Earnings Call Transcript - IIPR Q4 2020

Operator, Operator

Hello, and welcome to the Innovative Industrial Properties, Inc. FY Q4 2020 Earnings Conference Call. Please note, today's event is being recorded. I would now like to turn the conference over to your host today, Brian Wolfe. Mr. Wolfe, please go ahead.

Brian Wolfe, Host

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?

Alan Gold, Executive Chairman

Thank you, Brian, and welcome, everyone. Today, we look forward to providing a recap of our results through the back half of 2020 and into 2021, and our views on the continued evolution of the industry we are so proud to serve. There is certainly a lot to recap, both from our company's activities and the regulated cannabis industry as a whole. First and foremost, we are thrilled to see the great minds of our country and the world achieving what many believe to be impossible—multiple sets of highly effective vaccines ready for distribution in less than one year from the onset of this pandemic. This is a truly remarkable testament to the ingenuity of our scientists, and one which we hope brings the light at the end of the tunnel that much quicker. With all the challenges we have faced as a society over the last year, the regulated cannabis industry has demonstrated strong and sustained resilience across the United States during arguably the first major economic disruption that this very young industry has faced. As we have highlighted on prior calls, with the regulated cannabis industries designated as essential services in the vast majority of state and local jurisdictions, our tenant operators have been particularly adept at modifying their operations in ways to ensure continued, compassionate, individualized service to their patients and customers, while maximizing the safety and health of patients, customers, and employees. As the country and the world as a whole has suffered not only through a health crisis but also one of the quickest and deepest economic contractions in recent history, the United States regulated cannabis industry continued its tremendous growth path, growing over 50% annually from just over $13 billion in sales in 2019 to an estimated $20 billion in 2020. While the vast majority of businesses were retrenching in this unprecedented time, experienced, well-positioned regulated cannabis operators continued to expand their footprints and deepen their operations. We were proud to continue to partner with them in 2020 as their go-to real estate partner, a year in which we made 20 new property acquisitions and additional investments in our existing portfolio totaling over $620 million. As of today, we own 67 properties in 17 states, totaling 5.8 million square feet, which are 100% leased on a long-term basis to high-quality licensed cannabis operators. One property that was not leased in our portfolio at year-end was our Los Angeles, California property. As noted in our press release issued yesterday, Holistic Industries, our long-term tenant partner in Massachusetts, Maryland, Michigan, and Pennsylvania, acquired the operational licenses for this property in early January, and we executed a long-term lease with them for the entire property. Aside from our Los Angeles property, our tenants have paid all contractual rent due in the fourth quarter of 2020 and the first two months of 2021, other than one tenant in our Southern California portfolio that made a partial rent payment through that period. We have executed no rent deferrals for any tenant since July of last year, which we believe is a testament to the quality of our tenant base and their ability to adapt to this new normal, in addition to the exceptional resiliency of the regulated cannabis industry as a whole. Reflecting the strength and resiliency of our tenant partners, we paid a quarterly common dividend of $1.24 per share to stockholders on January 15, representing a 24% increase over the fourth quarter 2019 dividend and our ninth dividend increase since our IPO in December 2016. On the financing front, I would like to personally thank all our stockholders, our long-term company owners, for their steadfast support, providing us over $1 billion in net proceeds over the last year to support our tenant partners in their continued expansion initiatives while forging new tenant partnerships with top-tier operators in the industry. Catherine will also provide more detail regarding our financial results and capital raising activity. Of course, regulatory developments in the cannabis industry are also top of mind. With the continued strong majority support across nearly every demographic for legalizing cannabis, in November, the momentum we have seen over the past decade on the state level continued as five new states passed measures to legalize medical or adult-use cannabis, resulting in 36 states having legalized medical-use cannabis and 15 states also having legalized adult-use cannabis. We are closely monitoring the many proposals in Congress regarding cannabis legislation, and Paul will provide additional detail on that front. Now before I turn the call over to Paul, I want to reiterate our deep appreciation for you, our long-term owners, for your support throughout these four transformative years of our company, and we look forward to serving you in this amazing high-growth industry for many years to come.

