Good day, and welcome to the Innovative Industrial Properties Second Quarter Earnings conference call. . 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 may be deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors. For a detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the news release issued yesterday and filed with the SEC on Form 8-K as well as the company's reports filed periodically with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I'll now hand the call over to Alan. Alan?

Thank you, Brian, and welcome, everyone. Today, we look forward to providing you an update on our business since our last call in February. And our views on the continued evolution of a truly dynamic industry we are so proud to serve. Now there's certainly a lot to recap from our company's activity in the regulated cannabis industry as a whole. As we have noted on prior calls, with all the challenges that we have faced as a society over the last 1.5 years, the regulated cannabis industry has demonstrated a strong and sustained resilience across the United States. And as the country and the world as a whole has suffered through not only a health crisis, but also one of the quickest and deepest economic contractions in recent history, the United States regulated cannabis industry continued on its tremendous growth path, growing over 50% annually from just over $13 billion in sales in 2019 to an estimated $20 billion in 2020. That momentum has continued into 2021, with U.S. quarterly sales across regulated medical and adult-use cannabis markets, reaching an all-time high of $5.84 billion in the first quarter alone. And as noted in our earnings press release yesterday, we continue to execute on our acquisitions and investment pipeline, executing on over $245 million in new transactions since the beginning of the second quarter, representing a good mix of new tenant relationships and follow-on investments with our existing long-term tenant partners. Ben will provide an update on our acquisitions investments, along with a survey of recent developments with our largest tenant partners. Now as of today, we own 73 properties in 18 states totaling 6.8 million square feet, which are a 100% leased on a long-term basis to high-quality licensed cannabis operators. Reflecting the strength and resiliency of our…

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. We continue to see great progress being made on the state level, including establishment and rollout of both adult-use and medical-use programs. Our recent trend of 2021 has been passage of new programs via legislative action. And in just the past few months, we have seen 5 states take such steps with Connecticut, New York, Virginia and New Mexico passing legislation for adult-use cannabis programs and Alabama adopting, by legislative action, in medical-use cannabis program. To note, those four states, which adopted adult-use cannabis programs are expected to generate more than $4.5 billion in annual adult-use sales in just their fourth year of operations according to industry estimates. As we noted in our last call in February, these developments come on the heels of 5 other state measures, which passed by popular vote in November, including the establishment of adult-use programs in Arizona, New Jersey and Montana as well as approval of a medical-use program in Mississippi. As a result, 38 states in Washington, D.C. have legalized cannabis for medical use and 18 states have legalized cannabis for adult use, with over 70% of the U.S. population residing in medical-use cannabis states and over 40% residing in adult-use cannabis states. We are also tracking…

Thanks, Paul. Since April 1, we made 5 acquisitions in 4 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 73 properties across 18 states, representing approximately 6.8 million square feet, including approximately 2.4 million square feet under development or redevelopment with a weighted average remaining lease term that continues to be in excess of 16 years. Similar to past calls, I plan to touch on each of our acquisitions by state and also provide some information about each tenant and our portfolio overall in the state. I also plan to provide some additional detail on our tenant roster and overall portfolio. In Pennsylvania, we acquired a property, which is expected to comprise approximately 239,000 square feet of industrial space upon completion of redevelopment and entered into a long-term lease with Parallel with our total investment in the acquisition and tenant improvements at the property, expected to be about $68 million in the aggregate. In addition to this Pennsylvania property, we own and leased to Parallel 2 regulated cannabis cultivation and processing facilities in Florida and one property in Texas expected to be utilized for regulated cannabis cultivation, processing and retail activities upon completion of development. Assuming full reimbursement for tenant improvements under the leases, our total investment in properties leased to Parallel is expected to be approximately $203.1 million, encompassing approximately 895,000 square feet. Including this property, we own 8 properties in Pennsylvania, comprising an aggregate of approximately 1.1 million square feet and a total investment of approximately $292.3 million, with the other tenant partners being Curaleaf, Green Thumb, PharmaCann, Holistic, Columbia Care, Jushi and Maitri. With first sales in 2018, the Pennsylvania medical cannabis market continues to perform exceptionally well, with…

