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Edited Transcript of IIPR.N earnings conference call or presentation 8-Aug-19 5:00pm GMT

Q2 2019 Innovative Industrial Properties Inc Earnings Call

SAN DIEGO Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Innovative Industrial Properties Inc earnings conference call or presentation Thursday, August 8, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan D. Gold

Innovative Industrial Properties, Inc. - Executive Chairman

* Brian J. Wolfe

Innovative Industrial Properties, Inc. - VP, General Counsel & Company Secretary

* Catherine Hastings

Innovative Industrial Properties, Inc. - CFO, CAO & Treasurer

* Paul E. Smithers

Innovative Industrial Properties, Inc. - President, CEO & Director

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Conference Call Participants

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* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Thomas Catherwood

BTIG, LLC, Research Division - Director & REIT Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Innovative Industrial Properties Inc. Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Brian Wolfe, General Counsel. Mr. Wolfe, please go ahead.

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Brian J. Wolfe, Innovative Industrial Properties, Inc. - VP, General Counsel & Company Secretary [2]

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Thank you for joining the call. Presenting today are Alan Gold, Executive Chairman; Paul Smithers, President and Chief Executive Officer; and Catherine Hastings, Chief Financial Officer. 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.

Before I hand the call over to Alan, I want to mention that we have limited time for the call today, but we will answer as many questions as we can after our prepared remarks. Alan?

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Alan D. Gold, Innovative Industrial Properties, Inc. - Executive Chairman [3]

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Thank you, Brian, and welcome, everyone. Today, we get a chance to review and share our financial results for the second quarter plus year-to-date 2019, and provide our updated perspective on the business in the industry from our last call in March. As you know, 2018 was just our second full year since completing our IPO and purchasing our first property in December of 2016. Now into our third year of operations, the momentum of our business has been tremendous. To recap briefly, in the first 7 months of 2019, we acquired 15 properties in 6 states, representing over $167 million of investments, which included both follow-on transactions with our existing tenant partners to facilitate their continued expansion and new tenant relationships. Catherine will discuss our recent acquisitions in more detail. As of today, we owned 26 properties in 12 states, totaling over 2 million square feet, which are 100% leased on a long-term basis to a high-quality licensed cannabis operators. Our current blended yield on these properties is 14.6% with a weighted average remaining lease term of 15.5 years. In addition, we paid a quarterly common stock dividend of $0.60 per share to stockholders on July 15, representing a 140% increase over a second quarter in 2018 dividend, and a testament to our property portfolio's operating performance and confidence in our pipeline of acquisitions. This dividend was also supported by our tremendous 150% plus growth year-over-year in rental revenue, net income and AFFO. To reiterate, truly a remarkable track record for such a young company. Now Catherine will provide more detail regarding our financial results. The medical-use cannabis industry is one of the most dynamic growth industries in current times, and Paul will provide some detail on the industry and regulatory trends in our call today. We continue to be very optimistic about the future of this nascent industry, and our ability to deliver results for our stakeholders and enduring value to our tenant partners, by providing tailored real estate solutions that meet key operational and capital needs. And with that, I like to turn the call over to Paul. Paul?

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Paul E. Smithers, Innovative Industrial Properties, Inc. - President, CEO & Director [4]

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Thanks, Alan. As with prior calls, we'll try to provide as effective an overview as we can with the short time we have today, focusing in on 3 main topics: one, the current regulatory environment; two, the growth and evolution of the medical-use cannabis markets in the United States generally; and three, recent developments in our state markets.

First, regarding the current federal regulatory environment. Of course, cannabis remains a schedule 1 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 earlier this year, which carries through to September 30.

