Q1 2025 Innovative Industrial Properties Inc Earnings Call
Good day, and welcome to the Innovative Industrial Properties Inc. 1st quarter, 2025 earnings call. All participants will be in a listen only mode. Showed 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.
Speaker Change: I would now like to turn the conference over to Eli Cantor, Director of Investor Relations. Future events or otherwise.
I'll now hand the call over to Alan. Alan?
Alan: 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.
Alan: Year-to-date, we have acquired a $7.8 million industrial facility in Maryland, sold a cultivation facility of Michigan for $9 million for $7.8 million.
Alan: 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.
Alan: As we announced in March, we are proactively working to refresh the portion of our tenant base to better position our company for sustainable growth and financial performance.
Alan: 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: Thanks, Alan. As we noted the last quarter, we were taking a strategic and aggressive approach to replacing our default attendants. I'd like to provide some additional color on our progress with each tenant.
Speaker Change: Shortly after sending our default notices in March, Goldfarb filed for a voluntary receivership in the state of California and announced the suspension of trading on CBOE Canada.
Paul: These leads to gold flora.
Paul: Also in March we issued default notices to tilt holdings and following the delivery of these notices tilled made partial payments and 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 plan.
Paul: <unk> divestiture of their plant touching businesses.
Paul: For farm Mccann in forefront ventures, we have issued default notices and are actively working with local council 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.
Paul: We'll provide updates as we progress.
Paul: On the regulatory front. The state's 2.0 Act was introduced in the house last month with bipartisan co sponsors as a reminder, this Jack would make state legal cannabis businesses federally legal I would also eliminate the punitive to 80 tax among other benefits. In addition during last month's confirmation hearing for tariff.
Speaker Change: Cole President Trump's nominate to lead the DEA coal stays that reviewing the rescheduling of cannabis would be among his top priorities if confirmed.
Speaker Change: And at the state level, Pennsylvania, Florida, and Minnesota are making significant strides in their adult use cannabis legalization initiatives.
Speaker Change: Pennsylvania is exploring legalization of adult use cannabis with governor Shapiro's budget proposing legalization effective July one 2025 with sales anticipated to begin by January one 2026.
Speaker Change: 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 as office of cannabis management progressed, its regulatory framework by publishing its final rules in April with.
Speaker Change: These state level drivers and continued strong consumer demand E. D. S. A forecast U S cannabis sales to grow by 7% to $33 $5 billion in 2025 and projects a compounded annual growth rate from 2024 2020, 972%.
Speaker Change: 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.
Speaker Change: These market conditions are a key driver of our re tenant a philosophy of focusing on bringing best in class operators to our mission critical real estate.
Speaker Change: I'd like to now turn the call over to Ben to discuss our investment leasing and disposition activity been.
Ben: Thanks, Paul.
Speaker Change: My prepared remarks, I'd like to touch on our portfolio initiatives described by Allen leasing selective investment activity and opportunistic capital recycling.
Speaker Change: During the first quarter, we acquired a 22000 square foot industrial property in Maryland, and entered into a long term lease with a private Maryland, operator, expanding our footprint in the state to approximately 316000 square feet.
Speaker Change: And in April we closed on a $9 million disposition in Michigan for a property previously leased to Emerald growth and executed a PSA to sell another property in Palm Springs, California.
Speaker Change: These three transactions illustrate our team's focus on strategic investments and opportunistic capital recycling.
Speaker Change: On the leasing side over the first four months of the year, we have executed two new leases totaling 211000 square feet, including a full building lease for our 205000 square foot property in Warren, Michigan with Barry Greene, one of the largest cultivators in Michigan with one of the top selling brands in the state.
Speaker Change: We are encouraged with the demand we're 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.
Speaker Change: With that I'll hand, it over to David David.
David David: Thank you Ben for the first quarter, we generated total revenues of $71 7 million a six 5% decrease from the fourth quarter of last year.
David David: 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 re tenanted additional funding and building improvements that resulted in base rent increases and contractual rental escalations.
David David: During the quarter, we applied $5 8 million of security deposits for the payment of rent on properties leased to four tenants.
David David: 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 revenue sequentially.
David David: Our balance sheet remained solid this quarter supported by a $2 6 billion in gross assets with nearly $2 2 billion of those assets unencumbered.
David David: 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.
