Innovative Industrial Properties, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company is a REIT that owns specialized properties leased on a triple-net basis to state-licensed cannabis operators. At quarter-end, it owned 72 properties across 18 states, all reported 100% leased, totaling approximately 6.6 million rentable square feet, including space under development or redevelopment. Weighted-average remaining lease term was approximately 16.7 years.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Rental revenue | $48.9 million | $24.3 million | $91.8 million | $45.5 million |
| Income from operations | $32.9 million | $14.2 million | $60.6 million | $26.5 million |
| Net income | $29.3 million | $13.3 million | $55.3 million | $25.2 million |
| Net income attributable to common stockholders | $29.0 million | $13.0 million | $54.6 million | $24.5 million |
| Diluted EPS | $1.17 | $0.73 | $2.22 | $1.45 |
| Operating cash flow | Not stated separately | Not stated separately | $89.4 million | $43.1 million |
| FFO per diluted share | $1.56 | $1.12 | $2.94 | $2.16 |
| AFFO per diluted share | $1.64 | $1.19 | $3.11 | $2.31 |
Calculated from reported figures, operating margin was approximately 67.4% in Q2 2021 versus 58.2% in Q2 2020; net margin was approximately 60.0% versus 54.7%. For the first half, operating margin was approximately 66.1% versus 58.2%, and net margin approximately 60.2% versus 55.4%.
At June 30, total assets were $2.09 billion, including $1.28 billion of net real estate, $156.3 million of cash and cash equivalents, and $649.4 million of investments. Total liabilities were $575.7 million and stockholders’ equity was $1.52 billion. Debt principal totaled approximately $443.7 million: $300 million of 5.50% unsecured notes due 2026 and $143.7 million of 3.75% exchangeable notes due 2024. The company reported compliance with unsecured-note covenants. The notes are fixed-rate obligations.
For the first half, investing cash outflow was $287.2 million and financing cash inflow was $228.1 million; cash, cash equivalents and restricted cash increased $30.3 million to $156.3 million. Dividends declared included $1.32 per common share for Q1 and $1.40 for Q2; Series A preferred dividends were $0.5625 per share each quarter.
Material changes versus the prior comparable period
- Q2 rental revenue increased 101% year over year; first-half revenue increased 102%. Management attributed most of the growth to properties acquired in earlier periods, annual rent escalations, and rent changes associated with increased tenant-improvement allowances. 2021 acquisitions contributed $1.8 million of Q2 and $4.8 million of first-half rental revenue.
- First-half operating cash flow more than doubled to $89.4 million. Investing outflows were lower than in 2020, while financing shifted from common-stock issuance in 2020 to the 2021 unsecured-note offering.
- In May 2021, the company issued $300 million of unsecured notes. General and administrative expense rose to $5.6 million for Q2 and $11.2 million for the first half, primarily reflecting higher compensation, additional employees, public-company costs, travel and occupancy. Depreciation also rose with acquisitions and completed improvements.
- Diluted EPS includes the dilutive effect of the exchangeable notes in 2021; those notes were anti-dilutive in the 2020 comparison.
Outlook, risks and contingencies
- The filing provides no specific earnings or investment guidance. Management said it expects liquidity needs to be met by cash and short-term investments, operating cash flow and potential equity or debt issuance, but cautioned that financing may not be available on acceptable terms. The company reported receiving an investment-grade rating in May 2021 but did not identify the rating in the provided filing text.
- Management reported no material adverse COVID-19 effect on results or financial position as of June 30, 2021, while warning that a prolonged outbreak or resurgence could harm tenants and the company. Approximately $1.2 million of prior rent, property-management-fee and security-deposit deferrals remained scheduled for repayment by December 2021.
- Principal business risks include cannabis’s continuing illegality under federal law, tenant credit and concentration, competition for properties and tenant financing, evolving regulation, access to capital, and debt covenant or credit-rating risks. The largest tenant represented 13% of Q2 rental revenue; the five largest accounted for 47% in aggregate.
- Tenant-improvement commitments were approximately $287.2 million, with a further $12.5 million of unfunded construction-loan commitment. A separate $18.5 million construction loan for a California facility had $6.0 million funded at quarter-end. These commitments are additional to reported debt obligations and may be requested subject to applicable terms.
- The company recognized no impairment losses in the first half. It reported no material pending or threatened litigation and no known environmental liability expected to have a material adverse effect. Subsequent to quarter-end, it acquired an Illinois property for $6.5 million and agreed to fund up to $43.8 million of tenant improvements there.
Key facts for investors to verify
- Tenant rent-payment performance, particularly the largest tenants and repayment of the remaining COVID-era deferrals.
- Timing, conditions and funding needs for the substantial tenant-improvement commitments and construction loan, as well as the expected rent returns from those investments.
- Debt covenants, refinancing and credit-rating terms, including the stated step-up in unsecured-note interest if the rating is downgraded or withdrawn.
- Cash generation and dividend coverage using GAAP cash flow alongside FFO/AFFO; these non-GAAP measures are not substitutes for cash flow or funds available for distributions.
- Federal and state cannabis-law developments and their potential effects on tenant financing, property demand, competition and lease renewals.
- Potential dilution and settlement choices for the exchangeable notes, which were included in 2021 diluted EPS calculations.