Innovative Industrial Properties, Inc.
Q3 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

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

[Brian Wolfe:]

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:]

Thank you, Brian, and welcome, everyone. Today, we look forward to providing a recap of our results through the back half of 2020 and into 2021. And our views on the continued evolution of the industry, we are so proud to serve. There is certainly a lot to recap, both from our company's activities and the regulated cannabis industry as a whole. First and foremost, we are thrilled to see on display the great minds of our country and the world, achieving what many believe to be the impossible. Multiple sets of highly effective vaccines ready for distribution in less than one year from the onset of this pandemic, a truly remarkable testament to the ingenuity of our scientists, and one which we hope brings the light at the end of the tunnel that much quicker. With all the challenges that we have faced as a society over the last year, the regulated cannabis industry has demonstrated a strong and sustained resilience across the United States in arguably the first major economic disruption that this very young industry has faced. As we have highlighted on prior calls, with the regulated cannabis industries designated as essential services in the vast majority of state and local jurisdictions, our tenant operators have been particularly adept at modifying their operations in this new environment in ways to ensure continued, compassionate, individualized service to their patients and customers, and in an environment designed to maximize the safety and health of patients, customers and employees. 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. And while the vast majority of businesses were retrenching in this unprecedented time, experienced, well-positioned regulated cannabis operators continue to expand their footprints and deepen their operations. We were proud to continue to partner with them in 2020 as their go-to real estate partner, a year in which we made 20 new property acquisitions and additional investments in our existing portfolio totaling over $620 million. As of today, we own 67 properties in 17 states, totaling 5.8 million square feet, which are 100% leased on a long-term basis to high-quality licensed cannabis operators. Now the one property that was not leased in our portfolio at year-end was our Los Angeles, California property.

[Paul Smithers:]

Thanks, Alan. For this call, I plan to provide an update on the regulated cannabis industry, including

[Ben Regin:]

Thanks, Paul. Since October 1, we made five acquisitions in four states, representing a mix of expansion of our existing real estate partnerships with top operator and establishment of new tenant relationships. As of today, we own 67 properties across 17 states, representing approximately 5.8 million square feet, including approximately two million square feet under development or redevelopment, with a weighted average remaining lease term in excess of 16 years. Similar to past calls, I plan to touch on each of our acquisitions by state and also provide some information about each tenant and our portfolio overall in the state. I also plan to provide some additional detail on our tenant roster and overall portfolio. We have been fairly active in California in recent months with our two transactions with Kings Garden and the re-leasing of our Los Angeles property, the one property that was not leased on our overall portfolio.

[Catherine Hastings:]

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

[Alan Gold:]

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

[Operator:]

And the first question comes from Tom Catherwood with BTIG.

[Tom Catherwood:]

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

[Alan Gold:]

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

[Tom Catherwood:]

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

[Alan Gold:]

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

[Ben Regin:]

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

[Tom Catherwood:]

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

[Alan Gold:]

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

[Tom Catherwood:]

Got it. And just one last quick one for me, just on Vertical. Cath, I appreciated your commentary there. If memory serves me, this is one of the companies you gave a deferral to in 2Q and the idea back then as they were diversifying their wholesale business, moving away from kind of one key client that was having some trouble and bringing some new ones, which they were able to do. Is the kind of partial payment still tied to that diversification of clients? Or is this something new that they're working through?

[Alan Gold:]

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

[Catherine Hastings:]

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

[Operator:]

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

[Daniel Santos:]

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

[Alan Gold:]

So -- and I appreciate the question. And while we've tried to -- we say we have a very simple and, I think, a very strong business model of providing nondilutive and cost-effective capital to this industry. It is a -- we are providing it to a variety of different type of tenants that have a variety of different type of business models. And to say that this one issue is location specific, I don't think it has really anything to do with the location of the asset, but more of the specific business model that this one tenant focused on, being more focused on the wholesale side of the business as opposed to creating their own brand and focusing on that brand and growing that brand over time. Because of that, they've -- they were, I think, more affected by what was going on in the broader industry, including what's happening during -- because of COVID. And I think that that's the primary effect of the business. And they're working through it. We believe -- we're doing our best to help them. But once again, I mean, we're -- we have $1.8 billion worth of real estate over 67 different products. This is one property, one tenant, that represents less than 1% of our revenue.

