Innovative Industrial Properties - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue of $71.7M beat Wall Street consensus ($70.1M), but diluted EPS of $1.03 missed ($1.17); sequentially, revenue fell 6.5% and AFFO/share declined to $1.94, driven by tenant defaults and an impairment charge, partially offset by contractual escalators and new leases. EPS and revenue estimates from S&P Global: Primary EPS Consensus Mean $1.168*, Revenue Consensus Mean $70.127M*.
• Management advanced its tenant “refresh” initiative: declared defaults (4Front, Gold Flora, TILT; plus a $16.1M loan default), re-leased 205k sf in Michigan to Berry Green, and applied $5.8M of security deposits to rent in Q1; CFO flagged ~$0.20/share benefit from deposits that will not recur, a near-term headwind.
• Capital actions and balance sheet remain conservative: $220.8M total liquidity, 11% debt-to-gross assets, DSCR ~16.8x; YTD repurchased $20.1M of common stock and retired $8.8M of notes; issued ~$10M preferred equity.
• Dividend maintained at $1.90/share for Q1; re-tenanting progress and strong liquidity are key stock reaction catalysts, while deposit exhaustion and legal resolution timing temper near-term earnings visibility.

What Went Well and What Went Wrong

What Went Well

• Rapid re-tenanting: 205k sf in Warren, MI leased to Berry Green and 22k sf MD acquisition with a long-term lease; 211k sf leased YTD. “We delivered these results while navigating a turbulent market environment and advancing the strategic initiative…to strengthen our tenant credit profiles and optimize occupancy”.
• Strong balance sheet and disciplined capital allocation: ~$220M liquidity, 11% debt/gross assets; repurchased $20.1M of stock at $54.09 avg and retired $8.8M notes at a discount; issued ~$10M preferred equity. “Net debt-to-EBITDA of less than 1x…positions us well for long-term value creation”.
• Portfolio demand: management cited continued interest from efficient operators even in challenged markets (MI, MA, CA), supporting the re-tenanting plan over 18–36 months.

What Went Wrong

• Tenant defaults and revenue pressure: declared defaults for 4Front, Gold Flora, and TILT; contractual amounts owed totaled $9.0M, $1.7M, and $2.4M respectively as of March 28, plus $16.1M loan default; Q1 revenue declined ~5% YoY and 6.5% QoQ.
• Non-recurring rent support and impairment: $5.8M security deposits applied to rent (many now exhausted), and a $3.5M impairment tied to an expected Palm Springs sale, depressing EPS and signaling near-term revenue headwinds.
• EPS miss vs consensus despite revenue beat: operational headwinds (defaults, higher property/G&A, impairment) outweighed rental escalators and re-tenanting offsets. EPS actual $1.03 vs $1.168*, Revenue actual $71.7M vs $70.1M*.

Transcript

Operator (participant)

Good day, and welcome to the Innovative Industrial Properties first quarter 2025 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchstone phone. To withdraw your question, please press star, then two. 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.

Eli Kanter (Director of Investor Relations)

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. 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 Forms 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.

Alan Gold (Executive Chairman)

Thanks, Eli, and welcome everybody to our first quarter 2025 earnings call. Before we begin, I would like to thank the entire IIP team for their hard work and dedication. They have truly been committed to protecting the long-term value of our portfolio for our shareholders by bringing their special knowledge and experience to this challenging industry. We believe we are uniquely positioned with our strong balance sheet and liquidity to manage through the ongoing uncertainty of the broader macroeconomic environment and the continued challenges in the regulated cannabis market. As for the quarter, we generated total revenues of $71.7 million, AFFO of $55.3 million, and ended the period with just over $220 million of total liquidity. We delivered these results while navigating a turbulent market environment and advancing the strategic initiative we announced on our last call to strengthen our tenant credit profiles and optimize occupancy across our portfolio.

The broader macro environment, particularly the ongoing uncertainty around tariffs, has weighed on economic forecasts, inflation trends, consumer sentiment, and business planning. Against this backdrop, we continue to perform, focusing on optimizing occupancy of our portfolio, opportunistically recycling capital, and executing on growth initiatives on a disciplined selective basis. Year to date, we have acquired a $7.8 million industrial facility in Maryland, sold a cultivation facility in Michigan for $9 million, and executed two new leases totaling 211,000 sq ft. Now, Ben will provide more detail on our investing, leasing, and disposition activity. In addition, we strategically undertook steps to strengthen our financial foundation and drive long-term shareholder value. Year to date, we repurchased $20 million of our common stock at what we believe are compelling valuations and retired nearly $9 million of debt at a discount.

