Q4 2023 Innovative Industrial Properties Inc Earnings Call

Participants

Brian Wolfe; Vice President, General Counsel, Secretary; Innovative Industrial Properties Inc

Alan Gold; Executive Chairman of the Board; Innovative Industrial Properties Inc

Paul Smithers; CEO, President, and Director; Innovative Industrial Properties Inc

Ben Regin; Chief Investment Officer; Innovative Industrial Properties Inc

Catherine Hastings; COO; Innovative Industrial Properties Inc

David Smith; CFO and Treasurer; Innovative Industrial Properties Inc

Tom Catherwood; Analyst; BTIG

Scott Fortune; Analyst; Roth Capital Partners

Alexander Goldfarb; Analyst; Piper Sandler

Eric Des Lauriers; Analyst; Craig-Hallum Capital Group LLC

Presentation

Operator

Good day, and welcome to the Innovative Industrial Properties Incorporated fourth-quarter and full-year 2023 earnings call. (Operator Instructions) Please note that this event is being recorded.
I'd now like to turn the conference over to Brian Wolfe, General Counsel. Please go ahead.

Brian Wolfe

Thank you for joining the call. Presenting today are Alan Gold, Executive Chairman; Paul Smithers, President and Chief Executive Officer; David Smith, Chief Financial Officer; Catherine Hastings, Chief Operating Officer; and Ben Regin, Chief Investment 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 for the Private Securities Litigation Reform Act of 1995 and actual results may differ materially due to a variety of risks, uncertainties and other factors, please refer to the documents filed by the Company with the SEC. Specifically, the most recent reports on Forms 10 K and 10 Q, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
In addition, on today's call, we will discuss certain non-GAAP financial information such as FFO normalized FFO and adjusted FFO. You can find this information together with reconciliations to the most directly comparable GAAP financial measures in our earnings release issued yesterday as well as in our eight K filed with the SEC.
I'll now hand the call over to Alan.

Alan Gold

Thank you, Brian, and welcome, everyone. We are pleased to discuss our results for the full year 2023 and recent activity as we enter into our eighth full year of operations, the Company performed well in 2023 and has continued to execute year to date, demonstrated by one annual a FFO per share growth of 7%. Two, increasing our annual dividends declared each year since inception in 2016, three, committing capital totaling $119.5 million during 2023 for executing new leases and analyze to release five properties representing over $140 million of invested capital and five further enhancing our liquidity position and strong balance sheet with the closing of a new $45 million revolving credit facility for the year, IP generated total revenues of $310 million and adjusted funds from operations of $256 million, increases of 12% and 10% over 2022 respective. I will note that these growth results were achieved during a time when we strategically determined to reduce our investment activity in light of macroeconomic uncertainties and significant increased cost of capital. That financial performance allowed us to continue to grow our dividend with $7.22 of common stock dividends declared over the course of 2023 Annual dividends increasing each year since inception, our most recent dividend declared in Q4 of $1.82 per share was at the midpoint of our Board's target dividend payout range of 75% to 85% of AFFO. We have one of the strongest and most experienced teams of real estate professionals in the cannabis industry, a high quality portfolio and a conservative and flexible balance sheet with a 12% debt to total gross assets, no variable-rate debt, no debt maturities until May 2026. We further enhanced our balance sheet position during Q4 with introduction of a revolving credit facility and then recently upsized that facility earlier this month, which David will touch on further.
On the investments front, we are very pleased with our execution on re-leasing initiatives as well as the opportunities we are seeing to selectively close on new investments, which Ben will discuss in more detail from a regulatory perspective.
As we noted in our prior call, we continue to follow closely the potential rescheduling of candidates from Schedule one to Schedule three under the Controlled Substance Act. Of course, there are significant benefits to this. The most important, which from our perspective is the potential lifting of the consistent story to 80 E. federal taxes imposed on regulated cannabis operators, and Paul will discuss our thoughts in more detail.
I will now turn the call over to Paul to discuss licensing, regulatory and industry dynamics. Paul?

