Good day, and welcome to the Innovative Industrial Properties Third Quarter 2024 Earnings Call. Please note, this event is being recorded. I would now like to turn the conference over to Brian Wolfe, General Counsel. 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; Catherine Hastings, Chief Operating Officer; and Ben Regin, 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 adjusted FFO. 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 the SEC. I'll now hand the call over to Alan.

Thank you, Brian, and thanks to all of you for joining us this morning on our third quarter 2024 earnings call. We had a solid third quarter where we generated $76.5 million in total revenues and $2.25 in AFFO per share. In light of the crosswinds that the regulated cannabis industry has been experiencing for a number of years now, which we have discussed in detail in past quarters, we are pleased overall with how our tenants and portfolio have performed. As noted on prior calls, we achieved these results without the full impact of the rents for new leases that we executed in 2023 and year-to-date, which we expect to commence based in part on these tenants obtaining requisite approvals to operate in addition to certain pre-leased properties under development, where construction needs to be completed. Ben and Catherine will provide further updates on our further progress here. On the investment front, we continue to be highly selective in our evaluation of opportunities, closing on a follow-on transaction with one of our tenant partners, MCP in Maryland last month. Of course, we continue to have what I believe is one of the most resilient capital positions amongst real estate companies generally. Our total available liquidity exceeded $220 million as of quarter end, fully funding all remaining development commitments and continuing to provide us with ample dry powder for additional strategic investments. We further enhanced that liquidity position just last week, expanding our revolving line of credit by $37.5 million and introducing two new banks to the syndicate. We continue to have one of the lowest levered balance sheets in the REIT industry at 11% debt to total gross assets, no variable rate debt and no debt maturities until May 2026. David will provide more detail as well on our financial results for the quarter and capital position. From a regulatory perspective, there's a fair amount to talk about as we digest the results of the most recent election cycle and additional state program developments, in addition to the continued progress on potential rescheduling of cannabis from Schedule 1 to Schedule 3. I will now turn the call over to Paul to discuss our thoughts on election results, regulatory developments, and market dynamics.

Thanks, Alan. First off, with regard to the presidential and congressional election results, we would note that this is the first election cycle in U.S. history where both presidential candidates have supported cannabis reform. While tentative results of the presidential election indicate that Donald Trump has received the necessary electoral votes as well as the Republican Senate and a House that is skewing Republican, we note, of course, the continuing strong and growing bipartisan support for cannabis reform at the federal level and remain optimistic on that front. Presumed President-elect Trump's recent remarks in September on federal cannabis reform are also encouraging, with a focus on safe banking for state-authorized companies and supporting states’ rights for passing and operating regulated cannabis programs. That said, the path forward on meaningful cannabis reform at the federal level does narrow in our view in the near term, assuming the current expected results hold. Looking at state voting results, four states had cannabis legalization matters on their ballots in the election cycle, including adult-use programs for Florida, South Dakota, and North Dakota, and medical use for Nebraska. In Florida, while Amendment 3 received majority support from voters, it failed to receive the requisite 60% voter support to legalize adult-use cannabis despite the previous support from Donald Trump. Both North Dakota and South Dakota also failed to pass their adult-use cannabis referendums. Finally, Nebraska voters approved the adoption of a medical-use cannabis program with more than two-thirds support, reflecting, again, the large majority support for medical cannabis shown in polls of Nebraska residents. Assuming the ongoing legal challenges regarding signature for ballot access are rejected, Nebraska will join the overwhelming majority of states that have adopted a medical-use cannabis program. And in Minnesota, it has been quite some time coming, but the state's Office of Cannabis Management expects to finalize rules for the adult-use program in the first quarter of 2025, with the expectation of commencing adult-use operations shortly thereafter. Regarding the DEA's progress on rescheduling cannabis from Schedule 1 to Schedule 3, we will, of course, be closely watching the administrative hearing on the matter, which was recently postponed from December 2 to a date likely in early 2025. Visibility on rescheduling continues to be murky, factoring in the administrative hearing and the tens of thousands of comments received from the public. Nonetheless, we remain cautiously optimistic that rescheduling will continue to make forward progress. Looking to the general market dynamics, while we continue to see positive incremental steps toward additional state programs coming online and more efforts to combat the illicit markets, we do see continued financial pressure on licensed cannabis markets having to compete with the untaxed, unregulated, and historically unchecked illicit market, especially since inflationary pressures have made consumers all the more cost-conscious. To give a sense of the magnitude of the illicit market in certain states, while difficult to measure, it is estimated that the California illicit market alone is a $10 billion industry. And while California authorities recently announced the seizures or eradication of over $500 million of illicit cannabis year-to-date, that amounts to a mere 5% of the total estimated size of the illicit market. That said, we are seeing some progress in certain states and localities that have shifted priorities to more meaningful enforcement against illicit operators. In New York, for example, pursuant to legislation passed last year, there have been increased civil and tax penalties on licensed sales of cannabis and provided additional enforcement powers to authorities. New York has seen a significant uptick in enforcement actions in the illicit market, which we believe have also contributed to a strengthening of the licensed market, which is on pace to potentially exceed $1 billion in regulated adult-use sales in 2024. From a capital raising and M&A perspective, while the regulated cannabis industry continues to be challenged, we are seeing signs of more activity in the debt markets for MSO refinancing most recently evidenced by our tenant Ascent's Q3 closing on a private placement of $235 million of senior secured notes due in 2029. Of course, we are closely following developments and monitoring execution of refinancing plans for a number of MSOs that have debt maturities in the coming few years, with the bulk of those maturities coming in 2026. I'd like to now turn the call over to Ben to discuss our investment and leasing activity in Q3 and year-to-date.

