Innovative Industrial Properties Inc (IIPR) 2020 Q1 法說會逐字稿

Good day. And welcome to the Innovative Industrial Properties Inc., Q1 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Brian Wolfe. Please go ahead.

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

Before we begin, I'd like to remind everyone that statements made during today's conference call may be deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors. For a detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the news release issued yesterday and filed with the SEC on Form 8-K as well as the company's reports filed periodically with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

I'll now hand the call over to Alan. Alan?

Thank you, Brian. And welcome, everyone, to our 2020 first quarter earnings call. First and foremost, we want to express our sincerest gratitude to all of our medical professionals, caregivers and researchers who are on the front lines fighting the coronavirus pandemic we are experiencing across the globe. It has been a trying time as we battle this health crisis, and it is resulting in extreme economic disruption.

Although we've had our last call just in March, we have chosen to host a call today to share our financial results for the first quarter and provide our updated perspective on the business and the industry in light of the rapidly changing environment we are living through.

To recap briefly on our business and financial results, during the first 4 months of 2020, we acquired 9 properties totaling over 1 million square feet in 7 states and amended leases with our existing tenants for additional property improvements, collectively representing over $225 million of investments, which include both follow-on transactions with our existing tenant partners to facilitate their continued expansion and new tenant relationships. Ben Regin, our Vice President of Investments, will discuss our recent acquisitions in more detail in our overall portfolio.

As of today, we own 55 properties in 15 states, totaling 4.1 million square feet, which are over 99% leased on a long-term basis to high-quality, licensed cannabis operators. In addition, we paid a quarterly stock dividend of $1 per share to stockholders on April 15, representing a 122% increase over our first quarter 2019 dividend. Driven by the property portfolio's operating performance and continued execution on our pipeline of acquisitions. This dividend was also supported by our tremendous 200% plus growth year-over-year in rental revenue, net income and AFFO, which to now does not take into account at all the 2 acquisitions we completed after quarter end, constituting $65 million of additional investments. Catherine will also provide more detail regarding our financial results.

The medical-use cannabis industry continues to experience tremendous growth and change. And Paul will provide some detail on industry and regulatory trends in our call today, focusing on the impact of this current pandemic and how authorities and operators are adapting. We are resolutely focused on continuing to be long-term stewards of your investment in our company and navigating through the immense challenges posed by this health crisis and economic disruption. Despite these challenges, we have continued to be strong believers in the resilience and potential of this emerging industry and a key real estate capital provider to enable its continued strong growth for many years to come.

With that, I'd like to turn the call over to Paul. Paul?

Thanks, Alan. For this call, I plan to focus on the impact of the COVID-19 pandemic on the regulated cannabis industry, including, one, the current regulatory environment for cannabis operators during this crisis; and two, the dynamics of the industry during this crisis and developments that we continue to monitor closely.

I'd like to also preface this discussion noting that regulations and industry developments are evolving rapidly. And while we want to provide you a general landscape as of now, there can be no assurance that this landscape will not significantly change over the coming months, weeks or even days.

First, regarding the current regulatory environment, as it pertains to the COVID-19 pandemic, we have been in touch with each of our tenants during this pandemic, and we continue to monitor state and local developments where our tenants operate. In the vast majority of situations, medical-use and adult-use cannabis has been determined either formally or by implication to be an essential business that can continue to operate as an exception to general state and local shutdown orders. The essential designation has generally been applied throughout the supply chain, including cultivation, processing, packaging, distribution and dispensing. There have been certain exceptions, however, such as in Massachusetts, where the governor permitted medical-use cannabis businesses to continue to operate, but shut down adult-use cannabis businesses as nonessential.

While we are pleased to see state and local governments recognize the importance of medical-use cannabis as an alternative treatment for patients suffering from serious medical conditions and categorizing these businesses as essential, many authorities and businesses have introduced social distancing and other restrictions that have significantly altered patients' and consumers' purchasing habits. These include online ordering, home delivery and curbside pickup. Certain operators have adapted more readily than others with technology and logistical enhancements, but in general, the restrictions to implement social distancing have had a dampening effect on sales for many operators, significantly limiting the number of patients and consumers they can serve each day.

