Innovative Industrial Properties Inc Aktie

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Innovative Industrial Properties, Inc. First Quarter 2026 Earnings Call. [Operator Instructions].

I would now like to turn the call over to Eli Kanter, Director of Finance. Eli, please go ahead.

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 capital raising activities and those regarding potential lease transactions that are subject to 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 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 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, everyone, and thank you for joining our first quarter 2026 earnings call. First, I'd like to touch on the rescheduling of cannabis from Schedule 1 to 3, a significant regulatory development impacting the cannabis industry. In our view, the administration's recent action with respect to the medical cannabis market represents a major milestone for the industry and a clear sign of continued progress at the federal level. Although it does not yet extend to the broader adult-use market, it reinforces momentum toward a rational regulatory environment. Against that backdrop, the first quarter represented a strong start to the year, and our team remained focused on disciplined execution across the business.

While persistent inflation, elevated interest rates and broader macroeconomic headwinds continue to challenge the operating environment, our team has worked tirelessly to optimize our portfolio, allocate capital thoughtfully and maintain a strong and flexible balance sheet. Now we have been active on the debt and equity capital raising front, raising $128 million of gross proceeds year-to-date. In addition, we are working on several secured and unsecured financing transactions that have not yet closed totaling nearly $130 million. including a $56.5 million financing at a rate of 8.75% that we expect to be funded today. If completed, we expect to use the net proceeds of these financings to address our unsecured bond maturity this month and to provide additional capital to support future growth and the execution of our strategic priorities. This approach reflects our continued focus on disciplined capital management and maintaining balance sheet flexibility.

As for the quarter, we generated total revenues of $69 million and AFFO of $53.4 million or $1.88 per share, which was the same as last quarter. Operationally, we made meaningful progress across our portfolio as we continue to execute on our leasing strategy. During the quarter, we signed new leases at 4 properties totaling approximately 331,000 square feet, underscoring the progress we are building across the portfolio and the demand for our high-quality mission-critical facilities.

Turning to IQHQ. We continue to view this investment as a compelling strategic opportunity and an important extension of our platform. To date, we have funded $175 million of our $270 million commitment and continue to believe our entry point and timing of this investment will prove attractive over the long term. At the same time, we remain focused on executing across the business, driving performance in our existing portfolio, pursuing attractive opportunities in cannabis and allocating capital where we see the strongest risk-adjusted returns. With a diversified platform spanning cannabis and life science, a strong balance sheet with demonstrated access to capital and an experienced management team, we believe we are well positioned to build on our momentum and progress to deliver long-term value for our shareholders.

With that, I'll turn the call over to Paul.

Thanks, Alan. Last month, the DOJ and acting Attorney General issued a final order moving FDA-approved cannabis products and cannabis produced by state licensed medical operators to Schedule III, a landmark development and in our view, the most significant development affecting our business since our founding in 2016. This action eliminates the burden of 280E for qualifying medical operators, may create opportunity for retrospective tax relief and establishes an expedited DEA registration process for medical operators. Just as importantly, the DEA has now restarted the broader hearing process on whether marijuana as a category should move to Schedule III, with hearing set to begin on June 29 under an expedited time line.

Taken together, we believe these developments mark a major step forward for the industry and powerful catalyst for improving operator economics, expanding access to capital and supporting a healthier environment for longer-term growth and investment. At the state level, we are monitoring the expansion of existing medical programs, particularly in Texas. In April, the Texas Compassionate Use Program awarded conditional licenses to our tenant partners, Green Thumb Industries and Cresco Labs, joining Texas Original, Trulieve, Verano and others in the market. We are encouraged by this progress and look forward to the continued expansion of the program and the opportunities it creates for our tenants.

Regarding our current portfolio, as we highlighted in our March press release, we reached a resolution with PharmaCann on all pending litigation related to its lease defaults, and we are actively working to retenant the properties being returned to us later this month. Across the portfolio, we have now executed leases for the former Gold Flora assets, made substantial progress on the former PharmaCann assets and reached tentative agreements with prospective new tenants for all 4 former 4Front properties, subject to diligence and licensing approvals. I want to thank our team and all parties involved for their hard work in helping us navigate these challenges. The actions we have taken leave us better positioned to drive portfolio performance going forward.

With that, I'd like to now turn the call over to Ben to provide additional details on our leasing activity and discuss our other investment activities.

Thanks, Paul. Year-to-date, we have executed new leases totaling 389,000 square feet across 5 properties located in California, Illinois and Ohio and completed the sale of a dispensary in Arizona. As Paul described, we are pleased with the progress we have made stabilizing our portfolio and bringing Revolution to the former 4Front, PharmaCann and Gold Flora assets. All 3 former Gold Flora properties comprising 330,000 square feet are now leased. We executed lease agreements for our 70,000 square foot Palm Springs property in November 2025, our 204,000 square foot Desert Hot Springs property in January 2026 and our 56,000 square foot Palm Springs property in March 2026.

For 4Front, we have reached tentative agreements with prospective new tenants for all 4 properties, representing approximately 488,000 square feet across Illinois, Washington and Massachusetts. These tentative agreements remain subject to customary diligence and licensing approvals and are expected to take effect following the conclusion of the receivership proceedings, which we currently expect later this year. With respect to the former PharmaCann assets, we executed a lease agreement in March for our 66,000 square foot property in Dwight, Illinois with Grown Rogue, a publicly traded multistate operator new to our tenant roster. In April, we executed a lease agreement for our 58,000 square foot property in Ohio with Curaleaf, a public multistate operator and long-time tenant partner of ours.

In addition to these executed leases, we executed a nonbinding LOI for our 234,000 square foot facility in New York and are currently in lease negotiations subject to customary due diligence, including licensing and regulatory approvals. We also continue to work through diligence and are in negotiations with a prospective tenant for our 71,000 square foot property in North Adams, Massachusetts. With respect to our 270,000 square foot property in Pennsylvania leased to the cannabis company as of quarter end, we regained possession of that property on April 15 and are in active discussions with a potential new tenant. While there can be no assurance that any of these discussions or negotiations will result in the execution of a definitive lease, we are very pleased with the demand we are seeing for our assets.

For our 157,000 square foot property in Columbus, Ohio, remains leased to Battle Green, which defaulted on its lease obligations in March. We are actively enforcing our rights under the lease, including commencing eviction proceedings and pursuing available remedies under applicable guarantees.

