenant at your LA asset had ceased paying rent in January and February. You provide an update on the progress of working through that lease? And maybe, more generally, are there any other tenants that pose near-term credit risks in your portfolio?

Yes. Thanks, Tom. So with regard to DYME, the process continues to move forward. We are still getting a lot of interest from other operators that look at the LA location of the assets and I think that's a very valuable piece of property, especially for distribution. So the process and receivership continues. Sorry, what was the second part of your question?

Just beyond, just the LA asset, any changes in credit profiles or any other credit risks that you're seeing in your portfolio near term?

Tom, as you know, we keep a close eye on all of our tenants. And we look at their financials, at least on a quarterly basis. And we continue to be very happy with the performance of the portfolio to date.

Got it. All right. Thanks everyone.

Thanks, Tom.

Thank you, Tom.

Our next question will come from Scott Fortune with Roth Capital. Please go ahead.

Hi, Scott? How are you doing?

Mr. Fortune, your line is open.

Sorry. Good morning and thank you for the call. Sorry, about that. I wanted to touch base real quick on kind of the competition, we're seeing a little more in the cannabis industry, some competitors coming on board. What's your sense of them looking at industrial versus retail side of things? And how that might affect the yields going forward? Are you seeing competitive threats here?

So, at this time, we believe that we're in a very strong position. As you know, that we are the only New York Stock Exchange listed public entity in the country. As a matter of fact, we're the only company with a U.S.-based listing. We have seen the formation of up to four, five other new private type entities that have tried to launch and raise capital. Initially they've been able to raise private capital, but have since deployed that capital and are not able to obtain a listing in the U.S. market. The most newest entrant is accompanied by the name of Subversive, which raised a couple of hundred million dollars. And as you know, we're probably 10 times or at least 5 times the size of that company. And the -- so we're not seeing competition driving down yields in our market per se. We think the primary competition for our capital is other capital coming from private equity family offices and friends and family of those growers. And we believe our capital is fairly priced and fairly attractive to the growers today as evidenced by a very strong pipeline. We have over -- our pipeline today we have not seen it as large ever as we have seen it in today.

Okay. Thank you for that color. Covering a lot of these different cannabis names and management team obviously this is a high priority for them with the capital markets that you have a very strong portfolio the top MSOs out there. How do you look at kind of diversification or different sure from a geographic side or different tenant exposure from a percentage side of the portfolio? And just one other question is looking to get little bit more on the retail strategy versus just growers on the industrial side kind of strategy there?

Let me address the retail versus the industrial growth -- our growth facilities. I mean we have in our portfolio dispensaries and we'll continue to look at dispensaries with our existing growers. We believe that dispensaries are a unique and interesting part of the real estate component, but we believe that the -- that are our team based on our team's size and the efficiency of doing larger scale type transactions that we are best suited to continue to focus on the larger industrial grow type facilities. So with that that's where we are.As to diversification we're fairly -- pretty well-diversified already. We have 51 properties in 15 different states. We have 20 different growers. We continue to believe that adding one to two to three growers per year is the right way to do it with our strong and straightforward business model. Because our business model is focused on making sure that we are there as a very strong partner for our existing MSOs that are in a growth mode and growing.We believe that there are going to be new states as Paul has indicated in the prepared remarks. There are new states that are coming online and we're really excited about a couple of those new states. We're very excited about continuing to grow in our existing states including Florida if we can. As to our largest tenant concentration still is with PharmaCann. We're very excited about PharmaCann's prospects and their business. And we've worked very carefully at reducing that exposure. And we believe that we'll be able to continue to do that as we grow over time.

Okay. Thanks for the color. I will jump back in the queue.

Our next question will come from John Massocca with Ladenburg Thalmann. Please go ahead.

Good. Good morning. So, you talked a little bit about competing capital. But one of the things that was kind of out there particularly at the end of last year was some of the larger MSOs doing debt deals. Are you seeing increased kind of debt opportunities out there for your tenants' kind of competing with you in terms of your sale-leaseback solutions?

So, I think what you're referring to is some of the convertible debt type transactions that the -- some of the large MSOs we're able to access. And if they were -- if the true cost of capital was identified by the -- those MSOs or those individual companies, they would see that the that cost of that debt was very comparable or even actually higher than what doing a standard sale-leaseback with us would have entailed. We don't take any ownership of any of the entities. We -- so as opposed to a convertible debt type structure where they are giving up a piece of their company to raise that kind of capital.

Okay. And then maybe switching to the pipeline, what's the mix between maybe larger public MSOs and smaller MSOs/kind of single state operators?

So, as I described, we have 20 different growers to their MSOs in our portfolio today. Over 80% of them are the very large-type entities and they are continuing to perform extremely well.

Okay. And then kind of lastly, you touched on it briefly that you were kind of excited about some of the potential progress in states on the regulatory front, but are there any specific kind of catalysts you see out there that maybe over the longer term could help kind of keep the pipeline growing if you will?

Well, I mean I think as Paul described, over 11 different states are contemplating new programs and if you just to -- if you do a math and you do -- I mean, I'm not even saying that these states are going to be just doing this type of issuance of state licenses. But if all those 11 states and let's say there was only 10 of them that actually got it approved, if 10 states approved it and they had 10 new licenses and each one of those new states or new licenses required $50 million of additional capital, that's over $5 billion of additional capital needed in the industry just in those states alone. Not to mention the existing states and the potential for additional licenses associated with recreational use. The demand for capital in this industry is rather large growing. And the catalysts that I think that you're really referring to is the fact that the U.S., over 90% of the U.S. population is very excited and very positive about medical cannabis and the majority of the population has a positive view of recreational cannabis.

Okay, very helpful color. That is it from me. Thank you.

Thanks, John.

[Operator Instructions] At this time, there are no further questions and I would like to turn the conference back over to Alan Gold for any closing remarks.

Thank you. Thank you all for joining us here today. And again, I want to thank our team for their dedication and great work in producing what was a phenomenal 2019 and what is looking to be a very strong 2020. And also thank our stockholders for your continued support. With that, we'll end the call. Thank you.

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