David David: Debt to gross assets ratio of 11% and a debt service coverage ratio of nearly 17 times, which.
David David: Which we believe positions us well for long term value creation.
David David: This quarter, we executed on several strategic capital markets transactions to strengthen our financial position.
In February we repurchased $8 $8 million of the Companys unsecured notes at a discount to par value and year to date. The company issued just over 406000 shares of our series a preferred stock under our at the market equity offering program for $10 1 million in gross proceeds.
David David: 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.
David David: Since the adoption of our stock repurchase program, we have repurchased 371538 shares of common stock under this program for a total cost of 20.1 million at a weighted average price of $54 nine per share.
David David: Our solid financial position characterized by strong liquidity and diversified capital markets access positions us well to navigate the current challenging market environment.
Alan: With that I'll turn it back to Alan Alan.
Alan: 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.
Alan: With that I'd like to open it up to questions. Operator could you. Please open the call up for questions.
Alan: Absolutely we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: 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.
Speaker Change: Yeah.
Speaker Change: And your first question today will come from Tom Catherwood with BTG. Please go ahead.
Paul: Thank you so much and good morning, everybody I'm Paul.
Paul: I wanted to touch on the you mentioned working with pharma can towards the resolution.
Paul: But I assume the 205000 square feet that you will at least in Michigan in April is farm cans facility.
Paul: Is that right and have you gotten control of some of their assets already.
Paul: Yeah, Hey, Todd So yes that is correct that's foreign Mccann facility in there.
Paul: Really kind of proud of being able to reach at that facility as quickly as he didn't put into high quality tenants. So we think that is the beginning of a good process.
Paul: We will go down the road with the rest of them.
Paul: As necessary as we mentioned where we are.
Paul: Actively pursuing.
Paul: Legal remedies, but at the same time, there's other potential.
Paul: Outcomes, including receivership, so we're only really.
Paul: Few weeks into this process and so we think that.
Paul: Leasing that facility is a really good start for us.
Paul: Got it and just building on that lease you know you've also completed its kind of just a significant amount of large block releasing in the past 18 months. There is obviously that one farm. Mccann's then there was I think 160000 square feet in Pittsburgh last quarter and then.
Paul: 200000 square feet in Michigan at the end of 2023, so kind of two questions around that first how did these transactions come together or 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 dip.
Paul: <unk> from tenants, who we're leasing to four or five years ago.
Paul: Well, let me ask Ben to respond to that one.
Ben: Hey, Tom Yeah to reiterate you are right and when we're talking nearly a million square feet of total leasing activity and when you go back to late 2023, with our with our Michigan deal.
Paul: The sourcing of the tenants comes in all different ways.
Paul: Eight years in and have a lot of great relationships and networking in the industry.
Paul: 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.
Paul: It's great to see that there are still in challenging markets groups that can make money. If you find efficient operators that are performing well even in a Michigan in our Massachusetts, and California in states that are viewed as a little more challenged and I think they view.
Paul: A tremendous amount of value in our mission critical real estate.
Paul: We've been very encouraged you know really across the portfolio as the demand we're seeing from these groups.
Speaker Change: And Tom just.
Speaker Change: Following up on that question.
Speaker Change: So a lot of these tenants that are struggling today.
Speaker Change: Most likely have an issue with their balance sheet in there.
Speaker Change: Are there financial position more so than the actual operating business there, they're operating the operating environment while challenging.
Speaker Change: There it can be it can be a very good business, but with a historical balance sheet issues that some of them have creates more of a balance sheet issue and I think that's what we're discovering in and where you are.
Speaker Change: Very focused on choosing tenants that have the ability to operate very well and succeed in the future.
Speaker Change: Got it appreciate all those thoughts and then one last one for me.
Speaker Change: Since you announced the tenant reset fresh program at the end of March and a lot has changed as far as tariffs.
Speaker Change: And then Theres been report outset out there that.
Speaker Change: On a whole lot of packaging for cannabis operators comes from China.
Speaker Change: So kind of since that early April timeframe have has 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.
Speaker Change: Well as we were monitoring all of our tenants and.
Speaker Change: We believe that there are they're there the macro.
Speaker Change: The environment is still challenging and that there could be future a future issues, but right now Ah.
Speaker Change: Very confident that we've got our hands around our portfolio and our tenant base.
Speaker Change: <unk>.
