Innovative Industrial Properties Inc

NYSE:IIPR

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and welcome to the Innovative Industrial Properties Second Quarter Earnings conference call. [Operator Instructions].

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

[Brian Wolfe, VP, General Counsel & Company Secretary]

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 you an update on our business since our last call in February. And our views on the continued evolution of a truly dynamic industry we are so proud to serve. Now there's certainly a lot to recap from our company's activity in the regulated cannabis industry as a whole.

As we have noted on prior calls, with all the challenges that we have faced as a society over the last 1.5 years, the regulated cannabis industry has demonstrated a strong and sustained resilience across the United States. And as the country and the world as a whole has suffered through not only a health crisis, but also one of the quickest and deepest economic contractions in recent history, the United States regulated cannabis industry continued on its tremendous growth path, growing over 50% annually from just over $13 billion in sales in 2019 to an estimated $20 billion in 2020. That momentum has continued into 2021, with U.S. quarterly sales across regulated medical and adult-use cannabis markets, reaching an all-time high of $5.84 billion in the first quarter alone.

And as noted in our earnings press release yesterday, we continue to execute on our acquisitions and investment pipeline, executing on over $245 million in new transactions since the beginning of the second quarter, representing a good mix of new tenant relationships and follow-on investments with our existing long-term tenant partners. Ben will provide an update on our acquisitions investments, along with a survey of recent developments with our largest tenant partners.

Now as of today, we own 73 properties in 18 states totaling 6.8 million square feet, which are a 100% leased on a long-term basis to high-quality licensed cannabis operators. Reflecting the strength and resiliency of our cash flows and continued execution on our acquisition and investment pipeline, we paid a quarterly common stock dividend of $1.40 per share to stockholders on July 15, representing a 32% increase from the prior year's second quarter dividend and our 11th dividend increase since our IPO in December 2016.

On the financing front, this past quarter has been a transformational one for this young company. In May, we obtained an investment-grade corporate credit rating and shortly thereafter, executed on a bond offering that generated $300 million in gross proceeds with a 5.5% coupon rate and a 5-year maturity. With a strong book of demand for these notes, we are thrilled to further complement our strong balance sheet and liquidity profile with this new financing option, providing us with an attractively priced non-dilutive capital source as we continue to grow. Of course, we remain focused on maintaining a strong, flexible and prudent leverage balance sheet. And with this new offering, we have a debt to total gross assets ratio of just 21% as of quarter end. Catherine will also provide more detail regarding our financial results and capital raising activity.

And of course, regulated developments in the cannabis industry continue at a brisk pace. Since our last call alone, four states: Connecticut, New Mexico, New York and Virginia passed adult-use cannabis programs by legislative action, bringing that total to 18. And Alabama passed legislation in May to become the 38th state to establish a medical-use cannabis program. With these new programs coming online, new frontier projects regulated cannabis sales reaching $43 billion by 2025, representing a continued tremendous growth trajectory for the overall industry.

Regarding federal regulatory developments on the heels of the reintroduction of the safe banking act earlier this year, Senator Schumer introduced an extensive draft cannabis Bill last month, which seeks to address numerous items surrounding federal cannabis regulation, including descheduling cannabis, criminal record expungement, maintaining the authority of states to set their own cannabis policies and reform of federal taxation of cannabis businesses. Paul will provide further detail on these and other developments we are closely monitoring.

Finally, I would like to note that in June, we published our inaugural environmental, social and governance report, highlighting how we are addressing top ESG priorities of our stakeholders. We are proud of the work that we and our tenant partners have done so far in this front, and we look forward to keeping you updated as we continue to execute on our ESG initiatives.

And before I turn the call over to Paul, I want to reiterate our deep appreciation for you, our long-term owners for your steadfast support as we move through just our fifth year of operations, and we look forward to serving you in this amazing high-growth industry for many years to come.

With that, I'd like to turn the call over to Paul, who will provide additional detail on the recent legislative and market developments of the regulated cannabis industry. Paul?

[Paul Smithers, President, CEO & Director]

Thanks, Alan. For this call, I plan to provide an update on the regulated cannabis industry, including continued state developments, our views on the federal regulatory environment and an overview of recent dynamics of the industry. As mentioned on prior calls, I'd like to also preface this discussion, noting that regulations and industry developments are evolving rapidly. And while we want to provide you a general landscape, as of now in our opinions, there can be no assurance that this landscape will not significantly change.

First, a little detail on continued momentum from states on legalization. We continue to see great progress being made on the state level, including establishment and rollout of both adult-use and medical-use programs. Our recent trend of 2021 has been passage of new programs via legislative action. And in just the past few months, we have seen 5 states take such steps with Connecticut, New York, Virginia and New Mexico passing legislation for adult-use cannabis programs and Alabama adopting, by legislative action, in medical-use cannabis program.

