Innovative Industrial Properties - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 results were resilient but modestly down year over year: revenue $76.7M (-3% YoY), diluted EPS $1.36 (-6% YoY), AFFO/share $2.22 (-3% YoY). Drivers included properties recaptured/sold, lease amendments, partial rent payments, and two sales‑type leases shifting rent to deposit liabilities; offsets were new acquisitions, lease amendments, and escalations.
• Portfolio fundamentals improved: operating portfolio 98.3% leased (vs. 95.7% in Q3), WALT 13.7 years; 2024 leasing totaled ~530k RSF (6% of portfolio). Liquidity rose to $238.7M; revolver upsized to $87.5M and undrawn; debt-to-gross assets 11%, DSC 16.8x, no maturities until May 2026.
• Dividend maintained at $1.90/share (annualized $7.60); AFFO payout ratio 86%. IIP has increased dividends each year since inception.
• PharmaCann defaults resolved (Jan 30, 2025): rent restarted on 9 leases with increased deposits; two properties to be transitioned by Aug 1, 2025; CFO flagged ~$0.16 negative quarterly impact to rent going forward, potentially improving with re‑tenanting—reducing near‑term uncertainty and a key stock narrative catalyst.

What Went Well and What Went Wrong

What Went Well

• Leasing/occupancy strength: operating portfolio 98.3% leased; 2024 leasing of ~530k RSF including 160k RSF to Tri‑Mountain Pure (PA) and 6k RSF to non‑cannabis tenants (CA).
• Balance sheet and liquidity: total liquidity $238.7M at 12/31/24; revolver upsized to $87.5M and undrawn; 11% debt to gross assets; DSC 16.8x; no maturities until May 2026.
• Management execution and tone: “one of the lowest levered balance sheets in the REIT industry” and “exceptionally well positioned” to navigate headwinds and invest selectively.

What Went Wrong

• Revenue/AFFO pressure: Q4 revenue down 3% YoY; AFFO/share down 3% YoY, driven by asset recapture/sales, lease amendments/deferrals, partial rent payments, and reclassification of two leases to sales‑type (rent recognized as deposit liabilities).
• Tenant stress: applied $5.7M of security deposits in Q4 (vs. $0.8M in Q4’23), including $4.3M related to PharmaCann; underscores ongoing operator financing challenges and transitional rent abatements on re‑leased assets.
• PharmaCann rent reduction and rent abatement on two assets (MI, MA) effective Feb 1, 2025, plus dependency on PharmaCann refinancing by 6/30/25; CFO noted ~$0.16 negative quarterly rent impact until re‑tenanting offsets.

Transcript

Operator (participant)

Good day, and welcome to the Innovative Industrial Properties, Inc. Fourth Quarter 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Eli Kanter, Associate Finance. Please go ahead.

Eli Kanter (Finance Associate)

Thank you for joining the call. Presenting today are Alan Gold, Executive Chairman, Paul Smithers, President and Chief Executive Officer, David Smith, Chief Financial Officer, and Ben Regin, Chief Investment Officer. 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. Please refer to the documents filed by the company with the SEC, specifically the most recent reports on Forms 10-K and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

In addition, on today's call, we will discuss certain non-GAAP financial information such as FFO, normalized FFO, and AFFO. You can find this information together with reconciliations to the most directly comparable GAAP financial measure in our earnings release issued yesterday, as well as in our 8-K filed with the SEC. I'll now hand the call over to Alan. Alan.

Alan Gold (Executive Chairman)

Thanks, Eli. Good morning, everyone, and welcome to our call to discuss our 2024 results and recent activity. The company has continued to execute, generating over $255 million of cash flow from operations and returning over $210 million to shareholders through dividends, continuing our track record of increasing our annual dividends each year since our inception in 2016. On the investment front, we remain highly selective in evaluating opportunities, deploying over $70 million in capital to acquire two properties and providing additional building infrastructure allowances to enhance our facilities' capacity for our operators. We also made significant progress in leasing, executing new leases at six properties representing 530,000 sq ft, or 6% of our total portfolio. Additionally, we further strengthened our liquidity position and strong balance sheet with the upsizing of our credit facility to $87.5 million, with four banks now participating.