And just in June, the House of Representatives by a vote of 267 to 165, for the first time, passed in amendment that extends the protections in place for state medical cannabis programs to state adult-use cannabis programs. While the amendments still requires passage in the Senate and the President's signature, the house action represents an historic step forward at the federal level. And last month, Senator Kamala Harris and representative Jerrold Nadler introduced the Marijuana Opportunity Reinvestment and -- or the MORE Act, which would, among other things, provide for the descheduling of cannabis as a controlled substance under the controlled substance act. Also in July, the Senate Banking Housing and Urban Affairs Committee, for the first time, met to discuss the issues surrounding financial services for the regulated cannabis industry, including the SAFE Banking Act. The SAFE Banking Act, if it became law, will provide greater federal protection to bank servicing state-licensed, compliant operators and may also result in the banks being more open to providing debt capital to these operators. Aside from these, there have been numerous other initiatives taken by Congress, including the introduction of a number of bills in a favor of various forms of cannabis legalization. As we indicated on our prior call, the federal regulatory environment is a rapidly evolving one for the cannabis industry and we are monitoring all of these developments closely.

Onto a general update of the medical-use cannabis markets nationwide. The industry continues to move forward with tremendous velocity. 33 states have legalized medical-use cannabis by popular vote or legislative process, where a large majority of the U.S. population resides. Medical-use cannabis continues to poll year-after-year with 90 plus percent popular support in the United States, and the regulated cannabis industry is expected to continue to be a leading driver for U.S. jobs and tax revenues. In fact according to a study conducted by Leafly and Whitney Economics in March of this year, there are more than to 210,000 direct full-time jobs in the state regulated cannabis industry, and this industry added more than 64,000 jobs in 2018 alone.

Marijuana Business Daily's recent projections support the view of tremendous continued momentum by the industry, projecting a 35% increase in U.S. regulated cannabis sales from 2018 to 2019, and reaching nearly $30 billion by 2023.

And now for a brief update on developments in the 12 state markets where we own properties, which are New York, California, Massachusetts, Pennsylvania, Ohio, Michigan, Illinois, Maryland, Colorado, Arizona, Nevada and Minnesota. New York. As a reminder, we have owned 2 properties in New York since 2016 and 2017, which are leased on a long-term basis to 2 multistate operators, PharmaCann and Vireo. As we have noted in passed calls, New York's medical-use cannabis program has initially rolled out, had been described by many as one of the most restrictive and highly regulated. In response and in order to enable broader access to treatment, New York has taken several positive steps over time. These steps include expansion of the pool of potential recommending health professionals, expansion of the types of products that can be manufactured and distributed, streamlining the registration process and expansion of the list of qualifying medical conditions, most notably, for chronic pain, PTSD and cannabis as an opioid alternative.

Patient count growth continues to accelerate as a result with over 104,000 certified patients as of mid-July. Regarding the potential adult-use legalization in New York. Despite the thoughtful analysis of the New York Department of Health and Governor Cuomo's public statements showing support, the New York legislature did not pass the bill in the 2019 session. However, New York did pass legislation further decriminalizing cannabis use, including expunging many pass cannabis possession convictions and reducing the penalties for small possession of cannabis from a misdemeanor to a violation.

California. Now onto California, where we have been quite active, acquiring a property in February, a portfolio properties in April and another property just last month. As we discussed on the last call, California was the first state to permit the use of cannabis for medicinal purposes, adopting the Compassionate Care Act in 1996, and issued first licenses for the sale of adult-use cannabis just last year, following approval by California voters in November of 2016. California continues to have challenges and delays in its licensing program after numerous revisions to its rules, which has resulted in lower-than-anticipated regulated sales and licensed operators in a slower than anticipated move away from the deeply entrenched illicit cannabis market place. But the market opportunity for regulated cannabis remains tremendous, and it calculated to be about the size of Canada's entire market in a few years time.

Massachusetts. We own 2 properties in Massachusetts, 2 of which we acquired in 2018, and one which we acquired just last month. Our 2 acquisitions in 2018 represented follow-on transactions with tenants Holistic Industries and PharmaCann, as they continue their multistate expansion and we are thrilled to have Trulieve as our tenant following our most recent transaction that closed in July.