Turning to our life science portfolio. We have funded $175 million of our $270 million IQHQ commitment to date, with the remaining $95 million expected to be funded over time. The broader life science real estate market continues to show signs of stabilization and improving momentum as we move through 2026. Recent reports from CBRE and Colliers indicate that demand has held near pre-pandemic levels, while stronger equity performance and venture funding are supporting a more constructive backdrop for growth. At the same time, the market is still working through elevated vacancy from the prior supply wave, but new development has fallen sharply and the pipeline is at historically low levels, which should support a healthier supply-demand balance going forward. We also continue to see favorable long-term demand drivers in areas like manufacturing, onshoring and AI-enabled research, which we believe will position the sector for continued improvement over time.

With that, I'll turn the call over to David.

Thank you, Ben. Before diving into our quarterly results, I want to begin with our bond maturity that we have this month, which, as we discussed on prior calls, has been a key focus for the company. During and subsequent to quarter end, we have undertaken a series of capital raising actions to address this maturity. Year-to-date, we have raised $128 million of gross capital comprised of $72 million of preferred equity, $36 million of common equity and $20 million of secured debt through a 3-year secured term loan with a fixed rate of 9% that we recently closed on.

As Alan mentioned, we are also currently pursuing multiple secured and unsecured financing transactions totaling nearly $130 million, including a $56.5 million financing that we expect to be funded today. Based on the terms currently under discussion, these financings would carry an attractive blended rate of just over 8%. We are encouraged by the level of interest from multiple new lenders and by the opportunity to access attractively priced capital to address this maturity and provide additional capital to support future growth. These potential financings remain subject to a number of contingencies, and there can be no assurance that they will be completed on the terms currently contemplated or at all.

Turning to our results. For the first quarter, we generated total revenues of $69 million, a 3.5% increase compared to the fourth quarter. This increase was primarily driven by payments received from PharmaCann totaling $3.2 million. In addition, as previously disclosed, we received $1.5 million in the first quarter in settlement of all remaining unpaid administrative rents due from the Gold Flora receivership. Adjusted funds from operations, or AFFO, for the quarter totaled $53.4 million or $1.88 per share, which was in line with our results for the fourth quarter of 2025.

Turning to the balance sheet. As of March 31, we had total liquidity of approximately $177 million, consisting of $89 million of cash on hand and $87.5 million of availability under our revolving credit facilities. Once again, our balance sheet credit metrics remained excellent this quarter with a debt service coverage ratio exceeding 11x and net debt to adjusted EBITDA of 1.1x. And with our recent capital raising activity, we continue to maintain very strong credit metrics with a balance sheet positioned for growth in 2026.

With that, operator, could you please open the call for questions?

[Operator Instructions] Your first question comes from the line of Tom Catherwood with BTIG.

Ben, I just want to start with you. If my math is right, I think you have 8 leases that you've signed that have not yet commenced. And with the agreements for the 4Front assets, that could go to 12 properties. I know each deal is different and you don't control every aspect of commencement. But is there a way to bucket those 12 leases as to how many you expect to contribute in 2026 versus 2027 or even beyond that?

Tom, I guess I think the way I would think about it is just what we see in a typical deal from lease execution there's usually some sort of regulatory approval, license transfer. And after that, once the lease goes into effect, you could have a free rent period. So we've seen that average anywhere from 3 months to 12 to 18 months on the outside. I appreciate you mentioning the leasing activity. We've been very pleased with the demand we're continuing to see really across the portfolio. When you think about some of the previous tenant issues, PharmaCann, 4Fronts, Gold Flora, we've now addressed well north of 90% of those assets through LOIs, executed leases and lease discussions that we're currently having. And I would also add, when we think about the modeling is there can be the free rent period, there can be a license transfer period. But typically, the triple net expenses will be transferred over to the tenants upon lease execution. which is another pickup for our earnings.

And then I think last quarter, you mentioned, obviously, as I said, before each deal being different, but you had a range in execution as far as the rents that you achieved on those. I can't remember the exact numbers that you gave, you gave everything from nearly in line to down 50% in some cases. For those that you've executed this quarter, how have they come in compared to prior rents?

I still think that's the right way to think about it. I think that range applies across the board. And I think the other aspect of that to keep in mind is just the minimal capital outlay that we've seen really across the board. I mean these are I would say, on average, $5 to $10 a foot, sometimes as is deals, which is very unique, I think, in the real estate industry to be able to re-tenant these assets and really the volume of leasing that we've achieved really minimal cost to us.

Got it. Got it. And then this one might kind of seem a bit out there at the moment. But we've seen this increase in M&A activity come across the cannabis space, kind of early stages of it. But like, for example, what's happening with cannabis with -- they announced your tenant Holistic is taking over their operations in Ohio. As we see more resolutions and workouts like that, is there an opportunity for IIPR to get involved and provide the next wave of operators with capital for assets that had previously been owner-occupied? Or are we kind of thinking too far ahead?

No. I mean I don't think that we're thinking too far or anybody is thinking too far ahead. I think that the -- with the first phase of the rescheduling, and I know there's a lot more to go with that, we do see the strengthening of our -- of the tenants in general in the industry. And we do see, I think, an increased interest in the industry and potential growth opportunities in the cannabis industry. Now whether that's 6 months or 12 months or 36 months out there, it's an evolving story.

Got it. And then just last one for me, Paul, on the rescheduling. I know you mentioned the June 29 administrative hearings starting back up again. And what we're wrestling with is there's obviously the legalization on the medical cannabis side with the DOJ's final order. It sounds like there's a potential for the administrative hearings to expand that order. And it's obviously too early to tell, but what are the chances we might end up with kind of a split outcome where medical is exempt from 280E, but adult use still remains subject to more stricter taxation.

Yes, Tom, I think that's a fair question. I think in the short run, and by short run, I mean the next 30 days, that's somewhat unclear. But what the executive order did state was an expedited hearing, and that means within 30 days. So once the June 29 process starts, they expect to have that wrapped up with 30 days and compare that to what we had under the Biden administration, much different. So I think there will be a clear resolution of how cannabis is treated across the board, including medical and adult use at the conclusion of that hearing. So we are very excited about where this is going, as you can imagine. We've talked in the past about rescheduling what we think this is going to do for the industry and our operators. And I think we are thrilled that it's on this expedited time line.

And I think we're going to see certainly more capital to the bottom line for these operators. And we've had discussions, and we do expect that there will be much more interest in growth once the 280E tax situation is resolved and operators have a clear idea of where to go, and we think that's going to happen pretty quick. But we think that, that capital will be used to expand and they'll come to us for that expansion, we believe. We also see, of course, other advantages of rescheduling. We think that there's certain states that have maybe been kind of on the fence for a medical program or converting medical to adult use. We think that this rescheduling will really help those states make the move towards new programs. And lastly, I think rescheduling is wonderful for R&D there's a lot of companies going to be very interested in testing a plant and coming into particularly medical uses for the plant. So we are thrilled as these developments and the expedited time line.