To further enhance our capital structure, we also issued $10 million of preferred equity. These actions underscore our disciplined approach to capital allocation and our commitment to maximizing returns for shareholders. Now, David will provide more detail on our financial results and capital position shortly. As we announced in March, we are proactively working to refresh a portion of our tenant base to better position our company for sustainable growth and financial performance. As part of this effort, we issued default notices for non-paying tenants and are aggressively pursuing all legal remedies available to enhance the performance of our real estate portfolio. We are encouraged by our progress so far and believe it reflects our management team's ability to navigate complex situations effectively with a focus on protecting shareholder value. We remain confident in the strength of our business and the opportunities that lie ahead.

We look forward to keeping you updated on our continued progress. With that, I'll now turn the call over to Paul. Paul.

Paul Smithers (CEO)

Thanks, Alan. As we noted last quarter, we were taking a strategic and aggressive approach to replacing our defaulted tenants. I'd like to provide some additional color on our progress with each tenant. Shortly after sending our default notices in March, Gold Flora filed for voluntary receivership in the state of California and announced the suspension of trading on CBOE Canada. Stone Blossom Capital has been appointed as the receiver of the company, and we are currently in discussions with Stone Blossom about their plan for our properties leased to Gold Flora. Also, in March, we issued default notices to Tilt Holdings, and following the delivery of these notices, Tilt made partial payments in satisfaction of their April rent obligations for the two properties we leased to them.

We are working in good faith to resolve outstanding rental and other financial obligations under the leases while Tilt works to complete the planned divestiture of their plant-touching businesses. For PharmaCann and Forefront Ventures, we have issued default notices and are actively working with local counsel to aggressively pursue our legal rights under the leases, including evictions. Understanding that each state is different, which impacts the timing and complexity of recovering these properties, we are working diligently through the process and will provide updates as we progress. On the regulatory front, the STATES 2.0 Act was introduced in the House last month with bipartisan co-sponsors. As a reminder, this act would make state legal cannabis businesses federally legal and would also eliminate the punitive 280E tax, among other benefits.

In addition, during last month's confirmation hearing for Terrence Cole, President Trump's nominee to lead the DEA, Cole stated that reviewing the rescheduling of cannabis would be among his top priorities if confirmed. At the state level, Pennsylvania, Florida, and Minnesota are making significant strides in their adult-use cannabis legalization initiatives. Pennsylvania is exploring legalization of adult-use cannabis, with Governor Shapiro's budget proposing legalization effective July 1, 2025, with sales anticipated to begin by January 1, 2026. In Florida, the SMART and SAFE campaign aims to put adult-use cannabis back on the ballot for the 2026 election after receiving 56% support in last November's election. Finally, Minnesota's Office of Cannabis Management progressed its regulatory framework by publishing its final rules in April. With these state-level drivers and continued strong consumer demand, BDSA forecasts U.S.

Cannabis sales to grow by 7% to $33.5 billion in 2025 and projects a compounded annual growth rate from 2024 to 2029 of 7.2%, reaching $44.4 billion by 2029. That said, competition from the illicit market, price compression, market maturity, and few new adult-use markets may continue to weigh on investor sentiment and operator performance. These market conditions are a key driver of our retenting philosophy of focusing on bringing best-in-class operators to our mission-critical real estate. I'd like to now turn the call over to Ben to discuss our investment, leasing, and disposition activity. Ben.

Ben Regin (CIO)

Thanks, Paul. For my prepared remarks, I'd like to touch on our portfolio initiatives described by Alan: leasing, selective investment activity, and opportunistic capital recycling. During the first quarter, we acquired a 22,000 sq ft industrial property in Maryland and entered into a long-term lease with a private Maryland operator, expanding our footprint in the state to approximately 316,000 sq ft. In April, we closed on a $9 million disposition in Michigan for our property previously leased to Emerald Growth and executed a PSA to sell another property in Palm Springs, California. These three transactions illustrate our team's focus on strategic investments and opportunistic capital recycling.

On the leasing side, over the first four months of the year, we have executed two new leases totaling 211,000 sq ft, including a full building lease for our 205,000 sq ft property in Warren, Michigan, with Berry Green, one of the largest cultivators in Michigan with one of the top-selling brands in the state. We are encouraged with the demand we are seeing for our assets across markets and the leasing progress we have made this year, while also continuing to source attractive new investment opportunities, which we will continue to pursue on a very selective, disciplined basis. With that, I'll hand it over to David. David.