To note, those four states, which adopted adult-use cannabis programs are expected to generate more than $4.5 billion in annual adult-use sales in just their fourth year of operations according to industry estimates. As we noted in our last call in February, these developments come on the heels of 5 other state measures, which passed by popular vote in November, including the establishment of adult-use programs in Arizona, New Jersey and Montana as well as approval of a medical-use program in Mississippi. As a result, 38 states in Washington, D.C. have legalized cannabis for medical use and 18 states have legalized cannabis for adult use, with over 70% of the U.S. population residing in medical-use cannabis states and over 40% residing in adult-use cannabis states. We are also tracking several other states that we believe have a strong likelihood of legalizing either medical-use or adult-use cannabis in the next few years, which would bring those totals to 90% plus of the U.S. population in medical-use cannabis states and a solid majority of the U.S. population residing in states with adult-use programs.

We also see many states continue to chip away at the illicit market for cannabis as regulated cannabis companies continue to improve their operational efficiencies, strengthen their product offerings and experience for patients and customers and states continue to make adjustments to the regulatory frameworks over time, such as broadening qualifying medical conditions and distribution options. With the illicit cannabis market still making up approximately $66 billion of overall sales in 2019, there continues to be tremendous potential to move that activity into the regulated market, and we see state and local governments as a general matter of being in line with that goal with additional tax revenues, contributions to local economic activity and job creation as a result. In line with that view, new frontier data, in fact, estimates that by 2025, 42% of total annual U.S. cannabis demand will be met by legal purchases of cannabis in regulated marketplaces, up from 24% in 2020, a key driver to the continued strong growth of the regulated market.

Second, our views on the current federal regulatory environment. Piggybacking on our comments from February, we continue to see progression on national cannabis reform, reflecting clear and decisive shifts in popular opinion over recent years and the years of experience and results from state-run medical and adult-use programs. However, those reform proposals also are continuing to compete for space on the congressional agenda with the numerous other pieces of proposed legislation on infrastructure, pandemic assistance and other priorities. There are numerous cannabis-related bills pending in Congress at different stages of review. The SAFE Banking Act, which would provide additional safety to financial institutions in serving state compliant licensed cannabis operators was reintroduced in the current legislation session passed by the house and is now due for consideration by the Senate. Similar SAFE banking language was also added to a draft version of the fiscal 2022 Financial Services and General Government Funding Bill released by the house appropriations Bill in June. But whether the language will be included in the final appropriations Bill remains to be seen.

In addition, the MORE Act, short for the Marijuana Opportunity Reinvestment and Expungement Act was first introduced in the summer of 2019, passed the house in the prior legislative session in December of 2020 and was reintroduced earlier this year in the current legislative session. The MORE Act focuses on descheduling of cannabis from the Controlled Substances Act and strong social equity provisions. Last month, Senator Schumer released an initial draft of the Cannabis Administration and Opportunity Act, which provides for, among other things, removal of cannabis as a Schedule 1 controlled substance under the CSA, the giving of deference to states to determine their own cannabis policies, transfer of regulatory responsibility of cannabis to the U.S. Food and Drug Administration and certain other federal regulatory agencies and the establishment of a federal taxation framework for regulated cannabis sales.

As we have said before, predicting the timing or substance of federal legislation is exceedingly difficult and perhaps even today more so in today's political environment and the numerous competing priorities of the country as we emerge from this unprecedented pandemic. We continue to closely monitor the status and progress of the numerous bills in Congress and surrounding discussions. Strictly speaking, from our own view, we tend to see certain more limited bills like the SAFE Act, gaining traction in the near term, while more comprehensive far-reaching bills like Senator Schumer's trap Bill being further down the road.

Finally, regarding industry dynamics in the first half of 2021. Notwithstanding the unprecedented challenges experienced in the country from the pandemic, the remarkable resiliency and growth that the cannabis industry exhibited in 2020 has continued in 2021. In fact, with new markets coming online and existing markets trending strongly upward, annual legal cannabis sales in the U.S. are projected to surpass $30 billion by 2022. And that factors in only a small portion, if any, of the expected economic impact of the several states that have authorized the establishment of programs by valid measures in November of last year and through a legislative action this year, as we noted previously.

During the pandemic, many state and local authorities modified regulations to allow for different methods of purchasing cannabis designed in part to provide more reliable social distancing and to protect both the employees and customers of cannabis companies, many of whom are patients with pre-existing conditions that utilize cannabis for medical purposes. Many customers also adapted their more permanent preferences to such options as curbside delivery, online ordering and home delivery. As lockdowns and certain restrictions have gradually lifted, many of those forms of purchasing remain and online ordering and home delivery have, in particular, grown at significant scale, allowing regulated cannabis operators to reach customers in places where they do not have a local dispensary.

We have seen several of the national MSOs key in on this approach to reaching customers, including our tenant Cresco Labs acquisition of Florida Medicinal Cannabis Bluma Wellness and its home delivery operation earlier this year as well as our tenant Columbia Care's acquisition of our other tenant Green Leaf Medical in June, which included home delivery services for Green Leaf's operations in Maryland and Virginia. We see this development as just one of several factors that continue to drive the growth of existing state programs and reach to residents throughout the particular state.

Capital raising and M&A in the regulated cannabis space continues at the brisk pace we saw in late 2020 and early 2021 and noted in our last call. 2021 year-to-date, U.S. cannabis companies raised about $5 billion in equity and debt capital, dramatically surpassing any similar prior year's period. Mergers and acquisitions in the cannabis space are also on a record-setting pace, with over $5 billion in total consideration across 130 targeted M&A transactions year-to-date, also surpassing any year's same time period.