Your next question comes from the line of Alexander Goldfarb with Piper Sandler.

Just wanted to -- Paul, I just want to continue that same line of questioning. As we look at the -- certainly, the present on this is a bit confusing because there's a war on drugs and yet there's a promotion of medical use. So the -- what exactly happened is that medical use was downgraded to Schedule III, but adult use is still Schedule I. Is that what's happened? Or like what is technically in place right now? We know where ultimately, you can see where this path is sort of ending up. But what does it stand technically as of today?

As of today, and the acting Attorney General Blanche is very clear, I think, Alex, in where it stands today. Licensed medical use operators have the benefit of Schedule III. And that's 100% medical licenses. And as you know, our operators all hold medical licenses. So that accounts for 100% of our operators in our portfolio. I think it's clear too of the decision they made as far as other use cannabis, they put it on expedited schedule starting June 29 and to have that resolved within 30 days. So we don't expect any extended period like we saw in the past. So I think it's pretty darn clear about the decision to bifurcate, that's fine. But in the interim, where we are today is great because it's 100% covers our medical license holders, and that's in our portfolio.

Okay. So as far as the 280E exemption goes then, so even though -- so 100% of your tenants are covered because they're medical, which is the way I understood it, so that's good. But as far as the 280E, those same tenants through their operating businesses get the full deduction? Or does the IRS sort of split out their sales?

So what the DOJ order suggested was retroactive tax relief available for all qualifying medical operators. So that should be 100% for the medical operators. And as mentioned, that's our portfolio. I think what we will see through Treasury and the order does also request Treasury to give an opinion sooner than later as to what the retroactive effect of 280E will be for both medical and adult use. But in the short term, it's clear 280E relief, 100% for medical license holders.

Okay. So basically, it doesn't matter whether they sell rep or not, they're medical, and then we'll find out how long this retroactive is. In your view, and then as you guys look at your credit, as your tenants who have had credit issues, and this has been a few years from now, I mean, ongoing, is it your view that once the 280E relief comes in, that will basically eliminate any future pending credit issues? Or is your view that we're still going to have potential for credit issues even though there's this 280E relief? I guess that's -- as you know, that's what we've been focused on is just this continued sort of whack-a-mole and it'd be great to move past it and have everyone be in a stronger position. But I'm just curious if the 280E relief on its own and the retroactivity sort of solves that? Or if those credit issues are still going to be there because the tenants just -- the ones who have issues or debt refinancing, whatever, still have that and the 280E isn't really going to help in that front.

Alex, businesses run all the same. They all have risks. All of them have -- all industries have tenants that -- or companies that grow, shrink, disappear. This 280E allows these businesses to have better operating environments and better operating statistics, but they're still businesses. And they all go through -- they all have good management, okay, management that needs to refocus on their business. So we're going to experience what all industries experience and just like any other real estate company out there that leases space to any business.

Okay. And then just final question. You mentioned the IQHQ and more doing life science, your deck indicated that. Alan, as you look over the company, let's call it, the next 5 years, do you think it's more like 50-50 or 25-75 as far as life science contribution? Or I'm just trying to think is life science going to be heading towards 50% or will still be a small sliver of the company over the next, call it, 5 years? And I'm not going to hold you to that. It's just trying to understand where you guys see the best investment path forward over the next several years.

I think that that's a very difficult question to answer. But what we can say is that we're now in a situation where we have a strengthening cannabis industry. And if you see the level of activity that's going on in the life science industry, we -- our entry point was, I think, at one of the lowest parts of the industry over a long period of time. And we're seeing a very strong and resurging life science industry. So we have positioned ourselves to be very opportunistic with 2, I think, growing industries that will help us drive growth for our shareholders in the future.

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

Kind of piggybacking off that last one a bit, more specifically on IQHQ and incremental investments. I know in the filings, you talked about commencing more investments 2Q '26. Just want to -- sure, is that still the case? And maybe just give us some more color in terms of those incremental investments on IQHQ preferred stocks and the timing of it through the near to medium term.

Yes. I mean I think that we have scheduled the investment in the IQHQ organization out through 2027, mid-2027. And we have been able to opportunistically bring forward a couple of those scheduled investments for our benefit because they're a very accretive transaction. If you recall, it's on average, north of 14% and we have a cost of capital with our credit facility associated with making those investments in the 6% range. So extremely accretive investments, and we have been able to bring some of that forward. We continue to believe that the industry, the life science industry, of which IQHQ is involved with is doing really well. And we think that our investments will -- we will continue to look at opportunistically making the investments at the appropriate time.

Okay. Great. Really appreciate the color there. Second question for me on cannabis. Great to see some of the progress you're making on new leases of the previously defaulted tenants. As we talk about Schedule III creating more opportunities for you, can you talk about maybe some of the near to more medium-term opportunities? You seem to have alluded to your ability to get more aggressive on acquisitions, bringing on more new -- net new tenants. Where would you see those in the near term, would it strictly be medical given the clarity that we have there and maybe markets like Texas, Kentucky or Georgia? Just giving more color and granular in terms of where you might be able to see some opportunities in the near term where we have clarity on just medical only versus more longer opportunities as we wait for the second phase of rescheduling.

I appreciate that question. We do -- we are looking at all acquisition opportunities and for growth in the second half of 2026 and certainly into 2027. But our #1 priority and focus is right now making sure that we complete the refinancing of our unsecured debt, which we have done -- the team has had tremendous success, and we're highly confident. And once we complete that and complete our commitment to IQHQ, I think we can then look at additional opportunities going forward.

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

I wanted to keep going on rescheduling and try to get some perspective on whether you think the possibility of interstate commerce exists out of rescheduling? And if it did, would you consider the cultivation assets you have an opportunity in that environment? Or would there be a risk in that environment? How do you prepare, I guess, for the scenario or the possibility of interstate commerce?

Bill, it's Paul. So I think there's 2 questions there. And I'll address the first part of the question is the answer is no that rescheduling does not address interstate commerce. It does not address banking. And those are 2 things that some people were looking for some clarity on and that the Attorney General was clear that interstate commerce and banking and uplisting were issues that were not addressed in this piece. But your further question about interstate commerce is really, I think, something we've talked about over the years. And we don't really see that happening until there is a complete legalization of cannabis across the board. And we believe that is many years out.

