Innovative Industrial Properties, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Although the request identifies 2022 Q4, this filing reports full-year results and includes quarterly figures.
Business context
IIP is an internally managed REIT that owns specialized properties leased, generally on a long-term triple-net basis, to state-licensed cannabis operators. At year-end it owned 110 properties in 19 states; 108 operating properties were reported as fully leased, with a weighted-average remaining lease term of about 15.3 years. Approximately 1.6 million rentable square feet were under development or redevelopment.
Financial and operating results
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Rental revenue, including tenant reimbursements | $274.4 million | $204.6 million | +34% |
| Total revenue | $276.4 million | $204.6 million | +$71.8 million |
| Net income attributable to common stockholders | $153.0 million | $112.6 million | +36% |
| Diluted net income per share | $5.52 | $4.55 | +21% |
| AFFO | $233.7 million | $175.0 million | +34% |
| Diluted AFFO per share | $8.45 | $6.66 | +27% |
| Common dividends declared per share | $7.10 | $5.72 | +24% |
- Operating cash flow was $234.1 million, versus $188.7 million in 2021. Investing cash flow was negative $396.2 million; financing cash flow was positive $164.2 million. Year-end cash, cash equivalents and restricted cash totaled $88.6 million.
- At December 31, 2022, total assets were $2.415 billion and total liabilities were $452.9 million. Cash and cash equivalents were $87.1 million, and investments were $200.9 million.
- Debt principal totaled approximately $306.4 million: $300.0 million of 5.50% notes due 2026 and $6.4 million of 3.75% exchangeable notes due 2024. Interest expense was $18.3 million. Management reported compliance with debt covenants.
- Q4 2022 net income attributable to common stockholders was $41.2 million; diluted AFFO per share was $2.12.
- The company invested approximately $2.2 billion in its property portfolio and had $125.5 million of additional commitments for property improvements and construction at year-end. It raised approximately $352.0 million net from common-stock issuance during 2022.
Material changes versus 2021
- Revenue and earnings increased, reflecting property acquisitions, rent escalations, lease amendments that increased improvement allowances and related rents, and higher tenant reimbursements.
- Expenses also increased: general and administrative expense rose 68% to $38.5 million, including about $3.0 million in litigation costs; depreciation and amortization rose to $61.3 million.
- Rental revenue included security deposits applied to rent. The filing reports approximately $8.6 million of rent and reimbursement non-collection during 2022; reported rent collection was about 97% for the year and 94% in Q4, with security deposits included in the calculation.
- IIP sold a Pennsylvania property for $23.5 million and recognized a $3.6 million gain.
Outlook, risks and unusual items
- No formal earnings or AFFO guidance is provided. Year-end contractual minimum rent was $287.1 million for 2023, but this schedule is not a guarantee of collection. Management cited tenant credit, market and regulatory uncertainty as important to actual cash flows.
- Tenant defaults and payment relief are material concerns. Kings Garden defaulted in July 2022; Parallel and Green Peak defaulted on rent in late 2022, with additional Parallel defaults disclosed in February 2023. IIP also granted limited rent deferrals to Holistic and Calyx Peak in January 2023. The company recovered $15.4 million from Kings Garden under a confidential conditional settlement, but was investigating approximately $9.8 million of additional project costs for potential overpayments.
- Tenant concentration is significant: the ten largest tenants represented 75% of rental revenue in 2022. PharmaCann alone accounted for 14%; Parallel accounted for 10%. Several tenants have limited operating histories, and the company says some rent payments may depend on cash on hand or asset-sale proceeds rather than operating profits.
- Cannabis remains illegal under U.S. federal law. Changes in enforcement, state licensing or regulation, banking access, taxation, or the medical-use spending protection then scheduled to expire September 30, 2023 could adversely affect tenants, property values and IIP’s business.
- Management and the auditor identified a material weakness in internal control over financial reporting concerning review and approval of tenant-improvement funding disbursements. Management concluded controls were ineffective at year-end; the auditor issued an adverse opinion on internal controls. The auditor separately gave an unqualified opinion on the financial statements, which management said contained no material misstatements.
- The company faced securities class-action and derivative lawsuits and reported no accrual because outcomes could not be predicted. The filing also cites inflation, construction delays and cost overruns, reduced capital availability, declining cannabis product prices, and limited access to capital markets as risks.
- After year-end, IIP established a new ATM program permitting up to $500 million of common-stock sales; no shares had been sold under it as of February 28, 2023. Other subsequent events included a proposed $16.2 million sale of Vertical-leased California properties, subject to closing conditions.
Important facts for investors to verify
- Current rent collection, arrears, security-deposit use, and resolution of the Kings Garden, Parallel, Green Peak, Holistic and Calyx Peak situations.
- Progress in remediating the material weakness, including whether enhanced controls are operating effectively and have been tested.
- Tenant concentration, tenant financial capacity, and the extent to which rent depends on financing or asset-sale proceeds.
- Status and terms of the proposed Vertical property sale, the California construction loan amendment, and the $500 million ATM program, including any resulting dilution.
- Debt maturities and covenant headroom, dividend coverage by recurring cash flow, and the collectability of contractual minimum rents.
- Developments in federal and state cannabis law, banking access, tenant licensing, and the litigation matters disclosed in the filing.