Over the long term, we see the clear, nearly uniform designation of medical-use cannabis businesses as essential during this crisis as a very positive point for the industry and offering further validation of the key importance of medical cannabis for patients in managing their medical conditions. While the pandemic may postpone certain additional state-level initiatives to legalize medical-use or adult-use cannabis due to issues regarding petition drives during this time and state legislature shutdowns, we expect that the momentum for legalization of cannabis across states will continue, if not increase, once we're on the other side of this health crisis.

From a state government perspective, we also believe that this pandemic and associated economic fallout further illustrate the importance of supporting local businesses that have tremendous growth potential and can provide good jobs in local communities. To that end, we believe it to be prudent for federal, state and local authorities to focus on fostering growth of these businesses, which include, among other things, taxation of regulated cannabis products at reasonable levels, sensible regulation and disciplined enforcement of the rules against illicit trafficking. We hope that states like California will look at the models that have worked well across the country and make definitive pivots to support this regulated industry and create the best outcome for their residents.

Further, we would like to touch on the myriad of federal assistant programs that have been put in place to support businesses during this pandemic. While federal assistance has been denied to regulated cannabis operators due to the status of cannabis as a schedule one controlled substance, a bipartisan letter was issued on April 17 to the House of Representatives from 34 members of Congress and spearheaded by the congressional cannabis caucus. This letter formally requested that the regulated cannabis industry be included in the next round of government coronavirus relief funds. Quoting from the letter, "the COVID-19 outbreak is no time to permit federal policy to stand in the way of the reality that state legal cannabis businesses are sources of economic growth and financial stability for thousands of workers and families and need our support." We couldn't agree more and are hopeful that congress understands the importance of this industry and takes the steps necessary to protect the hundreds of thousands of workers that participate directly in this industry across 33 states and in Washington, D.C.

Secondly, regarding industry dynamics during this pandemic. As has been noted in the media, at the onset of this COVID-19 crisis, regulated cannabis spending increased dramatically in March, potentially as a result of patients and consumers pushing the stockpile supplies in response to the spread of the pandemic. However, sales in most geographies have since normalized or dropped below expected precrisis trend lines, and in places like Massachusetts, as a result of the state closure of adult-use cannabis operations, this sales drop has been more dramatic. As we noted previously, while most regulated cannabis operations have been designated essential businesses, social distancing measures and restrictions have reduced sales capacity.

We're seeing other industry dynamics play out here as well and what is really the first significant economic downturn experienced by the regulated cannabis industry. We expect to see continued consolidation of the industry, which has been a theme for a number of months now and continued challenges in the capital markets for cannabis operators. We also expect that strong brands and strong balance sheets will provide further differentiation in this environment in the months to come. We are certainly living in unprecedented times and what is truly an unprecedented period for this very young industry. In light of this, we have continued our strategy of focusing on developing and expanding our real estate partnerships with strong, well-positioned multistate operators, as Ben will describe in some detail.

While this is an extremely challenging time for our country and our world, we believe that the regulated cannabis industry will be one of the more resilient industries throughout this crisis. And when we overcome this crisis, through the collective ingenuity of our top medical professionals and researchers, the regulated cannabis industry will continue to thrive and be one of the top drivers of growth and good jobs across the country.

I'll now turn the call over to Ben, who will walk you through our recent acquisitions. Ben?

Thanks, Paul. As Alan noted, since January 1, we have acquired 9 properties in 7 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 55 properties across 15 states, representing approximately 4.1 million square feet, including approximately 1.3 million square feet under development or redevelopment. I plan to touch on each of our acquisitions by state and also provide some information about each tenant and our portfolio overall in the state.

