Innovative Industrial Properties Inc Q4 FY2025 Earnings Call

Hello, and welcome to the Innovative Industrial Properties, Inc. Fourth Quarter 2025 Earnings Call. I would now like to turn the conference over to Eli Kanter, Director of Finance. You may begin.

Thank you for joining the call. Presenting today are Alan Gold, Executive Chairman; Paul Smithers, President and Chief Executive Officer; David Smith, Chief Financial Officer; and Ben 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 those regarding potential transactions under letters of intent are forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995 and subject to risks and uncertainties. Actual results may differ materially, and we refer you to our SEC filings, specifically our most recent report on Form 10-K for a full discussion of risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. We are not obligated to update or revise any forward-looking statements, whether due to new information, future events, or otherwise, except as required by law. In addition, on today's call, we will discuss certain non-GAAP financial information, such as FFO, normalized FFO and AFFO. You can find this information together with reconciliations to the most directly comparable GAAP financial measure in our earnings release issued yesterday as well as in our 8-K filed with the SEC. I'll now hand the call over to Alan.

Thanks, Eli, and good morning. Thank you for joining our call. 2025 was a year defined by disciplined execution, balance sheet strength and strategic repositioning for long-term growth. For the full year, our diversified platform of over $2.5 billion of gross assets generated approximately $200 million of cash flows from operations. In addition, since our inception in 2016, we have returned $1.1 billion to shareholders through dividends, reflecting the durability of our business model and our continued focus on sharing our cash flows with our shareholders. We invested capital in 2025 selectively and accretively, committing $275 million across our real estate portfolio and through our strategic investment in IQHQ, further strengthening and diversifying our platform. Operationally, we made meaningful progress across the portfolio. During the year, we executed new leases at 4 properties totaling approximately 339,000 square feet, reinforcing our belief in the quality of our assets and the ability of our team to drive performance within our portfolio. For the year, we generated total revenues of $266 million and AFFO of $205 million. We also strengthened our liquidity position for the year by raising $100 million under a new revolving credit facility in October and issuing approximately $25 million of preferred stock through our ATM. For 2026, we continue to access the capital markets opportunistically and have raised over $40 million of preferred stock at an attractive yield of just over 9.5%, surpassing the amount we raised in all of 2025. We exited the year with total liquidity exceeding $105 million, including cash and availability under our credit facilities. As we diversify our platform, we remain confident in the long-term fundamentals supporting the life science sector. Discussions at the recent JPMorgan Healthcare Conference continue to reinforce our conviction that the sector is exhibiting early signs of renewed momentum, including improving capital availability for well-capitalized life science companies, increased strategic activity among large pharmaceutical companies and continued innovation. Together, these trends are supporting sustained demand for specialized real estate within leading life science markets. Before I turn the call over to Paul, I'd like to briefly address the recent regulatory development impacting the cannabis industry. President Trump's executive order directing the rescheduling of cannabis to Schedule III represents a significant regulatory development for the industry. While the timing and ultimate implementation remain uncertain, we believe this development is directionally positive for the industry, our tenants and our shareholders. Our actions in 2025 reflect a meaningful step in our evolution and our return to growth. We believe the combination of a diversified portfolio across cannabis and life science, a strong balance sheet and an experienced management team positions us to continue strengthening our platform and delivering long-term value for our shareholders. Now with that, I'll turn the call over to Paul.

