IIP - Innovative Industrial Properties Inc.
02/24/2026 | Press release | Distributed by Public on 02/24/2026 05:05
Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section above entitled "Cautionary Statement Regarding Forward-Looking Statements." Certain risk factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see Item 1A, "Risk Factors."
Overview
We are an internally-managed REIT focused on the acquisition, ownership and management of specialized industrial and commercial properties in the United States. Our properties are primarily leased to experienced, state-licensed operators for their regulated cannabis facilities. We have acquired and expect to continue to acquire our cannabis properties through sale-leaseback transactions and third-party purchases. These properties are generally leased, and we expect to continue leasing them, on a triple-net lease basis, pursuant to which the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term, including structural repairs, maintenance, real estate taxes and insurance. Outside of the cannabis sector, our leases may include different lease structures that do not require tenants to assume all property-related expenses. In addition to our cannabis-related real estate portfolio, we also have financial investments in the life science industry and intend to actively pursue acquisitions of properties within that sector as a key component of our growth strategy. We may continue expanding our investment activities to include joint ventures, debt or mezzanine financing, preferred or joint venture equity interests, and interests in other real estate funds or REITs.
We were incorporated in Maryland on June 15, 2016. We conduct our business through a traditional umbrella partnership real estate investment trust, or UPREIT structure, in which our properties are owned by our Operating Partnership, directly or through subsidiaries. We are the sole general partner of our Operating Partnership and own, directly or through subsidiaries, 100% of the limited partnership interests in our Operating Partnership. As of December 31, 2025, we had 23 full-time employees.
As of December 31, 2025, we owned 111 properties comprising 8.9 million square feet (including 303,000 rentable square feet under development/redevelopment) in 19 states. As of December 31, 2025, we had invested $2.5 billion in the aggregate (consisting of purchase price and funding of draws for improvements submitted by tenants, if any, but excluding transaction costs) and had committed an additional $6.5 million to fund draws to certain tenants and vendors for improvements at our properties. Of the $6.5 million committed to fund draws to certain tenants and vendors for improvements at our properties, $3.0 million was incurred but not funded as of December 31, 2025.
Of these properties, we include 109 properties in our operating portfolio, which were 96.7% leased as of December 31, 2025, with a weighted-average remaining lease term of 12.8 years. We define our "operating portfolio" as the portion of our property portfolio consisting of properties that are leased or are not leased but ready for their intended use. The operating portfolio excludes properties under development or redevelopment that are not yet available for tenant occupancy. Properties are added to the operating portfolio upon substantial completion and availability for occupancy and may be removed if they become vacant and we elect to redevelop them, pursue alternative uses, or market them for sale rather than re-lease them.
We do not include in our operating portfolio the following two properties (all of which were under development/redevelopment as of December 31, 2025, and together are expected to comprise 255,000 rentable square feet upon completion of development/redevelopment):
•Inland Center Drive in San Bernardino, California; and
•Leah Avenue in San Marcos, Texas.
Factors Impacting Our Operating Results
Our results of operations are affected by a number of factors and depend on the rental revenue we receive from the properties that we acquire, the timing of lease expirations, general market conditions, the regulatory environment in the cannabis industry, the regulatory and market conditions applicable to the life science industry, and the competitive environment for real estate assets supporting regulated cannabis operators and life science tenants.
Rental Revenues
We receive income primarily from rental revenue generated by the properties that we acquire. The amount of rental revenue depends upon a number of factors, including:
•our ability to enter into leases with increasing or market value rents for the properties that we acquire; and
•rent collection, which primarily relates to each of our current and future tenant's financial condition and ability to make rent payments to us on time.
The properties that we acquire consist of primarily real estate assets that support the regulated cannabis industry. Most states where we own properties issue licenses for cannabis operations for a limited period. If one or more of our tenants are unable to renew or otherwise maintain their licenses or other state and local authorizations necessary to continue its cannabis operations, such tenants may default on their lease payments to us. Current unfavorable market dynamics in the regulated cannabis industry have adversely affected our ability to re-lease properties upon tenant defaults at the rental rates we currently receive and, in some cases, for prolonged periods. See the section entitled "Business - Tenant Concentration" for a discussion of our recent tenant defaults. Furthermore, changes in federal law and current favorable state or local laws in the cannabis industry may impair our ability to renew or re-lease properties and the ability of our tenants to fulfill their lease obligations and could materially and adversely affect our ability to maintain or increase rental rates for our properties.
Conditions in Our Markets
Conditions in the markets in which we operate, including regulatory, economic and industry-specific developments, influence tenant performance and the performance of our life science investments and, in turn, our financial condition, results of operations and cash flows.
Our tenants primarily operate in the regulated cannabis industry and continue to be affected by a combination of macroeconomic, industry-specific and regulatory factors. These include federal, state and local taxation burdens; competitive pressure from illicit, unlicensed cannabis operations; declines in unit pricing for regulated cannabis products; constrained access to capital; inflationary pressures; elevated interest rates; significant debt maturities; labor market constraints; supply chain disruptions; evolving trade policies; and broader U.S. consumer financial conditions. Market dynamics and regulatory frameworks vary by state and may influence tenant profitability and demand for regulated cannabis cultivation and production facilities. These conditions have already adversely affected the ability of certain tenants to meet their lease obligations and have had a material adverse effect on the Company's financial condition, results of operations, and cash flows. If these challenges persist or worsen, additional tenants may default under their leases and we may be unable to re-lease affected properties on favorable terms, or at all. The extent and duration of these impacts depend on developments in the regulated cannabis markets in which we operate and remain subject to significant uncertainty.
In addition to the regulated cannabis industry, we have investments and strategic objectives related to the life science industry. Conditions in the life science sector, including capital availability, interest rate trends, new supply, valuation levels and sector consolidation may affect the performance of our life science investments and any life science properties that we may acquire.
See "Item 1A. Risk factors" in this annual report on Form 10-K for a discussion of additional risks we face.
Market Dynamics in Regulated Cannabis State Programs
Regulated cannabis markets differ significantly by state, reflecting variations in regulatory structures, taxation and licensing regimes, and enforcement practices related to illicit cannabis activity. In certain states, including California, the illicit market continues to represent a substantial portion of overall cannabis sales, and high state and local taxes on regulated cannabis products have impacted operator profitability. In markets where enforcement against illicit sales is limited or inconsistent, regulated operators may face additional competitive pressure, which can affect demand for regulated cannabis facilities.
In addition, many states have experienced sustained declines in unit pricing for regulated cannabis products, with pricing pressure more pronounced in certain markets. These trends have compressed margins for operators and, in some cases, led to consolidation of operations or the closure of certain facilities. These developments have influenced tenant demand for space and capital investment decisions and may continue to affect leasing activity.
Reduced Capital Availability and Significant Debt Maturities for Cannabis Operators
Capital availability for regulated cannabis operators remains constrained due to a combination of higher interest rates, increased market volatility, regulatory uncertainty, and the continued federal illegality of cannabis in the United States, which limits access to traditional bank financing and public capital markets. As a result, many operators rely on alternative sources of capital that are generally more expensive and restrictive. Since 2021, capital availability for the regulated cannabis industry has declined, in part due to broader macroeconomic conditions. According to Viridian Capital Advisors ("Viridian"), worldwide cannabis capital raises in 2025 decreased modestly to $2.1 billion, compared to $2.3 billion in 2024, but remained well below levels observed in prior years, including over $4.3 billion in 2022. In contrast, Viridian reports that mergers and acquisitions activity in the North American regulated cannabis industry increased to approximately $2.1 billion in 2025, up from $1.2 billion in 2024.
