Good day, and welcome to the Innovative Industrial Properties, Inc. Q3 2025 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Eli Kanter. Thank you, and over to you.

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. Alan?

Thanks, Eli. Good morning, and thank you for joining our call. In the third quarter, we completed our initial investment into IQHQ, a premier life science real estate platform that enhanced the diversification of the company and is expected to provide significant earnings accretion for the benefit of IIP shareholders. The total investment was $105 million, including $100 million into a revolving credit facility and $5 million in preferred stock. Our remaining commitment of $165 million in preferred stock is expected to be funded in multiple tranches through the second quarter of 2027. In conjunction with this investment, we successfully closed on a new $100 million secured revolving credit facility to support our investment into IQHQ and further strengthen our balance sheet. We were very pleased with the support of our largest lender in providing this facility, which we believe reflects continued confidence in our platform, balance sheet and disciplined approach to growth and capital allocation. These transactions mark a significant step in our evolution and our return to growth as we diversify our portfolio beyond cannabis into the dynamic life science sector. We have strong conviction in the long-term fundamentals driving this industry, and we believe this strategic investment at this entry point positions us to deliver highly accretive returns to our shareholders. We believe in the value of our diversified portfolio across both cannabis and life science and the ability of our team to strengthen our platform and create long-term value for our shareholders. Now with that, I'll turn the call over to Paul. Paul?

Thanks, Alan, and welcome, everyone. Our investment in IQHQ, together with the new credit facility, marks a meaningful step forward in executing on our strategy to return to growth while further diversifying and strengthening our portfolio. Expanding into life sciences positions us to capture long-term secular growth while complementing our established leadership in the regulated cannabis real estate market. We continue to actively maximize the value of our assets to drive growth and optimize performance, while at the same time, our investment in IQHQ provides an additional avenue for future growth. We believe this dual-track strategy will significantly enhance shareholder value and position IIP for sustained success across both industries. I'd like to provide a few specific updates on our progress within our portfolio. Receivership proceedings for 4Front Ventures are ongoing. We are engaged with the U.S. receiver and bankruptcy trustee regarding the properties and related claims and are working closely with outside counsel to protect our legal interest and pursue our rights under the leases. Gold Flora remains in receivership. We remain in ongoing discussions with the receiver regarding the receivership and sale process. We will continue to monitor developments and provide updates as appropriate. With respect to PharmaCann, we are pleased to report that the judge in Illinois ruled in our favor in our dispute with PharmaCann, and we expect to regain possession of our Illinois property by year-end. Our efforts to also regain control of the properties located in New York, Ohio and Pennsylvania remain a top priority. We continue to work closely with local counsel to pursue our rights and remedies under the leases and related guarantees, including monetary claims. Because timing varies by state and depends on local jurisdictions, we are unable to provide a specific time line at the moment. We remain focused on…

Thanks, Paul. Within our cannabis portfolio, we've executed leases totaling 281,000 square feet year-to-date across properties located in California and Michigan and taking advantage of capital recycling opportunities by selling 2 assets. We are also closely monitoring the situations with our tenants that Paul described and are encouraged by the strong demand for our real estate and look forward to sharing additional updates in the future. Turning to IQHQ, we're very excited about our return to growth. We closed on our initial $105 million investment with additional commitments of $165 million expected to be funded over time. We expect this investment to be highly accretive and positions us to capitalize on secular tailwinds. Just last month, Lila Sciences, an AI biotech company, leased 244,000 square feet across 2 buildings at IQHQ's Alewife Park asset in Cambridge, Massachusetts. The transaction represents one of the largest leases in the region since the beginning of the year and underscores the improving leasing momentum for IQHQ and continued demand for premier real estate assets. Overall, global spending on AI and pharma and biotech is projected to reach $3 billion in 2025 and $16.5 billion by 2034, reflecting a 27% CAGR. The use of AI can accelerate drug discovery and innovation, resulting in an associated increase in real estate needs according to Cushman & Wakefield. We believe the IQHQ portfolio located in key AI and life science hubs in San Diego, San Francisco and Boston is well positioned to capitalize on these trends. And within our investment pipeline, we will continue to selectively pursue assets in the cannabis and life science industries, focusing on the highest quality investments with the most attractive risk-adjusted returns for our shareholders. I'll now turn the call over to David.

