Good day and welcome to the Innovative Industrial Properties, Inc. Fourth Quarter 2021 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to, Brian Wolfe. Please, go ahead.

Thank you for joining the call. Presenting today are Alan Gold, Executive Chairman; Paul Smithers, President and Chief Executive Officer; Catherine Hastings, Chief Financial Officer; and Ben Regin, Vice President of Investments. Before we begin, I'd like to remind everyone that statements made during today's conference call 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 a recap of our business for 2021. And our views on the ever-changing landscape of this still very young industry. We have an ambitious agenda. We will, of course, save time at the end to answer your questions. As we all know, the end of 2020 and the start of 2021 witnessed a tremendous amount of optimism in the wake of the new election cycle and tremendous 50% plus growth in 2020, sustained by the regulated cannabis industry over what was a very challenged period for nearly every other industry. The capital markets optimism waned a bit, as we move further into 2021, as the prospect for near term adjustments to the federal regulatory position on the industry dimmed. However, the industry continued to see strong growth throughout 2021, driven in part by the continued march of new states adopting and rolling out both medical use and adult use programs, including unprecedented legislative action with New York, Virginia, Connecticut, and New Mexico, legislating for adult use programs and Alabama legislating for medical use. That momentum continues in 2022, with the latest sovereign state, Mississippi, legalizing cannabis for medical use earlier this month, becoming the 37th state to do so. 2021 also continue a trend of ever-increasing consolidation in the industry with over 210 mergers and acquisition transactions, totaling over $10 billion in value in the United States alone. We also witness consolidation within our tenant base during 2021 and into 2022. And Ben will provide more detail regarding those developments. Of course, with the growth of the industry and the rollout of new programs, demand for real estate capital continued to be robust throughout 2021. 2021 was the highest year of investment activity in our company's history, eclipsing…

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 on state legalization. As Alan alluded to in his opening remarks, we continue to see great progress being made on the state level, including establishment and rollout of both adult-use and medical-use programs. As we noted in our past call 2021 saw unprecedented steps by state legislatures to pass new programs by legislative action including Connecticut, New York, Virginia and New Mexico passing legislation for adult-use cannabis programs and Alabama adopting by legislative action and medical-use cannabis program. Earlier this month, Mississippi's governor signed legislation legalizing medical cannabis becoming the 37th state to have adopted a program. Interestingly, Mississippi by an overwhelming majority voted in favor of a broader legalization of medical cannabis in the November 2020 elections, but that vote was thrown out by the Mississippi Supreme Court for not following the state's signature requirements for ballot measures. As a result, 37 states in Washington DC have legalized cannabis for medical use, and 18 states in Washington DC have legalized cannabis for adult-use. We are also tracking several other states that we believe have a strong likelihood of legalizing either medical-use or adult-use cannabis in 2022 alone, such as Nebraska, in Idaho for medical-use, and potentially Oklahoma, Arkansas, Missouri, Ohio, North Dakota and Maryland for adult- use.…

Thanks, Paul. Since October 1st, we made 31 acquisitions in seven states, representing a mix of expansion of our existing real estate partnerships with top operators, and establishment of new tenant relationships. As of today, we own 105 properties across 19 states, representing approximately eight 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. The fourth quarter capped off a record year of investment activity for our company, during which we committed investments totaling $714 million, growing our total invested capital by more than 55%. As we have grown, we've continually diversified our portfolio, both in terms of geographic and tenant concentration. And as we stand today, no state and not one of our 27 tenants represents more than 15% of our total committed investments. Similar to past calls, I plan to touch on each of our recent acquisitions by state and also provide some information about each tenant in our portfolio overall in the state. I also plan to provide some additional detail on our tenant roster and overall portfolio. In December, we continue to support our long-term tenant partner LivWell, making a follow on investment of $34.7 million at our property in Michigan, acquiring the central utility plant onsite as well as making additional improvements and enhancements to the existing infrastructure, increasing the total rentable square feet at this property to 205,000 square feet. As you may know, LivWell founded in 2009 and PharmaCann, a long-term tenant partner of ours since 2016, announced their plan merger in October of last year, and pro forma for their combination PharmaCann and LivWell will become our single largest. Earlier this month, we also committed an additional $18 million to Skymint, a…

