Hello, everyone. Thank you for joining us, and welcome to the Innovative Industrial Properties Inc. Q3 2026 earnings call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Eli Kanter, Director of Finance.
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 potential lease transactions that are subject of letters of intent, are forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and subject to risks and uncertainties. Actual results may differ materially, and we refer you to our SEC filings, specifically our most recent reports 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 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, AFFO, and Adjusted EBITDA. You can find this information together with reconciliations to the most directly comparable GAAP financial measures, which is available on the investor relations section of our website at www.innovativeindustrialproperties.com, in our earnings release issued yesterday, as well as in our eight-K filed with the SEC. I'll now hand the call over to Alan.
Thanks, Eli. Good morning, everyone, and thank you for joining our third quarter 2026 earnings call. The third quarter marked another period of significant execution for us, highlighted by the continued expansion of our life science investments, strong leasing activity across our existing portfolio, significant growth in our AFFO per share versus the second quarter, and disciplined capital allocation. Most notably, in September, we entered into a $245 million mezzanine loan commitment as a member of a lender syndicate to IQHQ for Alewife Park, a premier life science campus in Cambridge, Massachusetts, one of the country's leading life science markets. This highly accretive investment builds on our existing relationship with IQHQ and is expected to generate an average interest rate of approximately 15.8% over the term of the loan.
Together with our original $270 million commitment to IQHQ and an additional $30 million investment through the preferred equity structure in September, we have now committed approximately $545 million to life sciences. Upon full funding, our life science investments are projected to account for approximately 26% of our total annualized income. We believe the current market environment continues to present compelling opportunities to deploy capital into the life science sector at attractive entry points. Our recent investments reflect both our confidence in the sector's long-term fundamentals and our disciplined approach to expanding our platform. At the same time, our team delivered strong leasing results across our cannabis portfolio. During the quarter, we executed new leases at six properties totaling approximately 604,000 sq ft, followed by an additional 270,000 sq ft lease subsequent to quarter end.
Together, these transactions represent approximately 874,000 sq ft of gross leasing activity since the beginning of the third quarter, bringing our total gross leasing activity year to date to approximately 1.3 million square feet across 12 properties, or 15% of our total portfolio. Importantly, we continue to see strong interest across our portfolio, reinforcing our confidence in the underlying value of our real estate, with an active pipeline of additional transactions. We remain focused on building upon this momentum, driving occupancy, and positioning the portfolio for strong long-term performance. We delivered strong quarterly earnings as well, with AFFO per share up 7% sequentially to $1.96 per share, as we had continued recoveries of past-due rents from certain tenants. On the capital front, and subsequent to quarter end, we completed a $54 million public offering of our 9.25% Series B Preferred Stock.
We intend to use the net proceeds to fund all or a portion of our remaining commitment under our Alewife Park mezzanine loan commitment and for general corporate purposes. This transaction further demonstrates our ability to access the capital markets to fund attractive, accretive investments and support the continued growth and diversification of our platform. Taken together, we believe these accomplishments underscore our strong management team and ability to deploy capital into accretive investments while actively managing and maximizing the value of our existing portfolio. We believe the combination of our growing life science investments, leasing momentum, and financial flexibility positions us for future growth and long-term shareholder value creation. With that, I'll turn the call over to Paul. Paul?
Thanks, Alan. At the federal level, cannabis reform continued to advance. Over the summer, the DEA completed its hearing on the proposed rescheduling of marijuana more broadly from Schedule I to Schedule III. While the proceedings remain subject to further administrative review, and the timing and outcome of any final decision remains uncertain, we believe federal reform has the potential to provide meaningful benefits to operators, including improved economics and broader access to traditional sources of capital. We have also seen encouraging investment and M&A activity across the cannabis industry, with established operators pursuing expansion in attractive markets, including Pennsylvania, Ohio, New York, and Colorado. We believe this activity signals that well-capitalized operators remain committed to strategic growth and are actively investing in markets with strong long-term fundamentals. While financial challenges persist for certain operators, we continue to take decisive action across our portfolio.