Speaker Change: And confident that within a short 18 to 36 month period of time, the ship that ship will generally be righted.
Speaker Change: Yeah.
Tom Catherwood: Understood I appreciate all the answers thanks, everyone. Thanks, Tom.
Speaker Change: And your next question today will come from Connor Mitchell with Piper Sandler. Please go ahead.
Connor Mitchell: Hey, good morning, Thanks for taking my question.
Connor Mitchell: First I just want to go back to the the space that was leased to Barry Greene, the 205000 square feet of the.
Speaker Change: The Michigan property previously farm again, I guess, just kind of following on to some of Tom's questioning it.
Speaker Change: What kind of make this this property unique in that you guys were able to lease it. So quickly and then should we expect any others that are in a similar stage or do you think that this is going to be.
Speaker Change: A path that might follow up with some of the foreign Mccann properties or some of the other things you mentioned might fall under the process of receivership and might be a little bit longer it's dead.
Ben: Yeah, Hey, Tom This is Ben I can take that.
I wouldn't necessarily say, it's unique I mean, I think this follows a pretty strong track record that the team has here of re tenant in these buildings are in Michigan like we've talked about before.
Speaker Change: I think we do expect that this will play out as Alan mentioned over the next 18 to 36 months as well as we're bringing new tenants and but again, we've been very encouraged by the outreach that we've gotten the inbound interest we have seen really across these buildings in multiple different markets.
Ben: The groups that we're talking to that I think have.
Speaker Change: The operational expertise in the <unk>.
Speaker Change: Actual position that we would want in our portfolio and we feel very good that we've got the right team in place here to execute on our plan for these buildings.
Speaker Change: Okay I appreciate that and then.
Speaker Change: Maybe if you could just.
Speaker Change: Remind us.
Speaker Change: How much of how.
Speaker Change: How much of a rent or security deposits were received and recorded in revenue in the quarter for the tenants that defaulted all payments for you guys viewed as part of the cleaning process that we should kind of think about it a modeling perspective stripping out going forward.
Speaker Change: And David what you go ahead and handle that but yeah. I think that's a really good point to that security deposits were used for are some rental income in the first quarter and won't be available in the second quarter and beyond yes.
Speaker Change: So kind of on that I think is as we disclosed.
Speaker Change: In our press release, there was $5 8 million.
Speaker Change: Obscure deposits applied for the quarter four of those default to tenants.
Mccann: It is important to note in the case of farm farm Mccann.
Forefront and tilt those security deposits were exhausted so just over just over 20 a share of impact.
Mccann: So from that benefit.
Mccann: Okay, and then any brands as well I think for some of these you may receive January payments, but.
Mccann: But not February March.
Mccann: In terms of what we actually collected.
Mccann: Yeah, just thinking about a modeling perspective going forward.
Mccann: What what won't be.
Mccann: Being received for.
Mccann: A quarterly standpoint, or even monthly yes, yes, we can go into the detail offline, but it was roughly $4 $5 million that we collected from a default attendance during the quarter.
Mccann: Okay I appreciate that and then maybe one more for me you guys made mention in the release of three lease properties that are still youre.
Mccann: Youre waiting on rent commencement due to.
Mccann: Approvals that haven't been acquired yet.
Mccann: Yes.
Mccann: Just wondering if you could give some color on maybe the markets. These are taking places and and then.
Mccann: If this is kind of changed your investment thesis on these markets. If you know the.
Mccann: The the regulatory process that licensing process, there's a little bit slower than anticipated maybe more difficult. When you were underwriting the acquisition of the properties.
Mccann: Hey, Conor this is Dan Yeah, I don't I don't 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.
Mccann: Make any improvements they might want to make two space ultimately get.
Mccann: Sign off and approval on final licensing. So I think this is all kind of in the normal course of what we would expect for these assets.
Mccann: Okay. That's all for me thank you.
Speaker Change: Thanks Scott.
Speaker Change: And your next question today will come from Bill Kirk with Roth Partners. Please go ahead.
Bill Kirk: Hey, Thank you good afternoon, everyone.
Speaker Change: So I wanted to talk logistically maybe about like.
Speaker Change: The remedy where you take possession of some of these properties and I guess, what I want to ask is in the context of you know not being plant touching.
Speaker Change: When you when you take possession of the property, how does that I dunno 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.