Starting with Illinois, we acquired a 231,000-square-foot industrial property in a sale-leaseback transaction with GTI with our total investment in the acquisition and tenant improvements at the properties expected to be $50 million in the aggregate. GTI is a leading multistate operator with 13 manufacturing facilities, licenses from 96 retail locations and operations across 12 U.S. markets with 1,600 employees. This transaction represented our third sale-leaseback transaction with GTI, following our sale-leaseback transaction with GTI for their medical cannabis cultivation and processing facility in Pennsylvania in November of last year and their medical cannabis processing facility in Ohio in February, which I will touch on later.

As of today, we own 6 properties in Illinois, and our total investment, including committed funding for future tenant improvements, is $172.1 million, which does not include the additional $10.7 million, which may be requested by Grassroots at our Litchfield property. These 6 properties are leased to some of the top regulated cannabis operators in the United States, including Ascend Wellness, Cresco Labs, Grassroots, GTI and PharmaCann.

As of today, Illinois has allowed both adult-use and medical-use cannabis businesses to remain open. Illinois commenced adult-use sales on January 1 under a regulatory framework of limited licenses with nearly $110 million in products sold during the first quarter alone.

Now to Massachusetts. Last month, we acquired 199,000-square-foot industrial property and entered into a long-term lease with Ascend Wellness, with our total investment in the acquisition and tenant improvements at the property expected to be $49 million in the aggregate. Ascend is a vertically integrated MSO with retail and cultivation operations in Massachusetts, Illinois, Ohio and Michigan.

Earlier this year, Ascend received its provisional license approval from the Massachusetts Cannabis Control Commission for what is expected to be one of the largest dispensaries on the East Coast in the heart of Downtown Boston. In late December, Ascend also announced the raising of over $28 million from several strategic investors, including U.S. cannabis sector funds and a large European-based investment fund. This transaction represented our third acquisition and lease with Ascend, having previously acquired and entered into long-term leases with Ascend for their cannabis cultivation and processing facilities in Illinois and Michigan.

As of today, we own 4 properties in Massachusetts, and our total investment, including committed funding for future tenant improvements, is $113.9 million, which does not include the additional $23.8 million, which may be requested by Trulieve at our Holyoke property. These 4 properties are also leased to some of the top regulated cannabis operators in the United States, including Ascend, Holistic Industries, PharmaCann and Trulieve.

As Paul noted, Massachusetts determined to keep medical-use cannabis businesses open and to close adult-use cannabis stores during this pandemic. This has severely impacted sales and has also precipitated a very significant increase in medical cannabis applications, which we believe also reinforces the position that many adult-use cannabis purchases are for medical-use purposes. And as such, adult-use cannabis operators should be allowed to remain open during these times. We are firm believers in any event, in the enduring long-term strength of the Massachusetts regulated cannabis market and our operators' abilities to navigate through this crisis and position themselves for continued success.

On to Florida. As you may recall, we originally entered the Florida market in October of last year, purchasing a 120,000-square-foot cultivation facility and a sale-leaseback transaction for $17 million with Trulieve.

In March, we closed on our second property in Florida in a sale-leaseback transaction with Parallel for its 373,000-square-foot industrial and greenhouse facility, with our total investment in the acquisition and tenant improvements at the property expected to be $43.5 million in the aggregate. Parallel is one of the largest privately held, multistate operators in the U.S. with over 1,700 employees nationwide and has raised more than $300 million in capital to date. Parallel is led by Chairman and CEO, Beau Wrigley, Jr., who is the Chairman and CEO of Global Gum and confectionery leader to William Wrigley Jr. Company until its sale to Mars in 2008 for $23 billion.

Florida medical cannabis dispensaries remain open as an essential service, akin to retail pharmacies. The piece of growth for the medical cannabis industry in Florida has continued and is one of the largest medical cannabis markets in the country. As of May 1, there were over 336,000 qualified patients throughout the state with over 2,500 qualified physicians.