During the quarter, we regained possession of properties previously leased to Parallel, PharmaCann, and The Cannabist Company. These transitions allow us to pursue leasing opportunities, strengthen our tenant base, and improve overall portfolio performance. Turning to the state level, Florida recently approved 22 additional vertically integrated medical cannabis licenses, representing a meaningful expansion of one of the country's largest medical cannabis markets. We believe the addition of new operators creates opportunities for further investment and expansion in the state, including demand for mission-critical real estate.
More broadly, regulated cannabis markets continue to reach significant milestones. Massachusetts surpassed $10 billion in cumulative adult-use cannabis sales in September, while California has generated nearly $8.4 billion in cannabis tax revenue since 2018. These achievements underscore the scale and economic significance of established cannabis markets, even as operators continue to navigate a challenging environment. With that, I'll turn the call over to Ben to provide additional details on our portfolio activities.
Thanks, Paul. Starting with our investment activity, we expanded our life science portfolio this quarter, closing on $275 million in new commitments. We invested an additional $30 million in IQHQ preferred equity and closed on a $245 million mezzanine loan commitment for Alewife Park, our premier life science campus in Cambridge, Massachusetts. Alewife Park is a 27-acre campus comprised of three existing buildings totaling 392,000 sq ft and two pad-ready sites with up to 364,000 sq ft of additional development potential. The existing buildings are 78% leased to Lila Sciences, an AI-enabled scientific discovery company. In addition to the approximately $800 million invested in the campus prior to our investment, we believe the quality of the real estate, established tenancy, and location within one of the country's leading life science markets provide a strong foundation for our accretive investment.
Under the terms of our commitment, we funded approximately $111 million at closing, with the remaining $134 million expected to be funded through the fourth quarter of 2027. The loan is expected to generate an average interest rate of approximately 15.8% over the term. The financing will support the completion, tenant improvements, lease-up, and stabilization of the campus. We believe the current environment continues to present attractive entry points in life science real estate, specifically for high-quality assets in the core life science markets of Boston, San Diego, and the Bay Area. According to JLL, these three markets, along with Raleigh-Durham, have seen combined demand increase 44% year-over-year to nearly 8 million sq ft in Q1 2026, driven by improved biotech funding conditions and biomanufacturing reshoring.
Against this backdrop, we are actively growing our acquisition pipeline, seeing opportunities to invest in high-quality assets in these core markets at attractive risk-adjusted returns. Turning to leasing, we had our most active quarter to date, with substantial activity across multiple properties and markets. During the third quarter, we executed new leases totaling 604,000 sq ft across six properties located in California, Massachusetts, New York, Ohio, and Washington. That momentum continued into the fourth quarter with an additional 270,000 sq ft lease for a property located in Pennsylvania, bringing total leasing activity since July to 874,000 sq ft. Beyond these completed transactions, we have a pipeline of additional transactions we believe are progressing toward execution.
We have agreements in place covering three properties in Colorado totaling 72,000 sq ft, subject to the license transfer and regulatory approval process, as well as agreements across three properties previously leased to 4Front Ventures, totaling another 374,000 sq ft. In total, these agreements cover an additional 446,000 sq ft beyond the leases already executed. These agreements remain subject to customary due diligence, including licensing and regulatory approvals, and there can be no assurance that these discussions or negotiations will result in executed leases. With that, I'll turn the call over to David.
Thank you, Ben. For the third quarter, we generated total revenues of $64.9 million compared to $63.3 million in the second quarter. Our results benefited from new leases executed across our portfolio and recoveries of past-due rents, primarily from Battle Green and 4Front, which added $0.15 per share to our results this quarter, as detailed in our press release yesterday. Adjusted funds from operations, or AFFO, for the quarter totaled $54.8 million, or $1.96 per diluted share. Compared to $53 million or $1.83 per diluted share in the prior quarter, driven by the previously mentioned items. We also continue to benefit from our investments in the life science sector. During the quarter, we recognized $10.4 million of interest and dividend income related to our financial investments in IQHQ, contributing to total interest and other income of $14.3 million for the quarter.
