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Innovative Industrial Properties (IIPR) Q4 2021 Earnings Call Transcript

The Motley Fool logo The Motley Fool 2/25/2022 Motley Fool Transcribing

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Innovative Industrial Properties (NYSE: IIPR)

Q4 2021 Earnings Call

Feb 24, 2022, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Innovative Industrial Properties, Inc. fourth quarter 2021 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.

Brian Wolfe -- General Counsel

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?

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Alan Gold -- Executive Chairman

Thank you, Brian. And welcome, everyone. Today, we look forward to providing a recap of our business for 2021. And our views on the ever-changing landscape of this still very young industry.

We have an ambitious agenda. We will, of course, save time at the end to answer your questions. As we all know, the end of 2020 and the start of 2021 witnessed a tremendous amount of optimism in the wake of the new election cycle and tremendous 50%-plus growth in 2020, sustained by the regulated cannabis industry over what was a very challenged period for nearly every other industry. The capital markets optimism waned a bit, as we move further into 2021, as the prospect for near term adjustments to the federal regulatory position on the industry dimmed.

However, the industry continued to see strong growth throughout 2021, driven in part by the continued march of new states adopting and rolling out both medical use and adult-use programs, including unprecedented legislative action with New York, Virginia, Connecticut, and New Mexico, legislating for adult-use programs and Alabama legislating for medical use. That momentum continues in 2022, with the latest sovereign state, Mississippi, legalizing cannabis for medical use earlier this month, becoming the 37th state to do so. 2021 also continue a trend of ever-increasing consolidation in the industry with over 210 mergers and acquisition transactions, totaling over $10 billion in value in the United States alone. We also witness consolidation within our tenant base during 2021 and into 2022.

And Ben will provide more detail regarding those developments. Of course, with the growth of the industry and the rollout of new programs, demand for real estate capital continued to be robust throughout 2021. 2021 was the highest year of investment activity in our company's history, eclipsing over $700 million during the year. Ben will also provide an update on our acquisitions and investments in 2021 and year to date.

As of today, we own 105 properties in 19 states, totaling approximately 8 million square feet, which are leased on a long-term basis to high-quality licensed cannabis operators with a weighted average lease term of over 16 years. We are by far the largest real estate company focused on the regulated cannabis industry. Reflecting the performance of our property portfolio, and continued execution on our acquisition and investment pipeline, 2021 revenues grew 75% and adjusted funds from operations grew 78% from the prior year. With the financial performance as a background, we continue to grow our quarterly common stock dividend at a healthy clip with our most recent Q4 dividend of $1.50 per share representing a 21% increase from the prior two years fourth quarter dividend.

Please remember that our board's policy of reviewing any dividend increases is on a biannual basis, with the next review coming shortly in the first quarter. Catherine will also provide more detail regarding our financial results and capital activity. Regarding federal regulatory developments, Paul will provide additional insight on the federal regulatory landscape and the cannabis market dynamics. Before I turn the call over to Paul, I want to again reiterate our entire team's appreciation for you, our long-term owners for your support throughout these years of growth and transformation of IIPR and the industry we serve.

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 and Chief Executive Officer

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 on state legalization. As Alan alluded to in his opening remarks, we continue to see great progress being made on the state level, including establishment and rollout of both adult-use and medical-use programs. As we noted in our past call 2021 saw unprecedented steps by state legislatures to pass new programs by legislative action including Connecticut, New York, Virginia and New Mexico passing legislation for adult-use cannabis programs and Alabama adopting by legislative action and medical-use cannabis program. Earlier this month, Mississippi's governor signed legislation legalizing medical cannabis becoming the 37th state to have adopted a program.

Interestingly, Mississippi by an overwhelming majority voted in favor of a broader legalization of medical cannabis in the November 2020 elections, but that vote was thrown out by the Mississippi Supreme Court for not following the state's signature requirements for ballot measures. As a result, 37 states in Washington DC have legalized cannabis for medical use, and 18 states in Washington DC have legalized cannabis for adult-use. We are also tracking several other states that we believe have a strong likelihood of legalizing either medical-use or adult-use cannabis in 2022 alone, such as Nebraska, in Idaho for medical-use, and potentially Oklahoma, Arkansas, Missouri, Ohio, North Dakota and Maryland for adult use. Second, our views on the current federal regulatory environment.

Building on our discussion from August, we continue to see some movement on national cannabis reform. However, those reform proposals also are continuing to compete for space on the Congressional agenda with 2022, of course, also being a midterm election year. There are numerous cannabis related bills pending in Congress at different stages of review, which we have touched on in prior calls. The Safe Banking Act, which would provide additional safety to financial institutions in serving state compliant, licensed cannabis operators, was reintroduced for the sixth time as an amendment to the America Competes Act earlier this year, though whether the Safe Banking Act language will be included in the final bill remains to be seen.

In addition, the MORE Act, short for the Marijuana Opportunity, Reinvestment and Expungement Act, was first introduced in summer of 2019 and passed the House in the prior to legislative session in December of 2020, and was reintroduced last year in the current legislative session. The MORE Act focuses on descheduling cannabis from the Control of Substances Act and includes strong social equity provisions. In July of last year, 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 One controlled substance under the CSA, deference to States to determine their own cannabis policies, transfer all regulatory responsibility of cannabis to the U.S. Food and Drug Administration and certain other federal agencies, and the establishment of a federal taxation framework for regulated cannabis sales.