But as we've discussed in the past, even if we do have some type of interstate commerce, we believe that our assets and our operators will do fine because what we have are indoor growth for the most part and medical, highly specialized product. And that's probably not going to be what's going to go rolling across some trucks across the country. So even if we are in interstate commerce situation, we think we're well positioned. But again, we don't see that for many years out.

Okay. And then there is a possible demand unlock that would benefit your tenants in November unless something changes intoxicating hemp basis a federal ban. I imagine most of your properties aren't growing much of it. So I wanted to get your perspective here on what intoxicating hemp going away could mean for your tenants and the demand for the products that they are growing.

Yes. I think that's accurate, Bill, that our tenants do not grow hemp. They are cannabis growers. And we've been watching that the whole litigation issue with the hemp really just kind of by standards in the sense that we don't believe hemp one way or the other is really going to affect our operators' business. But that being said, I think if there is a ban on intoxicating hemp products, that does put some clarity into the issue, and it will take away some of the Delta 8 stores that we see popping up in nonmedical states. So I think it's a good thing for the cannabis industry to get clarity in the intoxicating hemp legislation.

That concludes our question-and-answer session. I will now turn the call back over to Alan Gold for closing remarks.

Thank you, and thank you all for joining today. I'd certainly like to thank the team for all their hard work, great work and our stockholders for their continued support. That ends the call.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Hello, and welcome to the Innovative Industrial Properties, Inc. Fourth Quarter 2025 Earnings Call. [Operator Instructions] 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. 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 remains 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 order 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 4Front Ventures, PharmaCann and Gold Flora, where we have continued to actively pursue our legal rights and protect our interest 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 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. Ben?

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 1 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 4Front 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 4Front, we have made significant progress on our retenanting 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 estate, 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 $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 believe 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 to 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 of over $2 billion of real estate and our strong credit profile position us well as we pursue these alternatives.

With that, we thank you for joining the call, and we would like to open it up for questions. Operator, could you please open the call for questions?

[Operator Instructions] 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? 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?

Well, so first of all, thanks for the question. I think that there's a lot of things going on here. One, we have an extremely experienced management team that's been involved with this industry for the last 8 plus -- almost 10 years. And they're executing on the business plan that we've set out in -- at the end of 2024 and throughout 2025 and continue, and we believe we're going to continue to execute that business plan throughout 2026.

This return to growth is -- comes from, as we described in our past quarters that we were seeing the -- some green shoots in the industry. And those green shoots have allowed, we believe, the operators in our -- the strong operators in our industry to take advantage of some of the weaker operators who haven't been able to navigate these difficult times in the industry as well. But we still believe that there are significant challenges in the cannabis industry, although we do see unique opportunities. And working with some of the best growers that are in our portfolio and in the country, we believe that there are unique opportunities to take advantage of those.

Now Ben, do you have anything or Paul, do you have anything else you want to add?

Yes. 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 months, Curaleaf, Trulieve, GTI, 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 2 markets? Or is the headlines -- are the headlines kind of overstated when it comes to the ability to re-lease in more competitive states?

Yes. I mean I think the headlines are just a very general high-level view of some of these markets. And I think when you really understand and -- using our experience over the last decade to really understand the nuances of each market, they'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.

Got it. I appreciate that, Ben. And last one for me. Just wanted to clarify on the tenants that are in default. It sounds like kind of the outcomes are falling into 3 buckets. It's either the receivership is working through and the rents are going to commence again at the end of the receivership process.

The second bucket is you're getting space back and obviously re-leasing that. And then the third bucket is some tenants continue to pay, though you're not necessarily recognizing that rent and continue to look to regain their facilities. Of those, who falls in the rent could commence near term at the end of receivership and who falls into the re-leasing and then still fighting to regain properties buckets?

Just -- I'll turn these questions over to both Paul and Ben. But just as a point of clarification, if we receive rent, we recognize rent. There is no -- and that's what we've done. So I think that third bucket of -- there are tenants that are in default and the court has ordered them to pay rent or put rent in escrow and that -- and once that money is released, we recognize that rent. So that's -- just as a point of clarification. But with that, Paul?

This is Paul. So I would simplify it a little more. I'd really say 2 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 4Front. I think we've had some great results in resolving those. And understanding that 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 are receivers and those are 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 re-leasing 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 re-leasing 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 rate. So 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 $10 a 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.

And all those factors go into the rental rate that is finally negotiated.

Okay. Great. And second, regarding the dividend and earnings coverage going forward. On one end, you've had some more one-off payments from defaulted tenants, particularly in 4Q that aided in bridging the dividend gap. But you also have the IQHQ interest income, which should continue to build along with new lease tenants from the previously defaulted. So on a normalized basis, do you feel in a better position to have the dividend full covered in the near term? Or are incremental steps like getting more of the properties re-leased needed?

Well, I think, first of all, the dividend -- our dividend policy is set by our Board, and they review what has occurred in the past and the projections going forward. But what we're seeing is this return to growth, and we're seeing strong re-leasing activity, which is driving revenues. And we continue to see -- and we have the resolutions of some of these major lease or major litigations. And with those resolutions and the activity -- the leasing activity we're seeing, we continuously feel positive about where we are with regards to our 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?

Well, I think our tenants are -- as we've reported, are paying their rents and they're paying them on time and per the leases. But I'll turn that back -- I'll turn the question over to Paul to talk about the rescheduling and how that's benefited the industry.

Yes. I think, Bill, you follow it closely. The announcement 2 months ago by the President on the executive order was very significant. And that's created a lot of buzz, I think, and some positive feelings in the industry, especially with our larger MSOs that are looking to grow, looking to acquire leases in new states as evident by our re-leasing activity that we reported.

So there is some question as to when and how the EO will be implemented, but it's going to get done. I think that is the feeling from the industry now. So despite the fact there is some uncertainty as to when there is -- we see a definite positive [ vibe ] just from the announcement of the executive order.

Right. And I guess -- 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.

And when -- there's a possible or looming, I guess, intoxicating hemp ban in the U.S. in mid-November of 2026. A lot of that intoxicating hemp product competes against your tenants. Is that in your improved outlook for re-leasing or the way the tenants are feeling about their prospects of having a potential intoxicating hemp competitor go away 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 markets 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 increased -- the new table on the troubled tenants and how much they've paid over time. Hopefully, that can extend to the leases that have been resolved definitively versus in the works. It just helps with all the discussion. So a few questions here. First, just going to the opportunity set. You have that interesting table chart that shows the size of the cannabis industry, the lawful cannabis industry versus the various alcohol industries. And cannabis is pretty big, especially if you were to even include the illicit market.

