Innovative Industrial Properties, Inc. Class A (IIPR) Q4 2018 Earnings Conference Call Transcript

Paul?

Paul Smithers -- President and Chief Executive Officer

Thanks, Alan. As with prior calls, we'll try to provide as effective an overview as we can with the short time we have today, focusing in on three main topics. One, the current regulatory environment. Two, the growth and evolution of the medical-use cannabis markets in the United States generally.

And three, recent developments in our state markets. First, regarding the current federal regulatory environment. Of course, cannabis remains a Schedule 1 controlled substance, which generally prohibits all cannabis use and cannabis-related commercial activity in the United States. That said, Congress has continued to enact spending bills since 2014 with a provision that has been interpreted by courts as preventing the Department of Justice from using funds to interfere with the implementation of state medical-use cannabis laws.

That provision was again included in this year's congressional spending bill passed earlier this year which carries through to September 30. In addition, there have been numerous other initiatives taken by Congress, including the establishment of the bipartisan Congressional Cannabis Caucus in 2017 and the introduction of a number of bills in Congress in favor of various forms of cannabis legalization at the federal level. As we indicated on our prior call, we are monitoring all of these developments closely, including the recent bipartisan bill introduced by Senators Gardner and Warren in June of last year, which gives priority to state's rights and state licensed and regulated cannabis activities. Also noteworthy, a subcommittee of the house financial services committee held hearings just last month regarding banking services for the industry and appears to be actively planning to vote on a cannabis banking bill in the coming months.

These are a few of the many continued steps forward that we are seeing at various levels of government, which we view also to be in direct alignment with the will of the people of the United States. On to a general update of the medical-use cannabis markets nationwide. The industry continues to move forward with tremendous velocity. 33 states have legalized medical-use cannabis by popular vote or legislative process, where a large majority of the United States population resides.

Medical-use cannabis continues to poll year after year with 90% plus popular support in the United States, and the regulated cannabis industry is expected to continue to be a leading driver for U.S. jobs and tax revenues. In fact, recent estimates by ArcView project the regulated cannabis market in the United States alone to go to over $22 billion by 2022. And now for a brief update on developments in the markets where we own properties, which has now become a pretty long list: New York, Massachusetts, California, Illinois, Arizona, Maryland, Michigan, Colorado, Pennsylvania, Ohio and Minnesota.

New York. As a reminder, we have owned two properties in New York since 2016 and 2017, which are leased on a long-term basis to two multistate operators, PharmaCann and Vireo. As we have noted in past calls, New York's medical-use cannabis program has initially rolled out, had been described by many as one of the most restrictive and highly regulated. In response, and in order to enable broader access to treatment, New York has taken several positive steps over time.

These steps include expansion of the pool of potential recommending health professionals, expansion of the types of products that can be manufactured and distributed, streamlining the registration process and expansion of the list of qualifying medical conditions, most notably for chronic pain and PTSD, and in July 2018, cannabis as an opioid alternative. Patient count continues to accelerate as a result, with growth from 64,000 certified patients reported in our last call to 92,000 patients as of late February. Regarding potential adult-use legalization in New York. After a thoughtful recommendation from the New York Department of Health was publicly released in summer of last year.

Governor Cuomo is quoted as remaining confident that the state legislature would vote to localize adult-use cannabis as part of the state budget, which is due April 1. We will continue to monitor this and other developments across the states where we operate. Massachusetts. We own two properties in Massachusetts, which we acquired in 2018 and which are leased to Holistic Industries and PharmaCann.

We are thrilled to be working with these two experienced operators in a very dynamic state with tremendous potential. As of early 2019, there were nearly 60,000 active patients in the medical cannabis program and over 65,000 active healthcare provider certifications. As we mentioned on our last call, Massachusetts voters approved the legalization of adult-use cannabis in 2016 and first licenses for adult-used cannabis operators began to be issued in the summer of 2018. 2018 ended with just a handful of licensed and operational adult-use cannabis dispensaries, but industry participants expect that number to accelerate significantly in 2019.

Now onto California, where we own one property purchased earlier this year. California was the first state to permit the use of cannabis for medicinal purposes, adopting the Compassionate Care Act in 1996. In November of 2016, California voters approved the Adult Use of Marijuana Act, permitting the sale of cannabis for adult use, with first licenses issued in 2018. With 40 million people, ArcView expects California's regulated cannabis spending to grow to $5.6 billion in 2022, just modestly below the entire estimated 2022 market for all of Canada.

California's licensing program has been delayed significantly and there have been challenges as the state rolls out this new program. That said, we are thrilled to finally be in California and to be working with our operator in Sacramento, who is also one of the first operators to receive its permanent adult-use and medical-use cannabis retailer license in the state. Illinois. Similar to New York's evolution, Illinois' program, as initially rolled out, was highly restrictive, resulting in subdued growth for some time.

That said, in early 2019, the state regulatory authorities launched the Opioid Alternative Pilot program, which allows access to medical cannabis for individuals who have or could receive a prescription for opioids as certified by a doctor. These new rules also eliminated the requirements for fingerprints and background checks. These steps, along with other loosening of restrictions in the market, have led to strongly accelerating patient growth in the regulated market in 2018 and continuing into 2019. In addition, the new Governor of Illinois, J.B.

Pritzker, is strongly in support of legalizing adult-use cannabis, and the Illinois Economic Policy Institute issued a report in late 2018 in support of legalization, citing a large majority of voter support, job creation, much-needed tax revenues and the impact a regulated market will have on reducing the illicit market's footprint. Now on to Arizona, where we own one property purchased in late 2017. As we mentioned before, Arizona's medical-use cannabis program is further along in its maturity, having commenced medical-use cannabis sales in 2010. According to the Arizona Department of Health Services, there are nearly 190,000 qualifying patients in Arizona's medical cannabis program as of January 2019, continuing a strong pace of growth.

Medical cannabis sales themselves grew by 41% from 2017 to 2018, outpacing the growth of the patient pool by two to one. Maryland. We purchased our property in Capitol Heights Maryland in 2017. Although the first dispensaries were opened only in late 2017 and Maryland has had just one full year of operations as a result, there were nearly 90,000 registered patients and 60,000 certified patients for the program as of late February, providing a glimpse into the tremendous patient demand in the state.