The act was subject to a review period with requested comments by September of last year and received numerous comments both for and against. Perhaps one of the most significant criticisms, which we agree with, would be the proposed federal excise tax of 25%, the highest proposed tax structure of any of the bills we've seen. This, of course, would have various implications to the States regarding their own taxation systems and further challenge the industry as it competes with a much larger, unregulated and untaxed listed industry. For now, the comments have been taken under advisement, and once the bill is formally filed, it will be sent to committee for continued discussions and revisions before any potential Senate floor vote.

Also, late last year, House Republican, Nancy Mace introduced the State's Reform Act. Similar to the MORE Act and the CAO Act, the State's Reform Act would decriminalize cannabis and provide retroactive expungement for nonviolent federal cannabis offenses. However, there is limited federal oversight and the SRA vests to the individual States the authority to determine what level of cannabis reform, including outright prohibition. Notably, the SRA also has the lowest tax structure of all the bills at 3%, which cannot be increased for at least 10 years.

Notably, this Bill does carry some bipartisan appeal, including the support of four Republican representatives. As we have said before, predicting the timing or substance of federal legislation is exceedingly difficult and perhaps even more so in today's political environment. Any reform bill would have to compete with other legislative priorities of the country. As we emerge from this unprecedented endemic and into a midterm election cycle.

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 continue 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 draft bill being further down the road. Finally, regarding industry dynamics in 2021 and 2022, notwithstanding the unprecedented challenges experienced in the country from the pandemic, the cannabis industry continued to strong growth trajectory in 2021, after having exhibited a resiliency and strength that was truly unique versus other industry categories. While there has been some offsetting, slowing of the industry's sales growth due to the feeding of multiple rounds of fiscal stimulus, and the general loosening of pandemic related restrictions, annual U.S.

legal cannabis sales are still estimated to have grown to $25 billion in 2021, up from a tremendous year in 2020, at about $20 billion. And that factors in only small portion, if any of the expected economic impact of the several States that have authorized the establishment of programs by ballot measures in the past few years and through legislative action in 2021 as we noted previously. Finally I would note, as we have in the past that the total addressable market for cannabis is of course multiple times the current legalized cannabis market. In fact, New Frontier Data estimates approximately 25 billion global spending and legal cannabis markets for 2020, while the total annual spending in both legal and illicit markets combined, exceeded $400 billion globally, with the U.S., of course, constituting a very significant percentage of that amount.

Of course, that illustrates the continued tremendous opportunity to transition that illicit activity to the legal cannabis market. And while we are encouraged by certain state and local governments for their pragmatic approach to regulating and taxing cannabis, under there are established programs to promote that transition, we believe there's still much work to be done. Most notably in California, to modify, programs in ways that encourage the growth of the regulated industry and encourage the continued transition away from illicit markets. As Alan alluded to in his opening remarks, M&A in the regulated cannabis space continues at a brisk pace we saw starting in late 2020, progressing through last year and in 2022.

With U.S. M&A activity in 2020, when for regulated cannabis companies more than doubled the totals of either 2020 or 2019 in terms of transaction consideration, we continue to witness the advantages that many of the established public MSOs have in terms of scale, and capital availability, as they continue to build on their expansive footprints, primarily utilizing the debt markets to fund these initiatives. Ben will touch on some of the M&A activity in his discussion of our largest tenants. But I would also note that this consolidation march continues on in 2022.

Earlier this month, Verano announced the execution of a definitive agreement to buy our tenant goodness growth in an all stock transaction valued at around $439. As a reminder, we have been goodness gross real estate capital partner since 2017, and have long-term leases with them for two properties in Minnesota and New York. Also planning of course, is the merger of our long-term, tenant partners PharmaCann and LivWell, which was announced in October of last year, and which once consummated well once again make PharmaCann our largest tenant by investment. We believe that a significant driver of this M&A activity in general has been the relative availability of debt to finance acquisitions, which increased substantially over the course of 2021 as a percentage of the overall mix of capital in the industry.

While we applaud the enhanced capital availability to many proven operators, as part of a capital allocation that when utilized appropriately further enhances the credit quality of our tenant roster. In our underwriting of proposed transactions, we're taking a close look at the overall debt profiles of the operators, including assessments of the risks related to refinancing bad debt or repaying bad debt by other means when it comes due. 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 -- Vice President of Investments

Thanks, Paul. Since October 1, we made 31 acquisitions in seven 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 105 properties across 19 states, representing approximately eight 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. The fourth quarter capped off a record year of investment activity for our company, during which we committed investments totaling $714 million, growing our total invested capital by more than 55%.

As we have grown, we've continually diversified our portfolio, both in terms of geographic and tenant concentration. And as we stand today, no state and not one of our 27 tenants represents more than 15% of our total committed investments. Similar to past calls, I plan to touch on each of our recent acquisitions by state and also provide some information about each tenant in our portfolio overall in the state. I also plan to provide some additional detail on our tenant roster and overall portfolio.

