Innovative Industrial Properties, Inc.

Hello, everyone. Thank you for joining us and welcome to the Innovative Industrial Properties, Inc. Q2 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Eli Kanter, Director of Finance.

Thank you for joining the call. 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 some of the statements made during today's conference call including statements regarding architectural lease transactions that are subject of 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 Forms 10-K and 10-Q, for a full discussion of risk factors that could cause actual results to differ materially from those contained in 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 Thanks, Eli. Good morning, everyone, and thank you for joining our second quarter 2026 earnings call. This quarter was defined by strong execution across our platform.

Thank you for joining us. continue to see leasing activity across our cannabis portfolio and executed multiple strategic financing initiatives that further strengthened our balance sheet and enhanced our financial flexibility. Our investment in IQ HQ reflects our disciplined approach to capital deployment and ongoing portfolio diversification through opportunistic investment activity. Since our initial announcement in August of 2025, IQHQ has announced meaningful leasing activity and other operational developments across its portfolio. With the successful completion of our funding commitment, we continue to believe this investment is supported by the quality of the underlying assets and improving fundamentals in the life science sector. Importantly, our team remains actively engaged in evaluating a growing pipeline of opportunities in the life sciences sector. positioning IIPR to deploy capital selectively and accretively. Leasing execution was another key highlight of the quarter. Year-to-date, we have completed new leases at five properties totaling approximately 389,000 square feet while advancing several additional re-leasing initiatives. These efforts reflect the team's continued focus on driving occupancy, Stabilizing Assets, and Maximizing the Value of Our Cannabis Portfolio. Equally important, we delivered significant progress on the balance sheet. During the quarter, we completed approximately $150 million of secured term loan financings, efficiently addressed our $291 million senior debt maturity in May, and continue to utilize our ATM programs across both common and preferred equity. Most notably, we We successfully executed an upsized $402.5 million exchangeable notes offering, demonstrating strong investor demand and providing substantial growth capital. In connection with this transaction, we also repurchased approximately $80.5 million of our common stock. Taken together, these accomplishments highlight the strength of our platform, active portfolio management, consistent leasing execution, and Proven Access to Capital at Scale. With a fortified balance sheet, a differentiated investment strategy across cannabis and life sciences, and an experienced management team, we believe we are well positioned to continue creating long-term shareholder value. Now with that, I'll turn the call over to Paul.

Thanks, Alan. At the federal level, cannabis reform continued to move forward. The DEA completed its hearing last month on the proposed rescheduling of marijuana more broadly from Schedule 1 to Schedule 3. The matter now moves to the Administrative Law Judge for a recommended decision before returning to the DEA for final action. The timing remains uncertain, but completion of the hearing represents another meaningful step forward in the federal cannabis reform process. We are already beginning to see that progress reflected in the capital markets. In June, Trulieve became the first U.S. cannabis operator to list on the New York Stock Exchange after restructuring its consolidated business around state-licensed medical cannabis. Curaleaf, Verano, and Ascend Wellness have also taken steps towards potential listings on major U.S. exchanges. Broader access to those exchanges could expand the industry's institutional investor base and provide more traditional sources of capital Benefiting All Stakeholders Thanks, Paul.

