Innovative Industrial Properties, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company is an internally managed REIT that acquires and leases specialized properties to state-licensed cannabis operators, generally under triple-net leases.
Business and portfolio
- At quarter-end, the company owned 75 properties across 19 states; all were leased. The portfolio comprised approximately 7.3 million rentable square feet, including 2.7 million square feet under development or redevelopment, with a weighted-average remaining lease term of approximately 16.7 years.
- It reported approximately $1.4 billion invested in properties and approximately $417.5 million of additional commitments for tenant improvements and construction, excluding an $18.5 million construction loan.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Rental revenue | $53.9 million | $34.3 million | $145.6 million | $79.8 million |
| Operating income | $36.3 million | $20.4 million | $96.9 million | $46.9 million |
| Net income | $30.1 million | $19.2 million | $85.4 million | $44.4 million |
| Net income attributable to common stockholders | $29.8 million | $18.9 million | $84.3 million | $43.4 million |
| Diluted EPS | $1.20 | $0.86 | $3.41 | $2.33 |
| Operating cash flow | Not separately provided | Not separately provided | $141.0 million | $76.6 million |
- Q3 rental revenue increased 57%; nine-month revenue increased 82%. Management attributed growth largely to properties acquired in prior periods, rent escalations and lease amendments funding additional improvements. Q3 operating margin was approximately 67% and net margin approximately 56%, calculated from reported figures.
- Nine-month FFO was $119.6 million and AFFO was $126.4 million, including the diluted effect of assumed exchange of the exchangeable notes. Diluted AFFO per share was $4.81, versus $3.62 a year earlier. These are non-GAAP measures and the company cautions they are not substitutes for GAAP income or operating cash flow.
- Nine-month investing cash outflow was $333.5 million, primarily for real estate, tenant improvements and construction funding, partly offset by net maturities of short-term investments. Financing cash inflow was $193.8 million, mainly from the new notes issuance; common and preferred dividends paid totaled approximately $96.0 million. Cash and cash equivalents ended the period at $127.3 million.
- At September 30, cash and cash equivalents were $127.3 million and investments were $554.4 million. Total assets were $2.10 billion; total liabilities were $591.0 million and stockholders’ equity was $1.51 billion.
- Debt comprised $143.7 million principal of 3.75% exchangeable notes due 2024 and $300.0 million principal of 5.50% unsecured notes due 2026. Their combined carrying value was approximately $431.9 million, net of discounts and issuance costs. Management said the company complied with the unsecured notes’ financial covenants.
Material changes versus prior comparable periods
- Revenue and net income rose substantially year over year, alongside portfolio expansion and higher rent from existing properties.
- Interest expense increased to $6.3 million in Q3 from $1.9 million, and to $11.9 million for nine months from $5.6 million, reflecting the May 2021 issuance of $300 million of 5.50% notes. General and administrative expense also increased, primarily due to compensation, additional employees and public-company costs.
- Depreciation increased with acquisitions and improvements placed in service. Nine-month operating cash flow rose to $141.0 million from $76.6 million.
- The company issued no common stock under its ATM program during the nine-month period; approximately $231.7 million remained available under the program at September 30.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said available cash and short-term investments, operating cash flow and potential equity or debt issuances were expected to meet liquidity needs, while noting that financing may not be available on acceptable terms or in sufficient amounts.
- The common dividend declared for Q3 was $1.50 per share, up from $1.40 for Q2. REIT status generally requires distributing at least 90% of taxable income; future dividends depend on cash generation, debt service and investment opportunities.
- Key risks include cannabis remaining illegal under U.S. federal law, changing regulation, tenant lease defaults, tenant and industry concentration, competition for properties and operator financing, and reliance on access to capital. The five largest tenants represented 47% of Q3 rental revenue; the largest two each represented 12%.
- The company reported no material adverse impact from COVID-19 on its financial position or results as of September 30, 2021, but warned that a prolonged outbreak or resurgence could adversely affect tenants and the business. Approximately $411,000 remained due under prior pandemic-related deferrals.
- Outstanding commitments included approximately $355.9 million for improvement allowances and $9.6 million remaining under the construction loan. The company reported no material pending or threatened litigation and recognized no impairment losses in the nine-month periods presented.
- Subsequent events included a $51 million California property acquisition in October and completion of the exchange of all $300 million of original unsecured notes for registered notes with substantially identical terms.
Important facts for investors to verify
- Tenant financial health, rent collections and concentration exposure, especially given cash-basis revenue recognition and the federal regulatory uncertainty.
- Timing, funding requirements and expected rent returns for the substantial improvement and construction commitments.
- Liquidity available after dividends, debt interest and planned property investment; confirm compliance with debt covenants and refinancing options ahead of 2024 and 2026 maturities.
- Whether reported FFO and AFFO growth translates into durable cash generation and dividend coverage; review the company’s non-GAAP reconciliations.
- Potential effects of cannabis law changes, competition and alternative financing options on acquisition returns and tenant demand.