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Item 1A. Risk Factors

2025-11-04 compared with 2025-08-07 · 113 added, 2 removed, 8 unchanged (93% of the section changed)

2 unchanged sentences

Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2025, which could materially affect our business, financial condition and/or results of operations.

Except to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors, there have been no material changes

to the risk factors described in the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2024, and in Part II, “Item 1A.

Except to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors, and except as set forth below, there have been no material changes to the risk factors described in the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2024, and in Part II, “Item 1A.

Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2025.

3 unchanged sentences

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations.

Risks Related to Investments in Real Estate-Related Assets

Credit and structural risks related to our investment in the IQHQ Credit Facility may adversely affect our return on investment and financial condition.

Through IIP Life Science, a wholly owned subsidiary of our Operating Partnership, we became a lender under the IQHQ Credit Facility through the funding of a $100.0 million loan to the operating partnership of IQHQ REIT.

The ability of IQHQ REIT and its operating partnership to meet their obligations under the facility depends on numerous factors, including the performance of IQHQ REIT’s real estate assets, prevailing market conditions in the life sciences and commercial real estate sectors, and the financial health of the borrower and its affiliates.

A deterioration in the financial condition of the borrower or its affiliates could impair their ability to service the loan or meet other obligations under the IQHQ Credit Facility in a timely manner.

There can be no assurance that we will recover the full value of our investment in the IQHQ Credit Facility.

In the event of a default or restructuring, our ability to recover principal or interest could be delayed, reduced, or eliminated.

While the loan is secured by a pledge of a majority ownership interest in IQHQ REIT’s Fenway Center project held by an

affiliate of IQHQ REIT, this collateral does not generate cash flow and is not expected to contribute to repayment of the loan under the IQHQ Credit Facility.

A decline in the value of the pledged interest in the Fenway Center project could reduce the amount recoverable in the event of a default, particularly because the pledge is subordinate to certain construction financing.

Additionally, the real estate collateral securing our investment in the IQHQ Credit Facility may be negatively impacted by market fluctuations, changes in environmental and zoning laws, casualty or condemnation losses, regulatory limitations on rents, decreases in property values, changes in the appeal of properties to potential tenants, changes in supply and demand for competing properties in an area, the financial resources of potential tenants, changes in availability of debt financing that may render the sale or refinancing of properties difficult or impracticable, changes in building, environmental and other laws, energy and supply shortages, various uninsured or uninsurable risks and other unforeseen occurrences.

In addition, if we fail to meet our separate funding obligations under the Securities Purchase Agreement with respect to the purchase of IQHQ Preferred Stock, the interest rate payable to us under the IQHQ Credit Facility may be reduced by up to 3.0% per annum.

This would negatively affect our investment returns even absent a borrower default.

Accordingly, this investment exposes us to borrower credit risk, structural subordination, potential collateral impairment, and other uncertainties that could adversely affect our return on investment and financial condition.

Our investment through the IQHQ Credit Facility likely will not qualify as a “real estate asset” for our REIT asset test requirement that 75% of the value of our total assets be represented by real estate assets, cash, cash items and government securities.

If the investment doesn't qualify as a "real estate asset", any related interest income will not qualify as “good income” for our REIT income test that requires that we derive directly or indirectly at least 75% of our gross income, excluding gross income from prohibited transactions, from investments relating to real property or mortgages on real property, including “rents from real property.” While we presently believe we have adequate other qualifying real estate assets and income to meet these REIT asset and income test requirements, no assurances can be provided that these tests will be met in the future.

If we fail the REIT asset test in any calendar quarter or we fail a REIT income test in any calendar year, and cannot avail ourselves of certain relief provisions, we would cease to qualify as a REIT.

Our investment in IQHQ Preferred Stock subjects us to risks inherent in private company real estate investments and preferred equity instruments.

Through IIP Life Science, a wholly owned subsidiary of our Operating Partnership, we purchased the initial $5.0 million tranche of IQHQ Preferred Stock pursuant to the Securities Purchase Agreement.

Subject to the exercise of certain rights by existing investors and other conditions, we may purchase up to an additional $165.0 million of IQHQ Preferred Stock in multiple tranches commencing in the third quarter of 2025 through the second quarter of 2027, subject to extension options by IQHQ REIT.