At the same time, a number of operators have reached or are approaching the maturity of debt incurred in prior periods. Limited refinancing options, often at higher interest rates and with restrictive covenants, have increased financial pressure on some tenants and may lead to balance sheet restructurings, asset sales or reductions in operations. These factors may affect tenant credit profiles and leasing decisions and could influence future rental income and property utilization.
Inflation, Tariffs and Supply Chain Disruption
Inflationary pressures, changes in trade policy and ongoing supply chain challenges have contributed to higher operating and capital costs for cannabis operators and, in certain cases, for the development or redevelopment of our properties. Changes in tariff policies may increase the cost of equipment, construction materials and other inputs used in cultivation and production facilities. These higher costs may further affect tenant capital expenditure plans and operating margins.
In addition, supply chain disruptions and geopolitical developments have resulted in longer lead times and increased costs for certain capital projects, which may delay development or redevelopment activities and the commencement or expansion of tenant operations. The extent of these impacts will continue to depend on broader economic conditions, regulatory developments and future changes in trade and tariff policies.
Unit Pricing for Regulated Cannabis Products
Many states have experienced declines in unit pricing for regulated cannabis products, with that decline more pronounced in certain states than in others, which compresses operating margins for operators. As a result, certain regulated cannabis operators have consolidated operations or shuttered certain operations to reduce costs, which could have a negative impact on operators' demand for regulated cannabis facilities, including our existing tenants.
Significant Tenants and Concentrations of Risk
As of December 31, 2025, we owned 111 properties located in 19 states. Many of our tenants are tenants at multiple properties. We seek to manage our portfolio-level risk through geographic diversification and by minimizing dependence on any single property or tenant. At December 31, 2025, our largest property was located in New York and accounted for 5.5% of our net real estate held for investment. No other properties accounted for more than 5% of our net real estate held for investment at December 31, 2025. See Note 2 "Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements" in the notes to the consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest percentage of our total rental revenues for the year ended December 31, 2025.
Competitive Environment
We face competition from a diverse mix of market participants, including but not limited to, other companies with similar business models, independent investors, hedge funds, lenders and other real estate investors, as well as potential tenants (cannabis operators themselves), all of whom may compete with us in our efforts to acquire real estate zoned for regulated cannabis operations. Competition from others may diminish our opportunities to acquire a desired property on favorable terms or at all. In addition, this competition may put pressure on us to reduce the rental rates below those that we expect to charge for the properties that we acquire, which would adversely affect our financial results.
Operating Expenses
Our operating expenses include general and administrative expenses, including personnel costs, stock-based compensation, and legal, accounting and other expenses related to corporate governance, public reporting and compliance with the various provisions of U.S. securities laws. Our operating expenses also include costs that we incur for properties, including taxes, insurance, maintenance, security, utilities and other property-specific costs. We generally expect to structure our leases so that the tenant is responsible for real estate taxes, maintenance, insurance, and structural repairs with respect to the premises throughout the lease term. Increases or decreases in such operating expenses will impact our overall financial performance.
Our Qualification as a REIT
We have been organized and operate our business so as to qualify, to be taxed as a REIT for U.S. federal income tax purposes. Shares of our common stock and Series A Preferred Stock are subject to restrictions on ownership and transfer that are intended, among other purposes, to assist us in qualifying and maintaining our qualification as a REIT. In order for us to qualify as a REIT under the Code, the relevant sections of our charter provide that, subject to certain exceptions, no person or entity may own, or be deemed to own, by virtue of the applicable constructive ownership provisions of the Code, more than 9.8% (in value or number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of stock or Series A Preferred Stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of our outstanding common stock or any class or series of our outstanding preferred stock.
Results of Operations
Investments in Real Estate
See Note 6 "Investments in Real Estate" in the notes to the consolidated financial statements for information regarding our investments in real estate and property portfolio activity during the year ended December 31, 2025. Additionally, the Company declared a default under a secured promissory note in the aggregate principal amount of $16.1 million (the "MIH Note"). The MIH Note was issued to the Company by the purchaser of four properties in California and was secured by such four properties. In September 2025, due to borrower's continued default and voluntary surrender, the Company took back possession and ownership of the four properties through a deed in lieu of foreclosure.
Investment in Life Science
See Note 7 "Life Science Investments" in the notes to the consolidated financial statements for information regarding our life science investment activity for the year ended December 31, 2025.
Comparison of the Years Ended December 31, 2024 and 2023
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2024, which was filed with the SEC on February 21, 2025, for a comparison of the years ended December 31, 2024 and 2023.
Comparison of the Years Ended December 31, 2025 and 2024 (in thousands)
| Years Ended December 31, | |||||||||||||||||
| 2025 | 2024 | Change | |||||||||||||||
| Cannabis Portfolio Segment: | |||||||||||||||||
| Rental revenues (including tenant reimbursements) | $ | 265,486 | $ | 306,936 | $ | (41,450) | |||||||||||
| Other revenues | 469 | 1,581 | (1,112) | ||||||||||||||
| Property expenses | (30,177) | (28,472) | (1,705) | ||||||||||||||
| Depreciation and amortization expense | (74,068) | (70,807) | (3,261) | ||||||||||||||
| Impairment loss on real estate | (3,527) | - | (3,527) | ||||||||||||||
| Gain (loss) on sale of real estate | (326) | (3,449) | 3,123 | ||||||||||||||
| Interest and other income | 6,413 | 4,388 | 2,025 | ||||||||||||||
| Cannabis Portfolio Segment net income | 164,270 | 210,177 | (45,907) | ||||||||||||||
| Life Science Portfolio Segment: | |||||||||||||||||
| Interest and other income | 5,047 | - | 5,047 | ||||||||||||||
| Life Science Portfolio Segment net income | 5,047 | - | 5,047 | ||||||||||||||
| Unallocated: | |||||||||||||||||
| General and administrative expense | (33,735) | (37,444) | 3,709 | ||||||||||||||
| Interest and other income | 2,860 | 6,600 | (3,740) | ||||||||||||||
| Interest expense | (20,195) | (17,672) | (2,523) | ||||||||||||||
| Net income | 118,247 | 161,661 | (43,414) | ||||||||||||||
| Preferred stock dividends | (3,812) | (1,804) | (2,008) | ||||||||||||||
| Net income attributable to common stockholders | $ | 114,435 | $ | 159,857 | $ | (45,422) | |||||||||||
Cannabis Portfolio Segment
Rental Revenues. Rental revenues for the year ended December 31, 2025 were $265.5 million, compared to $306.9 million for the year ended December 31, 2024, reflecting a decrease of $41.5 million, or 14%, year over year. The decrease was primarily driven by tenant defaults, resulting in a decrease of $46.9 million related to properties leased to PharmaCann, Gold Flora, TILT, and 4Front. In addition, there was a decrease of $3.1 million related to properties that have been taken back or sold, a $3.9 million decrease from a one-time disposition-contingent lease termination fee that was collected during the year ended December 31, 2024 in connection with the sale of property in Los Angeles, California, and a $3.1 million decrease in tenant reimbursement revenue primarily due to tenant defaults. These decreases were partially offset by a $5.4 million increase from two properties acquired in 2024 and one property acquired in 2025, a $5.1 million increase from new leases executed on existing properties, and a $6.0 million increase from annual contractual rent escalations.
