Innovative Industrial Properties" Q2 2026 Earnings Call - Successfully Refinances $291M Debt and Accelerates Life Sciences Pivot

Operator: 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 one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Eli Kanter, Director of Finance.

Eli Kanter, Director of Finance, Innovative Industrial Properties Inc.: Thank you for joining the call. Presenting today are Alan Gold, Executive Chairman, Paul Smithers, President and Chief Executive Officer, David Smith, Chief Financial Officer, and Ben Regin, Chief Investment Officer. Before we begin, I’d like to remind everyone that some of the statements made during today’s conference call, including statements regarding our potential lease transactions that are subject of letters of intent, are forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, subject to risk and uncertainties. Actual results may differ materially. We refer you to our SEC filings, specifically our most recent report on forms 10-K and 10-Q, for a full discussion of risk factors that could cause actual results to differ materially from those contained in forward-looking statements.

We are not obligated to update or revise any forward-looking statements, whether due to new information, future events, or otherwise, except as required by law. In addition, on today’s call, we’ll discuss certain non-GAAP financial information such as FFO, normalized FFO, and AFFO. You can find this information together with 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. I’ll now hand the call over to Alan. Alan?

Alan Gold, Executive Chairman, Innovative Industrial Properties Inc.: Thanks, Eli. Good morning, everyone. 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. We successfully completed the full funding of our $270 million commitment to IQHQ, continued to see leasing activity across our cannabis portfolio, executed multiple strategic financing initiatives that further strengthened our balance sheet, enhanced our financial flexibility. Our investment in IQHQ reflects our disciplined approach to capital deployment, ongoing portfolio diversification through opportunistic investment activity. Since our initial announcement in August of 2025, IQHQ has announced meaningful leasing activity, 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, 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 sq ft while advancing several additional re-leasing 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 common and preferred equity. Most notably, we successfully executed an 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 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 team, we believe we are well positioned to continue creating long-term shareholder value. With that, I’ll turn the call over to Paul.

Paul Smithers, President and Chief Executive Officer, Innovative Industrial Properties Inc.: 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 I to Schedule III. 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. Curaleaf, 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. Turning 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 1st, 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 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?

Ben Regin, Chief Investment Officer, Innovative Industrial Properties Inc.: 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 4Front 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’ve been able to retenant 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. At 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 two 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 AdvanCell for the entire 128,000 square foot 1 Corporate Drive building at Innovation Park, IQHQ’s life science and advanced manufacturing campus in Andover, Massachusetts. AdvanCell, 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, 1 Corporate Drive is expected to serve as its manufacturing site in the U.S. and its global headquarters. The AdvanCell 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 2 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 2022. While biotech R&D employment reached a record level after five consecutive months of growth. Although vacancy remains elevated, the development pipeline is down over 85% from the 2023 peak, of the pending new supply, approximately 72% is pre-leased.

The unleased supply pipeline now represents less 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.

David Smith, Chief Financial Officer, Innovative Industrial Properties Inc.: 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 was primarily driven by reduced payments received from certain default tenants, partially offset by contractual rental escalations and incremental revenue from leasing activity. 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 secured term loan financings through five separate transactions and continued to access the 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. Due to strong investor demand, we were able to complete an upsized offering of $402.5 million of exchangeable notes due 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 the 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 of 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?

Operator: We will now begin our question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are 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 Grey with Alliance Global Partners. Aaron, your line is open. Please go ahead.

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

Alan Gold, Executive Chairman, Innovative Industrial Properties Inc.: Sure. I think that’s a great starting question because it goes to our belief that we now are positioned for growth. It allows us to take advantage of the execution that we’ve done on the balance sheet and obviously the execution we’ve done in the current portfolio. Our diversification that we’ve talked about in the last several quarters continues to be progressing well. As you will note, we’ve completed the commitment to IQHQ of an additional, I think it was $90 million to a total of $270 million of our commitment into the IQHQ transaction. With our latest commitment generating greater than a 14%+ yield. We see that opportunity to achieve those above average yields and being highly accretive to IIPR still in the life science industry. We are continuing to move forward with our diversification program. I think that’s where we sit today.

As to how chunky they are, the life science transactions are fairly large, which does talk about chunky future or large-scale future investments potentially. Yet we’re also still looking at what we think is an improving cannabis market for potential growth opportunities.