Thank you, Ben. For the third quarter, we generated total revenues of $64.7 million, a 3% increase compared to the prior quarter. This increase was primarily due to a payment of $0.8 million we received from the Gold Flora receivership, along with annual rent escalations in our portfolio. Adjusted funds from operations for the quarter totaled $48.3 million or $1.71 per share, representing no change from the second quarter results. Our balance sheet remains strong, supported by $2.7 billion in primarily unencumbered gross assets and a low leverage capital structure. We ended the quarter with nearly $80 million in liquidity, including cash on hand and availability under our credit facility. As Paul and Alan noted earlier, subsequent to quarter end, we secured a second revolver with a federally regulated bank for $100 million, reflecting our view that as we diversify into a new sector, it should increase IIP's access to attractively priced bank financing. The new revolving credit facility secured by our IQHQ investment was structured at favorable terms of SOFR plus 200 basis points or 6.1% on the closing date of the facility and includes an accordion feature that could expand capacity to $135 million, subject to additional bank commitments. This facility, combined with our low leverage capital structure and strong liquidity ensures we have ample flexibility to fund future growth. Our investment in IQHQ is expected to be highly accretive with a blended interest rate exceeding 14% or roughly 800 basis points higher than the current pricing on the new credit facility and aligns with our commitment to delivering strong risk-adjusted returns for our shareholders. As always, we remain focused on maintaining a conservative financial profile while pursuing strategic opportunities that drive long-term value, highlighted by a low debt to gross assets ratio of 13% and a robust debt service coverage ratio exceeding 11x. On the capital markets front, during the quarter, we opportunistically issued 246,000 shares of our preferred stock for total net proceeds of $5.9 million. Looking ahead, we are actively evaluating our capital structure and having ongoing discussions regarding our bonds maturing next year to proactively address this maturity in the near term. We will continue to explore a range of strategic financing alternatives that align with our long-term growth objectives and conservative financial philosophy. With that, we thank you for joining the call and would like to open up the call for questions. Operator, could you please open up the call for questions?

[Operator Instructions] We have the first question from the line of Tom Catherwood from BTIG.

I wanted to start with the dividend question, but from a different perspective. So the way we see it, there are 2 near-term catalysts that can help bridge the gap from the $1.71 per share of AFFO that you did in Q3 to the $1.90 of quarterly dividend. The first is, as you guys have spoken about, the IQHQ investment, which we think kind of conservatively can contribute, let's call it, $0.11 per share on a cash basis when it's fully deployed. And the second is your signed but not commenced backfill leases. And we think those can contribute something in the range of $0.11 to $0.15 a share per quarter. So regarding that second bucket, what are your expectations for the timing of rent commencements at your re-leased assets? And how does that timing factor into the company's dividend policy?

Well, I mean -- so I'm not sure that I follow your math exactly. I mean I think we might be a little bit -- have a little bit different perspective on the IQHQ investment, but we'll take that offline and deal with that separately. As to the timing of the rent commencements on unleased assets or assets that are -- we're going to be getting back, keeping in mind that the Gold Flora assets is going through a receivership in which the receiver, as Paul has mentioned, has awarded the opportunity to an entity that would be closing on the transaction and then paying rent on the facilities that it intends to use, leaving the remaining -- if there are any remaining assets for us available to re-lease, and we believe the timing on receiving income on that would be rather quickly given the level of interest that we've seen from those or that portfolio. As to Gold or as to 4Front, once again, going through receivership and with an intent of seeking a buyer to purchase the entity and then continue forward. We think once that is completed, the revenue would be immediate or very quickly after the completion of the receivership, which could be another, Paul, what you estimate?

On 4Front, it could be another 3 to 9 months.

And then on PharmaCann, we -- which is, I think, just a positive statement on the industry in general, we're seeing continued interest and increasing interest on those specific assets and in the individual states. And while we're pleased to be getting through the legal side of the Illinois transaction, we believe that there is interest from interested parties to take over that facility. We've just been stymy because of the courts to be engaging with those players. And now with the positive reaction from the court to our pleadings, we believe that we'll have significant interest and be able to get revenue starting in the 6- to 9-month time frame. So I'm sorry, let me let Paul finish with that.