Paul Smithers

Thanks, Joe. And licensing. Before discussing overall market developments, I'd like to provide an update on the properties leased or previously leased to parallel Green Peak and Kings Garden.
As we have noted in the past, and I think it is worth repeating here. We are, of course, first and foremost, focused on maximizing the value of each for our properties and having tenants with strong teams that can manage their businesses successfully through the inevitable ups and downs with the industry. As we discussed in detail previously, Green Peak was placed into receivership in March of last year, and we subsequently regained possession of the Summit building a cultivation and processing facility on a redevelopment and three small retail locations. The receiver also decided to turn back the harvest Park cultivation and processing facility to us, but we expect the buyer of the remaining Green Peak receivership estate to assume the leases for the other three retail locations with no changes to terms. As you also know, we filed actions against ParAllele for position and damages at our Texas and Pennsylvania properties and regain position of those two properties in March and October of last year, respectively. We are actively exploring all options for these properties with respect to the Pennsylvania property. A consent order was issued in October, affording us damages of $15.5 million, of which we collected $1.7 million in Q4. And in late September. As we previously disclosed, we regained possession of the remaining four properties previously occupied by Kings Garden. As Alan noted, we are pleased with our re-leasing efforts to date for these properties, and Ben will provide further detail in his prepared remarks.
Market developments.
Growth of the overall cannabis industry in the US continues to remain strong with BDSA. projecting cannabis sales to increase approximately 10% in 2024. Bdsi estimate U.S. cannabis sales were $29.5 billion in 2023, representing approximately a 12% growth from 2022, although unit pricing for regulated cannabis products has been under pressure in certain states at the wholesale level for some time now, indoor cannabis cultivation continues to command significant sustained premiums versus greenhouse and outdoor counterparts. Several factors affecting unit pricing, including basic supply demand dynamics, lack of meaningful enforcement in certain states on illicit non-license cannabis sales by state and local law enforcement authorities, taxation and general macro economic conditions.
From a state market perspective, we continue to see divergence in performance and dynamics with new markets experiencing high growth while some mature markets become increasingly competitive, especially after an extended period of price compression and the aforementioned challenges in competing with the illicit markets. For example, 2023 saw strong rollouts for adult use sales in Missouri and Maryland and Ohio legalized adult use in November with sales expected to commence this year, and I expect it to be one of the fastest-growing markets in the near future.
On the flip side, while New York introduced its adult-use program more than a year ago, it remains constrained by limited retail availability and a thriving illicit market. So there are efforts in the state to ramp up enforcement efforts for additional perspective, BDSI put out recent estimates that illicit competition drives more than three-quarters of total sales in the New York market and that there were roughly 50 active adult use retailers in the state earlier this month versus over 2000 illicit retailers, capital availability.
Another continuing theme from our prior calls is the impact that the tightening of financial conditions has had on capital availability for the cannabis industry. As with other industries, the cost of capital and capital availability have fundamentally changed for cannabis operators over the course of the past few years with Veridian Capital Advisors reporting that both US operator capital raising and mergers and acquisitions activity in 2023 were at their lowest levels since before 2018. The funding environment continues to be challenged right now. That said, we've seen a significant bounce in many publicly traded MSOs stock prices since the announcement by the Department of Health and Human Services that have recommended to the FDA a reclassification of cannabis from Schedule one to Schedule three federal legislation on the federal legislation front, we are closely watching for progress on the FDA's evaluation of the HHS recommendation to reschedule cannabis to Schedule three. Most importantly, such a reclassification is expected to end the two 80 E. tax treatment, which has imposed an extreme unsustainable tax burden on regulated operators. For years, we expect such a change to be a great win and potentially significant positive catalyst for the industry immediately providing meaningful improvement in many operators financials. To give you a sense of magnitude for this potential adjustment, a recent Veridian analysis estimated that removal of two, 80 burdens could reduce the 12 largest publicly-traded operators collective tax burden by $700 million annually, providing for a rational tax structure with these operations, many of which faced effective tax rates of well over 100% under the two e. regime.
I'd like to now turn the call over to Ben to discuss our portfolio and leasing activity in the fourth quarter and into 2020 for Ben?