Thanks, Paul. As we've noted on prior calls this year, we've made good progress in our execution on both new investment opportunities as well as the re-leasing of our vacant assets. Year-to-date, we have re-tenanted four properties, covering $69 million in invested capital, and selectively closed on new investments of just over $70 million. As we noted in our press release yesterday, we closed on a $5.6 million acquisition in Maryland of a cannabis processing facility and executed a long-term lease with MCP, one of our existing tenant partners. We continue to track an active pipeline across markets evaluating opportunities and look forward to executing on new investments on a very selective disciplined basis. Within our portfolio, while the vast majority has continued to perform well despite the market headwinds, as we noted in our press release yesterday, we applied security deposits for the payments of rent from ForeFront, Tilt, and Emerald Growth, where we collected partial rent from these three tenants in October. As we noted in prior calls, ForeFront has experienced delays of well over one year in the development of their large-scale cultivation and processing facility in Illinois, primarily as a result of issues relating to delivery of power from the local utility. We are pleased to see the facility complete and operational during the first quarter of this year. However, this delay was understandably impactful to their expected cash flows. Also, in Q3, we successfully regained possession of a property in Massachusetts previously leased to Temescal Wellness and we'll be looking to bring in another qualified cannabis operator to that asset. With that, I'll turn it over to Catherine.

Thanks, Ben. We've made strong progress in 2024 year-to-date on closing out or nearing completion on many of our tenants' remaining development projects. We've completed five leased projects during the year, which are now operational for our tenants: a 325,000 square foot expansion in New York, ForeFront's 250,000 square foot ground-up development in Illinois, Battle Green's 157,000 square foot ground-up development in Ohio, the 23,000 square foot Perez Road development project in California, and this quarter, completing the cultivation build-out of 104,000 square feet in our Summit building in Michigan, which is now 100% operational. We are pleased to see that these facilities are complete and are focused on bringing success to our remaining assets under redevelopment. Regarding our portfolio, as of September 30, we owned 108 properties across 19 states, comprising 9 million rentable square feet including 618,000 square feet of development or redevelopment. Of these 108 properties, 105 properties are included in our operating portfolio, which was 95.7% leased at quarter end with a weighted average remaining lease term of 14 years. Of the three properties under development and redevelopment, one was pre-leased at quarter end, and the remaining two assets consist of 192,000 square feet of warehouse space in San Bernardino and a 12-acre parcel of land in Texas. Our portfolio continues to be well diversified with no one tenant representing more than 17% of our annualized base rent and no state representing more than 15% of our annualized base rent. We have relationships with some of the largest and most experienced operators in the industry, with our leased operating portfolio comprised of 91% multistate operators, and 62% leased to public company tenants. The total amount of capital invested and committed across our operating portfolio equates to $281 per square foot, which we believe remains significantly below replacement cost. And with that, I'll turn it over to David.