Thanks, Ben. It's been yet another busy quarter for acquisitions and investments, and our tenant partners continue to execute with strength in their operations throughout the challenges presented over the past many months, both of which continue to be reflected in our financial results for the first 2 quarters of 2021. We generated total revenues of approximately $48.9 million for the quarter, a 101% increase from Q2 of last year. The increase was driven primarily by the acquisition and leasing of new properties, additional tenant improvement allowances provided to tenants at certain properties that resulted in base rent adjustments and contractual rent escalations at certain properties. As we noted in our press release, Q2 2021 revenue also includes $625,000 paid to us in June, which relates to the stipulated rent for 2020 owed by the receivership at our Los Angeles, California property. As we discussed in our prior call, that receivership concluded in January 2021 when the cannabis licenses were sold to Holistic Industries, a long-term tenant partner in a number of other states, and we executed a new lease with Holistic for the entire property. And as we reported in our press release, as an update to the temporary rent deferrals that we granted to 3 of our tenants at the onset of the pandemic in Q2 of last year, $1.3 million of that amount has been repaid, with the remaining $1.2 million of deferrals scheduled for pro rata monthly payments until repaid in full in December 2021. And as we've indicated in the past, our Q2 revenue reflects only partial quarters of revenues from the acquisitions and investments executed during the quarter. And no revenues, of course, for the leases or lease amendments executed after the end of the quarter. And our revenues for the quarter were also…

Thanks, Catherine. I'd like to note the following in closing. As Ben 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 reached another significant milestone for our company with our investment-grade credit rating and our ability to raise attractively priced non-dilutive capital through the unsecured bond market, which we view as a clear demonstration of our tenants' partners' success, the strength of our property portfolio and the strength of our balance sheet. The regulated cannabis industry continues to be one of the fastest-growing dynamic industries, and we believe still that we're in the early innings of its maturity. The best is yet to come for this industry, and we look forward to continuing our work as the go-to long-term real estate capital partner for best-in-class operators across the United States. And as always, I want to personally thank our stockholders for your continued support and entrusting us as stewards of your investment. We have and will continue to do our very best in that role every day. With that, I'd like to open it up to questions. Operator, could you please open the call up for questions.

. Our first question will come from Tom Catherwood with BTIG.

Good morning, everyone, and thank you for all the color in the prepared remarks. It was very helpful. When we're looking at 2021 acquisitions, the average deal size has increased materially over 2020. I think so far this year, the average deal size is roughly $26 million and last year, it was something in the $16 million range. So kind of 2 questions from that. First, how is your acquisition pipeline looking right now kind of compared to previous quarters? And 2, how is that pipeline breaking down in terms of larger deals with existing tenants, kind of follow-on issuances and then maybe bringing new operators into the portfolio as well?

Thanks, Tom. Let's see how to answer that complex and large question there. One, the pipeline is looking fantastic. We continue to be able to place our capital in that 6 to 9-month time frame. And we think that that will -- that continues -- that will continue as we move through the balance of 2021 and into 2022. Secondly, as to the deal size is -- I think what you're -- you are seeing a change in deal size. And the reason you're seeing a deal -- a change in deal size is that the bifurcation of the quality of the credits within the industry is occurring, that those large, high quality, higher credit type tenants are able to start and develop and own larger type transactions. And we, with our access to capital, have been able to meet those needs. We are in our pipeline and what we are seeing, we continue to see a wide variety of different types of tenants from these high quality, high credit type tenants to emerging entities such as the entity that we are contemplating, working with at in California, where we have issued a construction loan. And such as the mid-tier type companies that are multistate operators, but emerging multistate operators. So we're seeing all of those things. We're -- I think we're very, very excited about our prospects through 2021 and see continued demand for our capital into 2021 and 2022.

And you mentioned new entities, and Ben had talked about the addition of Sozo and Temescal into the portfolio this past quarter. How do you go about evaluating these early-stage companies and determining whether or not to make investments in the real estate assets? And along with that, how large of an opportunity could there be for -- with these early stage companies?