Ben Regin

Thanks, Paul. For my prepared remarks, I plan to highlight our leasing progress for our vacant and under development assets. We took back possession of our summer property in Michigan in March of 2023, while it was under redevelopment, we signed an LOI for the asset in Q three less than six months after repossession and executed a lease in Q4. We anticipate completing redevelopment of the 201,000 square foot project in Q4 of this year and are looking forward to our new tenant moving in and activating the building.
In addition to the lease for the summer building, we've also executed LOIs for both our McLean and 19th Avenue properties in Southern California. We are working diligently through lease negotiations on these assets, and we'll provide updates as we progress. These two assets, along with Summit represent over $120 million of invested capital. And we are very pleased with the demand we saw for the space and the speed in which we were able to get each asset under LOI or lease also, as Paul noted, Green Peak is expected to move out of our harvest Park property on March first, we saw significant interest in the asset since the announcement of Greenpeace departure and executed a letter of intent earlier this month ahead of green Peak's move out date.
Lastly, we signed a lease last month for one of our three vacant retail assets in Michigan. We are continuing to market for lease the remaining two retail assets as well as our Northampton and Del Sol assets in Southern California, the total of which is less than 1% of our total invested capital.
Regarding our San Bernardino property, as noted on previous calls, we are exploring a potential mixed-use development at the property, and we'll continue to provide updates on progress on future calls for our land site in San Marcos, Texas. We continue to explore options for that site for vertical construction has not yet and at our Pittsburgh Pennsylvania asset ParAllele wound down its operations in late October, and we were awarded a consent judgment for possession and damages at that time, as Paul noted, and collected about $1.7 million on that judgment in December. As we now have control of the asset, we are actively exploring leasing options for the property.
Regarding new investment activity, we have continued to selectively close on new opportunities supporting our tenant partners and their growth initiatives in key markets. As we previously reported, we amended our lease with goodness growth in New York in Q4, providing additional funding to complete the development of the expanded cultivation and processing facility and increasing rent accordingly, as business growth previously disclosed, and we noted on the last call, the Company is exploring the sale of its New York operations, including the operations at this facility. We also executed a lease amendment with PharmaCann to provide additional construction funding of $16 million to our New York asset and PharmaCann executes on its strategy to expand production capacity after being awarded an adult use production license late last year. We are pleased with the demand we are seeing for assets across markets and the significant leasing progress we have made in the last year, also continuing to source attractive new investment opportunities, which we will continue to pursue on a very selective, disciplined basis.
With that, I'll turn it over to Karen Katen.

Catherine Hastings

Thanks. Then for this call, I'll describe our property portfolio and tenant roster. In addition to our rent collection statistics and updates on our development projects. As of December 31st, we owned 108 properties across 19 states, comprising 8.9 million rentable square feet, including 1.4 million square feet under development or redevelopment. Of these 108 properties, 103 properties are included in our operating portfolio, which was 96% leased at year end with a weighted average remaining lease term of approximately 14.6 years. Our portfolio continues to be well diversified, with no one tenant representing more than 16% of our annualized base rent and no state, representing more than 15% of our annualized base rent. We have relationships with some of the largest and most experienced operators in the industry with our leased operating portfolio comprised of 90% multistate operators and 62% leased to public company tenants. The total amount of capital invested and committed across our operating portfolio equates to $275 per square foot, which we believe remains significantly below replacement costs.
Moving on to rent collection, we collected 100% of contractually due base rent and property management fees from our operating portfolio in Q4. Rent collected for the quarter included approximately 800,000 of security deposits applied for the payment of rent in connection with an amendment with forefront at one of our Illinois properties. As we indicated in the past, this property has been under development since August of 2021 and has experienced significant delays to get permanent power delivered to the building, which is needed to get it operational. We recognize this hardship and in January this year, restructured for France, Illinois rental obligation to reduce the base rent due through September 2024 and increase their obligation there after allowing for better alignment of for France, future Illinois rental obligations with their ability to generate revenue from the property while also extending the term of all four leases we have with forefront. We're also pleased to report that the building did finally get permanent power in January, and we look forward to this project's completion in the near future.
Q4 rent collection included approximately $700,000 of the $1.7 million collected in December 2023 from ParAllele pursuant to a consent judgment award in our favor and applied to rent due from ParAllele for October 2023.
At one of our Pennsylvania properties, which ParAllele vacated on October 31st. As David will describe next, the full $1.7 million from ParAllele increased our revenue for the fourth quarter but only the 700,000 impacted our Q4 rent collections statistics. Overall, for the full year 2023, we collected 98% of our contractual rent on our operating portfolio. As for the first two months of 2024, we collected 100% of contractually due base rent and property management fees from our operating portfolio. We also continued to fund draws for improvement allowances or construction development to our operators under our leases. As we've previously noted on prior calls, these improvements are critical for the efficient production of quality cannabis products at scale. In Q4 of 2023, we funded $21 million for building improvements and construction activities at our properties. Recently, several projects received their operational status, including battle green in Ohio with several other projects projected to complete this next quarter.
And with that, I'll turn it over to David Davis.

