Innovative Industrial Properties, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited interim results. IIP is a REIT that acquires and leases specialized properties to state-licensed regulated cannabis operators, generally under triple-net leases.
Business context and portfolio
- At June 30, IIP owned 110 properties in 19 states, reported as 100% leased, totaling approximately 8.6 million rentable square feet; about 2.5 million square feet were under development or redevelopment. Weighted-average remaining lease term was approximately 16 years.
- Six-month rent collection was approximately 99% of contractually due base rent and property management fees, before Kings Garden’s post-quarter default.
- The five largest tenants accounted for approximately 14% (PharmaCann), 10% (Parallel), 9% (Ascend), 8% (Kings Garden) and 7% (Trulieve) of six-month rental revenue, respectively.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $70.5 million | $48.9 million | $135.0 million | $91.8 million |
| Operating income | $44.1 million | $32.9 million | $84.0 million | $60.6 million |
| Net income | $40.2 million | $29.3 million | $75.3 million | $55.3 million |
| Net income attributable to common stockholders | $39.9 million | $29.0 million | $74.6 million | $54.6 million |
| Diluted EPS | $1.42 | $1.17 | $2.75 | $2.22 |
| Diluted FFO per share | $1.97 | $1.56 | $3.83 | $2.94 |
| Diluted AFFO per share | $2.14 | $1.64 | $4.19 | $3.11 |
- Revenue rose 44% in Q2 and 47% for the first half year over year. Management attributed most of the increase to properties acquired in prior periods, rent escalations and lease amendments that increased rent in connection with additional improvement allowances and construction funding. Q2 revenue also included $0.5 million of interest revenue; six-month other revenue was $0.9 million.
- Calculated operating margin was approximately 62.6% in Q2 versus 67.4% a year earlier, and 62.2% for the six months versus 66.1%. Higher depreciation, property costs and G&A contributed to expense growth. G&A increased to $8.7 million in Q2 and $17.5 million for the half year, partly reflecting higher compensation, staffing and public-company costs.
- Operating cash flow was $122.0 million for the six months, compared with $89.4 million in 2021. Investing used $427.0 million, chiefly for real estate, tenant improvements and construction funding; financing provided $264.5 million, mainly from common-stock issuance. Cash, cash equivalents and restricted cash ended at $46.0 million, versus $156.3 million a year earlier.
Balance sheet, debt and liquidity
- Total assets were $2.43 billion at June 30, 2022, up from $2.08 billion at December 31, 2021. Net real estate held for investment was $2.02 billion.
- Debt carrying value was approximately $300.9 million: $294.5 million on the 5.50% senior notes due 2026 and $6.4 million on the 3.75% exchangeable notes due 2024. Principal outstanding totaled approximately $306.5 million. Debt is at fixed rates; management reported compliance with the 2026 notes’ financial covenants.
- Cash and cash equivalents were $45.4 million, restricted cash $0.5 million, and investments $309.4 million at quarter-end. IIP said it expected to meet liquidity needs through cash and short-term investments, operating cash flow, and potential equity or debt offerings, while warning that volatile markets had reduced capital access.
- In April, IIP issued 1.82 million common shares in a public offering, generating approximately $330.9 million net. Six-month common-share issuance proceeds, including ATM sales, totaled $352.0 million. The ATM program had approximately $209.9 million remaining available at June 30.
- Six-month dividends declared were $1.75 per common share per quarter and $0.5625 per Series A preferred share per quarter. Common and preferred dividends paid during the half year totaled approximately $85.0 million.
Material changes, outlook and risks
- During the first half, IIP acquired properties with reported total purchase price and transaction costs of approximately $145.0 million and funded approximately $291.4 million of tenant improvement and construction draws. It had approximately $194.4 million of improvement-allowance commitments and $0.8 million remaining on a construction-loan commitment. Future contractual minimum rent was reported at $6.25 billion.
- Kings Garden default: On July 13, after quarter-end, the tenant defaulted on July rent, fees and insurance reimbursements at six California properties. The reported amount was approximately $2.2 million; IIP applied approximately $2.3 million of security deposits and reported about $373,000 remained as of August 4. IIP filed suit and noted a reasonable possibility of loss related to the default and construction projects, but said it could not estimate the loss. No impairment had been recorded for these properties in the reported period.
- Two post-quarter lease amendments abated rent or fees on properties still under construction; management cited construction delays, including materials procurement.
- The filing identifies tenant credit and concentration, cannabis remaining illegal under federal law, state regulatory and market uncertainty, falling wholesale cannabis prices, inflation and construction-cost increases, supply-chain and labor constraints, and reduced capital availability as risks. California and Michigan wholesale flower prices each fell more than 30% in the first half, according to cited industry data.
- A securities class action was filed in April; a derivative action was filed in July. IIP said it would defend the cases, could not predict their outcomes, and had accrued no amounts for them.
- Guidance: The filing provides no specific earnings or revenue guidance. Management said liquidity and capital sources were believed adequate, but availability on acceptable terms was not assured. Forward-looking statements are subject to substantial risks and are not guarantees.
Important facts for investors to verify
- Subsequent Kings Garden rent collections, security-deposit balances, lawsuit developments and any resulting impairment or property re-leasing costs.
- Whether other tenants remain current and how tenant concentration and the reported 99% first-half collection rate evolve.
- Progress, costs and operating commencement dates for development and redevelopment projects, including fulfillment of outstanding improvement commitments.
- Access to equity and debt capital, covenant compliance, debt maturities and the capacity to fund investments and dividends.
- Developments in the securities and derivative litigation, and whether any material loss estimate or accrual becomes appropriate.