Innovative Industrial Properties, Inc.

Hello and welcome to the Innovative Industrial Properties Inc. fourth quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. I would now like to turn the conference over to Eli Cantor, Director of Finance. You may begin.

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 Regan, Chief Investment Officer. Before we begin, I'd like to remind everyone that some of the statements made during today's conference call, including those regarding potential transactions under letters of intent, are forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, and subject to risk and uncertainties. Actual results may differ materially, and we refer you to our SEC filings, specifically our most recent report on Form 10-K for a full discussion of risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. We are not obligated to update or revise any forward-looking statements, whether due to new information, future events, or otherwise, except as required by law. 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 8K filed with SEC. I'll now hand the call over to Alan.

Thanks, Eli, and good morning. Thank you for joining our call. 2025 was a year defined by discipline execution, balance sheet strength, and strategic repositioning for long-term growth. For the full year, our diversified platform of over $2.5 billion of gross assets generated approximately $200 million of cash flows from operations. In addition, since our inception in 2016, we have returned $1.1 billion to shareholders through dividends, reflecting the durability of our business model and our continued focus on sharing our cash flows with our shareholders. We invested capital in 2025 selectively and accretively, committing $275 million across our real estate portfolio and through our strategic investment in IQ HQ, further strengthening and diversifying our platform. Operationally, we made meaningful progress across the portfolio. During the year, we executed new leases at four properties totaling approximately 339,000 square feet, reinforcing our belief in the quality of our assets and the ability of our team to drive performance within our portfolio. For the year, we generated total revenues of $266 million and AFFO of 205 million. We also strengthened our liquidity position for the year by raising $100 million under a new revolving credit facility in October and issuing approximately 25 million of preferred stock through our ATM. For 2026, we continue to access the capital markets opportunistically and have raised over 40 million of preferred stock and an attractive yield of just over 9.5%, surpassing the amount we raised in all of 2025. We exited the year with total liquidity exceeding 105 million, including cash and availability under our credit facilities. As we diversify our platform, we remain confident in the long-term fundamentals supporting the life science sector. Discussions at the recent JPMorgan Healthcare Conference continue to reinforce our conviction that the sector is exhibiting early signs of renewed momentum, including improving capital availability for well-capitalized life science companies, increased strategic activity among large pharmaceutical companies and continued innovation. Together, these trends are supporting sustained demand for specialized real estate within leading life science markets. Before I turn the call over to Paul, I'd like to briefly address the recent regulatory development impact in the cannabis industry. President Trump's executive order directing the rescheduling of cannabis to Schedule 3 represents a significant regulatory development for the industry. While the timing and ultimate implementation remains uncertain, we believe this development is directionally positive for the industry, our tenants, and our shareholders. Our actions in 2025 reflect a meaningful step in our evolution and our return to growth. We believe the combination of a diversified portfolio across cannabis and life science, a strong balance sheet, and an experienced management team positions us to continue strengthening our platform and delivering long-term value for our shareholders. Now, with that, I'll turn the call over to Paul.