Paul Smithers, CEO

Thanks, Alan. For this call, I plan to provide an update on the regulated cannabis industry, including: one, state developments from the most recent election cycle; two, our views on the federal regulatory environment; and three, recent dynamics of the industry during this health crisis and along with recent election results. As mentioned on our last call, I'd like to also preface this discussion, noting that regulations and industry developments are evolving rapidly. While we want to provide you with a general current landscape, there can be no assurance that this landscape will not significantly change. First, state results from the most recent elections in November. As we discussed in prior calls, pre-pandemic 2020 was shaping up to be another watershed year on the state legalization front. However, shelter-in-place orders greatly impacted the ability of organizers to gather sufficient signatures in person. As a result, a number of initiatives had to be postponed. Even in the face of such challenges, five new state measures to legalize medical or adult-use cannabis passed in November, with approvals of adult-use programs in Arizona, New Jersey, and Montana, as well as approval of a medical-use program in Mississippi. Notably, South Dakota voters approved both adult-use and medical-use programs in November, a first for a state to approve both programs at the same time. In just a few years' time, these programs alone are expected to add over $3 billion in revenues to the U.S. totals. Furthermore, with numerous adult-use and medical-use programs in place across the United States, states with new programs have several models from which to choose, and we expect that these experiences will enable new states to effectively implement new programs over significantly shorter time periods than has been historically the case. In 2021, we are tracking no less than 11 additional states that may potentially move forward towards establishing new programs, including on the medical side, Texas, South Carolina, Alabama, Kentucky, Kansas, and Nebraska. On the adult side, New York, Connecticut, New Mexico, Rhode Island, and Virginia. Of course, these include some of the most populous states and tremendous future potential for the industry. With 36 states and D.C. having legalized cannabis for medical use and 15 states having legalized cannabis for adult use, this continued rapid adoption across states reflects the 90% plus support seen among U.S. citizens for medical-use cannabis and the overwhelming majority support of U.S. citizens for adult-use cannabis legalization as shown in poll after poll. Second, our views on the current federal regulatory environment. With the clear dramatic shift of popular opinion in the last decade, years of experience in state-run medical and adult-use programs, and continued rollouts of new state programs, we believe that national cannabis reform is much nearer. As we all know, the most recent federal election cycle brought a changing of the guard in terms of a Democratic White House, a 50-50 Senate with a tiebreaker to Vice President Kamala Harris, along with the continuing majority Democratic control of the House. That said, there are numerous competing agenda items of the new administration and Congress in 2021, most notably getting the COVID health crisis under control, accelerating vaccine administration, and supporting the economy and working families. There are numerous cannabis-related bills pending in Congress at different stages of review. A few of the more notable bills include the MORE Act passed by the House in December, which focuses on descheduling cannabis and social equity; the SAFE Banking Act, which would provide safety to financial institutions in serving state-compliant licensed cannabis operators; and the STATES Act, which would protect states to enact their own cannabis policies, free from federal interference; and bills focused on mitigating the draconian tax impact of IRS Code Section 280E for cannabis operators. It goes without saying that predicting federal legislation, including both content and timing, is challenging, particularly with respect to cannabis. That said, with the near universal designation of cannabis across state programs as essential during this COVID pandemic, in combination with popular support that spans all types of demographics and party affiliations, we believe that changes are on the horizon. We are closely monitoring the status of bills in Congress and the evolving dynamics of both Congress and the administration, including the Senate voting dynamics. In our view, and this is just our view, we see certain bills such as the SAFE Act, and those addressing the 280 tax issue as perhaps near-term, while bills such as the STATES Act may be further on the horizon. Finally, regarding industry dynamics in the second half of 2020 and continuing into this year, the cannabis industry in general, and our tenants in particular, continue to exhibit unique resiliency throughout the health and economic challenges we have faced as a country over the past year. In 2020, a year unprecedented in recent U.S. history in terms of economic decline, the legal cannabis market was projected to have grown over 50% from the prior year, fueled by the introduction of new state programs, sustained growth, the continued transition from the illicit market to the regulated market in established state programs, and ongoing recognition of cannabis' therapeutic value across a wide array of medical conditions. With this sustained growth in demand, the expansion across states of regulated cannabis programs, and the recent results of the federal election cycle, best-in-class operators, including many of our tenants, have focused in recent months on additional capital raising and M&A activity to position themselves to take full advantages of the opportunities they see in the months and years ahead. On the M&A side for our tenants, we have seen numerous recent announcements since early December, including deals like our tenant Cresco's $213 million announced plan to acquire Bluma Wellness, and our tenant Columbia Care's announcement to acquire our other tenant, Green Leaf, for $240 million in cash and stock. This has been the trend of the last several months, which included our tenant Curaleaf's acquisition of our other tenant Grassroots in Illinois, North Dakota, and Pennsylvania, and Columbia Care's acquisition of our other tenant, the Green Solution, in Colorado in 2020. We have seen this trend really accelerate in December and January, and we expect to see continued consolidation as top operators continue to gain market share. We are also seeing a tremendous level of capital raising activity, which we believe reflects the resilience and amazing growth of this industry. The broad based public acceptance and support of the regulated cannabis industry, especially medical-use cannabis across the United States, and changes in the composition of the federal government in this election cycle may hasten federal regulatory changes. In fact, in January alone, North American cannabis companies closed or announced more than $1.6 billion in capital raises, an amount almost double the previous record for that time period. The lion's share of that capital raising went to top-tier operators, including many of our tenants, which we believe provides a meaningful further enhancement to the credit quality of our tenant base. I'll now turn the call over to Ben, who will walk you through our recent acquisitions and follow-on investments as well as some additional color on our overall portfolio.