For the year ended December 31, 2025, we applied $6.6 million of security deposits for payment of contractual rent on properties leased to seven tenants. For the year ended December 31, 2024, we applied $7.7 million of security deposits for payment of contractual rent on properties leased to six tenants.
Other Revenues. Other revenues for the years ended December 31, 2025 and 2024 primarily consist of interest revenue related to leases for property acquisitions that did not satisfy the requirements for sale-leaseback accounting. The $1.1 million decrease in other revenue for the year ended December 31, 2025 was primarily due to non-collection of rent related to one property leased to 4Front.
Property Expenses.Property expenses for the year ended December 31, 2025 increased by $1.7 million, or 6%, to $30.2 million, compared to $28.5 million for the year ended December 31, 2024. The increase was primarily driven by additional investment in existing properties, resulting in a $2.1 million increase in property tax expense, as well as a $0.8 million increase in expenses associated with properties that we took back possession of from defaulted tenants but not yet re-leased. These increases were partially offset by a $1.2 million decrease in insurance expense due to lower premiums on
the master property insurance policy renewed in August 2024 and 2025. Property expenses related to leased properties are generally reimbursable to us by the tenants under the terms of the leases.
Depreciation and Amortization Expense.Depreciation and amortization expense for the year ended December 31, 2025 increased by $3.3 million, or 5%, to $74.1 million, compared to $70.8 million for the year ended December 31, 2024. The increase in depreciation and amortization expense was primarily related to depreciation on the two properties we acquired in 2024, one property acquired in 2025 and the placement into service of construction and improvements at certain of our properties.
Impairment loss on real estate. Impairment loss on real estate of $3.5 million for the year ended December 31, 2025 is related to one of our properties located in Palm Springs, California which was sold in June 2025.
Loss on Sale of Real Estate.Loss on sale of real estate for the year ended December 31, 2025 related to the sale of a property located in Mancos, Colorado, which was sold in December 2025. Loss on sale of real estate for the year ended December 31, 2024 related to the sale of a property located in Los Angeles, California, which was sold in May 2024. See Note 6 "Investments in Real Estate" to our consolidated financial statements included in this report for more information.
Interest and Other Income.Interest and other income for the year ended December 31, 2025 increased by $2.0 million, or 46%, to $6.4 million, compared to $4.4 million for year ended December 31, 2024. The increase was primarily due to interest payments on the MIH Note, which were previously recognized as a deposit liability on our consolidated balance sheets but was recognized as interest and other income in September 2025 in connection with the termination of the note.
Life Science Portfolio Segment
Interest and Other Income. Interest and other income was $5.0 million for the year ended December 31, 2025 and represented interest and dividend income earned on our investments in the IQHQ Credit Facility and IQHQ Preferred Stock.
Unallocated Items
General and Administrative Expense.General and administrative expense for the year ended December 31, 2025 decreased by $3.7 million, or 10%, to $33.7 million, compared to $37.4 million for the year ended December 31, 2024. The decrease was primarily attributable to lower non-cash stock-based compensation expense, which decreased by $7.2 million from $17.3 million for the year ended December 31, 2024 to $10.1 million for the year ended December 31, 2025, driven by the expiration of the performance share units ("PSUs") granted in 2022 on December 31, 2024. The decrease was partially offset by higher legal, consultant and payroll expenses during the year ended December 31, 2025.
Interest and Other Income. Interest and other income decreased by $3.7 million, or 57%, to $2.9 million for the year ended December 31, 2025, compared to $6.6 million for the year ended December 31, 2024. The decrease was due to lower interest-bearing investments and lower rates earned on those investments.
Interest Expense.Interest expense primarily consists of interest on our Notes due 2026 and interest on our Credit Facilities. Interest expense for the year ended December 31, 2025 increased by $2.5 million, or 14%, to $20.2 million, compared to $17.7 million for the year ended December 31, 2024. The increase was primarily driven by interest incurred on borrowings under our Credit Facilities beginning in September 2025.
Preferred Stock Dividends. Preferred stock dividends increased by $2.0 million, or 111%, to $3.8 million for the year ended December 31, 2025, compared to $1.8 million for the year ended December 31, 2024 due to issuance of 1,016,852 shares of preferred stock during the year ended December 31, 2025.
Cash Flows
The following summary discussion of our cash flows is based on the consolidated statements of cash flows in Item 8, "Financial Statements and Supplementary Data" and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | Change | |||||||||||||||
| Net cash provided by (used in) operating activities | $ | 198,189 | $ | 258,446 | $ | (60,257) | |||||||||||
| Net cash provided by (used in) investing activities | (174,301) | (55,996) | (118,305) | ||||||||||||||
| Net cash provided by (used in) financing activities | (122,536) | (197,904) | 75,368 | ||||||||||||||
| Ending cash and cash equivalents | 47,597 | 146,245 | (98,648) | ||||||||||||||
Operating Activities
Cash flows provided by operating activities for the years ended December 31, 2025 and 2024 were $198.2 million and $258.4 million, respectively. Cash flows provided by operating activities were primarily from contractual rent and tenant reimbursements from our properties, partially offset by our general and administrative expense, interest expense, property expenses in excess of tenant reimbursements and property expenses at properties that were not leased. The decrease in cash flows provided by operating activities for the year ended December 31, 2025 compared to the year ended December 31, 2024 was primarily due to lower net income and the application of $6.6 million of security deposits for contractual rent due to tenant defaults. Cash flows provided by operating activities for the year ended December 31, 2024 also included a one-time $3.9 million disposition-contingent lease termination fee that was received concurrently with the sale of our property in Los Angeles, California.
Investing Activities
Cash flows used in investing activities for the year ended December 31, 2025 were $174.3 million, of which $150.3 million was related to investments in life science financial instruments, $31.2 million was related to investments in real estate and funding of draws for improvements and construction funding at our properties, partially offset by $2.2 million in net proceeds related to the sale of two real estate properties and $5.0 million in proceeds related to the net purchases and maturities of short-term investments.
Cash flows used in investing activities for the year ended December 31, 2024 were $56.0 million, of which $82.6 million was related to the purchases of investments in real estate, funding of draws for improvements and construction, and funding of construction loan and other investments in the aggregate, partially offset by $9.1 million in net proceeds related to the sale of our Los Angeles, California property and $17.5 million of net maturities of short-term investments.
The year-over-year decrease in purchases of investments in real estate, funding of draws for improvements and construction, and funding of construction loan and other investments was due to smaller acquisitions and lower development activities as certain projects were completed during 2025.
Financing Activities
Cash flows used in financing activities for the year ended December 31, 2025 were $122.5 million, primarily related to dividend payments of $219.5 million to common and preferred stockholders, $20.1 million related to repurchase of common stock and partial principal payments on the Notes due 2026 of $8.7 million, partially offset by net total draws on our two revolving credit facilities of $102.5 million and $24.1 million in net proceeds from the issuance of our Series A Preferred Stock pursuant to our ATM program.