David Smith (CFO)

Thank you, Ben. For the first quarter, we generated total revenues of $71.7 million, a 6.5% decrease from the fourth quarter of last year. The decrease was primarily driven by the tenant defaults we previously disclosed in March. The decline was partially offset by increased revenues from properties we recently acquired or retented, additional funding and building improvements that resulted in base rent increases and contractual rental escalations. During the quarter, we applied $5.8 million of security deposits for the payment of rent on properties leased to four tenants. Adjusted funds from operations for the first quarter was $55.3 million, or $1.94 per share, a decrease of 13% compared to the fourth quarter of 2024, driven primarily by the same factors that drove the decrease in revenues sequentially. Our balance sheet remained solid this quarter, supported by $2.6 billion in gross assets, with nearly $2.2 billion of those assets unencumbered.

Our only debt consists of $291 million in fixed-rate unsecured bonds maturing in May 2026. Furthermore, we continue to operate with conservative credit metrics highlighted by a net debt-to-EBITDA of less than one times, debt-to-gross assets ratio of 11%, and a debt service coverage ratio of nearly 17 times, which we believe positions us well for long-term value creation. This quarter, we executed on several strategic capital markets transactions to strengthen our financial position. In February, we repurchased $8.8 million of the company's unsecured notes at a discount to par value, and year to date, the company issued just over 406,000 shares of our Series A preferred stock under our at-the-market equity offering program for $10.1 million in gross proceeds. In addition, with the stock repurchase program we established in March, we have the ability to opportunistically repurchase shares that we view as a clear undervaluation of our stock.

Since the adoption of our stock repurchase program, we have repurchased 371,538 shares of common stock under this program for a total cost of $20.1 million at a weighted average price of $54.09 per share. Our solid financial position, characterized by strong liquidity and diversified capital markets access, positions us well to navigate the current challenging market environment. With that, I'll turn it back to Alan. Alan.

Alan Gold (Executive Chairman)

Thanks, David. As I indicated in my opening comments, I am proud of what our team accomplished this quarter, and we are confident in the future. As long-term owners of our company, thank you as always for your continued support. With that, I'd like to open it up to questions. Operator, could you please open the call up for questions?

Operator (participant)

Absolutely. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. Your first question today will come from Tom Catherwood with BTIG. Please go ahead.

Tom Catherwood (Analyst)

Thank you so much, and good morning, everybody. Paul, I want to touch on you mentioned working with PharmaCann towards a resolution, but I assume the 205,000 sq ft that you leased in Michigan in April is PharmaCann's facility. Is that right? And have you gotten control of some of their assets already?

Paul Smithers (CEO)

Yeah, Tom, so yes, that is correct. That's a PharmaCann facility, and we're really kind of proud of being able to retent that facility as quickly as we did and put in a high-quality tenant. We think that is the beginning of a good process, and we'll go down the road with the rest of them as necessary. As we mentioned, we're actively pursuing legal remedies, but at the same time, there's other potential outcomes, including receivership. We're only really a few weeks into this process. We think leasing that facility is a really good start for us.

Tom Catherwood (Analyst)

Got it. And just building on that lease, you've also completed kind of just a significant amount of large block releasing in the past 18 months. There's obviously that one, the PharmaCann's. Then there was, I think, 160,000 sq ft in Pittsburgh last quarter, and then another 200,000 sq ft in Michigan at the end of 2023. So kind of two questions around that. First, how did these transactions come together? Did you find the tenants, or did they find you? And then second, is there anything unique with these tenants in terms of either their strategy or structure or management that makes them different from tenants you were leasing to four or five years ago?

Paul Smithers (CEO)

Yeah. Let me ask Ben to respond to that one.

Ben Regin (CIO)

Yeah, hey, Tom. Yeah, I mean, to reiterate, you're right. We're talking nearly 1 million sq ft of total leasing activity when you go back to late 2023 with our Michigan deal. The sourcing of the tenants comes in all different ways. We're eight years in and have a lot of great relationships and networking in the industry. We're very confident in the team that we have in place to execute and source these tenants. We're very confident in our plan for the portfolio. It's great to see that there are still in challenging markets groups that can make money. You find efficient operators that are performing well, even in a Michigan and a Massachusetts and California and states that are viewed as a little more challenged. I think they view a tremendous amount of value in our mission-critical real estate.