For the year, we generated total revenues of $308.5 million and AFFO of $256.1 million, continuing our success of generating significant revenue from the regulated cannabis industry. The regulated cannabis industry continues to experience headwinds, which we are navigating through with one of the most experienced management teams in the industry. As of year-end, our total available liquidity exceeded $235 million, providing us with ample dry powder to pursue additional strategic investments. We are proud to have strategically positioned ourselves to have one of the lowest-leveraged balance sheets in the REIT industry at 11% debt to total gross assets. David will provide more detail on our financial results and capital position. Last week, we announced that two of our independent directors, David Stecher and Mary Curran, have made the decision to retire from our board and not stand for reelection when their terms expire.

David has served on the board since 2017 and Mary since 2020, and we want to thank them both for their service to the company over the years and are in the process of searching for replacement directors. I also want to take a moment to congratulate Tracie Hager and Kelly Spiker, who were both promoted to Senior Vice President in January. Tracie has managed our asset management department since 2021, and Kelly has provided incredible real estate legal support since 2019. Both are seasoned professionals who have added incredible value, and we are truly fortunate to have such dedicated and talented members on our management team. Before I turn the call over to Paul, I wanted to touch on our resolution with PharmaCann.

We are pleased with the outcome announced last month and believe it reflects our management team's capabilities in navigating challenging situations to the benefit of our shareholders. Paul will provide additional detail on the resolution. Paul?

Paul Smithers (CEO, President and Director)

Thanks, Alan. As we noted in our press release last month, we reached a comprehensive resolution to PharmaCann's defaults that included, among other things, PharmaCann recommencing rent payments on nine of 11 leases in February, a required capital infusion by PharmaCann investors, and a junior secured note issued to IIP. We are proud of our team's ability to navigate this situation swiftly and believe this is the best path forward to maximize shareholder value. On the regulatory front, with the election behind us and a unified Congress, there is potential for federal reform, including rescheduling and SAFE Banking. Rescheduling efforts to reclassify cannabis from a Schedule I drug to Schedule III drug were stalled by a DEA administrative law judge canceling the rulemaking hearing that was set to begin in January. Since that postponement, President Trump has recently appointed Terrence Cole to lead the DEA.

President Trump has not released any official policy directive related to rescheduling, but Cole has voiced opposition to legalization efforts. However, President Trump has shown public support for cannabis reform, including for both rescheduling and the approval of adult-use cannabis in Florida, and we remain cautiously optimistic that rescheduling will continue to make progress. We do continue to see growth prospects in the state markets, with four states voting on cannabis legislation in 2024. Pennsylvania is exploring adult-use cannabis legalization through legislation, and earlier this month, Governor Shapiro's 2025-26 budget proposes a legalization of adult-use cannabis effective July 1, 2025, with sales beginning January 1, 2026. In Florida, the Smart & Safe Florida campaign was relaunched in January to put adult-use cannabis back on the ballot for the 2026 election, after the recent measure received majority support from voters but failed to receive the requisite 60% needed.

These two states combined generated approximately $3.8 billion in sales in 2024 and are projected to be two of the largest cannabis markets in the U.S. by 2028, according to BDSA. In Minnesota, while regulations for adult-use cannabis have yet to be finalized, the OCM began accepting applications for cannabis businesses earlier this month. Additionally, the public comment period for the regulatory framework concluded earlier this month, and the OCM is expected to publish the final rules by the end of Q1-25. We look forward to the adult-use rollout and are excited for our tenant partners, Green Thumb and Vireo. The growth of the overall cannabis industry in the U.S. continues to remain strong, with 41 states having legalized cannabis for medical or recreational use, accounting for 71% of the U.S. population.