[Daniel Santos:]

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

[Alan Gold:]

So other than -- we've collected 100% of our rent. Other than the fact that we've had 180% year-over-year growth on our AFFO, I'm trying to figure out a metric here as I'm talking. Other than the fact that we have the top 10 tenants in the entire country, other than the fact that the tenants have been able to raise capital and -- not only from private investors and family offices, but also through the public market. I mean, I think maybe perhaps that's the one metric that you could focus on that really gives the state of health of the industry, and it is just their ability to raise capital. And we can focus in on that. You could also focus in on the fact that in the industry itself, the year-over-year growth of sales is still growing at north of 30%. That's a really strong thing. I think that Ben mentioned that over 75% of our revenue comes from the top 10 tenants in the entire country. That's another very strong metric. And Paul, do you want to add?

[Paul Smithers:]

Yes. I would -- just to go further on that, I would just look at the industry itself. And 2020 was a pandemic year. And we see tremendous performance of our tenant operators and the tremendous growth of the industry. And most importantly, I think, is the early designation of cannabis industry as essential services in those states we operate, which really allowed our operators to excel and produce the results they did. So yes, I would just add that on top of the things that Alan enumerated.

[Daniel Santos:]

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

[Alan Gold:]

So Dan, I think if you recall or you remember that, we don't have access to a credit facility. We don't have access to that kind of the ability to warehouse capital on a credit line or warehouse acquisitions on a credit line and then raise capital later to pay down the credit line. So you can think about our excess capital is our credit facility that we created for ourselves. And the cost of that capital is really the cost of our dividend as we go forward. I think that it's important to note that we've been very consistent in our ability to be able to place that capital in a 6- to 9-month period of time after raising it. We believe that raising the capital at -- through the ATM at the end of 2020 really gives us the strength and ability to continue to move through our pipeline and give our tenant partners the confidence that when they need the capital, we have the capital available. It gives the new tenant partners the confidence that when we commit to do a transaction, that we can accomplish that. Remembering, again, that we don't have the access to a credit facility to be able to warehouse those type transactions. I think the best way to model it is to assume that capital that is put on the balance sheet will get placed in that 6- to 9-month period of time. And that dilution that we do take when we do raise that capital, we believe is well taken care of with very accretive type transactions we're doing. We did over $600 million worth of transactions in 2020, all within our targeted acquisition yield range of between 11% and 15%, and we believe that we'll be able to continue to do that as we move forward.

[Catherine Hastings:]

Yes. And Dan, I just wanted to also point out, too, that we tend to hold cash on our balance sheet that's already been committed. So remember that when we're making a commitment for construction, we have that cash available that sits on our balance sheet until we actually fund it out over time as improvements are going into the properties. So I think in my prepared remarks, we'd indicated that today we have about $280 million of cash for those future investments that have not been committed today.

[Operator:]

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

[Scott Fortune:]

I wanted to kind of follow-up a little bit on the pipeline outlook and kind of breakdown percentage of the existing tenants that are moving forward with new facilities or tenant expansions and kind of the new tenant opportunities. The beauty of the space is that a lot of these limited licenses are capped. And so it's going to provide a lot more tenants over the long run for these states to do well within each state from that standpoint. But if you can provide a little more color on kind of the percentage of the existing tenant pipeline and potential new ones as these operators are getting flushed with more capital here, that would be great?

[Alan Gold:]

Sure. I mean, I think the best way to look at a very strong pipeline is that is -- in our business model is that we -- when we bring in a new grower, we have 22 growers now that are part of our tenant base. And that we commit to not only helping them with the current transaction, but helping to support them to grow as they move forward. As you can see from our historical acquisitions, probably, I would say, greater than 60% of our transactions were repeat business with existing growers. And we tend to add new growers very carefully and with a lot of consideration because of that commitment to be able to provide them future capital. So with that, maybe I'll turn it over to Ben to perhaps talk about where we -- what we see in our pipeline.