David Smith

Thank you, Catherine. For the fourth quarter, we generated total revenues of $79 million, a 12% increase from Q4 of last year. The increase was driven primarily by an increase in tenant reimbursements versus the prior period as well as activity in prior periods for the acquisition and leasing of new properties, additional funding of building improvements provided to tenants at certain properties that resulted in base rent increases and contractual rental escalations. $79 million of revenue for the fourth quarter included approximately $0.8 million of security deposits applied for payment of rents, or $0.03 per share and $1.7 million or $0.06 per share received as partial payment from the consent judgment against ParAllele for its failure to pay rent at one of our Pennsylvania properties previously leased to parallel.
For the three months ended December 31st, 2023, we recorded net income attributable to common stockholders of $41 million or $1.45 per share. Adjusted funds from operations for the fourth quarter was $64 million or $2.28 per share, an increase of 8% compared to the fourth quarter of 2022, driven by increased tenant reimbursements, revenue generated by properties acquired in prior periods, contractual rent escalations and revenue earned on additional CapEx investments at existing properties FFO for the fourth quarter was down $0.01 per share versus the third quarter FFO of 20 $0.29 with a decrease primarily due to our taking back the remaining four properties at Kings Garden occupied until late September.
Regarding Kings Garden, as mentioned on last quarter's call, results in the third quarter included $1.7 million or $0.06 per share of rent from Kings Garden applicable to those four properties, which was partially offset by $0.4 million in payments made by Kings Garden in the fourth quarter. Pursuant to a consent judgment issued in our favor. On January 12th, we paid a quarterly dividend of $1.82 per share to common stockholders of record as of December 29th, an increase of $0.02 per share versus the third quarter dividend of $1.80. As Alan noted, our dividend remains covered by our AFFO during the quarter with a payout ratio of 80%, which is in line with the Board's targeted payout ratio of 75% to 85% of AFFO.
Turning to the balance sheet at year end, we had approximately $2.6 billion in total gross assets and roughly $304 million in fixed rate debt. Our debt outstanding as of today consists solely of $300 million in unsecured bonds, not maturing until May 2026, with the holders of the remaining $4 million of exchangeable senior notes having exchanged their notes in full earlier this month for a mix of cash and common stock or receive cash payment at maturity. We continue to maintain credit metrics that are among the best in the entire publicly traded read industry with a debt to gross assets ratio of less than 12% and a debt service coverage ratio in excess of 16 times.
On the liquidity front, we ended the fourth quarter with over $175 million of total liquidity comprised of our cash, short-term investments and availability under our revolving credit facility. We closed on this credit facility last October, which at that time was a $30 million three-year facility. I'm pleased to report that just this month we were able to increase our capacity at $15 million to provide us $45 million in total availability. We are well positioned as we continue to maintain a conservative and low leverage balance sheet, generate positive free cash flow and have now added another liquidity option for the company with the closing of this credit facility in the fourth quarter.
Finally, as a result of the investment activity that Ben mentioned, we opportunistically tapped our ATM program on a limited basis, issuing 101,000 shares of common stock for $9.6 million in net proceeds with that I will turn it back to Alan Allen.

Alan Gold

Thanks to that I'd like to note the following and closing now into our 8th year of operations. I am proud of what our team of dedicated professionals has accomplished over that time. With our property footprint, team expertise, balance sheet position and strategic focus, I believe we are well positioned for the journey ahead serving a dynamic industry with a continued long-term growth trajectory.
With that, I'd like to open it up to questions. Operator, could you please open the call up for questions?

Question and Answer Session

Operator

(Operator Instructions) Tom Catherwood, BTIG.

Tom Catherwood

Thank you and good morning, everyone from Paul. You had previously talked about and kind of mentioned that you expected weaker operators to exit mature markets over time. And there was an article out this week that spoke to a year over year decline in active U.S. cannabis licenses in 23 despite expansions of states like Maryland, New Jersey and Illinois? And how is this tightening impacted your markets? And are you expecting more consolidation in 2024?

Alan Gold

So Thomas, Allen first, I have to say that we are we're really very proud of our current tenant base and our current portfolio and the geographic diversification of our of our properties. We think that we have some of the strongest tenants in the industry. And we we believe that the growth that we exhibited in 2023 or 7% year-over-year growth is something that is replicable. And we look forward to continued growth in 2024. But now I'm going to turn it over to Paul to answer the question.

Ben Regin

Yes, I hate, John. So yes, I think we've always figured out that there would be some consolidation over the years and we have seen that. But I think it's important to note that we are our tenant base is, as you know, primarily indoor grows. So what we're seeing a lot of the consolidation is on some of the states that have more outdoor grow and our greenhouse grow. So we're very happy with the performance of our operators. And if we do see some consolidation, some of the bigger states with Michigan and California, as we've noted in the past, we think that's only a positive 90% of our tenant base are MSOs, as you know. So we think we're there really well-positioned going forward.

Tom Catherwood

It's really helpful. And then we're trying pieced together a couple of items since three QU., it put more capital to work than you did over the prior two quarters. David, you mentioned tapping the equity markets opportunistically in 4Q and obviously upsizing the credit facility to $45 million. How do these items relate to your interest and maybe comfort level in pursuing additional investments this year?