Thank you, Catherine. For the third quarter, we generated total revenues of $76.5 million compared to $77.8 million for the same period in 2023. The decrease was primarily due to a $3 million loss in revenue for properties we took back possession of. Since the second quarter of 2023, the $1.3 million in rent received during the quarter but not recognized in total revenues due to a reclassification of two leases as sales-type leases as of January 1, 2024, and $1.3 million of contractually due rent interest and property management fees that were not collected during the quarter. The decrease was partially offset by a $4.6 million increase in contractual rent and property management fees primarily due to contractual rent escalations, amendments to leases for additional improvement allowances at existing properties, and new leases entered into since June 2023. Revenues for the quarter were also down sequentially versus the second quarter of this year, primarily as a result of a one-time disposition lease termination fee of $3.9 million earned in the second quarter relating to the sale of our Esperanza property in Los Angeles. As we noted in our press release last night, our third quarter results also included $1.4 million of security deposits applied for contractually due rent, and we applied the remainder of ForeFront's security deposits totaling $0.5 million for payment of rent owed for October. We are closely monitoring ForeFront's progress, and at this point, expect rent collection for ForeFront well below what is contractually due for the fourth quarter. AFFO for the third quarter was $64.3 million or $2.25 per share, a 2% decrease versus the second quarter of 2024 driven primarily by one-time interest payments of $1 million or $0.04 per share received on a secured construction loan in the second quarter and a lease termination with Temescal Wellness in Massachusetts during the third quarter. As we've noted on prior calls, while we expect the re-leasing activity we achieved this year to contribute meaningfully to our long-term earnings, the timeline to rent stabilization may differ between the properties as there are state and local approvals needed for these transitions, additional regulatory requirements to be completed at certain assets, and some level of rent abatement negotiated to allow for ramping of our new tenants' operations. That being said, we are seeing continued progress on this front with Loom receiving approvals for operation of the Harvest Park facility and completion of the cultivation space for our Summit project, both in Michigan, with rent expected to ramp up in the next 3 months to 6 months. Since our IPO in 2016, we have maintained one of the most conservative balance sheets in the REIT industry, and that continued this quarter with only $300 million of debt on gross assets of $2.6 billion. Our debt to gross assets was a low 11% and our debt service coverage ratio was a strong 17 times. We expect to continue to run the business with a conservative balance sheet and maintain strong liquidity. Regarding liquidity, we finished the third quarter with over $220 million of total liquidity, which is slightly higher than the second quarter and is comprised of our cash, short-term investments, and availability under our revolving credit facility. And just this week, we added two banks to our revolving line of credit, bringing it to four in total and expanded capacity by another $37.5 million. Our total capacity on our revolver now stands at $87.5 million, all of which is undrawn as of today. We are pleased that we have nearly tripled the size of this revolver since a year ago and appreciate the increasing support from our banking relationships. We are continuing to have dialogue with numerous banks regarding their interest in joining our credit facility to continue to increase the overall capacity. Finally, we opportunistically issued shares of our Series A preferred stock under our ATM program in the third quarter, totaling $9.6 million in net proceeds. As we noted previously, we entered into a new ATM program in the second quarter to provide additional flexibility in the offering of common stock on a forward basis and issuance of shares of our Series A preferred stock from time to time, and we're excited with the demand we saw for our preferred stock during the quarter. Overall, we are pleased with where we are positioned as our balance sheet remains strong with leverage among the lowest in the REIT industry and we have continued to demonstrate access to many capital markets. With that, I'll turn it back to Alan.

