Innovative Industrial Properties, Inc. (IIPR) Earnings Call Transcript & Summary

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

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 Regan, 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 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 10-K and 10-Q for a full discussion of risk factors that could cause actual results to differ materially from those contained in forward-looking statements. We are not obligated to update or revise any forward-looking statements, whether due to new information, future events, or otherwise except as required by law. In addition, on today's call, we will discuss 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 SEC.

Now handing the call over to Alan. Alan? Thanks, Eli. Good morning, everyone, and thank you for joining our second quarter 2026 earnings call. This quarter was defined by strong execution across our platform, with the IIPR team delivering meaningful results in portfolio management, leasing, and capital markets. successfully completed the full funding of our $270 million commitment to IQHQ, continued to see leasing activity across our cannabis portfolio, and executed multiple strategic financing initiatives that further strengthened our balance sheet and enhanced our financial flexibility. Our investment in IQHQ reflects our disciplined approach to capital deployment and ongoing portfolio diversification through opportunistic investment activity. Since our initial announcement in August of 2025, IQHQ has announced meaningful leasing activity and other operational developments across its portfolio. With the successful completion of our funding commitment, we continue to believe this investment is supported by the quality of the underlying assets and improving fundamentals in the life science sector. Importantly, our team remains actively engaged in evaluating a growing pipeline of opportunities in the life sciences sector. positioning IIPR to deploy capital selectively and accretively. Leasing execution was another key highlight of the quarter. Year to date, we have completed new leases at five properties totaling approximately 389,000 square feet. while advancing several additional releasing initiatives. These efforts reflect the team's continued focus on driving occupancy, stabilizing assets, and maximizing the value of our cannabis portfolio. Equally important, we delivered significant progress on the balance sheet. During the quarter, we completed approximately $150 million of secured term loan financings, efficiently addressed our $291 million senior debt maturity in May, and continue to utilize our ATM programs across both. of common and preferred equity. Most notably, we successfully executed and upsized $402.5 million exchangeable notes offering, demonstrating strong investor demand and providing substantial growth capital. In connection with this transaction, we also repurchased approximately 80.5% $5 million of our common stock. Taken together, these accomplishments highlight the strength of our platform. Active portfolio management, consistent leasing execution, and proven access to capital at scale. With a fortified balance sheet, a differentiated investment strategy across cannabis and life sciences, and an experienced management 2018, we believe we are well positioned to continue creating long-term shareholder value.

With that, I'll turn the call over to Paul. Thanks, Alan. At the federal level, cannabis reform continued to move forward. The DEA completed its hearing last month on the proposed rescheduling of marijuana more broadly from Schedule 1 to Schedule 3. The matter now moves to the administrative law judge for a recommended decision before returning to the DEA for final action. The timing remains uncertain, but completion of the hearing represents another meaningful step forward in the federal cannabis reform process. We are already beginning to see that progress reflected in the capital markets. In June, Trulieve became the first U.S. cannabis operator to list on the New York Stock Exchange after restructuring its consolidated business around state-licensed medical cannabis. Clear Relief, Verano, and Ascend Wellness have also taken steps towards potential listings on major U.S. exchanges. Broader access to those exchanges could expand the industry's institutional investor base and provide more traditional sources of capital, benefiting all stakeholders. Even with this progress, challenges remain for certain operators. As we disclosed last month, Parallel defaulted on its lease obligations at two of our Florida properties. We intend to coordinate with Parallel on an orderly transition of possession of the properties while continuing to reserve all rights and remedies available under the leases. According to the state level, Virginia took a long-awaited step by establishing a regulated adult-use retail market with retail sales expected to begin on July 1, 2027. We believe Virginia presents a meaningful growth opportunity for our tenants and positions the state to become one of the more attractive cannabis markets in the world. markets in the country. With that, I'd now like to turn the call over to Ben to provide additional details on our leasing, disposition, and other investment activities. Ben?.

Thanks, Paul. During the first half of the year, we executed new leases totaling 389,000 square feet across five properties located in California, Illinois, and Ohio. This is in addition to the 488,000 square feet of agreements we have in place across the four assets previously leased to Forefront Ventures. These agreements are still subject to customary due diligence, including licensing and regulatory approvals, and there can be no assurance that these discussions or negotiations will result in executed leases. As Paul described, we expect to regain possession of our two Florida properties leased by parallel, totaling 593,000 square feet. Florida remains the largest medical cannabis market in the country, supported by a broad patient base, strong consumer demand, and a limited license structure. We believe these fundamentals provide a compelling foundation for continued growth with the potential for adult use legalization representing an additional long-term catalyst. We are optimistic that these market conditions will translate to meaningful demand for our facilities. We continue to be encouraged by not only the level of demand for our assets, but the capital-efficient manner in which we have been able to re-tenant our properties. Based on the approximately 877,000 square feet of gross leasing activity we have described, we estimate that average total leasing costs for these assets will be less than $5 per square foot. Turning to dispositions, during the quarter, we closed on an $88.5 million sale of our 389,000 square foot facility in New York to Vireo Growth pursuant to a tenant purchase option. closing, we received a down payment of approximately $39 million and provided approximately $49 million in seller financing at a 15% interest rate. We also closed on the disposition of our land site in San Marcos, Texas. And are under contract to sell to retail properties in Michigan and California. Each of which remains subject to customary closing conditions and other contingencies. Together with the sale of a dispensary property in Arizona earlier this year, these transactions reflect our ongoing strategy to opportunistically monetize select assets and recycle capital across the portfolio. Turning to our investment activity this quarter, we continue to execute on our strategy to diversify our platform and increase our investments in the life science industry. Specifically, we fully funded the remaining $120 million on our $270 million commitment to IQHQ. As described by IQHQ in their June press release, IQHQ recently entered into a long-term lease with advanced sale for the entire 128,000 square foot, one corporate drive building at Innovation Park, IQHQ's life science and advanced manufacturing campus in Andover, Massachusetts. Advance Cell, a clinical stage radiopharmaceutical company, announced in their June and July 2026 press releases that it recently completed an oversubscribed $315 million Series D financing, and OneCorp Drive is expected to serve as its manufacturing site in the United States and its global headquarters. The advanced cell lease follows the 244,000 square foot lease IQHQ announced with Lila Sciences at its Alewife Park asset in 2025 and represents approximately 372,000 square feet of gross leasing activity across these two assets since we made our initial investment in IQHQ. This leasing activity comes at a time when we are seeing encouraging signs across the broader life sciences market. Recent reports from CBRE and JLL indicate that leasing activity across the major U.S. life science markets increased to approximately 3 million square feet during the first quarter, above the 2025 quarterly average. Also, According to these reports, Boston, San Diego, and the Bay Area have averaged a combined 75 life science leases per quarter over the past two years, representing a 35% increase from pre-pandemic levels. Venture capital funding increased 12% year-over-year to $7.4 billion, bringing the funding over the last four quarters reaching its highest level since 2008. 2022, while biotech R&D employment reached a record level after five consecutive months of growth. And, although vacancy remains elevated, the development pipeline is down over 85% from the 2023 peak, and of the pending new supply, approximately 72% is pre-leased. The unleased supply pipeline now represents than 1% of the total existing life science inventory across the country. Taken together, these trends continue to reinforce our confidence in the long-term fundamentals of the sector.

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

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

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

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

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

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

Okay, great. Appreciate the color. I'll go and jump back in the queue. Thank you. Thanks, Aaron.

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

Good afternoon, everybody. I wanted first to ask about the sale of the property in St. Marcus. I guess what changed about the opportunity at that property,.

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