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

Thanks, Paul. To recap our year in 2025, we executed new leases totaling 339,000 square feet across properties located in California, Massachusetts and Michigan, opportunistically closed on 3 dispositions and closed on approximately $275 million in new investment activity, including one cannabis acquisition and our strategic investment in IQHQ, of which we have funded $150 million to date. We've continued to build on this momentum heading into 2026. As Paul described, we've been very pleased with the activity we are seeing related to the Gold Flora and Forefront receiverships as well as our legal pursuits related to PharmaCann. Gold Flora filed for voluntary receivership in March of 2025 and we have since made meaningful progress re-leasing our 3 properties. We executed a lease agreement with a new tenant for our 70,000 square foot Palm Springs asset during the fourth quarter, executed a lease agreement with a new tenant for our 204,000 square foot Desert Hot Springs asset last month, and we have received multiple offers for a 56,000 square foot Palm Springs asset. Overall, we are very pleased with the outcome of the receivership proceedings and the resolution achieved with respect to these properties. Regarding our 4 assets previously leased to Forefront, we have made significant progress on our re-tenanting initiatives for these assets. This quarter, we reached a tentative agreement with the tenant to lease our 114,000 square foot Washington property and expect lease execution and rent commencement in the near term. For our 250,000 square foot asset in Illinois, we have executed an LOI for the full building with a new operator, which is expected to go into effect at the closing of receivership proceedings anticipated in the coming quarters. For a 67,000 square foot property in Georgetown, Massachusetts, a stalking horse bidder has been selected by the receivership of state, and we have agreed to lease terms with this bidder. We also expect this new lease agreement to become effective upon the conclusion of the receivership process. For our 57,000 square foot property in Holliston, Massachusetts, we have received multiple offers to lease the building, which are currently under review. We look forward to continuing to move these transactions forward and bring resolution to these properties. Moving on to our properties leased to PharmaCann, we continue to be pleased with the progress we have made retenanting our 6 cultivation assets. In early 2025, we regained possession of our 205,000 square foot cultivation asset in Michigan and subsequently executed a lease with a new tenant in April. We also successfully regained possession of our 58,000 square foot cultivation asset in Massachusetts and executed a lease with a new tenant in November. In Illinois, as we reported last quarter, the judge ruled in our favor with respect to our 66,000 square foot cultivation property, and we successfully regained possession of the asset in late December, subsequently signing an LOI with a new tenant for the property in January. Looking ahead, we expect to receive similar rulings from the courts in Pennsylvania, Ohio and New York and are encouraged by the inbound interest we have already received across these assets. Apart from these properties, we are also pleased to report that we signed an LOI in February with a new tenant for a 71,000 square foot vacancy in North Adams, Massachusetts. In parallel with our leasing initiatives, we have also pursued selective asset sales to opportunistically recycle capital. During 2025, we sold 3 assets located in California, Colorado and Michigan, and also closed on the sale of a dispensary in Phoenix earlier this month. These dispositions reflect our ongoing efforts to opportunistically prune noncore assets from our portfolio, enhance overall portfolio quality and redeploy capital towards other investments. Regarding our strategic investment in IQHQ, to date, we have funded $150 million of our $270 million commitment, with the additional $120 million expected to be funded over time. We are encouraged by this investment, and we believe the life science real estate market is continuing to stabilize following a prolonged period of elevated supply. The current construction pipeline of approximately 6 million square feet is at its lowest level since early 2019 and is down sharply from the 2023 peak of more than 37 million square feet. Signs of stabilization are beginning to emerge in key markets. Recent reports from Cushman & Wakefield and Colliers highlight improving fundamentals in select regions. In Boston, annual new demand totaled 2.1 million square feet, surpassing 2024 totals by approximately 72%. The San Francisco Peninsula recorded its first decline in vacancy in more than 2 years in Q4 2025. Continued growth among life science and AI tenants is expected to support sustained improvement in market conditions in 2026 as supply moderates and demand gradually improves. With that, I'll turn the call over to David.

