Innovative Industrial Properties, Inc.

Good day and welcome to the Innovative Industrial Properties, Inc. first quarter 2025 earnings call. All participants will be in a 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 that this event is being recorded. I would now like to turn the conference over to Eli Cantor, director of investor relations. Please go ahead, sir.

Thank you for joining the call. Presenting today are Alan Gold, executive chairman, Paul Smithers, president, chief executive officer, David Smith, chief financial officer, and Ben Reagan, 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 SEC. I'll now hand the call over to Alan.

Alan? Thanks Eli, and welcome everybody to our first quarter 2025 earnings call. Before we begin, I would like to thank the entire IIP team for their hard work and dedication. They have truly been committed to protecting the long term value of our portfolio for our shareholders by bringing their special knowledge and experience to this challenging industry. We believe we are uniquely positioned with our strong balance sheet and liquidity to manage through the ongoing uncertainty of the broader macroeconomic environment and the continued challenges in the regulated cannabis market. As for the quarter, we generated total revenues of $71.7 million, AFFO of $55.3 million, and ended the period with just over $220 million of total liquidity. We delivered these results while navigating a turbulent market environment and advancing the strategic initiative we announced on our last call to strengthen our tenant credit profiles and optimize occupancy across our portfolio. The broader macro environment, particularly the ongoing uncertainty around tariffs, has weighed on economic forecasts, inflation trends, consumer sentiment, and business planning. Against this backdrop, we continue to perform focusing on optimizing occupancy of our portfolio, opportunistically recycling capital, and executing on growth initiatives on a disciplined selective basis. Year to date, we have acquired a $7.8 million industrial facility in Maryland, sold a cultivation facility in Michigan for $9 million, and executed two new leases totaling 211,000 square feet. Now Ben will provide more detail on our investing, leasing, and disposition activity. In addition, we strategically undertook steps to strengthen our financial foundation and drive long-term shareholder value. Year to date, we repurchased $20 million of our common stock at what we believe are compelling valuations, and retired nearly $9 million of debt at a discount. To further enhance our capital structure, we also issued $10 million of preferred equity. These actions underscore our disciplined approach to capital allocation and our commitment to maximizing returns for shareholders. Now David will provide more detail on our financial results and capital positions shortly. As we announced in March, we are proactively working to refresh a portion of our tenant base to better position our company for sustainable growth and financial performance. As part of this effort, we issued default notices for non-paying tenants and are aggressively pursuing all legal remedies available to enhance the performance of our real estate portfolio. We are encouraged by our progress so far and believe it reflects our management team's ability to navigate complex situations effectively, with a focus on protecting shareholder value. We remain confident in the strength of our business and the opportunities that lie ahead. We look forward to keeping you updated on our continued progress. With that, I'll now turn the call over to Paul. Paul?

Thanks, Alan. As we noted last quarter, we are taking a strategic and aggressive approach to replacing our defaulted tenants. I'd like to provide some additional color on our progress with each tenant. Shortly after sending our default notices in March, Gold Flora filed for voluntary receivership in the state of California and announced the suspension of trading on CBOE Canada. Stone Blossom Capital has been appointed as the receiver of the company and we are currently in town. We are also in touch with Stone Blossom to discuss their plan for our properties leased to Gold Flora. Also in March, we issued default notices to Tilt Holdings and following the delivery of these notices, Tilt made partial payments in satisfaction of their April rent obligations for the two properties we leased to them. We are working in good faith to resolve outstanding rental and other financial obligations under the leases while Tilt works to complete the planned divestiture of their plant-touching businesses. In the plan and forefront ventures, we have issued default notices and are actively working with local council to aggressively pursue our legal rights under the leases, including evictions. Understanding that each state is different, which impacts the timing and complexity of recovering these properties, we are working diligently through the process and will provide updates as we progress. On the regulatory front, the States 2.0 Act was introduced in the House last month with bipartisan co-sponsors. As a reminder, this Act would make state legal cannabis businesses federally legal and would also eliminate the punitive 280E tax, among other benefits. In addition, during last month's confirmation hearing for Terrence Cole, President Trump's nominee to lead the DEA, Cole stated that reviewing the rescheduling of cannabis would be among his top priorities if confirmed. And at the state level, Pennsylvania, Florida, and Minnesota are making significant strides in their adult-use cannabis legalization initiatives. Pennsylvania is exploring legalization of adult-use cannabis, with Governor Shapiro's budget proposing legalization effective July 1, 2025, with sales anticipated to begin by January 1, 2026. In Florida, the Smart and Safe campaign aims to put adult-use cannabis back on the ballot for the 2026 election after receiving 56% support in last November's election. Finally, Minnesota's Office of Cannabis Management progressed its regulatory framework by publishing its final rules in April. With these state-level drivers and continued strong consumer demand, BDSA forecasts U.S. cannabis sales to grow by 7% to $33.5 billion in 2025 and projects a compounded annual growth rate from 2024 to 2029 of 7.2%, reaching $1.5 billion in 2025. BDSA estimates U.S. cannabis sales to grow by $44.4 billion by 2029. That said, competition from the illicit market, price compression, market maturity, and few new adult-use markets may continue to weigh on investor sentiment and operator performance. These market conditions are a key driver of our re-tenanting philosophy of focusing on bringing -in-class operators to our mission-critical real estate. I'd like to now turn the call over to Ben to discuss our investment, leasing, and disposition activity. Ben? Thanks, Paul.