Thanks, David. I'd like to note the following in closing. I'm proud of what our team has accomplished year-to-date, especially in light of some of the enduring challenges faced by the regulated cannabis industry. We continue to be laser-focused on maximizing the value of each property in our portfolio for the benefit of our stockholders, and I see our company as exceptionally well positioned from an overall capitalization and liquidity perspective to continue to execute on additional investments where we see the potential for exceptional risk-adjusted returns. As long-term owners of our company, thank you, as always, for your continued support. And with that, I'd like to open it up to questions. Operator, could you please open the call up for questions.

The first question comes from Tom Catherwood with BTIG. Please go ahead.

Thanks, and good morning everyone. Maybe starting with Alan or Paul. In the past, you've worked with tenants that faced operating challenges usually by doing short-term lease amendments for the tenants that paid partial or no rent in Q3. Did they just stop paying out of the blue? Or did they come to you ahead of time looking for some kind of amendment or workout, and you declined?

Well, first, we have worked, we continue to work with all of our tenants on understanding their businesses and making sure that we know what they are doing and how things are going. So that's number one. Number two, we want to work with our tenants when they are experiencing unusual or unforeseen issues, such as what we've done with ForeFront regarding the power issue in Illinois. And we've been able to work through that issue with them and I think come to a very amicable and positive resolution for our shareholders and for ourselves, in addition to themselves.

Yes. I think, Tom, you've seen how we've dealt with these issues in the past. We do take a different path depending on each situation. If it’s something unusual, we work with that tenant. But on the other hand, if the situation is such that a tenant stops paying rent, and we don't see a reasonable path for them to restart paying rent and get back to even, we take a very aggressive stance in regaining possession of the property. So, there's two paths that we take, and it's really dependent on the situation.

Got it. Appreciate those thoughts. And then maybe going over to acquisitions. Last quarter, it sounded like operators were almost in a wait-and-see kind of mode waiting for the election and to see what would happen with rescheduling before making any investment decisions. What worries us is a scenario where the addressable market for cultivation acquisitions with high-quality operators is just more limited than once thought. How do you think of the potential to scale acquisitions and grow your portfolio without having to go further out on the risk curve with less experienced operators?

I mean I can turn it over to Ben to kind of talk about our pipeline, where we still have, I think, a strong pipeline. But before we do that, I think your presumption that the industry has stalled all of a sudden because of a political outcome or something that the election, perhaps that's weighing on many people's thoughts. But this industry has been around for a period of time, and it's going to be around for a long period of time. And it's not going anywhere. Revenue sales are expected to increase 9% year-over-year, and the industry is definitely growing. Our largest growers are constantly looking at opportunistic ways of expanding their businesses. We believe that in 2025, with the advent of what we think is a positive outcome from rescheduling, that there is going to be a significant continued resurgence of interest in the industry in addition to the continued growth of sales. Ben, do you want to talk about our pipeline at all?

Just to reiterate, Tom, we are continuing to see that growth in the industry. To highlight again, we're expecting north of a 9% CAGR through 2028 in the industry overall. We're very happy with what we're seeing in the pipeline and the quality of the transactions, and we will execute on those in 2025 in a very disciplined and selective basis.

Got it. And then last one for me, if I can, Ben, sticking with you for the asset that you took back in North Adams, Massachusetts. I know it's early, but what is the outlook for backfilling that space? And is any incremental investment needed to get the building market ready?