Thank you, Ben. For the fourth quarter, total revenues were $66.7 million and AFFO totaled $53.3 million or $1.88 per share representing a 10% improvement compared to our third quarter 2025 AFFO of $1.71 per share. This quarter-over-quarter improvement was primarily driven by a $3.7 million or $0.13 per share of payments received for unpaid rent due during the Gold Flora receivership and a full quarter's benefit of earnings accretion from our initial investment in IQHQ. For the first quarter of 2026, as Ben detailed, we continue to pursue the recovery of unpaid rents for certain default tenants and so far have received an additional $3 million, $0.10 per share related to our Gold Flora and PharmaCann properties. On the capital markets front, we have raised over $145 million of attractively priced debt and preferred equity since October 2025. For preferred stock, during the fourth quarter of 2025, we issued approximately $5 million on our ATM and we have already issued over $40 million of preferred equity at an attractive yield of just over 9.5% early in the first quarter of 2026, reflecting continued strong investor demand for this perpetual security. We have now grown our Series A preferred stock to $95 million of par value outstanding through our ATM issuances. On the debt front, during the fourth quarter, we added a new $100 million revolving credit facility secured by our investment in IQHQ, which provides us with low-cost, flexible capital at an attractive rate of 6.1% and further enhances our liquidity profile. When we announced our IQHQ transaction in August, we believed one benefit would be the potential to access lower cost capital, and we are pleased to see that come to fruition with the closing of this new credit facility. This continued access of capital strengthens our ability to fund growth opportunities while maintaining a conservative balance sheet. Our balance sheet remains strong, supported by over $2 billion of unencumbered real estate and a conservative capital structure with a debt service coverage ratio exceeding 10x and a net debt to adjusted EBITDA of 1.4x. We ended the quarter with over $107 million in total liquidity, including cash on hand and availability under our revolving credit facilities, which was further improved with our year-to-date preferred stock ATM issuances I mentioned earlier. As it relates to our bond maturity at the end of May, we are actively evaluating a range of alternatives to address the obligation, including potential refinancing and other capital sources. We believe our unencumbered asset base is over $2 billion of real estate and our strong credit profile positions us well as we pursue these alternatives. 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?

Your first question comes from Tom Catherwood with BTIG.

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

Thank you for the question. There are several factors at play here. First, we have a highly experienced management team that has been in this industry for nearly a decade. They are currently executing on the business plan we outlined for the end of 2024 and through 2025, and we expect to continue this execution into 2026. Our return to growth stems from the signs of recovery we noted in previous quarters, which have permitted the stronger operators in our field to capitalize on the challenges faced by weaker competitors. While there are still considerable obstacles in the cannabis industry, we also see distinct opportunities, especially in collaborating with some of the top growers in our portfolio and nationwide. Ben or Paul, do you have anything to add?

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

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

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

I appreciate that, Ben. I just wanted to clarify the situation with the tenants in default. It seems the outcomes fall into three categories. The first is that the receivership process is in progress and rents will start again once it's completed. The second is that we are retrieving space and will be looking to re-lease it. The third is that some tenants are still making payments, but we are not recognizing those rents as they attempt to regain their facilities. Can you tell me who is likely to start paying rent soon after receivership ends, who will require re-leasing, and who is still trying to recover their properties?

I will pass these questions to both Paul and Ben. To clarify, when we receive rent, we recognize it, which is our current practice. There are some tenants in default who have been ordered by the court to pay rent or deposit it in escrow, and once that money is made available, we will recognize the rent. This is just a clarification point. Now, Paul, it's your turn.

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

Your next question comes from Aaron Grey with Alliance Global Partners.

This is John on for Aaron. So regarding the LOIs that have been signed or new term agreements you've come to with the 4Front assets, could you provide some color on the new rental rates and how that differs versus the rates paid by the respective tenant prior to default? Obviously, it probably varies by each property and state. But any detail on a broad haircut that might have needed to be applied would be helpful.

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

And I would also add that we've seen some very positive situations where CapEx has been significantly lower on re-leasing than anybody has anticipated. Is that right?

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

Okay. Great. Regarding the dividend and earnings coverage moving forward, you've received some additional one-off payments from defaulted tenants, especially in the fourth quarter, which helped bridge the dividend gap. You also have the IQHQ interest income, which should continue to increase alongside new lease agreements from the previously defaulted tenants. On a normalized basis, do you believe you are in a better position to have the dividend fully covered in the near term, or would incremental steps like getting more properties leased be necessary?