As we mentioned previously Massachusetts voters approved the legalization of adult-use cannabis in 2016, and first licenses for adult-use cannabis operators began to be issued in the summer of 2018. Adult-use sales begin in November 2018, generating $50 million in the first 5 months of 2019. While adult-use sales continue to ramp up significantly, medical-use cannabis sales are also expected to remain strong due in part to the tax advantages afforded to patients of medical cannabis.

Pennsylvania. In Pennsylvania, we own 3 properties. 2 of which were required earlier this year. Pennsylvania enacted medical-use cannabis legislation in May of 2016 and dispensaries made their first sales in February of last year's. 12 grower processor licenses were issued in the first phase of this program, with a total of 25 grower processor licenses, all of which have been issued in the 2 phase rollout. Just last month, the Pennsylvania Department of Health announced that there were more than 110,000 active certified patients and more than 1,600 physicians in the medical cannabis program, with the Pennsylvania Department of Health also approving effective as of July 20th, anxiety disorders and tourette syndrome to list the programs serious medical conditions eligible for treatment with medical cannabis.

Ohio. We closed on our properties in Ohio with PharmaCann in March and with Vireo in May of this year. Ohio is the earliest stage state where we owned property, having kicked off sales at dispensaries in mid-January of this year, and with the state's registry opening for patients late last year. The state of Ohio Board of Pharmacy published its patient and caregiver statistics for June, which included nearly 50,000 registered patients and over 3,400 registered caregivers.

As of July of 2019, Ohio had awarded 17 Tier 1 cultivation licenses and 13 Tier 2 cultivation licenses. The state is also allowed to issue up to 40 processing licenses, of which, 7 have received certificates of operation and 56 dispensary licenses, of which, 24 have received certificates of operations. Ohio's medical cannabis market is expected to be large with each permit having the potential to be extremely valuable, given the state's population and broad list of qualifying conditions.

In light of that fact, ArcView estimates Ohio's medical cannabis sales to grow to nearly $300 million by 2022.

Michigan. In Michigan, we own 3 properties, 2 of which we acquired this year, and one which was this year, and one which was acquired last year. Although the Michigan Marijuana Act was passed in 2008, the industry has operated as a highly permissive system, somewhat similar to how California's system had operated historically, prior to the establishment of a state licensing and regulatory framework. And is still one of the largest medical cannabis markets in the United States. Michigan has also significantly accelerated its licensing of medical cannabis operators with the marijuana regulatory agency ruling on 213 medical cannabis business permit applications in May alone. As noted previously, Michigan residents also voted in November of 2016 to legalize adult-use cannabis and state authorities have indicated they will begin accepting license applications from operators in the fall. Taking into consideration all the dynamics of the Michigan market, ArcView expects Michigan's regulated cannabis market to continue to grow at a healthy pace, reaching nearly $1.4 billion by 2022.

Illinois. We own 1 property in Illinois, which we acquired in late 2018, and leased to Ascend Wellness. Similar to New York's evolution, Illinois program as initially rolled out was highly restrictive, resulting in subdued growth for some time. In early 2019, the state regulatory authorities launched the Opioid Alternative Pilot Program, which allows access to medical cannabis for individuals who have, or could receive, a prescription for opioids as certified by a doctor. Along with other loosening of restrictions in the market, these steps have led to strongly accelerating patient growth in the regulated market in 2018 and through 2019. In addition, in late June, Illinois become the 11th state to legalize cannabis for adult-use, with the program expected to launch beginning in 2020.

Maryland. We purchased our property in Capitol Heights, Maryland in 2017. With the first dispensaries opening in late 2017, there were over 60,000 registered patients and 1,300 registered providers in the program as of May.

Interestingly as well as another indication of the continued evolution of the industry, in June, the University of Maryland School of Pharmacy introduced a new master's degree program in medical cannabis, which is thought to be the first of its kind in the United States.

Colorado. We entered the Colorado market in December of 2018, with our acquisition of a property in the Denver area and leased to The Green Solution. Colorado was one of the pioneers in the regulated cannabis industry, rolling out its adult-use cannabis program in 2014 as the first state to legalize recreational cannabis use. In May of this year, Colorado Governor, Jared Polis, signed a measured that will allow physicians in the state to recommend medical cannabis in lieu of opioids. This move could influence sales of medical marijuana and is scheduled to go into effect in early August.