Now for Michigan. Last month, we acquired a 115,000-square-foot industrial property in a sale-leaseback transaction with Cresco Labs, with our total investment in the acquisition and tenant improvements at the property expected to be $16 million in the aggregate. Cresco is one of the largest vertically integrated cannabis companies in the United States with licensed operations in 11 states. With its pending acquisitions, Cresco has 15 licensed cannabis production facilities, 25 retail cannabis licenses and 15 operational cannabis dispensaries across 9 states.

This sale-leaseback transaction marks our fourth acquisition and lease with Cresco with prior acquisitions and leases for 3 of Cresco's licensed cannabis cultivation and processing facilities in Illinois and Ohio. As of today, our total investment, including committed funding for future tenant improvements for the properties we own in Michigan is $114.8 million. As of today, Michigan has allowed both adult-use and medical-use cannabis businesses to remain open, though is limiting purchases to curbside pickup and delivery and is not allowing in-store purchases.

Now for Ohio. In January, we acquired a property in Ohio comprising approximately 50,000 square feet of industrial space and entered into a long-term lease with Cresco Labs. Our total investment in the acquisition and tenant improvements of the property is expected to be approximately $12.5 million. And also in January, we acquired a property in Ohio and executed a long-term lease with GTI, with our total investment in the property, including reimbursement for tenant improvements expected to be $7.2 million. As of today, we own 4 properties in Ohio, and our total investment in the market, including committed funding for future tenant improvements is over $43 million. Medical-use cannabis dispensaries in Ohio made their first sales in 2019, and as of the end of March, 94,000 patients and over 10,000 caregivers have been registered for the state's medical cannabis program.

Similar to other states, Ohio health officials deemed medical cannabis as essential under the category of medicine and exempts from the stay-at-home orders. While home delivery is not permitted, Ohio regulatory authorities have taken steps similar to other states, including temporarily authorizing curbside pickup, allowing physicians to recommend medical cannabis by phone or video, allowing patients to preorder over the phone and increasing limits on purchases per patient.

In January, we also marked our entry into the Virginia market with the acquisition of a property expected to comprise approximately 82,000 square feet of industrial space upon completion of development. Our total investment in the property is expected to be $19.8 million, including funding for completion of development. We executed a long-term lease with Green Leaf Medical, and the property will be utilized for medical-use cannabis cultivation, processing and dispensing. This is our second transaction with Green Leaf Medical, having executed a sale-leaseback transaction in 2019 for their Pennsylvania cultivation and processing facility. Together with our Pennsylvania property, our total expected investment in properties leased to Green Leaf is $32.8 million. Green Leaf holds 1 of 5 vertically integrated licenses to cultivate, process and dispense medical cannabis in Virginia. While Virginia is in its very early stages, the Virginia governor last month approved a bill to decriminalize cannabis possession in the state, marking continued progress on the state level.

Finally, we acquired 2 dispensary locations in Colorado and sale-leaseback transactions with LivWell, marking our second and third transactions with LivWell after acquiring their Michigan cultivation and processing facility. Our total expected investment, including reimbursements or tenant improvements, is expected to be approximately $4.2 million.

Colorado generally has authorized medical-use and adult-use cannabis operators to remain open. Though as with other states, the industry is feeling the effects of the stay-at-home orders, severe economic disruptions and job losses, severe slowdowns in tourism and cancellation of events, including the events surrounding 420.

Prior to the pandemic, regulated cannabis sales were over $1.7 billion state-wide in 2019, a record high. In terms of our overall pipeline, we continue to see very strong demand for our real estate capital solutions and are in active negotiations with a number of strong operators, both existing tenants and new ones and look forward to sharing additional transactions as we complete them in the months to come, continuing to utilize the strength of our balance sheet.

With that, I will turn it over to Catherine. Catherine?