BDSA is projecting cannabis sales to increase approximately 10% in 2025, after an estimated 9.8% growth in 2024, with total U.S. cannabis sales of $32.4 billion. Recent data shows that cannabis consumption is also strong, with volumes up 15% in 2024, according to Hoodie Analytics. Additionally, studies have highlighted daily marijuana use surpassed daily alcohol consumption in 2022. These trends reflect the growing acceptance and integration of cannabis, which positions the industry for continued expansion. However, challenges persist, particularly from illicit and gray markets that undermine the regulated industry. While states like California and New York have made incremental progress in enforcement, the illicit market is estimated to be more than two and a half times the size of the regulated market. Addressing this issue requires further efforts at both the state and federal levels.

At the state level, we are encouraged by the continued expansion of the New York and Ohio cannabis markets. As of December, New York's adult use cannabis sales surpassed $1 billion since launching in December of 2022 and, according to BDSA, is projected to reach $2.4 billion of annual sales by 2028. In Ohio, adult use sales exceeded $300 million within the first six months following their launch in August of 2024 and are projected to grow to over $2 billion of annual sales by 2028. I'd like to now turn the call over to Ben to discuss our investment and leasing activity. Ben?

Ben Regin (CIO)

Thanks, Paul. In 2024, we deployed over $70 million across five properties, and in 2025, we have one asset under contract for $7.8 million, with closing expected this quarter, subject to diligence and closing conditions. Also, in 2024, we executed leases totaling approximately 530,000 sq ft, including a new lease executed in the fourth quarter with Tri-Mountain Pure for 160,000 sq ft at our Pittsburgh asset, bringing the property to 100% occupancy. Tri-Mountain Pure is led by the prior founder of PurePenn, one of the early Pennsylvania grower-processors that sold to Trulieve in November of 2020. Additionally, in Q4 of 2024 and the first quarter of this year, we executed two leases totaling 11,000 sq ft to non-cannabis tenants in Palm Springs. Our 2024 leasing efforts brought our operating portfolio to over 98% leased as of year-end.

Our three properties under development consist of one pre-leased asset in California, a 192,000 sq ft property in San Bernardino, and a 12-acre parcel of land in San Marcos, Texas. With total available liquidity exceeding $235 million, we are well-positioned to pursue strategic investments and capitalize on our pipeline. With that, I'll hand it over to David. David?

David Smith (EVP and CFO)

Thank you, Ben. For the year-end in 2024, we generated total revenues of $308.5 million, compared to $309.5 million for the same period in 2023. The less than 1% decrease in our cash revenues collected was primarily due to certain properties we recaptured or sold since 2023, adjustments to rent for certain properties through lease amendments, and partial payment of rent by certain tenants where we fully utilized our security deposits. Our comparability year-over-year was also impacted, as we have previously disclosed since the first quarter, by two leases that, when amended, changed our lease classification from operating leases to sales-type leases starting in January 2024.

The decrease was partially offset by the $3.9 million disposition contingent lease termination fee that was received in connection with the sale of our property in Los Angeles, California, in the second quarter, amendments to leases for additional improvement allowances at existing properties that resulted in adjustments to rent, revenue from the two new properties we acquired in 2024, and contractual rent escalations on our other existing properties. As we noted in our press release yesterday, the fourth quarter's results also included $5.7 million of security deposits applied for contractually due rent on properties leased to five tenants, of which $4.3 million related to PharmaCann. AFFO for the fourth quarter was $63.4 million, or $2.22 per share, a 3% decrease compared to the fourth quarter of 2023, and a 1% decrease versus the third quarter of 2024, with both decreases driven by reduced rent collections for certain tenants.

In addition, as it relates to the PharmaCann amendments we announced in January, it results in an approximately 16% negative quarterly impact to rent going forward, which could improve with any retention activities at the Michigan and Massachusetts properties. Our balance sheet remained strong during the quarter with $2.6 billion in total gross assets and our only debt consisting of $300 million in fixed-rate unsecured bonds maturing in May 2026. Furthermore, we continue to maintain REIT industry-leading credit metrics, with a net debt to EBITDA of less than one times, debt to gross assets ratio of 11%, and a debt service coverage ratio of nearly 17 times. In the fourth quarter, we added two banks to our revolving credit facility, bringing it to four in total and expanding capacity on that facility by another $37.5 million.