[Ben Regin:]

Yes, sure. Hey, Scott. So we continue to see a nice mix of business with our existing tenants. It becomes a very mutually beneficial relationship, really, I think, proven out by the fact that we've closed on follow-on transactions with the vast majority of our current partners. And then on top of that, with the new markets coming online with the expansion in the industry overall, there is also a lot in the pipeline and a lot of business and a lot of capital needs really across the industry inside and outside our portfolio.

[Alan Gold:]

Right. And Scott, and just -- I'd also remind you that the market or the availability of capital for our tenants, even four or five months ago, was very challenging for them. And while they're enjoying it now, we all know that what comes up, sometimes goes down, and there could be different market conditions as we move forward. Cath, do you want to add?

[Catherine Hastings:]

Yes. Scott, I just wanted to -- I think this is a very unique industry, too, where in addition to acquisitions for our capital, having these market -- these state markets grow their programs. When we -- when the operators are identifying a facility that they want to have operations in, much of that includes expansion opportunities. And so we've seen a great use of our capital on amendments to existing properties that we already own. We did last year $160 million of amendments for that expansion growth for properties that were already in our portfolio. And that's a great opportunity for us to continue to get an increase in base rent as well as our lease extension. And I think looking at our weighted average lease length today of well over 16 years, that's a great testament to the interest in our portfolio.

[Scott Fortune:]

I appreciate the color. Makes a lot of sense, especially as new states are coming on board here, we see every day, states looking to legalize here. I mean, New Jersey and New York are only 3%, 4% of the portfolio. And those states are very undersupplied. So it seems like your large tenants will move that way. One last question for me. From a competitive landscape, we see although a little different model type. What are you seeing from a competitive standpoint? And how is that potentially compressing some of the cap rates with also the debt offerings or the debt raises that some of the tenants have done? Are you seeing any cap rate compressions during the year?

[Alan Gold:]

I think we have continuously seen potential competitors for that pop up because of the strong business that we've been able to put together. But the -- we haven't actually seen any of them really succeed in the long run. They raised some amount of capital and then they burned through that capital pretty quick and then are stymied. We think we still have and continue to be the only REIT focused on the medical cannabis industry on the New York Stock Exchange. And we think that our size, having a market cap in excess of $4.5 billion, $5 billion is a pretty strong lead. We do think that there is -- maybe not from other competitors, but from other capital, there is competition. There always has been and will always continue to be. But we're, I think, a very strong real estate team that has been able to adapt, and we'll -- and be able to compete quite effectively. We've been able to grow this company from -- in a very short 4-year period of time from less than $70 million to, as I said, north of $4.5 billion.

[Scott Fortune:]

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

[Alan Gold:]

Well, I think we -- that our pipeline continues to be in that range, and we continue to believe that that's the appropriate kind of range for our portfolio at this point. We do think that there are very -- certain tenants that are very, very strong and have access to perhaps a little bit more competitive capital than that, but we're confident that we can continue to grow in that -- with those type of yields.

[Operator:]

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

[Eric Des Lauriers:]

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

[Catherine Hastings:]

So we disclosed in the press release that about $424,000 was used from their -- from Vertical's available security deposits for rents for 2020.

[Eric Des Lauriers:]

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

[Alan Gold:]

Sure. And I think that competition comes from other real estate competitors and from the industry's access to capital. And we do believe that the industry's access to capital can and does have an effect. And perhaps the -- it creates the opportunity for some of our most -- the largest type tenants in the industry to ask for lower yields. But it doesn't mean that our business model has really changed much. We're still very focused on sale-leaseback transactions. We're not modifying our -- the lengths of our lease. We've actually increased the average length of our lease from the average 15 years that we were doing early on to now average of 20 years. We've actually -- I think we've seen some modest modification of our annual cost increases, which were 3% to 4%. And now they're probably 2.5% to 3.5%. We are -- we started out and looked at focusing on a certain class of tenants that have grown significantly. And now we need to bring in another group of those tenants that are underneath our current and we're focused very highly on that. We are quite pleased with the yields of the transactions we've recently closed, which are right down the middle of our expected -- our anticipated acquisition yields. And we think that we'll be able to be very close to that as we move forward throughout the year. I think the year is -- we still have a long time left in this year. We still have a lot of acquisitions to do. And we think we're going to be right there between the -- on average between 11% and 15%.