Thanks, Alan. I'd like to begin by reinforcing the significance of the recent executive order directing the rescheduling of cannabis to Schedule III. While the timing and final implementation remain unclear, this represents one of the most substantial regulatory developments for the industry in many years. If enacted, rescheduling may eliminate the punitive impact of 280E for our tenants, which we believe would meaningfully improve operator cash flows, strengthen credit profiles, and support additional investments across the industry. In addition, the executive order highlighted concerns regarding the proliferation of hemp-derived THC products. Recent legislation closing certain loopholes under the 2018 Farm Bill is expected to restrict hemp-derived THC products beginning in November 2026, which should reduce unregulated products and support consumer safety across the U.S. At the state level, we are tracking several meaningful catalysts on the horizon. including the potential commencement of adult use sales in Virginia and possible adult use legalization in Pennsylvania and Florida. We own 16 properties totaling approximately 2.6 million square feet in those states, accounting for approximately 26% of annualized base rent. And we believe our real estate and tenant base are well positioned to benefit as those markets transition to adult use. Regarding our current portfolio, As you recall, last March, we announced initiatives to replace non-performing tenants and enhance the performance of our portfolio. Since then, receivership and legal proceedings have been ongoing for Forefront Ventures, Pharmacan, and Gold Flora, where we have continued to actively pursue our legal rights and protect our interests under those leases. We have been actively engaged across these assets and are pleased with the significant progress that has been made. We have signed leases LOIs and are in various stages of review for over 900,000 square feet of leasing activity related to those assets, which Ben will discuss in more detail. We believe we are at an inflection point in our efforts to bring resolution to the previously non-performing assets in the portfolio and believe future quarters will reflect the realization of earnings upside from these actions. We are extremely proud of our team's execution and track record of re-tenanting our assets quickly and efficiently, maximizing value of our portfolio and driving long-term value for our shareholders. Lastly, we are also pleased to share a legal update. Last month, we received a judgment in our favor of $7 million for unpaid rent and damages due from Temescal Wellness, a former tenant at a property in Massachusetts. I'd like to now turn the call over to Ben to provide additional details on our leasing success and to discuss our other investment activities. Ben? Thanks, Paul.

To recap our year in 2025, we executed new leases totaling 339,000 square feet across properties located in California, Massachusetts, and Michigan, opportunistically closed on three dispositions, and closed on approximately $275 million in new investment activity including one cannabis acquisition and our strategic investment in IQHQ, of which we have funded $150 million to date. We've continued to build on this momentum heading into 2026. As Paul described, we've been very pleased with the activity we are seeing related to the Gold Flora and Forefront receiverships, as well as our legal pursuits related to Pharmacam. Gold Flora filed for voluntary receivership in March of 2025, and we have since made meaningful progress releasing our three properties. We executed a lease agreement with a new tenant for our 70,000-square-foot Palm Springs asset during the fourth quarter, executed a lease agreement with a new tenant for our 204,000-square-foot Desert Hot Springs asset last month, and we have received multiple offers for our 56,000-square-foot Palm Springs asset. Overall, we were very pleased with the outcome of the receivership proceedings and the resolution achieved with respect to these properties. Regarding our four assets previously leased to Forefront, we have made significant progress on our re-tenanting initiatives for these assets. This quarter, we reached a tentative agreement with a tenant to lease our 114,000 square foot Washington property and expect lease execution and rent commencement in the near term. For our 250,000 square foot asset in Illinois, we have executed an LOI for the full building with a new operator, which is expected to go into effect at the closing of receivership proceedings anticipated in the coming quarters. For a 67,000 square foot property in Georgetown, Massachusetts, a stocking horse bidder has been selected by the receivership estate, and we have agreed to lease terms with this bidder. We also expect this new lease agreement to become effective upon the conclusion of the receivership process. For our 57,000 square foot property in Holliston, Massachusetts, we have received multiple offers to lease the building, which are currently under review. We look forward to continuing to move these transactions forward and bring resolution to these properties. Moving on to our properties leased to Pharmacan, we continue to be pleased with the progress we have made retenanting our six cultivation assets. In early 2025, we regained possession of our 205,000 square foot cultivation asset in Michigan and subsequently executed a lease with a new tenant in April. We also successfully regained possession of our 58,000 square foot cultivation asset in Massachusetts and executed a lease with a new tenant in November. In Illinois, as we reported last quarter, the judge ruled in our favor with respect to our 66,000 square foot cultivation property, and we successfully regained possession of the asset in late December, subsequently signing an LOI with a new tenant for the property in January. Looking ahead, we expect to receive similar rulings from the courts in Pennsylvania, Ohio, and New York, and are encouraged by the inbound interest we have already received across these assets. Apart from these properties, we are also pleased to report that we signed an LOI in February with a new tenant for our 71,000 square foot vacancy in North Adams, Massachusetts. In parallel with our leasing initiatives, we've also pursued selective asset sales to opportunistically recycle capital. During 2025, we sold three assets located in California, Colorado, and Michigan, and also closed on the sale of a dispensary in Phoenix earlier this month. These dispositions reflect our ongoing efforts to opportunistically prune non-core assets from our portfolio, enhance overall portfolio quality, and redeploy capital towards other investments. Regarding our strategic investment in IQHQ, to date we have funded $150 million of our $270 million commitment, with the additional $120 million expected to be funded over time. We are encouraged by this investment, and we believe the life science real estate market continuing to stabilize following a prolonged period of elevated supply. The current construction pipeline of approximately 6 million square feet is at its lowest level since early 2019 and is down sharply from the 2023 peak of more than 37 million square feet. Signs of stabilization are beginning to emerge in key markets. Recent reports from Cushman and Wakefield and Colliers highlight improving fundamentals in select regions. In Boston, annual new demand totaled 2.1 million square feet, surpassing 2024 totals by approximately 72%. The San Francisco Peninsula recorded its first decline in vacancy in more than two years in Q4 2025. Continued growth among life science and AI tenants is expected to support sustained improvement in market conditions in 2026 as supply moderates and demand gradually improves. With that, I'll turn the call over to David.