For my prepared remarks, I'd like to touch on our portfolio initiatives described by Alan, leasing, selective investment activity, and opportunistic capital recycling. During the first quarter, we acquired a -square-foot industrial property in Maryland and entered into a long-term lease with a private Maryland operator, expanding our footprint in the state to approximately 316,000 square feet. And in April, we closed on a $9 million disposition in Michigan for our property previously leased to Emerald Growth and executed a PSA to sell another property in Palm Springs, California. These three transactions illustrate our team's focus on strategic investments and opportunistic capital recycling. On the leasing side, over the first four months of the year, we have executed two new leases totaling 211,000 square feet, including a full-building lease for our -square-foot property in Warren, Michigan with Berry Green, one of the largest cultivators in Michigan with one of the top-selling brands in the state. We are encouraged with the demand we are seeing for our assets across markets and the leasing progress we have made this year, while also continuing to source attractive new investment opportunities, which we will continue to pursue on a very selective, disciplined basis. With that, I'll hand it over to David.

David? Thank you, Ben. For the first quarter, we generated total revenues of $71.7 million, a .5% decrease from the fourth quarter of last year. The decrease was primarily driven by the tenant defaults we previously disclosed in March. The decline was partially offset by increased revenues from properties we recently acquired or re-tenanted, additional funding and building improvements that resulted in base rent increases, and contractual rental escalations. During the quarter, we applied $5.8 million of security deposits for the payment of rent on properties leased to four tenants. Adjusted funds from operations for the first quarter was $55.3 million, or $1.94 per share, a decrease of 13% compared to the fourth quarter of 2024, driven primarily by the same factors that drove the decrease in revenue sequentially. Our balance sheet remained solid this quarter, supported by $2.6 billion in gross assets, with nearly $2.2 billion of those assets unencumbered. Our only debt consists of $291 million in fixed-rate, unsecured bonds maturing in May 2026. Furthermore, we continued to operate with conservative credit metrics highlighted by 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, which we believe positions us well for long-term value creation. This quarter, we executed on several strategic capital markets transactions to strengthen our financial position. In February, we repurchased $8.8 million of the company's unsecured notes at a discount to par value, and -to-date, the company issued just over 406,000 shares of our Series A Preferred Stock under our -the-Market Equity Offering Program for $10.1 million in gross proceeds. In addition, with the stock repurchase program we established in March, we have the ability to opportunistically repurchase shares that we view as a clear undervaluation of our stock. Since the adoption of our stock repurchase program, we have repurchased 371,538 shares of common stock under this program for a total cost of $20.1 million at a weighted average price of $54.09 per share. Our solid financial position, characterized by strong liquidity and diversified capital markets access, positions us well to navigate the current challenging market environment. With that, I'll turn it back to Alan. Alan?

Thanks, David. As I indicated in my opening comments, I am proud of what our team accomplished this quarter, and we are confident in the future. As long-term owners of our company, thank you as always for your continued support. With that, I'd like to open it up to questions. Operator, could you please open the call up for questions?

Absolutely. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone 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 2. At this time, we will pause momentarily to assemble our roster. Your first question today will come from Tom Catherwood with BTIG. Please go ahead.

Thank you so much, and good morning, everybody. Paul, I want to touch on, you mentioned working with Pharmacan towards a resolution, but I assume the 205,000 square feet that you leased in Michigan in April is Pharmacan's facility. Is that right? Have you gotten control of some of their assets already?

Yes, Tom. Yes, that is correct. That's a Pharmacan facility, and we're really kind of proud of being able to re-tenant that facility as quickly as we did and put in a high quality tenant. We think that is the beginning of a good process, and we'll go down the road with the rest of them as necessary. As we mentioned, we're actively pursuing legal remedies, but at the same time, there's other potential outcomes, including receivership. We're only really a few weeks into this process, and so we think leasing that facility is a really good start for us.