Thanks, Ben. I'd like to briefly summarize our results for the quarter and then provide some updates on subsequent decisions we've made after speaking with each of our tenants and monitoring the impact of the current pandemic and economic disruption on the industry. We generated total revenues of approximately $21.1 million for the quarter, a 210% increase from Q1 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 noted in our press release, total revenues also include the application in full of the remaining security deposit for our lease at our Los Angeles, California property, which is under receivership. And an application of part of the security deposit that we have with Vertical for properties leased to them in Southern California from March rent.

As we've indicated in the past, our Q1 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. And our revenues for the quarter were also impacted by rent abatements or deferrals under certain leases that are expected to burn off in the next few months as we continue to account for all of our leases on a cash basis.

For the 3 months ended March 31, 2020, we recorded net income of $11.5 million. Funds from operations, which adds back property depreciation to net income, was $16.4 million. Adjusted funds from operations, which adds back noncash stock-based compensation expense and noncash interest expense related to our exchangeable senior notes, was $17.8 million.

For the 3 months ended March 31, 2020, adjusted funds from operations grew 236% from the prior year quarter. On April 15, we paid our quarterly dividend of $1 per share to common stockholders of record as of March 31. The Q1 2020 common stock dividend reflects a 122% increase from the prior year's first quarter.

Throughout March and April, we've been in discussions with each of our tenants as we progress through this unprecedented period of time. In light of those discussions, we've worked with 3 of our 21 tenants to provide temporary rent deferrals. Generally structured to apply a portion of the security deposit we hold under each lease to pay April rent in full, defer rent for May and June in full and provide for the pro rata repayment of the security deposit and deferred rent over an 18-month time period starting July 1.

Pursuant to these amendments, a total of $743,000 of security deposits that we hold in cash were applied to the payment of rent for April, and a total of $1.5 million in rent was deferred for May and June. The total amount of $2.3 million from these amendments represents approximately 3% of our total revenues annualized as reported for Q1.

And with respect to financing activity, in January, we completed a follow-on public offering of common stock, raising net proceeds of about $240 million, including the exercise in full of our underwriters' option to purchase additional shares. Also in January, we raised net proceeds of about $78 million under our previously established at-the-market equity offering program, or ATM program.

We are truly grateful for all of our stakeholders' continued support and focused on investing the proceeds from our recent equity raises with the best tenants and working closely with our tenants to navigate through these unprecedented times and come out even stronger on the other end.

Finally, I'd like to note that we remain very conservatively leveraged with no secured debt and approximately 13% of our total gross assets consisting of our exchangeable senior notes. A leverage rate and balance sheet composition that's truly unique among real estate companies. Those 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. Those exchangeable notes are the only debt we have on the balance sheet totaling over $1 billion of assets as of quarter end.

And with that, I'll turn it back to Alan. Alan?

Thanks, Catherine. As we continue to navigate this challenging time, I want to highlight a few things in closing. We are proud of everything that our tenants have accomplished and thank our tenants and their teams for continuing to operate to provide key access to medical-use cannabis patients during these difficult times. We are well capitalized with a tremendous balance sheet that puts us on a strong footing, not only to weather these conditions, but to continue to support the industry and make real estate investments with best-in-class tenant operators. We remain steadfast in our support of this industry and believe with the utmost conviction in its very bright long-term future.

I want to personally thank our stockholders for your continued support and entrusting us as stewards of your investment. We have and will continue to do our very best in that role every day.

Now with that, I'd like to open it up for questions. Operator, could you please open the call up for questions?

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

So in terms of medical cannabis sales data, Paul, I know you made the comment on it being mixed. We've obviously seen it strong in some of the limited license states, but kind of more challenged in California, Colorado and Nevada, where there's more issue with local regulations, dispensary closures and black market competition. But when you think of the deferrals that you've given, is there a geographic concentration with those tenants on par with kind of that sales data? Or does it have to do with tenants that are in the early stages of their CapEx cycle? Or are there other external factors that are driving the need for deferment?