During the first half of the year, we executed new leases totaling 389,000 square feet across five properties located in California, Illinois, and Ohio. This is in addition to the 488,000 square feet of agreements we have in place across the four assets previously leased to Forefront Ventures. These agreements are still subject to customary due diligence, including licensing and regulatory approvals, and there can be no assurance that these discussions or negotiations will result in executed leases. As Paul described, we expect to regain possession of our two Florida properties leased by parallel, totaling 593,000 square feet. Florida remains the largest medical cannabis market in the country, supported by a broad patient base, strong consumer demand, and a limited license structure. We believe these fundamentals provide a compelling foundation for continued growth, with the potential for adult use legalization representing an additional long-term catalyst. We are optimistic that these market conditions will translate to meaningful demand for our facilities. We continue to be encouraged by not only the level of demand for our assets, but the capital-efficient manner in which we have been able to retenant our properties. Based on the approximately 877,000 square feet of gross leasing activity we have described, we estimate that average total leasing costs for these assets will be less than $5 per square foot. Turning to dispositions, during the quarter, we closed on an $88.5 million sale of our 389,000 square foot facility in New York to Vireo Growth pursuant to a tenant purchase option. At closing, we received a down payment of approximately $39 million and provided approximately $49 million in seller financing at a 15% interest rate. We also closed on the disposition of our land site in San Marcos, Texas, and are under contract to sell two retail properties in Michigan and California. each of which remain subject to customary closing conditions and other contingencies. Together with the sale of a dispensary property in Arizona earlier this year, these transactions reflect our ongoing strategy to opportunistically monetize select assets and recycle capital across the portfolio. Turning to our investment activity this quarter, we continue to execute on our strategy to diversify our platform and increase our investments in the life science industry. Specifically, we fully funded the remaining $120 million on our $270 million commitment to IQHQ. As described by IQHQ in their June press release, IQHQ recently entered into a long-term lease with advance sale for the entire 128,000 square foot, one corporate drive building at Innovation Park, IQHQ's life science and advanced manufacturing campus in Andover, Massachusetts. Advance Cell, a clinical stage radiopharmaceutical company, announced in their June and July 2026 press releases that it recently completed an oversubscribed $315 million Series D financing, and One Corporate Drive is expected to serve as its manufacturing site in the United States and its global headquarters. The Advance Cell lease follows the 244,000-square-foot lease IQHQ announced with Lila Sciences at its Alewife Park asset in 2025. and represents approximately 372,000 square feet of gross leasing activity across these two assets since we made our initial investment in IQHQ. This leasing activity comes at a time when we are seeing encouraging signs across the broader life sciences market. Recent reports from CBRE and JLL indicate that leasing activity across the major US life science markets increased to approximately 3 million square feet during the first quarter. above the 2025 quarterly average. Also, according to these reports, Boston, San Diego, and the Bay Area have averaged a combined 75 life science leases per quarter over the past two years, representing a 35% increase from pre-pandemic levels. Venture capital funding increased 12% year over year to $7.4 billion, bringing the funding over the last four quarters reaching its highest level since 2022, while biotech R&D employment reached a record level after five consecutive months of growth. and, although vacancy remains elevated, the development pipeline is down over 85% from the 2023 peak and of the pending new supply, approximately 72% is pre-leased. The unleased supply pipeline now represents less than 1% of the total existing life science inventory across the country. Taken together, these trends continue to reinforce our confidence in the long-term fundamentals of the sector. With that, I'll turn the call over to David.

Thank you, Ben. For the second quarter, we generated total revenues of $63.3 million compared to $69 million in the first quarter. The decrease was primarily driven by reduced payments received from certain default tenants, partially offset by contractual rental escalations, and incremental revenue from leasing activity. Adjusted funds from operations for the quarter were $53 million, or $1.83 per diluted share, compared to $53.4 million or $1.88 per diluted share in the prior quarter with this decrease again driven by the items I mentioned previously. Turning to capital markets, during the quarter we remained focused on proactively strengthening our balance sheet and addressing our May debt maturity through a series of coordinated financing transactions. During the quarter, we completed nearly $150 million of secure term loan financings through five separate transactions and continue to access the equity markets opportunistically, raising $35 million through our common stock ATM program and $21 million through our preferred stock ATM program. Together with cash on hand and availability under our revolving credit facilities, these actions support the full repayment of our $291 million of notes due in May, eliminating a significant debt maturity and further strengthening our balance sheet. Following the payoff of our May bond maturity, With a well-positioned balance sheet, we turned to growth. In June, we launched a convertible debt offering, and due to strong investor demand, we were able to complete an upsized offering of $402.5 million of exchangeable notes due 2029, priced at an attractive 6%. In connection with the transaction, we also repurchased approximately $80.5 million of our common stock. A portion of the remaining net proceeds were used to repay borrowings under our revolving credit facility, with a balance further enhancing our financial flexibility and supporting our long-term strategic growth. As a result of these financing activities, we ended the quarter with a strong and flexible balance sheet with total liquidity of $300 million consisting of cash on hand and availability under our revolving credit facilities. Our balance sheet credit metrics remain strong with net debt to adjusted EBITDA 1.7 times and net debt to total gross assets of 14%. We believe our conservative capital structure, diversified access to multiple capital markets, and ample liquidity position us well to support our existing portfolio and drive continued long-term accretive growth of the platform. With that, operator, could you please open the call for questions?