Aaron Grey, Analyst, Alliance Global Partners: Appreciate that color. That’s really helpful. Second question for me is just on some of the legacy cannabis tenants. Obviously, last year, we looked at some of you guys taking the kitchen sink in terms of being proactive in some of the tenant defaults, and things seem to be improving, but we obviously had the Parallel just get in now. Just want 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 Section 280E taxes improved, at least for medical, potentially for adult use with Phase Two rescheduling. Just wanted to get the broader picture in terms of how comfortable you are today with the cannabis portfolio going forward. Thank you.

David Smith, Chief Financial Officer, Innovative Industrial Properties Inc.: I think that the Parallel transaction was a slow

Alan Gold, Executive Chairman, Innovative Industrial Properties Inc.: progressing restructuring that took many years to finally come to fruition. It was started, we’ve been dealing with it for the last, I don’t know, three or four years. It finally culminated. Yes, we did end up with two very high-quality assets in Florida, which we believe is a strong market. We are already receiving interest in those two assets. As to the balance of the portfolio, we believe that the industry is continuing to improve. We certainly feel very positive of the rescheduling, and hopeful that the further rescheduling process is completed, noting that everything takes much longer than we all want or hope for the positive effects of those actions to occur. We are monitoring all of our tenants on a quarterly basis 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 believe that the opportunity to take advantage of the rescheduling that’s happening in the cannabis industry will show itself throughout this year and into 2027, and beyond.

Aaron Grey, Analyst, Alliance Global Partners: Okay, great. Appreciate the color. I’ll go and jump back in the queue.

Alan Gold, Executive Chairman, Innovative Industrial Properties Inc.: Thank you.

Ben Regin, Chief Investment Officer, Innovative Industrial Properties Inc.: Thanks, Aaron.

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

Bill Kirk, Analyst, Roth Capital Partners: Good afternoon, everybody. I wanted first to ask about the sale of the property in San Marcos. I guess, what changed about the opportunity at that property, particularly as Texas finally gets its medical program rolling?

Ben Regin, Chief Investment Officer, Innovative Industrial Properties Inc.: Yeah. Hey, Bill. This is Ben. I wouldn’t say anything changed. 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. We saw a pretty extended runway, even though we think Texas is a great opportunity, until we could potentially have to develop something and get it approved. 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.

Bill Kirk, Analyst, Roth Capital Partners: Okay. No change in how you’re thinking about Texas?

Ben Regin, Chief Investment Officer, Innovative Industrial Properties Inc.: That’s right.

Bill Kirk, Analyst, Roth Capital Partners: Okay. Paul, you talked a little about how the capital markets are treating the industry differently, maybe treating your tenants a little bit differently, treating you maybe differently. From a theoretical perspective, with those changing regulations, whose cost to capital is set to improve more, yours or your tenants?

Alan Gold, Executive Chairman, Innovative Industrial Properties Inc.: Well, thanks, Bill. I would like to say both. I think that what we can point to right off the bat is, as far as the tenants are concerned, when we see Trulieve listing on the New York Stock Exchange. Now, if you said that three years ago, you’d think we were crazy. We look at Curaleaf, Verano, and Ascend also making moves for uplisting. I think that is a quick way for those operators to gain access to the public capital markets. That’s a big benefit for them, I think, and certainly for them as our credit tenants. I think our cost of capital certainly will benefit in two ways. One, I think from the fact that our diversification into the life science industry and non-cannabis. We look at lenders, and they look at us a little more positive because we’re not in the cannabis space.

I think we’ve seen a direct result of that diversification, and I think just as well, I think our access in the cannabis space to lenders will certainly improve with rescheduling.

Bill Kirk, Analyst, Roth Capital Partners: Thank you. Thank you, Paul. Thank you, Ben. I’ll pass it along.

Alan Gold, Executive Chairman, Innovative Industrial Properties Inc.: Thanks, Bill.

Operator: Your next question is from the line of Tom Catherwood with BTIG. Tom, your line is now open. Please go ahead.