Yes. Just some additional thoughts, Tom. I think as far as the litigation, I think we're in the fourth quarter of getting some resolution. It takes a long time in these various jurisdictions to get a trial date. And as we reported, we had a favorable outcome in Illinois. I think Pennsylvania and Ohio will be next in line by either a trial or summary judgment and at some point in New York after that. So we are getting close -- much closer to a resolution of those matters. And I also want to add that in the bankruptcy cases involving 4Front and Gold Flora, our back rent and rent owed to us is considered an administrative claim in the receivership process. So once the receivership is concluded, we should receive significant funds by way of administrative claim. And again, that is -- Gold Flora is sooner than 4Front, but we'll continue to report on the timing on those.

That's great. That was really helpful. And just kind of to add to that, there's a couple of other leases that you signed since the end of 2023. So these are like the re-leasing you did with Mitten Extracts or Lume Cannabis, Tri-Mountain Pure and Berry Green, all the backfills that were already done. For that run rate that you had this quarter, that $171 million, how many of those leases have commenced in that run rate this quarter? And how many are still left to commence kind of near term?

Tom, this is Ben. Yes, I think it's pretty minimal for the third quarter. I think just as a general statement, when we sign a lease, there's sometimes a licensing process, ramp-up of operations and kind of various things that impact when that revenue starts. But just to echo what Alan and Paul said, I think we've been very pleased with the leasing success. We're very optimistic about the demand we're seeing really across all assets that are going through the various kind of legal processes. So timing is a little more difficult to peg, but again, very encouraged by the demand that we're seeing really across the portfolio.

Okay. But just to clarify, Ben, so those ones that I mentioned, the ones that you had backfilled over the past 2 years, those -- you said it was a de minimis contribution to 3Q. So there's still more of that to roll in. Is that correct?

Yes. I mean, Tom, on that side, there was a slight benefit, but I would say de minimis this quarter as those leases come online and ramp up.

And to wrap up in the fourth quarter and beyond.

Perfect. Perfect. All right. And then the last one for me in terms of the balance sheet, as we think through sources and uses over the next 6 months, you obviously mentioned in the prepared remarks the new $100 million revolver, which kind of can continue to support your ongoing investment in IQHQ. For the unsecured bonds that mature in May, what are the specific options or kind of avenues that you're currently pursuing? And what is your expectation in terms of timing and getting to a resolution on those?

Well, I mean, I think the options are very clear. We're either going to refinance them or we're going to refinance them. I think that's what we're -- that's our options right now. We believe that we have the -- a very strong and affirmed rating from Egan-Jones and continue to believe that we have a very, very strong balance sheet, one of the strongest in REIT land. And we believe that investors will recognize the strength of our balance sheet and the fact that we have executed on our promise to pay on the bonds for the last 4.5 or 4.3 years. And we believe we have sufficient time to work through the refinancing as they become due next year. And the earliest that they become repayable, I believe, is in the first quarter.

Correct. Yes.

Okay. So that's perfect, Alan. So timing-wise, we should just kind of expect to see -- get to the end of that process in first quarter of '26, correct?

That is the plan that we have on the table today.

We have the next question from the line of Aaron Grey from Alliance Global Partners.

So first one for me, just on potential impact of reschedule. I know it's been talked about in the past. I just wanted to revisit it again because, in terms of direct impact, it would seem better cash and stabilizing your existing base of tenants, so maybe less worry of incremental defaults. But how do you think about potential opportunities for growth and more uses for acquisitions and new tenants? Is it less so dependent on rescheduling and more so dependent on additional states coming online? Just want to give your broader outlook on cannabis, given the supply/demand that we've seen in a lot of the existing states, the appetite that you're seeing for potential additional cultivation or if that's more so dependent on new states versus rescheduling there.

