Business context and reporting period
Innovative Industrial Properties, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2017. Formed in 2016, the company focuses on specialized industrial properties leased to state-licensed medical-cannabis operators and intends to qualify as a REIT beginning with tax year 2017. At quarter-end it owned one 127,000-square-foot New York property, leased to PharmaCann in a triple-net sale-leaseback.
Financial results and position
| Metric | Q1 2017 / March 31, 2017 |
|---|---|
| Rental revenue | $1.290 million |
| Other revenue | $35,000 |
| Total revenue | $1.325 million |
| General and administrative expense | $985,000 |
| Stock-based compensation | $770,000 |
| Depreciation | $161,000 |
| Net loss; diluted loss per share | $591,000; $0.18 |
| Operating cash flow | $624,000 |
| Cash and cash equivalents | $33.351 million |
| Total assets; total liabilities; stockholders’ equity | $63.507 million; $2.889 million; $60.618 million |
| Debt | None outstanding |
FFO was negative $430,000 (negative $0.13 per basic share); AFFO was $340,000 ($0.10 per diluted share). These non-GAAP measures are supplemental and are not cash available for discretionary use. The filing does not provide a meaningful comparable prior-quarter operating period or report operating margins. Cash from operations included $770,000 of noncash stock compensation and $161,000 of depreciation.
Changes, outlook and material items
- The company says comparative operating results are not relevant because it began active real estate operations in December 2016; no property investments were completed during Q1.
- PharmaCann accounted for 100% of annualized base rental revenue at quarter-end. The company records rent from this tenant on a cash basis because of uncertainty about collectability given the tenant’s limited operating history.
- The initial lease has a 15-year term, two five-year extension options, and annual base-rent increases of the greater of 4% or 75% of CPI. Contractual minimum rent totals $82.333 million over the remaining lease term, including supplemental rent and management fees.
- On May 1, 2017, the company agreed, subject to diligence and customary closing conditions, to acquire a Maryland property under development. The expected investment is up to $15 million, plus a separately funded $1.9 million rent reserve. The planned 16-year triple-net lease has a three-month rent abatement and stated annual escalations of 3.25%.
- Management expects to fund acquisitions and other needs with cash on hand, operating cash flow, and potentially equity or debt. It considers current liquidity adequate but cautions that future funding may not be available on acceptable terms. Borrowings are generally limited by investment guidelines to 50% of tangible-asset cost at the time of new borrowing, subject to board discretion.
- No dividends had been declared or paid as of May 11, 2017. The company expects to qualify as a REIT and generally must distribute at least 90% of taxable income to maintain that status.
- Key risks include federal cannabis prohibition and potential changes in enforcement, tenant concentration and creditworthiness, changes in state cannabis laws, competition for properties, access to capital, and REIT qualification. Management reported no material litigation or known material environmental liability, and no impairment loss. Disclosure controls were deemed effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether PharmaCann continues to pay rent as contracted and whether the single-tenant concentration is reduced through additional acquisitions.
- Whether the Maryland acquisition closes, its final total cost and rent terms, and how the rent reserve is funded and used.
- Cash deployment, future operating cash generation, and any new equity or debt financing; the company had $33.351 million in cash and no debt at quarter-end.
- Progress toward REIT qualification and the timing and capacity for distributions.
- Federal and state cannabis-law developments and any effect on tenants, leases, property values, or the company’s ability to operate.