Thanks, Ben. The fourth quarter capped off an exceptional year for IP in the area of acquisitions and investments. And we were thrilled to continue to deepen our long-term real estate partnerships with our existing tenants while continuing to expand our tenant roster with strong management teams. The execution on the investment side and strong portfolio performance continued to drive our financial results for the fourth quarter and for the full year 2021. We generated total revenues of approximately $59 million for the quarter, a 59% increase from Q4 of last year. The increase was driven primarily by the acquisition and leasing of new properties, additional improvement allowances provided to tenants at certain properties that resulted in basement adjustments, and contractual rent escalations at certain properties. And as we've indicated in the past, our Q4 revenue reflects only partial quarters of revenues from the acquisitions and investments executed during the quarter, and no revenues, of course, for the leases or lease amendments executed after the end of the quarter. And our revenues for the quarter were also impacted by rent abatements or deferrals under certain leases as we continued to account for all of our leases on a cash basis. For the three months ended December 31, 2021, we recorded net income of $28 million, or $1.14 per diluted share. As noted in our earnings press release, our exchangeable notes were considered dilutive for purposes of calculating net income, FFO and AFFO for the fourth quarter and full year 2021, and for the fourth quarter of 2020, but not for the full year 2020. We wanted to continue to highlight this item especially as it makes an apples-to-apples comparison difficult between the full year 2021 and 2020 results, as it relates to net income FFO and AFFO measures. Also during…

Thanks, Catherine. I'd like to note the following in closing. As we have highlighted, we are thrilled with the quality of our tenant roster and the continued demonstrated strength and resilience of our tenant partners and their execution on our operations. We are well positioned to continue to execute on our business, providing non dilutive permanent growth capital to facilitate our tenant partners continued expansion as an important part of prudently managed capital structure. The regulated cannabis space continues to be one of the fastest growing dynamic industries. And we believe we are still in the early innings of its maturity, especially as it pertains to continuing to transition illicit sales to the regulated market, ramping existing program promoted by sensible state regulation and the launch of new program in many states. As always, I want to personally thank our stockholders for your continued support, and entrusting us as stewards of your investment. We have and will continue to do our very best in that role every day. With that, I'd like to open it up for questions. Operator, can you please open the call up for questions?

We will now begin the question-and-answer session. And the first question comes from Tom Catherwood with BTIG. Please go ahead.

Thank you, and good morning, everyone.

Good morning, Tom.

You guys have talked in the past about the – the timeline of medical and adult-use states of evolving and eventually becoming attractive opportunities for real estate investments. With the recent legalizations in New Mexico and Mississippi, and eventual rollouts programs in New York, New Jersey and Maryland and Delaware, likely following behind. Which geographies do you think provide the most near-term opportunities for you? And which ones could provide growth kind of over the medium to longer term?

Well, Tom, I think that's a really good question. I'm going to start with first off, the cannabis industry continues to experience tremendous growth, and is expected to double by 2025. I'm going to turn it over to Paul and perhaps Ben to perhaps directly answer which states go ahead, Paul.

Yeah. Thanks, Alan. So Tom, we look – we love what's going on in New York, and New Jersey, despite New Jersey, missing a timeline, or obligation they had, we're pretty confident they're going to get this thing together. We're really happy what happened with New York. Opening up the medical conditions, requirements, I think, until New York, does rollout, the rec program, and I think the opening up the medical is a great sign. So we love those states. I think, very strong with Pennsylvania, still very strong there, Michigan, we're very interested in Texas is one of the new states coming out with their medical program. We think there's tremendous opportunity there. So, Virginia, of course, so we're very, very happy about what we're seeing in some of the states that have passed, adult-use programs, what they're doing to try and, move that timeline up, we saw that with Virginia, they passed a bill to kick start their rec program sales in September. Of course, that still may not get through the Republican controlled House in Virginia. But, those are great signs, I think, you're right, we have talked about, there is a transition time between medical and adult-use. But I think as the states become more mature, they look at what other states have done. And they look at maybe some legislative fixes, we're confident that – that timeline that it might be as much as you know, 24 months to 36 months, that's going to that's going to shorten, because the states are getting it and they're understanding that, the program needs to roll out. They need the tax revenue, they need the job. So we like what we're seeing.