Ben Regin, Vice President of Investments

Thanks, Paul. Since October 1, we made five acquisitions in four 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 67 properties across 17 states, representing approximately 5.8 million square feet, including approximately 2 million square feet under development or redevelopment, with a weighted average remaining lease term in excess of 16 years. Similar to past calls, I plan to touch on each of our acquisitions by state and also provide some information about each tenant and our portfolio overall in that state. We have been fairly active in California in recent months with our two transactions with Kings Garden and the re-leasing of our Los Angeles property, the one property that was not leased in our overall portfolio. California's regulated cannabis market is one of the largest in the world, with approximately $5.6 billion in sales in 2020, and is expected to continue to represent over 20% of the overall U.S. market in 2025. Kings Garden is one of the top operators in California, consistently ranking in the top five for flower and concentrate sales in the state, and as you may recall, was one of the first cannabis operators to commence regular quarterly dividends to its shareholders in June 2020, a remarkable achievement for a company continuing on its rapid expansion path. With our two transactions in November 2020 and earlier this month, we now leased six properties to Kings Garden, representing well over 0.5 million square feet, including projects under development and a total investment of nearly $150 million, including commitments to fund future development and redevelopment. We are proud partners of Michael King and his great team and look forward to supporting them through the development and redevelopment of state-of-the-art facilities to dramatically expand production capacity and continue to deliver the highest quality product they are known for. As we previously announced, we are thrilled to team with Holistic Industries as our new tenant partner for our property in Los Angeles. Holistic has been a tenant partner of ours since 2017, and I'll go into more detail on our footprint with them a little later. Moving on to Florida, we acquired a property comprising approximately 295,000 square feet of industrial space and entered into a long-term lease with Harvest Health and Recreation, with our total investment in the acquisition and tenant improvements at the property expected to be about $35 million in the aggregate. Harvest is a leading vertically integrated U.S. multistate operator, with licensed operations in nine states, including 38 retail locations, 12 cultivation and processing locations, and over 1,100 employees across its operations. We are thrilled to add Harvest to our tenant roster and look forward to supporting them in their expansion of production capacity at this facility. Florida is the largest medical-use cannabis market in the United States, closing in on 0.5 million qualified patients. Including the Harvest property, we own and lease four properties in Florida, totaling about 1 million square feet to tenants Trulieve, Parallel, and Harvest, representing a total investment of a little over $150 million, including commitments to fund future improvements. We cannot be more thrilled with our tenant base and the overall opportunity in Florida. Now to Massachusetts. In December, we expanded our footprint in Massachusetts with the acquisition and lease to 4Front Ventures of an industrial facility for cultivation, processing, and dispensing. Concurrently, with that close, we acquired another property and executed a long-term lease with 4Front in Washington, with our total investments across both properties being $33 million and comprising about 181,000 square feet. We're excited to bring 4Front in as a new tenant partner, a leading MSO with licensed operations and services in California, Illinois, Massachusetts, and Washington. Including our 4Front transaction, we own six properties in Massachusetts, representing a total investment of a little over $185 million, comprising approximately 647,000 square feet with tenants 4Front, Ascend Wellness, Cresco Labs, Holistic, PharmaCann, and Trulieve—an exceptional roster of leading MSOs. As noted, our 4Front transaction marks our first acquisition and lease in the state of Washington. Washington is a relatively well-developed, mature market with recreational cannabis sales of over $1 billion in 2019. We believe that 4Front has differentiated itself with its cost-effective, high-quality cultivation and manufacturing. We are excited to partner with a tenant of this quality in the state. Finally, on the investments front, I would like to touch on the follow-on investments we've made in our existing properties, which we believe is a key differentiator of our model with the flexibility to grow to meet our tenant partners' needs to expand at the appropriate times. Since October of last year, we have executed a $25 million follow-on investment with Green Thumb in Ohio; a $31 million follow-on investment with PharmaCann in New York; follow-on investments with Holistic, totaling $7 million in Massachusetts and Pennsylvania; and a $7 million follow-on investment with LivWell in Michigan in addition to others. This exemplifies our mission to be the key provider of growth capital to our tenants, being there to offer funding solutions for their expansion at the time and on the terms that provide them optimal, nondilutive capital to capture that market opportunity. Finally, I would like to touch on our most significant tenants as a brief update. These top ten tenants account for over 75% of our contractual rent as of today. Those tenants, in order of concentration, include PharmaCann, Kings Garden, Ascend Wellness, Cresco Labs, Green Thumb Industries, Holistic, Parallel, Curaleaf, Green Leaf, and Trulieve. As you know, PharmaCann is where we started, having executed our sale-leaseback with them for their property in New York in December 2016 shortly after we completed our IPO. Since then, we have partnered with PharmaCann in numerous transactions to facilitate their continued expansion with five properties located in Illinois, Massachusetts, New York, Ohio, and Pennsylvania, with our total investment, including future commitments to fund additional improvements, totaling about $167.5 million. With licenses in eight states and being one of the largest privately-owned, vertically-integrated cannabis companies in the U.S., we are proud to partner with PharmaCann over the last four-plus years and support them in their strategic growth in markets representing tremendous growth opportunities. Kings Garden— I discussed in