IIPR

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Innovative Industrial Properties, Inc. First Quarter 2026 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 during that time, simply press star, then the number 1 on your telephone keypad. I would now like to turn the call over to Eli Kanter, Director of Finance. Eli, please go ahead.

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 some of the statements made during today's conference call, including statements regarding our capital raising activities and those regarding potential 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'll discuss certain non-GAAP financial information, such as FFO, normalized FFO, and AFFO. You can find this information together with reconciliation 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. Good morning, everyone, and thank you for joining our first quarter 2026 earnings call. First, I'd like to touch on the rescheduling of cannabis from Schedule I to Schedule III, a significant regulatory development impacting the cannabis industry. In our view, the administration's recent action with respect to the medical cannabis market represents a major milestone for the industry and a clear sign of continued progress at the federal level. Although it does not yet extend to the broader adult use market, it reinforces momentum toward a rational regulatory environment. Against that backdrop, the first quarter represented a strong start to the year, and our team remained focused on disciplined execution across the business.

While persistent inflation, elevated interest rates, and broader macroeconomic headwinds continue to challenge the operating environment, our team has worked tirelessly to optimize our portfolio, allocate capital thoughtfully, and maintain a strong and flexible balance sheet. We have been active on the debt and equity capital raising front, raising $128 million of gross proceeds year to date. In addition, we are working on several secured and unsecured financing transactions that have not yet closed, totaling nearly $130 million, including a $56.5 million financing at a rate of 8.75% that we expect to be funded today. If completed, we expect to use the net proceeds of these financings to address our unsecured bond maturity this month and to provide additional capital to support future growth and the execution of our strategic priorities.

This approach reflects our continued focus on disciplined capital management and maintaining balance sheet flexibility. As for the quarter, we generated total revenues of $69 million and AFFO of $53.4 million or $1.88 per share, which was the same as last quarter. Operationally, we made meaningful progress across our portfolio as we continue to execute on our leasing strategy. During the quarter, we signed new leases at 4 properties totaling approximately 331,000 sq ft, underscoring the progress we are building across the portfolio and the demand for our high-quality mission-critical facilities. Turning to IQHQ, we continue to view this investment as a compelling strategic opportunity and an important extension of our platform.

To date, we have funded $175 million of our $270 million commitment and continue to believe our entry point and timing of this investment will prove attractive over the long term. At the same time, we remain focused on executing across the business, driving performance in our existing portfolio, pursuing attractive opportunities in cannabis, and allocating capital where we see the strongest risk-adjusted returns. With a diversified platform spanning cannabis and life science, a strong balance sheet with demonstrated access to capital, and an experienced management team, we believe we are well-positioned to build on our momentum and progress to deliver long-term value for shareholders. With that, I'll turn the call over to Paul.

Thanks, Alan. Last month, the DOJ and acting attorney general issued a final order moving FDA-approved cannabis products and cannabis produced by state-licensed medical operators to Schedule III, a landmark development and, in our view, the most significant development affecting our business since our founding in 2016. This action eliminates the burden of Section 280E for qualifying medical operators May create opportunity for retrospective tax relief and establishes an expedited DEA registration process for medical operators. Just as importantly, the DEA has now restarted the broader hearing process on whether marijuana as a category should move to Schedule III, with hearings set to begin on June 29th under an expedited timeline. Taken together, we believe these developments mark a major step forward for the industry and powerful catalysts for improving operator economics, expanding access to capital, and supporting a healthier environment for longer-term growth and investment. At the state level, we are monitoring the expansion of existing medical programs, particularly in Texas. In April, the Texas Compassionate Use Program awarded conditional licenses to our tenant partners, Green Thumb Industries and Cresco Labs, joining Texas Original, Trulieve, Verano, and others in the market.

We are encouraged by this progress and look forward to the continued expansion of the program and the opportunities it creates for our tenants. Regarding our current portfolio, as we highlighted in our March press release, we reached a resolution with PharmaCann on all pending litigation related to its lease defaults, and we are actively working to re-tenant the properties being returned to us later this month. Across the portfolio, we have now executed leases for the former Gold Flora assets, made substantial progress on the former PharmaCann assets, and reached tentative agreements with prospective new tenants for all four former 4Front properties, subject to diligence and licensing approvals. I want to thank our team and all parties involved for their hard work in helping us navigate these challenges. The actions we have taken leave us better positioned to drive portfolio performance going forward.

With that, I'd like to now turn the call over to Ben to provide additional details on our leasing activity and discuss our other investment activities.