Thank you, Ben. For the fourth quarter, Total revenues were $66.7 million, and AFFO totaled $53.3 million, or $1.88 per share, representing a 10% improvement compared to our third quarter 2025 AFFO of $1.71 per share. This quarter-over-quarter improvement was primarily driven by $3.7 million, or $0.13 per share, of payments received for unpaid rent due during the gold floor receivership, and a full quarter's benefit of earnings accretion from our initial investment in IQHQ. For the first quarter of 2026, as Ben detailed, we continue to pursue the recovery of unpaid rents for certain default tenants, and so far have received an additional $3 million, 10 cents per share, related to our Gold, Flora, and Farm to Can properties. On the capital markets front, We have raised over 145 million of attractively priced debt and preferred equity since October 2025. For preferred stock, during the fourth quarter of 2025, we issued approximately 5 million on our ATM, and we have already issued over 40 million of preferred equity at an attractive yield of just over 9.5% early in the first quarter of 2026, reflecting continued strong investor demand for this perpetual security. We have now grown our Series A preferred stock to 95 million of par value outstanding through our ATM issuances. On the debt front, during the fourth quarter, we added a new 100 million revolving credit facility secured by our investment in IQHQ, which provides us with low cost, flexible capital at an attractive rate of 6.1% and further enhances our liquidity profile. When we announced our IQHQ transaction in August, We believe one benefit would be the potential to access lower-cost capital, and we are pleased to see that come to fruition with the closing of this new credit facility. This continued access to capital strengthens our ability to fund growth opportunities while maintaining a conservative balance sheet. Our balance sheet remains strong, supported by over $2 billion of unencumbered real estate and a conservative capital structure with a debt service coverage ratio exceeding 10 times and a net debt to adjusted EBITDA of 1.4 times. We ended the quarter with over $107 million in total liquidity, including cash on hand and availability under our revolving credit facilities, which was further improved with our year-to-date preferred stock ATM issuances I mentioned earlier. As it relates to our bond maturity at the end of May, we are actively evaluating a range of alternatives to address the obligation, including potential refinancing and other capital sources. We believe our unencumbered asset base of over 2B of real estate and our strong credit profile position us well as we pursue these alternatives. With that, we thank you for joining the call and would like to open it up for questions. Operator, can you please open the call for questions?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. Please ensure that your phone is not on mute when called upon. Thank you. Your first question comes from Tom Catherwood with BTIG. Your line is open.

Thank you, and good morning, everybody. Great to see the leasing progress in the fourth quarter and obviously so far this year in 2026. In terms of this uplift, are cannabis operators looking to expand again? Are they looking to move up the quality spectrum with new space? Or did you adjust your leasing strategy this past quarter? Or is there something else driving this increase in activity?