Cash flows used in financing activities for the year ended December 31, 2024 were $197.9 million, primarily related to dividend payments of $213.5 million to common and preferred stockholders and principal payment on the Exchangeable Senior Notes of $4.4 million, partially offset by $11.8 million in net proceeds from the issuance of our common stock and $9.6 million in net proceeds from the issuance of our Series A Preferred Stock pursuant to our ATM program.
Liquidity and Capital Resources
Sources and Uses of Cash
Liquidity is a measure of our ability to meet potential cash requirements. We expect to use significant cash to acquire additional properties and other investments (including the completion of our investment in IQHQ Preferred Stock), associated acquisition and improvement costs, non-reimbursed expenses associated with unleased properties, operating and administrative expenses, scheduled debt service and repayments, and the payment of dividends to holders of our Common Stock and Preferred Stock, as well as any future series of preferred stock we may issue. As of December 31, 2025, we had cash and cash equivalents of $47.6 million.
We derive substantially all of our revenues from leasing our properties and collecting rental income, which includes operating expense reimbursements, based on contractual arrangements with our tenants. This source of revenue represents our primary source of liquidity to fund the acquisition of additional properties, the development and redevelopment of existing properties, the funding of our remaining investment in IQHQ Preferred Stock, dividends to our stockholders, scheduled debt service under our Notes due 2026, repayment of borrowings and interest payments under our Credit Facilities, general and administrative expenses, property development and redevelopment activities, property operating expenses and other expenses incurred related to managing our existing portfolio and investing in additional properties. Because substantially all of our leases are triple net, our tenants are generally responsible for the maintenance, insurance and property taxes associated with the properties they lease from us. If a tenant defaults on one of our leases or the lease term expires with no tenant renewal, we would incur property costs not paid by the tenant during the time it takes to re-lease or sell the property.
We expect to meet our liquidity needs through a combination of rental income from our properties, cash and investments on hand, borrowings under our Credit Facilities, and access to capital markets, including potential note issuances, equity offerings (of both common stock and preferred stock), including under our ATM Program, or other financing arrangements.
At December 31, 2025, the outstanding principal balance on the Notes due 2026 was $291.2 million, which matures in May 2026. The maturity of the Notes due 2026 within one year from the date of issuance of the Company's financial statements, together with the Company's current liquidity position, raises substantial doubt about the Company's ability to continue as a going concern within one year after the date the financial statements are issued.
Management is actively evaluating alternatives to address the maturity of the Notes due 2026, which may include refinancing the existing indebtedness or raising additional capital combined with existing cash resources to retire the obligation. Although management believes that it is more likely than not that the Company will be able to address the maturity of the Notes due 2026, guidance issued under Accounting Standard Codification ("ASC") 205-40, Presentation of Financial Statements - Going Concern, requires that management not conclude that such an outcome is "probable" if, among other factors, the outcome is not within control of the Company. Because no such refinancing or capital transactions have closed, such outcomes are not solely within the control of the Company and therefore, management is unable to conclude that such an outcome is probable. Accordingly, management has concluded that there is substantial doubt about the Company's ability to continue as a going concern within one year following the date of issuance of these consolidated financial statements. The failure to retire or refinance the Notes due 2026 could lead to an event of default, which would have a material adverse effect on the Company's financial condition.
In recent years, financial markets have been volatile in general. If sustained, this could also have a material adverse effect on our business, financial condition and results of operations, including our ability to refinance our existing indebtedness, fund our obligations to purchase IQHQ Preferred Stock, and continue to make acquisitions of new properties and fund investments for improvements at existing properties. Our investment guidelines also provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at the time of any new borrowing, subject to our board of directors' discretion.
IQHQ Investments
We have made a long-term capital commitment to fund investments in IQHQ REIT through both purchases of preferred equity and secured credit instruments. These investments represent a strategic expansion of our portfolio and are expected to be funded over an extended period through a combination of available cash on hand, operating cash flows, our Credit Facilities, and potential future financing activities.
On September 30, 2025, IIP Life Science completed the initial closing of the Company's investment in preferred equity of IQHQ REIT pursuant to the Securities Purchase Agreement, acquiring 5,000 shares of IQHQ Preferred Stock for an aggregate purchase price of $5.0 million. On October 31, 2025, the Company purchased an additional 45,000 shares of IQHQ Preferred Stock for $45.0 million, resulting in a total investment of 50,000 shares with an aggregate purchase price of $50.0 million. Under the terms of the Securities Purchase Agreement, IIP Life Science holds the right and obligation to purchase up to an aggregate of $170.0 million of IQHQ Preferred Stock, subject to the exercise of preemptive rights by existing IQHQ investors and certain other conditions. Our remaining investment in IQHQ Preferred Stock pursuant to the Securities Purchase Agreement is expected to be funded in multiple tranches commencing the second quarter of 2026 and continuing through the second quarter of 2027. IQHQ REIT may elect to delay or cancel scheduled funding dates under the terms of the Securities Purchase Agreement, which could affect the timing or total amount of our investment. We expect to fund the additional investments in IQHQ Preferred Stock with cash on hand, draws on our IIP Life Science Credit Facility and potential proceeds from future financing activities.
In connection with the initial closing of our investment in IQHQ Preferred Stock, we also became a lender under the IQHQ Revolving Credit Facility and funded our $100.0 million loan commitment using available cash on hand and borrowings under our Revolving Credit Facility. See the section above entitled "Business - 2025 Business Update - Life Science Investments" for a discussion of the terms of the IQHQ Credit Facility.
Notes Due 2026
In May 2021, we received an investment grade rating from a ratings agency. We sought to obtain an investment grade rating to facilitate access to the investment grade unsecured debt market as part of our overall strategy to maximize our financial flexibility and manage our overall cost of capital. In May 2021, our Operating Partnership issued $300.0 million aggregate principal amount of Notes due 2026. The Notes due 2026 are the Operating Partnership's general unsecured and unsubordinated obligations, and rank equally in right of payment with all of the Operating Partnership's future senior unsecured indebtedness. The terms of the Notes due 2026 are governed by an indenture, which requires compliance with various financial covenants including limits on the amount of total leverage and secured debt maintained by the Operating Partnership and which require the Operating Partnership to maintain minimum levels of debt service coverage. Management believes that it was in compliance with those covenants as of December 31, 2025. In addition, the terms of the indenture provide that if the debt rating on the Notes due 2026 is downgraded or withdrawn entirely, interest on the Notes due 2026 will increase to a range of 6.0% to 6.5% based on such debt rating. As of December 31, 2025, the outstanding principal balance on our Notes due 2026 was $291.2 million and we plan to refinance these notes prior to maturity in May 2026.
ATM Program
We have an "at the market" equity offering program ("ATM Program"), pursuant to which we may offer and sell from time to time, including on a forward basis, shares of our common stock and 9.00% Series A Cumulative Redeemable Preferred Stock, $0.001 par value per share (the "Series A Preferred Stock"), up to an aggregate offering price of $500.0 million. During the year ended December 31, 2025, we sold 1,016,852 shares of our Series A Preferred Stock for net proceeds of $24.1 million. As of December 31, 2025, shares of the Company's common stock and Series A Preferred Stock having an aggregate offering price of up to $464.9 million remain available for offer and sale pursuant to the ATM Program.