Our total capacity on our revolver now stands at $87.5 million, all of which remains undrawn as of today. With this increased liquidity, we finished the fourth quarter with over $235 million of total liquidity, comprised of cash, short-term investments, and availability under our revolving credit facility. Our dialogue continues with additional banks about increasing our overall credit capacity. We continue to be well-positioned with a conservative balance sheet, strong liquidity, and continued progress on expanding our banking relationships to increase the size of our credit facility. With that, I will turn it back to Alan. Alan?

Alan Gold (Executive Chairman)

Thanks, David. I'm proud of what our team accomplished in 2024. We continue to be laser-focused on maximizing the value of each property in our portfolio for the benefit of our stockholders, and I see our company as exceptionally well-positioned to continue to execute on the business while navigating through the regulated cannabis industry headwinds. As long-term owners of our company, thank you, as always, for your continued support. With that, I'd like to open it up for questions. Operator, can you please open the call up for questions?

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. Our first question comes from Tom Catherwood with BTIG. Please go ahead.

Thomas Catherwood (Managing Director and REIT Analyst)

Thank you, and good morning, everybody.

Alan Gold (Executive Chairman)

Good morning, Tom.

Thomas Catherwood (Managing Director and REIT Analyst)

So first off, kudos on the swift resolution with PharmaCann. That was huge, and I know a very big lift. But if we step back and think more broadly about tenant risks, in the three cases where you've had to work through issues, and this includes Parallel and Green Peak, the tenant was also facing issues with their lenders. How are you thinking about risk for your tenant base over the course of the next year, given that 2026 is an outsized year for debt maturities across the cannabis industry?

Alan Gold (Executive Chairman)

Well, thanks, Tom. I think that, first of all, you're talking about something that's going to occur in 2026, and we're, I think this is still February of 2025. And we believe that the industry has continued to show green shoots and to mature and perform better. And we believe that the broader markets should be in a much better position to be able to deal with the 2026 maturities that many of these tenants do have. But with that, we do acknowledge that the earlier the maturity of debt that occurs with our tenants, the more stress that they are seeing. And that is an issue that we are following and watching very closely.

Thomas Catherwood (Managing Director and REIT Analyst)

I appreciate that, Alan, and maybe if I take the flip side to that, could there also exist a scenario where IIP plays a role in helping some of those tenants or operators work through their debt issues, whether it's sale-leasebacks, taking down more real estate, effectively injecting fresh capital through your sale-leaseback process?

Alan Gold (Executive Chairman)

We're always looking at opportunities, and as Ben will talk about, we continue to review opportunities, and we will do that. We have the privilege of having a very strong balance sheet with around 11% debt to total gross assets and over $200 million of liquidity, giving us the flexibility to play and to work with tenants that do have interesting opportunities for us. We will look at that. But that's not what we believe. We believe the broader industry needs to continue to perform better, which, as Paul described, there are several green shoots occurring. We believe that the broader real estate industry needs to be there for the industry in general.

Thomas Catherwood (Managing Director and REIT Analyst)

Got it. Appreciate that, Alan. Last one for me, Paul, maybe going back to your comments on rescheduling. Do you have a sense of what the next checkpoints are in restarting the hearings that got postponed or delayed? And at what point in time do we get a better sense of how the DEA may be approaching rescheduling?

Paul Smithers (CEO, President and Director)

Yeah. I mean, that's a question, Tom. I think the whole industry is waiting to find out. We're in the court system to get the scheduling process back on track. There's really no timeline as to when the administrative judge may make a ruling on what the DEA did or didn't do. It's kind of guesswork on that timeline. It could be stalled indefinitely, or it could be as soon as maybe three to six months. But I think really all eyes are on the White House at this point, Tom, because with the appointments of Terrence Cole as DEA, with Pam Bondi as AG, with RFK Jr. as HHS, we don't have a lot of guidance at those hearings where they testified as to what their position will be. We can only look historically at what they've said.