Got it. Just building on that lease, you've also completed just a significant amount of large block releasing in the past 18 months. There's obviously that one, the Pharmacan's, then there was 160,000 square feet in Pittsburgh last quarter, and then another 200,000 square feet in Michigan at the end of 2023. So kind of two questions around that. First, how did these transactions come together? Did you find the tenants or did they find you? And then second, is there anything unique with these tenants in terms of either their strategy or structure or management that makes them different from tenants you were leasing to four or five years ago?

Let me ask Ben to respond to that one.

Yeah, Tom. Yeah, I mean, to reiterate, you're right. We're talking nearly a million square feet of total leasing activity when you go back to late 2023 with our Michigan deal. You know, the sourcing of the tenants comes in all different ways. We're eight years in and have a lot of great relationships and networking in the industry. We're very confident in the team that we have in place to execute and source these tenants. We're very confident in our plan for the portfolio. It's great to see that there are still in challenging markets, groups that can make money. You find efficient operators that are performing well, even in a Michigan and a Massachusetts and California and states that are viewed as a little more challenged. And I think they view a tremendous amount of value in our mission critical real estate. And we've been very encouraged, you know, really across the portfolios that demand we're seeing from these groups.

And Tom, just following up on that question. So a lot of these tenants that are struggling today might most likely have an issue with their balance sheet and their financial position more so than the actual operating business. They're operating in the operating environment while challenging. It can be a very good business. But with the historical balance sheet issues that some of them have, it creates more of a balance sheet issue. And I think that that's what we're discovering. And we are being very focused on choosing tenants that have the ability to operate very well and succeed in the future.

Got it. Appreciate all those thoughts. And then one last one for me. Since you announced the tenant refit fresh program at the end of March, a lot has changed as far as tariffs. And there's been a report out there that, you know, a lot of packaging for cannabis operators comes from China. So since that early April timeframe, have there been any other tenants that you're concerned with their operations or outlook going forward and might have to be included in this refresh program going forward?

Well, as we're monitoring all of our tenants and we believe that the macro environment is still challenging and that there could be future issues. But right now, we're fairly confident that we've got our hands around our portfolio and our tenant base and confident that within a short 18 to 36 month period of time, the ship will generally be righted.

Understood. Appreciate all the answers. Thanks, everyone. Thanks,

Tom. And your next question today will come from Connor Mitchell with Piper Sandler. Please go ahead.

Hey, good morning. Thanks for taking my question. First, I just want to go back to the space that was leased to Barry Green, the 205,000 square feet of the Michigan property, previously Pharmacan. I guess just kind of following on to some of Tom's questioning. What kind of makes this property unique in that you guys were able to lease it so quickly? And then should we expect any others that are in a similar stage? Or do you think that this is going to be a path that might follow for some of the Pharmacan properties or some of the others, as you mentioned, might fall under the process of receivership and might be a little bit longer instead?

Yeah, hey, Connor. This is Ben. I can take that. You know, I wouldn't necessarily say it's unique. I mean, I think this follows a pretty strong track record that the team has here of retenanting these buildings in Michigan, you know, like we've talked about before. You know, I think we do expect that this will play out, as Alan mentioned, over the next 18 to 36 months as we're bringing new tenants in. But again, we've been very encouraged by, you know, the outreach that we've gotten, the inbound interest we've seen really across these buildings in multiple different markets. The groups that we're talking to that I think have the operational expertise and the financial position that we would want in our portfolio. And we feel very good that we've got the right team in place here to execute on our plan for these buildings.

Okay, I appreciate that. And then maybe if you could just remind us, you know, how much of how much the rent or security deposits were received and recorded in revenue in the quarter for the tenants that defaulted on payments for you guys, viewed as part of the cleaning process that we should kind of think about in a modeling perspective stripping out going forward.

David, why don't you go ahead and handle that. But I think that's a really good point that security deposits were used for some rental income in the first quarter and won't be available in the second quarter and beyond. Yeah,

so, Connor, on that, I think as we disclosed, you know, in our press release, there was 5.8 million of security deposits applied for the quarter for those defaulted tenants. It is important to note in the case of PharmaCAN, Forefront and Tilt, those security deposits were exhausted. So, you know, just over 20 cents a share of impact from that benefit.

Okay, and then any rents as well, I think, for some of these, you may receive January payments, but not February or March. In terms of what

we actually

collected? Yeah, just thinking about a modeling perspective going forward, what won't be being received for a quarterly standpoint or even monthly. Yeah,

yeah, we can go into the detail offline, but it was roughly 4.5 million that we collected from the defaulted tenants during the quarter.