We have been very encouraged, really, across the portfolios that demand we are seeing from these groups.

Alan Gold (Executive Chairman)

Tom, just following up on that question, a lot of these tenants that are struggling today might most likely have an issue with their balance sheet and their financial position, more so than the actual operating business. Their operating environment, while challenging, it can be a very good business. With the historical balance sheet issues that some of them have, it creates more of a balance sheet issue. I think that that's what we're discovering, and we are being very focused on choosing tenants that have the ability to operate very well and succeed in the future.

Tom Catherwood (Analyst)

Got it. Appreciate all those thoughts. One last one for me. Since you announced the tenant refresh program at the end of March, a lot has changed as far as tariffs. There have been reports out there that a lot of packaging for cannabis operators comes from China. Kind of since that early April timeframe, have there been any other tenants that you're concerned with their operations or outlook going forward and might have to be included in this refresh program going forward?

Alan Gold (Executive Chairman)

As we're monitoring all of our tenants, and we believe that the macro environment is still challenging and that there could be future issues. Right now, we're fairly confident that we've got our hands around our portfolio and our tenant base and confident that within a short 18-36-month period of time, the ship will generally be righted.

Tom Catherwood (Analyst)

Understood. Appreciate all the answers. Thanks, everyone.

Paul Smithers (CEO)

Thanks, Tom.

Operator (participant)

Your next question today will come from Connor Mitchell with Piper Sandler. Please go ahead.

Connor Mitchell (Analyst)

Hey, good morning. Thanks for taking my question. First, I just want to go back to the space that was leased to Berry Green, the 205,000 sq ft of the Michigan property, previously PharmaCann. I guess just kind of following on to some of Tom's questioning, what kind of makes this property unique in that you guys were able to lease it so quickly? Should we expect any others that are in a similar stage, or do you think that this is going to be a path that might follow for some of the PharmaCann properties or some of the others that you mentioned might fall under the process of receivership and might be a little bit longer instead?

Ben Regin (CIO)

Yeah. Hey, Connor, this is Ben. I can take that. I would not necessarily say it is unique. I mean, I think this follows a pretty strong track record that the team has here of retenting these buildings in Michigan, like we have talked about before. I think we do expect that this will play out, as Alan mentioned, over the next 18-36 months as we are bringing new tenants in. Again, we have been very encouraged by the outreach that we have gotten, the inbound interest we have seen really across these buildings in multiple different markets, the groups that we are talking to that I think have the operational expertise and the financial position that we would want in our portfolio. We feel very good that we have got the right team in place here to execute on our plan for these buildings.

Connor Mitchell (Analyst)

Okay. Appreciate that. Maybe if you could just remind us how much of the rent or security deposits were received and recorded in revenue in the quarter for the tenants that defaulted on payments for you guys viewed as part of the cleaning process that we should kind of think about in a modeling perspective stripping out going forward.

Alan Gold (Executive Chairman)

David, why don't you go ahead and handle that? I think that's a really good point that security deposits were used for some rental income in the first quarter and won't be available in the second quarter and beyond.

Paul Smithers (CEO)

Yeah. So Connor, on that, I think as we disclosed in our press release, there was $5.8 million of security deposits applied for the quarter for those defaulted tenants. It is important to note in the case of PharmaCann, Forefront, and Tilt, those security deposits were exhausted. So just over $0.20 a share of impact from that benefit.

Connor Mitchell (Analyst)

Okay. Any rents as well? I think for some of these, you may receive January payments, but not February or March.

Paul Smithers (CEO)

In terms of what we actually collected?

Connor Mitchell (Analyst)

Yeah. Just thinking about a modeling perspective going forward, what won't be being received from a quarterly standpoint or even monthly?

Paul Smithers (CEO)

Yeah. Yeah. We can go into the detail offline, but it was roughly $4.5 million that we collected from the defaulted tenants during the quarter.

Connor Mitchell (Analyst)

Okay. Appreciate that. Maybe one more for me. You guys made mention in the release of three leased properties that are still, you're waiting on rent commencement due to approvals that haven't been acquired yet. Just wondering if you could give some color on maybe the markets these are taking place in, and if this has kind of changed your investment thesis on these markets, if the regulatory process, the licensing process, is a little bit slower than anticipated and maybe more difficult when you were underwriting the acquisition of the properties.