Speaker Change: Hey, Bill it's Paul So, it's really not a problem for us to date and when we do take possession.
Speaker Change: Of course, we as.
Speaker Change: New York Stock Exchange listed company, we do not hold the license we do not operate the property. So what we've done in the past to ensure a smooth transition is to utilize.
Speaker Change: MSA.
Speaker Change: Good service agreement. So we can put a third party in the yard to facilitate the transition to a new tenant and facilitate the license transfer. So we have a good process in place to ensure that.
Speaker Change: We don't we don't.
Speaker Change: Cross any lives with our division.
Speaker Change: Not being a Dutch company.
Speaker Change: That's perfect. That's all I had thank you.
Bill Kirk: Thanks Bill.
Speaker Change: And your next question today will come from Aaron Grey with Alliance Global Partners. Please go ahead.
Aaron Grey: Hi, good afternoon, and thank you for the questions here so.
Aaron Grey: You don't want to piggyback a bit off some of the questions have been asked on the resolutions I understand you're limited in what you can discuss could still ongoing and theres a lot of puts and takes but curious in terms of timing of a resolution for windows. These active facilities is that coming into play I know a lot of time for the existing tenants. They don't want to keep on going.
Aaron Grey: Operations are with the new tenant potentially coming in as well they'd like to have everything you know up to date and ongoing as well. So curious how that comes into play, especially when you do have you know a crop with a certain amount of you know.
Aaron Grey: Our lifecycle, there and you want it to be fresh and going out to be sold for the best amount of cash flow. So just curious if that comes into play in terms of these negotiations and how youre looking to come to resolution two thank you.
Aaron Grey: Yes. Thanks Darrin this is Paul so, yes, youre exactly right.
Aaron Grey: It is.
Speaker Change: Much more desirable to have high performing facility.
Aaron Grey: The.
Aaron Grey: Plants in good shape and growing in all of the.
The infrastructure up and running to facilitate a good transfer so.
Aaron Grey: That's always the goal.
Now that being said if we if it.
Aaron Grey: Lauren a receivership situation, it's a little easier because it's structured and we have the control of the receiver to health facilities.
Aaron Grey: Facilitate the transfer, but if we earn any eviction situation.
Aaron Grey: We are willing and able to take over the property.
Aaron Grey: Anything you want to MSA like I mentioned.
Aaron Grey: Clean it out, but that's kind of a last resort and even when we're in a any picture once we take control.
Aaron Grey: Were typically already in negotiations with a replacement tenant and so with the cooperation.
Speaker Change: Your party Janet.
Aaron Grey: We can make that transfer so.
Speaker Change: As I mentioned is always desirable to have.
Speaker Change: The functioning facility in place on the transfer.
Speaker Change: Our goal.
Speaker Change: Really appreciate that color. That's helpful. And then second question for me just as we think about potentially you know we're trying to get them on the offensive.
Speaker Change: I think you said about $220 million of liquidity available in the presentation. Just given the current set of candidates I know that it remains a focus but last quarter. I believe you mentioned that you've broadened investment opportunities. So just curious you know today you know any more color you can provide on that you know where are you seeing potential opportunities to deploy some of that liquidity. Thank you.
Speaker Change: Sure.
Speaker Change: Yes, so we are continuing to evaluate many opportunities I think that.
That liquidity comes with a cost of capital and we're highly focused on making sure that we are.
Speaker Change: Are looking at opportunities that can.
Speaker Change: That can provide us an accretive return based on our cost of capital and a.
Speaker Change: Unfortunately, the environment does have a several unique opportunities.
Speaker Change: Hopefully in the next short three to six month period of time, we can.
Speaker Change: Announce some new investments.
Speaker Change: But in addition to that we continue to review and analyze unique opportunities within the cannabis industry and still have a pipeline associated with the with that.
Speaker Change: I appreciate the color I'll jump back in the queue.
Speaker Change: Thanks Sarah.
Speaker Change: With our question and answer session I would like to turn the conference back over to Alan Gold for any closing remarks.
Speaker Change: Thank you and.
Speaker Change: First and foremost I'd like to thank you all for joining us here today and again to thank our team for their hard hard and great work and before on.
Speaker Change: On this.
Speaker Change: Portfolio and our stockholders for their continued support with that.
Speaker Change: Well in the end the call. Thank you.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Yeah.