Credit Facilities
In October 2023, our Operating Partnership entered into a loan and security agreement (the "Loan Agreement") with a federally regulated commercial bank, as lender and as agent for lenders that become party thereto from time to time. The Loan Agreement matures on October 23, 2026, and was most recently amended in November 2024 to increase aggregate commitments for secured revolving loans to $87.5 million (the "Revolving Credit Facility"). The Loan Agreement also allows the Operating Partnership, subject to the satisfaction of certain conditions, to request additional revolving incremental loan commitments up to a specified amount. Borrowings under the Revolving Credit Facility bear interest at a variable rate based on the greater of (i) the prime rate plus an applicable margin based on deposits with the participating bank(s) ranging from 0.5% to 2.05% and (ii) 9.0%. At December 31, 2025, the interest rate was 9.0%. The Loan Agreement is subject to certain liquidity and operating covenants, including a debt service coverage ratio covenant, defined as the ratio of (i) consolidated EBITDA to (ii) debt service costs and required to be not less than 2.0 to 1.0, measured as of the end of each fiscal quarter. The Loan Agreement also includes customary representations and warranties, affirmative and negative covenants and events of default. Management believes it was in compliance with these covenants as of
December 31, 2025. As of December 31, 2025, there were $27.5 million of borrowings outstanding under the Revolving Credit Facility.
On October 3, 2025, our Operating Partnership and IIP Life Science entered into a loan agreement with a federally regulated commercial bank, as agent for the lenders that become party thereto from time to time (the "IIP Life Science Credit Facility" and together with the Revolving Credit Facility, the "Credit Facilities"). Under the IIP Life Science Credit Facility, our Operating Partnership has a revolving line of credit available up to $100.0 million until the maturity date on October 3, 2028. The IIP Life Science Credit Facility includes an accordion feature under which the revolving line of credit may be increased up to an aggregate of $135.0 million, under certain conditions, including obtaining additional lender commitments. The availability of credit at any given time under the IIP Life Science Credit Facility is subject to, among other things, the amount of collateral available and a borrowing base formula based upon the value of eligible investments in certain securities and an eligible loan receivable. All obligations under the IIP Life Science Credit Facility are secured by substantial assets of the loan parties, including the Company's investment through IIP Life Science in IQHQ Preferred Stock, the IQHQ Warrant, and the IQHQ Credit Facility. Borrowings under the IIP Life Science Credit Facility will bear interest on the outstanding daily balance at a rate of interest per annum equal to the greater of (i) the one-month Secured Overnight Financing Rate ("SOFR"), as administered by CME Group Benchmark Administration, plus 2.0% and (ii) 6.10%. At December 31, 2025, the interest rate was 6.1%. The IIP Life Science Credit Facility contains a liquidity covenant and a debt service coverage ratio covenant, which requires that the ratio of the Company's consolidated EBITDA to debt service costs not be less than 2.0 to 1.0, measured as of the end of each fiscal quarter. Management believes it was in compliance with these covenants as of December 31, 2025. As of December 31, 2025, outstanding borrowings under our IIP Life Science Credit Facility were $75.0 million.
Share Repurchase Program
We may voluntarily repurchase our outstanding debt or equity securities (depending on prevailing market conditions, our liquidity, contractual restrictions and other factors) through cash purchases, open-market purchases, privately negotiated transactions, tender offers or otherwise. In March of 2025, our Board of Directors authorized the purchase of up to $100.0 million in shares of our common stock. The timing, volume and nature of the repurchases will be at the discretion of management based on its evaluation of the capital needs of the Company, market conditions, applicable legal requirements and other factors. There is no guarantee as to the number of shares that will be repurchased. Repurchases under the share repurchase plan are expected to be funded from existing cash balances and proceeds from the sale of the Company's Series A Preferred Stock under its ATM Program. During the year ended December 31, 2025, 371,538 shares of common stock were repurchased and retired for $20.1 million under the share repurchase plan. The repurchase plan expires on March 17, 2026, and may be extended, suspended, modified or discontinued at any time at the Company's discretion.
We have filed a registration statement with the SEC allowing us, from time to time, to offer and sell common stock, preferred stock, warrants, debt securities of our Operating Partnership and other securities to the extent necessary or advisable to meet our liquidity needs.
Dividends
The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to qualify and maintain its qualification as a REIT. As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. During 2025, we declared cash dividends on our common stock totaling $7.60 per share, and cash dividends on our Series A Preferred Stock totaling $2.25 per share. Our ability to continue to pay dividends is dependent upon our ability to continue to generate cash flows, service any debt obligations we have, including our Notes due 2026, and make accretive new investments.
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Ordinary income distributions | $ | 6.143200 | $ | 7.440000 | $ | 7.700000 | |||||||||||
| Return of capital | 0.626800 | - | - | ||||||||||||||
| Total | $ | 6.770000 | $ | 7.440000 | $ | 7.700000 | |||||||||||
The common stock distribution with a record date of December 31, 2024 was a split-year distribution, with $0.83 allocable to 2024 for federal income tax purposes and $1.07 allocable to 2025 for federal income tax purposes. The common stock distribution with a record date of December 29, 2023 was a split-year distribution, with $0.83 allocable to 2023 for federal income tax purposes and $0.99 allocable to 2024 for federal income tax purposes.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2025 (in thousands):
|
Payments Due by Year |
Notes due 2026 | Credit Facilities | Interest | Office Rent | Total | |||||||||||||||||||||||||||
| 2026 | $ | 291,215 | $ | 27,500 | $ | 13,132 | $ | 543 | $ | 332,390 | ||||||||||||||||||||||
| 2027 | - | - | 4,639 | 45 | 4,684 | |||||||||||||||||||||||||||
| 2028 | - | 75,000 | 3,517 | - | 78,517 | |||||||||||||||||||||||||||
| 2029 | - | - | - | - | - | |||||||||||||||||||||||||||
| 2030 | - | - | - | - | - | |||||||||||||||||||||||||||
| Thereafter | - | - | - | - | - | |||||||||||||||||||||||||||
| Total | $ | 291,215 | $ | 102,500 | $ | 21,288 | $ | 588 | $ | 415,591 | ||||||||||||||||||||||
As of December 31, 2025, we had (1) $120 million remaining on our commitment to purchase up to $170 million of IQHQ Preferred Stock which is scheduled to be funded in various installments by June 30, 2027, subject to extension options exercisable by IQHQ; (2) $6.5 million outstanding in commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease; and (3) $0.2 million outstanding in commitments to fund the Construction Loan. The commitments discussed in this paragraph are excluded from the table of contractual obligations above as there is no explicit time frame for incurring the obligations, which generally may be requested from time to time, subject to satisfaction of certain conditions.
Non-GAAP Financial Information and Other Metrics
In addition to the required GAAP presentations, we use certain non-GAAP performance measures as we believe these measures improve the understanding of our operational results. We continually evaluate the usefulness, relevance, limitations, and calculation of our reported non-GAAP performance measures to determine how best to provide relevant information to the public and thus such reported measures could change.