But just given how sizable it is, you guys talk more about going to life science. So is it -- as we think about the company over the next few years, even as more states contemplate legalizing and perhaps the cannabis is downgraded to Schedule III, is it your view that the life science offers a better risk-adjusted return over the next several years even if cannabis is able to resolve its current issues and get back to more of a growth arena?

Well, I think that the diversification out of the -- into the life science industry is multifaceted also. And it's not only that -- I mean, it's not only about the unique opportunity that we see -- that we saw in the life science industry, how that industry had perhaps hit rock bottom and that there were green shoots and increasing opportunities and a way to use our cost of capital or take advantage of opportunities with our cost of capital.

So I think you have that as one of the reasons for diversification. But you also have the fact that by diversifying, we might open ourselves up to greater avenues of capital and giving us the opportunity to reduce our overall cost of capital with that diversification. And I think that we are executing on that and seeing some of the benefits of that as we move forward.

And then along those lines on HQ, I think last time you updated us on the pre-leasing or the leasing, I think it was -- the portfolio was roughly 25% leased. Is there an update? Has that changed at all or it's still about where it was?

They are a private organization. They haven't disclosed anything publicly yet, although we are seeing significant increased leasing activity in the markets in general, specifically in the Boston markets, Boston and then the Bay Area. And it's -- historically, what we've seen when the industry recovers, when the life science real estate sector recovers, it recovers first in the Boston area and then the Bay Area and then it moves to San Diego. And so we're -- and we're seeing that come to fruition now.

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 clearly have been pursuing various tenants who have been paying. But can you just sort of give us an 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 associated to the tenant defaults and our efforts to oust 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 front.

But what causes on the reserve -- what causes the auditors to make a company -- just generically, a company to set aside a reserve versus no reserve?

Yes. I would just point to the statement in the 10-K where it says neither probable nor unlikely. And until it becomes one of those probable, that could require something.

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

Thank you. And first and foremost, I'd like to -- I need to thank the team for their great execution, their strong work to get us to where we are today and how we believe we're prepared for future opportunities as time evolves. And we also like to thank the support of our stakeholders. And with that, we'll end the call. Thank you.

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

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 advancing these processes as efficiently as possible, and we'll provide updates as developments occur.

In September, we took back possession and control of the 4 California properties previously securing a loan totaled at $16.1 million, which we declared in default and are evaluating options to maximize the value of these assets.

Turning to federal developments impacting the cannabis industry. Recent commentary from President Trump has reaffirmed that cannabis reform remains a priority at the federal level. His endorsement of medical cannabinoids, particularly for senior citizens, alongside references to the potential $64 billion in health care savings signals growing political momentum for rescheduling cannabis to Schedule III, eliminating the burdensome 280 tax for operators. We believe this shift will be a positive catalyst for the industry, unlocking broader access to capital and accelerating institutional participation that we remain cautious on the likelihood and timing.

We also see compelling demographic trends that reinforce the long-term opportunity in cannabis. Seniors by currently underrepresented among cannabis users are the fastest-growing consumer segment with usage growing at a 9% 5-year compounded annual growth rate, triple the rate of the broader adult population. Importantly, this cohort is more likely to rely on physician recommendations and rescheduling could ease barriers for doctors to prescribe cannabis for conditions like pain, arthritis and sleep disorders. Accounting for 35% of total drug spending, we believe increased adoption by seniors could drive meaningful incremental revenue for the industry and further validate cannabis as a mainstream therapeutic option.

Finally, we are also pleased to share a significant legal update. Last month, the U.S. Court of Appeals for the Third Circuit unanimously affirmed the District Court's dismissal of the federal securities class action brought against IIP and certain of our officers and directors. While we disagreed with the arguments of this class action since the very beginning, it is great to see our views validated by the courts. This outcome allows us to continue focusing on executing our strategy and delivering long-term value to our shareholders.

I'd like to now turn the call over to Ben to discuss our leasing, disposition and investment activity. Ben?

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.

Good day, everyone, and welcome to the Innovative Industrial Properties Second Quarter 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, Director of Investor Relations. Please go ahead, sir.

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. Yesterday, we announced our first expansion outside of the cannabis industry with a strategic investment in IQHQ, a leading private life science REIT. This investment underscores our conviction in the long-term fundamentals of the life science industry and provides IIP a unique opportunity to accretively deploy capital while adding industry and tenant diversification to our portfolio and positioning us to continue driving growth and creating long-term value for our shareholders.

IQHQ was founded in 2019 and has raised over $4 billion of equity capital since inception. Its current portfolio, including both operational and under development properties, totals over 5 million square feet with additional pipeline potential, all located in the leading and largest global life science markets in Boston, South San Francisco, San Diego and the Golden Triangle in the U.K.

Within the overall life science real estate market, we anticipate improving fundamentals with new deliveries in 2025 trending down compared to prior years and continued deceleration and construction starts expected in the near term. In addition, life science fundraising in 2025 is on track to be its highest since 2021, further underscoring investors' confidence in the long-term fundamentals of the industry. This investment at this entry point positions us to capitalize on these long-term secular tailwinds.

The total commitment of $270 million is expected to be highly accretive to AFFO, carrying a blended yield exceeding 14%. Our investment includes a $100 million investment in IQHQ's revolving credit facility to be funded at closing and future funding of up to $170 million invested in IQHQ preferred stock to be funded over time. We expect to fund these investments with a combination of cash on hand, draws from the company's revolving credit facility and future financing activities.

While we continue to evaluate investment opportunities in the cannabis industry, this investment provides complementary growth opportunities to enhance our investment pipeline, including a right of first offer on all future asset sales by IQHQ, providing potential pipeline opportunities on over 5 million square feet of leading life science real estate for IIP.

Our management team brings decades of experience in the life science industry. Most recently in BioMed Realty, giving us the expertise to leverage our existing platform to drive accretive growth for our shareholders. As we continue to execute on our plan and drive value within our Canada's portfolio, we are excited to announce this return to accretive growth with our investment in IQHQ.

With that, I'll now turn the call over to Paul. Paul?

Thanks, Alan. Good morning, everyone. We are very excited about the IQHQ opportunity we announced and the growth potential for IIP. At the same time, we remain proud of our position as a pioneering and leading provider of real estate to the regulated cannabis industry. Although the cannabis industry continues to face challenges, including persistent macroeconomic uncertainty and an unpredictable regulatory backdrop, it is still forecasted to grow at a compounded annual growth rate of approximately 7% from 2024 to 2029, reaching $44 billion by 2029.