some detail our tenant partner, Kings Garden, as it relates to recent investment activity, so I won't go into much additional detail here. But needless to say, we are thrilled to team with Kings Garden in California, one of the top operators in the largest regulated cannabis market in the world. Ascend Wellness—we have been Ascend's real estate partner since 2018 and have partnered with Ascend on three properties in Illinois, Massachusetts, and Michigan, representing a total commitment of nearly $120 million. Ascend, which is led by Abner Kurtin, is a vertically integrated MSO with assets in Illinois, Michigan, Ohio, Massachusetts, and New Jersey. Abner has developed a tremendous footprint with a world-class team to execute on these key strategic markets and continues to effectively fund strategic initiatives throughout this pandemic, including a $68 million capital raise in August of last year to execute on additional expansion opportunities in Illinois. Cresco Labs—we have partnered with Cresco on five properties in Illinois, Massachusetts, Michigan, and Ohio, representing a total commitment of $121 million. Cresco is the largest wholesaler of branded cannabis products in the U.S. And as mentioned previously, recently announced a transaction to acquire Florida's Bluma Wellness for $213 million in an all-stock transaction and closed on a $125 million stock transaction last month. We see Cresco as extremely well positioned to continue to gain market share throughout its states of operation, with an enviable liquidity position to take advantage of these opportunities. Green Thumb Industries is a tenant partner of ours in Illinois, Ohio, and Pennsylvania, representing a total commitment of about $122 million. Led by Ben Kovler, Green Thumb is one of the largest MSOs in the United States, with licenses for 97 retail locations, 13 cultivation and manufacturing facilities, and operations across 12 states. Earlier this month, they raised $100 million of equity capital from a single institutional investor, which we view as a real testament to the success of their business and future opportunities. Holistic—we own five properties leased to Holistic in California, Maryland, Massachusetts, Michigan, and Pennsylvania, representing a total commitment of about $108 million. Our Maryland property represented our second property acquisition in our history, and we are truly grateful to have partnered with Josh Genderson and his team since that time in numerous transactions, as Josh has led his team in the highly successful expansion across the Northeast and Midwest and now out to California, with our most recent lease executed last month in Los Angeles. Holistic, originally founded in 2011, is one of the largest privately-owned, vertically-integrated MSOs, with operations in California, Maryland, Massachusetts, Michigan, Pennsylvania, and Washington, D.C. Holistic closed on an oversubscribed debt financing in September of last year for $35 million, led by Altmore Capital. Parallel—we own two properties leased to Parallel in Florida, representing nearly 600,000 rentable square feet and a total commitment of approximately $100 million. With a great footprint in Florida, Massachusetts, Nevada, Pennsylvania, and Texas, Parallel operates 50 retail locations nationwide and continues to look at further strategic expansion opportunities. Parallel is led by Beau Wrigley, who previously served as the Chairman and CEO of a global gum and confectionery leader at the William Wrigley Jr. Company, which was acquired by Mars in 2008 for $23 billion. Having previously raised over $400 million in capital, Parallel announced earlier this week a pending merger with Ceres Acquisition Corp., expected to close this summer. The transaction includes a commitment by investors for an additional investment of $225 million, with an implied valuation of about $1.9 billion. I want to congratulate Beau and his team for all their success, and we look forward to tracking the close of this transformational transaction for Parallel. Curaleaf—we own four properties leased to Curaleaf in Illinois, New Jersey, North Dakota, and Pennsylvania, representing a total commitment of nearly $103 million. These include properties leased to Grassroots, which, as Paul mentioned, was acquired by Curaleaf in 2020 and for which we received corporate lease guarantees from Curaleaf. Curaleaf has developed a tremendous footprint with operations in 23 states, over 100 dispensaries, 23 cultivation sites, 30 processing sites, and over 1,150 employees. Last month, Curaleaf closed on a capital raise exceeding CAD 300 million, one of the largest capital raises for a publicly traded operator in this industry's history. Green Leaf—we own two properties leased to Green Leaf in Pennsylvania and Virginia, representing a total commitment of about $63 million. Green Leaf is the market leader in the mid-Atlantic region with cultivation, extraction, processing, and retail operations across Pennsylvania, Maryland, Ohio, and Virginia. As Paul alluded to in his remarks, at the very end of last year, Columbia Care announced that it had signed a definitive agreement to acquire Green Leaf for $240 million in cash and stock, and that transaction is expected to close in the summer of 2021. As you may recall, Columbia Care acquired one of our other tenants, at one of our Colorado properties, the Green Solution in 2020. We also lease to Columbia Care two properties in New Jersey, and pro forma for its acquisition of Green Leaf, we would expect to lease to Columbia Care properties representing a total investment of about $88 million. Columbia Care is one of the largest and most experienced MSOs, operating 108 facilities with licenses in 18 jurisdictions and the EU. Rounding out our top ten tenants is Trulieve, a tenant partner of ours at properties in Florida and Massachusetts, representing a total commitment of a little over $60 million. Led by CEO Kim Rivers, Trulieve is the dominant cannabis operator in Florida, the largest medical cannabis market in the U.S., with 66 retail locations and 2 million square feet of cultivation. Trulieve also operates in California, Massachusetts, Connecticut, and Pennsylvania, and was recently awarded several dispensary permits for the new West Virginia Medical Cannabis Program as it continues to expand its national reach. While we only touched on our top ten tenants, we are proud of what all our tenant partners have accomplished during this time, and feel that in just a few short years, we have established a tremendous tenant roster and property footprint that will be extremely challenging to replicate in coming years. With that, I'll turn it over to Catherine. Catherine?