Funds from Operations, Normalized Funds from Operations and Adjusted Funds from Operations
Funds from operations ("FFO") and FFO per share are operating performance measures adopted by NAREIT. NAREIT defines FFO as the most commonly accepted and reported non-GAAP measure of a REIT's operating performance equal to net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, depreciation and amortization and impairment related to real estate properties, and after adjustments for unconsolidated partnerships and joint ventures. The Company also excludes the disposition-contingent lease termination fee relating to the sale of our property in Los Angeles, California.
Management believes that net income, as defined by GAAP, is the most appropriate earnings measurement. However, management believes FFO and FFO per share to be supplemental measures of a REIT's performance because they provide an understanding of the operating performance of our properties without giving effect to certain significant non-cash items, primarily depreciation expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. We believe that by excluding the effect of depreciation, FFO and FFO per share can facilitate comparisons of operating performance between periods. We report FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share.
We compute normalized funds from operations ("Normalized FFO") by adjusting FFO, as defined by NAREIT, to exclude certain GAAP income and expense amounts that we believe are infrequent and unusual in nature and/or not related to our core real estate operations. Exclusion of these items from similar FFO-type metrics is common within the equity REIT industry, and management believes that presentation of Normalized FFO and Normalized FFO per share provides investors with a metric to assist in their evaluation of our operating performance across multiple periods and in comparison to the operating performance of other companies, because it removes the effect of unusual items that are not expected to impact our operating performance on an ongoing basis. Normalized FFO is used by management in evaluating the performance of our core business operations. Items included in calculating FFO that may be excluded in calculating Normalized FFO include certain transaction-related gains, losses, income or expense or other non-core amounts as they occur.
During the year ended December 31, 2025, the Company revised its presentation of Normalized FFO to include two adjustments related to income on seller-financed notes and deferred lease payments received on sales-type leases that were previously reflected in adjusted funds from operations ("AFFO"), which has been reflected for all periods presented. Management believes this change better aligns the Company's presentation with its assessment of core operating performance and improves comparability with industry peers. Items included in calculating FFO that may be excluded in calculating Normalized FFO include certain transaction-related gains, losses, income or expense or other non-core amounts as they occur.
Management believes that adjusted funds from operations ("AFFO") and AFFO per share are also appropriate supplemental measures of a REIT's operating performance. We calculate AFFO by adjusting Normalized FFO for certain cash and non-cash items.
For the years ended December 31, 2024 and 2023, and for the three months ended March 31, 2024, FFO (diluted), Normalized FFO, AFFO and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock.
For the three months ended September 30, 2024 and June 30, 2024, 25,352 shares and 20,713 shares, respectively, issuable upon vesting of the PSUs were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of the respective periods. No shares were issuable upon vesting of the PSUs for all other periods presented, as the performance thresholds for vesting of the PSUs were not met as measured as of the end of those respective periods.
Our computation of FFO, Normalized FFO and AFFO may differ from the methodology for calculating FFO, Normalized FFO and AFFO utilized by other equity REITs and, accordingly, may not be comparable to such REITs. Further, FFO, Normalized FFO and AFFO do not represent cash flow available for management's discretionary use. FFO, Normalized FFO and AFFO should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. FFO, Normalized FFO and AFFO should be considered only as supplements to net income computed in accordance with GAAP as measures of operations.
The table below is a reconciliation of net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the years ended December 31, 2025, 2024 and 2023 (in thousands, except share and per share amounts):
| Years Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| Net income attributable to common stockholders | $ | 114,435 | $ | 159,857 | $ | 164,236 | |||||||||||
| Real estate depreciation and amortization | 74,068 | 70,807 | 67,194 | ||||||||||||||
| Impairment loss on real estate | 3,527 | - | - | ||||||||||||||
|
Loss on sale of real estate/(Disposition-contingent lease termination fee, net of loss on sale of real estate)(1)
|
326 | (451) | - | ||||||||||||||
| FFO attributable to common stockholders (basic) | 192,356 | 230,213 | 231,430 | ||||||||||||||
| Cash and non-cash interest expense on Exchangeable Senior Notes | - | 28 | 219 | ||||||||||||||
| FFO attributable to common stockholders (diluted) | 192,356 | 230,241 | 231,649 | ||||||||||||||
| Litigation-related expense | 2,008 | 788 | 2,480 | ||||||||||||||
| Loss (gain) on exchange of Exchangeable Senior Notes | - | - | (22) | ||||||||||||||
| Loss (gain) on partial repayment of Notes due 2026 | (32) | - | - | ||||||||||||||
|
Income on seller-financed notes(2)
|
(835) | 1,104 | 1,342 | ||||||||||||||
|
Deferred lease payments received on sales-type leases(3)
|
25 | 4,938 | - | ||||||||||||||
| Normalized FFO attributable to common stockholders (diluted) | 193,522 | 237,071 | 235,449 | ||||||||||||||
| Stock-based compensation | 10,132 | 17,317 | 19,581 | ||||||||||||||
| Non-cash interest expense | 1,999 | 1,664 | 1,375 | ||||||||||||||
| Non-cash accretion of life science investments | (333) | - | - | ||||||||||||||
| Above-market lease amortization | 92 | 92 | 92 | ||||||||||||||
| AFFO attributable to common stockholders (diluted) | $ | 205,412 | $ | 256,144 | $ | 256,497 | |||||||||||
| FFO per common share - diluted | $ | 6.78 | $ | 8.07 | $ | 8.20 | |||||||||||
| Normalized FFO per common share - diluted | $ | 6.82 | $ | 8.31 | $ | 8.33 | |||||||||||
| AFFO per common share - diluted | $ | 7.24 | $ | 8.98 | $ | 9.08 | |||||||||||
| Weighted average common shares outstanding - basic | 28,005,228 | 28,226,402 | 27,977,807 | ||||||||||||||
| Restricted stock and RSUs | 371,999 | 294,780 | 196,821 | ||||||||||||||
| Dilutive effect of Exchangeable Senior Notes | - | 9,468 | 81,169 | ||||||||||||||
| Weighted average common shares outstanding - diluted | 28,377,227 | 28,530,650 | 28,255,797 | ||||||||||||||
________________________________________________________
(1)For the year ended December 31, 2024, amount reflects the $3.9 million disposition-contingent lease termination fee received concurrently with the sale of our property in Los Angeles, California, net of the loss on sale of real estate of $3.4 million (see Note 6 "Investments in Real Estate" to our consolidated financial statements included in this report for more information).
(2)Positive amounts represent non-refundable cash payments received pursuant to two seller-financed notes issued by us in connection with our disposition of certain properties. As the transactions did not qualify for recognition as completed sales under GAAP, the payments were initially recorded as a deposit liability and included in other liabilities on our consolidated balance sheet. For the year ended December 31, 2025, the negative amount resulted from the recognition of $2.6 million of non-refundable cash payments received on the MIH Note as interest and other income in connection with the termination of the seller-financed note.
(3)Amount reflects the non-refundable lease payments received on two sales-type leases which are recognized as a deposit liability starting on January 1, 2024, and is included in other liabilities in our consolidated balance sheets as of December 31, 2025 and 2024, as the transaction did not qualify for recognition as a completed sale (see Note 2 "Lease Accounting" to our consolidated financial statements included in this report for more information). Prior to the lease modifications on January 1, 2024, which extended the initial lease terms, the leases were classified as operating leases and the lease payments received were recognized as rental revenue and therefore, included in net income attributable to common stockholders.