As we noted on our last call, we are focused on optimizing occupancy across our portfolio to strengthen our tenant credit profiles and are actively pursuing all legal remedies available to enhance the performance of our real estate portfolio. I'd like to provide some additional color on our progress with each tenant.

4Front Ventures filed for bankruptcy protection in Canada and for voluntary receivership in Massachusetts with OPUS Consulting partners appointed as a receiver. In addition, we are in active discussions with the U.S. receiver and bankruptcy trustee regarding the properties and related claims. We continue to work closely with outside counsel to protect our legal interest and pursue our rights under the leases. Gold Flora is currently in receivership. We have intervened in the proceeding to actively protect our legal interest and remain in ongoing discussions with the receiver regarding the receivership and sale process. We successfully worked with the receiver to terminate the lease on one asset previously leased to Gold Flora and are actively pursuing re-leasing opportunities. We will continue to monitor the sale process and provide updates as we are able.

With respect to PharmaCann, we have commenced formal legal proceedings to regain possession of the remaining properties they continue to occupy, including cultivation facilities located in Illinois, New York, Ohio and Pennsylvania and five retail properties located in Colorado. We are working closely with local counsel to pursue all of our rights and remedies under the leases and related guarantees, including pursuing monetary claims. These legal processes vary by state and are subject to the time lines of local jurisdictions, which makes it difficult to estimate the timing for recovery of these properties. However, we are diligently working through these processes as efficiently as possible, and we'll provide updates as developments occur.

In regards to TILT Holdings, they have made regularly monthly partial rent payments since April and we continue to reserve all of our rights under the leases while working in good faith with TILT to reach a resolution with respect to their outstanding financial obligations in conjunction with the planned divestiture of their plant-touching businesses. As TILT announced last month, they have entered into a strategic agreement with MariMed in Pennsylvania, where MariMed intends to assume day-to-day management of operations at our Pennsylvania asset commencing in September. We will continue to provide updates on TILT's progress as we are able.

We are committed to providing updates on all our proceedings and expected timing as we navigate through this process. However, we are still in the early stages. While we are encouraged by drawing bipartisan support for cannabis reform, we continue to operate in a federally constrained environment. Despite nearly 90% of Americans supporting legal medical cannabis according to Pew Research and a majority of Republicans backing reform, meaningful federal action remains elusive. Reclassification to Schedule III would represent a critical first step easing the tax burden on operators and improving access to capital.

We continue to see signs of resilience and long-term opportunity in the U.S. cannabis market. Notably, cannabis is outperforming traditional consumer categories and volume growth, outpacing alcohol, tobacco and even beverages like bottled water and energy drinks, underscoring its staying power as a consumer product. At the state level, we are monitoring adult-use legalization efforts in Florida and Pennsylvania. In Texas, while the medical program remains highly restrictive, Governor Abbott recently signed legislation increasing the number of licenses in the state from 3 to 15, adding qualifying conditions to the program and raising the cap on product potency. We are also very encouraged by the strong sales growth in Maryland, New York and Ohio, where adult-use conversations and an expanding consumer base are driving double-digit increases in sales.

One of the most pressing challenges operators face is the persistent and growing threat of the illicit market. This is not just a matter of unlicensed operators undercutting legal businesses. It's a deeply entrenched transnational issue. Investigated reporting has highlighted the rise of international organized crime groups that have established a dominant presence in the illegal marijuana trade across the U.S. These networks not only undermine regulated markets, but are also linked to broader criminal activities, including money laundering, human trafficking and violence. Their operations exploit regulatory gaps, overwhelm local enforcement and jeopardize the safety and reputation of legitimate operators.

Just last quarter, California alone seized nearly 185,000 pounds of illegal canvas valued at $500 million. These figures underscore a fraction of the issue and the need for stronger coordinated enforcement efforts at both the state and federal levels.

I'd like to now turn the call over to Ben to discuss our investment, disposition and leasing activity. Ben?

Thanks, Paul. Despite the challenges of the current environment, we have continued to execute on multiple fronts within our existing portfolio. Year-to-date, we have closed on a $7.8 million acquisition in Maryland, completed two dispositions totaling $10.8 million in Michigan and California and executed two new leases totaling 211,000 square feet also in Michigan and California. In addition, as Alan touched on, we closed on a new investment with IQHQ, a private life science REIT with large-scale operating and development assets located in transit-rich hubs within the top life science real estate markets in the world. The current portfolio is targeted to encompass over 5 million square feet once all development projects have been completed with meaningful future development potential in the owned pipeline.

Our investment into the revolving credit facility and preferred stock will sit senior to all common equity in IQHQ and at a discount to replacement costs of the underlying assets, providing strong risk-adjusted returns. Looking ahead, our overall pipeline remains robust including both cannabis investments and additional opportunities to deploy capital in the life science industry. As part of our IQHQ investment, IIP was granted a right of first offer for any future asset sales by IQHQ. As Alan mentioned, this ROFO alone provides for a potential pipeline of future acquisitions exceeding 5 million square feet of Class A premier life science real estate.

We will continue to pursue these opportunities selectively, focusing on the highest quality investments with the most attractive risk-adjusted returns for our shareholders. We remain confident with the plan we have in place and the experienced management team we have to execute on that plan.

And with that, I'll hand it over to David.

Thank you, Ben. For the second quarter, we generated total revenues of $62.9 million, a 12% decrease from the first quarter of this year. The decrease was primarily driven by the tenant defaults we previously disclosed in March. This decline was partially offset by additional funding of building improvements that resulted in base rent increases and contractual rental escalations.

Adjusted funds from operations for the second quarter was $48.4 million or $1.71 per share, a decrease of 12% compared to the first quarter of 2025, driven primarily by the same factors affecting revenue. Our balance sheet remains in excellent shape backed by $2.6 billion in primarily unencumbered gross assets. We maintain a simple, low leverage capital structure with only $291 million in fixed rate debt outstanding. We also finished the quarter with strong liquidity exceeding $190 million through cash on hand and an undrawn revolver, providing ample financial flexibility to fund future growth including the IQHQ investment we announced yesterday, and we remain committed to maintaining a conservative financial profile highlighted by a low debt to gross assets ratio of 11% and a robust debt service coverage ratio exceeding 15x.

On the capital markets front, during the quarter, we repurchased 367,000 shares of our common stock at a weighted average price of $53.98 per share for a total cost of $19.8 million, which we accretively funded through the use of cash on hand and preferred stock that we issued during the quarter.

In summary, our continued financial strength is evident in our prudent balance sheet management, ample liquidity and disciplined capital allocation. As we look ahead, we remain confident that our robust financial position will support ongoing growth and deliver lasting value for our shareholders.