The Colorado market is expected to reach approximately $2 billion by 2022 according to ArcView.

Arizona. Now on to Arizona, where we own 1 property, which we purchased in late 2017. Having commenced medical use of cannabis sales in 2010, Arizona's medical-use cannabis program is further along in its maturity to many other states. According to the Arizona Department of Health Services, there were over 200,000 qualifying patients in Arizona's medical cannabis program as of June 2019, continuing a strong pace of growth. In May, the Arizona Supreme Court ruled that extracts, including concentrates, edibles and other infused products are legal under the state's program. While the ruling did not have a significant economic impact to current operators, this ruling gives official legal approval for edibles in infused sales, which were previously in question. Patient usage has also witnessed strong growth. Sales for medical cannabis grew by 41% from 2017 to 2018, outpacing the growth of the patient pool by 2 to 1.

Nevada. We acquired our first property in Nevada just this past month, which Catherine will discuss later on in detail. Nevada voted to approve adult-use cannabis in November 2016, and put regulations in place very quickly allowing for opening of stores in July of 2017. From 2016 to 2018, Nevada witnessed tremendous growth in the regulated cannabis market, seeing a shrinking illicit market and legal spending growing from $117 million in 2016 to an estimated $580 million in 2018, according to ArcView. In its first full year of regulated adult-use cannabis sales, the state also brought in approximately $70 million in tax revenue, exceeding the state's expectations by approximately 40%.

And finally, Minnesota. We acquired our Minnesota property in 2017. As we mentioned on our last call, our tenant, Vireo, is one of only 2 licensed medical cannabis operators in the entire state of Minnesota, with each operator also operating 4 dispensaries. While a smaller market that began medical cannabis sales in mid-2015, registered medical cannabis patient to Minnesota has experienced significant and accelerating growth from less than 2,000 for much of 2016 to over 17,000 as of July.

Similar to New York, Minnesota's medical cannabis program was initially rolled out as a highly regulated and restricted program, but has gradually expanded the program for treatment of additional medical conditions, including Intractable pain and PTSD, Autism Spectrum Disorders, sleep apnea and Alzheimer's Disease. Intractable pain alone accounts for more than half of all patients certifications. I'll now turn the call over to Catherine, who will walk you through our recent acquisitions, capital raising activity and financial results for the second quarter of 2019. Catherine?

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Catherine Hastings, Innovative Industrial Properties, Inc. - CFO, CAO & Treasurer [5]

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Thanks, Paul. On the acquisitions front, as Alan mentioned, we continue to execute well on our strategy. Since the beginning of 2019, we've acquired 15 new properties in 6 states. Our leases at these properties are a mixture of high-quality new tenants and follow-on transactions with our existing tenants as they continue to grow their footprints in additional states. As of today, we owned 26 properties across 12 states, representing approximately 2 million square feet, including approximately 631,000 square feet under development or redevelopment. As it relates to the second quarter and July acquisition activity, specifically, it's been by far the busiest 4 months of our company's history.

In April, we acquired 5 industrial properties in Southern California, totaling approximately 102,000 square feet for $27.1 million in the aggregate, and entered into a long-term triple net lease for each of those properties with an experienced licensed operator. Also in April, we acquired a 51,000 square foot industrial property in Pennsylvania, and entered into a long-term lease with Maitri Genetics, with our total investment in the acquisition and redevelopment of the property expected to be $16.3 million.

In May, we acquired an 11,000 square foot industrial property in Ohio, and entered into another long-term lease with Vireo, with our total investment in the acquisition and redevelopment of the property been about $3.6 million. Also in May, we acquired a 266,000 square foot industrial property in Pennsylvania for $413 million, and entered into a long-term triple net lease with Green Leaf for continued use of medical cannabis cultivation and processing facility.