[Eric Des Lauriers:]

Okay. Good. That's good to hear. I suppose, last one for me here. Just kind of given all the potential puts and takes with the industry, some of your larger tenants maybe having less of a dependence on alternative capital, while at the same time, presumably more and more licensed growers kind of entering the space and potential tenants entering the space. So when you kind of look at all those different puts and takes, increased competition, et cetera, do you envision any shift in your strategy as it relates to production assets versus retail assets? Any reason for any of those changing dynamics to impact that strategy of sort of favoring large production assets over sort of more traditional retail assets?

[Alan Gold:]

No. We've never shied away from doing retail assets in a -- with any one of our existing growers. But if the average size of a retail asset has not changed from that $2 million to -- $1 million to $2 million to $3 million in size. And we're focused and -- staying focused on larger-sized transactions. And as I described earlier, our average transaction size is in that $30 million size range. So we don't see any need to change our business model from where we are. I did indicate just in my last -- answer to the last question that we are, again, looking at the group of tenant growers that are not the same as the current top 10 that we have in our portfolio. I want to be very careful to say that they're not the same quality. They are very high-quality growers. They're just not -- they just aren't public or at the same financial level as the other -- as our current growers because they've grown such -- so significantly with -- over the last couple of years. Perhaps that might be the area where we -- you might see some new grower names that aren't as familiar as you -- as the current ones that we've been growing within the past 18 to 24 months.

[Operator:]

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

[John Massocca:]

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

[Alan Gold:]

I don't think that you can go down that path that a de novo transaction would have a different yield than a lease amendment. We evaluate and underwrite every single one of our transaction individually. We underwrite the quality of the tenant, the quality of the location, the deal terms and the complexity of the transaction. And that all goes into helping us create what we think is an appropriate yield for the capital that we intend to offer. I think if you were thinking more of de novo perhaps new growers that aren't multistate operators that have -- that are -- that have received a license but haven't really grown in the past, those type of transactions aren't what we're focused on, if that's what you're asking.

[John Massocca:]

No. It was more of the first part of the answer, which I think explained it pretty succinctly. And then understanding each transaction, as you said, is kind of bespoke in the space. Is there a good rule of thumb for us to follow with regards to trying to think about the impact that kind of starting deferrals and abatements might have on kind of quarter-to-quarter rent, one quarter has a particularly robust amount of investment activity, how that's going to affect quarter-to-quarter rent either in the next quarter or three quarters out or whatever you think is maybe the best kind of way we should think about it, particularly from a modeling perspective?

[Alan Gold:]

Okay. So I think where you're going with is that perhaps the number of transactions in our pipeline are that we do on an average quarter that have some sort of rent deferral because of construction that has to be completed or development that is ongoing. And I think -- is that the question? I think that's...

[John Massocca:]

Yes. Yes. Just kind of maybe what's a good rule of thumb for when to think about that rent impact?

[Catherine Hastings:]

Yes. So John, I think we've described in the past that if there's typically a large construction project, so if we're offering large tenant improvements or elements of construction that there tends to be a longer abatement period before rent is beginning fully on that committed capital. And I think in the past, before this past year, I mean, many of our projects were smaller tenant improvement projects. We typically had maybe between three to six months, maybe nine months tops, if it were maybe $10 million of tenant improvements. This year, in 2020, we've really seen a large acceleration of big TI projects. And many of those are taking between three and 12 months before the -- to complete that construction. And some of our abatements will mirror that periods of that three to 12 months before we're earning rent on the full amounts of the capital we've committed.

[John Massocca:]

Okay. That's very helpful.

[Ben Regin:]

I would just add to what -- hey, this is Ben, what Cath said, that I think at any given time, it could be upwards of 75% of our pipeline will have some sort of development or significant build out component to it.

[Operator:]

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

[Alan Gold:]

Thank you. And once again, I'd like to not only again thank our stockholders for their support, but certainly for the team here for your unbelievable hard work in the -- in 2020 and in the first part of year of 2021. It's been a very challenging period of time, not only for the world and in the industry, but I think we continue to be very hopeful and positive about Innovative Industrial Properties and our prospects as we move forward. Thank you all.

[Operator:]

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