We will now begin our question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from the line of Aaron Gray with Alliance Global Partners. Aaron, your line is open. Please go ahead.

Hi, good afternoon, and thank you very much for the questions here. So I know you guys had a lot of activity in the quarter. Maybe just to start off, how best to think about with the increased liquidity, how you're thinking about deploying and allocating that? You mentioned some of the opportunities within life sciences. Obviously, you've had the legacy cannabis. So as we think about some of the opportunities you're seeing for that to be deployed, maybe just some commentary between the two sectors and whether or not you see them and more in terms of larger chunks of deployment or are you seeing them kind of spread out through smaller? Thank you.

Sure. I think that's a great starting question because it goes to our belief that we now are positioned for growth. Growth and it allows us to take advantage of the execution that we've done on the balance sheet and obviously the and the execution we've done in the current portfolio. But our diversification that we talked about in the last several quarters continues to be progressing well. As you will note, we've completed the commitment to IQHQ of an additional, I think it was 90 million to a total of $270 million of our commitment into the IQ HQ transaction with our latest commitment generating greater than a 14% plus yield. We see that opportunity to achieve those above average yields and being highly accretive to IIPR still in the life science industry. So we are continuing to move forward with our diversification program. I think that's where we sit today. As to how chunky they are, the life science transactions are fairly large, which does talk about chunky future or large scale future investments potentially. But yet we're also still looking at what we think is an improving I appreciate that, Kyle.

That's really helpful. Second question for me is just on some of the legacy cannabis tenants. Obviously, last year, we looked at some of you guys taking a kitchen sink in terms of being proactive in some of the tenant defaults, and things seem to be improving, but we obviously had the parallel just getting announced. So I just want to circle back on that in terms of your commentary in terms of how well positioned you are with the current portfolio. Things seem to be improving now with 280E. Taxes improved at least for medical, potentially for adult use with Phase II rescheduling. So just wanted to get the broader picture in terms of how comfortable you are today with the cannabis portfolio going forward. Thank you.

And, you know, I think that you can, you know, the parallel transaction was a a slow progressing restructuring that took many years to finally come to fruition. It was started as we've been dealing with it for the last, I don't know, three or four years. And it finally culminated. And yes, we did end up with two very high quality assets in the in Florida, which we believe is a strong market. And we are already receiving interest in those two assets. As to the balance of the portfolio, we believe that the industry is continuing to improve. We certainly feel very positive of the rescheduling and hopeful that the that the further rescheduling process is completed, noting that everything takes much longer than we all want or hope for the positive effects of those actions to occur. We are monitoring all of our tenants. on a quarterly basis and or more regularly. And we are doing our best to make sure that we understand where all of our tenants sit. We believe that our portfolio continues to strengthen and believe that the opportunity to take advantage of the rescheduling that's happening in the cannabis industry will show itself throughout this year and into 2027 and beyond.

Okay, great. Appreciate the caller. I'll go and jump back in the queue.

Thank you. Thanks, Aaron.

Your next question comes from the line of Bill Kirk with Roth Capital Partners. Bill, your line is now open. Please go ahead.

Good afternoon, everybody. I wanted first to ask about the sale of the property in St. Marcus. I guess what changed about the opportunity at that property, particularly as Texas finally gets its medical program rolling?

Hey, Bill, this is Ben. I wouldn't say anything changed. I mean, that was an undeveloped piece of land. That was a transaction that we had done with Parallel a number of years ago. The improvements, the cannabis-specific improvements never went into the site. So we saw a pretty extended runway, even though we think Texas is a great opportunity, until we could potentially have to develop something and get it approved. And we felt that being able to recycle that capital now into some of the very accretive transactions, such as the IQ HQ funding, was a better use of that capital as opposed to a new development.

Okay, so no change in how you're thinking about taxes. That's right. Okay, and then, Paul, you talked a little about how the capital markets are treating the industry differently, maybe treating your tenants a little bit differently, treating you maybe differently. So from a theoretical perspective, with those changing regulations, whose cost to capital is set to improve more, yours or your tenants?