Paul Smithers

So again, Tom, this is Alan. I mean, I think that we are we are cautiously as we were in 2023, keeping the same sort of you on in 2024 being very cautious, but opportunistic we believe that we have been able to drive strong returns to for our shareholders and and are going to continue to do so and that we believe that the or the strength of our existing tenants continues to be exceptional, and we look forward to a bright 2024. But nonetheless, then talk about our portfolio pipeline.

Alan Gold

And Tom, appreciate the question on the pipeline, we're seeing a lot of attractive new opportunities. And when we really think about driving revenue growth going forward, there's the pipeline where we're seeing opportunistic and transactions out there that we can take advantage of. And I also want to highlight the 460,000 square feet of leasing and LOI activity we had out of out of our development portfolio as well as another 128,000 square feet within our operating portfolio that we have under lease or LOI in the last year. So not only did the new transactions that we can pursue, but but nearly 600,000 square feet of leasing activity between our new leases in LOI and last year, Thinkful can to set us up well for continued revenue growth going forward.

Tom Catherwood

Appreciate that color. And then last one for me, Dan and Paul, I know you both touched on on New York and the challenges that it has had, but sentiment from MSOs seems to be improving in the market. I think PharmaCann announced plans to increase headcount by nearly three X in the state and obviously, you've made incremental investments over the last few months in New York. What are you seeing on the ground in the state? And how do you expect the market to evolve going forward?

Alan Gold

I think we're seeing we're happy to see the additional retail licenses being issued. There's certainly been some historical challenges, but we very much like the position that our tenant partners are in the state and to your comment about PharmaCann. So we feel there's a tremendous amount of value of that asset, in particular, a lot of the cultivation in the state is either outdoor greenhouse, as Paul touched on, that is one of the very few high-quality indoor facilities in the state. I think it sets PharmaCann up very well to take advantage of the wholesale opportunities that we're going to see. That's projected to be one of the top markets in the country, perhaps not it's growing as fast as some had hoped in previous years, but we're really seeing some improvement seeing the improved sentiment from the MSOs. As you mentioned, people that are very bullish on the state want to get into the market. They recognize the potential there, and we're very happy to support it tenant partners on their growth initiatives in that state.

Tom Catherwood

Appreciate all your thoughts. That's it for me. Thanks, everyone.

Operator

Scott Fortune, Roth MKM.

Scott Fortune

Yes, thank you, and thanks for the questions here. Just kind of want to dig a little deeper in there, probably for being in that as you talk with your tenant partners, we see most of them really focus on cost efficiencies, improving yields within kind of cultivation facilities to drive their profitability and margins as the prices compressed here and some of these markets, but two things, one, a better ops and improves your tenants cash flow generation, which is important for the tenant health, but more importantly, second, what is IPAs on your your help or your involvement in improving these facility efficiencies, improving yield and you expect to see kind of facility improvement needed more moving forward here to be successful in a normalized lower pricing environment for them? And just a little follow-up on that, would be kind of and while demand volume for cannabis remains very robust, kind of where you are you seeing pricing stabilize in your tenants in these key states to kind of further strengthen that tenant now from our standpoint. Sorry, long-winded question there, but just wanted to dig deeper into the up front.

Alan Gold

So Scott, this is Alan. So first start from the very beginning our business model and business plan was to provide our capital to some of the smartest and best growers in the country. And we've done we've done that. We have a very strong portfolio. And as big as it's been noted earlier, that over 90% of our portfolio are MSOs and matter of fact, over 62% of our of our tenants are public public tenants and the majority, if not almost all of them, are now cash flow breakeven and or EBITDA breakeven or positive. And the business model is to provide them capital so that they can create a very efficient spaces and that they are the ones who are focused on the efficiency of their of their operations. And as you can see that they've been they've been the ones doing that work and continue to do that work in and are our, I think, doing a very good job of keeping up with the technology and the efficiencies to be able to deal with on pricing pressures and the macroeconomic issues that the broader economy is exhibiting. So I think I think that that would be how we would look at it.
Now as to I don't know if Paul or Ben want to talk about the overall pricing pressures on the wholesale pricing, but just keep in mind that as both both Paul and and Ben have reiterated that we deal with a indoor grow primarily in US facilities and products and or have tenants that deal with those type of products as opposed to the outdoor grow product that is that is exhibiting the most pricing pressure.

Paul Smithers

And Scott, this has been to follow up on Alan's comments on pricing things. I've been very pleased to see the stabilization in particular, some of the markets people have been focusing on historically being California and Michigan and the sentiment there has certainly gotten better. And I think that's evidenced by the leasing success we've had in those two markets and we had a good chunk of the nearly 600,000 square feet of leasing activity we mentioned was both in Michigan and California and most recently the harvest Park facility that Green Peak intends to move out of after they announced that we received a tremendous amount of interest, multiple offers, and we're able to successfully put that under LOI before Green Peak even moved out of the building. So I think that really speaks to the way operators on the ground in those markets, their confidence going forward and the pricing stability in the market. So overall.