So first of all, thanks for the question. I think that there's a lot of things going on here. One, we have a an extremely experienced management team that's been involved with this industry for the last eight plus almost 10 years. And they're executing on the business plan that we we've set out in at the end of 2024 and throughout 2025 and continue. And we believe we're going to continue to execute that business plan throughout 2026. This this return to growth comes from, as we described in our past quarters, that we were seeing some green shoots in the industry. And those green shoots have allowed, we believe, the strong operators in our industry to take advantage of some of the weaker operators who haven't been able to navigate these difficult times in the industry as well. But we still believe that there are significant challenges in the cannabis industry, although we do see unique opportunities. And working with some of the best growers that are in our portfolio and in the country, We believe that there are unique opportunities to take advantage of those. Now, Ben, do you have anything? Or Paul, do you have anything else you want to add?

Yeah, this is Ben. Yeah, I would just add I think the rescheduling news is certainly seen as a positive amongst the operators. We've seen a number of our top tenants successfully execute refinancings or new debt raises in the last handful of months. PureLeaf, Trulieve, GTI, Cresco, among those. And I think they view these expansion opportunities as a relatively cost-effective way to move into what we believe are high-quality, turnkey facilities. And we're really excited about the team's ability to convert that interest into the leasing activity that we've been talking about.

I appreciate all those answers. And Ben, maybe as a follow-up to that, There's a difference sometimes between headlines and kind of what's actually happening on the ground. And when we think of US cannabis, we hear the headlines of oversupply in Massachusetts and Michigan and California. You've had success releasing in those markets. And you've also had success in stronger markets like the recent leases in LOIs in Illinois. How does the approach differ, if at all, between those two markets? Or are the headlines kind of overstated when it comes to the ability to release in more competitive states?

Yeah, I mean, I think that the headlines are just a very general, high-level view of some of these markets. And I think when you really understand and, you know, using our experience over the last decade to really understand the nuances of each market, they're, you know, finding the successful, efficient operators in markets like California and Massachusetts and Michigan. And, you know, identifying the groups that we believe in, that we think that can grow their business in a profitable way and bring them into our portfolio, we think makes a lot of sense. I think it's the same approach that we would take in any market.

Got it. Appreciate that, Ben. Thank you. And then last one for me, just wanted to clarify on the tenants that are in default. It sounds like kind of the outcomes are falling into three buckets. It's either the receivership is working through and the rents are going to commence again at the end of the receivership process, or the second bucket is you're getting space back and obviously releasing that. And then the third bucket is some tenants continue to pay, though you're not necessarily recognizing that rent and continue to look to regain their facilities. Of those, who falls in the rent could commence near term at the end of receivership and who falls into the releasing and still fighting to regain properties buckets?

I'll turn these questions over to both Paul and Ben. Just as a point of clarification, if we receive rent, we recognize rent. There is no There's. And and and that's what we've done. So I think that third bucket of there are tenants that that are in default and the court has ordered them to pay rent or put Brent in escrow and that and once that money is released, we recognize that that Brent. So let's just. just as a point of clarification. But with that.

Hey, this is Paul. Hey, Tom. So I would simplify it a little more. I'd really say two buckets. We look at the defaulting tenants that are in receivership and those that are currently in litigation. So, you know, we talked in detail about the receivership gold floor and forefront. I think we've had some great results in resolving those and understanding that receivership Typically, there's administrative costs, and that's deferred rent that we're not getting currently, and we get that at the end of the receivership, typically. The other bucket is primarily Parmakant, that we are in the late stages of the litigation process with those cases, and we think we're gonna have resolutions in the near future on those. So we look at it a little more simplistically. You know, those are receivers and those are not. But either way, we're very pleased where we are today compared to where we were a year ago. And I think Ben and his team have done an outstanding job releasing those assets where, you know, a year ago there was some question. I know people had, gee, these are tough markets. Are we going to have difficulty entering these leases? But we proved those people wrong and done a good job releasing those.

