Innovative Industrial Properties, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are to Q1 2019 unless otherwise noted. The company is a REIT that owns specialized properties leased primarily to state-licensed cannabis operators, generally on a triple-net basis.
Business context and portfolio
At quarter-end, the company owned 53 properties in 15 states, 99.1% leased by square footage, with approximately 3.8 million rentable square feet (including space under development or redevelopment) and a 15.8-year weighted-average remaining lease term. It acquired six properties for approximately $73.0 million during the quarter. It had invested approximately $647.3 million in its portfolio and committed a further $138.0 million for tenant improvements and construction, subject to stated exclusions.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $21.1 million | $6.8 million; up 210% |
| Income from operations | $12.3 million | $3.4 million |
| Net income | $11.9 million | $3.6 million |
| Net income attributable to common stockholders | $11.5 million | $3.3 million |
| Diluted earnings per share | $0.72 | $0.33 |
| FFO / diluted share | $1.03 | $0.46 |
| AFFO / diluted share | $1.12 | $0.54 |
| Operating cash flow | $19.6 million | $4.6 million |
| Cash, cash equivalents and restricted cash | $131.3 million | $59.2 million at March 31, 2019 |
Rental revenue excluding tenant reimbursements increased 214% to $20.6 million. Management attributed approximately $0.8 million of the increase to Q1 2020 acquisitions and approximately $13.2 million to properties acquired before 2020, including rent escalations and lease amendments. General and administrative expense rose 74% to $3.3 million; depreciation increased to $4.9 million as the portfolio and placed-in-service improvements grew. No impairment losses were recorded.
At March 31, 2020, total assets were $1.08 billion, total liabilities $221.5 million, and stockholders’ equity $859.0 million. The company held $272.9 million of short-term investments and $108.3 million of cash and cash equivalents, alongside $23.0 million of restricted cash. Exchangeable senior notes had $143.7 million principal outstanding and a $135.2 million carrying value; they bear fixed interest of 3.75% and mature in 2024. The company also declared a $1.00-per-common-share dividend for Q1, payable April 15.
Operating cash flow was more than offset by $308.3 million of investing outflows, including real estate investment, tenant-improvement/construction funding, and net purchases of short-term investments. Financing provided $302.7 million, principally from $317.8 million of net common-stock proceeds. The January public offering and ATM sales together issued approximately 4.4 million shares, increasing shares outstanding from 12.6 million at year-end to 17.0 million at quarter-end.
Changes, outlook and risks
- Growth in rents, earnings, FFO/AFFO and operating cash flow reflected substantial portfolio expansion. Results per share also increased, while the equity issuance materially expanded the share count.
- The filing provides no numerical earnings or investment guidance. Management said available liquidity and capital sources were adequate for expected needs, while noting that financing might not be available on acceptable terms. Its investment guidelines limit aggregate borrowings to 50% of tangible-asset cost at the time of a new borrowing, subject to board discretion.
- COVID-19 had no material adverse effect on reported results or financial position as of March 31, according to the company, but management warned a prolonged outbreak could materially harm the business and tenants. By May 6, certain leases had temporary rent and property-management-fee deferrals: $743,000 applied from security deposits to April payments, $743,000 deferred for May, and $781,000 deferred for June. Deferred amounts and deposit replenishments are scheduled for repayment over 18 months beginning July 2020.
- The Los Angeles tenant remained in rent default; Q1 rent and penalties there were collected through security-deposit draws. Southern California tenant Vertical also used security deposits toward March rent. PharmaCann accounted for approximately 24% of Q1 rental revenue, and Ascend approximately 9%, indicating tenant concentration exposure.
- Key risks include cannabis remaining illegal under U.S. federal law, tenant credit and lease-collection risk, regulatory and market uncertainty, construction delays, and dependence on continued access to capital. The company records rental revenue on a cash basis because of collectability uncertainty. It reported no material pending litigation and no material adverse environmental liability known to it.
- After quarter-end, the company acquired two properties for a combined $31.8 million, with $33.3 million of tenant-improvement and construction commitments. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether COVID-related rent deferrals were repaid as scheduled and whether further concessions or security-deposit draws occurred.
- Current rent collection, tenant financial health and exposure to major tenants, including PharmaCann, Ascend, Vertical and the defaulting Los Angeles tenant.
- Progress, costs and tenant completion of redevelopment projects, along with funding of the company’s substantial tenant-improvement and construction commitments.
- Cash available after restricted balances, future equity or debt issuance needs, and the effect of share issuance on per-share results and dividends.
- Whether portfolio occupancy, long-term leases and tenant cash flows remain resilient amid cannabis regulatory uncertainty and the economic effects of COVID-19.