Got it. Appreciate that. Maybe if we look at the cannabis industry, in general, public operators are seeing their cost of capital increase, especially at least on the equity side. And at the same time, investment opportunities seem to be accelerating. We saw a similar pattern to this in late 2019, and operators turn more towards their real estate as a source of growth capital. Have you seen an increase in demand for sale leaseback opportunities given this kind of real recent market dislocation?

I'm going to turn it over to Ben to really talk about our pipeline. But I think you – you have identified a unique aspect of the industry is that, as their ebb and flows in the – in our tenants cost of capital. The demand for our unique and specific capital does ebb and flow. We've seen, obviously 2021 was a tremendous year, or we did over $700 million acquisitions. Pretty fantastic. And that yields that were -- we expected actually to be on average, somewhat lower, and they were actually somewhat higher. So we think that in 2022, we have the same dynamics building, especially with the most recent disruption to the geopolitical world. But so now, I'm going to turn it over to Ben to really go through our pipeline, Ben.

Yeah, sure. Exactly, Tom. Yeah, we are certainly seeing those dynamics. I think we've always continued to believe that this is the most efficient, non-dilutive capital available in the industry. And I think that is -- becomes even more pronounced, as you see the fluctuations in the equity markets. We've seen, as Alan mentioned, equity markets go up and down changes on the regulatory landscape or on the competitive landscape, and have been able to consistently succeed on placing capital, having our largest year ever by investment volume last year. I think we continue to be uniquely positioned the strength of the balance sheet to capitalize on these opportunities as we see him pop up.

Appreciate that color. That’s really helpful as well. Kind of building off of that, Ben, you've all talked in the past about M&A activity driving sale lease backs, Alan, you mentioned it was a record year for those and cannabis in 2021. As you sit right now, how much of your identified pipeline is more M&A driven, as compared to expansions of existing assets or construction of new facilities?

I was going to say, I don't think we have bifurcated our pipeline in that way. I think, the real exciting aspect of our program is that it provides for -- and allows companies to develop over time and know that they have the capital available to them, when they when they work with us. And I think that that will continue. So I don't know, Ben, do you have any further color as to kind of percentages?

Yeah, no. I mean, I think that's right. I mean, I think one of the strengths and the biggest benefits we provide is being able to offer creative and tailored real estate solutions to the groups we work with whether that's M&A, construction, existing facilities. So that will shift over time, depending on the particular groups we're working with and industry dynamics. But we're again, we feel very well positioned to support the groups that we partner with whatever form that takes.

Understood. And then the last one for me, what headlines around record cannabis harvests in the western US this fall, and then how that put pressure on cannabis pricing. Your exposure is small in these markets, I think it's less than 20% of your portfolio overall. But can you talk a bit about whether kind of that cannabis pricing pressure impacted your tenants? And maybe does the focus on indoor cultivation, and maybe premium flour, insulate your tenants from some of those pricing shocks that we read about and hear about in the news?

Yes, this is Paul, I think that's exactly right. We said at the end there is such a difference between as you know, the outdoor grow product, and the indoor grow product that our tenants to cultivate. So when we see those headlines, I think a lot of it is coming from outdoor grows in California, Oregon and Washington, which are really different, of course from our tenants grow. So we see those numbers. We're not seeing an impact on sales or commodity pricing for the indoor product.

Appreciate that color. That's it for me. Thanks, everyone.

Thanks, Tom.

The next question comes from Scott Fortune with ROTH Capital Partners. Please go ahead.