As we noted on our last call, and as Ben will touch on during his remarks, our tenant partners have also been significant participants and beneficiaries of this dramatic increase we have seen this year in both capital raising and strategic M&A activity.

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?

[Ben Regin, Director, Investments & Finance]

Thanks, Paul. Since April 1, we made 5 acquisitions in 4 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 73 properties across 18 states, representing approximately 6.8 million square feet, including approximately 2.4 million square feet under development or redevelopment with a weighted average remaining lease term that continues to be in excess of 16 years.

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 the state. I also plan to provide some additional detail on our tenant roster and overall portfolio.

In Pennsylvania, we acquired a property, which is expected to comprise approximately 239,000 square feet of industrial space upon completion of redevelopment and entered into a long-term lease with Parallel with our total investment in the acquisition and tenant improvements at the property, expected to be about $68 million in the aggregate. In addition to this Pennsylvania property, we own and leased to Parallel 2 regulated cannabis cultivation and processing facilities in Florida and one property in Texas expected to be utilized for regulated cannabis cultivation, processing and retail activities upon completion of development. Assuming full reimbursement for tenant improvements under the leases, our total investment in properties leased to Parallel is expected to be approximately $203.1 million, encompassing approximately 895,000 square feet.

Including this property, we own 8 properties in Pennsylvania, comprising an aggregate of approximately 1.1 million square feet and a total investment of approximately $292.3 million, with the other tenant partners being Curaleaf, Green Thumb, PharmaCann, Holistic, Columbia Care, Jushi and Maitri.

With first sales in 2018, the Pennsylvania medical cannabis market continues to perform exceptionally well, with 2020 medical-use cannabis sales of approximately $545 million. With limited licensing, the state allows for up to 25 growing and processing licenses and up to 150 dispensary licenses, and the state government continues to support the industry, including passage of recent legislation in June that loosens certain restrictions on programs, including increases in the days of supply that a patient can purchase, maintaining curbside deliveries and continuing to allow patient certification by a physician remotely via telehealth.

Moving on to Illinois. We acquired a property earlier this week, which is expected to comprise approximately 250,000 square feet of industrial space upon completion of development and entered into a long-term lease with forefront ventures, with our total investment in the acquisition and construction expected to be about $50 million. In addition to this Illinois property, we own and lease to 4Front, a regulated cannabis cultivation, processing and dispensing facility in Massachusetts and a regulated cannabis cultivation and processing facility in Washington. Assuming full reimbursement for tenant improvements under the Illinois lease, our total investment in properties leased to 4Front is expected to be about $83 million, encompassing approximately 431,000 square feet. 4Front was founded in 2011 and is a vertically integrated multistate cannabis operator with operations in strategic, medical and adult-use cannabis markets, including California, Illinois, Massachusetts, Michigan and Washington.

Including this property, we own 7 properties in Illinois, representing a total investment of approximately $254.9 million, with the other tenant partners being Ascend Wellness, Cresco, PharmaCann, Curaleaf and Green Thumb. Illinois, the 11th state to legalize cannabis for adult-use commenced adult-use cannabis sales at the beginning of last year. In just its first year of adult use sales, Illinois regulated cannabis sales were over $1 billion, including $669 million in adult-use sales and over $366 million in medical-use sales. That strength in sales continues into 2021, including June 2021 adult-use cannabis sales alone being in excess of $115 million and being the fourth month in a row of sales in excess of $100 million.

Now to Massachusetts. In May, we expanded our footprint in Massachusetts with the acquisition and lease to Temescal Wellness of an industrial facility for cannabis cultivation and processing, which encompasses approximately 70,000 square feet. We are providing reimbursement to Temescal for the redevelopment of the property, and our total investment is expected to be about $18 million. We are excited to bring Temescal in as a new tenant partner, a leading cannabis company in Massachusetts founded in 2015, which also operates an existing cultivation and processing facility and 3 dispensary locations in Massachusetts. Including our Temescal transaction, we own 7 properties in Massachusetts, representing a total investment of over $200 million, comprising approximately 717,000 square feet with tenants PharmaCann, Holistic, Trulieve, Ascend, Cresco, 4Front and Temescal, an exceptional roster of leading cannabis companies.

And on to Michigan. In April, we partnered again with our long-term tenant Green Peak Industries, which is branded as Skymint, acquiring an industrial property expected to comprise 175,000 square feet upon completion of redevelopment as a cannabis cultivation, processing and distribution facility. In total, with this newest property, we own and lease to Skymint 8 properties in Michigan, including another cultivation and processing facility in 6 retail locations. One of the largest vertically integrated operators in Michigan, we have been a real estate partner of Skymint since 2018 as Skymint has significantly expanded its production capability, breadth of product lines and reach throughout the state.

A month later, we closed on another transaction in Michigan with the purchase of an 85,000 square foot industrial property and leased to Sozo companies, a vertically integrated cannabis company founded in 2018 and focused on the Michigan market. With this latest acquisition, our total investment, including committed funding for future tenant improvements for properties we own in Michigan is a little less than $210 million.

