Innovative Industrial Properties, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The company is a REIT that owns and leases specialized industrial properties to state-licensed medical-use cannabis operators, generally under triple-net leases. At quarter-end, it owned five fully leased properties totaling approximately 617,000 rentable square feet across New York, Maryland, Arizona and Minnesota.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $2.764 million | $1.290 million |
| Operating income (loss) | $0.724 million | $(0.626) million |
| Net income (loss) | $0.945 million | $(0.591) million |
| Net income (loss) attributable to common stockholders | $0.607 million as presented in the statement of operations; EPS reconciliation allocates $0.037 million to participating securities and uses $0.570 million | $(0.591) million |
| Basic / diluted EPS | $0.10 / $0.09 | $(0.18) / $(0.18) |
| Operating cash flow | $1.355 million | $0.624 million |
| Cash and cash equivalents | $42.076 million | $11.758 million at Dec. 31, 2017 |
| Short-term investments | $48.856 million | None reported at Dec. 31, 2017 |
| Total assets | $158.898 million | $80.028 million at Dec. 31, 2017 |
| Total liabilities | $7.184 million | $6.479 million at Dec. 31, 2017 |
Revenue increased about 114% year over year, principally from four properties acquired in 2017 and a rent escalation at the company’s first New York property. Operating income improved to a profit. General and administrative expense fell to $1.477 million from $1.755 million, mainly because noncash stock-based compensation declined by approximately $0.440 million; depreciation rose to $0.476 million from $0.161 million. Interest income increased to $0.221 million from $0.035 million, largely due to higher interest-bearing balances.
Rental revenue was $2.677 million; tenant reimbursements were $0.087 million. The filing reports no debt outstanding. Net cash from investing activities was $(48.763) million, primarily reflecting purchases of short-term investments. Financing cash flow was $77.726 million, including $79.314 million of net common-stock proceeds. The company declared a $0.25 common dividend per share and a $0.5625 preferred dividend per share. It reported FFO of $1.083 million and AFFO of $1.413 million; these are supplemental, non-GAAP measures, not substitutes for cash flow or net income.
Material changes, outlook and risks
- On January 22, 2018, the company issued 3.22 million common shares for approximately $79.3 million net proceeds. Common shares outstanding rose from 3.50 million at year-end to 6.78 million at March 31.
- Management said it expects revenue and expenses to increase as the portfolio grows, but provided no quantified earnings or investment guidance. It considered liquidity and capital sources adequate for its cash requirements, while noting that future capital may not be available on acceptable terms.
- After quarter-end, on April 6, the company acquired a Pennsylvania property for approximately $5.8 million, with up to $2.8 million in future tenant-improvement reimbursements. The 15-year triple-net lease has initial annual base rent of approximately $1.3 million, 3.5% annual increases, and two five-year renewal options.
- Tenant and asset concentration is material: two tenants accounted for 50% and 24% of Q1 rental revenue. One New York property represented 43% of net real estate at quarter-end; Maryland and Arizona represented 25% and 22%, respectively.
- Key risks include cannabis remaining illegal under federal law, changing regulation, tenant collectability and the limited operating histories of tenants, concentration, competition for suitable properties, access to capital, and maintaining REIT qualification. The company recognizes lease revenue on a cash basis because of collection uncertainty. No impairment losses were recorded in the quarter.
- Commitments included $5.0 million of tenant-improvement allowances outstanding at March 31; approximately $1.3 million was funded in April. The company reported no material pending or threatened litigation and no material known environmental liability.
Important facts for investors to verify
- Reconcile the $0.607 million common-stockholder income shown in the operations statement with the $0.570 million amount used in the EPS reconciliation after the participating-securities allocation.
- Review tenant payment capacity, lease collectability and exposure to federal and state cannabis-law changes, especially given the disclosed revenue concentration.
- Assess the use and investment risk of the substantial cash and short-term-investment balance, and the company’s future funding needs for acquisitions, dividends and tenant improvements.
- Confirm future dividend declarations and coverage; the board retains discretion, and the stated common dividend rate is not assured.
- Track execution and tenant performance under the Pennsylvania lease and the remaining tenant-improvement commitments.