Thanks, Paul. Year to date, we have executed new leases totaling 389,000 sq ft across 5 properties located in California, Illinois, and Ohio, and completed the sale of a dispensary in Arizona. As Paul described, we are pleased with the progress we have made stabilizing our portfolio and bringing resolution to the former 4Front, PharmaCann, and Gold Flora assets. All 3 former Gold Flora properties, comprising 330,000 sq ft, are now leased. We executed lease agreements for our 70,000 sq ft Palm Springs property in November 2025, our 204,000 sq ft Desert Hot Springs property in January 2026, and our 56,000 sq ft Palm Springs property in March 2026.

For 4Front, we have reached tentative agreements with prospective new tenants for all four properties, representing approximately 488,000 sq ft across Illinois, Washington, and Massachusetts. These tentative agreements remain subject to customary diligence and licensing approvals and are expected to take effect following the conclusion of the receivership proceedings, which we currently expect later this year. With respect to the former PharmaCann assets, we executed a lease agreement in March for our 66,000 sq ft property in Dwight, Illinois, with Grown Rogue, a publicly traded multi-state operator new to our tenant roster. In April, we executed a lease agreement for our 58,000 sq ft property in Ohio with Curaleaf, a public multi-state operator and longtime tenant partner of ours.

In addition to these executed leases, we executed a non-binding LOI for our 234,000 square foot facility in N.Y. and are currently in lease negotiations subject to customary due diligence, including licensing and regulatory approvals. We also continue to work through diligence and are in negotiations with a prospective tenant for our 71,000 square foot property in North Adams, Massachusetts. With respect to our 270,000 square foot property in Pennsylvania, leased to the cannabis company as of quarter end, we regained possession of that property on April 15th and are in active discussions with a potential new tenant. While there can be no assurance that any of these discussions or negotiations will result in the execution of a definitive lease, we are very pleased with the demand we are seeing for our assets.

For our 157,000 sq ft property in Columbus, Ohio, remains leased to Battle Green, which defaulted on its lease obligations in March. We are actively enforcing our rights under the lease, including commencing eviction proceedings and pursuing available remedies under applicable guarantees. Turning to our life science portfolio, we have funded $175 million of our $270 million IQHQ commitment to date, with the remaining $95 million expected to be funded over time. The broader life science real estate market continues to show signs of stabilization and improving momentum as we move through 2026. Recent reports from CBRE and Colliers indicate that demand has held near pre-pandemic levels, while stronger equity performance and venture funding are supporting a more constructive backdrop for growth.

At the same time, the market is still working through elevated vacancy from the prior supply wave, but new development has fallen sharply, and the pipeline is at historically low levels, which should support a healthier supply-demand balance going forward. We also continue to see favorable long-term demand drivers in areas like manufacturing, onshoring, and AI-enabled research, which we believe will position the sector for continued improvement over time. With that, I'll turn the call over to David.

Thank you, Ben. Before diving into our quarterly results, I want to begin with our bond maturity that we have this month, which, as we discussed on prior calls, has been a key focus for the company. During and subsequent to quarter end, we have undertaken a series of capital-raising actions to address this maturity.

Year to date, we have raised $128 million of gross capital, comprised of $72 million of preferred equity, $36 million of common equity, and $20 million of secured debt through a 3-year secured term loan with a fixed rate of 9% that we recently closed on. As Alan mentioned, we are also currently pursuing multiple secured and unsecured financing transactions totaling nearly $130 million, including a $56.5 million financing that we expect to be funded today. Based on the terms currently under discussion, these financings would carry an attractive blended rate of just over 8%. We are encouraged by the level of interest from multiple new lenders and by the opportunity to access attractively priced capital to address this maturity and provide additional capital to support future growth.

These potential financings remain subject to a number of contingencies, and there can be no assurance that they will be completed on the terms currently contemplated or at all. Turning to our results, for the first quarter, we generated total revenues of $69 million, a 3.5% increase compared to the fourth quarter. This increase was primarily driven by payments received from PharmaCann totaling $3.2 million. In addition, as previously disclosed, we received $1.5 million in the first quarter in settlement of all remaining unpaid administrative rents due from the Gold Flora receivership. Adjusted funds from operations, or AFFO, for the quarter totaled $53.4 million, or $1.88 per share, which was in line with our results for the fourth quarter of 2025.