Catherine Hastings, CFO

Thanks, Ben. It's been yet another busy quarter, and the regulated cannabis market has really continued to show its resiliency during these unprecedented times, both of which are reflected in our financial results for the fourth quarter and full year 2020. We generated total revenues of approximately $37.1 million for the quarter, a 110% increase from Q4 of last year. The increase was driven primarily by the acquisition and leasing of new properties, additional tenant improvement allowances provided to tenants at certain properties that resulted in base rent adjustments and contractual rent escalations at certain properties. As Alan mentioned, we've collected 100% of contractually due rent across our total portfolio for the fourth quarter of 2020 and the first two months of 2021, other than for our Los Angeles property and for one other tenant in Southern California that made partial payments during that time frame and have no ongoing rent deferrals for any tenants. Regarding the tenant that made partial payments, we're closely monitoring that tenant's business and are in regular communications with their management. I would note that the properties they lease represent less than 1% of our total gross assets at year-end. As we indicated in the past, our Q4 revenue reflects only partial quarters of revenues from the acquisitions and leases executed during the quarter and no revenues, of course, for the leases executed after the end of the quarter. 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 3 months ended December 31, 2020, we recorded net income of $21 million. As noted in our earnings press release, for the first time in the fourth quarter 2020, our exchangeable notes were considered dilutive for purposes of calculating net income, FFO, and AFFO. As a result, for the fourth quarter 2020 results, the exchangeable notes are treated as if they had been exchanged for common stock at the then-current exchange price, which resulted in adding back cash and noncash interest expense for the exchangeable notes of approximately $1.9 million for the quarter to FFO diluted and also adding approximately 2.2 million shares to the fully diluted share count. This essentially decreased our reported AFFO per diluted share by $0.07. We want to highlight this item, especially as it makes an apples-to-apples comparison difficult between the Q4 results and any other period as it relates to FFO and AFFO measures. As in all other periods, the exchangeable notes were antidilutive for accounting purposes. To note as well, all years presented, including 2020, treat the exchangeable notes as antidilutive for purposes of FFO and AFFO measures. For the fourth quarter, funds from operations, which adds back both cash and noncash interest expense on the exchangeable notes and property depreciation to net income, was $31.6 million. Adjusted funds from operations, which adds back noncash stock-based compensation to FFO was $32.4 million. On January 15, we paid our quarterly dividend of $1.24 per share to common stockholders of record as of December 31. The Q4 2020 common stock dividend reflects a 24% increase from the prior year's fourth quarter. As we've indicated in the past, the Board continues to target a dividend payout ratio of 75% to 85% of AFFO on a stabilized portfolio basis. We also continued to fund real estate improvements into many of our properties as offered in tenant improvement allowances or construction development to our operators under our leases. As we previously noted, these improvements are critical to either redeveloping an existing facility to a cannabis facility or funding expansion to address growing market demands. As Ben previously mentioned, we've been proud to continue to partner with many of our tenant operators and amend the leases to provide for additional expansion capital at our facilities for a corresponding increase in base rent. During the year ended December 31, 2020, we capitalized costs of approximately $301 million and funded approximately $290 million relating to the tenant improvements and construction activity at our properties. With respect to financing activity, in November, we entered into a new at-the-market (ATM) offering program, allowing us to sell up to 500 million shares of our common stock. During the fourth quarter, we raised net proceeds of approximately $263 million through our ATM program, bringing our total net capital raised to approximately $1.7 billion from the IPO, follow-on common stock offerings, our Series A preferred stock, exchangeable senior notes, and our ATM program. To date, we've committed around 83% of our raised capital or approximately $1.4 billion in the aggregate under our leases and have approximately $280 million of available capital to place today. Finally, as highlighted on our last call, I'd like to note that we continue to have one of the most conservatively leveraged balance sheets in the REIT space with no secured debt and less than 8% of our total gross assets consisting of our exchangeable senior notes at year-end. The exchangeable notes have a fixed cash interest rate of 3.75%, equating to approximately $5.4 million of total cash interest payments per year, and do not mature until 2024. This is the only debt we have on the balance sheet totaling $1.8 billion of gross assets as of year-end. With that, I'll turn it back to Alan. Alan?

Alan Gold, Executive Chairman

Thanks, Catherine. I'd like to note the following in closing: In just over four years of our company's operations, we have developed what I think is a truly exceptional property footprint and tenant roster with tenant partners that continue to execute exceptionally well in one of the most challenging years we have experienced as a society. We continue to be well capitalized with a strong, flexible balance sheet that we see as a tremendous asset for future opportunities. We believe that in each year, in the last four years, has progressively validated our core belief in the tremendous future of this very young industry, which has demonstrated a truly unique resilience throughout the health and economic crisis that sets it apart from nearly any other industry. I want to personally thank our stockholders for your continued support and for entrusting us as stewards of your investment. We have and will continue to do our very best in that role every day. With that, I'd like to open it up to questions. Operator, could you please open the call up for questions?

Operator, Operator

And the first question comes from Tom Catherwood with BTIG.

William Catherwood, Analyst

Just building off of what you kind of — Paul, you touched on it, and Ben touched on it as well, the capital raising and access to capital for cannabis operators in the U.S., obviously, really positive news, speaks to investor interest. Stock prices have absolutely improved along with that. But from your standpoint, given this increased access to capital, how are your tenants viewing real estate sales as part of their capital stack going forward?