Good morning and thank you for the questions. Want to dig in a little bit more on the pipeline, and what you're seeing. Obviously, we've seen some delay in some of these new states coming on board and are pushing out and that puts a little bit pressure in near-term, especially for the MSOs. But it seems like the MSOs has a little more competitive debt financing, down 8% levels here and maybe not turning on to the real estate side as much and you're moving down to more of the single state operators. How do you look at your pipeline in terms of evaluating it from your existing established top tier in the cells versus these new customers, providing some of the growth going forward for you, if you can kind of unpack that a little bit as a new channel especially?

Yeah, I mean, before I turn it over to Ben really, maybe to dig a little bit further deeper, you know, the – first you got to remember that real estate transactions in general are very lumpy. And we had abandoned year closing a lot of transactions, specifically closing a couple of transactions at the end of the year. We think our pipeline is very strong. We think we have continued demand from our existing MSOs. And a continued demand from single state operators that want to be multi state operators through a variety of paths, including M&A. I think we continue to have great confidence in our ability to place between $125 million, $150 million of transactions per quarter. And I think that's a pace that we've been very successful at for the last couple of years. Keeping in mind, if you think – if you back up and remember that we have a very unique offering. We're only doing one type of product, which is the sale leaseback transaction, where we're looking for 15 to 20 year lease terms, which allows us to have that, you know, weighted average lease length in excess of 16 years. So, I think that that's how I would think about or I would ask you to think about how our pipeline is going. If Ben, you want to talk about the – what debt yields and or Paul, you want to talk about the debt yields, and how that might relate to our programs.

Yes, sure. This is Ben. Thanks, Alan. You know, we are definitely seeing there's more debt in the industry. I think that is a result of the strength of the operators. And we feel we have over 90% of who we think of the top operators in the country are in our portfolio and their financial strength is such that they can command lower rates. This only strengthens our existing portfolio. That's not to say, we're not going to continue to work with the top operators in the country. And it gives evidence by closing on a deal with Ascend Wellness here in New Jersey recently. Again, we had our largest year last year by investment with the debt markets opening up, we're going to continue to support our tenants, leveraging our balance sheet and continue to grow the portfolios.

Alan, I appreciate the color. And then kind of follow up on that. How is IIP looking at the capital markets here, weighing on the different opportunities from a capital raising or financing side of things in this rising rate environment? I appreciate the color Alan, on the consistency that you are able to hit with your acquisitions on a quarterly basis 125 million, 150 million. Looking at your cash level with the ATM, about 230 million line available, kind of what's the commitment there and maybe the cash needs as you look out the different financing options going forward here?

Yeah, I think we still have one of the strongest balance, we have a very, extremely strong balance sheet with less than 15% debt to total gross assets. We have obviously access to the equity markets and we have a variety of other forms of capital debt, sort of convertible debt, straight equity issuances, and even some recent interest from the preferred side of our preferred investors. We are looking at all those options and we will certainly do what is the best for the company, given how choppy the markets are, how impacted they are by the geopolitical events that have gone on. But our company continues to perform extremely well and we think we have tremendous access to capital as we before.

Well, then one quick follow on price for Catherine, you're committed your short term cash needs and cashier that's committed for your acquisitions and TI going forward, kind of what's leaving you as far as the balance for potential acquisition transactions going forward from a cash level?

Yeah, Scott, so we have over $400 million of cash on the balance sheet. And as you said, about $300 million of that is earmarked for eventual tenant improvements and redevelopment at the projects. But especially these large projects that we've entered into over the last us several years sit on our balance sheet for an extended period of time. So that allows us to be strategic on when we think we can raise capital. We've talked in the past that those projects typically take between 9 and 12 months to fully request those reimbursements for us.

Okay. I appreciate all the color and I'll jump back in the queue. Thanks.

Hey, Scott.

The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, good morning. Good morning out there. Cat, maybe just sticking with that. If I heard you correctly, you guys have 400 million of cash, but 300 million is earmarked. So it sounds like capital market activity is definitely on the horizon. You mentioned Preferred, there was also that debt offering that you guys were contemplating earlier this year. So if you look at ATM, preferred, unsecured bonds, where do you see the best opportunity? And how do you guys think about, sort of, the capital costs. Because, obviously, as the exchangeable notes played out, there's the initial coupon, and then there's the reality over time, as things can happen, as the exchangeable notes demonstrate.