In December, we continue to support our long-term tenant partner LivWell, making a follow-on investment of $34.7 million at our property in Michigan, acquiring the central utility plant on-site, as well as making additional improvements and enhancements to the existing infrastructure, increasing the total rentable square feet at this property to 205,000 square feet. As you may know, LivWell founded in 2009 and PharmaCann, a long-term tenant partner of ours since 2016, announced their plan merger in October of last year, and pro forma for their combination PharmaCann and LivWell will become our single largest. Earlier this month, we also committed an additional $18 million to Skymint, a tenant partner of ours since 2018, and one of the largest vertically integrated operators in Michigan, as they continue to build out their capacity and one of their cultivation and processing facilities. Skymint recently announced a pending acquisition of another operator in Michigan, which would add another dozen dispensaries to Skymint's operating portfolio in the state.

Now on to New Jersey. Earlier this month, we extended our real estate partnership with Ascend Wellness, acquiring 114,000-square-foot industrial property in New Jersey with a long-term lease to AWH, together with our properties leased on a long-term basis to Green Leaf and Columbia Care. We own four properties in New Jersey, with our total investment expected to be about $90 million. New Jersey, of course, is on the cusp of launching its adult-use cannabis program, which is expected to generate over $2 billion in annual revenues within four years of launch.

In November, we executed a follow-on investment commitment with Temescal Wellness, providing an additional $8.7 million for improvements of the property in January. We closed on the purchase of the 57,000-square-foot industrial property and leased with 4Front Ventures, a tenant partner of ours for another property in Massachusetts and properties in Illinois and Washington. Including these transactions we own eight properties in Massachusetts representing a total investment of $227.8 million comprising 775,000 square feet with tenants PharmaCann, Holistic, Trulieve, Ascend, Cresco Labs, 4Front Tenesco. In October, we closed on a 201,000-square-foot industrial property in Southern California and entered into a long term lease with Gold Flora.

Assuming full reimbursement for improvements, we expect our total investment in the facility to be $16 million. Gold flora is a privately owned company with dispensary locations throughout the state, including the Kings Crew dispensary and Long Beach and the higher-level dispensary chain serving Hollister and Seaside. Gold Flora recently announced the acquisition of Airfield Supply Company, a vertically integrated cannabis company originally established in 2010 with premium brands and strong established presence in Northern California. Finally, in December, we acquired a fully leased portfolio of 27 properties for about $73 million, including 24 properties in Colorado two properties in North Dakota and one property in Pennsylvania.

Of these properties 16 are leased to Columbia care for at least a Schwazze, three are leased Curaleaf three are leased to LivWell and one is leased to Kaya Cannabis. This transaction represented a great way for us to efficiently acquire well located retail assets, strong established operator tenants in place, and we expect to opportunistically add to our portfolio of retail cannabis locations over time. Similar to prior calls, I would like to touch on our top 10 tenants as a brief update. Those tenants in order of total investment are PharmaCann, Parallel, Ascend Wellness, Columbia Care, Kings Garden, Trulieve, Green Thumb, Cresco labs, Holistic Industries and Curaleaf.

Just to note for purposes of tenant concentration calculations, we have calculated our total investment in PharmaCann's properties pro forma for its pending merger with LivWell, which I'll discuss in more detail. As noted earlier in our prepared remarks PharmaCann and LivWell announced their plan merger in October, and so we are presenting information on PharmaCann pro forma for this combination. In total, we own at least the PharmaCann and LivWell a 11 properties located in Colorado, Illinois, Massachusetts, Michigan, New York, Ohio and Pennsylvania, with our total investment, including future commitments to fund additional improvements, totaling about $261 million and encompassing approximately 630,000 square feet. After the LivWell merger, PharmaCann is expected to operate more than 60 dispensaries and 11 cultivation and processing facilities across eight states, representing one of the largest privately owned vertically integrated cannabis companies in the U.S.

and representing what we see as a great combination of best in class operational and financial expertise. We own four properties leased at Parallel in Florida, Texas and Pennsylvania, with our total investment including commitments to fund improvements totaling approximately $203 million in compensation approximately 895,000 square feet. As disclosed by Parallel previously, the company has formed a strategic alternatives committee of his board of directors to scorch at strategic options for the company. Parallel has developed a strong footprint in markets that we believe are or will become some of the largest and strongest growth markets in the United States, which includes 46 retail locations, and cultivation processing facilities in Florida, Massachusetts, Pennsylvania, and Texas.

Parallel continues to pay their rent in full and we look forward to supporting them through this process and as a long-term real estate capital partner at these locations for many years to come. We have been Ascend Wellness' real estate partners since 2018 and have partnered with Ascend in for properties in Illinois, Massachusetts, Michigan, and New Jersey, representing a total commitment of nearly $180 million. Led by founder and CEO Abner Kurtin, Ascend continues its evolution is one of the top performing MSOs with a highly strategic footprint across Illinois, Massachusetts, Michigan, New Jersey, and Ohio. In Q3 of last year, the company closed on a $210 million debt financing, ending Q3 with over $200 million in cash on its balance sheet.