So Tom, this is Alan. Look, there's -- there are multiple reasons for each of our tenants having -- or each of those tenants, the 3 tenants having some sort of an issue. We've gone from California tenant to a Michigan tenant to a Colorado tenant -- Pennsylvania tenant. And so -- yes, we could go through each one of the tenants and talk about why and it is. But it does start, as you described, some of it with kind of an emerging tenant and then some with having to deal with the state issues themselves. I'm going to turn it over to Ben to go through the 3 tenants.

Tom, so the tenants, particular Vertical Wellness in California, Green Peak in Michigan, and then Maitri Medicinals in Pennsylvania. And you're really seeing a number of factors from construction impacts for earlier-stage facilities to disruption at the retail level as you're shifting to the social distancing, curbside pickup and home-delivery model as well as potential collection issues when it comes to California, and you have impacted the retail level that can affect Vertical's wholesale business, for example. So it's different factors for each tenant. We had in-depth discussions with all of our tenants and thought it was prudent to support these 3, in particular, through the rent deferrals and have a very high level of confidence in each of these management teams to be able to navigate through these challenging times.

Got it. Appreciate that color, Alan and Ben. So I guess taking it from another perspective then, many of the other REITs that have reported seem to be in the early stages of engaging with their tenants and evaluating deferral requests. From your statements here, it sounds like you've already engaged with all your tenants. So my question is, are there more deferral requests that you're evaluating? And if so, how large of a percent could that be?

So we've -- as I said, we've talked with all 21 of our tenants, and we're -- and I think we're fairly confident that we are -- have dealt with the issues that the -- that our tenants might have. Keeping in mind that the majority of our tenants over -- I think we generate -- over 80 -- 70% to 80% of our tenants are EBITDA-positive as reported in their last reporting periods. And so we're fairly confident in the quality of our portfolio and are very excited about the growth prospects of our tenants going forward, especially given the fact that we now believe that we're at the beginning of reopening of these -- of the economy in general and specifically in some of these states. And we believe that, that opening is going to allow the states to remove the regulations that are preventing some of these tenants from achieving their maximum revenues.

Got you. So on that last point, the idea being that, that 3 months is enough of a window to allow some reopening, allow dispensaries to reopen and kind of carry those tenants through and construction to complete?

That's how we evaluated it, yes.

Got it. And then regarding acquisitions, you've already put, including the deals with Grassroots and Trulieve from 2019. It looks like you've put roughly $246 million to work year-to-date. How is your pipeline shaping up currently? And has your investment focus or interest shifted at all since the onset of COVID?

So I think our -- I think we -- perhaps we're a little -- slowed things down just a little bit in our acquisitions. When we said -- when we raised the capital, we indicated that we'd be able to place that capital in a 3- to 6-month and/or 6 -- around 6-month time period. Although I think we're going to achieve that, but more to the back end. I think our pipeline continues to be very strong. And Ben, why don't you talk about that further?

Yes. I echo that. The pipeline is very strong right now, continues to grow. We're seeing continued demand for this type of capital solution. There's still a lot of very high-quality operators out there continuing to grow their businesses. And real estate capital is very important to be able to build out these mission-critical facilities to continue to support their operations. And we have the ability to be very disciplined and selective and work with the top companies in the country and support their business.

Our next question comes from Scott Fortune with Roth Capital Partners.

Congrats on the quarter. Real quick just kind of following up on update on the fund, you funded about $720 million. You have unfunded commitments about $144 million, not counting that $35 million tenant options. Of around $380 million in cash. So that gets us about $200 million going forward to be developed into the pipeline. Can you confirm that?

And then just kind of follow-on, providing the color on the new COVID environment for the pipeline moving forward? Are we seeing more TI delays or final pipeline acquisition delays to kind of slow down on the drawdown of the capital?

So I'm going to take -- or I'm going to have Cath deal with the first question, and then we'll deal with your second part of your question regarding the COVID and displays I have been dealing with. Go ahead Catherine.

