Good day, everyone, and welcome to the Innovative Industrial Properties Second Quarter 2025 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Eli Kanter, Director of Investor Relations. Please go ahead, sir.

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 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 Form 10-K and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, on today's call, we will discuss certain non-GAAP financial information, such as FFO, normalized FFO and AFFO. You can find this information together with reconciliations to the most directly comparable GAAP financial measure in our earnings release issued yesterday as well as in our 8-K filed with the SEC. I'll now hand the call over to Alan.

Thanks, Eli. Good morning, and thank you for joining our call. Yesterday, we announced our first expansion outside of the cannabis industry with a strategic investment in IQHQ, a leading private life science REIT. This investment underscores our conviction in the long-term fundamentals of the life science industry and provides IIP a unique opportunity to accretively deploy capital while adding industry and tenant diversification to our portfolio and positioning us to continue driving growth and creating long-term value for our shareholders. IQHQ was founded in 2019 and has raised over $4 billion of equity capital since inception. Its current portfolio, including both operational and under development properties, totals over 5 million square feet with additional pipeline potential, all located in the leading and largest global life science markets in Boston, South San Francisco, San Diego and the Golden Triangle in the U.K. Within the overall life science real estate market, we anticipate improving fundamentals with new deliveries in 2025 trending down compared to prior years, and continued deceleration in construction starts expected in the near term. In addition, life science fundraising in 2025 is on track to be its highest since 2021, further underscoring investors' confidence in the long-term fundamentals of the industry. This investment at this entry point positions us to capitalize on these long-term secular tailwinds. The total commitment of $270 million is expected to be highly accretive to AFFO, carrying a blended yield exceeding 14%. Our investment includes a $100 million investment in IQHQ's revolving credit facility to be funded at closing and future funding of up to $170 million invested in IQHQ preferred stock to be funded over time. We expect to fund these investments with a combination of cash on hand, draws from the company's revolving credit facility and future financing activities. While we continue to evaluate investment opportunities in the cannabis industry, this investment provides complementary growth opportunities to enhance our investment pipeline, including a right of first offer on all future asset sales by IQHQ, providing potential pipeline opportunities on over 5 million square feet of leading life science real estate for IIP. Our management team brings decades of experience in the life science industry, most recently in BioMed Realty, giving us the expertise to leverage our existing platform to drive accretive growth for our shareholders. As we continue to execute on our plan and drive value within our Canadian portfolio, we are excited to announce this return to accretive growth with our investment in IQHQ. With that, I'll now turn the call over to Paul.