We own 21 properties leased to Columbia Care in Colorado, New Jersey, Pennsylvania, and Virginia, representing a total commitment of about $148 million. As we've previously noted, in line with the industry consolidation, we have seen Columbia Care acquired the Green Solution in 2020 and Green Leaf Medical this past June, two of our tenants in Colorado, Pennsylvania, and Virginia. In addition, our portfolio purchased in December added 16 properties to our portfolio leased to Columbia Care. Columbia Care's footprint includes licenses in 18 U.S.

jurisdictions and the EU, with 32 cultivation and processing facilities and 99 dispensaries in operation or under development. Earlier this month, Columbia Care announced the closing of $185 million debt offering with a term of four years. Onto Kings Garden, which is a tenant partner of ours across six properties in Southern California, representing a total commitment of about $148 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 the state that represents the largest market in the world.

As Kings Garden ramps production capacity, they expect to be generating approximately 140,000 to 150,000 pounds of finished cannabis per year in addition to concentrates. With their brand reputation and operational expertise driving financial results, the Kings Garden team has also been one of the uniquely positioned operators to return capital to its long-term owners in the form of dividends, including $3 million each of the last two years. We are excited to be working closely with Kings Garden as a complete full build out of their production capacity in the months to come. Trulieve is a tenant partner of ours at five properties in Florida, Maryland, Massachusetts, and Nevada, representing a total commitment of a little over $141 million.

Trulieve, with over 9,000 employees nationwide, closed on its acquisition of Harvest Health and Recreation in October of last year and continues to expand its presence across 11 states with over 160 dispensaries opened. Shortly after the announced closing, Trulieve closed on a private placement of $350 million in senior secured notes, which was utilized in part to redeem certain debt of Harvest after the combination. Trulieve followed on with an additional $75 million debt raise at the end of last month. Green Thumb is a tenant partner of ours in Illinois, Ohio, and Pennsylvania, representing a total commitment of about $122 million.

Green Thumb is one of the largest MSOs in the United States, employing 3,800 people with 75 open retail locations and 17 manufacturing facilities across 15 U.S. markets. GTI continues to grow its footprint both organically and through acquisitions, including the recently announced opening of new dispensaries in Virginia, Massachusetts, Nevada, and New Jersey, in addition to the acquisition of LeafLine industries, one of the two vertically integrated license holders in Minnesota at the very end of last year. I would note that our total investment in GTI does not include the potential investment of up to $55 million at one of our Pennsylvania properties for improvements expected to be made by GTI at the property, and for which GTI may request reimbursement in a single lump-sum anytime between June 15 and July 31, with any reimbursement resulting in adjustments to the property's base rent.

If that investment were drawn in full on a pro forma basis, GTI would represent our fourth largest tenant in terms of total investment. We have been Cresco Labs real estate partners since 2019, and a partner with Cresco on five properties in Illinois, Massachusetts, Michigan and Ohio, representing a total commitment of about $121 million. Cresco was founded in 2013 and now employs over 3,500 people with 28 cultivation processing facilities and 49 operating retail locations across 10 states. In August of last year, Cresco upsize its existing senior secured term loan by $200 million maturing in August 2026.

In addition to the continued ramping of its existing operations, which included the opening in November of Cresco's flagship Illinois dispensary near Chicago's Wrigley Field, Cresco also continued to make strategic acquisitions, including acquisitions of operators in Florida, Massachusetts and Pennsylvania. We own five properties leased to Holistic industries in California, Maryland, Massachusetts, Michigan and Pennsylvania, representing a total commitment of about $116 million. Holistic, originally founded in 2011, is a privately owned vertically integrated MSO with operations in California, Maryland, Massachusetts, Michigan, Zuri, Pennsylvania, West Virginia, and Washington DC. Holistic operates five cultivation processing facilities and has 18 operational dispensaries with licenses for operation in eight states, including a recently awarded medical use Cannabis license for vertically integrated operations in New Jersey.

In May 2021, Holistic raised an additional $55 million in capital through an oversubscribed convertible note issuance, which was led by Harbert Stoneview Fund. We own seven properties leased to Curaleaf in Illinois, New Jersey, North Dakota and Pennsylvania, representing a total commitment of about $108 million. Curaleaf has operations in 23 states, 125 dispensaries, 25 cultivation sites, and approximately 4.4 million square feet of cultivation capacity. Curaleaf closed last month on its acquisition of Bloom dispensaries, the vertically integrated single state operator in Arizona and in December of last year closed on an issuance of senior secured notes totaling $475 million.

While we have time to touch on just our top 10 tenants, our other tenant partners continue to execute well and we're very happy to note our growth of new tenant relationships since the beginning of 2021, including six new tenants Gold Flora, Temescal, Sozo, Schwazze, Calyx Peak and Kaya Cannabis. With that, I'll turn it over to Catherine. Catherine?

Cat Hastings -- Chief Financial Officer

Thanks, Ben. The fourth quarter capped off an exceptional year for IIP in the area of acquisitions and investments. And we were thrilled to continue to deepen our long-term real estate partnerships with our existing tenants while continuing to expand our tenant roster with strong management teams. The execution on the investment side and strong portfolio performance continued to drive our financial results for the fourth quarter and for the full year 2021.