Finally, on the investments front, consistent with our business strategy to be the go-to long-term real estate capital partner to our tenant partners, providing optimal non-dilutive capital as they continue their expansion initiatives. We continue to execute on follow-on transactions, closing on a $30 million follow-on investment with Jushi Holdings in Pennsylvania in April, an $8 million follow-on investment with Parallel in Florida in June and a $7.1 million follow-on investment with Harvest in Florida also in June.

I would like to also note the construction loan we executed with a developer for the ground up construction of a regulated cannabis cultivation and processing facility in California. With this construction loan, we teamed with the developer that we've known since early 2019, who has significant experience developing and delivering high-quality cannabis real estate in the California market. As we noted in our press release, following development of the property, we have an option to purchase the property and execute a pre-negotiated lease with an affiliate of the developer or at least with another third party. Although the potential identified tenant is relatively early stage, we think highly of the management team they have assembled and that team's track record in the cannabis industry.

Finally, similar to prior calls, I would like to touch on our most significant tenants as a brief update. These top 10 tenants continue to account for well over 3/4 of our contractual rent as of today. Those tenants in order of concentration include Parallel, PharmaCann, Kings Garden, Green Thumb, Cresco Labs, Ascend Wellness, Trulieve, Holistic, Curaleaf and Columbia Care. Just to note, for purposes of tenant concentration calculations, we've calculated our total investment in Trulieve's properties pro forma for its pending acquisition of Harvest, which I'll discuss in more detail.

Parallel. We own 2 properties leased to Parallel in Florida and one property leased to Parallel in Texas. And as I noted previously, acquired another property with Parallel as our tenant partner in Pennsylvania. These investments with properties leased to Parallel, including future commitments to fund improvements total approximately $203 million, encompassing approximately 895,000 square feet. As we noted previously, Parallel is expected to close this year on its pending merger with Ceres Acquisition Corp., is back. The transaction includes a commitment by investors for an additional investment of $225 million with an implied valuation of about $1.9 billion. Parallel also continues its strategic expansion and operational execution, including opening their first dispensary in Pennsylvania last month, executing a definitive agreement in April to acquire Windy City cannabis, a leading operator of 6 Illinois dispensary locations and launching the first CBN cannabis product line for medical cannabis patients in Texas in June.

PharmaCann. Having partnered with PharmaCann for a sale-leaseback of the first property we acquired in New York in 2016, we now own and lease to PharmaCann 5 properties located in Illinois, Massachusetts, New York, Ohio and Pennsylvania, with our total investment, including future commitments to fund additional improvements totaling about $170 million. PharmaCann is one of the largest privately owned vertically integrated cannabis companies in the U.S. with dispensaries and cultivation and processing operations in 6 States. In June, PharmaCann closed on a 4-year secured debt transaction, raising nearly $80 million in net proceeds as they continue to pursue strategic growth opportunities. That follows on the heels of a strategic investment by Cronos Group announced earlier that month for an option to purchase a 10.5% minority stake in PharmaCann for a little over $110 million. We are excited to see the capital opportunities available for PharmaCann and strategic partnerships it continue to form with other leaders in the industry, which, in our mind, offers clear evidence validating the strength of PharmaCann's team and its operations and execution and the tremendous footprint they developed over the years.

On to Kings Garden, which is a tenant partner of ours across 6 properties in Southern California, representing a total commitment of nearly $150 million and which is expected to encompass over 500,000 square feet of space upon completion of development and redevelopment at certain properties. Kings Garden has developed a truly distinguished brand in California and consistently ranks as a top producer in sales in a state that represents the largest market in the world. With production of 40,000 pounds of cannabis flower annually and continuing to ramp significantly, is the leading top-quality producer in the state. Kings Garden is also thinking long-term about sustainable production. Kings Garden recycles and reclaims its water supply, getting about 70% of what it needs internally and water that cannot be repurposed for cannabis cultivation is donated to local farmers for use on seasonable crops. In addition, Kings Garden has set a goal of fully transitioning to LED lighting by the end of 2022. A light source that is environmentally friendly, lasting longer and utilizing only a fraction of energy required from other lighting options. We highlighted a number of environmental initiatives of our tenant partners in their operations and our inaugural ESG report posted to our website. And Kings Garden is yet another example of our tenant partners focused on long-term, responsible, sustainable production.

Green Thumb 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 110 retail locations, 15 cultivation and manufacturing facilities and operations across 13 states and employing over 2,700 people. Green Thumb continues to be a leader in the industry in both its operations and strategic expansion, which was facilitated earlier this year with an equity raise of $156 million and over $200 million of secured debt, a portion of which was utilized to retire existing higher rate debt. Utilizing this capital, in July, Green Thumb entered the Virginia regulated cannabis market with the acquisition of Dharma Pharmaceuticals, a limited license medical cannabis market that earlier this year approved legislation to establish an adult-use program.

Cresco Labs. We've been Cresco's real estate partners since 2019 and have partnered with Cresco on 5 properties in Illinois, Massachusetts, Michigan and Ohio, representing a total commitment of about $121 million. Cresco with 2,700 employees is the largest wholesaler branded cannabis products in the U.S. with 18 cultivation and processing facilities and 33 operating and retail locations across 10 states. Cresco continues to drive expansion through its mix of strong operational performance and selective acquisitions across key areas of focus, including closing on its acquisition of Bluma Wellness in April, a vertically integrated Florida operator, acquiring 4 Ohio dispensaries in February and announcing an agreement to acquire vertically integrated Massachusetts operator in March.