While this investment is structured to provide both cash and PIK dividends, it remains subject to a number of significant risks.

Investments in preferred equity securities of private real estate companies, such as IQHQ REIT, are inherently illiquid and subordinate to all debt obligations of the issuer.

While preferred equity may confer certain negotiated rights, such as consent or approval rights over specified actions and redemption provisions, such rights are generally more limited in scope than the legal remedies and enforcement mechanisms available to secured lenders.

In the event of a default, liquidation, or restructuring, our ability to recover invested capital may be limited, delayed, or entirely impaired, particularly where IQHQ REIT’s obligations to senior creditors remain unsatisfied.

These structural and contractual limitations may adversely affect the value of our investment and our ability to realize expected returns.

Furthermore, the payment of dividends on the IQHQ Preferred Stock is not guaranteed and is subject to the financial condition and performance of IQHQ REIT.

If IQHQ REIT fails to generate sufficient cash flows, experiences project delays, faces cost overruns, or encounters disruptions in the life science real estate market, it may be unable to meet its dividend or redemption obligations.

These risks are heightened given the capital-intensive nature of life science development projects and the sector’s exposure to shifting demand, tenant concentration, and regulatory risk.

In addition, although the IQHQ Preferred Stock includes a fixed cash dividend and PIK component, the dividend rate may be reduced by up to 3.0% in the event we fail to meet our funding obligations to purchase additional IQHQ Preferred Stock under the Securities Purchase Agreement, regardless of the performance of the underlying real estate assets.

There is no public market for the IQHQ Preferred Stock, and any ability to monetize this investment may be limited to contractual redemption rights or a liquidity event involving IQHQ REIT, neither of which is assured or within our control.

As a result, the timing and amount of any returns on this investment are inherently uncertain and may not meet our expectations.

Any adverse developments related to IQHQ REIT, its projects, capital structure, or operating performance

could result in reduced income, impaired recoverability of our investment, or other negative impacts on our results of operations and financial condition.

Further, in connection with our IQHQ Preferred Stock investment we received warrants to purchase units in IQHQ Holdings, LP, a limited partnership that owns substantial equity in IQHQ REIT.

These warrants have a nominal exercise price and as such are treated as deemed exercised for federal income tax purposes, with the consequence that we are treated as holding equity units in IQHQ Holdings, L.P.

and may receive allocations of taxable income and gains from this entity even though we do not receive any current distributions.

This may require us to increase our distributions to continue to qualify as a REIT and to eliminate any entity level taxation or alternatively, we may need to pay tax upon allocation of such income to us.

We may need to raise or borrow funds to make these distributions or pay these taxes.

We may invest in the equity of private company REITs and real estate-related companies, which subjects us to additional risks, including limited liquidity, valuation uncertainty and operational risk.

As part of our investment strategy, we may invest in the equity of private REITs, such as our investment in IQHQ Preferred Stock, and other private real estate-related companies.

These investments may subject us to risks that are different from, or in addition to, those associated with our directly owned real estate portfolio or investments in publicly traded securities.

Private REITs and similar entities are generally not subject to the same disclosure, governance, or liquidity standards as publicly traded REITs.

As a result, we may have limited access to financial and operational information and may be unable to monitor these investments with the same degree of transparency.

Furthermore, valuations of equity interests in private REITs may be difficult to assess and inherently uncertain due to the absence of active trading markets.

Private REITs are also subject to general real estate risks, including those related to tenant defaults, financing availability, property-level performance, and market conditions.

Investments in the equity of private REITs, such as our investment in IQHQ Preferred Stock, inherently involve limited liquidity, which may restrict our ability to exit such positions in a timely or cost-effective manner.

If we are required to liquidate an investment in a private REIT under adverse market conditions or before an optimal exit opportunity arises, we may be forced to do so at a discount or suffer a loss.

In addition, we may be exposed to indirect risks through our proportionate share of the REIT’s management practices, leverage, and compliance with REIT qualification requirements under the Internal Revenue Code.

A failure by a private REIT to maintain its REIT status could result in adverse tax consequences that could reduce the value of our investment and our returns.

Failure of a private REIT to maintain its REIT status would likely cause our investment to cease to be a qualifying “real estate asset” for our REIT asset test requirement that 75% of the value of our total assets be represented by real estate assets, cash, cash items and government securities.