Okay, I appreciate that. And then maybe one more for me. You guys made mention in the release of three lease properties that are still, you're waiting on rent commencement due to approvals that haven't been acquired yet. Just wondering if you could give some color on maybe the markets these are taking places in and then if this has kind of changed your investment thesis on these markets, if, you know, the regulatory process, the licensing process is a little bit slower than anticipated and maybe more difficult when you were underwriting the acquisition of the properties.

Yeah, hey, Connor, this is Ben. Yeah, I don't think it changes our view on the markets. I think this is pretty standard across markets and across industries really. I mean, it does take some time for a new operator to get in there, make any improvements they might want to make to the space, ultimately get sign off and approval and final licensing. So I think this is all kind of in the normal course of what we would expect for these assets.

Okay, that's all for me. Thank you. Thanks, Connor.

And your next question today will come from Bill Kirk with Roth Partners. Please go ahead.

Hey, thank you. Good afternoon, everyone. So I wanted to talk logistically maybe about like the remedy where you take possession of some of these properties. And I guess what I want to ask is in the context of not being plant touch, you know, the the property, how does that influence that listing status with the exchanges or what can you do with the property when you were to take possession that keeps you in compliance with what you need to do?

Hey, Bill, it's Paul. So, you know, it's really not a problem for us to date. And when we do take possession, of course, we as in your stock exchange listed company, we do not hold the license. We do not operate the property. So what we've done in the past to ensure a smooth transition is to utilize MSA management service agreement. So we put a third party in there to facilitate the transition into a new tenant and facilitate the license transfer. So we have a good process in place to ensure that, you know, we don't we don't cross any lines with our division from not being a plant touching company.

That's perfect. That's all I had. Thank you. Okay, thanks, Bill.

And your next question today will come from Aaron Gray with Alliance Global Partners. Please go ahead.

Good afternoon and thank you for the questions here. So, you know, I want to piggyback, you know, a bit off some of the questions that have been asked on the resolutions. I understand you're limited in what you can discuss because it's still ongoing and there's a lot of puts and takes. But here's in terms of, you know, timing of a resolution for when there's these active facilities. Is that coming into play? I know a lot of times for the existing, you know, tenants, you know, they want to keep ongoing operations with a new tenant potentially coming in as well. They'd like to have everything, you know, up to date and ongoing as well. So here's how that comes into play, especially when you do have, you know, a crop with a certain amount of, you know, lifecycle there and you want to be fresh and going out to be sold for the best amount of cash flow. So just curious if that comes into play in terms of these negotiations and how you're looking to come to resolutions here. Thank you.

Thanks, Aaron. This is Paul. So, yeah, you're exactly right that it is much more desirable to have a performing facility with the plants in good shape and growing and all the infrastructure up and running to facilitate a good transfer. So that's always the goal. But that being said, if we if we're in a receivership situation, it's a little easier because it's structured and we have the control of the receiver to help facilitate the transfer. But, you know, if we are in an eviction situation, we are willing and able to take over the property, put it into an NSA like I mentioned and clean it out. But, you know, that's kind of a last resort. And even when we're in an eviction, once we take control, you know, we're typically already in negotiations with a replacement tenant. And so, you know, with the cooperation of the departing tenant, we can make that transfer. So, you know, as I mentioned, it's always desirable to have the functioning facility in place on the transfer. And that's our goal.

Really appreciate that, Kyle. That's helpful. And then second question for me, just as we think about potentially returning to getting on the offensive, I think said about 220 million of liquidity available in the presentation. Just given the current set of cannabis, I know that remains a focus, but last quarter, I believe you mentioned that you've broadened investment opportunities. So just curious, you know, today, you know, any more color you can provide on that? You know, where are you seeing potential opportunities to deploy some of that liquidity? Thank you.

Yeah, so we are continuing to evaluate many opportunities. I think that that liquidity comes with a cost of capital, and we're highly focused on making sure that we are looking at opportunities that can provide us in a creative return based on our cost of capital. And unfortunately, the environment does have several unique opportunities, and hopefully in the next short three to six month period of time, we can announce some new investments. But in addition to that, we continue to review and analyze unique opportunities within the cannabis industry and still have a pipeline associated with that.

I appreciate the color there. I'll jump back in the queue.

Thanks, Jared.

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

Thank you. And first and foremost, I'd like to thank you all for joining us here today and again to thank our the team for the hard and great work on this portfolio and stockholders for their continued support. With that, we'll end the call. Thank you.

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