Innovative Industrial Properties (NYSE:IIPR) reported higher third-quarter revenue and adjusted funds from operations, supported by new leasing activity, rent recoveries and growing income from its life science investments. The cannabis-focused real estate investment trust also outlined further efforts to diversify into life science real estate financing and said it is working to re-lease properties recovered from former tenants.
Total revenue rose to $64.9 million in the third quarter from $63.3 million in the prior quarter. Adjusted funds from operations, or AFFO, totaled $54.8 million, or $1.96 per diluted share, compared with $53 million, or $1.83 per diluted share, in the second quarter.
Chief Financial Officer David Smith said the quarter benefited from newly executed leases and recoveries of past-due rent, primarily involving Battle Green and 4Front. Those recoveries contributed $0.15 per share during the quarter, according to the company. Smith noted during the question-and-answer session that several benefits detailed in the earnings release, including items tied to PharmaCann, Parallel and Battle Green, were nonrecurring.
Life Science Commitments Expand
The company continued to build its life science investment platform through investments involving IQHQ. Executive Chairman Alan Gold said Innovative Industrial Properties entered a $245 million mezzanine loan commitment for Alewife Park, a life science campus in Cambridge, Massachusetts, and made an additional $30 million preferred-equity investment in September.
Combined with its original $270 million commitment to IQHQ, the company has committed about $545 million to life sciences. Upon full funding, those investments are expected to represent approximately 26% of annualized income, Gold said.
Chief Investment Officer Ben Regin said Alewife Park is a 27-acre campus with three existing buildings totaling 392,000 square feet and two pad-ready development sites that could support up to 364,000 additional square feet. The existing buildings are 78% leased to Lila Sciences, an AI-enabled scientific discovery company.
Innovative Industrial Properties funded about $111 million of the $245 million mezzanine commitment 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 roughly 15.8% over its term, according to Regin. The financing is intended to support completion, tenant improvements, lease-up and stabilization of the campus.
Smith said the third-quarter results included only a few days of contribution from the Alewife investment, with a larger impact expected in the fourth quarter. During the third quarter, the company recognized $10.4 million of interest and dividend income from its IQHQ financial investments, contributing to total interest and other income of $14.3 million.
Management said it sees opportunities in high-quality life science assets in Boston, San Diego and the Bay Area. Gold added that the company views its IQHQ investments as a way to gain exposure to the broader life science industry and diversify beyond cannabis real estate.
Leasing Activity Reaches Record Level
The company executed new leases covering approximately 604,000 square feet across six properties in California, Massachusetts, New York, Ohio and Washington during the third quarter. It also signed a 270,000-square-foot lease in Pennsylvania after quarter-end.
That brought gross leasing activity since the start of the third quarter to about 874,000 square feet. Year-to-date leasing activity totaled approximately 1.3 million square feet across 12 properties, representing 15% of the portfolio, Gold said.
Regin said the company has agreements covering another 446,000 square feet, though the transactions remain subject to due diligence, license transfers and regulatory approvals. The agreements include three Colorado properties totaling 72,000 square feet and three properties formerly leased to 4Front Ventures totaling 374,000 square feet.
During the quarter, Innovative Industrial Properties regained possession of properties previously leased to Parallel, PharmaCann and The Cannabist Company. Regin said re-leasing a property can take from six to 18 months, including tenant sourcing, lease commencement, license transfers and regulatory processes.
More than two-thirds of the company’s remaining vacancy, which totals slightly more than 800,000 square feet, is associated with two former Parallel properties in Florida, Regin said. Management highlighted Florida’s new monthly sales record in July, a 20% year-over-year increase in state sales, and the approval of 22 additional vertically integrated medical cannabis licenses as favorable developments for the market.
Regin also said re-tenanting costs have remained below $10 per square foot year-to-date, including commissions, tenant improvements and landlord work. He noted that some terminated properties already have replacement tenants, including a Washington property formerly leased to 4Front and a New York property transitioned from PharmaCann.
Capital Raising and Balance Sheet
After quarter-end, the company completed a public offering of 2.2 million shares of 9.25% Series B Preferred Stock at $25 per share, generating $54 million in gross proceeds. The company plans to use proceeds to fund all or part of its remaining Alewife Park commitment and for general corporate purposes.
Smith said Innovative Industrial Properties also extended its $87.5 million revolving credit facility by 90 days, moving its maturity to January 2027. The company ended the third quarter with $142 million of total liquidity, excluding the subsequent preferred-stock raise. Net debt to adjusted EBITDA stood at 2.1 times, while net debt represented 19% of total gross assets.
During the question-and-answer session, Smith said security deposits had been fully exhausted for four of five tenants discussed in the company’s earnings release, while deposits remained for a handful of properties involving The Cannabist Company. The company also said its new Series B preferred stock has an at-the-market issuance capability, similar to its existing Series A preferred program.
About Innovative Industrial Properties (NYSE:IIPR)
Innovative Industrial Properties, Inc (NYSE:IIPR) is a real estate investment trust focused on the regulated cannabis industry in the United States. The company acquires, owns and manages specialized industrial properties, including cultivation, processing and manufacturing facilities used by state-licensed cannabis operators.
Innovative Industrial Properties generally leases its properties to cannabis companies under long-term, typically triple-net lease agreements. Under these arrangements, tenants are generally responsible for property-level operating expenses, while the company provides real estate capital and manages its portfolio as a landlord.
Founded in 2016, Innovative Industrial Properties has expanded through property acquisitions, sale-leaseback transactions and investments in the development or redevelopment of cannabis facilities.