Thanks, Alan. Good morning, everyone. We are very excited about the IQHQ opportunity we announced and the growth potential for IIP. At the same time, we remain proud of our position as a pioneering and leading provider of real estate to the regulated cannabis industry. Although the cannabis industry continues to face challenges, including persistent macroeconomic uncertainty and an unpredictable regulatory backdrop, it is still forecasted to grow at a compounded annual growth rate of approximately 7% from 2024 to 2029, reaching $44 billion by 2029. As we noted on our last call, we are focused on optimizing occupancy across our portfolio to strengthen our tenant credit profiles, and are actively pursuing all legal remedies available to enhance the performance of our real estate portfolio. I'd like to provide some additional color on our progress with each tenant. 4Front Ventures filed for bankruptcy protection in Canada and for voluntary receivership in Massachusetts with OPUS Consulting partners appointed as a receiver. In addition, we are in active discussions with the U.S. receiver and bankruptcy trustee regarding the properties and related claims. We continue to work closely with outside counsel to protect our legal interest and pursue our rights under the leases. Gold Flora is currently in receivership. We have intervened in the proceeding to actively protect our legal interest and remain in ongoing discussions with the receiver regarding the receivership and sale process. We successfully worked with the receiver to terminate the lease on one asset previously leased to Gold Flora and are actively pursuing re-leasing opportunities. We will continue to monitor the sale process and provide updates as we are able. With respect to PharmaCann, we have commenced formal legal proceedings to regain possession of the remaining properties they continue to occupy, including cultivation facilities located in Illinois, New York, Ohio, and Pennsylvania, and five retail properties located in Colorado. We are working closely with local counsel to pursue all of our rights and remedies under the leases and related guarantees, including pursuing monetary claims. These legal processes vary by state and are subject to the timelines of local jurisdictions, which makes it difficult to estimate the timing for recovery of these properties. However, we are diligently working through these processes as efficiently as possible, and we'll provide updates as developments occur. In regards to TILT Holdings, they have made regular monthly partial rent payments since April and we continue to reserve all of our rights under the leases while working in good faith with TILT to reach a resolution with respect to their outstanding financial obligations in conjunction with the planned divestiture of their plant-touching businesses. As TILT announced last month, they have entered into a strategic agreement with MariMed in Pennsylvania, where MariMed intends to assume day-to-day management of operations at our Pennsylvania asset commencing in September. We will continue to provide updates on TILT's progress as we are able. We are committed to providing updates on all our proceedings and expected timing as we navigate this process. However, we are still in the early stages. While we are encouraged by bipartisan support for cannabis reform, we continue to operate in a federally constrained environment. Despite nearly 90% of Americans supporting legal medical cannabis according to Pew Research and a majority of Republicans backing reform, meaningful federal action remains elusive. Reclassification to Schedule III would represent a critical first step easing the tax burden on operators and improving access to capital. We continue to see signs of resilience and long-term opportunity in the U.S. cannabis market. Notably, cannabis is outperforming traditional consumer categories and volume growth, outpacing alcohol, tobacco, and even beverages like bottled water and energy drinks, underscoring its staying power as a consumer product. At the state level, we are monitoring adult-use legalization efforts in Florida and Pennsylvania. In Texas, while the medical program remains highly restrictive, Governor Abbott recently signed legislation increasing the number of licenses in the state from 3 to 15, adding qualifying conditions to the program and raising the cap on product potency. We are also very encouraged by the strong sales growth in Maryland, New York, and Ohio, where adult-use conversations and an expanding consumer base are driving double-digit increases in sales. One of the most pressing challenges operators face is the persistent and growing threat of the illicit market. This is not just a matter of unlicensed operators undercutting legal businesses; it's a deeply entrenched transnational issue. Investigative reporting has highlighted the rise of international organized crime groups that have established a dominant presence in the illegal marijuana trade across the U.S. These networks not only undermine regulated markets but are also linked to broader criminal activities, including money laundering, human trafficking, and violence. Their operations exploit regulatory gaps, overwhelm local enforcement, and jeopardize the safety and reputation of legitimate operators. Just last quarter, California alone seized nearly 185,000 pounds of illegal cannabis valued at $500 million. These figures underscore a fraction of the issue and the need for stronger coordinated enforcement efforts at both the state and federal levels. I'd like to now turn the call over to Ben to discuss our investment, disposition, and leasing activity.

Thanks, Paul. Despite the challenges of the current environment, we have continued to execute on multiple fronts within our existing portfolio. Year-to-date, we have closed on a $7.8 million acquisition in Maryland, completed two dispositions totaling $10.8 million in Michigan and California, and executed two new leases totaling 211,000 square feet also in Michigan and California. In addition, as Alan touched on, we closed on a new investment with IQHQ, a private life science REIT with large-scale operating and development assets located in transit-rich hubs within the top life science real estate markets in the world. The current portfolio is targeted to encompass over 5 million square feet once all development projects have been completed with meaningful future development potential in the owned pipeline. Our investment into the revolving credit facility and preferred stock will sit senior to all common equity in IQHQ and at a discount to replacement costs of the underlying assets, providing strong risk-adjusted returns. Looking ahead, our overall pipeline remains robust including both cannabis investments and additional opportunities to deploy capital in the life science industry. As part of our IQHQ investment, IIP was granted a right of first offer for any future asset sales by IQHQ. As Alan mentioned, this ROFO alone provides for a potential pipeline of future acquisitions exceeding 5 million square feet of Class A premier life science real estate. We will continue to pursue these opportunities selectively, focusing on the highest quality investments with the most attractive risk-adjusted returns for our shareholders. We remain confident with the plan we have in place and the experienced management team we have to execute on that plan. And with that, I'll hand it over to David.

