Innovative Industrial Properties Reports Resolution to Default by PharmaCann

Rhea-AI Summary

Innovative Industrial Properties (NYSE: IIPR) has reached an agreement with PharmaCann to resolve existing lease defaults for eleven properties. The resolution includes:

- Full utilization of security deposits for December 2024 and January 2025 defaulted rent
- Amendments for nine properties in NY, IL, PA, OH, and CO, reducing monthly base rent from $2.8M to $2.6M starting February 2025
- Plans to transition two properties in MI and MA to new tenants by August 2025, with $1.3M monthly rent abated from February 2025

The agreement includes additional equity investment from PharmaCann's investors and a secured promissory note issued to IIPR maturing in 2035. The deal is contingent on PharmaCann refinancing its senior secured credit facility by June 30, 2025. Post-agreement, IIPR leases nine properties totaling 434,000 square feet to PharmaCann, representing approximately $223M in invested capital.

Positive

• Security deposits utilized to cover defaulted rent payments
• Secured new promissory note from PharmaCann
• Additional equity capital being contributed by PharmaCann's investors
• Retained nine properties with $223M invested capital

Negative

• Monthly base rent reduced from $2.8M to $2.6M
• Complete rent abatement ($1.3M monthly) for MI and MA properties
• Risk of agreement nullification if PharmaCann fails to refinance by June 2025
• Loss of two properties (MI and MA) requiring new tenant transition

Insights

Financial Analyst

The resolution between IIPR and PharmaCann represents a complex restructuring that carries both immediate and long-term implications for IIPR's financial health. The 7.1% reduction in monthly base rent (from $2.8 million to $2.6 million) for nine properties, while significant, appears to be a calculated compromise to maintain tenant stability.

The strategic decision to potentially divest two properties in Michigan and Massachusetts, with $1.3 million in monthly rent being abated, suggests IIPR is taking a proactive approach to portfolio optimization. This restructuring affects approximately $223 million of IIPR's invested capital, representing a substantial portion of their portfolio.

Critical risk factors include:

• The agreement's dependency on PharmaCann's ability to refinance its senior secured credit facility by June 30, 2025
• The extended timeline for security deposit replenishment (starting February 2027)
• The subordination of IIPR's new promissory note to existing senior debt

The restructuring demonstrates IIPR's flexibility in working with troubled tenants while protecting shareholder interests. However, the contingency on refinancing creates a significant near-term risk, as failure would revert all lease terms to their original state. This resolution provides a template for potential future tenant workout situations in the challenging cannabis real estate sector.

Real Estate Investment Specialist

This restructuring reveals sophisticated asset management in the specialized cannabis real estate sector. The retention of 434,000 square feet across five states represents a strategic focus on core markets, while the planned exit from Michigan and Massachusetts properties indicates market-specific concerns.

The security package is notably comprehensive:

• Staged security deposit replenishment
• Asset-backed promissory note
• Restrictions on additional debt
• License transfer commitments for transitioning properties

The six-month transition period for the Michigan and Massachusetts properties demonstrates pragmatic market awareness, allowing time for proper tenant vetting while maintaining license value. The structure provides IIPR multiple options: successful transition to new operators, property repurposing, or strategic disposition.

The arrangement's linkage to PharmaCann's refinancing creates a clear milestone for evaluating the restructuring's success, while the extended security deposit repayment timeline aligns with realistic cannabis industry recovery projections.

SAN DIEGO--(BUSINESS WIRE)-- Innovative Industrial Properties, Inc. (IIP), the first and only real estate company on the New York Stock Exchange (NYSE: IIPR) focused on the regulated U.S. cannabis industry, announced today that it has reached an agreement with PharmaCann Inc. and its affiliates (collectively, PharmaCann) to resolve PharmaCann’s existing defaults under leases for eleven properties that the Company owns (collectively, the “Leases”), previously announced by IIP on December 20, 2024.