Turning to the balance sheet, as of March 31st, we had total liquidity of approximately $177 million, consisting of $89 million of cash on hand and $87.5 million of availability under our revolving credit facilities. Once again, our balance sheet credit metrics remained excellent this quarter, with a debt service coverage ratio exceeding 11x and net debt to adjusted EBITDA of 1.1x. With our recent capital raising activity, we continue to maintain very strong credit metrics with a balance sheet positioned for growth in 2026. With that, operator, could you please open the call for questions?

Your first question comes from the line of Thomas Catherwood with BTIG. Please go ahead.

Excellent. Thank you, and good morning, everybody.

Good morning, Tom.

Ben, I just want to start with you. If my math is right, I think you have 8 leases that you've signed that have not yet commenced, and with the agreements for the 4Front assets, that could go to 12 properties. Now, I know each deal is different and you don't control every aspect of commencement, but is there a way to bucket those 12 leases as to how many you expect to contribute in 2026 versus 2027 or even beyond that?

Hey, Tom. I guess, you know, I think the way I would think about it is, you know, just what we see in a typical deal from lease execution. There's usually some sort of regulatory approval, license transfer, and after that, once the lease goes into effect, you could have a free rent period. We've seen that average anywhere from, you know, 3 months to 12-18 months on the outside. You know, appreciate you mentioning the leasing activity. You know, we've been very pleased with the demand we're continuing to see really across the portfolio.

When you think about, you know, some of the previous tenant issues, PharmaCann, 4Front, Gold Flora, you know, we've now addressed, you know, well north of 90% of those assets through LOIs, executed leases and lease discussions that we're currently having. I would also add, you know, when we think about the modeling is, you know, there can be the free rent period, there can be a license transfer period, but typically the triple net expenses will be transferred over to the tenants upon lease execution, which is another pickup for our earnings.

Ben, I think last quarter you mentioned, you know, obviously, as I said before, each deal being different, but you'd had a range in execution as far as the rents that you'd achieved on those. I can't remember the exact numbers that you gave. You gave everything from, you know, nearly in line to down 50% in some cases. For those that you've executed this quarter, how have they come in compared to prior rents?

Look, I still think that's the right way to think about it. I think that range, you know, applies, you know, across the board. I think the other aspect of that to keep in mind is just the minimal capital outlay that we've seen really across the board. I mean, these are, I would say, on average, $5 to $10 a foot. Sometimes, you know, as is deals, which is very unique, I think, in the real estate industry to be able to retenant these assets and the really the volume of leasing that we've achieved, really minimal cost to us.

Got it. Got it. This, this one might kind of seem a bit out there at the moment, but, you know, we've seen this increase in M&A activity, come across the cannabis space, kind of early stages of it. For example, what's happening with cannabis with, you know, they announced your tenant Holistic is taking over their operations in Ohio. As we see more resolutions and workouts like that, is there an opportunity for IIPR to get involved and provide the next wave of operators with capital for assets that had previously been owner-occupied, or are we kind of thinking too far ahead?

No, I mean, I don't think that you're thinking too far, or anybody's thinking too far ahead. I think that the with the first phase of the rescheduling, and I know there's a lot more to go with that, we do see the strengthening of our of the tenants in general in the industry. We do see, I think a increased interest in the industry and potential growth opportunities in the cannabis industry. Now, whether that's, you know, 6 months or 12 months or 36 months out, there, it's an evolving story.

Got it. Just last one for me, Paul, on the rescheduling. I know you mentioned the June 29th administrative hearings starting back up again. What we're wrestling with is, you know, there's obviously the legalization on the Medical cannabis side with the DOJ's final order. It sounds like there's a potential for the administrative hearings to expand that order. It's obviously too early to tell, but, you know, what are the chances we might end up with kind of a split outcome where Medical is exempt from Section 280E, but Adult use still remains subject to more stricter taxation?

Yeah, Tom, I think that's a fair question. I think, in the short run, and by short run, I mean the next 30 days, that's somewhat unclear. What the executive order did state was an expedited hearing, and that means within 30 days. Once the June 29th process starts, they expect to have that wrapped up with 30 days. Compare that to what we had under the Biden administration, much different. I think there will be a clear resolution of how cannabis is treated across the board, including medical and adult use, at the conclusion of that hearing. We are very excited about where this is going, as you can imagine.

You know, we've talked in the past about rescheduling what we think this is gonna do for the industry and our operators, I think we are thrilled that it's on this expedited timeline. You know, I think we're gonna see certainly more capital to the bottom line for these operators. You know, we've had discussions and we do expect that there will be much more interest in growth once the 280E tax situation is resolved and operators have a clear idea of where to go, and we think that's gonna happen pretty quick. We think that that capital will be used to expand and they'll come to us for that expansion, we believe. You know, we also see, of course, other advantages of rescheduling.