In June, we amended our lease with Green Peak at one of our Michigan properties, making available an additional $18 million in funding for a new 55,000 square foot expansion of the property, to meet the demand of the Michigan regulated cannabis market. Assuming full payment of the additional funding, our total investment in this property will be $31 million. Also in June, we acquired a 45,000 square foot industrial property in Michigan and entered into a long-term triple-net lease with an affiliate of Emerald Growth, with a total investment in the acquisition and redevelopment of the property expected to be approximately $10 million. The velocity of our acquisition activity continued through July, with another 4 transactions closing after the quarter end. We acquired 145,000 square foot industrial property in Michigan, and entered into a long-term triple-net lease with Ascend which intends to operate the facility for medical-use cannabis cultivation and processing upon completion of redevelopment. Our total investment in the acquisition and redevelopment of the property is expected to be approximately $19.8 million. This marks our second transaction with Ascend following our initial lease with them for an Illinois property late last year as Ascend continues its multistate growth initiatives. We then acquired a 43,000 square foot industrial property in Nevada, and entered into a long-term triple-net lease with MJardin, for continued use as a regulated cannabis cultivation and processing facility. Our total investment in this property is expected to be $9.6 million, which includes acquisition and redevelopment of the property and marks our first acquisition in the Nevada regulated cannabis market. We followed the MJardin transaction with the acquisition of a 35,000 square foot industrial property in California and long-term lease with DionyMed Brands for continued use as a regulated cannabis cultivation, distribution, processing and dispensing campus. Our total investment in this property expected to be $15 million, which includes our initial purchase price and commitment for redevelopment of the property. This marks our third transaction in California. And finally, in late July, we acquired a 150,000 square foot industrial property in Massachusetts, and entered into a long-term triple-net lease with a subsidiary of Trulieve, which intends to operate the facility for regulated cannabis cultivation and processing upon completion of redevelopment. With an initial purchase price of $3.5 million and an additional commitment to fund up to $40 million for redevelopment of the property, which funding is subject to reduction at Trulieve's option within the first 6 months of the lease term. Trulieve have had tremendous success and developed a track record of distinction in the Florida medical cannabis market, and we look forward to supporting their continued expansion and work in Massachusetts.

Now onto our results for the second quarter and first 6 months of the year. We generated rental revenues of approximately $8.3 million and $14.9 million for the 3 and 6 months ended June 30, 2019, respectively. The increases in both periods were 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 of certain properties. Importantly, this revenue growth reflects only partial quarters of revenues from the numerous acquisitions and leases executed during the year and is 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. Notwithstanding all of this, our Q2 rental revenues grew 155% year-over-year from Q2 of 2018. For the 3 months ended June 30, 2019, we recorded net income of $3.1 million, funds from operations, which adds back property depreciation to net income was $4.7 million, adjusted funds from operations, which adds back noncash stock-based compensation and noncash interest expense related to our exchangeable senior notes was $5.8 million.

For the 3 months ended June 30, 2019, adjusted funds from operations for Q2 grew 176% from the prior year period. For the 6 months ended June 30, 2019, we recorded net income of $6.4 million, funds from operations of $9.2 million and adjusted funds from operations of $11.1 million. For the 6 months ended June 30, 2019, adjusted funds from operations increased by 215% from the prior year period. As Alan mentioned, on July 15, we paid our ninth consecutive quarterly dividend of $0.60 per share to common stockholders of record as of June 28. The Q2 2019 common stock dividend reflects a 33% increase from the prior quarter and a 140% increase from the prior year second quarter. This serves as a reflection of our strong growth and operational performance over the past year and our confidence in our acquisition pipeline. And with respect to financing activities, in July 2019, we completed a follow-on public offering of common stock, raising gross proceeds of about $188 million, including the exercise in full of our underwriter's option to purchase additional shares. We are truly grateful for all of our stakeholders continued support and we are focused exclusively on investing the proceeds from these offerings with the best tenants. And with that, I'll turn it back to Alan. Alan?

