Innovative Industrial Properties, Inc. Common stock 2026 Q2 Earnings Call

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? 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.

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? 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.