We think that there's certain states that have maybe been kind of on the fence for a medical program or converting medical to adult use. We think that this rescheduling will really help those states make the move towards new programs. Lastly, I think, you know, rescheduling is wonderful for R&D. There's a lot of companies gonna be very interested in testing the plant and coming into particularly medical uses for the plant. You know, we are thrilled as to these developments and the expedited timeline.

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

Thanks, Tom.

Your next question comes from the line of Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, morning out there. Just wanted to, Paul, just want to continue that same line of questioning. As we look at the Yeah, certainly the president on this is a bit confusing because there's a war on drugs, yet there's a promotion of, you know, medical use. The what exactly happened is that medical use was downgraded to Schedule III, but adult use is still Schedule I. Is that what's happened? Or, like, what is technically in place right now? We know where, you know, ultimately you can see where this path is sort of ending up, but what does it stand technically as of today?

As of today, the acting Attorney General Blanche was very clear, I think, Alex, in where it stands today. Licensed medical use operators have the benefit of Schedule III, and that's 100% medical licenses. As you know, our operators all hold medical licenses. That accounts for 100% of our operators in our portfolio. I think it's clear, too, of the decision they made as far as other use of cannabis, adult use cannabis. They put it on an expedited schedule starting June 29th, and to have that resolved within 30 days. We don't expect any extended, you know, period like we saw in the past. I think it's pretty darn clear about the decision to bifurcate, that's fine.

In the interim, where we are today is great because it's 100% covers, our medical, license holders, and that's who's in our portfolio.

Okay. As far as the 280E exemption goes then, so even though 100% of your tenants are covered because they're medical, which is the way I understood it, so that's good. As far as the 280E, those same tenants, through their operating businesses get the full deduction, or does the IRS sort of split out their sales?

What the DOJ order suggested was retroactive tax relief available for all qualifying medical operators. That should be 100% for the medical operators. As mentioned, that's our portfolio. I think what we will see through Treasury, the order does also request Treasury to give an opinion sooner than later as to what the retroactive effect of Section 280E will be for both medical and adult use. In the short term, it's clear, Section 280E relief 100% for medical license holders.

Basically, it doesn't matter whether they sell rec or not, you know, they're medical, and then we'll find out how long this retroactive is. In your view, Ben, as you guys look at your credit as your tenant to have had credit issues, and this has been a few years from now, I mean, ongoing. Is it your view that once the 280E relief comes in, that will basically eliminate any, you know, future pending credit issues? Is your view that we're still gonna have potential for credit issues even though there's this 280E relief? I guess that's You know, as you know, that's what we've been focused on, is just this continuous sort of whack-a-mole. It'd be great to move past it and have everyone be, you know, in a stronger position.

I'm just curious if the 280E relief on its own and the retroactivity, you know, sort of solves that, or if those credit issues are still gonna be there because The ones who are, have issues or debt refinancing, whatever, still have that and the 280E isn't really gonna help in that front.

You know, Alex, you know, businesses run on, run all the same. They all have risks. All of them have, all industries have tenants that or companies that grow, shrink, disappear. The this 280E allows these businesses to have better operating environments and better operating statistics. They're still businesses. They all go through, they all have good management, okay management that needs needs to refocus on their business. We're gonna experience what all industries experience and, just like any other real estate company out there that leases space to any business.

Okay. Just final question. You mentioned, you know, the IQHQ and more doing life science. Your deck indicated that. Alan, as you look over the company, let's call it the next 5 years, do you think it's more like 50/50 or 25/75 as far as life science contribution? I'm just trying to think, is life science going to be, you know, heading towards 50% or it'll still be, you know, a small sliver of the company over the next, call it, 5 years? I'm not going to hold you to that. It's just trying to understand where you guys see the best investment path forward over the next several years.

You know, I think that's a very difficult question to answer. What we can say is that we're now in a situation where we have a strengthening cannabis industry. If you could see the level of activity that's going on in the life science industry, our entry point was, I think, at one of the lowest parts of the industry over a long period of time. We're seeing a very strong and resurging life science industry. We have positioned ourselves to be very opportunistic with 2, I think, growing industries that will help us drive growth for our shareholders in the future.

Thank you, Alan.