First of all, our dividend policy is determined by our Board, which considers past performance and future projections. We are witnessing a return to growth and strong leasing activity that is boosting revenues. Additionally, we have resolved some major lease litigations, and with these outcomes and the ongoing leasing activity, we feel optimistic about our position regarding the dividend.

Your next question comes from Bill Kirk with ROTH Capital Partners.

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

I believe our tenants are paying their rents on time and according to their leases. Now, I will let Paul discuss the rescheduling and its benefits for the industry.

Yes, I believe you closely follow this, Bill. The announcement made two months ago by the President regarding the executive order was very important. It has generated considerable interest and positive sentiment in the industry, particularly among our larger MSOs that are eager to expand and acquire leases in new states, which is reflected in our reported re-leasing activity. There is some uncertainty regarding the timing and manner of the executive order's implementation, but it will happen. That seems to be the current sentiment in the industry. Despite the uncertainty surrounding the timeline, there is a clear positive energy stemming from the executive order's announcement.

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

There is a potential intoxicating hemp ban in the U.S. coming in mid-November. Many of these intoxicating hemp products compete with your tenants. Does this affect your improved outlook for re-leasing or influence how tenants feel about their future with a possible competitor being removed this year?

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

The next question comes from Alexander Goldfarb with Piper Sandler.

Just a few questions. First, thank you for the new table on the troubled tenants and their payments over time. I hope that can also include the leases that have been definitively resolved, as it aids our discussions. So, a few questions here. First, regarding the opportunity set, you have an interesting chart that compares the size of the legal cannabis industry to various alcohol industries. The cannabis sector is quite significant, especially when factoring in the illicit market. However, you mention a focus on life science. As we consider the company’s future over the next few years, particularly with more states looking into legalization and the potential for cannabis to be reclassified to Schedule III, do you believe that life science presents a better risk-adjusted return in the coming years, even if the cannabis sector is able to overcome its current challenges and return to a growth phase?

I believe that our diversification into the life science industry is complex. It’s not just about the unique opportunities we identified in this sector, where we noticed it had potentially hit its lowest point but was showing signs of recovery and increased opportunities. We see a way to leverage our capital to seize these chances. Diversification also provides us with access to broader capital sources, which could help us lower our overall cost of capital. We are currently implementing this strategy and are beginning to see some benefits as we progress.

And regarding IQHQ, the last update on the leasing was that the portfolio was approximately 25% leased. Is there any update on that? Has it changed at all or is it still around the same?

They are a private organization and have not shared any public information yet. However, we are observing a noticeable increase in leasing activity in the markets overall, particularly in Boston and the Bay Area. Historically, when the life science real estate sector rebounds, it tends to start in the Boston area, followed by the Bay Area, and then progresses to San Diego. We are currently witnessing this pattern unfold.

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

Yes, Alex, it's David. I mean on the legal reserve, we have not taken that. Our auditors have not required to do it either as was disclosed in the 10-K. And so we'll be working through that. There will be costs, but it's hard to estimate at this point.

I would add, this is Paul, Alex, a lot of the legal costs have been related to the tenant defaults and our efforts to remove them from the properties and go along with the receivership. So there's significant costs there. We think will be resolved in the next couple of quarters. So there will be some savings there on the legal fund.

But what causes a company to set aside a reserve versus no reserve?

Yes. I would point to the statement in the 10-K that indicates it is neither probable nor unlikely. Until it is classified as one of those probable scenarios, that could necessitate action.

This concludes the question-and-answer session. I'll turn the call to Alan Gold for closing remarks.

Thank you. First and foremost, I want to express my gratitude to the team for their exceptional execution and hard work that have brought us to this point. We believe we are well-prepared for future opportunities as they arise. I would also like to thank our stakeholders for their support. With that, we will conclude the call. Thank you.

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