Got it. Appreciate all the answers. Thanks, everyone.

Your next question comes from Aaron Gray with Alliance Global Partners. Your line is open.

Hi, this is John on for Aaron. Thank you for the question. So regarding the LOIs that have been signed or new term agreements you've come to with the forefront assets, could you provide some color on the new rental rates and How that differs versus the rates paid by the respective tenant prior to default. Obviously, it probably varies by each property and state, but any detail on a broad haircut that might have needed to be applied would be helpful.

Hey, John, this is Ben. I think a couple things there. Obviously, for some of these deals, these and others are still in negotiations for competitive reasons. We won't be disclosing anything. The exact numbers deal by deal, I think, broadly speaking, we have seen a variety. There's some unique circumstances where in certain assets historically, you know, you could be around, you know, 50% below 50% of contract. And we've had instances where you're pretty much right on top of the prior lease rates. It's a pretty, a pretty wide range. Um, you know, depending on each individual situation.

And I would also add that we've seen some very positive situations where the capex has been significantly lower on releasing than anybody's anticipated. Is that right?

Yeah, I think that's exactly right. And a great thing to keep in mind is, you know, we're typically, you know, 10 bucks a square foot, 15 bucks a square foot and below for these releasing activities. You know, a lot of tenants that have come into our assets, if anything, have invested their own money to make additional improvements to our buildings. So these rental rates come along with a minimal capital outlay on our end, which has been great to see.

And all those factors go into the rental rate that is finally negotiated.

Okay, great. Thank you. And second, regarding the dividend and earnings coverage going forward, on one end, you've had some more one-off payments from defaulted tenants, particularly in 4Q that aided in bridging the dividend gap. You also have the IQHQ interest income, which should continue to build, along with new lease tenants from the previously defaulted. So on a normalized basis, do you feel in a better position to have the dividend full covered in the near term or are incremental steps like getting more of the properties released needed?

Well, I think first of all, our dividend policy is set by our board and they review what has occurred in the past and the projections going forward. What we're seeing is this return to growth, and we're seeing strong releasing activity, which is driving revenues, and we continue to see, and we have the resolutions of some of these major lease or major litigations, and with those resolutions, and the leasing activity we're seeing, we continuously feel positive about where we are with regards to our dividend.

Great. Thank you. I'll hop back in the queue.

Your next question comes from Bill Kirk with Roth Capital Partners. Your line is open.

Hey, everybody. So following the executive order, what have you seen in regards to tenant health and maybe more importantly, like willingness to be prompt payers? I know we already talked a little bit about the 280E elimination and how that improves future health, but what about now, before the rescheduling change? What are you seeing from tenant willingness and tenant health?

Well, I think our tenants are, as we've reported, are paying their rents. and they're paying them on time and per the leases. But I'll turn that back. I'll turn the question over to Paul to talk about the rescheduling and how that's benefited the industry.

Yeah, I think, Bill, you followed closely. The announcement two months ago by the president on the executive order was very significant, and that's created a lot of buzz, I think, and some positive feelings in the industry, especially with our larger MSOs that are looking to grow, looking to acquire leases in new states as evident by our releasing activity that we reported. So, you know, there is some question as to when and how the EO will be implemented, but it's going to get done. I think that is the feeling from the industry now. So, you know, despite the fact there is some uncertainty as to when, we see a definite positive vibe just from the announcement of the executive order.

Right. And I guess that is one of the green shoots that we've seen. But the closing of the border, the tightening of wholesale pricing in some of the markets, all of those, I think, go to helping the health of our tenants improve.

Thank you. And there's a possible or looming, I guess, intoxicating hemp ban in the U.S. in mid-November of 2026. A lot of that intoxicating hemp product competes against your tenants. Is that in your improved outlook for releasing or the way the tenants are feeling about their prospects having a potential intoxicating hemp competitor go away this year?