Well, so our underwriting process really hasn't changed for these younger start-up type entities. We spent a great deal of time focus not only on the real estate -- the proposed real estate transaction that brings those tenants to the company. But we spent a lot of time with the management team, evaluating their skills and expertise in running not only a business, but in marketing and then most specifically in growing. And we utilize our existing network of growers to do background checks on these tenants, understanding where they've come from and their reputations in the specific state or just in the industry in general. So all of that goes into underwriting start-up tenants along with our last analysis or probably one of the most important is, is there financial wherewithal, where the -- how much capital they've already raised, where the capital that they raised came from and how strong those investors are and how committed are they to supporting the growth of what we believe is a or what we think is going to be an exciting opportunity for these companies, but one that has many potential pitfalls and requires a very strong financial backing.

I appreciate that, Alan. And finally for me, either for Paul or for Alan. You had both mentioned states that are rolling out new recreational programs. We hear a lot of discussion about that, especially in New York, New Jersey and Connecticut, but there's not as much discussion about what happens after the initial stage. For example, we know that New Jersey is going to expand beyond 12 licenses. And New York is going to expand beyond their 10. And when they do, the people that win those are going to rush in to get up and running as soon as possible. So in your experience, what typically happens when limited license states expand their licensing programs? And is there more opportunity for IIPR maybe with the new license holders that are coming in than there may be with the legacy operators?

Hello, Tom, this is Paul. Yes. So we've certainly seen that when a medical program morphs into medical and REC program, there's a lot of excitement, a lot of need for capital as these operators want to expand their facility. And we've certainly seen that in New York, is a great example. But along with that, there is some frustration because program usually doesn't go as quickly as people would like. And if we look historically, there's been lawsuits, there's been other things to slow down the development. But I think as every state adopts a new program, I think they learn what has gone before them. So we're really pretty encouraged about the rollouts. And we look to Illinois as a great example of really a REC rollout that has just had tremendous success. So yes, we just think that there'll be a tremendous demand for capital as these states -- the newer states rollout into the REC program. And we're seeing that from our existing tenants. And certainly, as these states do mandate that a certain amount of the new licenses will be reserved for single state operators, we're in that space real quick because we've made a great business out of being able to spot those single state operators become their capital partner early on and watch them develop into those successful multistate operators that really make up our -- the majority of our portfolio today.

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

Just one more follow-up on that. You guys have done a lot of detail on these states and single state operators. New Jersey, New York, they're coming onboard with a lot more social equity licenses awarding there. How is IPR kind of looking at this social equity cultivations, although smaller in size and potentially working with some of your larger tenants that are helping out these emerging social equity programs for these states as we see going forward? Any initiatives on that side of things.

Yes, Scott, this is Paul. Yes, we're working with them and very excited too about the opportunities that some of these new operators will have. And depending on the state, the state is going to be able to provide some financial assistance, similar to an SBA program, but not the SBA program at the federal level. But -- so we're looking at the opportunities to have some state money come in to help some of these new operators. And that could provide a good opportunity for us. We get a little more comfortable if we think there's a little more financial support at the state level. So we're excited about these opportunities on the social equity tenants. And we think, again, we're going to be very disciplined in our approach of underwriting them, and we're confident that we'll be able to find certainly some operators that will fit nicely into the program.

And then a little different question. From a competitive landscape, we see lower cost of capital options coming onboard for a lot of larger MSO tenants and also seeing some more competitive companies, public and private starting to offer similar leaseback options. What are you seeing from a competitive standpoint? And how are the large operators looking at this as far as the stack of the real estate versus debt opportunity for these tenants? And then what type of cap rates are you guys still experiencing currently and expect going forward into 2021, 2022?

Yes. So we are seeing additional competitive capital coming into the industry in general. And remember that this industry, in general, has a wide range of credits and size of organizations. And so what we're seeing is that, yes, the very large operators that we've grown with are able to obtain more competitive capital from a variety of different sources. And we are working with them. We think that we continue -- can continue to be a very good source of non-dilutive capital to them, while at the same time that they can continue to strengthen their balance sheet with what I consider dilutive capital, selling equity and/or potentially raising convertible type debt. So we are seeing that. But we are also seeing a great -- a large number of new emerging MSOs that kind of -- that need our capital, need access to our capital and don't quite have the same access to that very competitive capital that I just spoke about. In addition to, we believe that there are emerging new entities that are spinning out of existing large growers that are ideal for our programs and allow us to continue to provide capital to them at, I think, very attractive yields. We're -- and then on top of all of that, you are seeing the bifurcation tube between retail type spaces and industrial growth facilities. We are seeing that becoming a wider bifurcation of yields. And so we're -- we think that we are still providing very competitive and high-quality capital, and our capital is going to be in demand for a long period of time.

