Prepared remarks
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. The operator provided instructions to participants on how to ask questions. 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 I to III, 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 hearings set to begin on June 29 under an expedited timeline. Taken together, we believe these developments mark a major step forward for the industry and a 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 four 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 five 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 resolution to the former 4Front, PharmaCann and Gold Flora assets. All three 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 four 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. 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 market firms 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 three-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?
Questions and answers
The operator opened the line for the question-and-answer session. 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 eight 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 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. After that, once the lease goes into effect, you could have a free rent period. We've seen that average anywhere from three 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 across the portfolio. When you think about some of the previous tenant issues—PharmaCann, 4Front, 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, there can be the free rent period and the 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. That range applies across the board. I think the other aspect to keep in mind is just the minimal capital outlay that we've seen across the board. These are, on average, $5 to $10 a foot, sometimes as-is deals, which is very unique in the real estate industry to be able to re-tenant these assets at minimal cost. We've been pleased with that dynamic.
Got it. And then this one might seem a bit out there at the moment. But we've seen this increase in M&A activity across the cannabis space, in early stages. For example, your tenant Holistic is taking over 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 don't think anyone is thinking too far ahead. With this first phase of rescheduling, and there is more to go, we do see a strengthening of tenants in general in the industry. We see increased interest and potential growth opportunities in the cannabis industry. Whether that's six months, 12 months or 36 months out, it's an evolving story.
And then just last one for me, Paul, on the rescheduling. I know you mentioned the June 29 administrative hearings starting back up again. 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. It's too early to tell, but what are the chances we might end up with a split outcome where medical is exempt from 280E, but adult use still remains subject to stricter taxation?
Yes, Tom, I think that's a fair question. In the short run, meaning the next 30 days, that's somewhat unclear. But the executive order did state an expedited hearing, and that means within 30 days. So once the June 29 process starts, they expect to have that wrapped up within 30 days. Compare that to what we had under the prior administration, it is much different. 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. We are very excited about where this is going. We've talked in the past about rescheduling and what we think this will do for the industry and our operators, and we are thrilled that it's on this expedited timeline. We expect to see certainly more capital to the bottom line for these operators. We've had discussions, and we do expect 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 quickly.
We think that capital will be used to expand and they'll come to us for that expansion. We also see other advantages of rescheduling: certain states that have been on the fence for a medical program or converting medical to adult use may be more likely to move toward new programs. Lastly, rescheduling is positive for R&D; many companies will be interested in testing the plant and entering particularly medical uses for the plant. So we are very pleased with these developments and the expedited timeline.
Your next question comes from the line of Alexander Goldfarb with Piper Sandler.
Just wanted to continue that same line of questioning. The present situation is a bit confusing because there's a restriction on nonmedical use and yet a promotion of medical use. What exactly happened is that medical use was downgraded to Schedule III, but adult use is still Schedule I. Is that what's happened? What is technically in place as of today? We know where this path might be ending up, but what does it stand as technically as of today?
As of today, the acting Attorney General was very clear. Licensed medical-use operators have the benefit of Schedule III. That applies to 100% medical licenses. Our operators all hold medical licenses, so that accounts for 100% of our operators in our portfolio. The decision made as far as other-use cannabis is that they put it on an expedited schedule process starting June 29 with the expectation to resolve within 30 days. We don't expect any extended period like we saw in the past. So it's pretty clear about the decision to bifurcate. In the interim, where we are today is great because it covers our medical license holders, which are in our portfolio.
Okay. So as far as the 280E exemption goes, 100% of your tenants are covered because they're medical. As far as 280E, do those same tenants through their operating businesses get the full deduction? Or does the IRS split out their sales?
What the DOJ order suggested was retroactive tax relief available for all qualifying medical operators. That should be 100% for the medical operators, and that is our portfolio. Treasury has been requested to give an opinion sooner rather than later on what the retroactive effect of 280E will be for both medical and adult use. In the short term, it's clear: 280E relief for medical license holders.