We generated total revenues of approximately $59 million for the quarter, a 59% increase from Q4 of last year. The increase was driven primarily by the acquisition and leasing of new properties, additional improvement allowances provided to tenants at certain properties that resulted in basement adjustments, and contractual rent escalations at certain properties. And as we've indicated in the past, our Q4 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 continued to account for all of our leases on a cash basis.

For the three months ended December 31, 2021, we recorded net income of $28 million, or $1.14 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 the fourth quarter and full year 2021, and for the fourth quarter of 2020, but not for the full year 2020. We wanted to continue to highlight this item especially as it makes an apples-to-apples comparison difficult between the full year 2021 and 2020 results, as it relates to net income FFO and AFFO measures. Also during the fourth quarter, we privately negotiated with certain holders of our exchangeable senior notes representing a little over $110 million in principal amount to induced the exchange of these notes, pursuant to which we delivered shares to the note holders equal to the then current exchange rate under the indenture along with accrued, but unpaid interest through the date of the exchange, and a cash inducement fee equal to approximately 1% of the principal amount exchanged.

We wanted to take a bit of time to explain this inducement and our rationale. Exchange rate for exchangeable senior notes adjusts each quarter in part based on our current dividend rate versus the reference dividend rate of $0.35, which was the dividends in place when we initially issued these exchangeable notes in February 2019, meaning that on a quarterly basis, the common stock dividend declared results in adjustments to the exchange rate, increasing the number of shares that were required to issue to note holders on their eventual exchange. By inducing the exchange now, we're able to eliminate this additional expected dilution from future dividends as it pertains to the notes exchange, which we believe is in the best interest of our long-term stockholders. In connection with this inducement, we paid $1.2 million to be accrued and unpaid interest on these notes, a 1% cash inducement fee noted above and transaction costs of $590,000.

In addition to these cash payments, we also recorded during the quarter a non-cash loss on extinguishment of debt of approximately $2.4 million for the notes exchanged. As noted in our press release in order to provide a meaningful comparison of our funds from operations between time periods, so that investors can better compare our operational performance on an apples-to-apples basis. We've included normalized funds from operations, which adds back to funds from operations, transactions specific expenses, which we exclude from funds from operations to provide investors a better understanding of ongoing operational performance. As a result of adding back acquisition related expenses and the loss on inducement of our exchangeable senior notes, normalized funds from operations was $46.1 million, or $1.75 per diluted share for the fourth quarter.

Adjusted funds from operations for the fourth quarter, which adds back non-cash stock-based compensation and non-cash interest expense related to our unsecured senior notes to normalized FF0 was approximately $48.6 million or $1.85 per diluted share. Total revenues for the full year 2021 grew 75% to approximately $205 million and adjusted funds from operations grew 78% for the same period to $175 million. That growth, as Alan mentioned in his opening remarks was attributable to exceptional investment activity in 2020 and 2021, as well as the continued strength of our overall portfolio's performance. On January 14, we paid our quarterly dividend of $1.50 per share to common stockholders of record as of December 31, equivalent to an annualized dividend of $6 per common share, and a 21% increase from the prior year's fourth quarter.


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As we noted in our prior press releases, our board of directors generally evaluates adjustments to the level of our quarterly common stock dividends every six months, with adjustments expected to be declared in Q1 and Q3 of each year. The board continues to target a dividend payout ratio of 75% to 85% of AFFO on a stabilized-portfolio basis. We also continue to fund real estate improvements into many of our properties as offered an improvement allowances or construction development to our operators under our leases. As we previously noted, these improvements are critical to either redeveloping an existing facility to a cannabis facility or funding expansion to address growing markets announced.

In 2021, we've capitalized costs of approximately $384 million and funded approximately $375 million relating to improvements in construction activity at our properties. Finally, with almost $2.2 billion in total gross assets, and a total of about $334 million in debt, consisting solely of unsecured debt with no maturities this year or next year, and $300 million of net debt not maturing until 2026, our debt to total growth assets ratio stood at 15% at year end. We believe we continue to have one of the strongest balance sheets in the REIT industry. 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 we have 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 our operations. We are well-positioned to continue to execute on our business, providing non dilutive permanent growth capital to facilitate our tenant partners continued expansion as an important part of prudently managed capital structure.

The regulated cannabis space continues to be one of the fastest growing dynamic industries. And we believe we are still in the early innings of its maturity, especially as it pertains to continuing to transition illicit sales to the regulated market, ramping existing program promoted by sensible state regulation and the launch of new program in many states. 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 for questions. Operator, can you please open the call up for questions?

Questions & Answers:

Operator

[Operator instructions] And the first question comes from Tom Catherwood with BTIG. Please go ahead.

Tom Catherwood -- BTIG -- Analyst

Thank you, and good morning, everyone.

Alan Gold -- Executive Chairman

Good morning, Tom.