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Alan D. Gold, Innovative Industrial Properties, Inc. - Executive Chairman [6]

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Thanks, Catherine. We have had a tremendous year-to-date for acquisitions, far outpacing our expectations. With that, we are very excited about the opportunities to come in this fast-growing industry and our singularly focused on executing on our business plan. I want to personally thank our stockholders for your continued support as we aim to continue to create sustainable and long-term value for it. With that, a like to open it up to questions. Operator, could you please open the call up for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Tom Catherwood with BTIG.

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Thomas Catherwood, BTIG, LLC, Research Division - Director & REIT Analyst [2]

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So Alan, following along on your comment about acquisition pace. Clearly, it's accelerated more than surpass the $90 million, you guys did in 2018. Certainly a 2 part question. First, how is the pipeline sizing up for the balance of the year? And second, what are the key drivers behind the higher volume so far? Is it primarily tensed getting a better understanding of the sale-leaseback structure? Or is it expanded state programs? Or is it something else?

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Alan D. Gold, Innovative Industrial Properties, Inc. - Executive Chairman [3]

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It's a multipronged question. I hope I can answer all of it. First, we are extremely excited about our pipeline. As you know, I mean when you look back already this year, we already acquired 15 new transactions. When we raised capital at the beginning of the year, we said that $200-plus-million of capital would be able to place in a 6 to 12 month period of time, and we obviously place that well, ahead of schedule. We are now having just raised another gross $188 million. We indicated that we will be able to place that in a 6 to 9 month period of time based on the size of the pipeline that we saw at that time. Since then, the pipeline has increased and continues to increase with some very exciting entities similar to the Trulieve company that we just recently announced a transaction with. So what we're seeing are more mature companies looking at our program and coming away very excited and very interested. And I think the reason for that is a multipronged: one, as you described, the program is becoming more recognized as a way to raise capital; two, Innovative Industrial Properties is certainly becoming the extremely well known within the industry; and three, I think the Canadian capital markets have slow down somewhat giving our -- these mature companies a pause as to where capital can be raised and certainly, we are a significant and exciting positive source for that capital.

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Thomas Catherwood, BTIG, LLC, Research Division - Director & REIT Analyst [4]

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Understood. And then kind of sticking with that Trulieve deal and I know you provided more information on it. But when we go back to the comments on the 4Q '18 call, you mentioned, trying to break into the Florida market, you've always been interested in that, but the challenges around that, obviously, as Cat mentioned, Trulieve has a big presence in Florida. Is the idea -- kind of situation here that this transaction in Massachusetts opens up more opportunities with them in Florida? Or is it just really a one-off transaction?

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Alan D. Gold, Innovative Industrial Properties, Inc. - Executive Chairman [5]

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So we are really excited about the growers that we underwrite and spend a great deal of time, getting to know and bringing them into our portfolio. And as we have indicated in the past, typically, we see about 30% of our pipeline in the form of transaction with existing growers, and we continue to see the same sort of demand in our pipeline from that. We're very excited about the Florida market, we think that is a very strong market. And we think that by penetrating that market with one of the stronger growers, we will be in great position. I just can't say how pleased we are with the -- and how excited we are about the size and the quality of our pipeline today.

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Thomas Catherwood, BTIG, LLC, Research Division - Director & REIT Analyst [6]

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Understood. So then I guess one for Paul. In the past, you've talked about looking at some select retail opportunities, but being very cautious around that. Cat mentioned that the only med deal, included a storefront as part of that production and cultivation facility. How are you looking at the retail side of the business from a specimen standpoint right now?

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Alan D. Gold, Innovative Industrial Properties, Inc. - Executive Chairman [7]

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Thanks, Tom. So as you talked about before we are considering the retail opportunities. These are coming to us more likely as the last transaction, the dying transaction, is part of the, perhaps the cultivation package or in a portfolio package. So we're looking at these as they come across, but they do have different yields typically and different lease term, so we look at each one individually, but we're open-minded to.