Yes. Thanks, Alan. Scott, the way that we look at our uncommitted capital is we really have about $113 million of uncommitted capital today. We raised a little over $1 billion in capital to date and placed almost a little under $900 million. So I think your numbers may not be including the additional about $35 million of tenant improvements that is really at the election of 2 operators to be able to request that.

And then Alan?

Yes. And then as to COVID's impact on the pipeline and maybe construction activities. I think, Ben, why don't you deal with that?

Yes. So we're -- like we said about the pipeline, we're continuing to see extremely high demand for this type of capital given the challenging economic conditions. Like we were saying, we continue to be very selective and disciplined in which types of investments that we're willing to pursue and move forward with in the environment.

Great. Can I follow up on that, Ben? Going forward, you said your pipeline would come about 50% or 75% from existing clients. Is that kind of moving up at a higher rate? Or are you still seeing -- there's a lot of number -- in covering the space, there's a lot of good up and coming private companies that are positive EBITDA, they're moving forward, are you still seeing some nice opportunities to add new tenants going forward, kind of step to lease a percentage of the pipeline with large MSOs, per se?

Yes. We're continuing to see both. We're continuing to see a lot of organic growth within our current portfolio as our tenants expand into other states or expand their facilities or their footprints in their existing states. And a big part of our business plan has always been to support our existing growers as they expand their operations. And on top of that, like you mentioned, we are seeing new tenants, new operators in the industry that are extremely successful that are also coming to us with potential investment opportunities. So it's a nice mix of existing tenant relationships as well as new growers coming to us for new potential investments.

Okay. And then one last question. Just any additional color on DionyMed, an outlook for that property kind of dovetailing that with looking at some of these tenants, 3 tenants that you're helping get across the finish line here for next or let's assume COVID kind of continues to put a lot of pressure on this and then challenges continue for the tenants, what are the kind of the next step for these tenants or process going forward for these challenged tenants not being able to meet rent payments, even though it's a small percentage of the overall portfolio? Just kind of step me through how you're looking at DionyMed, is there interest in that property not being repurchased or being purchased, but -- versus being recommissioned from that standpoint? And the next step for these potential tenants down the road as a risk.

All right. So before I turn it over to Paul to talk about DionyMed, the -- let me -- let's be clear that these tenants could work -- could and should -- could make their rent payments. What we felt was is that by working with the tenants we can make these tenants -- put these tenants in better financial position for the long run. Now this was -- the accommodations that we made were combinations that we believe was in best interest of the tenants and of the company. But let's make it very clear that our existing tenants are -- do have the ability to continue to pay their rents going forward. And then -- and aren't in the position of going into a receivership position that we know of today. And now I'm going to turn it over to Paul to talk about DionyMed to begin.

Sure. Scott, so what I can tell you about Esperanza property is very positive. We're happy to report that we're in advanced negotiations with a very qualified multistate operator, and we're hopeful to have a deal in place in the next few weeks. So we're moving very positively in that direction.

Our next question comes from Eric Des Lauriers with Craig-Hallum Capital.

A bit of a follow-up on your pipeline. In terms of minimizing tenant risk, can you help us understand how you guys think about diversifying your tenant base versus increasing your exposure to higher-quality tenants, like GTI?

Well, I mean, first, I think one thing that we haven't talked about is -- when we talk about our pipeline is the fact that yields have remained very high and very strong. And I think that that's an important point. And we're still seeing transaction opportunities in our pipeline with yields north of a 12% and certainly close to the 15%.

And then in terms of the diversification, obviously, there's -- we believe with the 21 tenants that we're fairly well diversified within our tenant base. We are going to continue to grow that. Keeping in mind that every time we add a new grower, we -- the grower that is added expects us to be there for, not only for the current transaction, but to be a partner with them going forward. And that's the basis of our business model and why we focused on the highest quality growers going forward today. And while we're so excited that we have in our portfolio of the top 10 growers, I believe we have 7 to 10 of those. And hopefully, we're hoping to add the last couple as we go forward. So that's how we're looking at it. It's important that we do diversify within our tenant base. We intend to do that on a very controlled basis over the next couple of years. But it's also important for us to be able to continue to support our existing growers and -- by providing them additional capital as they continue to expand and take advantage of this emerging industry.