Our third quarter results only had a few days of benefit from our recent Alewife investment, and we will have a larger beneficial impact in our fourth quarter results. Turning to capital markets, subsequent to quarter end, we priced an underwritten public offering of 2.2 million shares of our 9.25% Series B Preferred Stock at $25 per share, representing $54 million in gross proceeds of attractively priced perpetual capital. The proceeds from this offering are intended to support our previously announced mezzanine loan investment in the life science sector while providing additional flexibility to pursue future investment opportunities. We believe this transaction further demonstrates our ability to access multiple sources of the capital to support the continued diversification and growth of our platform. Also subsequent to quarter end, we executed a 90-day extension of our existing $87.5 million revolving credit facility, extending its maturity to January of 2027.
This extension provides us with additional flexibility to continue to evaluate our financing alternatives and manage our capital structure as we are seeing increased lender interest as a result of our continued diversification into the life science industry. Furthermore, as part of our diversification efforts, we are continuing to obtain increased research coverage and are pleased to welcome Stifel Nicolaus and Huntington Capital Markets to our equity research coverage, bringing the total number of firms covering IIP to eight. We appreciate the continuing interest in our company and look forward to engaging with the broader investment community as we execute on our strategy. Our balance sheet remains strong, supported by $142 million in total liquidity at quarter end, which does not include our recent $50 million preferred raise that further bolstered our total liquidity.
We ended the quarter with net debt to Adjusted EBITDA of 2.1 x, one of the lowest in the REIT industry, and net debt to total gross assets at a strong 19%. We continue to remain focused on maintaining a conservative capital structure and strong liquidity position while selectively pursuing attractive investment opportunities that support our long-term growth. With that, operator, could you please open the call for questions?
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from the line of Aaron Grey with Alliance Global Partners. Aaron, your line is now open. Please go ahead.
Hi, and thank you very much for the questions. So first question for me, just regarding some of the facilities that you've taken back possession of. Appreciate the color in terms of the timing for the 4Front properties. As we think about some of the other properties, PharmaCann, Parallel and the seven The Cannabist that you have possession of in August and September, how best to think about timing of when you can get those getting released and rent revenue from those? Thanks.
Ben, you want to take that?
Yeah. Hey, Aaron. No problem. Yeah, I think historically we've seen that can be anywhere from six to 18 months between sourcing a new tenant, lease commencement, license transfer, the regulatory process. I think we feel very good about our position and those assets in particular. Of the current vacancy, about two-thirds of that is our two Florida assets leased to Parallel, or previously leased to Parallel. And the Florida market has been performing very well this year. They set a new sales record in July, and we really like where that market is going and feel that those assets are well-positioned for future leasing activity. As well as, again, we like to highlight the capital-efficient nature in which we've been able to re-tenant these assets. For year-to-date, you're well below $10 a foot, all in for commissions, TIs, landlord work, really everything to re-tenant these assets.
Okay, great. Appreciate that color. Second question from me. I know last quarter we talked about diversification split between cannabis and life sciences, but wanted to dive more now in terms of diversification within the life sciences sector specifically, and how you think about further opportunities within life sciences and having some diversification versus concentration with existing IQHQ and affiliates. Thanks.
Yeah, I think that as we started the process of diversification, we've, I think, executed well. We've focused our efforts to date with investments into IQHQ, which we think are investments that are well-secured by the positions in which there are in at IQHQ. We believe that that has given us a very good window into what's going on in the life science industry, and we believe that our diversification will continue and that there are unique opportunities, not only within IQHQ, but within the broader life science industry that we are certainly exploring and look forward to exploring those opportunities in the future.
Okay, great. Appreciate the call. I will jump back in the queue.
Your next question is from the line of Bill Kirk with Roth Capital Partners. Bill, your line is open. Please go ahead.