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?

[Operator Instructions] And our first question today will come from Tom Catherwood with BTIG.

So I recognize the benefit the IQHQ investment can have for IIP's earnings and growth. That said, life science real estate still faces challenges and IQHQ is dealt with headwinds of its own. Can you walk us through the real estate investment case specifically for IQHQ, what is the business plan? How is the company overcoming challenges? And why is now the right time to invest in this specific company?

Tom, we certainly can. But I just want to back up and just remind, we didn't make an investment in the real estate. We made an investment in an operating company that's invested in the life science sector, along with having the opportunity to take advantage of the -- what's going on in the AI industry and the demand from AI software-type companies who are looking for high-quality real estate.

Now so again, we didn't invest in life science real estate. We believe from our expertise and historical knowledge that the life science industry, yes, is at an inflection point. It is -- has a very difficult 3.5, almost 4 years and those owners of existing life science real estate have had a very difficult time. We believe that there is a -- that the industry is -- has an opportunity to recover, and that recovery has begun. And that valuations are still extremely low, are starting to move in a very positive way.

As a financial investment, our investment in IQHQ is -- was very well thought out, very well researched. It follows our, I think, very simple business plan of investing in sale leasebacks in the -- for the cannabis industry. We have made financial investments in a revolving credit facility and future commitments in a preferred -- the preferred series in IQHQ. I mean I think I might -- the capital stack, let me turn that over to Ben to really talk about IQHQ, capital stack and where we fit within that capital stack.

Yes, sure. Thanks, Alan. Tom, we believe on top of this being an accretive transaction, as you mentioned, that it is a very safe, secure investment and that we sit in front of the approximately $4 billion in equity that IQHQ has raised since inception. We believe that our spot in the capital stack represents a material discount to replacement costs. There's the property level debt, and then we are the most secure position behind that within the capital stack, again, ahead of the $4 billion that IQHQ has raised.

Okay. And then specifically on IQHQ and what this money goes towards and kind of the business plan for them, what does this get them to -- and what was it that attracted you to that? That there's a missing piece where I get the broader recovery in the sector that we're looking for, and we see the green shoots there. But what was it about IQHQ's opportunity specifically that you thought this capital was useful for?

Yes. Well, -- so specifically because of our inside our unique knowledge and expertise with IQHQ and with the life science industry, we and our due diligence of researching and the markets that they're in, we believe that IQHQ portfolio is well positioned to take advantage of the AI demand and the -- what we believe future demand for the life science industry. Now what this capital provides -- this capital, along with other capital that has been provided to IQHQ, gives them the ability to, one, complete their existing developments to complete the lease-up of a very strong and high-quality portfolio that are located in some of the best markets in -- for the life science sector and even for the AI tech boom. And gives them the ability to do those things and the time to accomplish that goal and provides -- while all that's occurring and while they are succeeding, provides a very attractive accretive return to IIP and IIP shareholders.

Got it. I appreciate those details, Alan. And then last one for me. When this investment opportunity arose, how are potential conflicts of interest identified and reviewed to ensure the transaction didn't create risks for IIPR shareholders outside of normal course of business investment risk?

Well, first, there's an assumption that there were or that conflicts existed. But secondly, the IIP used a very focused and logical methodology to -- by employing a special committee where the committee members had no interest in IQHQ. And then after that, the special committee reviewed the analysis and the diligence prepared by the team and outside counsel then that was then brought to the Board and then the Board -- that the Board members that had de minimis or no interest in IQHQ, voted on this transaction and unanimously approved it because of its unique way it helps IIP. It is a very accretive transaction. It's a transaction that provides current cash flow to IIP shareholders. And it diversifies the -- our tenant exposure and our industry exposure at a time when we are looking to access the broader capital markets for a variety of different uses. And it gives us the ability to drive earnings growth in the future.

Our next question will come from Bill Kirk with MKM Partners.

On the IQHQ, I'm trying to think of like the opportunity cost for the capital -- and at current level today, your dividend yield on your stock would be, I think, above 16%. So if you think that dividend level is safe, wouldn't the $270 million get a better return buying back shares versus the estimated 14% in the IQHQ structure?

Well, that's really easy to say when you look in the rearview mirror. Last week, two weeks ago, IIP shares weren't trading at 16%. So -- and we believe that the market volatility that occurs on a day-to-day basis isn't the way to run your business. We look at our overall cost of capital and our overall cost of capital includes our access to a variety of different capital from not only our preferred and our debt and our credit facility, but also our common shares and what the expected return our investors are expecting from their common shares. So on a combination of all that, we believe this to be a very highly accretive transaction especially when you consider that we are using capital that has been sitting and earning 3%, 4% and now has the opportunity to earn in that average of 14%, very accretive.

And then as a follow-up, what's the flexibility on the timing or, I guess, the commitment to the preferred portion of the investment? Like do you have the ability to pick when those tranches are made? Do you have the ability to reduce size, increase size? What's the flexibility there because that 16% isn't rearview mirror anymore, it's today.

So well -- and what -- and if it's different tomorrow, it could be completely different tomorrow and so on and so forth. But to answer your question, look, we have a great deal of flexibility. We've designed the investment in the Series G to reflect what we believe will be our ability to raise capital over time. David, do you want to elaborate on that?

Yes. And I think just on the funding. As Alan mentioned, that will occur between now or between now and second quarter of 2027. But back to one of the points of the deal that we noted is we believe with accessing this new real estate market that has been along in the REIT space for a long time, and that will improve our overall access to equity and debt capital as a result of that just because it's non-cannabis new sector. All of you on this call today are familiar, but life science real estate has been around a very long time.

And our next question will come from Aaron Grey with Alliance Global.

Just sticking on the question with IQHQ. So regarding the decision there to diversify some capital away from cannabis, can you maybe speak to how that decision came as it relates to the dividend, right? So we know the dividend has been a hot topic for you guys as it relates to the AFFO and you mentioned how this really helps to accelerate some of the earnings that you'll be able to generate. So how that timing came into play, and particularly through the lens of uncertainty regarding some of the defaults that you've had with some of the cannabis properties and when those earnings will come back?

I mean, I think that's a really good question because I think as Paul has noted many times, we -- over the last 18, 24 months, we've been evaluating what's been going on within the industry. We have indicated to our shareholders that we've been looking at other investment opportunities outside of the cannabis and -- so we've been strategically evaluating different transactions and opportunities. And this opportunity came about. And it appeared to provide what we were looking for a strategic investment that was of size that had the current income and the overall yield that met our -- what we believed our high cost of capital was and is. And that began the process for us to continue to evaluate it. And as we spend more time doing the diligence, and understanding where we would be in the capital stack and how flexible the investment it became obvious to us that it was something that we should seriously consider.