Alan Gold, Executive Chairman

So Tom, this is Alan. We are really very excited about all that—the interest in the industry by investors and providing greater and much stronger balance sheets for our public-related tenants. But in the end, we are still the best and most cost-effective nondilutive capital for this industry. The cost of capital that the companies are incurring when they sell a piece of their business is significantly higher and more dilutive than what we are providing. So we're seeing a very strong and continued interest in our program. We believe that the industry overall is growing much larger, creating greater opportunities for us to provide more of our capital and to be able to place it very accretively.

William Catherwood, Analyst

I appreciate that. Along those lines, in terms of acquisitions, 2021 is ahead of your pace in 2020 through the same period of time. And some of these new deals look a little bit chunkier. So larger deals spaced out a little bit more, but also still with the best operators. Can you give us a sense of how your pipeline right now compares to 2020?

Alan Gold, Executive Chairman

Certainly. I think you've hit on a couple of points. First of all, these transactions are very chunky. And they're chunky by design. We think we have a very strong business model that focuses on larger-sized tenants with larger-sized projects creating chunky acquisitions. The average deal—our average deal size is north of the $30 million range. Because of that, we are a unique organization in the industry that has the capacity to do these types of transactions. There are competitors, and there are ways for our tenant partners to raise capital in the smaller range. But to do large-size transactions, say a leaseback transaction north of that $30 million, we think we are uniquely positioned to be able to provide that capital. We believe that our pipeline continues to be robust, and we believe that we've been able to place capital on a very efficient basis. Especially after raising the capital, we've been able to consistently place that capital in that 6- to 9-month time period after raising the capital. We are highly confident that we can continue on that pace. Ben, do you want to add something?

Ben Regin, Vice President of Investments

Sure. Tom, just echoing what Alan said. We are continuing to see tremendous growth in the industry overall, which is very exciting. The addressable market continues to increase. And again, as Alan mentioned, we are uniquely well positioned and feel that we are the best proven cost-effective source of nondilutive capital to the industry.

William Catherwood, Analyst

I appreciate that outlook. And kind of tying that together with something that Paul had said, and Ben, I think you mentioned it as well, just the increase in M&A activity in the industry. Are you seeing any companies looking at utilizing some real estate sales as a way to finance some of these transactions, sort of like Blackstone preselling some of the equity office assets back in 2007? Is that something that's made its way into the market yet? Or is it still too early for that?

Alan Gold, Executive Chairman

We think the M&A activity is continuing to be robust. As Paul has described, many of our large tenants have been on the outlook for unique acquisition targets, and we think that will continue. We think our capital, which is still the most effective and nondilutive capital out there, is a key component to the way our large tenants are looking at their balance sheet and using that to help them with acquisitions.

William Catherwood, Analyst

Got it. And just one last quick one for me, just on Vertical. Cath, I appreciated your commentary there. If memory serves me, this is one of the companies you gave a deferral to in Q2, and the idea back then was that they were diversifying their wholesale business, moving away from one key client that was having some trouble and bringing some new ones, which they were able to do. Is the kind of partial payment still tied to that diversification of clients? Or is this something new that they're working through?

Alan Gold, Executive Chairman

I'll have Cath answer that or maybe even Ben. But we're really very proud of our overall portfolio and to say that we're 100% leased is a remarkable feat in a very young industry in general. The industry continues to evolve. Our tenants continue to look at different business models to maximize their opportunity. We are really excited about the fact that we've been able to generate 180% year-over-year AFFO growth with a portfolio that has been 100% leased.

Catherine Hastings, CFO

Yes. So thanks, Alan. Yes, Tom, Vertical was one of those three operators that we did provide that limited COVID rent relief program to back in April. We feel that those assets are really well positioned there. We continue to work with Vertical to try and get them current. They are continuing to operate from the facility today. And as I remarked, they are less than 1% of our total portfolio.

Operator, Operator

And the next question comes from Daniel Santos with Piper Sandler.

Daniel Santos, Analyst

So I'll just keep with the tenant health and sort of same and kind of dig into that a bit more. If I understand the situation correctly, it isn't all of their assets that's an issue, which sort of indicates that the issue is location dependent. We talked in the past about the limitations you guys have on what you can disclose about your tenants. But how can we, and the investor community in general, get more comfortable with the idea that there aren't more tenants to follow? I mean, I appreciate that in some ways, for a cash business, cash collection is the most important metric, but there have to be some other metrics that we can sort of look at qualitatively or quantitatively to kind of get comfortable with your specific portfolio.

Alan Gold, Executive Chairman

I appreciate the question. While we've tried to portray that we have a strong business model of providing nondilutive and cost-effective capital to this industry, we are providing it to a variety of tenants with different business models. This one issue is location specific, related to the specific business model that this tenant focused on, being more focused on the wholesale side as opposed to creating their own brand and growing that over time. Because of that, they were more affected by the broader industry, including the impacts of COVID. They're working through it, and we believe we are doing our best to help them. We have $1.8 billion worth of real estate over 67 different properties. This is one property, one tenant, representing less than 1% of our revenue.

Daniel Santos, Analyst

Right. I totally appreciate that it is a sort of small piece of the portfolio. But as we look forward, you've now had two tenants that you've had to disclose. And, again, I get that you've had 100% rent collections. But are there some metrics or things that we can look at to get a little bit more comfortable with the underlying health of your tenants?