Okay. That makes sense. That's very helpful. And then just a bit of a follow-up to that. Are you guys looking at different markets on a geographic basis in terms of looking to increase your exposure to more limited-license states? Or is it really kind of following your high-quality tenants' growth plans at this point?

Paul, why don't you take that?

Sure. Thanks, Eric. So it might be a little bit of both. I mean we continue to follow our highly ranked MSOs in the portfolio, and they're going in the states we like. And we do continue to like the limited-license states, Florida, New Jersey. We continue to avoid the Oregon and Washington. So nothing's changed in our game plan in that respect. But we do see many of our current tenants navigating to those new states.

And I'll just add that we still remain focused on the United States.

Our next question comes from John Massocca with Ladenburg Thalmann.

So maybe just touching a little bit as kind of a broader follow-up to the DionyMed question. And I know it's a little hard to formulate without kind of a lot of historical data points. And obviously, there's ongoing discussions at the DionyMed property -- the former DionyMed property. But broadly speaking, what kind of recoveries do you think you can get on cannabis properties that need to be retenanted that have a tenant that goes into receivership? Do you guys have any kind of thought process there?

So from the very beginning, we have focused on a specific asset class, and that being the cannabis-related real estate. These facilities are special-purpose facilities. They have -- they're high-quality, mission-critical facilities. And they have very unique improvements within them that allow them to be -- allow them to operate as a grow facility or a dispensary. And we believe that these facilities as those -- as that product have long-term and tremendous value.

If you're asking if they had to be repurposed for something different, you're -- then it is we absolutely believe that the -- that in repurposing that the majority of the improvements that would not translate to another type of tenant. But...

No, no. I was definitely focused on repurposing for additional -- for an alternative cannabis cultivator or retailer.

We're highly confident that a fully built out facility, especially one that has been built out within the last couple of years, it would be in very high demand from other growers. And certainly, a grower that would be acquiring the license associated with the grower that happened to go into receivership, if it -- if that were to be the case. And so we believe that there's -- that these improvements are generic and reusable and fungible between tenants and would be in great demand.

Understood. And then I know it's maybe a little bit -- I mean we're still in a period of kind of dislocation in the broader capital markets and just economically generally. But given maybe the resilience of your kind of cost of capital and the fact that people -- kind of competitors of yours that don't have that same access to capital. When I say competitors, I mean other people kind of investing in the kind of cannabis real estate space. Is M&A potentially something that's still on the table in terms of a growth option? Or does the kind of current environment make that less attractive just given there's kind of a lot of uncertainty out there.

So I think the question is, would we be open to acquiring one of our competitors or working with -- joining with one. We have a very strong pipeline. We have a very strong group of growers that are looking to grow. And we're very proud of our portfolio and our tenants. And we believe that supporting the existing growers and adding the right additional growers to our portfolio is the right path and the right business plan for us today.

Understood. And then one last quick one, and sorry, if maybe I missed it in the prepared remarks. You guys gave some color on Massachusetts, but for your portfolio specifically, are all of your assets kind of open or essentially have access to kind of retail distribution for the cultivation assets?

So we do have 1.3 million square feet of facilities under development. So obviously, those aren't open, okay? Of the assets that are completed and operating, they are operating in some state -- some functional ability if they can be -- if the specific state allows them. But Ben, I think there might be 1 tenant that has closed a couple of their dispensaries.

We've seen certain disruptions on the retail side, but the vast majority of our facilities have been able to continue to operate with procedures put in place to address the COVID emergency.

Okay.

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

Well, thank you. And I would like to thank everybody for joining us here today. And I just want to reiterate that how proud we are of our tenants. And more importantly, I want to be -- I want to say how thankful I am of our team for their dedication and hard work.

And with that, we conclude the call. Thank you, all.

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