Ascend Wellness. We have been Ascend's real estate partner since 2018 and have partnered with Ascend on 3 properties in Illinois, Massachusetts and Michigan, representing a total commitment of nearly $120 million. Under Founder and CEO, Abner Kurtin's leadership, Ascend continues its evolution as one of the top-performing MSOs with a highly strategic footprint across Illinois, Massachusetts, Michigan, New Jersey and Ohio. Ascend earlier this year completed its initial public offering, raising over $75 million in net proceeds and continues its strong growth trajectory, reporting revenue growth of over 190% from the prior year in Q1. Ascend also recently welcomed Joe Hinrichs to its Board of Directors, an Executive at the Ford Motor Company for over 19 years, who most recently served as Ford's President, Automotive, a great addition to the Ascend's team as they continue to execute on their strategy.

Trulieve is a tenant partner of ours at properties in Florida and Massachusetts, representing a total commitment of a little over $60 million. Pro forma for the acquisition of Harvest, which is expected to be completed later this year, subject to the satisfaction of closing conditions, license transfer authorizations and Harvest shareholder approval with a shareholder vote scheduled for later this month. Our total investment in properties leased to Trulieve and Harvest combined is approximately $111.8 million. Note also that this total investment includes our Nevada property, where Harvest is acquiring the business, pending final approval of license transfers. Led by CEO, Kim Rivers, with approximately 6,200 employees nationwide, Trulieve continues to be the dominant cannabis operator in Florida, the largest medical cannabis market in the U.S., capturing nearly 50% of the Florida market with 85 retail locations in Florida alone.

Trulieve also has licenses to operate in California, Massachusetts, Connecticut, Pennsylvania and West Virginia, and last week was awarded one of the 2 Class I production licenses in Georgia. In May, Trulieve announced that it entered into a definitive agreement to acquire Harvest Health and Recreation, another tenant partner of ours in Florida and Nevada, representing a total transaction value of $2.1 billion at the time of signing. The combination of Trulieve and Harvest would result in pro forma revenue of over $700 million and pro forma adjusted EBITDA of $266 million in 2020, making it one of the largest U.S. MSOs from a revenue generation perspective and the largest U.S. cannabis operator on a retail and cultivation footprint basis according to Harvest's filings.

Holistic. We own 5 properties leased to Holistic in California, Maryland, Massachusetts, Michigan and Pennsylvania, representing a total commitment of about $108 million. Holistic originally founded in 2011 is one of the largest privately owned, vertically integrated MSOs, with operations in California, Maryland, Massachusetts, Michigan, Pennsylvania, West Virginia, Missouri and Washington, D.C., and is continuing to grow its presence in these states that looks at additional organic growth opportunities with pending license applications in states like New Jersey, Virginia and Illinois. With over 600 employees and over 500,000 square feet of cultivation and processing facilities, holistic raised an additional $55 million in capital through an oversubscribed convertible note issuance in May, which was led by Harbert Stoneview Fund.

Curaleaf. We own 4 properties leased to Curaleaf in Illinois, New Jersey, North Dakota and Pennsylvania, representing a total commitment of nearly $103 million. Curaleaf has operations in 23 states, 108 dispensaries, 22 cultivation sites, 30 processing sites, 2 million square feet of cultivation capacity and is the largest U.S. cannabis company by revenue, reaching $260 million in Q1 alone. Curaleaf closed on a capital raise in excess of CAD 300 million earlier this year and in April completed its acquisition of EMMAC Life Sciences Limited, the largest vertically integrated independent cannabis company in Europe, extending Curaleaf's leadership position in the cannabis industry to the global arena.

Rounding out our top 10 tenants, we own 5 properties leased to Columbia Care in Colorado, New Jersey, Pennsylvania and Virginia, representing a total commitment of about $88 million. Columbia Care's footprint includes licenses in 18 U.S. jurisdictions and the EU, with 31 cultivation and processing facilities and 95 dispensaries in operation or under development. In late June, Columbia Care completed a $75 million capital raise in convertible notes and also continues with its expansion into new states and deepening its presence in existing states, including last month's governmental approvals to commence cultivation in West Virginia and an announced closing on the acquisition of 4 dispensaries in Ohio. As we noted on our prior call, Columbia Care also completed the previously announced acquisition of Green Leaf Medical, our tenant partner in Pennsylvania and Virginia, earlier this year as well as the Green Solution, one of our tenant partners in Colorado, in September of last year. In connection with those acquisitions, we received corporate guarantees from the Columbia Care parent company with respect to our leases in place with Green Leaf Medical and TGS.

While we have time to touch on just our top 10 tenants, our other tenant partners continue to execute well, and we are proud to introduce our new tenant partners, Temescal Wellness in Massachusetts and Sozo in Michigan as we continue on our path of growing with our existing tenant partners and establishing new long-term real estate relationships with other strong operators.

With that, I'll turn it over to Catherine. Catherine?

[Catherine Hastings, CFO & Treasurer]

Thanks, Ben. It's been yet another busy quarter for acquisitions and investments, and our tenant partners continue to execute with strength in their operations throughout the challenges presented over the past many months, both of which continue to be reflected in our financial results for the first 2 quarters of 2021.