Hey, everybody. Thank you for taking the question. I guess to start, there is a chunk of AFFO that is still coming from defaulted properties, whether it is security deposits or payments that are continuing. I guess the simple question is, would you expect quarterly AFFO to remain above that $1.90 payout?
David, why do you take that?
Yeah, I think, Bill, as you know, we had a very strong quarter. AFFO was up 7% sequentially, drove our payout ratio down to 97% for this quarter. So very happy with our results there. In terms of the go-forward, we don't give guidance. I think we have done a great job historically of recovering these past due rent payments that are owed to us. Again, that benefited this quarter. I think as you're noting, there were a number of benefits this quarter as we detail in our press release that will be non-recurring, including PharmaCann, Parallel, and Battle Green benefited as well.
Maybe that segues into a follow-up there. For the Battle Green, there was a change in control there, right, with Vireo. So what should we expect from that one going forward? We can see the payments in the third quarter, but what do those payments maybe look like going forward from those assets?
Yeah. Hey, Bill, it's Ben. I mean, we typically don't disclose lease terms on new leases. I mean, we really viewed that as, we had a defaulted tenant, and we were very aggressive in enforcing our rights under the lease and received interest from a new group that wanted to execute a lease for that asset before we were even able to wrap up that legal process. So I thought that really spoke to the quality of the real estate and getting another tenant in there so quickly, and we're very pleased to have Vireo in there and up and running.
Thank you. I'm going to sneak one last one in. Could you give us a little more detail on the, I think it was 16 terminated leases? It looks to me like a mix of retail and cultivation. So I guess what type of properties were they? Was it concentrated to a particular tenant or a particular market? Then I'll pass it along.
Yeah, no problem. Yeah, so of those, vast majority from a square footage perspective is going to be the cultivation assets. Almost half of that is the two Florida assets that we recovered from Parallel. You also had a couple from PharmaCann, as well as Battle Green and 4Front. I think it's also important to note that there's a number of those that we already have new leases executed. So that Battle Green example we just talked about, there was a lease that we signed in New York that was the termination of getting PharmaCann out and bringing a new tenant in there. And then the 4Front asset in Washington, where again, we have a new tenant in there up and running and paying rent already. So again, very pleased with the execution on those.
Okay. Thank you for clearing up my confusion there. Thank you.
Your next question is from the line of Tom Catherwood with BTIG. Tom, your line is open. Please go ahead.
Thank you so much, and good morning, everybody. Maybe circling back on Aaron's leasing question. Your Q3 leasing activity was a record. Was the increase more a result of deals that you've been working on for a long time all reaching a conclusion at once, or has customer activity accelerated? If it's the latter, what's driving the change, and how sustainable do you think that demand is?
Yeah. Hey, Tom, it's Ben. I think it's a combination of those. I mean, real estate transactions are obviously chunky in nature, so we had a number of those all come together in the same quarter. I think we are still pleased with the velocity we've seen on the re-tenanting. I think there's some optimism and some increased M&A activity that we've seen in the groups that are out there that are getting back on offense in some of these states where they want to expand, and they see the value in the real estate that we have. Going forward, the remaining vacancy currently is a little over 800,000 sq ft, and the vast majority, two-thirds of that is our two Parallel assets in Florida. That'll be our focus.
Like we mentioned before, feel very good about the Florida market setting a new monthly sales record here in July, and 20% year-over-year increase in sales in the Florida market. They just issued some new licenses. We feel we're very well positioned with those two assets.
Great. Appreciate that, Ben. Then maybe last one for me, going over to the IQHQ investment and kind of thinking specifically about the preferreds. When you first looked at the original investment with IQHQ, and the milestones that would have been associated with the Series G fundings, the draws the company would have made- How has the performance compared to your initial underwriting or expectations? Is the incremental $30 million that you put in this quarter tied to better execution or higher costs?