The tables below are reconciliations of quarterly net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the years ended December 31, 2025 and 2024 (in thousands, except share and per share amounts):
|
Three Months Ended(1)
|
|||||||||||||||||||||||
| December 31, 2025 | September 30, 2025 | June 30, 2025 | March 31, 2025 | ||||||||||||||||||||
| Net income attributable to common stockholders | $ | 30,705 | $ | 28,288 | $ | 25,146 | $ | 30,296 | |||||||||||||||
| Real estate depreciation and amortization | 18,538 | 18,639 | 18,500 | 18,391 | |||||||||||||||||||
| Impairment loss on real estate | - | - | - | 3,527 | |||||||||||||||||||
| Loss on sale of real estate | 326 | - | - | - | |||||||||||||||||||
| FFO attributable to common stockholders (basic and diluted) | 49,569 | 46,927 | 43,646 | 52,214 | |||||||||||||||||||
| Litigation-related expense | 585 | 604 | 413 | 406 | |||||||||||||||||||
| Loss (gain) on partial repayment of Notes due 2026 | - | - | - | (32) | |||||||||||||||||||
|
Income on seller-financed notes(2)
|
223 | (2,375) | 1,164 | 153 | |||||||||||||||||||
|
Deferred lease payments received on sales-type leases(3)
|
- | - | 5 | 20 | |||||||||||||||||||
| Normalized FFO attributable to common stockholders (diluted) | 50,377 | 45,156 | 45,228 | 52,761 | |||||||||||||||||||
| Stock-based compensation | 2,698 | 2,684 | 2,672 | 2,078 | |||||||||||||||||||
| Non-cash interest expense | 568 | 485 | 476 | 470 | |||||||||||||||||||
| Non-cash accretion of life science investments | (333) | - | - | - | |||||||||||||||||||
| Above-market lease amortization | 23 | 23 | 23 | 23 | |||||||||||||||||||
| AFFO attributable to common stockholders (diluted) | $ | 53,333 | $ | 48,348 | $ | 48,399 | $ | 55,332 | |||||||||||||||
| FFO per common share - diluted | $ | 1.75 | $ | 1.66 | $ | 1.54 | $ | 1.83 | |||||||||||||||
| Normalized FFO per common share - diluted | $ | 1.78 | $ | 1.60 | $ | 1.60 | $ | 1.85 | |||||||||||||||
| AFFO per common share - diluted | $ | 1.88 | $ | 1.71 | $ | 1.71 | $ | 1.94 | |||||||||||||||
| Weighted average common shares outstanding - basic | 27,913,384 | 27,912,881 | 27,924,092 | 28,275,549 | |||||||||||||||||||
| Restricted stock and RSUs | 390,146 | 390,719 | 393,601 | 312,473 | |||||||||||||||||||
| Weighted average common shares outstanding - diluted | 28,303,530 | 28,303,600 | 28,317,693 | 28,588,022 | |||||||||||||||||||
|
Three Months Ended(1)
|
|||||||||||||||||||||||
| December 31, 2024 | September 30, 2024 | June 30, 2024 | March 31, 2024 | ||||||||||||||||||||
| Net income attributable to common stockholders | $ | 39,461 | $ | 39,651 | $ | 41,655 | $ | 39,090 | |||||||||||||||
| Real estate depreciation and amortization | 18,240 | 17,944 | 17,473 | 17,150 | |||||||||||||||||||
|
Disposition-contingent lease termination fee, net of loss on sale of real estate(4)
|
- | - | (451) | - | |||||||||||||||||||
| FFO attributable to common stockholders (basic) | 57,701 | 57,595 | 58,677 | 56,240 | |||||||||||||||||||
| Cash and non-cash interest expense on Exchangeable Senior Notes | - | - | - | 28 | |||||||||||||||||||
| FFO attributable to common stockholders (diluted) | 57,701 | 57,595 | 58,677 | 56,268 | |||||||||||||||||||
| Litigation-related expense | 268 | 210 | 164 | 146 | |||||||||||||||||||
|
Income on seller-financed notes(2)
|
30 | 268 | 403 | 403 | |||||||||||||||||||
|
Deferred lease payments received on sales-type leases(3)
|
568 | 1,452 | 1,462 | 1,456 | |||||||||||||||||||
| Normalized FFO attributable to common stockholders (diluted) | 58,567 | 59,525 | 60,706 | 58,273 | |||||||||||||||||||
| Stock-based compensation | 4,315 | 4,316 | 4,371 | 4,315 | |||||||||||||||||||
| Non-cash interest expense | 456 | 419 | 401 | 388 | |||||||||||||||||||
| Above-market lease amortization | 23 | 23 | 23 | 23 | |||||||||||||||||||
| AFFO attributable to common stockholders (diluted) | $ | 63,361 | $ | 64,283 | $ | 65,501 | $ | 62,999 | |||||||||||||||
| FFO per common share - diluted | $ | 2.02 | $ | 2.02 | $ | 2.05 | $ | 1.98 | |||||||||||||||
| Normalized FFO per common share - diluted | $ | 2.05 | $ | 2.08 | $ | 2.12 | $ | 2.05 | |||||||||||||||
| AFFO per common share - diluted | $ | 2.22 | $ | 2.25 | $ | 2.29 | $ | 2.21 | |||||||||||||||
| Weighted average common shares outstanding - basic | 28,254,565 | 28,254,565 | 28,250,843 | 28,145,017 | |||||||||||||||||||
| Restricted stock and RSUs | 299,770 | 299,770 | 300,582 | 278,890 | |||||||||||||||||||
| PSUs | - | 25,352 | 20,713 | - | |||||||||||||||||||
| Dilutive effect of Exchangeable Senior Notes | - | - | - | 38,079 | |||||||||||||||||||
| Weighted average common shares outstanding - diluted | 28,554,335 | 28,579,687 | 28,572,138 | 28,461,986 | |||||||||||||||||||
________________________________________________________
(1)The sum of quarterly financial data may vary from annual data due to rounding and differences in the dilutive effect of potentially issuable shares of each reporting period.
(2)Positive amounts represent non-refundable cash payments received pursuant to two seller-financed notes issued by us in connection with our disposition of certain properties. As the transactions did not qualify for recognition as completed sales under GAAP, the payments were initially recorded as a deposit liability and included in other liabilities on our consolidated balance sheet. For the three months ended September 30, 2025, the negative amounts resulted from the recognition of $2.6 million of non-refundable cash payments received on the MIH Note as interest and other income in connection with the termination of the seller-financed note.
(3)Amount reflects the non-refundable lease payments received on two sales-type leases which are recognized as a deposit liability starting on January 1, 2024, and is included in other liabilities in our consolidated balance sheets as of December 31, 2025 and 2024, as the transaction did not qualify for recognition as a completed sale (see Note 2 "Lease Accounting" to our consolidated financial statements included in this report for more information). Prior to the lease modifications on January 1, 2024, which extended the initial lease terms, the leases were classified as operating leases and the lease payments received were recognized as rental revenue and therefore, included in net income attributable to common stockholders.
(4)Amount reflects the $3.9 million disposition-contingent lease termination fee received concurrently with the sale of our property in Los Angeles, California, net of the loss on sale of real estate of $3.4 million (see Note 6 "Investments in Real Estate" to our consolidated financial statements included in this report for more information)
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with GAAP, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates and assumptions.