Alan Gold, Executive Chairman

Other than we've collected 100% of our rent, and we’ve had 180% year-over-year growth on our AFFO, I'm trying to figure out a metric here. You could also focus on the year-over-year growth of sales still growing at north of 30%. That's a strong indication. In addition, the fact that 75% of our revenue comes from the top 10 tenants across the country is another strong metric.

Paul Smithers, CEO

Yes. I would just look at the industry itself. In 2020, during the pandemic, our tenant operators had tremendous performance, which underscores the market's resiliency. Importantly, the cannabis industry designation as essential services during the pandemic enabled operators to excel and produce the results they did.

Daniel Santos, Analyst

Okay. That's helpful. And then my next question is sort of on the balance between ATM, dilution, and acquisitions. Like you said, in a lot of ways, you have a pretty simple business model. You raise equity, you buy assets. But unless those things are perfectly timed, you're going to take the dilution hit before you get the benefit of the income. So without being too long-winded, I guess, a, is there a way we can kind of close that gap between the dilution and the earnings? Or how could we be thinking about it as we model you going forward? And then, b, given that you ended the quarter with cash, which presumably funded your 21 acquisitions, how should we be thinking about ATM in the future?

Alan Gold, Executive Chairman

Dan, if you recall, we don't have access to a credit facility. We don't have the ability to warehouse capital on a credit line and then raise capital later to pay down that line. You can think of our excess capital as our credit facility. The cost of that capital is essentially our cost of dividend as we go forward. We've been consistent in placing capital in a 6- to 9-month period after raising it. Raising capital through the ATM at the end of 2020 really strengthens our ability to move through our pipeline and give tenant partners confidence that we have capital available. Remember that we don’t have the access to a credit facility to warehouse transactions. The best way to model it is to assume that capital put on the balance sheet will get placed in that 6- to 9-month timeframe. The dilution we take when we raise capital is well compensated by accretive transactions. We did over $600 million worth of transactions in 2020, all within our targeted acquisition yield range of 11% to 15%, and we believe we'll continue to do that as we move forward.

Catherine Hastings, CFO

Yes. Dan, I just wanted to also point out that we tend to hold cash on our balance sheet that's been committed. When we make a commitment for construction, we have that cash available that sits on our balance sheet until we fund it out over time as improvements are made to the properties. Today we have about $280 million of cash for future investments that have not been committed.

Operator, Operator

And the next question comes from Scott Fortune with ROTH Capital.

Scott Fortune, Analyst

I wanted to kind of follow-up a little bit on the pipeline outlook and the breakdown percentage of the existing tenants that are moving forward with new facilities or tenant expansions and the new tenant opportunities. The beauty of the space is that a lot of these limited licenses are capped. This is going to provide a lot more tenants over the long run for these states to perform well within. If you can provide a little more color on the percentage of the existing tenant pipeline and potential new ones as these operators are being flushed with more capital here, that would be great?

Alan Gold, Executive Chairman

I think the best way to look at a very strong pipeline in our business model is that when we bring in a new grower, we have 22 growers now that are part of our tenant base. We commit to helping them with the current transaction and to support their growth moving forward. We estimate that over 60% of our transactions were repeat business with existing growers. We carefully add new growers because we want to provide them future capital. Ben, do you want to talk about our pipeline?

Ben Regin, Vice President of Investments

Yes, sure. We continue to see a nice mix of business with our existing tenants. This becomes a mutually beneficial relationship that we believe is proven out by the number of follow-on transactions with the majority of our current partners. New markets for growth in the industry with capital needs are not only inside but also outside our portfolio.

Alan Gold, Executive Chairman

Just a reminder that the availability of capital for our tenants was very challenging only five months ago. While they are enjoying it now, we all know that what goes up sometimes comes down, and different market conditions could occur moving forward. Cath, do you want to add?

Catherine Hastings, CFO

Yes. Scott, I just wanted to note that in this unique industry, the operators are often identifying facilities they want. Many of those include expansion opportunities. We've seen great use of our capital on amendments to existing properties—$160 million in amendments for expansion growth for properties already in our portfolio. This is a great opportunity for us to continue to earn increases in base rent as well as lease extensions. Our current weighted average lease length is over 16 years, which reflects strong interest in our portfolio.

Scott Fortune, Analyst

I appreciate the insights. It makes sense, especially with new states joining the market as we observe daily efforts towards legalization. New Jersey and New York only represent 3-4% of the portfolio, and those markets are significantly undersupplied. It appears that your larger tenants will trend in that direction. I have one final question. From a competitive perspective, we notice some variations in model types. What is your observation regarding competition? How might this impact the cap rates alongside the debt offerings or raises that some tenants have undertaken? Have you observed any compression in cap rates throughout the year?

Alan Gold, Executive Chairman

We have continuously seen potential competitors pop up because of the strong business we've built. However, we haven't seen any succeed in the long run. These competitors may raise some capital but then burn through it quickly. We think we are still the only REIT focused on the medical cannabis industry on the New York Stock Exchange. Our size, with a market cap in excess of $4.5 billion, provides a strong lead. There is competition for capital in the industry, but we have a strong real estate team that adapts effectively. We've grown this company from less than $70 million to over $4.5 billion in a very short period.