Tom, I can handle that. We just took back that facility on September 30. So, like you said, it is very early in the process. But the facility is a fully built-out cannabis cultivation and processing facility, and we believe that we should have the same general reusability that we've seen on other built-out assets that we've re-tenanted.

And the next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Maybe just continuing on Tom's question on the tenant credit. A two-parter in the tenant credit. One is you guys made an additional investment in ForeFront in the second quarter. They have four properties, and it sounds like there was only an issue with one of the properties. So just want to get a bit more understanding on maybe it was all on lease across the four properties. In order for them to not pay on one, it implied all of them. But maybe just some more color on the comfort of giving them more investment last quarter for properties and then a power issue on one of the properties. And then regarding the other two tenants, is this — years ago, we used to talk — or I used to — it was my word, my words, sort of a whack-a-mole where there'd be a tenant issue that will get resolved, there will be another one. So, I just want to understand if that maybe is, in fact, how the business works, that there's always going to be a few tenants not necessarily the same, but a few that are always surfacing. And therefore, this isn't a bad thing. It's just part of the business.

Well, certainly, we would love to be fully rented and not have any tenants ever have a bad situation. That would be the ideal operating environment. But it would get kind of boring for you guys if we did that, and you wouldn't have questions to ask us about. This really gives us opportunities to... every industry has ups and downs and has tenants that overexpand and need to retrench, and so we're no different than all the others. The difference is we've been paid a very high adjusted rate of return for what we believe is a much lower risk profile. We've paid that for a long period, and we have a very long weighted average lease length to continue to capitalize on that disparity in our favor. With that, I'll turn it over to Ben.

Sure, Alex. I just wanted to touch on your question on ForeFront. We did make an investment in the Illinois facility to round out construction there. We do have four individual leases with ForeFront, but that is by far the largest, and there were significant delays in construction, which understandably had an impact on the overall cash flow. That asset is in Illinois, which is one of the top five markets in the U.S. We feel very confident in the Illinois market. And as Paul described, we look at each of these situations individually, and we're looking to maximize value across the portfolio, and we feel very positive about the future resolution for these issues.

So, it was just the one asset that defaulted; the other three were still paying. Is that what I hear you saying?

We have cross-default language in place. We evaluate each tenant along with the parent company guarantees for all our leases. This asset is significant due to its size and the expected output once it is fully operational, which will greatly enhance their overall business as we approach 2025. We have a strong belief in the Illinois market and anticipate that the operational deal at the Illinois building will provide a significant advantage to their business.

Okay. And then, Paul, on the three ballot defeats, it's been a while since we've had that. I don't know if that's the start of a trend or is there a read-through to that? Is that maybe states are reflecting whether or not legalizing cannabis is a good thing? Or is it just they've seen how the tax scheme has worked in other states and maybe people just buy from their guy and they don't need it to be legal? Just trying to understand why we had these three defeats versus a long string of wins.

Sure. Well, let me chop it up a little. If you look at the Dakotas, North and South Dakota, that's always been a challenge. We've had such tremendous momentum in the last 10 years, starting with the West Coast and starting with Colorado. Now that we get to this part of the 50 states, it's getting challenging. The Dakotas are always going to be a challenge. With Nebraska passing medical, there might be a legal challenge, but that's a positive. Obviously, the big issue in Florida, where Amendment 3 got 56% approval, faced a ton of opposition money spent by Governor DeSantis, which made 60% a challenge. While many in the industry are disappointed, we are not out in Florida. I think it's a learning lesson, and I expect it to be back on the ballot in two years. I wouldn’t view this as a momentum killer. The battles get tougher now because the states that were easier to get to have already been there and are performing beautifully for the most part and generating a lot of tax revenue and jobs for the public. Overall, we continue to see cannabis becoming a bipartisan issue, and we're very encouraged by the election results.

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

Well, thank you, and thank you all for joining. I know there was a lot of activity in the quarter, and I really want to thank the team for their strong and great work, and thank the shareholders for their continued support. With that, we can finish the call. Thank you.

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