Thank you, Ben. For the second quarter, we generated total revenues of $62.9 million, a 12% decrease from the first quarter of this year. The decrease was primarily driven by the tenant defaults we previously disclosed in March. This decline was partially offset by additional funding of building improvements that resulted in base rent increases and contractual rental escalations. Adjusted funds from operations for the second quarter was $48.4 million or $1.71 per share, a decrease of 12% compared to the first quarter of 2025, driven primarily by the same factors affecting revenue. Our balance sheet remains in excellent shape backed by $2.6 billion in primarily unencumbered gross assets. We maintain a simple, low leverage capital structure with only $291 million in fixed-rate debt outstanding. We also finished the quarter with strong liquidity exceeding $190 million through cash on hand and an undrawn revolver, providing ample financial flexibility to fund future growth including the IQHQ investment we announced yesterday, and we remain committed to maintaining a conservative financial profile highlighted by a low debt to gross assets ratio of 11% and a robust debt service coverage ratio exceeding 15x. On the capital markets front, during the quarter, we repurchased 367,000 shares of our common stock at a weighted average price of $53.98 per share for a total cost of $19.8 million, which we accretively funded through the use of cash on hand and preferred stock that we issued during the quarter. In summary, our continued financial strength is evident in our prudent balance sheet management, ample liquidity, and disciplined capital allocation. As we look ahead, we remain confident that our robust financial position will support ongoing growth and deliver lasting value for our shareholders. With that, we thank you for joining the call, and we'd like to open it up for questions. Operator, could you please open the call for questions?

And our first question today will come from Tom Catherwood with BTIG.

So I recognize the benefit the IQHQ investment can have for IIP's earnings and growth. That said, life science real estate still faces challenges, and IQHQ is dealt with headwinds of its own. Can you walk us through the real estate investment case specifically for IQHQ, what is the business plan? How is the company overcoming challenges? And why is now the right time to invest in this specific company?

Tom, absolutely. I want to clarify that our investment was not in real estate itself, but in an operating company focused on the life science sector, which also allows us to capitalize on the growing demand from AI software companies needing quality real estate. We did not directly invest in life science real estate. Based on our expertise and history, we see that the life science industry is at a turning point. It has faced significant challenges over the past 3.5 to 4 years, and owners of existing life science properties have struggled as well. However, we believe the industry is positioned for recovery, which is already underway, and valuations are starting to improve from very low levels. Our financial investment in IQHQ was meticulously planned and researched, aligning with our straightforward business strategy of investing in sale leasebacks within the cannabis sector. Additionally, we have committed funds to a revolving credit facility and a preferred series in IQHQ. To provide more insight into our investment strategy and context within the capital structure, I’ll hand it over to Ben to discuss the capital stack of IQHQ further.

Yes, sure. Thanks, Alan. Tom, we believe on top of this being an accretive transaction, as you mentioned, that it is a very safe, secure investment and that we sit in front of the approximately $4 billion in equity that IQHQ has raised since inception. We believe that our spot in the capital stack represents a material discount to replacement costs. There's the property level debt, and then we are the most secure position behind that within the capital stack, again, ahead of the $4 billion that IQHQ has raised.

What does this investment in IQHQ aim to achieve, and what attracted you to this opportunity? While we acknowledge the broader recovery in the sector and notice some positive signs, what specifically about IQHQ made you feel that this capital investment was beneficial?

Yes. Our unique knowledge and expertise with IQHQ and the life science industry, along with our thorough research into the markets they operate in, leads us to believe that IQHQ's portfolio is well positioned to benefit from the increasing demand for AI and the future needs of the life science sector. This capital, in conjunction with other investments previously made in IQHQ, enables them to finalize their current developments and lease up a robust and high-quality portfolio situated in prime markets for both the life science industry and the AI technology boom. This funding allows them the necessary time to achieve these objectives, which, while they are succeeding, will provide a very attractive return to IIP and its shareholders.

Got it. I appreciate those details, Alan. And then last one for me. When this investment opportunity arose, how were potential conflicts of interest identified and reviewed to ensure the transaction didn't create risks for IIPR shareholders outside of normal course of business investment risk?

Well, first, there's an assumption that there were or that conflicts existed. But secondly, IIP used a very focused and logical methodology by employing a special committee where the committee members had no interest in IQHQ. And then after that, the special committee reviewed the analysis and the diligence prepared by the team and outside counsel, then that was brought to the Board, and then the Board members that had de minimis or no interest in IQHQ voted on this transaction and unanimously approved it because of its unique way it helps IIP. It is a very accretive transaction. It's a transaction that provides current cash flow to IIP shareholders, and it diversifies our tenant exposure and our industry exposure at a time when we are looking to access the broader capital markets for a variety of different uses, and it gives us the ability to drive earnings growth in the future.