We generated total revenues of approximately $48.9 million for the quarter, a 101% increase from Q2 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 we noted in our press release, Q2 2021 revenue also includes $625,000 paid to us in June, which relates to the stipulated rent for 2020 owed by the receivership at our Los Angeles, California property. As we discussed in our prior call, that receivership concluded in January 2021 when the cannabis licenses were sold to Holistic Industries, a long-term tenant partner in a number of other states, and we executed a new lease with Holistic for the entire property.

And as we reported in our press release, as an update to the temporary rent deferrals that we granted to 3 of our tenants at the onset of the pandemic in Q2 of last year, $1.3 million of that amount has been repaid, with the remaining $1.2 million of deferrals scheduled for pro rata monthly payments until repaid in full in December 2021. And as we've indicated in the past, our Q2 revenue reflects only partial quarters of revenues from the acquisitions and investments executed during the quarter. And no revenues, of course, for the leases or lease amendments executed after the end of the quarter. And our revenues for the quarter were also impacted by rent abatements or deferrals under certain leases as we continue to account for all of our leases on a cash basis.

For the 3 months ended June 30, 2021, we recorded net income of $29 million or $1.17 per diluted share. As noted in our earnings press release, our exchangeable notes were considered dilutive for purposes of calculating net income, FFO and AFFO for Q2 and the first 6 months of 2021. This has been the case starting in the fourth quarter of 2020. As a result, for the second quarter 2021 results, the exchangeable notes are treated as if they've 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.

Similar to Q4 2020 and Q1 2021, we wanted to highlight this item, especially as it makes an apples-to-apples comparison difficult between the Q2 and first half of 2021 results and the prior year periods as it relates to FFO and AFFO measures. As in the prior year period, the exchangeable notes were anti-dilutive for accounting purposes. So for the second quarter, funds from operations diluted, which adds back both cash and noncash interest expense on the exchangeable notes and property depreciation to net income was $40.7 million or $1.56 per diluted share.

Adjusted funds from operations, which adds back noncash stock-based compensation and noncash interest expense related to our newly issued unsecured senior notes to FFO, was approximately $43 million or $1.64 per diluted share. On June 15, we paid our quarterly dividend of $1.40 per share to common stockholders of record as of June 30. The Q2 2021 common stock dividend reflects a 32% increase from the prior year's second 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've previously noticed, 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 6 months ended June 30, 2021, we capitalized costs of approximately $176 million and funded approximately $152 million relating to tenant improvements and construction at our properties.

And with respect to financing activity. As Alan mentioned in his opening remarks, the IIP team is proud to announce its execution on obtaining an investment-grade corporate credit rating, followed by its debut unsecured bond offering of $300 million of 5-year notes. We focused over the years on maintaining a strong, flexible balance sheet and in combination with a tremendous tenant roster and the proven ability of our tenant partners to execute on their businesses throughout this unprecedented pandemic, we were thrilled to expand the breadth of our capital options with this attractively priced non-dilutive capital. The notes bear interest at 5.5% per annum maturing in May of 2026. And along with our exchangeable senior notes due in 2024 are the only debt we have outstanding. We continue to have no secured debt. And as of quarter end, our total debt to total gross assets was approximately 21%, with total gross assets in excess of $2.1 billion.

And 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. As Ben highlighted, we are thrilled with the quality of our tenant roster and the continued demonstrated strength and resilience of our tenant partners and their execution on operations. We reached another significant milestone for our company with our investment-grade credit rating and our ability to raise attractively priced non-dilutive capital through the unsecured bond market, which we view as a clear demonstration of our tenants' partners' success, the strength of our property portfolio and the strength of our balance sheet.

The regulated cannabis industry continues to be one of the fastest-growing dynamic industries, and we believe still that we're in the early innings of its maturity. The best is yet to come for this industry, and we look forward to continuing our work as the go-to long-term real estate capital partner for best-in-class operators across the United States.

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

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

[Operator]

[Operator Instructions]. Our first question will come from Tom Catherwood with BTIG.

[William Catherwood, BTIG]

Good morning, everyone, and thank you for all the color in the prepared remarks. It was very helpful. When we're looking at 2021 acquisitions, the average deal size has increased materially over 2020. I think so far this year, the average deal size is roughly $26 million and last year, it was something in the $16 million range. So kind of 2 questions from that. First, how is your acquisition pipeline looking right now kind of compared to previous quarters? And 2, how is that pipeline breaking down in terms of larger deals with existing tenants, kind of follow-on issuances and then maybe bringing new operators into the portfolio as well?

[Alan Gold, Executive Chairman]

Thanks, Tom. Let's see how to answer that complex and large question there. One, the pipeline is looking fantastic. We continue to be able to place our capital in that 6 to 9-month time frame. And we think that that will -- that continues -- that will continue as we move through the balance of 2021 and into 2022. Secondly, as to the deal size is -- I think what you're -- you are seeing a change in deal size. And the reason you're seeing a deal -- a change in deal size is that the bifurcation of the quality of the credits within the industry is occurring, that those large, high quality, higher credit type tenants are able to start and develop and own larger type transactions. And we, with our access to capital, have been able to meet those needs. We are in our pipeline and what we are seeing, we continue to see a wide variety of different types of tenants from these high quality, high credit type tenants to emerging entities such as the entity that we are contemplating, working with at in California, where we have issued a construction loan. And such as the mid-tier type companies that are multistate operators, but emerging multistate operators. So we're seeing all of those things. We're -- I think we're very, very excited about our prospects through 2021 and see continued demand for our capital into 2021 and 2022.