No, I think as we alluded to earlier in our comments that we're really seeing some really positive interest in our facilities that we have in the states when we do have facilities. So we're seeing continued interest by the existing growers in those states who have maybe survived or as you want to say, we think the consolidation phase of this market, of the cannabis, industry seems to have worked. It's worked through the majority of that consolidation and that the most efficient and the efficient growers and companies in that industry have survived and are continuing to look to consolidate, but grow their focus in the individual states that they're in. So we're seeing that positive green shoot there without the rescheduling occurring. And we believe that, that will continue to build over time. And as it builds over time, we are absolutely best positioned to take advantage of any new demand for the sale-leaseback program that we continue to offer to the market and to use our capital for the benefit of IIP, our shareholders. Now Paul, I mean, do you want to add anything to -- with regards to the rescheduling and what you think how the impact might be for our tenants?

Sure. So I think we've, Aaron, in the past, discussed what rescheduling would look like and how that helps. And I think you identified it that I think the first real impact is really improving the credit of the operators. They have just much more free cash to use. So that improves the credit as far as our tenant base, but also gives them the opportunity to use that cash to expand. And so much of our development is our operators expanding the existing facilities coming to us for additional investments. So we think that's certainly a possibility or likelihood, I think, with rescheduling. And as we noted in our remarks that there is this kind of up and down enthusiasm about rescheduling. We're -- now we're in a place where some really positive comments have come out of the White House, both by the President and the President's staff that said we expect a resolution on the rescheduling by the end of this year, which means, what, 2 months now. So we are anxiously awaiting that. We do believe that it makes sense for the President to get ahead of this issue politically, and he is motivated that way. And his comments about CBD usage with -- for the elderly and things of that nature that he's posted really give a lot of momentum to having some resolution. We think it would be a positive resolution on rescheduling, hopefully by the end of the year.

Really appreciate that color. That was helpful there. So then in the near term, right? So before we see rescheduling, you talked about potential opportunities for both life sciences and as well as cannabis. How should we think about prioritizing in the near term and your current -- given your current liquidity position? Does the life science offer more near-term opportunities given what we just saw with IQHQ and the rate on the revolver? Assuming that's related to -- obviously, it's related to IQHQ and a much better rate than you have from the other revolver related to the cannabis. So absent rescheduling, do you see more opportunities in the life sciences for the near term? Or do you still see even as and rescheduling equal opportunity within both?

Yes. No, I think we are highly focused on the cannabis industry and making sure that we are supporting our tenant partners as best we can. And we believe that, that's our primary focus. Secondarily, do I think that there are more double-digit plus yield opportunities in the life science industry. We are constantly looking at that. But I think that, that was a very unique opportunity that we were able to capitalize based on our expertise and knowledge. And we will continue to look at that, but I think our primary focus will remain in the cannabis industry.

We have the next question from the line of Bill Kirk from ROTH Capital Partners.

So the press release mentioned, I think, a few new names where you're collecting security deposits. One was named, the other is unnamed in Sacramento. Can you give us a sense for size on those? What do you expect the outcome to be? And were those 2 identified when you went through that tenant health work that you did earlier in the year?

Yes, we're less than 1% of our revenue. And we're monitoring all of our tenants, and we spent time with those tenants and understood what was going on in with them. Ben, do you have any color associated with those 2 tenants or anything you want to add to that?

Yes, I would just add. So those were 2 tenants in California. And I think this is a theme maybe we've seen in many markets where the growth and expansion of the efficient operators and the demand that we're seeing for these facilities, along with some of the other vacancies that we've taken back, really reflects the consolidation that we're seeing play out in the industry and the less efficient operators moving out and the more efficient operators continuing to grow their platforms within these individual markets. I feel very good about the quality of those assets, along with the rest of our portfolio, which I think is reflected again in the amount of interest that we're seeing really across the board.

And with the additional square footage leased at IQHQ with biosciences, what does that take occupancy to at IQHQ? And ultimately, kind of where do you expect occupancy to go? Maybe how long does it take to get there? And what capital do you think is required to get that occupancy rate up further?

Well, I mean, I think that's -- IQHQ is a private organization, that's really there for them. From our perspective, what we can say is that the occupancy level approaches that 24%, 25% level and that we certainly hope that they can take occupancy up to the 90-plus percent range in the next I guess, 18 to 24 months.

We have the next question from the line of Alexander Goldfarb from Piper Sandler.