But I think if we get a statement from the White House, from President Trump, that is consistent with his September postings on his Truth Social, where he was very clear that he supported rescheduling, SAFER Banking, and, of course, legalization in Florida, if we get direction from him, I think the DEA and HHS will fall in line, I think, and we'll get that process back on. So I think the smart money is to see what happens from the White House and when that might happen.

Thomas Catherwood (Managing Director and REIT Analyst)

Understood. Appreciate all the answers. Thanks, everyone.

Alan Gold (Executive Chairman)

Thanks, Tom.

Paul Smithers (CEO, President and Director)

Thanks, Tom.

Operator (participant)

The next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.

Aaron Grey (Managing Director and Head of Consumer Research)

Hi, good afternoon. Thank you very much for the questions here. So first question for me, thanks for the income recall in terms of the security deposits. So it looks like $4.3 of that, $5.7 from PharmaCann. So regarding the other $1.3 and four tenants, I know you had mentioned, I believe, three of them in the prior call, so it'd be relating to those and one more. Just anything that you're doing in terms of working through that for the partial or non-payments and just how we should anticipate the security deposits either going forward if that is being resolved or there might be incremental issues there. So just the broader tenant portfolio on the security deposits being applied there. Thanks.

Alan Gold (Executive Chairman)

Yeah. No, I think that the way to look at it is that we're taking each situation as a unique and special situation and drilling down with the tenants and working with them to get them back to where they agreed to be and where we expect them to be. And so that's, I think, the best we can say with regards to the actual tenants, given how the majority of our tenants are private and we have confidentiality agreements with them. And so we have to be very careful with what we say, but we are working very closely with those. And then, Ben, do you have anything further, Dan?

Ben Regin (CIO)

I think that's right, Alan. And I think, really, when we think about tenant health, we're really talking about the health of the industry overall and the green shoots that we're seeing in the cannabis industry that Paul described. But as Alan mentioned, we have a lot of private tenants, but we are, of course, watching each of our tenants and working with them very closely.

Aaron Grey (Managing Director and Head of Consumer Research)

Appreciate that color there. Second one for me, just could you provide some color on the pipeline for 2025? You have healthy liquidity, so curious as to how you're currently viewing the pipeline translating to committed capital for the year in the current environment that we stand in today, and then also how much that could change either via potential state legalization or federal reform?

Ben Regin (CIO)

Yeah. Aaron, this is Ben. So as we have for the last year or two, we are continuing to be very opportunistic and very disciplined as it relates to the pipeline. We're seeing a wide variety of opportunities. I believe we have a very strong balance sheet, very strong liquidity position around $235 million to capitalize on which of those opportunities we think are best.

Aaron Grey (Managing Director and Head of Consumer Research)

Okay. Great. Thanks for the call. I'll jump back in with you.

Alan Gold (Executive Chairman)

Thank you.

Operator (participant)

And the next question comes from Bill Kirk with Roth Capital Partners. Please go ahead. Bill, your line might be on mute. We're moving on to Eric Des Lauriers with Craig-Hallum Capital Group. Please go ahead.

Eric Des Lauriers (Senior Research Analyst)

Great. Thank you for taking my questions. First one, just a bit of a follow-up on Aaron's question there. So you mentioned strategic investments a couple of times on the call. Just for clarification, should we be thinking of these as your typical acquisitions and investments that you've been making, or are you perhaps looking at perhaps other non-cannabis or other types of investments?

Alan Gold (Executive Chairman)

I think that we have broadened our investment opportunities, but we are primarily focused on the cannabis industry. We think that there are unique opportunities to invest within the financial side of the cannabis industry, obviously generating real estate-related income, and so we're looking at a variety of ways to enhance the revenue-producing aspect of the company using our balance sheet and our very strong balance sheet and our available liquidity.