Well, thanks, Bill. I would like to say both. And I think that what we can point to right off the bat is, as far as the tenants are concerned, when we see Trulieve listing on the New York Stock Exchange, if you said that three years ago, you'd think we were crazy. And we look at Curlie, Verano, and Ascend also making moves for uplisting. I think that is a quick way for those operators to gain access to the public capital markets. So that's a big benefit for them, I think, and certainly for them as our credit tenants. I think our cost of capital certainly will benefit in two ways. One, I think, from the fact that our diversification into the life science industry and non-cannabis, we look at lenders and they look at us a little more positive because we're not in the cannabis space. So I think we've seen a direct result of that diversification. And I think just, you know, as well, I think our access in the cannabis space to lenders will certainly improve with rescheduling.

Thank you. Thank you, Paul. Thank you, Ben. I'll pass it along. Thanks, Bill.

Your next question is from the line of Pam Catherwood with BTIG. Pam, your line is now open. Please go ahead.

Ooh, that's a new one. Hello, everybody. I guess I have something to admit. Tom Catherwood with BTIG. Thank you for taking the questions. Just wanted to touch on the leases that you've signed. As you're going to the quarter by our math, there were like nine properties where you had released space, but the tenants hadn't started paying rent. and I know the timing of lease commencements can be hard to predict but run rate revenues seem to come in stronger than we would expect this quarter. Can you give us a general sense maybe of what commenced in 2Q and then what you're expecting in your kind of base case through the second half of this year?

Yeah, hey Tom, this is Ben. You know, specific to Q2, I wouldn't say there was anything material that commenced in it and I still think, you know, what we've discussed in the past is the right way to think about it, which is you're looking at nine to 12 plus months from lease execution to get through abatement periods and licensing. So when you think about the almost 900,000 square feet between executed leases and the agreements we have in place with Forefront, that's still the former Forefront assets. I think that's still the right way to model that out.

Just to clarify, on that one, Ben, because again, if we strip out the back rents paid by Forefront and PharmaCan and we strip out some of the security deposits that you've included in rental revenue, it still looks like you're running maybe $2 million, maybe $1.92 million higher quarter over quarter on a run rate basis than Is that something else commencing or is that just kind of the kind of a steady state run rate and therefore everything else that you find is still upside from here?

Yeah, I think Thomas, David, I would just reiterate what Ben said. There's nothing material during the quarter. So happy to talk to you offline about this further. I think, you know, one other item that if you're taking into account in the first quarter, we did have also like a million and a half that we received from Global Flora. So I'm not sure if you're adjusting from that in your numbers, but happy to discuss that further.

Perfect. Appreciate that, David. And then the last one for me, PharmaCan in New York and Pennsylvania, and I understand you're likely limited in what you can say, But in the release, it did seem like there's been a change in engagement there with those two assets specifically. So is there a potential there to maybe beat up the resolution? I know, I think you had mentioned in the past that there was a previous LOI on the Montgomery New York asset. What has been that kind of shift and kind of how could it impact occupancy of those assets?

Yeah, hey Tom, this is Ben again. Yeah, I think we have been pleased with the interest in those two assets. I wouldn't say anything has changed on the Montgomery asset. That is still something we're working through. I think we mentioned that we are working towards a potential resolution where we new tenants to those two properties. which I think would be a great sign to further stabilize the portfolio on top of the 900,000 square feet that we've been talking about. I think that's as much as we can say about that at this time.

Appreciate it. One follow-up on that, Ben. You mentioned the assets that are released. You mentioned the forefront assets that are awaiting the court resolution. Are there any other assets that you have under LOI that You're expecting near-term execution of a formal lease?

Yeah, I mean, there are multiple assets under LOI and in various stages of negotiations. You know, I think that we've talked about that broadly, just given the uncertainty around timing and remaining diligence items and really kind of focused our comments today on the executed leases, the forefront agreements that are in place, you know, totaling, you know, again, nearly a million square feet in leasing activity just in those two buckets. behind that and we've been very pleased again across the portfolio with the level of demand that we've seen for our assets and we're hopeful that we'll be able to continue to convert some of these LOIs and some of these discussions into incremental gross leasing balance of 2026 and into 2027. That's great.

Thanks for all the answers everyone.

Thanks, Todd.

There are no further questions at this time. I will now turn the call back to Alan Gold for some closing remarks.

Thank you, and thank you all for joining today. Thanks to the team for the tremendous execution, not only on the balance sheet and on the portfolio, but on the diversification program that we have in place. With that, we will sign off.

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