Business context and reporting period
Innovative Industrial Properties, Inc. (IIP) is an internally managed REIT that acquires and leases specialized properties to state-licensed cannabis operators, generally under long-term triple-net leases. This Form 10-Q covers the quarter and nine months ended September 30, 2020; financial amounts below are in U.S. dollars, with statement figures converted from thousands to millions where appropriate.
At quarter-end, IIP owned 63 properties in 16 states, approximately 99.3% leased by square footage, with about 5.0 million rentable square feet (including space under development or redevelopment) and a 16.2-year weighted-average remaining lease term. The Los Angeles property in receivership is excluded from the leased percentage.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $34.3 million | $11.6 million | $79.8 million | $27.0 million |
| Operating income | $20.4 million | $6.8 million | $46.9 million | $14.3 million |
| Net income | $19.2 million | $6.5 million | $44.4 million | $13.6 million |
| Net income attributable to common stockholders | $18.9 million | $6.2 million | $43.4 million | $12.6 million |
| Basic / diluted EPS | $0.87 / $0.86 | $0.56 / $0.55 | $2.35 / $2.33 | $1.22 / $1.20 |
Revenue rose approximately 197% in Q3 and 196% for the nine-month period year over year. Nine-month operating margin was approximately 58.7% versus 53.1%; net margin was approximately 55.6% versus 50.3%. Q3 operating and net margins were approximately 59.5% and 56.0%, respectively, broadly similar to the prior-year quarter. These margins are simple calculations from reported results.
FFO attributable to common stockholders was $26.5 million in Q3 and $62.7 million for nine months; AFFO was $27.9 million and $66.7 million, respectively. Q3 diluted FFO and AFFO per share were $1.22 and $1.28; nine-month figures were $3.40 and $3.62. FFO and AFFO are non-GAAP supplemental measures, not substitutes for GAAP earnings or operating cash flow.
For the first nine months, operating cash flow was $76.6 million, investing cash outflow was $721.3 million, and financing cash inflow was $688.5 million. Investing included $182.1 million of real estate purchases, $210.1 million of tenant-improvement and construction funding, and net purchases of short-term investments. Financing was primarily $741.1 million of net common-stock proceeds, partly offset by $50.5 million of common and preferred dividends. Ending cash and cash equivalents were $161.1 million; restricted cash was zero.
At September 30, total assets were $1.500 billion, including $885.0 million of net real estate and $451.2 million of short-term investments. Total liabilities were $229.9 million and stockholders’ equity was $1.270 billion. Exchangeable senior notes had $143.75 million principal outstanding and a $136.2 million carrying value; they bear fixed interest at 3.75% and mature in February 2024. Cash and short-term investments totaled approximately $612.3 million.
Material changes versus the prior comparable period
- Growth reflected portfolio expansion and increased rent from previously acquired properties, including contractual escalations and rent associated with increased tenant-improvement allowances. IIP acquired 15 properties during the first nine months, for total purchase price and transaction costs of approximately $182.7 million.
- Common shares outstanding increased from 12.64 million at year-end 2019 to 22.17 million at September 30, 2020. Three follow-on offerings and ATM sales generated substantial equity funding; the ATM program was nearly fully used, with approximately $15,000 remaining available.
- Depreciation increased to $19.3 million for nine months from $5.1 million, primarily due to acquired properties and improvements placed in service. General and administrative expense increased to $9.7 million from $6.7 million.
- Common dividends declared per share rose from $1.00 for Q1 2020 to $1.06 for Q2 and $1.17 for Q3. The Series A preferred dividend remained $0.5625 per share per quarter.
Outlook, risks, contingencies, and unusual items
The filing provides no specific earnings or investment guidance. Management said it expects to fund investments and operating needs through cash on hand, operating cash flow after dividends, and equity or debt issuance, and considers current liquidity adequate, while noting financing may not be available on acceptable terms.
At September 30, IIP had approximately $232.6 million of tenant-improvement commitments and $6.9 million of construction-funding commitments. Future contractual minimum rent was $3.184 billion, including $2.498 billion thereafter; these contractual rents depend on tenants meeting their obligations. Common and preferred dividends declared for Q3 totaled approximately $26.3 million.
COVID-19 had not, in management’s assessment, materially adversely affected the company’s results or financial position as of quarter-end, but a prolonged outbreak could do so. Three tenants received temporary rent and property-management-fee deferrals, with repayments scheduled over 18 months; approximately $1.5 million of rent was deferred for May and June. As of November 5, 2020, IIP reported collecting 100% of contractual rent due for July through October, excluding the Los Angeles tenant in receivership.
The Los Angeles property tenant remained in default and receivership. A proposed replacement-operator lease depended on final government approvals and other closing conditions. Tenant and geographic concentration, operator creditworthiness, cannabis’s continued illegality under federal law, changing state regulation, access to capital, competition, and COVID-19 are material risks. One tenant, PharmaCann, contributed 19% of nine-month rental revenue; the next largest listed tenant contributed 10%. Management reported no impairment losses for the first nine months and no material litigation known to it. The company reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether tenants continue paying rent and repaying deferrals, particularly the Los Angeles property’s status and any replacement lease approvals.
- How tenant concentration and exposure to operators’ financial condition affect rent collections and portfolio performance.
- The timing and funding of the $232.6 million tenant-improvement and $6.9 million construction commitments, and the returns those investments generate.
- Whether acquisition growth and rent escalations translate into sustainable per-share cash generation after substantial share issuance and dividends.
- Access to capital and the effects of federal cannabis policy, state regulation, and any prolonged COVID-19 disruption.