Tom Catherwood -- BTIG -- Analyst

You guys have talked in the past about the timeline of medical and adult-use states of evolving and eventually becoming attractive opportunities for real estate investments. With the recent legalizations in New Mexico and Mississippi, and eventual rollouts programs in New York, New Jersey and Maryland and Delaware, likely following behind. Which geographies do you think provide the most near-term opportunities for you? And which ones could provide growth kind of over the medium to longer term?

Alan Gold -- Executive Chairman

Well, Tom, I think, that's a really good question. I'm going to start with first off, the cannabis industry continues to experience tremendous growth, and is expected to double by 2025. I'm going to turn it over to Paul and perhaps Ben to perhaps directly answer which states go ahead, Paul.

Paul Smithers -- President and Chief Executive Officer

Yeah, thanks, Alan. So Tom, we look -- we love what's going on in New York, and New Jersey, despite New Jersey, missing a timeline, or obligation they had, we're pretty confident they're going to get this thing together. We are really happy what happened with New York. Opening up the medical conditions, requirements, I think, until New York, does rollout, the rec program, and I think the opening up the medical is a great sign.

So we love those states. I think, very strong with Pennsylvania, still very strong there, Michigan, we're very interested in Texas is one of the new states coming out with their medical program. We think there's tremendous opportunity there. So Virginia, of course, so we're very, very happy about what we're seeing in some of the states that have passed, adult-use programs, what they're doing to try and, move that timeline up, we saw that with Virginia, they passed a bill to kick start their rec program sales in September.

Of course, that still may not get through the Republican controlled House in Virginia. But, those are great signs, I think, you're right, we have talked about, there is a transition time between medical and adult use. But I think, as the states become more mature, they look at what other states have done. And they look at maybe some legislative fixes, we're confident that that timeline that it might be as much as you know, 24 months to 36 months, that's going to that's going to shorten, because the states are getting it and they're understanding that, the program needs to roll out.

They need the tax revenue, they need the job. So we like what we are seeing.

Tom Catherwood -- BTIG -- Analyst

Got it. Appreciate that. Maybe if we look at the cannabis industry, in general, public operators are seeing their cost of capital increase, especially at least on the equity side. And at the same time, investment opportunities seem to be accelerating.

We saw a similar pattern to this in late 2019, and operators turn more toward their real estate as a source of growth capital. Have you seen an increase in demand for sale leaseback opportunities given this kind of real recent market dislocation?

Alan Gold -- Executive Chairman

I'm going to turn it over to Ben to really talk about our pipeline. But I think, you have identified a unique aspect of the industry is that, as their ebb and flows in the -- in our tenants cost of capital. The demand for our unique and specific capital does ebb and flow. We've seen, obviously, 2021 was a tremendous year, or we did over $700 million acquisitions.

Pretty fantastic. And that yields that were -- we expected actually to be on average, somewhat lower, and they were actually somewhat higher. So we think that in 2022, we have the same dynamics building, especially with the most recent disruption to the geopolitical world. But so now, I'm going to turn it over to Ben to really go through our pipeline, Ben.

Ben Regin -- Vice President of Investments

Yeah, sure. Exactly, Tom. Yeah, we are certainly seeing those dynamics. I think, we've always continued to believe that this is the most efficient, non-dilutive capital available in the industry.

And I think, that is -- becomes even more pronounced, as you see the fluctuations in the equity markets. We've seen, as Alan mentioned, equity markets go up and down changes on the regulatory landscape or on the competitive landscape, and have been able to consistently succeed on placing capital, having our largest year ever by investment volume last year. I think, we continue to be uniquely positioned the strength of the balance sheet to capitalize on these opportunities as we see him pop up.

Tom Catherwood -- BTIG -- Analyst

Appreciate that color. That's really helpful as well. Kind of building off of that, Ben, you've all talked in the past about M&A activity driving sale lease backs, Alan, you mentioned it was a record year for those and cannabis in 2021. As you sit right now, how much of your identified pipeline is more M&A-driven, as compared to expansions of existing assets or construction of new facilities?

Alan Gold -- Executive Chairman

I was going to say, I don't think we have bifurcated our pipeline in that way. I think, the real exciting aspect of our program is that it provides for -- and allows companies to develop over time and know that they have the capital available to them, when they work with us. And I think, that that will continue. So I don't know, Ben, do you have any further color as to kind of percentages?

Ben Regin -- Vice President of Investments

Yeah. No. I mean, I think, that's right. I mean, I think, one of the strengths and the biggest benefits we provide is being able to offer creative and tailored real estate solutions to the groups we work with whether that's M&A, construction, existing facilities.

So that will shift over time, depending on the particular groups we're working with and industry dynamics. But we're again, we feel very well-positioned to support the groups that we partner with whatever form that takes.

Tom Catherwood -- BTIG -- Analyst

Understood. And then, the last one for me, what headlines around record cannabis harvests in the western U.S. this fall, and then how that put pressure on cannabis pricing. Your exposure is small in these markets, I think it's less than 20% of your portfolio overall.

But can you talk a bit about whether kind of that cannabis pricing pressure impacted your tenants? And maybe does the focus on indoor cultivation, and maybe premium flour, insulate your tenants from some of those pricing shocks that we read about and hear about in the news?