As we described in the prepared remarks, the life science industry continues to improve, and that's so that. I think IQHQ is benefiting from that increase, including having a stronger, having more leasing activity, particularly at Alewife, getting it up to 78% and perhaps additional demand for their emerging. We see their success in their Redwood City Elco Yards property, and even some new leasing activity emerging in the San Diego market. They are performing. That's number one. Number two is the additional capital investment was an opportunity that we had that we took advantage of. They had good news, capital needs, and we had capital available that we believed was very well-priced and very accretive to IIPR.
Got it. Appreciate the answers. Thanks, everyone.
Your next question is from the line of Rob Stevenson with Huntington. Rob, your line's open. Please go ahead.
Good morning, guys. David, I guess to ask the revenue question a little differently, are there any additional security deposits beyond the $3.8 million you did in the third quarter that you can pull down in the fourth quarter for those tenants that are currently not paying or where the lease is in transition but not yet commenced, et cetera? Or are you tapped out of the security deposits for those tenants that you listed in the earnings release at this point?
Yeah, sure. Rob, four of the five tenants, those are all fully exhausted. We do still have a handful of properties with The Cannabist Company where we do still have some security deposits on hand.
Okay, that is helpful. Thank you. Alan, how should we be thinking about the likelihood that you will acquire the incremental $155 million of the IQHQ mezz loan, and what dictates that in your mind?
Well, not acquire it. They will draw on that additional $155 million as they continue to build out the improvements for the Lila lease. We believe that that will get drawn over time, barring any changes.
So that is in addition to the $134 million that is yet to be drawn? So it is actually $289 million of incremental draw for you guys on that? Right? Because it was $245 million with $111 million at closing, and there was $134 million left on that $245 million, and then you had the option to acquire the $155 million from another lender on the same terms.
Oh, I see. I see. I am sorry. I did not understand that. Okay, go ahead. The opportunity for us to acquire that additional, I think that that is a possibility. It is part of our agreement. It is what we are looking to do. We have to have the available capital available to us to be able to make that determination. If we determine that that is the best allocation of capital when the opportunity surfaces, we will certainly look at that. It would be a very accretive transaction should it occur.
Okay. Then I guess just the last one to sort of follow up on that. How is the board thinking about sort of max investment in IQHQ at this point as that continues to ratchet up? I mean, are you getting to the point where if you did pull down that extra 155, that that would be it? Or is there still the board thinking that there's still room for incremental investment there?
Well, I mean, if you think about the opportunity, we believe the assets that IQHQ has are of high quality, which is why we made an additional investment in the Alewife transaction. That is just one example of a very high-quality asset that has a tremendous amount of leasing already in place and additional leasing activity. If there are other opportunities, I think the board would look, certainly would consider it.
We don't think that our investments are really just investments in IQHQ, but tangentially also investments in the life science industry, and are a vehicle for us to diversify from our portfolio from just the cannabis focus that we had. This diversification that we're doing has increased our access to new lenders and new capital sources. So it's proven to be what the board had thought it would be, which is a very good move for the company, and to give us greater access to capital.
Okay.
And we think that that will probably, if there are other opportunities, we will probably continue to do that, given that our diversification desire is higher than where we are sitting right today.
Okay. I lied. One last one, David. With the new preferred issuance, do you have the opportunity to open that up via an ATM and issue incrementally there? Or is that needed to come back if you wanted to issue additional on that series that you would have to do a fully marketed offering?
No, we do have the ability to do the ATM on that new Series B. So I think, as you are alluding to, we had that capability in our Series A. We had very strong demand and success of raising perpetual capital for that Series A this year. As you know, the Series B has that ability as well.
Okay. Thanks, guys. Appreciate the time.
Thank you.
There are no further questions at this time. I will now turn the call back to Alan Gold for closing remarks.
Thank you. First of all, I would like to thank all of those who have joined on the call today and for those very good questions. I would like to thank our team for their very hard work this past quarter, and we certainly look forward to the opportunities for IIPR in the future. With that, thank you all, and we will end the call.
This concludes today's call. Thank you for attending. You may now disconnect.