Innovative Industrial Properties, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company is a REIT that owns and leases specialized industrial properties to state-licensed regulated-cannabis operators, primarily under triple-net leases.
Business context and portfolio
- At quarter-end, IIP owned 107 properties across 19 states, all reported as 100% leased, totaling approximately 8.0 million rentable square feet, including 2.4 million under development or redevelopment. Weighted-average remaining lease term was approximately 16.5 years.
- Q1 acquisitions totaled $62.4 million, including transaction costs. The company also funded approximately $129.4 million for tenant improvements and construction activities.
Financial performance and position
- Revenue: $64.5 million, up 50% from $42.9 million. Rental revenue rose to $64.1 million from $42.9 million; management attributed most of the increase to prior-period acquisitions, rent escalations, and lease amendments. Other revenue was $0.4 million.
- Profit: Net income was $35.1 million versus $25.9 million; net income attributable to common stockholders was $34.7 million versus $25.6 million. Diluted EPS was $1.32, up from $1.05.
- Margins: Operating margin was approximately 61.8%, compared with 64.5% a year earlier; net margin was approximately 54.3%, versus 60.5%. Higher interest and operating costs contributed to the lower margins.
- REIT operating measures: Diluted FFO per share was $1.86 versus $1.39; Normalized FFO was $1.87 versus $1.39; AFFO was $2.04 versus $1.47. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
- Cash flow: Operating cash flow was $59.9 million, up from $42.6 million. Investing activities used $81.1 million, compared with $13.0 million used in Q1 2021; financing activities used $20.2 million. Cash, cash equivalents, and restricted cash ended at $45.0 million, down from $86.4 million at year-end 2021.
- Liquidity: At March 31, cash and cash equivalents were $43.1 million, restricted cash was $1.9 million, and investments were $209.9 million. Management stated liquidity and capital sources were adequate, while noting that financing sources may not always be available on acceptable terms.
- Debt: Outstanding principal was $309.5 million: $300.0 million of 5.50% senior notes due 2026 and $9.5 million of 3.75% exchangeable notes due 2024. Management reported compliance with debt covenants. Cash interest rates are fixed; a downgrade of the 2026 notes could raise their rate to 6.0%–6.5%.
- Dividends and capital: The company declared a common dividend of $1.75 per share and a Series A preferred dividend of $0.5625 per share. It raised $21.1 million net through its ATM program during the quarter.
Material changes and notable items
- Revenue increased substantially year over year, while property expenses, general and administrative expense, and depreciation and amortization also rose. Interest expense increased to $4.8 million from $1.9 million, reflecting the 2026 notes issued in 2021; Q1 2022 also included a $0.1 million loss on exchange of notes.
- Holders exchanged approximately $23.9 million of exchangeable-note principal for 365,842 common shares during Q1. The company adopted ASU 2020-06 on January 1, 2022, recording an opening-equity adjustment.
- Subsequent to quarter-end, the company issued 1,815,790 common shares in April, generating approximately $345 million gross proceeds. It also disclosed additional property investments and up to $45 million of increased construction funding for a New York property.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or revenue guidance. Management expects to fund operations, dividends, debt service, and investments with rental cash flows, cash and short-term investments, and potential equity or debt issuance.
- Key risks include cannabis remaining illegal under U.S. federal law, tenant ability to pay rent, regulatory and market changes, tenant and industry concentration, competition for properties, access to capital, and the effects of COVID-19, economic disruption, and inflation. Fixed rent escalations may lag inflation, and inflation could pressure tenants and construction budgets.
- Five tenants represented 49% of Q1 rental revenue; PharmaCann represented 14%. The company reported no property individually exceeded 5% of net real estate.
- As of quarter-end, the company had approximately $185.3 million of improvement-allowance commitments, $3.0 million remaining under a construction loan, and a potential $55.0 million Pennsylvania funding obligation if elected by the tenant. These amounts are in addition to reported contractual obligations.
- A federal securities class action filed April 25, 2022 names the company and certain officers and alleges false or misleading statements. The company intends to defend the case; the filing does not quantify potential exposure.
- No real estate impairment losses were recognized in Q1 2022 or Q1 2021. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Tenant rent collections, tenant financial health, and exposure to the largest tenants.
- Completion, funding requirements, and expected rent contribution of development and improvement projects, including the Pennsylvania and New York commitments.
- Cash available after dividends and investment spending, and the effect of the April share issuance on per-share measures and dilution.
- Debt covenant headroom, credit-rating developments, and the 2024 and 2026 debt maturities.
- Developments in the securities class action and any resulting legal costs or liabilities.