Merrill Ross

Merrill Ross inquired about the characteristics of the MSRs sold in Q3 and those scheduled to settle in Q4, specifically if they were low-coupon assets targeted by financial investors. She also asked if the company is rotating into slightly higher-coupon MSRs, with the DTC platform acting as a better hedge for these assets.

Answer

Bill Greenberg, President and CEO, confirmed that the MSRs sold were indeed low-coupon assets, consistent with their overall portfolio. He also affirmed that the company is comfortable with a slight rotation into higher-coupon MSRs, noting that the gross coupon rate of their portfolio increased from 3.53% to 3.59%. He explained that this strategy is supported by the DTC platform's ability to generate attractive recapture rates on these higher-WAC assets.

Merrill Ross inquired about the MSR sales, specifically confirming the split between Q3 and Q4 settlements and the characteristics of the MSRs sold. She also asked if the rotation from these sales into slightly higher coupons, facilitated by the DTC platform, was a deliberate strategy.

Answer

Bill Greenberg (President and CEO) confirmed that the remaining $10 billion of MSR sales are scheduled to settle at the end of the month. He stated that the MSRs sold were low coupon, consistent with their portfolio. He affirmed that the rotation into slightly higher coupons, supported by the DTC platform's hedging capabilities, is a comfortable and desired strategy, noting a six-basis-point rise in the gross coupon rate of the portfolio.

Merrill Ross of Compass Point Research & Trading, LLC posed three questions: a request for quantification of the company's 'high liquidity,' details on loan recapture versus flow originations, and the strategic rationale for entering the Ginnie Mae market.

Answer

CFO William Dellal confirmed high liquidity levels with significant cash and unused borrowing capacity. President and CEO Bill Greenberg addressed the other points, noting that organic recapture is low due to a small refinanceable population (0.5% of the portfolio) but that bulk and flow channels are used to replenish runoff. He explained the Ginnie Mae entry is for diversification, to access a broader market, and to become a more full-service mortgage originator and servicer.

Merrill Ross asked for details on the York Space Systems acquisition, including total investment, cap rate, and its strategic importance. She also questioned the evolving mix of federal versus state/local/government-adjacent lease income and whether the GSA is considering more modern lease structures with escalators.

Answer

Allison Marino, EVP and CFO, stated the York Space Systems acquisition price was $29 million with a low 11% cap rate, highlighting its role as headquarters with a clean room for satellite construction, integral to government contracts. She outlined a target portfolio mix of 70% GSA/federal, 15% state/local, and 15% government-adjacent, noting recent acquisitions demonstrate this strategy. Ms. Marino confirmed the GSA is open to more modern lease structures, citing a successful embedding of escalators in a recent USFS Albuquerque renewal.

Merrill Ross asked why the company chose a revolver and preferred stock structure for the IQHQ investment rather than making a direct investment in a life sciences property or forming a joint venture. She also requested the current cash yield on the revolver portion of the investment.

Answer

Executive Chairman Alan Gold explained that the yields on direct, well-leased life science properties are currently significantly below IIP's cost of capital, making the structured investment in IQHQ a more accretive and opportunistic transaction. He stated that the combined current cash yield on the total investment is north of 10%.

Merrill Ross from Compass Point Research & Trading LLC questioned why IIP chose a revolver and preferred stock structure for the IQHQ investment rather than a direct property acquisition or a joint venture. She also asked for the current cash yield on the revolver.

Answer

Executive Chairman Alan Gold explained that direct investments in well-leased life science properties would yield significantly below IIP's cost of capital. The chosen structure was more accretive and leveraged IQHQ's operational expertise, creating a secure, high-quality transaction. He confirmed the current cash yield on the combined investment is north of 10%.

Merrill Ross of Compass Point Research & Trading LLC asked why IIPR chose a revolver and preferred stock structure for the IQHQ investment instead of a direct property acquisition or JV, and inquired about the investment's cash yield.

Answer

Executive Chairman Alan Gold explained that direct acquisitions of quality life science assets would yield significantly less than IIPR's cost of capital. The chosen structure is more accretive and secure, leveraging IQHQ's operational expertise. He confirmed the combined current cash yield on the investment is north of 10%.

Merrill Ross questioned the strategic rationale and return expectations for acquiring a 100% occupied, age-restricted property with no expansion potential. She also asked for clarification on whether rental homes are included in the properties being refinanced with the GSEs.

Answer

President and CEO Samuel Landy and EVP and COO Brett Taft explained the acquisition's value lies in its vacancy decontrol feature, which allows rents to be raised to market rates over time as homes turn over, projecting a yield of 6.5% to 7% within five years. EVP and CFO Anna Chew clarified that for the GSE refinancing, the income from the site under the rental home is included, but the value of the physical rental home itself is not currently being financed.