Because private REITs may not distribute consistent or predictable cash flows, our ability to rely on these investments for income generation could be limited.

Additionally, income received from private REITs may consist of dividends, capital gains, or return of capital, each of which may be taxed differently and, in the case of dividends, may not qualify for favorable tax treatment applicable to qualified dividends.

Accordingly, while investments in private REITs and similar entities may offer opportunities for portfolio diversification and enhanced returns, they also introduce structural, operational, tax, and liquidity risks that could adversely affect our financial condition, results of operations, or ability to make distributions to our shareholders.

Some of our investments in real estate-related equity securities may become distressed, which could result in a high risk of loss, increased volatility, and limited liquidity .

Although our investment strategy generally focuses on non-distressed real estate-related assets, certain of our equity investments, such as our investment in IQHQ Preferred Stock, may be adversely affected by changing market conditions or negative developments impacting the issuer.

The life sciences sector, in particular, has experienced financial stress in recent years, including limited access to capital, rising financing costs, broad valuation declines, and industry consolidation.

These pressures have affected both public and private life sciences companies, those in earlier stages of development or with limited cash flow visibility.

See “Investments in Life Science Properties” below for a discussion of risks associated with investments in the life sciences sector.

Equity securities of companies operating in financially or operationally challenged sectors tend to be highly illiquid, more volatile, harder to trade, and may decline significantly in value.

In the event of issuer distress, including potential bankruptcy or restructuring, equity holders are subordinate to creditors and may experience a partial or total loss of capital.

Recovery prospects are typically more uncertain for equity investments than for debt, and any reorganization process may result in receipt of securities of reduced value, diminished voting rights, or other unfavorable terms.

As a result, our exposure to real estate-related equity securities, particularly in stressed sectors like life sciences, involves a higher degree of risk and could materially adversely affect our financial condition, results of operations, and our ability to make distributions to our shareholders.

Investments in real estate-related assets may be subject to risks including various creditor risks and early redemption features which may materially adversely affect our results of operations and financial condition.

The real estate-related assets in which we invest may include secured or unsecured debt at various levels of an issuer’s capital structure.

The real estate-related assets in which we invest may not be protected by financial covenants or limitations upon additional indebtedness, may be illiquid or have limited liquidity, and may not be rated by a credit rating agency.

Debt securities are also subject to other creditor risks, including (1) the possible invalidation of an investment transaction as a “fraudulent conveyance,” (2) lender liability claims by the issuer of the obligation and (3) environmental liabilities.

Our investments may be subject to early redemption features, refinancing options, prepayment options or similar provisions which, in each case, could result in the issuer or borrower repaying the principal on an obligation held by us earlier than expected, resulting in a lower return to us than anticipated or reinvesting in a new obligation at a lower return to us.

Risks Related to Debt Financing

Rising interest rates could increase our cost of capital, reduce investment returns, and adversely affect our ability to make distributions to our shareholders .

We may fund our real estate-related investments, including our commitments under the IQHQ Credit Facility and purchases of IQHQ Preferred Stock, using borrowings under variable-rate debt instruments or other interest-sensitive liabilities.

In a rising interest rate environment, our cost of capital may increase, which could reduce the spread between our investment income and financing costs, negatively impacting our net returns and cash flows.

Although certain of our investments bear fixed rates of return and are not directly tied to market interest rates, their relative attractiveness may decline in a higher interest rate environment, and we could experience a negative interest rate spread if our cost of capital rises.

This may reduce the profitability of such investments and limit our ability to deploy capital on favorable terms.

Additionally, higher interest rates would increase interest expense on any variable-rate debt we may incur, reducing cash available for distributions to our shareholders.

If we are required to refinance existing debt during periods of elevated interest rates, we may face increased borrowing costs or be forced to dispose of assets at times or prices that are not optimal.

These conditions could materially and adversely affect our business, results of operations, financial condition, and our ability to make distributions to our shareholders.

Increased debt service obligations under our Credit Facilities or otherwise reduce the amount of cash available for distribution to our shareholders.

The interest and principal payments we are required to make on any outstanding debt under our Credit Facilities or otherwise directly decrease the cash flow available for distributions to our shareholders.