Real quick on the cap rates that you guys are funding most recently and then kind of as you look out kind of what the range for those yield rates going forward?

I think our yields, perhaps, given the quality of the -- of our credits and the access to -- our credits having access to more competitive capital, probably have lowered at the lower end. So we're -- before we talked about 11% to 15%, and perhaps now we're seeing opportunities in that 9.5% to still 15% size range. I think when you add retail type opportunities in there, that lower end could go even lower into -- closer to that 8% range. But we maintain that there is a wide range of growers. There's a wide range of opportunities. And we believe that the business is -- those transactions are chunky. So we're going to see some at the lower end, and we're going to see some at the upper end over time.

Our next question will come from Daniel Santos with Piper Sandler.

I'll just kind of continue along that line. You talked about the yield compression. I guess, could you comment on how quickly and how much yields have compressed relative to what you were expecting? And is that timing, is the velocity of deals and how much yields are compressing, surprising you? It's certainly 9.5% or even into the 8%, is probably lower than I think we're used to hearing.

Yes. So you used the word yield compression. I don't see -- I don't think yields have compressed. I mean I think that a variety of tenants and a variety of investment opportunities have come into the industry that we didn't have before. When we started doing transactions, we didn't have these high-quality credits, and now we do. So we -- so I don't think yields have compressed in that sense. And I wouldn't characterize as there being any yield compression. I think there's been an expansion of the industry, that this industry is continuing to -- while it's very young, it's continuing to mature, and we're seeing some very strong credits that deservedly so have very competitive capital. But for, I think, a risk-adjusted basis, I think they're getting -- they are achieving that yield. We're still seeing on a risk-adjusted basis, yields in the same range that we have seen in the past, we're just seeing more and different types of opportunities. And that's what we're trying to describe here today.

And then, Alan, as someone who's sort of invested across different REIT sectors, who do you think whether it's a type of REIT or maybe a REIT subsector that's probably best prepared to kind of hit the ground running once we do get legislative reform? Or do you think that you'll continue to sort of be the only REIT in the space for a while?

Well, I don't -- I think we do have competitors out there, and I don't think that there's -- that we're going to be the only one. I think that this is a specialized industry, and it will continue to be specialized for forever. Whenever you focus in on one industry product type, you become experts in it, and it does take time for that to occur. We do believe that there are others that do have a lower cost of capital than us in the future, and they could enter the business. And -- but we believe that we have an enormous lead on understanding the credits underwriting and evaluating the opportunities that we've garnered over many years of working in this industry.

And one last one, if I may. I appreciate the comments during the prepared remarks of guessing the timing of when Congress will or won't pass something is probably impossible. But at the same time, Schumer sort of put out his wish list of what he likes and so you already kind of know what's on the table. Presumably, any Bill that comes after this is probably going to have less teeth once the negotiation process starts. So I guess, could you comment on -- specifically on how that Bill compares to what you were sort of expecting? And if that has impacted your thoughts on timing and your runway over the next, call it, 12 to 18 months?

Yes, Dan, this is Paul. We are actually pretty happy with the Senator Schumer's Bill, as it's outlined. And certainly, it is correct that he put it out there, I think, with a real wish list of what he wants with the understanding. He does not have the votes even on the democratic side to get everything he wanted. So he put it out there. He's using September -- through September to get comments on the Bill. And then we expect it'll go for a substantial rewrite, probably won't be reintroduced until the beginning of next year. So we're happy with it. I think many of the operators in the portfolio we've spoken with are equally happy because they do like the idea that states will be able to direct their own program. And we were happy to see that. So we continue to keep a close eye on it. And we are not surprised, and it really doesn't change any of our timing because we have, since day one, always been of the opinion that legislative reform at the federal level will be a slow process, and we have not changed our opinion on that.

Due to time constraints, this concludes our question-and-answer session. I would like to turn the conference back over to Alan Gold for any closing remarks.

Thank you, and we'd certainly like to thank everybody for joining us on the call today. I'd like to once again thank our stockholders for their support and most importantly, thank the Innovative Industrial Properties' team for their very hard work in achieving these phenomenal results, and we look forward to more of that. Thank you.

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