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Thomas Catherwood, BTIG, LLC, Research Division - Director & REIT Analyst [8]

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Got it. And then last one for me. Thinking about the deals that you have done over the past quarter. How many deals would you say you're looking at right now are one-off type transactions? And how many deals are more strategic like relationships whereas, Alan, you alluded to 30% of the business is just previous tenants. There's a lot of that kind of work going forward along the same lines? Or there's still a lot of one-off in the pipeline?

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Alan D. Gold, Innovative Industrial Properties, Inc. - Executive Chairman [9]

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I think rarely do we do a one-off transaction with the thought process that the grower is going to be looking to us for future opportunities or future capital. So I mean I look at -- we look at every one of our growers as a potential source for new transaction. And as we expands, it just shows you why -- as we expand our portfolio of tenants, you can see why our pipeline continues to grow and increase significantly over time.

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Operator [10]

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Next question comes from John Massocca with Ladenburg Thalmann.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [11]

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So what were may be some of the factors that drove I guess the relatively lower cap rate on the Trulieve transaction? Is it driven by the quality of the tenant, competition in the Massachusetts market? Anything broader, just any color there would be helpful.

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Alan D. Gold, Innovative Industrial Properties, Inc. - Executive Chairman [12]

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Yes. I mean think that -- I think one, as I have described just a minute ago, we are seeing more mature companies come into our universe and into our pipeline. And Trulieve is one of the strongest growers out there, having generated tremendous positive EBITDA and strengthen and that market. So we're very excited about that. I think as we talk about who are our primary competition is, it's -- the competition for capital that these very mature companies have with throughout -- through the capital markets. And that's who we're competing with this transaction. So we're actually -- when we underwrote that transaction, we spent a great deal of time with the management team, with the opportunities, with the corporate guarantee, the strength of their marketing prowess, the strength of their financials and we are comfortable that the yield was appropriate for the risks that we are taking on that specific transaction.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [13]

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Okay. And with that transaction still, I mean more of a detail oriented front. What were some of the factors that -- with regards to kind of the ability to truly it has to may be scale back the TI reimbursement commitment. When does that window open in kind of -- was that $40 million more kind of a broad range you gave them and they really would only need like 20 or 30? Or is that just in case they can build this facility or redevelop this facility cheaper than they anticipated?

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Catherine Hastings, Innovative Industrial Properties, Inc. - CFO, CAO & Treasurer [14]

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Yes. John it's really kind of the latter. I mean understanding the facility and where is they were in the budgetary process, we allow some flexibility to them over the next 6 months, to understand what that budget is and draw accordingly to the costs that are going into the project.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [15]

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Okay. And then, on the acquisition side, may be more broadly. Are you seeing any more interest in your real estate solutions being generated by kind of operator M&A activity that's happening in the cannabis space? I mean DionyMed seems like one of those kind of situations that increasing the deal flow you're seeing?

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Alan D. Gold, Innovative Industrial Properties, Inc. - Executive Chairman [16]

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We do see significant deal flow occurring from our group of our growers expanding and acquiring other growers. We do see that, yes.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [17]

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Okay. And then on year on balance sheet, how are you looking at -- I know it's still early days, a lot of capital to deploy here. But as you may be look on the horizon additional debt financing, is that something that might interest you, especially it seems like the fairly active debt market with some of these specialty finance providers for the operators side of things, but could that be an attractive way to raise additional capital here if you guys continues to grow?

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Alan D. Gold, Innovative Industrial Properties, Inc. - Executive Chairman [18]

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That's I think a very good question. We do have additional capacity given the fact that we raise additional common equity to perhaps take on more debt than we have on the balance sheet right today. Although our preference does lean more towards the equity side of our balance sheet.

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Operator [19]

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(Operator Instructions)

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Alan D. Gold, Innovative Industrial Properties, Inc. - Executive Chairman [20]

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Operator, it sounds like we're done with question. With that, I'd like to thank our stakeholders again, and more importantly, thank to team for their incredible dedication to this exciting and growing company and their ability to execute on this very exciting business plan. Thank you, all.

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Operator [21]

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