Scott Fortune

Got it. I appreciate that color. And maybe a follow-up on this discussion on 23, we saw a year of retrenching by your tenants. Obviously, CapEx for for most of the major MSOs that you work with came off anywhere from 30% to 50% and kind of similar expectations of our earnings are coming up here shortly for 24 as far as the CapEx, but what are you hearing from your from your tenants kind of moving forward. If we get the federal relief, obviously you highlighted that the cash flow from the tax savings will be generated by the MSOs. That could be pass through the pricing, but also they are looking to grow. Right. And just kind of give a sense for your tenants and what are you hearing from them as far as regarding sales leaseback opportunities going into later in 24 into 25 compared to last two, three quarters versus kind of their CapEx expectations, just kind of the temperature around your tenants from that standpoint improving, right.

Alan Gold

So this is Alan again. And I first saw, I think that I think as we've stated, we believe that the 24 is going to look kind of similar to 23. We believe there's still tremendous demand for our capital and the type of capital that we provide. And there are significant opportunities as we as we've also shown that we've been able to to opportunistically take advantage of some investment opportunities most recently and which has allowed us to generate that the above average growth year over year. So we still think that that's that is out there, but we're being cautious. And I think I think, Ben, you would agree that we're I think, given the tenants out there remaining cautious?

Scott Fortune

Yes, I think I think that's fair. I think we will be very strategic and disciplined in investing additional capital. I think as Alan mentioned, 24, looking like 23 where we are we're able to source very accretive and attractive opportunities to support our tenants, grow our portfolio and intend to continue to do that. Yes. And then Ray, and then one but no, I'm sorry. Maybe, Paul, you talked about the overall industry growth rate.

Paul Smithers

And yes, I think it's when we talk about relatively slower years in 23 and maybe going for 24, we can't lose fact that we had a 12% increase in the overall market in 23. And looking forward in 2024, it's projected to have a 10% increase. So those are not insignificant numbers. And I think we look at potential states coming on primarily Florida and Pennsylvania, perhaps with the adult-use programs this year is really exciting. I think that's not lost on a lot of our operators, especially in those states. So they're excited.

Ben Regin

There's that excitement. I think even if you put aside the rescheduling conversation. So we see significant growth with or without rescheduling. And so our operators are excited about that also and we have this year.
Yes, last year, Oklahoma, Minnesota Delaware, Ohio, they passed their programs and we're looking at 24 tests and development in those. So those states new potential states for adult use are pretty exciting for the industry. No, I agree completely Ohio, Minnesota and Virginia are expected really come on board to Then last question real quick and just from a housekeeping side of things and congrats on the pre-leases in LOIs in place.

Scott Fortune

But to follow up on the amended leases you have had from 23. Are those now being fully paid back as the increased or the pro rata payback was supposed to start January 24th. Is that starting going forward here?

Paul Smithers

So I'm I have I can't address that, but just it goes. It goes to the strength of our tenants and how how well there was some need to provide some additional relief. I think things seem to be proceeding very well count and we were pleased to receive the limited deferral that we had issued to some of our tenants last quarter and they've all started paying rent. Again, cash rent and holistic tenants go in forefront where the three tenants that we had offered that program to, and we're happy to see them start paying cash again.

Scott Fortune

Great. Thank you for all the detail.

Operator

(Operator Instructions) Alexander Goldfarb, Piper Sandler.

Alexander Goldfarb

Morning.Morning out there. A few questions for me. First. Yes, just thinking about the the spaces that you guys have recaptured and then reletting, how much NOI is coming back online this year from the spaces that you recaptured last year or previous that you've now backfilled and have tenants that are opening up this year. Just want to get a sense for how much NOI that is on an annualized basis. And then when that NOI will come online this year from a earnings perspective?

Alan Gold

Yes, this has been the I would just say that each each situation's going to be different. Some of the deals that we mentioned are under LOI. We are diligently working through lease negotiations, but it's a real estate company that takes some time. So I can't give you an exact number as to when that revenue will commence given the status of negotiations. But again, I think we, as a company are fairly very happy with not only the amount of leasing activity the pace of leasing activity, the quality of the tenants that we've been able to source to backfill these properties. And I think it's been a tremendous amount of progress that we've made but as you know, as to specific timing, we will we will continue to report and provide updates as we can throughout the year.