Our next question will come from Bill Kirk with MKM Partners.

On the IQHQ, I'm considering the opportunity cost for the capital, and at the current level, your dividend yield on your stock would be above 16%. So, if you believe that dividend level is secure, wouldn't the $270 million yield a better return through share buybacks compared to the estimated 14% in the IQHQ structure?

Well, that's really easy to say when you look in the rearview mirror. Last week, two weeks ago, IIP shares weren't trading at 16%. So, and we believe that the market volatility that occurs on a day-to-day basis isn't the way to run your business. We look at our overall cost of capital, and our overall cost of capital includes our access to a variety of different capital from not only our preferred and our debt and our credit facility, but also our common shares and what the expected return our investors are expecting from their common shares. So on a combination of all that, we believe this to be a very highly accretive transaction, especially when you consider that we are using capital that has been sitting and earning 3%, 4%, and now has the opportunity to earn in that average of 14%, very accretive.

And then as a follow-up, what's the flexibility on the timing or, I guess, the commitment to the preferred portion of the investment? Like do you have the ability to pick when those tranches are made? Do you have the ability to reduce size, increase size? What's the flexibility there because that 16% isn't rearview mirror anymore, it's today.

The situation could change tomorrow, and it may continue to evolve. To address your question, we have significant flexibility. We structured the Series G investment to align with our anticipated ability to raise capital over time. David, would you like to expand on that?

Yes. And I think just on the funding. As Alan mentioned, that will occur between now or between now and second quarter of 2027. But back to one of the points of the deal that we noted is we believe with accessing this new real estate market that has been along in the REIT space for a long time, and that will improve our overall access to equity and debt capital as a result of that just because it's a non-cannabis new sector. All of you on this call today are familiar, but life science real estate has been around a very long time.

And our next question will come from Aaron Grey with Alliance Global.

Just sticking on the question with IQHQ. So regarding the decision there to diversify some capital away from cannabis, can you maybe speak to how that decision came as it relates to the dividend, right? So we know the dividend has been a hot topic for you guys as it relates to the AFFO and you mentioned how this really helps to accelerate some of the earnings that you'll be able to generate. So how that timing came into play, and particularly through the lens of uncertainty regarding some of the defaults that you've had with some of the cannabis properties and when those earnings will come back?

I mean, I think that's a really good question because I think as Paul has noted many times, over the last 18 to 24 months, we've been evaluating what's been going on within the industry. We have indicated to our shareholders that we've been looking at other investment opportunities outside of cannabis, and we've been strategically evaluating different transactions and opportunities. And this opportunity came about. It appeared to provide what we were looking for, a strategic investment that was of size that had the current income and the overall yield that met our high cost of capital. That began the process for us to continue to evaluate it. As we spent more time doing the diligence, understanding where we would be in the capital stack and how flexible the investment became obvious to us that it was something that we should seriously consider. I lost my train of thought or lost the balance of your question because you had another important part of your question. And it was the dividend. We believe that we needed more time to work through the underlying issues in the cannabis sector in general and specifically those major tenants that have had defaults and then to be able to reposition those assets to benefit IIP and to reaccelerate our revenue growth. As you can see from what Ben has said, we've already re-leased a couple of assets in Michigan and Pennsylvania and continue to have great insight as to how to be able to reposition the assets that we will be taking back from those tenants and/or restructuring with those tenants.

That's helpful. Second question for me, just regarding some of the defaults, particularly PharmaCann. I know you gave some color on your prepared remarks. But just you previously noted that they had debt maturing June 2025. So any color in terms of how specifically that's impacting the process in terms of the communication and how that could evolve given that they did have debt that was coming due 2 months ago or on June 30.

Yes. This is Paul, Aaron. I think right now, we're focused on recovering the assets from PharmaCann. We're very aggressively pursuing our eviction cases. We are getting no indication from PharmaCann that they will be in a position to amicably resolve the debt they owe us and for back rents and future rents. So we're laser focused on recovering those properties and re-leasing to qualified operators. So what happens with PharmaCann's debt coming due is quite frankly, not on our radar.

And our next question will come from Alexander Goldfarb with Piper Sandler.