I lost my train of thought or lost the balance of your question because you had another important part of your question. And it was the dividend. And so we believe that -- and we believe that we needed more time to work through the underlying issues in the cannabis sector in general and specifically those major tenants that have had defaults and then to be able to reposition those assets that we are seeking to have returned to us in a way that it will be to the benefit of IIP and to reaccelerate our revenue growth. As you can see from our -- from what Ben has said, we've already re-leased assets, a couple of assets in Michigan and Pennsylvania and continuing to have great insight as to how to be able to reposition the assets that we will be taking back from those tenants and/or restructuring with those tenants.

That's helpful. Second question for me, just regarding some of the defaults, particularly PharmaCann. I know you gave some color on your prepared remarks. But just you previously noted, right, that they had debt maturing June 2025. So any color in terms of how specifically that's impacting the process in terms of the communication and how that could evolve given that they did have debt that was coming due 2 months ago or on June 30.

Yes. This is Paul, Aaron. I think right now, we're focused on recovering the assets from PharmaCann. We're very aggressively pursuing our eviction cases. We are getting no indication from PharmaCann that they will be in a position to, anyway, amicably resolve of the debt they owe us and for back rents and future rents. So we're laser focused on recovering those properties and re-leasing to qualified operators. So what happens with PharmaCann's debt coming due is quite frankly, not on our radar.

And our next question will come from Alexander Goldfarb with Piper Sandler.

So I have a few questions here. First, Alan, obviously, you were clinically involved with IQHQ as a company. I believe you left a few years ago, just trying to understand the opportunity now. You guys are obviously enthusiastic about the rebound of IQHQ. And just want to know what's different now versus when you stepped away from the company a few years ago.

Well, a few years ago, the things -- I mean, I want to be very careful because it is a private company, and there was a lot going on when I stepped away personally and with the organization itself. Since I've departed that organization, they've made significant changes to the Board, to the governance structure, to management at the company. And all, I think, to the benefit of the potential success for IQHQ.

Okay. And then you guys said that you're looking at this as an investment, not operating the assets, but you also mentioned a ROFO to potentially acquiring the assets if they trade -- and presumably, there's a lot of CapEx that's needed to lease up these developments. So a 2-parter there. One is, it sounds like you are underwriting the potential of operating these assets. And two, does IQHQ have the capital required to fit these buildings out and lease them up.

Well, to the second one, do they have the capital? Yes. They do have the capital, depending on the timing and the size of the tenant and the quality of that tenant and the length of the lease and -- on and on, there's many, many factors that IQHQ have to evaluate. And on the same thing, you're talking about right of first offer, which just gives us the ability to have insight as to when and if they try to sell an asset so that we can make sure that we're protecting our investment in the company. But if indeed, the transaction where we're going to trade at a yield that would be attractive for IIP with a very strong tenant and well leased. I mean, I think financially, if we had a very attractive, high-yielding strong tenant asset, I would think you would want us to look at it and evaluate it very carefully and see if it make sense for IIP shareholders to capitalize. And I think that's what we would do.

Okay. And then the final question is, Paul, at the start of your comments, you talked about the competition in cannabis. Certainly, we know about the illicit market, the gray market, but you mentioned sort of the global cartel market, which, I guess, we all would know, but you mentioned it more prominently big picture, given the debt issues the industry is facing for refinancing over the next 12 months and obviously, this investment in IQHQ, are you saying that your thoughts on future investment in cannabis are no longer what you guys originally thought they would be? Or were you just mentioning the global cartel thing as sort of one of the generic headwinds that the industry is facing. I just want to know if it's more of a generic headwind versus, hey, you know what, the business case for cannabis isn't quite what we thought it was a few years ago. And therefore, you're going to see -- we're going to see you guys shift more away from cannabis into other sorts of real estate?

Right. So Alex, I think with regard to the combination about the Chinese [ illegal ] grows, that's mentioned is just another factor in the overall illicit competition we have for the licensed operators. It's not a game changer, it just hit the news, I think, as far as the ICE raids in California, some of the Chinese issues came up. So that's just another leg. And we are -- I want to make it clear that we are still committed to the cannabis industry. We are the leading providers of capital will remain that way. I think we have telegraphed explicitly in our last couple of calls that there's not that many opportunities currently in the cannabis field. So being good stewards of capital, and we felt it was appropriate to look at alternative investments, which we did for quite a while, over a year, we've been evaluating different opportunities. That's how we got to the IQHQ opportunity and looked at it extremely objectively and from square one and committed a great deal of diligence used outside counsel and we came to the conclusion unanimously that this was the best opportunity to invest in something outside of cannabis. But we are still believers in the cannabis industry. We -- I talked about the projected growth. It is -- as I mentioned, it's outselling other beverage products, it's going. Right now, it's challenged. But rather than just sitting on our hands, we thought it was appropriate and duty owed to our shareholders to use this capital appropriately and accretively. And so that's what we're doing.

So is this more of a temporary side -- like not side investment, but temporary non-cannabis investment? Or we should expect more non-cannabis investments?

Well, I think that at this point, we're going to see how things play out. We have a lot of things left to do, including you work through the assets that we are going to be taking back from some of our tenants and hoping that the industry, the cannabis industry has some positive recovery news, and we're going to work through that first, before we make -- before we go to do anything else differently than what we've already done.

Our next question will come from Merrill Ross with Compass Point.

As to why you didn't make an investment given your expertise and investment separately in a life sciences property or to a joint venture with IQHQ. Why was this structure of a revolver and a preferred plus warrant more attractive than directly making your own investment?

The overall yields of -- or the current yields of life science transactions if they were going to trade and assets that have -- that are well leased. Those yields are significantly -- would be significantly below our current cost of capital and investing in this way allowed us to have a very accretive transaction. And so that's why we went down this path. And I think because of the how difficult the life science industry right now and the overall operational expertise of operating a life science asset is something that is something that I think is best suited for a company such as IQHQ, we went down this path, and we believe we've structured a very opportunistic and high-quality secure transaction that will provide, I think, a very accretive returns for IIP and IIP shareholders.

And to follow up, can you disclose the current cash yields on the revolver?

I mean the current cash yield on our -- on the investment is north of 10%.

That excludes the [ preferred and warrant ]?

No, it's a combination of both.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Alan Gold for any closing remarks.

Thank you. And I would like to thank our shareholders for their continued support. I thank the team for your good and hard work. And with that, we'll end the call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.