The key terms of the agreement between PharmaCann and IIP are as follows:

• IIP fully utilized security deposits held by it under all Leases for the payment in full of defaulted rent for December 2024 and January 2025 and certain penalties.
• IIP entered into amendments with PharmaCann with respect to nine of the Leases for properties located in New York, Illinois, Pennsylvania, Ohio, and Colorado as follows:
  • Increased the total required security deposits, which will be paid pro-rata over thirty-six months commencing February 1, 2027.
  • Reduced cumulative total base rent from $2.8 million per month to $2.6 million per month, with cash rent payments commencing February 1, 2025.
• IIP entered into amendments with PharmaCann with respect to two of the Leases for cultivation properties in Michigan and Massachusetts, as follows:
  • PharmaCann will work with IIP to transition the properties to new tenant(s) by contributing the licenses, subject to regulatory requirements, and providing other support as requested by IIP.
  • If the properties have not been transitioned to new tenant(s) by August 1, 2025, IIP will regain full control and PharmaCann will have no further obligations under the Leases for these properties
  • Monthly base rent of $1.3 million will be abated in full effective February 1, 2025.
• In consideration of IIP entering into the Lease amendments described above:
  • Additional equity capital is being contributed to PharmaCann by certain of PharmaCann’s current investors.
  • PharmaCann issued an interest-bearing, secured promissory note to IIP (the “Note”), which matures February 1, 2035 (or earlier upon a change of control or certain other events). The Note is junior to PharmaCann's existing senior secured facility and is secured by all of PharmaCann’s assets, including licenses, where allowed by law.
  • PharmaCann agreed that, except for refinancing the existing senior secured credit facility and the additional equity investments, it may not incur additional indebtedness without IIP’s consent until full repayment of the Note or its cancellation.
• If PharmaCann is not able to refinance its existing senior secured credit facility maturing June 30, 2025, all modifications to the Leases described herein will immediately be null and void and the Leases will revert to the terms in effect as of January 1, 2025 and the Note will be cancelled.

The transactions described above, including the amendments to the Leases, became effective on January 28, 2025. Effective as of such date and excluding the Leases for the Michigan and Massachusetts cultivation properties, IIP leases to PharmaCann nine properties in five states, comprised of 434,000 square feet and representing total invested and committed capital of approximately $223 million, inclusive of the unfunded tenant improvement allowance in the New York cultivation lease.

About Innovative Industrial Properties

Innovative Industrial Properties, Inc. is a self-advised Maryland corporation focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated cannabis facilities. Innovative Industrial Properties, Inc. has elected to be taxed as a real estate investment trust, commencing with the year ended December 31, 2017. Additional information is available at www.innovativeindustrialproperties.com.

Innovative Industrial Properties Forward-Looking Statements

This press release contains statements that IIP believes to be “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than historical facts, including, without limitation, statements regarding PharmaCann’s observance of the amended terms of the Leases, including payment of rent and replenishment of security deposits; IIP’s ability to re-lease its cultivation properties in Michigan and Massachusetts that are currently leased to PharmaCann and PharmaCann’s assistance with such process; IIP’s receipt of any payments under the Note, are forward-looking statements. When used in this press release, words such as IIP “expects,” “intends,” “plans,” “estimates,” “anticipates,” “believes” or “should” or the negative thereof or similar terminology are generally intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Investors should not place undue reliance upon forward-looking statements. IIP disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

View source version on businesswire.com: https://www.businesswire.com/news/home/20250129227012/en/

IIP Contact:

David Smith

Chief Financial Officer

Innovative Industrial Properties, Inc.

(858) 997-3332

Source: Innovative Industrial Properties, Inc.

FAQ

What are the key terms of IIPR's default resolution with PharmaCann in January 2025?

The resolution includes rent reduction to $2.6M monthly, security deposit utilization for past defaults, transition plans for MI and MA properties, and a new secured promissory note, contingent on PharmaCann's refinancing by June 2025.

How much did IIPR reduce PharmaCann's monthly rent in the January 2025 agreement?

IIPR reduced PharmaCann's monthly base rent from $2.8 million to $2.6 million, effective February 1, 2025.

What happens to IIPR's Michigan and Massachusetts properties under the PharmaCann agreement?

These properties will transition to new tenants by August 1, 2025, with $1.3M monthly rent abated from February 2025. If not transitioned by August 2025, IIPR regains full control.

What is IIPR's total invested capital in the remaining PharmaCann properties after the 2025 restructuring?

IIPR maintains approximately $223 million in total invested and committed capital across nine properties totaling 434,000 square feet in five states.

What happens if PharmaCann fails to refinance its credit facility by June 30, 2025?

If PharmaCann fails to refinance, all lease modifications become void, reverting to January 1, 2025 terms, and the promissory note will be cancelled.