It's an interesting comment, and I think that we're going to have to wait to see. We think that the strengthening of the markets is a multifaceted situation, and every one of these small incremental improvements help all our tenants.

Thank you guys. All the best.

Thank you. Thanks, Bill.

The next question comes from Alexander Goldfarb with Piper Sandler. Your line is open.

Hey, good morning out there. Just a few questions. First, thank you for the increased new table on the troubled tenants and how much they've paid over time. Hopefully that can extend to the leases that have been resolved you know, definitively versus in the works. It just helps with all the discussion. So a few questions here. First, just going to the opportunity set, you know, you have that interesting table chart that shows the size of the cannabis industry, the lawful cannabis industry versus the various alcohol industries. And, you know, cannabis is pretty big, especially if you were to even include the illicit market. But, you know, just given how sizable it is, you know, you guys talk more about going to life science. So is it, you know, as we think about the company over the next few years, even as more states contemplate legalizing and perhaps, you know, the cannabis is downgraded to schedule three, is it your view that the life science offers a better, you know, risk adjusted return over the next several years, even if cannabis is able to resolve, you know, its current issues and get back to more of a growth arena?

Well, I think that the diversification into the life science industry is multifaceted also. And it's not only that. I mean, it's not only about the unique opportunity that we saw in the life science industry, how that industry had perhaps hit rock bottom and that there were green shoots and increasing opportunities. and a way to use our cost of capital or take advantage of opportunities with our cost of capital. So I think you have that as one of the reasons for diversification, but you also have the fact that by diversifying, we might open ourselves up to greater avenues of capital and and giving us the opportunity to reduce our overall cost of capital with that diversification. And I think that we are executing on that and seeing some of the benefits of that as we move forward.

And then along those lines on HQ, I think last time you updated us on the pre-leasing or the leasing, I think the portfolio was roughly 25% leased. Is there an update? Has that changed at all or is it still about where it was?

They are a private organization. They haven't disclosed anything publicly yet, although we are seeing significant increased leasing activity in the markets in general, specifically in the Boston markets, Boston and then the Bay Area. And it's historically what we've seen when the industry recovers, when the life science real estate sector recovers, it recovers first in the Boston area and then the Bay Area, and then it moves to San Diego. And we're seeing that come to fruition now.

Okay. And then just the final question is, I noticed in the update in your K on litigation, the SEC has now entered the fray, but you guys don't have any legal reserve. Can you just comment on what we just should expect for legal costs this year? I think it's averaged about $2 million over the past few years, and obviously that's all-encompassing. It's a variety of things. You clearly have been pursuing various tenants who haven't been paying, but can you just sort of give us an expectation for legal costs and

what causes a company to set aside a legal reserve versus right now you don't you don't have one yeah alex it's david i mean on the uh on the legal reserve uh we have not taken that uh our auditors have not required to do it either as as was disclosed in the 10k and so we'll be working through that there will be there will be costs but it's hard to hard to estimate at this point

I would add, this is Paul. Alex said, you know, a lot of the legal costs have been attributed to the tenant defaults in our efforts to, you know, oust them from the properties and go along with the receiver shift. So there's significant costs there we think will be resolved in the next couple of quarters. So there will be some savings there on the legal fund.

But what causes on the reserve?

what causes the auditors to make a company you know just generically a company to set aside a reserve versus you know no reserve yeah we just i would just point to you know the statement in the 10k where it says neither probable you know nor unlikely and until it becomes one of those you know probable that could could require something okay that's that's helpful listen thank you all right thanks a lot this concludes the question and answer session

I'll turn the call to Alan Gold for closing remarks.

Thank you. And first and foremost, I'd like to, I need to thank the team for their great execution, their strong work to get us to where we are today and how we believe we're prepared for future opportunities as time evolves. And we also thank the support of our stakeholders. And with that, I will end the call. Thank you.

This concludes today's conference call. Thank you for joining. You may now disconnect.