[William Catherwood, BTIG]

And you mentioned new entities, and Ben had talked about the addition of Sozo and Temescal into the portfolio this past quarter. How do you go about evaluating these early-stage companies and determining whether or not to make investments in the real estate assets? And along with that, how large of an opportunity could there be for -- with these early stage companies?

[Alan Gold, Executive Chairman]

Well, so our underwriting process really hasn't changed for these younger start-up type entities. We spent a great deal of time focus not only on the real estate -- the proposed real estate transaction that brings those tenants to the company. But we spent a lot of time with the management team, evaluating their skills and expertise in running not only a business, but in marketing and then most specifically in growing. And we utilize our existing network of growers to do background checks on these tenants, understanding where they've come from and their reputations in the specific state or just in the industry in general. So all of that goes into underwriting start-up tenants along with our last analysis or probably one of the most important is, is there financial wherewithal, where the -- how much capital they've already raised, where the capital that they raised came from and how strong those investors are and how committed are they to supporting the growth of what we believe is a or what we think is going to be an exciting opportunity for these companies, but one that has many potential pitfalls and requires a very strong financial backing.

[William Catherwood, BTIG]

I appreciate that, Alan. And finally for me, either for Paul or for Alan. You had both mentioned states that are rolling out new recreational programs. We hear a lot of discussion about that, especially in New York, New Jersey and Connecticut, but there's not as much discussion about what happens after the initial stage. For example, we know that New Jersey is going to expand beyond 12 licenses. And New York is going to expand beyond their 10. And when they do, the people that win those are going to rush in to get up and running as soon as possible. So in your experience, what typically happens when limited license states expand their licensing programs? And is there more opportunity for IIPR maybe with the new license holders that are coming in than there may be with the legacy operators?

[Paul Smithers, President, CEO & Director]

Hello, Tom, this is Paul. Yes. So we've certainly seen that when a medical program morphs into medical and REC program, there's a lot of excitement, a lot of need for capital as these operators want to expand their facility. And we've certainly seen that in New York, is a great example. But along with that, there is some frustration because program usually doesn't go as quickly as people would like. And if we look historically, there's been lawsuits, there's been other things to slow down the development. But I think as every state adopts a new program, I think they learn what has gone before them. So we're really pretty encouraged about the rollouts. And we look to Illinois as a great example of really a REC rollout that has just had tremendous success. So yes, we just think that there'll be a tremendous demand for capital as these states -- the newer states rollout into the REC program. And we're seeing that from our existing tenants. And certainly, as these states do mandate that a certain amount of the new licenses will be reserved for single state operators, we're in that space real quick because we've made a great business out of being able to spot those single state operators become their capital partner early on and watch them develop into those successful multistate operators that really make up our -- the majority of our portfolio today.

[Operator]

Our next question will come from Scott Fortune with Roth Capital.

[Scott Fortune, ROTH Capital Partners]

Just one more follow-up on that. You guys have done a lot of detail on these states and single state operators. New Jersey, New York, they're coming onboard with a lot more social equity licenses awarding there. How is IPR kind of looking at this social equity cultivations, although smaller in size and potentially working with some of your larger tenants that are helping out these emerging social equity programs for these states as we see going forward? Any initiatives on that side of things.

[Paul Smithers, President, CEO & Director]

Yes, Scott, this is Paul. Yes, we're working with them and very excited too about the opportunities that some of these new operators will have. And depending on the state, the state is going to be able to provide some financial assistance, similar to an SBA program, but not the SBA program at the federal level. But -- so we're looking at the opportunities to have some state money come in to help some of these new operators. And that could provide a good opportunity for us. We get a little more comfortable if we think there's a little more financial support at the state level. So we're excited about these opportunities on the social equity tenants. And we think, again, we're going to be very disciplined in our approach of underwriting them, and we're confident that we'll be able to find certainly some operators that will fit nicely into the program.

[Scott Fortune, ROTH Capital Partners]

And then a little different question. From a competitive landscape, we see lower cost of capital options coming onboard for a lot of larger MSO tenants and also seeing some more competitive companies, public and private starting to offer similar leaseback options. What are you seeing from a competitive standpoint? And how are the large operators looking at this as far as the stack of the real estate versus debt opportunity for these tenants? And then what type of cap rates are you guys still experiencing currently and expect going forward into 2021, 2022?

[Alan Gold, Executive Chairman]

Yes. So we are seeing additional competitive capital coming into the industry in general. And remember that this industry, in general, has a wide range of credits and size of organizations. And so what we're seeing is that, yes, the very large operators that we've grown with are able to obtain more competitive capital from a variety of different sources. And we are working with them. We think that we continue -- can continue to be a very good source of non-dilutive capital to them, while at the same time that they can continue to strengthen their balance sheet with what I consider dilutive capital, selling equity and/or potentially raising convertible type debt.