Scott Fortune, Analyst

So you're seeing the same cap rates holding up, the 11% to 15% that you guys stated?

Alan Gold, Executive Chairman

Our pipeline continues to be in that range. We believe that's an appropriate yield range for our portfolio at this point. There are certain tenants with access to more competitive capital than us, but we are confident in our ability to continue growing with those type of yields.

Operator, Operator

And the next question comes from Eric Des Lauriers from Craig-Hallum Capital.

Eric Des Lauriers, Analyst

Okay, great. First one just kind of bit of housekeeping. So understand the broader portfolio is very healthy and that these rents, the property in L.A. and Vertical are less than 1% of your assets. So understanding this is small, could you guys quantify how much of an impact that had on your rental revenues in Q4?

Catherine Hastings, CFO

We disclosed in the press release that about $424,000 was used from their available security deposits for rents for 2020.

Eric Des Lauriers, Analyst

Okay, great. And then just a bit of a follow-up on the previous question. So it's good to hear that rates aren't really budging in your pipeline from what you can see right now. Where do you think competition will impact your pipeline? I mean, if we get SAFE Banking and these companies can access banking debt, it's logical that cap rates would come down. You could kind of lever up and offset that. But just wondering where you envision competition impacting your pipeline, whether it be fewer opportunities, maybe just lower rates, or perhaps lower durations, and some buyback provisions in there. Just help us understand the factors that you see being impacted by increased competition or perhaps that your tenants are starting to get a bit tougher in negotiations—that would be great.

Alan Gold, Executive Chairman

Sure. I think competition comes from other real estate competitors and the industry's access to capital. We believe that the industry's access to capital can and does have an effect, and it can create the opportunity for our largest tenants to ask for lower yields. However, it doesn't mean that our business model has changed much. We're still focused on sale-leaseback transactions and we haven't modified lease lengths. In fact, we've increased the average lease length from 15 to 20 years. We have seen some modest modifications of our annual cost increases, gradually moving from 3% to 4% down to approximately 2.5% to 3.5%. We're looking to bring in another group of tenants not currently in the top 10 and are highly focused on that. We have been pleased with the yields of recent transactions, which align with our expectations. The year is still long with many potential acquisitions ahead, and we are confident of maintaining yields between 11% and 15%.

Eric Des Lauriers, Analyst

Okay, good. That's good to hear. I suppose last one for me here. Given all the potential puts and takes, with some of your larger tenants having less dependence on alternative capital, while at the same time, more licensed growers entering the space and potential tenants coming into the market. So when you look at all those factors, increased competition, do you envision any shift in your strategy related to production assets versus retail assets? Any reasons for changing strategies from favoring large production assets over traditional retail assets?

Alan Gold, Executive Chairman

No. We've never shied away from retail assets with any of our existing growers. The average size of a retail asset has not changed from $1 million to $2 million to $3 million. We're focused on larger-sized transactions. As noted earlier, our average transaction size is in the $30 million range. We don't see any need to change our business model. We are looking at a group of tenant growers that are not the same as the current top 10 and being cautious with those considerations. You may see some new grower names that aren't as familiar as the current ones—still high-quality growers but not at the same level as our top growers due to rapid growth.

Operator, Operator

And the last question comes from John Massocca from Ladenburg Thalmann.

John Massocca, Analyst

Most of my questions have already answered, but I have a couple of quick ones. I guess, are cap rates any different for de novo transactions versus some of the recent lease amendment deals? Essentially, do you have some advantage by being the landlords that would allow you to facilitate pushing higher yield on some of those deals?

Alan Gold, Executive Chairman

I don't think you can say definitively that a de novo transaction would have a different yield than a lease amendment. We evaluate every transaction individually. We assess the quality of the tenant, the quality of the location, the deal terms, and the complexity of the transaction, which all contributes to our sense of what yield is appropriate for the capital we plan to invest. If you're referring to de novo transactions for new growers who haven't previously operated, those types of transactions aren’t our focus.

John Massocca, Analyst

No. It was more of the first part of the answer, which I think explained it succinctly. And then understanding each transaction is bespoke in the space, is there a good rule of thumb for us to think about the impact that starting deferrals and abatements might have on quarter-to-quarter rent? One quarter might have a particularly robust amount of investment activity; how could that affect quarter-to-quarter rent in the next quarter or three quarters out?

Alan Gold, Executive Chairman

I think your question is pertaining to whether the number of transactions in our pipeline have rent deferrals due to ongoing construction. Generally, our more significant construction projects lead to longer abatement periods before full rent begins, typically anywhere from 3 to 12 months depending on the scale of tenant improvements.

Catherine Hastings, CFO

Yes. In 2020, we witnessed larger tenant improvement projects, resulting in abatement periods of three to twelve months before we earn rent on the full committed capital. It could be upwards of 75% of our pipeline involving development or significant build-out components.

Operator, Operator

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

Alan Gold, Executive Chairman

Thank you. I again thank our stockholders for their support and the team here for their hard work during 2020 and early 2021. It has been a challenging time not only for the world and the industry, but we remain hopeful and positive about Innovative Industrial Properties and our prospects moving forward. Thank you all.

Operator, Operator

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