Innovative Industrial Properties, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included where relevant. The company is a REIT that acquires specialized properties and leases them, generally on a long-term triple-net basis, to state-licensed cannabis operators.
Financial and operating results
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Rental revenue, excluding tenant reimbursements | $43.4 million | $14.3 million | +202% |
| Total revenue | $44.7 million | $14.8 million | +202% |
| Net income | $23.5 million | $7.0 million | — |
| Net income available to common stockholders | $22.1 million | $5.6 million | +293% |
| Diluted net income per common share | $2.03 | $0.75 | +171% |
| AFFO | $34.9 million | $9.7 million | +259% |
| Diluted AFFO per common share | $3.27 | $1.34 | +144% |
| Common dividends declared per share | $2.83 | $1.20 | +136% |
- Operating income was $24.9 million, compared with $5.3 million; depreciation was $8.6 million and general and administrative expense was $9.8 million. Interest expense was $6.3 million, primarily related to the notes issued in 2019.
- Cash from operations was $44.9 million, versus $15.7 million. Investing activities used $340.6 million and financing activities provided $400.0 million.
- Year-end cash and cash equivalents were $82.2 million, restricted cash $35.1 million, and investments $119.6 million. Total assets were $745.9 million; total liabilities were $197.8 million; stockholders’ equity was $548.0 million.
- Debt consisted of $143.75 million principal amount of 3.75% exchangeable senior notes due 2024, carried at $134.7 million net of discount and issuance costs. The notes are senior unsecured obligations and are exchangeable, subject to their terms. The company reported no other outstanding debt.
- At year-end, the company owned 46 properties in 14 states, all reported 100% leased, totaling approximately 3.05 million rentable square feet, including about 913,000 square feet under development or redevelopment. Weighted-average remaining lease term was approximately 15.3 years. The company reported an average current yield on invested capital of approximately 13.6%, a non-GAAP measure.
Material changes and quarterly trend
- Revenue growth principally reflected acquisitions: the company acquired 35 properties in 2019, adding approximately 1.92 million rentable square feet. Its reported aggregate investment reached approximately $491.6 million, with another approximately $142.6 million committed for construction and tenant improvements.
- Common stock offerings and ATM sales generated approximately $286.3 million in net proceeds during 2019; the notes generated approximately $138.5 million in net proceeds. Shares issued and outstanding rose to 12.64 million at year-end from 9.78 million a year earlier.
- Quarterly revenue increased through the year, from $6.8 million in Q1 to $17.7 million in Q4. Q4 net income available to common stockholders was $9.6 million and diluted earnings per share were $0.78; quarterly diluted AFFO per share was $1.18.
- Operating cash flow increased, but the company funded substantial property acquisitions and tenant improvements, relying heavily on equity issuance and debt financing to support growth.
Outlook, risks and unusual items
- Outlook: Management expected to fund liquidity needs with cash, operating cash flow, and equity or debt financing, and stated that available liquidity was believed adequate. The filing provides no specific earnings, acquisition, or dividend guidance. Future growth depends on suitable investments, tenant performance, and continued access to capital.
- Tenant and collection risk: Four tenants generated 54.1% of rental revenue; PharmaCann alone represented 26.2%. Many tenants are start-ups with limited operating histories, and the company records rental revenue on a cash basis because collectability is uncertain.
- Default after year-end: The tenant at the Los Angeles property was in receivership and defaulted on January and February 2020 rent. The property had generated approximately $776,000 in 2019 rental revenue. A tenant at another California property also defaulted in January 2020.
- Regulatory exposure: Cannabis remains illegal under U.S. federal law, notwithstanding state programs. Changes in enforcement, banking access, state licensing or cannabis laws could impair tenants, property values, rent collection, and the company’s business. Leases do not generally prohibit state-compliant adult-use operations, which may carry additional federal risk.
- Commitments and funding: At year-end, outstanding tenant-improvement and construction commitments included approximately $92.1 million of tenant-improvement allowances and specified construction funding. Some additional tenant-elected reimbursement commitments were excluded from those figures. Certain commitments were amended or canceled after year-end, including cancellation of a $4.0 million Pennsylvania commitment.
- Dividends and capital: The company declared $2.83 per common share for 2019. REIT distribution requirements and growing investment needs may require external financing; the filing cautions that distributions are not assured and could be funded from sources other than operating cash flow.
- Accounting and controls: The company adopted lease accounting Topic 842 in 2019 and ceased to qualify as an emerging growth company on December 31, 2019. The auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
- Contingencies: The company reported no known pending or threatened litigation expected to have a material adverse effect and no known environmental liability requiring disclosure or loss accrual. It cautions that environmental, regulatory and other unknown liabilities remain possible.
Most important facts for investors to verify
- Whether major tenants—particularly PharmaCann—and the broader tenant base can sustain rent payments from operating cash flow, and the financial impact of the Los Angeles and other tenant defaults.
- How much of the approximately $142.6 million in year-end committed funding, plus tenant-elected commitments, is drawn, canceled, or converted into rent increases; and whether development projects finish on schedule and budget.
- Whether the reported 13.6% average current yield and AFFO growth translate into durable cash available for dividends, after debt service and recurring funding needs.
- The effects of equity issuance and potential note exchange on dilution, and the company’s ability to refinance or repay the $143.75 million notes due in 2024.
- Changes in federal cannabis enforcement, state regulation, banking access, and REIT tax treatment that could affect tenants, assets, distributions, or REIT qualification.