So we are seeing that. But we are also seeing a great -- a large number of new emerging MSOs that kind of -- that need our capital, need access to our capital and don't quite have the same access to that very competitive capital that I just spoke about. In addition to, we believe that there are emerging new entities that are spinning out of existing large growers that are ideal for our programs and allow us to continue to provide capital to them at, I think, very attractive yields. We're -- and then on top of all of that, you are seeing the bifurcation tube between retail type spaces and industrial growth facilities. We are seeing that becoming a wider bifurcation of yields. And so we're -- we think that we are still providing very competitive and high-quality capital, and our capital is going to be in demand for a long period of time.

[Scott Fortune, ROTH Capital Partners]

Real quick on the cap rates that you guys are funding most recently and then kind of as you look out kind of what the range for those yield rates going forward?

[Alan Gold, Executive Chairman]

I think our yields, perhaps, given the quality of the -- of our credits and the access to -- our credits having access to more competitive capital, probably have lowered at the lower end. So we're -- before we talked about 11% to 15%, and perhaps now we're seeing opportunities in that 9.5% to still 15% size range. I think when you add retail type opportunities in there, that lower end could go even lower into -- closer to that 8% range. But we maintain that there is a wide range of growers. There's a wide range of opportunities. And we believe that the business is -- those transactions are chunky. So we're going to see some at the lower end, and we're going to see some at the upper end over time.

[Operator]

Our next question will come from Daniel Santos with Piper Sandler.

[Daniel Santos, Piper Sandler & Co.]

I'll just kind of continue along that line. You talked about the yield compression. I guess, could you comment on how quickly and how much yields have compressed relative to what you were expecting? And is that timing, is the velocity of deals and how much yields are compressing, surprising you? It's certainly 9.5% or even into the 8%, is probably lower than I think we're used to hearing.

[Alan Gold, Executive Chairman]

Yes. So you used the word yield compression. I don't see -- I don't think yields have compressed. I mean I think that a variety of tenants and a variety of investment opportunities have come into the industry that we didn't have before. When we started doing transactions, we didn't have these high-quality credits, and now we do. So we -- so I don't think yields have compressed in that sense. And I wouldn't characterize as there being any yield compression. I think there's been an expansion of the industry, that this industry is continuing to -- while it's very young, it's continuing to mature, and we're seeing some very strong credits that deservedly so have very competitive capital. But for, I think, a risk-adjusted basis, I think they're getting -- they are achieving that yield. We're still seeing on a risk-adjusted basis, yields in the same range that we have seen in the past, we're just seeing more and different types of opportunities. And that's what we're trying to describe here today.

[Daniel Santos, Piper Sandler & Co.]

And then, Alan, as someone who's sort of invested across different REIT sectors, who do you think whether it's a type of REIT or maybe a REIT subsector that's probably best prepared to kind of hit the ground running once we do get legislative reform? Or do you think that you'll continue to sort of be the only REIT in the space for a while?

[Alan Gold, Executive Chairman]

Well, I don't -- I think we do have competitors out there, and I don't think that there's -- that we're going to be the only one. I think that this is a specialized industry, and it will continue to be specialized for forever. Whenever you focus in on one industry product type, you become experts in it, and it does take time for that to occur. We do believe that there are others that do have a lower cost of capital than us in the future, and they could enter the business. And -- but we believe that we have an enormous lead on understanding the credits underwriting and evaluating the opportunities that we've garnered over many years of working in this industry.

[Daniel Santos, Piper Sandler & Co.]

And one last one, if I may. I appreciate the comments during the prepared remarks of guessing the timing of when Congress will or won't pass something is probably impossible. But at the same time, Schumer sort of put out his wish list of what he likes and so you already kind of know what's on the table. Presumably, any Bill that comes after this is probably going to have less teeth once the negotiation process starts. So I guess, could you comment on -- specifically on how that Bill compares to what you were sort of expecting? And if that has impacted your thoughts on timing and your runway over the next, call it, 12 to 18 months?

[Paul Smithers, President, CEO & Director]

Yes, Dan, this is Paul. We are actually pretty happy with the Senator Schumer's Bill, as it's outlined. And certainly, it is correct that he put it out there, I think, with a real wish list of what he wants with the understanding. He does not have the votes even on the democratic side to get everything he wanted. So he put it out there. He's using September -- through September to get comments on the Bill. And then we expect it'll go for a substantial rewrite, probably won't be reintroduced until the beginning of next year. So we're happy with it. I think many of the operators in the portfolio we've spoken with are equally happy because they do like the idea that states will be able to direct their own program. And we were happy to see that. So we continue to keep a close eye on it. And we are not surprised, and it really doesn't change any of our timing because we have, since day one, always been of the opinion that legislative reform at the federal level will be a slow process, and we have not changed our opinion on that.

[Operator]

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

[Alan Gold, Executive Chairman]

Thank you, and we'd certainly like to thank everybody for joining us on the call today. I'd like to once again thank our stockholders for their support and most importantly, thank the Innovative Industrial Properties' team for their very hard work in achieving these phenomenal results, and we look forward to more of that. Thank you.

[Operator]

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