We continually evaluate the estimates and assumptions we use to prepare our consolidated financial statements. Our critical accounting estimates are defined as accounting estimates or assumptions made in accordance with GAAP, which involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material
impact on our financial condition or results of operations. The following critical accounting estimates discussion reflects what we believe are the most significant estimates and assumptions used in the preparation of our consolidated financial statements. This discussion of our critical accounting estimates is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates and assumptions. For further discussion of our significant accounting policies, see Note 2 "Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements" to our consolidated financial statements included in this report.
Lease Accounting
We account for our leases as lessor under ASC 842, Leases, which requires significant estimates and judgments by management in its application. Upon lease inception or lease modification, we assess the lease classification of both the land and building components of the property. The determination of lease classification requires the calculation of the rate implicit in the lease, which is driven by significant estimates relating to the unguaranteed residual value of the assets at the end of the non-cancelable lease term. A decrease of 5% in the estimated unguaranteed residual value of our properties would not change the lease classification of any new leases or leases that were modified during the year ended December 31, 2025.
Acquisition of Rental Property, Depreciation and Impairment
All of our acquisitions of rental properties to date were accounted for as asset acquisitions and not business combinations because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings, and related intangible assets). The accounting model for asset acquisitions requires that the acquisition consideration (including acquisition costs) be allocated to the individual assets acquired and liabilities assumed on a relative fair value basis.
We exercise judgment to determine key assumptions used in each valuation technique (cost, income, and sales approaches). For example, we are required to use judgment and make a number of assumptions, including those related to projected growth in rental rates and operating expenses, anticipated trends and market/economic conditions. The use of different assumptions can affect the amount of consideration allocated to the acquired depreciable/amortizable asset, which in turn can impact our net income due to the recognition of the related depreciation/amortization expense in our consolidated statements of operations.
We depreciate buildings and improvements where we are considered the owner for accounting purposes based on our evaluation of the estimated useful life of each specific asset, not to exceed 40 years. Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise judgment.
The determination of whether we are or the tenant is the owner of improvements for accounting purposes is subject to judgment. In making that determination, we consider numerous factors and perform a detailed evaluation of each individual lease. No one factor is determinative in reaching a conclusion. The factors we evaluate include but are not limited to the following:
•whether the lease agreement requires landlord approval of how the improvement allowance is spent prior to installation of the improvements;
•whether the lease agreement requires the tenant to provide evidence to the landlord supporting the cost and what the improvement allowance was spent on prior to payment by the landlord for such improvements;
•whether the improvements are unique to the tenant or reusable by other tenants;
•whether the tenant is permitted to alter or remove the improvements without the consent of the landlord or without compensating the landlord for any lost utility or diminution in fair value; and
•whether the ownership of the improvements remains with the landlord or remains with the tenant at the end of the lease term.
When we conclude that we are the owner of improvements for accounting purposes using the factors discussed above, we record the cost to construct the improvements as our capital asset.
We evaluate our real estate assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a given asset may not be recoverable. We evaluate our real estate assets for impairment on a property-by-property basis. Indicators we use to determine whether an impairment evaluation is necessary include:
•deterioration in rental rates for a specific property;
•deterioration of a given rental submarket;
•significant change in strategy or use of a specific property or any other event that could result in a decreased holding period, including classifying a property as held for sale, or significant development delay;
•evidence of material physical damage to the property; and
•default by a significant tenant when any of the other indicators above are present.
When we evaluate for potential impairment our real estate assets to be held and used, we first evaluate whether there are any indicators of impairment. If any impairment indicators are present for a specific real estate asset, we then perform an undiscounted cash flow analysis and compare the net carrying amount of the real estate asset to the real estate asset's estimated undiscounted future cash flow over the anticipated holding period. If the estimated undiscounted future cash flow is less than the net carrying amount of the real estate asset, we perform an impairment loss calculation to determine if the fair value of the real estate asset is less than the net carrying value of the real estate asset. Our impairment loss calculation compares the net carrying amount of the real estate asset to the real estate asset's estimated fair value, which may be based on estimated discounted future cash flow calculations or third-party valuations or appraisals. We recognize an impairment loss if the amount of the asset's net carrying amount exceeds the asset's estimated fair value. If we recognize an impairment loss, the estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis would be depreciated (amortized) over the remaining useful life of that asset. If a real estate asset is designated as real estate held-for-sale, it is carried at the lower of the net carrying value or estimated fair value less costs to sell, and depreciation ceases.
Our undiscounted cash flow and fair value calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flow and property fair values, including determining our estimated holding period. We are also required to make a number of assumptions relating to future economic and market events and prospective operating trends.
For each property where such an indicator occurred, we completed an impairment evaluation. During the year ended December 31, 2025, we recognized an impairment loss on real estate of $3.5 million related to one of our properties in Palm Springs, California which was under contract for sale. We completed the sale of the property in June 2025. For all other operating properties that were evaluated, we determined that the undiscounted cash flows over the holding period were in excess of carrying value and, therefore, we did not record any impairment losses for these properties for the year ended December 31, 2025. Significant adverse changes in the critical accounting estimates used in the impairment evaluation are required for the undiscounted cash flows over the holding period to be less than the carrying value of these properties as of December 31, 2025. No impairment losses were recognized for the year ended December 31, 2024 and 2023.
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, the U.S. credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.
Interest Rate Risk
We are exposed to interest rate risk primarily through our variable-rate indebtedness, including amounts outstanding under our Revolving Credit Facility and our IIP Life Science Credit Facility. Borrowings under these facilities bear interest at variable rates based on the greater of prime rate or SOFR, as applicable, plus an applicable margin and stipulated rate. As a result, increases in market interest rates may increase our borrowing costs and adversely affect our results of operations and cash flows.
Our Notes due 2026 bear interest at a fixed rate of 5.50% per annum and therefore are not subject to variability in interest payments due to changes in market interest rates.
Our investments in IQHQ Preferred Stock and the IQHQ Credit Facility provide fixed cash and PIK returns and are not directly exposed to changes in prevailing market interest rates. However, to the extent these investments are funded with variable-rate indebtedness or other interest-sensitive capital sources, increases in interest rates may increase our cost of capital and reduce investment spreads.
We monitor our exposure to interest rate risk and may use a mix of fixed- and variable-rate debt to manage such exposure over time.
See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional information regarding our interest rate sensitivity.
Our investments in short-term money market funds, certificates of deposit and short-term investments in obligations of the U.S. government with an original maturity at the time of purchase of greater than 90 days are less sensitive to market fluctuations than a portfolio of long-term securities. Accordingly, we believe that a significant change in interest rates would not have a material effect on the consolidated financial statements.
Impact of Inflation
The U.S. economy has experienced a sustained increase in inflation rates in recent years. We enter into leases that generally provide for fixed increases in rent. During times when inflation is greater than the fixed increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation. See also the discussion under Item 1A, "Risk Factors," under the caption "Inflation may adversely affect our business and our tenants' financial condition and results of operations."
Seasonality
Our business has not been, and we do not expect our business in the future to be, subject to material seasonal fluctuations.
IIP - Innovative Industrial Properties Inc. published this content on February 24, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on February 24, 2026 at 11:06 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]