Alexander Goldfarb

Okay. But then along those lines, is there a sense of how much in aggregate NOI there is or it sounds like this is this leasing that you guys have done really is more of a 2025 impact just trying to get a sense because you clearly have been busy. You spoke positively about some of the markets that have stabilized and the intensity of the leasing in California and Michigan, which is a good thing. I'm just trying to see when we should expect it to hit the bottom line. And it almost sounds like it's more of a 25 I mean, yes, without we don't want to get into providing guidance. We don't want to get into specific deal terms. I would say that we're very happy with the returns that we're getting on our investment in each of these assets in each case. Again, these things take time and we'll work through otherwise work that we couldn't get tenants in the space get them up and running, get them revenue-generating as fast as we can to continue to provide them drive revenue growth and provide value to our shareholders.

Ben Regin

Our next question is Paul I think I think it was you who spoke about the difference in pricing and how your indoor product is commanding a premium outdoor and hot house product is under pricing pressure and then I guess separately, there would be of the illicit market. I'm going to go back to a theme that I've you and I've spoken about before, especially with Fendt now are you seeing it sounds like the the market is finally coming around to understanding there the regulatory benefits of the product that's grown in Europe in your facilities. Is that the case.

Scott Fortune

And do you think that gives you a leg up versus the illicit market? Or does the cannabis market remain purely price driven and therefore, people don't pay don't put a volume premium on, you know, the quality that you guys provide versus what's going on in from the illicit market or other sources?

Alan Gold

Yes. So Alex, this is Alan. Before I turn it over to Paul, I just want to just remind you and all the listeners that we don't touch the plant. We don't sell a single.

Paul Smithers

Yes, I didn't.
Yes, sorry about that, Alan, sorry, sorry, yes.

Alan Gold

And but our tenants who do who are working them, we're going to probably come in with perhaps, Paul, you want to say, yes, we talked about Houston, you're right, it was a product grown in a controlled environment is vastly superior to a product that's grown outdoors and is subject to everything outdoors, pulling pests and variances and the weather. So you just start with the idea that when you can control the growth, you get a better product. And that's certainly true for the medical product, which can be manipulated in such a way during the growth and to address very certain medical conditions. So a medical product really used to be drawn in George, when you talk about the quality of the adult-use product is also somewhere because you can really maintain potency consistencies in the indoor environment. And that's very important, I think, for consumers.
And when you talk about the illicit market. Certainly a risk that people do see a consumer state buying it off the street corner is you don't have consistency of product, and that's very important. And you don't have the quality controls with the testing. So yes, I do believe that and for consumers certainly are going to the regulated cannabis environment for their products. But people are beating our people, our people and there is a price driving quotient to. And I think some of the states that really did create an artificial pricing structure based on taxing are coming around and California is one of them and figuring out that when they overtaxed the product, it makes it really hard for the consumer to buy it. So we're very optimistic that the states will come around and pricing will be more in line where it should be. And yes, the indoor product will remain the choice of foreign consumers and just quality and safety and then just the final question is on the two e.

Alexander Goldfarb

Given the administration's sort of pro cannabis mindset, is there anything that's going on within the discussions or the process that gives you pause that it may not happen or is this merely going through a typical governmental time line and it's got to go through X months, X process, whatever. But this will happen. I'm just trying to figure out, yes, if any, if there's any holdup or if this is just typical government process and the news came out a while ago and now we just have to sit around and wait out the shot clock, but you know, this is Allen.

Alan Gold

And before I turn it over five, and I'm sure Paul is going to say the same thing is just the number, but our job is not to we're not we're not politicians were not in the government. We're not in the government. The political process takes a long time, and we're operating our business with a very strong and solid balance sheet that will allow us to deal with any any different tailwinds or headwinds that may come from any actions that occur in the broader economy or the broader market?
Yes.

Paul Smithers

So yes, obviously, we're kind of reading what you're reading and there's a lot of guesswork going on as to when that will be an announcement what the announcement will be, but it's guesswork. What we do know is the FDA did confirm that it is conducting its review. So that's a fact we know. So that's a very positive thing, I think so we're going to stay tuned. And and if history is any indicator, the FDA does typically follow HHS regulations, but that certainly doesn't mean they have to. So we'll see. But we are optimistic like the rest of the world, but anything can happen.

Alexander Goldfarb

So we haven't Thank you very much.

Operator

Eric Des Lauriers, Craig-Hallum Capital Group.