Paul Smithers -- President and Chief Executive Officer

Yes, this is Paul, I think, that's exactly right. We said at the end there is such a difference between as you know, the outdoor grow product, and the indoor grow product that our tenants to cultivate. So when we see those headlines, I think a lot of it is coming from outdoor grows in California, Oregon and Washington, which are really different, of course from our tenants grow. So we see those numbers.

We are not seeing an impact on sales or commodity pricing for the indoor product.

Tom Catherwood -- BTIG -- Analyst

Appreciate that color. That's it for me. Thanks, everyone.

Alan Gold -- Executive Chairman

Thanks, Tom.

Operator

The next question comes from Scott Fortune with ROTH Capital Partners. Please go ahead.

Scott Fortune -- ROTH Capital Partners -- Analyst

Good morning, and thank you for the questions. I want to dig in a little bit more on the pipeline, and what you're seeing. Obviously, we've seen some delay in some of these new states coming on board and are pushing out and that puts a little bit pressure in near-term, especially for the MSOs. But it seems like the MSOs has a little more competitive debt financing, down 8% levels here and maybe not turning on to the real estate side as much and you're moving down to more of the single state operators.

How do you look at your pipeline in terms of evaluating it from your existing established top tier in the cells versus these new customers, providing some of the growth going forward for you, if you can kind of unpack that a little bit as a new channel especially?

Alan Gold -- Executive Chairman

Yeah, I mean, before I turn it over to Ben really, maybe to dig a little bit further deeper, you know, first, you got to remember that real estate transactions in general are very lumpy. And we had abandoned year closing a lot of transactions, specifically closing a couple of transactions at the end of the year. We think our pipeline is very strong. We think we have continued demand from our existing MSOs.

And a continued demand from single state operators that wanna be multi state operators through a variety of paths, including M&A. I think, we continue to have great confidence in our ability to place between $125 million, $150 million of transactions per quarter. And I think, that's a pace that we've been very successful at for the last couple of years. Keeping in mind, if you think -- if you back up and remember that we have a very unique offering.

We are only doing one type of product, which is the sale leaseback transaction, where we're looking for 15- to 20-year lease terms, which allows us to have that, you know, weighted average lease length in excess of 16 years. So I think, that that's how I would think about or I would ask you to think about how our pipeline is going. If Ben, you want to talk about the -- what debt yields and or Paul, you want to talk about the debt yields, and how that might relate to our programs.

Ben Regin -- Vice President of Investments

Yeah, sure. This is Ben. Thanks, Alan. You know, we are definitely seeing there's more debt in the industry.

I think, that is a result of the strength of the operators. And we feel we have over 90% of who we think of the top operators in the country are in our portfolio and their financial strength is such that they can command lower rates. This only strengthens our existing portfolio. That's not to say, we're not going to continue to work with the top operators in the country.

And it gives evidence by closing on a deal with Ascend Wellness here in New Jersey recently. Again, we had our largest year last year by investment with the debt markets opening up, we're going to continue to support our tenants, leveraging our balance sheet and continue to grow the portfolios.

Scott Fortune -- ROTH Capital Partners -- Analyst

Alan, I appreciate the color. And then, a kind of follow-up on that. How is IIP looking at the capital markets here, weighing on the different opportunities from a capital raising or financing side of things in this rising rate environment? I appreciate the color Alan, on the consistency that you are able to hit with your acquisitions on a quarterly basis 125 million, 150 million. Looking at your cash level with the ATM, about 230 million line available, kind of what's the commitment there and maybe the cash needs as you look out the different financing options going forward here?

Alan Gold -- Executive Chairman

Yeah, I think, we still have one of the strongest balance, we have a very, extremely strong balance sheet with less than 15% debt to total gross assets. We have, obviously, access to the equity markets and we have a variety of other forms of capital debt, sort of convertible debt, straight equity issuances, and even some recent interest from the preferred side of our preferred investors. We are looking at all those options and we will certainly do what is the best for the company, given how choppy the markets are, how impacted they are by the geopolitical events that have gone on. But our company continues to perform extremely well and we think we have tremendous access to capital as we before.

Scott Fortune -- ROTH Capital Partners -- Analyst

Well, then one quick follow-up on price for Catherine, you're committed your short term cash needs and cashier that's committed for your acquisitions and TI going forward, kind of what's leaving you as far as the balance for potential acquisition transactions going forward from a cash level?

Cat Hastings -- Chief Financial Officer

Yeah, Scott, so we have over $400 million of cash on the balance sheet. And as you said, about $300 million of that is earmarked for eventual tenant improvements and redevelopment at the projects. But especially these large projects that we've entered into over the last us several years sit on our balance sheet for an extended period of time. So that allows us to be strategic on when we think we can raise capital.

We've talked in the past that those projects typically take between nine and 12 months to fully request those reimbursements for us.

Scott Fortune -- ROTH Capital Partners -- Analyst

OK. I appreciate all the color, and I'll jump back in the queue. Thanks.

Alan Gold -- Executive Chairman

Thanks, Scott.

Operator

The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Alexander Goldfarb -- Piper Sandler -- Analyst

Hey, good morning. Good morning out there. Cat, maybe just sticking with that. If I heard you correctly, you guys have 400 million of cash, but 300 million is earmarked.