Tom Catherwood, Analyst, BTIG: Ooh, that’s a new one. Tom. Hello, everybody. I guess I have something to admit. Tom Catherwood with BTIG. Thank you for taking the questions. Just wanted to touch on the leases that you’ve signed. As you’re going through the quarter, by our math, there were nine properties where you had re-leased space, but the tenants hadn’t started paying rent. I know the timing of lease commencements can be hard to predict, but run rate revenues seem to come in stronger than we would expect this quarter. Can you give us a general sense maybe of what commenced in Q2, and then what you’re expecting in your base case through the second half of this year?

Ben Regin, Chief Investment Officer, Innovative Industrial Properties Inc.: Yeah. Hey, Tom. This is Ben. Specific to Q2, I wouldn’t say there was anything material that commenced in it, and I still think what we’ve discussed in the past is the right way to think about it, which is you’re looking at nine to 12 plus months from lease execution to get through abatement periods and licensing. When we think about the almost 900,000 square feet between executed leases and the agreements we have in place with 4Front, the former 4Front assets, I think that’s still the right way to model that out.

Tom Catherwood, Analyst, BTIG: Just to clarify on that one, Ben, because again, if we strip out the back rents paid by 4Front and PharmaCann, and we strip out some of the security deposits that you’ve included in rental revenue, it still looks like you’re running maybe $2 million, maybe $1.9 million to $2 million higher quarter-over-quarter on a run rate basis. Is that something else commencing, or is that just the steady state run rate and therefore everything else that you’ve signed is still upside from here?

David Smith, Chief Financial Officer, Innovative Industrial Properties Inc.: Yeah, I think, Tom, David, I would just reiterate what Ben said. There was nothing material during the quarter. Happy to talk to you offline about this further. I think one other item that, I don’t know if you’re taking into account, in the first quarter, we did have also a million and a half that we received from Gold Flora. I’m not sure if you’re adjusting from that in your numbers.

Tom Catherwood, Analyst, BTIG: Yep

David Smith, Chief Financial Officer, Innovative Industrial Properties Inc.: Happy to discuss that further.

Tom Catherwood, Analyst, BTIG: Perfect. Appreciate that, David. Then last one from me. PharmaCann in New York and Pennsylvania, I understand you’re likely limited in what you can say, in the release, it did seem like there’s been a change in engagement there with those two assets specifically. Is there a potential there to maybe speed up the resolution? I think you had mentioned in the past that there was a previous LOI on the Montgomery, New York asset. What has been that kind of shift and kind of how could it impact occupancy of those assets?

Ben Regin, Chief Investment Officer, Innovative Industrial Properties Inc.: Hey, Tom, this is Ben again. I think we have been pleased with the interest in those two assets. I wouldn’t say anything has changed on the Montgomery asset. That is still something we’re working through. I think we mentioned that we are working towards a potential resolution where we new tenants to those two properties, which I think would be a great sign to further stabilize the portfolio on top of the 900,000 sq ft that we’ve been talking about. I think that’s as much as we can say about that at this time.

Tom Catherwood, Analyst, BTIG: Appreciate it. Just one follow-up on that, Ben. You mentioned the assets that are already leased. You mentioned the 4Front assets that are awaiting the court resolution. Are there any other assets that you have under LOI that you’re expecting near-term execution of a formal lease?

Ben Regin, Chief Investment Officer, Innovative Industrial Properties Inc.: I mean, there are multiple assets under LOI and in various stages of negotiations. I think that we’ve talked about that broadly, just given the uncertainty around timing and remaining diligence items, and really kind of focused our comments today on the executed leases the 4Front agreements that are in place, totaling again, nearly 1 million sq ft in leasing activity just in those two buckets. Behind that, we’ve been very pleased, again, across the portfolio with the level of demand that we’ve seen for our assets. We’re hopeful that we’ll be able to continue to convert some of these LOIs and some of these discussions into incremental gross leasing activity for the balance of 2026 and into 2027.

Tom Catherwood, Analyst, BTIG: That’s great. Thanks for all the answers, everyone.

David Smith, Chief Financial Officer, Innovative Industrial Properties Inc.: Thanks, Tom.

Operator: There are no further questions at this time. I will now turn the call back to Alan Gold for some closing remarks.

Alan Gold, Executive Chairman, Innovative Industrial Properties Inc.: Thank you, and thank you all for joining today. Thanks to the team for the tremendous execution, not only on the balance sheet and on the portfolio, but on the diversification program that we have in place. With that, we will sign off.

Operator: This concludes today’s call. Thank you for attending. You may now disconnect.