Eric Des Lauriers

Great. Thanks for taking my questions. First one, a bit of a high-level question for me. Just kind of understanding the mechanics behind the rent collection statistics. So and kind of wondering if you can help me understand what happens sort of mechanically statistics when a tenant stops paying some. We have some some defaulted properties and development properties, some operational properties, not fully leased, some security deposits being applied towards rents, but then rent collection statistics remain at 100%. So could you maybe just walk us through the mechanics of what happens to your rent collection statistics, where the tenants are paying? And then maybe to help with modeling, is there a simple way to quantify the difference between the rents you're collecting from tenants any given quarter versus what you would be collecting if your portfolio was 100% operational, 100% leased to 100% rent collection. Yet there's a way to quantify sort of the rent that you're actually collecting versus the total potential rent to be collected, I think they'd be helpful. Thank you.

Alan Gold

So I mean, in general, I mean, we think that we have a very strong portfolio and one, we are operating very very similar to what other real estate companies do. If a property and some of the properties that we have, we happened to get back. We're in a development stage. We put them in a development portfolio because there's work that has to be done. It's very hard to lease a product, a property that is not completed or needed or needs additional work to actually get into the lease statement. But if it was a fully completed asset, then it would stay in our operating portfolio and it would affect our leasing statistics. An example of an asset, not that went into our development portfolio was the San Marcos Texas asset, which was really just the land of the. And to note, I think, Ben, what do we collect on the yellow.

Ben Regin

So our basis in that our asset is about $8 million, and we collected over $6 million in rent from the tenant during their occupancy.
But it's still just land. And in order for us to re-lease it, we'd have to either build it out or find a A., a tenant who wanted to actually complete the full it fully design the projects that that was designed by parallel at the time. So that's why that's in our development portfolio, not and not part of our operating statistics.
Yes.

Eric Des Lauriers

Okay. And is there a way to sort of help us help us calculate or quantify the difference between sort of total rent potential and then what you're collecting and especially at some of these development properties and other lease properties potentially start collecting revenue or I guess collecting rents in 24? Just kind of kind of help quantify the potential impact here given the rent collection discretionary, not 100% because it's something that we'll have to get back to off-line if you don't mind on that, if you can just.
Yes, that would be the best I think you know from.
And then just last question from me is just kind of a bit of a housekeeping one for me. Property expenses and tenant reimbursements Is it still these these property expenses are still 100% and reimbursed. And so in the instance where there is a difference between property expense and the amount reimbursed, it's just kind of a timing issue. So that's I guess my first question here and then the second one is how should we think about this going forward? It's increased each quarter softened past two years here? And is this related to specific tenants or specific property? Will this begin to decrease at any time? Just any kind of insight into how to model the these these property expenses would be great. Thank you.

David Smith

Yes, sure, Eric. It's David harm. So one I will just clarify your comment. So the net expense that we've had throughout this year from Q1 to Q3 has actually gone gone down, not gone up versus what you said. But separately, I think you're alluding to going from Q3 to Q4, we did see it increase in the overall net expense. So in other words, are reimbursements we received from tenants a lessee of taxes and insurance that we paid that was driven by the properties we took back from Kings Garden in September in parallel, Pennsylvania in October. So we did have elevated property expenses in Q4 just because we are on the hook for those expenses. That being said, you've given what Paul and Ben mentioned on the releasing activity that we've had, those will go down over time, just given again the substantial re-leasing efforts that we've announced today with our results.

Eric Des Lauriers

So yes, sorry, maybe just to clarify here. So I'm I'm referring to the first line item and the expenses property expenses, which of them increased each quarter here. And my understanding was that those were basically some of those are also reflected in revenue and that they were simply kind of reimbursement that you recognize the expenses out and then get reimbursed. So I don't know if that helps clarify my question. Does this cause looking at that first line item would probably yes.

David Smith

And yes, you're looking at just that line item?
That's correct.
But those can also go up. You're going to see inflationary increases in insurance and property taxes. But to your point, Eric, the actual reimbursement from the tenants that's coming through the revenue line as well. So you really need to you net those two together. But they can yes, they can be episodic to your point, depending on when when those when those come through for the taxes and insurance. So there can be a timing difference as well.

Eric Des Lauriers

Okay.
And then I guess just kind of last thing on this like overall, I mean, this had been increasing each quarter. Is this what we should expect to continue going forward? Just give I mean, assuming inflation, steady inflationary environment, I guess I'm just trying to understand that first Expedia and I don't have feedback.

Alan Gold

I'm sure. Yes, I would just go back to my prior comment on on that, Eric, where you did see the expenses increase from Q3 to Q4. And again, that was driven by taking back properties from King's yard and parallel. So as those properties get released with the re-leasing activities that Ben had mentioned. You'll see some of those come down over time.

Eric Des Lauriers

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Alan Gold for any closing remarks.

Alan Gold

Thank you, and I'd like to thank all the stakeholders for your continued support. Thank all the team here at the Innovative Industrial Properties for their continued hard and fantastic work. Thank you all. With that, we'll sign off. Thank you.

Operator

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