Eric Des Lauriers (Senior Research Analyst)

I appreciate that, and could you elaborate on some of the green shoots that you've been referring to in the industry and, I guess, overall level of competition in cannabis markets? They've obviously been challenging for some time here. Wondering if you're seeing a plateauing of sorts or sort of continuing to get perhaps increasingly challenging, but just overall kind of elaboration on the green shoots that you're seeing.

Paul Smithers (CEO, President and Director)

Yeah. Hey, this is Paul. I think we gave some specifics in our prepared remarks, but we start with the projection of a 10% growth for 2025, which is not insignificant. Then we look at some of the state-by-state analysis. For example, Tennessee just introduced bills for both medical and rec, and that's Tennessee. We haven't seen that. We talked about Illinois breaking a record, a $2 billion record. That's substantial. We look at Governor Shapiro in Pennsylvania, who again calls for adult use as part of his budget for 2025. We just saw a recent poll in Florida. If the rec vote was held today, it would get 67% support, which, of course, is over the 60% threshold. So that would pass if today it was held. We look at other things.

We look at, with more border enforcement, do we see the possibility of, with enforcement, we have a decrease in illegal supply crossing the border? Do we see a decrease in aliens working in the black market, perhaps, on the grows? So that may be an effect. But then again, state by state, we look at good records in New York and Ohio. Ohio did $300 million in its first six months. That was very impressive. We see New York hit the $1 billion mark. So these are all very state-specific, but when viewed in the aggregate, it supports what we think is still a pretty robust industry. And along with the 10% growth, we're pretty optimistic that this industry will continue to grow. It's going to have some headwinds, as we discussed, primarily the black market in some of the larger states. And you talked about competition.

We are seeing the states and the larger states, certainly. We're seeing some of the less successful growers drop out. And that's market dynamics that we've always talked about for years, that we do believe there will be a consolidation in these larger states. And that's coming to pass. So we've always, well, tried to put our dollars with the MSOs that we see as the larger growers in these states and the ones that we support. So we think they will continue to do well as the markets grow.

Eric Des Lauriers (Senior Research Analyst)

All right. Appreciate that color. And then last one for me, regarding the PharmaCann resolution, which I'll also echo my congratulations on a swift resolution there. So part of that did come with a certainly modest reduction in rents. I'm just wondering if you're getting calls from existing tenants to sort of follow on with that. I would imagine some of them are looking to do so. And just if so, how are you handling those discussions? Is that something that we should perhaps be on the lookout for, of some of this minor or modest rent reductions to other tenants?

Alan Gold (Executive Chairman)

It's an interesting question. It's a very difficult one for us to answer because if we were receiving calls, we wouldn't want to talk about that. But we have said that we are monitoring all of our tenants, and we are monitoring all of our tenants. But the thing that we want to make very, very clear is that this company relies on our leases, that we do what we say we're going to do, and we expect our tenants to live to their agreements. And that's what we should be focused on.

Yeah. And.

I might also add, I think, as we've described in the past, that the resolution we reached with PharmaCann was just not a reduction in rent and taking back properties. PharmaCann has committed to some substantial policy changes and some financial commitments by their investors, of course, the note that we take, and other commitments such as not taking any more debt. The fact that it was a fair question: Are other tenants going to try and get a rent reduction? But if they do, they're going to be met. If they default, we will meet them with the same swiftness that we did with PharmaCann, immediately filing default notices on all those properties proceeding to eviction. If there is a way to work something out, we will get something to compensate us for the loss of rent.

So that's an important point that needs to be stressed, I think, and to have any potential tenants realize that we're not open for business just to cut rents. If there is a rent reduction, there will be something on the back end.

Eric Des Lauriers (Senior Research Analyst)

That's very helpful. Thank you for the color.

Operator (participant)

Mm-hmm.