A significant portion of our operating cash flows may be allocated to meeting these debt obligations, which may limit our ability to make distributions.

In addition, if we are required to repay or refinance debt, we may need to liquidate one or more of our investments.

Such sales may occur under market conditions that do not permit us to realize the full value of those assets, further reducing the cash available for distribution to shareholders.

Investments in Life Science Properties.

The life science industry is highly competitive and subject to rapid technological changes.

As a result, we may be unable to compete successfully, which would harm our business.

The life science industry is highly competitive and characterized by rapid technological change.

In making investments in the life sciences industry, we expect to face intense competition from other companies, including other companies with significant resources.

This competitive challenge may make it difficult for us to acquire commercially viable life science assets.

Any investments in life sciences properties subjects us to industry-specific risks.

As part of our broader growth strategy, we have made and may continue to make investments in properties used by tenants in the life science sector, either through direct property acquisitions or through other investment structures such as joint ventures, debt or mezzanine financing, preferred or joint venture equity interests, and interests in other real estate funds or REITs.

These investments may expose us to risks that differ from those associated with our regulated cannabis industry portfolio.

Properties leased to life science tenants are subject to a variety of industry-specific risks.

If any of these risks were to materialize, they could adversely impact our financial condition, results of operations, and cash flows.

For example, tenants in the life sciences sector may face heightened regulatory scrutiny, including evolving healthcare regulations, increased government-imposed price controls, and other cost-containment measures.

In addition, the success of life science companies often depends on the safety and efficacy of their products, the availability of substantial capital to fund ongoing research and development, and their ability to maintain intellectual property protection.

Adverse developments in any of these areas could impair the financial condition of our potential tenants in the life science industry and their ability to meet their lease obligations, which in turn could negatively affect the revenue generated by such properties and their valuation.

In addition, life science properties typically require more capital-intensive improvements than traditional commercial or office space.

These may include enhanced structural loads, increased floor-to-ceiling heights, specialized HVAC systems, advanced environmental controls, upgraded plumbing and electrical infrastructure, and buildouts such as laboratories and clean rooms.

The cost and complexity of these improvements may limit the pool of replacement tenants and increase re-leasing costs, particularly if space must be reconfigured for a non-life science use.

If we acquire life science properties in the future, such properties may be used by tenants that handle hazardous materials, chemicals, or biological and radioactive substances as part of their operations.

As a result, we and any future tenants of such properties would be subject to federal, state, and local environmental laws and regulations governing the use, storage, handling, and disposal of these materials.

In the event of contamination or injury arising from such activities, we could, under certain circumstances, be held liable for damages, remediation costs, or regulatory penalties, even if caused solely by a tenant’s actions.

Such liabilities could exceed our available insurance coverage or financial resources and could have a material adverse effect on our business, financial condition, or ability to make distributions to our shareholders.

Accordingly, while investments in life science properties represent a key component of our growth strategy, they also introduce unique operational, regulatory, and environmental risks that may differ from those associated with our current portfolio.

Changes in the life science industry could adversely affect the performance of any future investments we make in lab properties.

As part of our growth strategy, we may pursue investments in life science properties, including lab space, either directly or through other investment structures.

If we do so, the performance of these investments could be adversely affected by economic, financial, regulatory, or industry-specific developments impacting the life science sector.

For example, a downturn in the life science industry could reduce demand for lab space, limit our ability to lease or re-lease such properties on favorable terms, or result in increased vacancy levels.

In addition, lab properties often require significant upfront capital investment due to their highly specialized infrastructure, and repositioning these assets for alternative uses could be costly and time-consuming.

Any oversupply of lab space, reduced funding for life science and biotech companies, or industry consolidation could also negatively impact tenant demand or reduce the amount of rentable square footage required by prospective tenants.

Moreover, any geographic shift in demand, including a migration of life science activity away from U.S.

markets or from key hubs such as South San Francisco, San Diego, and Boston, could adversely impact the viability of any lab property investments we may make in those areas.

As such, while we view life science investments as a potential avenue for long-term growth, these opportunities are also subject to distinct market and industry risks that could materially affect our future results of operations, financial condition, and cash flows.

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What changed 10-Q

Item 1A. Risk Factors