Okay. So it doesn't matter whether they sell recreationally or not; if they're medical, we'll find out how long the retroactivity applies. In your view, as you look at tenant credit issues that have been ongoing for a few years, does the 280E relief essentially eliminate future pending credit issues? Or will there still be potential credit issues because of debt refinancing or other factors where 280E alone won't fully resolve those problems?
Alex, businesses operate with risks like any other industry. This 280E relief allows these businesses to have a better operating environment and better operating statistics, but they remain businesses and will face typical operational risks. Some companies will grow, some will shrink, some will disappear. We'll experience what all industries experience, just like any other real estate company that leases space to businesses.
Okay. And then just a final question. You mentioned IQHQ and more life science exposure. Alan, as you look over the company over the next five years, do you think the split might be 50-50 between life science and cannabis, or more like 25-75? I'm just trying to understand whether life science will head toward 50% or remain a smaller portion over the next several years.
I think that's a difficult question to answer precisely. What I can say is that we are in a position where we have a strengthening cannabis industry and a resurging life science industry. Our entry point into life science was, I think, at one of the lower parts of the industry over a long period. We have positioned ourselves to be opportunistic with two growing industries that we believe will help 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, more specifically on IQHQ and incremental investments. In the filings, you talked about commencing more investments in 2Q '26. Is that still the case? And can you give more color on those incremental investments in IQHQ preferred stock and their timing in the near to medium term?
Yes. We have scheduled the investment in IQHQ through mid-2027, and we have been able to opportunistically bring forward a couple of those scheduled investments because they're very accretive. If you recall, it's on average north of 14% and our cost of capital with our credit facility associated with making those investments is in the mid-single digits. So these are extremely accretive investments, and we have been able to bring some of that forward. We continue to believe the life science industry, of which IQHQ is a part, is doing well, and we will continue to look at opportunistically making investments at the appropriate time.
Great. Second question on cannabis. Good to see progress on new leases of previously defaulted tenants. As we talk about Schedule III creating more opportunities, can you talk about some near- to medium-term opportunities? You mentioned being able to get more aggressive on acquisitions and bringing on net-new tenants. In the near term, would that strictly be medical given the clarity we have there, and maybe markets like Texas, Kentucky or Georgia? Or are there other near-term opportunities versus longer-term ones as we wait for the second phase of rescheduling?
We are looking at acquisition opportunities for growth in the second half of 2026 and into 2027. But our number one priority right now is completing the refinancing of our unsecured debt, which the team has had tremendous success addressing and we are highly confident in completing. Once we complete that and our commitment to IQHQ, we can 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 get perspective on whether interstate commerce is possible out of rescheduling. If it did occur, would you consider your cultivation assets an opportunity or a risk? How do you prepare for the possibility of interstate commerce?
Bill, it's Paul. There are two parts to that. First, rescheduling does not address interstate commerce or banking. The Attorney General was clear those issues were not addressed in this action. We don't see interstate commerce happening until there is complete legalization across the board, and we believe that is many years away. Even if there is some form of interstate commerce, we believe our assets and operators will do fine because our facilities are primarily indoor growth and produce medical, highly specialized products. That is not likely to be what moves across long-haul interstate distribution. So even in that scenario, we think we're well positioned, but we don't see that occurring for many years.
There is a possible demand unlock that would benefit your tenants if intoxicating hemp is restricted, which could take effect in November unless something changes. I imagine most of your properties aren't growing hemp. What's your perspective on what a ban on intoxicating hemp could mean for your tenants and the demand for the products they grow?
Our tenants do not grow hemp; they are cannabis growers. We've been watching the litigation around hemp, and we don't believe hemp one way or the other is likely to affect our operators' businesses significantly. That said, if there is a ban on intoxicating hemp products, it would put clarity into the issue and remove some of the Delta-8 stores that we see in nonmedical states. I think that's beneficial for the cannabis industry to get clarity on 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 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.