Your next question comes from the line of Aaron Grey with Alliance Global Partners. Please go ahead.

Hi. Thanks for the questions. Kind of piggybacking off that last one a bit, more specifically on IQHQ and incremental investments. I know in the filings, you talked about commencing more investments, 2Q to 2026. Just wanted to, you know, sure is that still the case? Maybe just give me some more color in terms of those incremental investments on IQHQ preferred stocks and the timing of it through the near to medium term. Thank you.

I mean, I think that we have scheduled the investment in the IQHQ organization out through 2027, mid-2027. We have been able to opportunistically bring forward a couple of those schedule investments for our benefit because they're a very creative transaction. If you recall, it's, you know, on average north of a 14 with we have a cost of capital with our credit facility associated with making those investments in the 6% range. Extremely creative investments, and we've been able to bring some of that forward. We continue to believe that the industry, the life science industry, of which IQHQ is involved with, is doing really well.

We think that our investments will, we will continue to look at opportunistically making the investments at the appropriate time.

Okay. Great. Really appreciate the color there. Second question from me on cannabis. You know, great to see, you know, some of the progress you're making on new leases of the previously defaulted tenants. You know, as we talk about, you know, Schedule III creating more opportunities for you know, can you talk about maybe some of the near to more medium-term opportunities? You seem to have alluded to your ability to get more aggressive on acquisitions and bringing on more new, net new tenants. You know, where would you see those? In the near term, would it strictly be medical, given the clarity that we have there and maybe markets like Texas, you know, Kentucky or Georgia?

Just giving more color and granular in terms of where you might be able to see some opportunities in the near term where we have clarity on just medical only versus more longer opportunities as we wait for the second phase of rescheduling. Thank you.

Yeah. You know, I appreciate that question. We are looking at all acquisition opportunities and, you know, for growth in the second half of 2026 and certainly into 2027. Our number one priority and focus is right now making sure that we complete the refinancing of our unsecured debt, which we have done, you know, the team has had tremendous success, and we're highly confident. Once we complete that and complete our commitment to IQHQ, I think we can then look at additional opportunities going forward.

Okay, great. Thanks for the call. Back in the queue.

Thanks, Aaron.

Your next question comes from the line of William Kirk with Roth Capital Partners. Please go ahead.

Hey, thank you, everybody. I wanted to keep going on rescheduling and try to get some perspective on whether you think the possibility of interstate commerce exists out of rescheduling. If it did, would you consider the cultivation assets you have an opportunity in that environment, or would it be a risk in that environment? How do you prepare, I guess, for the scenario or the possibility of interstate commerce?

Hey, Bill, it's Paul. I think there's 2 questions there. I'll address the first part of the question. The answer is no, that rescheduling does not address interstate commerce. It does not address banking. Those are 2 things that some people were looking for some clarity on. The Attorney General was clear that interstate commerce, banking, and up-listing were issues that were not addressed in this piece. Your further question about interstate commerce is really, I think, you know, something we've talked about over the years. We don't really see that happening until there is a complete legalization of cannabis across the board. We believe that is many years out.

You know, as we've discussed in the past, even if we do have some type of interstate commerce, we believe that our assets and our operators will do fine because what we have are indoor grows for the most part and medical highly specialized product. That's probably not gonna be what's gonna go rolling across in trucks across the country. Even if we are in interstate commerce situation, we think we're well-positioned. Again, we don't see that for many years out.

Okay. Thank you for that. There is a possible demand unlock that would benefit your tenants in November unless something changes, intoxicating hemp faces a federal ban. I imagine most your properties aren't growing much of it. Wanted to get your perspective here on what intoxicating hemp going away could mean for your tenants and the demand for the products that they are growing.

Yeah, I think that's accurate, Bill, that our tenants do not grow hemp. They are cannabis growers. You know, we've been watching the whole litigation issue with the hemp really just kind of bystanders in the sense that we don't believe hemp one way or the other is really going to affect our operators' business. That being said, I think if there is a ban on intoxicating hemp products, that does put some clarity into the issue, and it will take away some of the Delta-8 stores that we see popping up in non-medical states. I think it's a good thing for the cannabis industry to get clarity in the intoxicating hemp legislation.

Thank you. I'll pass that along. Thank you, guys.

Thanks, Bill.

That concludes our question and answer session. I will now turn the call back over to Alan Gold for closing remarks.

Thank you. Thank you all for joining today. I'd certainly like to thank the team for all their hard work, great work, and our stockholders for their continued support. That ends the call.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.