Ben Regin (CIO)

Hey, Connor. This is Ben. Yeah. I do not think it changes our view on the markets. I think this is pretty standard across markets and across industries, really. I mean, it does take some time for a new operator to get in there, make any improvements they might want to make to the space, ultimately get sign-off and approval and final licensing. I think this is all kind of in the normal course of what we would expect for these assets.

Connor Mitchell (Analyst)

Okay. That's all for me. Thank you.

Operator (participant)

Your next question today will come from Bill Kirk with Roth Partners. Please go ahead.

Bill Kirk (Analyst)

Hey, thank you. Good afternoon, everyone. I wanted to talk logistically maybe about the remedy where you take possession of some of these properties. I guess what I want to ask is, in the context of not being plant-touching, when you take possession of the property, how does that, I don't know, influence that listing status with the exchanges, or what can you do with the property when you were to take possession that keeps you in compliance with what you need to do?

Paul Smithers (CEO)

Hey, Bill, this is Paul. It's really not a problem for us to date. When we do take possession, of course, we, as a New York Stock Exchange listed company, do not hold the license. We do not operate the property. What we've done in the past to ensure a smooth transition is to utilize an MSA, Management Service Agreement. We put a third party in there to facilitate the transition into a new tenant and facilitate the license transfer. We have a good process in place to ensure that we don't cross any lines with our division from not being a plant-touching company.

Ben Regin (CIO)

That's perfect. That's all I had. Thank you.

Paul Smithers (CEO)

Okay. Thanks, Bill.

Operator (participant)

Your next question today will come from Aaron Grey with Alliance Global Partners. Please go ahead.

Aaron Grey (Analyst)

Hi, good afternoon, and thank you for the questions here. I want to piggyback a bit off some of the questions I've been asked on the resolutions. I understand you're limited in what you can discuss because it's still ongoing and there's a lot of puts and takes. Curious in terms of timing of a resolution for when there's these active facilities, is that coming into play? I know a lot of times for the existing tenants, they want to keep ongoing operations with a new tenant potentially coming in as well. They'd like to have everything up to date and ongoing as well. Curious how that comes into play, especially when you do have a crop with a certain amount of life cycle there and you want it to be fresh and going out to be sold for the best amount of cash flow.

Just curious if that comes into play in terms of these negotiations and how you're looking to come to resolutions here. Thank you.

Paul Smithers (CEO)

Yeah. Thanks, Aaron. This is Paul. Yeah, you're exactly right that it is much more desirable to have a performing facility with the plants in good shape and growing and all the infrastructure up and running to facilitate a good transfer. That's always the goal. That being said, if we're in a receivership situation, it's a little easier because it's structured and we have the control of the receiver to help facilitate the transfer. If we are in an eviction situation, we are willing and able to take over the property, put it into an MSA, like I mentioned, and clean it out. That's kind of a last resort. Even when we're in eviction, once we take control, we're typically already in negotiations with a replacement tenant. With the cooperation of the departing tenant, we can make that transfer.

As I mentioned, it's always desirable to have the functioning facility in place on the transfer. And that's our goal.

Operator (participant)

Really appreciate that color. That's helpful. Second question for me, just as we think about potentially returning again on the offensive, I think you said about $220 million of liquidity available in the presentation. Just given the current state of cannabis, I know that remains the focus, but last quarter, I believe you mentioned that you've broadened investment opportunities. Just curious today, any more color you can provide on that? Where are you seeing potential opportunities to deploy some of that liquidity? Thank you.

Alan Gold (Executive Chairman)

Yeah. We are continuing to evaluate many opportunities. I think that liquidity comes with a cost of capital, and we're highly focused on making sure that we are looking at opportunities that can provide us an accretive return based on our cost of capital. Unfortunately, the environment does have several unique opportunities. Hopefully, in the next short three- to six-month period of time, we can announce some new investments. In addition to that, we continue to review and analyze unique opportunities within the cannabis industry and still have a pipeline associated with that.

Aaron Grey (Analyst)

Appreciate the color, and I'll jump back in the queue.

Paul Smithers (CEO)

Thanks, Aaron.

Operator (participant)

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

Alan Gold (Executive Chairman)

Thank you. First and foremost, I'd like to thank you all for joining us here today. Again, to thank the team for the hard and great work on this portfolio and stockholders for their continued support. With that, we'll end the call. Thank you.

Operator (participant)

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