So it sounds like capital market activity is definitely on the horizon. You mentioned Preferred, there was also that debt offering that you guys were contemplating earlier this year. So if you look at ATM, preferred, unsecured bonds, where do you see the best opportunity? And how do you guys think about, sort of, the capital costs. Because, obviously, as the exchangeable notes played out, there's the initial coupon, and then there's the reality over time, as things can happen, as the exchangeable notes demonstrate.

Paul Smithers -- President and Chief Executive Officer

Before I turn it over to Cat, the market is choppy, we're going to -- we're navigating what I think is one of the unprecedented periods of time, where a lot of things are changing and changing rather rapidly. And we are looking at all our options moving forward. We think our cost of capital still provide for very accretive transactions. And so, we're still excited about that opportunity.

I think, the pullback that we've seen in one field allows another an opportunity and another. And I and also even with the convert, which -- we sold equity at that time, I think, up 20%-plus. And so, it was still an accretive transaction, very accretive in a long period of time. Now for, obviously, accounting purposes, the way it worked out, because those investors made a fantastic bet and our share price certainly increased significantly.

There was a accounting dilutive impact to our -- to what we were doing. Keeping in mind, so we keep all those options and we're looking at all those options as we make every move forward and make those capital decisions. I don't know, Cat, is there anything else you want to add to that?

Cat Hastings -- Chief Financial Officer

I mean, that's exactly right. And, we are happy with all the options that we do have. I mean, looking at the balance sheet with only 15% debt to total growth assets. We have a portfolio of strong cash flows and are growing our AFFO 78% year over year.

It gives us a lot of options, both for equity and debt. And we continue to be strategic as to when we want to raise additional capital.

Alexander Goldfarb -- Piper Sandler -- Analyst

OK. And then, the second question is, Alan, you mentioned all the stuff going on in Congress, different ways that people are trying to either reintroduce the SAFE Act or maybe full legalization. And it's interesting, because you look last year and it was Schumer and Booker that killed SAFE Banking at the end of the year and the defense budget, because they wanted to pass full legalization. And obviously, with everything that's going on, that doesn't look as likely.

So in the current environment, it actually seems like the ideal situation for you guys, right, meaning, that no legalization, no SAFE Banking that makes your business model continue to be very attractive, or is your view that with legalization or SAFE Banking, that you would see better opportunities? I'm just curious, which you think is better for IIPR, the current situation or one in which you either have legalization or SAFE Banking?

Alan Gold -- Executive Chairman

That's an interesting question that it's a double edged sword. I mean, right now things are fantastic. We have got great pricing power. We are the only New York Stock Exchange Traded REIT with a balance sheet -- really super strong balance sheet that exists out there.

We are probably 10, 20 maybe more times our nearest competitor and have the greatest opportunity to raise capital today. As you know, if something changes in the regulatory environment, we still have the strongest balance sheet. It's strong. The greatest portfolio -- weighted average lease length in excess of 16 years, a very great group of tenants and we would have then certainly, I think, greater access to even all sorts of different capital markets opportunity and be able to drive our cost of capital value in the moment.

So right now, I think, we're comfortable where it is. It certainly has made it very much more difficult for our competitors to catch up or even compete with us on a long-term basis.

Alexander Goldfarb -- Piper Sandler -- Analyst

OK. Thank you.

Operator

The next question comes from Eric Des Lauriers with Craig-Hallum Capital. Please go ahead.

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

Great. Thank you for taking my question. So with more debt capital entering the space, you mentioned, you're going to look more closely at MSO debt profiles. You also brought on six new tenants in 2021.

My question is, as more capital comes online, and naturally ways on tap rates, would you guys prefer to be flexible on the lease terms in order to sort of preserve your mix of top-MSOs, or would you prefer to be a bit more flexible on the tenant mix in order to preserve your attractive lease terms? Thank you.

Paul Smithers -- President and Chief Executive Officer

Another interesting question. I mean, yeah, I mean, I think that -- look we're agnostic as to really how much or how we generate great returns, if we can generate great returns with a different tenant mix. We are certainly going to go down that path. If we can continue to -- generate great returns, providing capital to our existing tenant mix.

We are going to do that. And that's how we know we're looking at that -- we are looking -- look at it. Our job is to make money for our stakeholders and make as much as we can.

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

That makes sense. Thank you.

Operator

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

Alan Gold -- Executive Chairman

Thank you, operator, and thank you all for joining us today. And certainly, my one comment is to you know, send prayers out to those that are in harm's way in today's geopolitical issues. And for -- and thank our stakeholders and our team, for the stakeholders for really sticking with us and for our team for all your continued hard work. Thank you, all.

Brian Wolfe -- General Counsel

That will conclude the call.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Brian Wolfe -- General Counsel

Alan Gold -- Executive Chairman

Paul Smithers -- President and Chief Executive Officer

Ben Regin -- Vice President of Investments

Cat Hastings -- Chief Financial Officer

Tom Catherwood -- BTIG -- Analyst

Scott Fortune -- ROTH Capital Partners -- Analyst

Alexander Goldfarb -- Piper Sandler -- Analyst

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

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