So just big picture, I think at the end of last year, you had like 27% of ABR that was in default. It sounds like you signed some new -- it sounds like you signed some backfills. You're working on some resolution and receivership, but there were some new tenants, including the $16 million loan that went bad. So net, as a percent of ABR, where do we now stand as far as percent of ABR that's not rent paying? I'm not saying occupying space, but not rent. I'm talking how much ABR is still not rent paying. Where do we stand now?

Alex, obviously, since we announced that last December, I mean, some things have moved around too. We've taken some properties back from PharmaCann, but from kind of an overall ABR collection, there's roughly 20%.

Okay. So David, so we're now at -- we were 27%, we're now 20% and that 20% includes the impact of the latest tenants in the third quarter and the $16 million loan.

That's correct. Keep in mind, as Alan mentioned before, those 2 tenants during the quarter were very small, 1%, so kind of immaterial to the overall portfolio. But you're roughly correct.

Okay. That's cool. That's cool. And then on the -- obviously, we all appreciate your background in life science. Alan, you cofounded and were there through December at IQHQ, and there's a deep history. But you look at both industries, cannabis, there's still issues going on, tenants having struggles. The Alexandria, the only pure-play REIT out there, life science still has issues. BXP talks about life science issues. So we understand the quality of the balance sheet now, but it definitely seems like there are capital -- potential capital needs for both cannabis and if something happens senior to you at IQHQ and you have to defend your position there to defend your stake. So how -- like I still -- it's still unclear like the risk of going into IQHQ, just given life science is not out of the woods. Like I would get it if things were blowing and going and a lot of activity was going on in that space, but it still seems like it's pretty troubled. So just how do we balance the capital needs of both industries when even in cannabis, you're still having some tenant issues?

Yes. I mean I think, first of all, we didn't make the investments so that we would have to defend the investment. We made the investment such that we are in a very strong credit position. And the only -- it's the common shareholders at IQHQ and/or the other investors who have to really defend and really are focused on defending that business. So that's not our role or our responsibility, number one. Number two is we maintain a very strong balance sheet, a very conservative balance sheet that allows us as we've just proven that to be able to get additional credit from our bank group and at a very attractive yield. So we think we still have that and continue to have great access to a variety of capital sources. Number three is that I know you guys want to -- you want the companies to only invest when it's absolutely clear that the gold ring is right in front of them and they can easily grab it. But our job is to do -- is to try to look around the corner, to try to look for unique investment opportunity that provide attractive, accretive returns to our shareholders. And we've done just that. And if you -- if in 3 years or 4 years, you come back on the call and you want to ask about how IQHQ and that investment went, I'll be happy to report exactly how that investment went.

Okay. And just the final question is, Paul, over the years, there have been a lot of hopeful things happening in cannabis that this measure, this state legalizing or this rescheduling and that would almost be like the panacea like now the sector would catch traction. Obviously, I appreciate your comments on giving us an update of what's going on with the rescheduling, the eagerness of seniors to adopt cannabis. But every time that we've heard positive stuff before, it hasn't jump-started the industry. So is your view that these positives could jumpstart the industry? Or your view is, hey, these are positives that are out there, but there's still the issue of the gray market, there's still the issue of the black market. There's still all those other -- I guess I'm just trying to understand, should we get excited that there's good stuff coming or it's like, hey, these are positives, but there's still a lot of negatives that the industry is still dealing with, namely the gray market and the black market?

Yes, Alex, obviously, rescheduling doesn't make the black market go away. Those are 2 separate things that need to be separately addressed. With rescheduling, I think that will be a huge shot in the arm to the industry for the reasons we've discussed in great detail. At the same time, I think we've seen some real positive movement on state-by-state combating black market. It's not fixed by any means, but it's getting much more attention, I think, in the larger states. You've seen in California and Massachusetts and Michigan, especially some really significant -- and New York, I think about it, some real significant movement in curtailing the black market grows, but also the gray market retail. And I know you and I have discussed this in New York, the actual physical blackouts of the retail. So going in the right direction on that.

This concludes our question-and-answer session. I would now like to turn the conference back to Alan Gold for any closing remarks.

Thank you. And I thank you all for joining today. Again, I'd like to thank our team for the hard and good work that they've done. And with that, we conclude the call.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.