The next question comes from Bill Kirk with Roth Capital Partners. Please go ahead.

Bill Kirk (Managing Director)

Hey, good afternoon, everyone. Sorry for my tech difficulties earlier. I kind of have a two-part question here. The portfolio today is primarily cultivation properties. How do you see the mix of forward opportunities between cultivation and retail assets? And then, related, kind of the second part is most of the business today is multi-state operators. How do you see kind of the opportunities with the multi-state operators going forward versus maybe some smaller single-state operators?

Alan Gold (Executive Chairman)

So first of all, we've been very, very clear that we're focused on the cultivation assets and highly focused on that. We will look at retail assets, and our opportunities are primarily focused within the same percentage of our portfolio, again, the cultivation assets. And then, I mean, your second part of your question had to do with, I'm sorry, what?

Bill Kirk (Managing Director)

Multi-state tenants versus single-state?

Alan Gold (Executive Chairman)

Yeah. Our underwriting criteria has continued to be one of looking at the best, whether they're multi-state or single-state, but highly focused on the multi-state operators, and we're going to continue to do that.

Bill Kirk (Managing Director)

Thank you.

Operator (participant)

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

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Hey. Good morning out there.

Paul, I appreciate your warning to other tenants trying to pull a PharmaCann. So I like the public address. Two questions here. First, you commented on the growth of the industry, and certainly in your slide deck, you talk about 9% CAGR. Yet investment since 2020 has declined despite 20-plus states legalizing some sort of medical or recreational, etc. So how much overcapacity do you think is out there? When do you think that this growth translates to commensurate renewed interest in investment such that we see 9% investment growth in this space? When do you think this turns?

Paul Smithers (CEO, President and Director)

I think that the industry still has headwinds, as we've described. And those headwinds come from the illicit market and the illicit growers. And as that, as Paul alluded to, as that is reduced, whether through border enforcement or other types of enforcement, I think that's going to allow the industry to be able to continue the capital growth within the industry. That's number one. The other real factor is really the SAFER banking-type provision, which will allow capital providers to feel more comfortable in providing capital to the industry. And that's something that's been talked about and something that everybody has been looking for for a long period of time. So do we see that in the short term? Not particularly, but we do believe that it is coming, and it will be something very important for the industry.

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Okay. And then the second question is, again, you guys have always been very vocal about MSO exposure and the credit improvement that that provides. Yet, obviously, PharmaCann was an MSO that had issues. Kings Garden was another. So my question is, is MSO really a good metric of credit, or are there other things as the business has evolved that you guys are starting to look more towards that provide greater comfort to you on the credit side that the operator is money good?

Paul Smithers (CEO, President and Director)

The MSO, the multi-state operator.

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Sorry. MSO, not MCO. Sorry.

Paul Smithers (CEO, President and Director)

That is an aspect, which is why we have single-state operators that we're very excited about. But it does show the ability for a company to raise a significant amount of capital and to be able to operate in multiple states does provide a form of diversification that we've looked at and why we have focused on that. We really are looking at the operators themselves and their ability to raise capital and their ability to have the experience and expertise to grow product and sell product in a very challenging environment, and that's what we're looking for.

Alexander Goldfarb (Managing Director and Senior Research Analyst)

So have you had any reassessments of credit of tenants that before you would have ranked highly, and now you're looking at them going, "Geez, they're current and they're fine, but we may want to reduce exposure going forward"?

Paul Smithers (CEO, President and Director)

I think, as I said, we're watching all of our tenants. We're doing deep dives into every single one of our tenants, including the strongest ones and the single-state operators.

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Okay. Thank you very much.

Paul Smithers (CEO, President and Director)

Thank you.

Alan Gold (Executive Chairman)

Thanks, Alan.

Operator (participant)

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

Alan Gold (Executive Chairman)

Thank you. And once again, thank you all for joining us today. I really want to say thank you to the team for all the hard, smart work we've done over the last year and this last quarter. And with that, we conclude.

Operator (participant)

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