Before I turn it over to Cat -- the market is choppy, we're going to -- we're navigating what I think is one of the unprecedented periods of time, where a lot of things are changing and changing rather rapidly. And we're looking at all our options moving forward. We think our cost of capital still provide for very accretive transactions. And so we’re still excited about that opportunity. I think, the pullback that we've seen in one field allows another an opportunity and another. And I and also even with the convert, which -- we sold equity at that time, I think, up 20-plus-percent. And so it was still an accretive transaction, very accretive in a long period of time. Now for, obviously, accounting purposes, the way it worked out, because those investors made a fantastic bet and our share price certainly increased significantly. There was a accounting dilutive impact to our -- to what we were doing. Keeping in mind, so we keep all those options and we’re looking at all those options as we make every move forward and make those capital decisions. I don't know, Cat, is there anything else you want to add to that?

I mean, that's exactly right. And, we are happy with all the options that we do have. I mean, looking at the balance sheet with only 15% debt to total growth assets. We have a portfolio of strong cash flows and are growing our AFFO 70% -- 78% year-over-year. It gives us a lot of options, both for equity and debt. And we continue to be strategic as to when we want to raise additional capital.

Okay, and then the second question is, Alan, you mentioned all the stuff going on in Congress, different ways that people are trying to either reintroduce the SAFE Act or maybe full legalization. And it's interesting, because you look last year and it was Schumer and Booker that killed SAFE Banking at the end of the year and the defense budget, because they wanted to pass full legalization. And obviously, with everything that's going on, that doesn't look as likely. So, in the current environment, it actually seems like the ideal situation for you guys, right, meaning, that no legalization, no SAFE Banking that makes your business model continue to be very attractive, or is your view that with legalization or SAFE Banking, that you would see better opportunities? I'm just curious, which you think is better for IIPR, the current situation or one in which you either have legalization or SAFE Banking?

That's an interesting question that it's a double edged sword. I mean, right now things are fantastic. We have got great pricing power. We're the only New York Stock Exchange Traded REIT with a balance sheet -- really super strong balance sheet that exists out there. We are probably 10, 20 maybe more times our nearest competitor and have the greatest opportunity to raise capital today. As you know, if something changes in the regulatory environment, we still have the strongest balance sheet – the strong. The greatest portfolio -- weighted average lease length in excess of 16 years, a very great group of tenants and we would have then certainly, I think, greater access to even all sorts of different capital markets opportunity and be able to drive our cost of capital value in the moment. So right now, I think we're comfortable where it is. It certainly has made it very much more difficult for our competitors to catch up or even compete with us on a long-term basis.

Okay, thank you.

The next question comes from Eric Des Lauriers with Craig-Hallum Capital. Please go ahead.

Great. Thank you for taking my question. So with more debt capital entering the space, you mentioned, you're going to look more closely at MSO debt profiles. You also brought on six new tenants in 2021. My question is, as more capital comes online, and naturally ways on tap rates, would you guys prefer to be flexible on the lease terms in order to sort of preserve your mix of top-MSOs, or would you prefer to be a bit more flexible on the tenant mix in order to preserve your attractive lease terms? Thank you.

Another interesting question. I mean, yeah, I mean, I think that -- look we're agnostic as to really how much or how we generate great returns, if we can generate great returns with a different tenant mix. We're certainly going to go down that path. If we can continue to -- generate great returns, providing capital to our existing tenant mix. We're going to do that. And that's how we know we're looking at that – we are looking -- look at it. Our job is to make money for our stakeholders and make as much as we can.

That makes sense. Thank you.

This concludes our question-and-answer session. I'll turn the conference back over to Alan for any closing remarks.

Thank you, operator, and thank you all for joining us today. And certainly, my one comment is to you know, send prayers out to those that are in harm's way in today's geopolitical issues. And, and for -- and thank our stakeholders and our team, for the stakeholders for really sticking with us and for our team for all your continued hard work. Thank you, all.

That will conclude the call.

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