So I have a few questions here. First, Alan, obviously, you were clinically involved with IQHQ as a company. I believe you left a few years ago, just trying to understand the opportunity now. You guys are obviously enthusiastic about the rebound of IQHQ. And just want to know what's different now versus when you stepped away from the company a few years ago.

Well, a few years ago, I want to be very careful because it is a private company, and there was a lot going on when I stepped away personally and with the organization itself. Since I left, they have made significant changes to the Board, to the governance structure, and to management at the company. I believe all of these changes are beneficial for the potential success of IQHQ.

Okay. You mentioned that you're viewing this as an investment rather than operating the assets, but you also referred to a right of first offer for potentially acquiring the assets if they become available. It seems there will be considerable capital expenditures needed to lease these developments. I have two questions: First, it appears that you are considering the potential for operating these assets. Second, does IQHQ have the necessary capital to fit out and lease these buildings?

Well, to the second question, do they have the capital? Yes. They do have the capital, depending on the timing and the size of the tenant and the quality of that tenant and the length of the lease, on and on, there's many factors that IQHQ has to evaluate. And on the same thing, you're talking about right of first offer, which just gives us the ability to have insight as to when and if they try to sell an asset so that we can make sure that we're protecting our investment in the company. But if indeed, the transaction where we're going to trade at a yield that would be attractive for IIP with a very strong tenant and well leased. I mean, I think financially, if we had a very attractive, high-yielding strong tenant asset, I would think you would want us to look at it and evaluate it very carefully and see if it makes sense for IIP shareholders to capitalize. And I think that's what we would do.

Okay, Paul, at the beginning of your remarks, you discussed the competition in the cannabis sector. We are aware of the illicit and gray markets, but you highlighted the global cartel market, which is well-known, yet you emphasized it more broadly, considering the debt challenges the industry is facing for refinancing in the coming year and your investment in IQHQ. Are you suggesting that your perspective on future investments in cannabis has changed from your original expectations? Or was the mention of the global cartel just one of the general challenges the industry is encountering? I want to clarify if it's more about the general headwinds versus the belief that the business case for cannabis isn't as strong as it appeared a few years ago, leading to a potential shift away from cannabis investments towards other types of real estate.

Alex, regarding the illegal grows, they are one aspect of the overall illicit competition facing licensed operators. While it's been highlighted in the news, particularly with the ICE raids in California and issues involving some Chinese entities, it’s not a game changer. We remain committed to the cannabis industry and are the leading providers of capital in this space. As we've indicated in our recent calls, there aren’t many opportunities currently in the cannabis sector. Therefore, to be responsible stewards of capital, we felt it necessary to explore alternative investments, which we have been doing for over a year. This led us to the IQHQ opportunity, where we applied a thorough and objective analysis with outside counsel, arriving at the unanimous conclusion that this was the best investment outside of cannabis. We still believe in the cannabis industry. As I've mentioned, its projected growth shows it is outselling other beverage products, although it is currently facing challenges. Instead of remaining passive, we believe it is our responsibility to utilize our capital effectively and beneficially for our shareholders, which is exactly what we are doing.

Is this more of a temporary investment outside of cannabis, or should we expect to see more non-cannabis investments in the future?

Well, I think that at this point, we're going to see how things play out. We have a lot of things left to do, including working through the assets that we are going to be taking back from some of our tenants and hoping that the cannabis industry has some positive recovery news, and we're going to work through that first, before we make anything else differently than what we've already done.

Our next question will come from Merrill Ross with Compass Point.

As to why you didn't make an investment given your expertise and investment separately in a life sciences property or to a joint venture with IQHQ. Why was this structure of a revolver and a preferred plus warrant more attractive than directly making your own investment?

The overall yields of life science transactions, if they were going to trade and assets that are well leased, are significantly below our current cost of capital, and investing in this way allowed us to have a very accretive transaction. And so that's why we went down this path. I think because of how difficult the life science industry is right now, the overall operational expertise of operating a life science asset is something that I think is best suited for a company such as IQHQ. We went down this path, and we believe we've structured a very opportunistic and high-quality secure transaction that will provide a very accretive return for IIP and IIP shareholders.

And to follow up, can you disclose the current cash yields on the revolver?

The current cash yield on our investment is north of 10%.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Alan Gold for any closing remarks.

Thank you. I would like to thank our shareholders for their continued support. I thank the team for your good and hard work. And with that, we'll end the call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.