Innovative Industrial Properties, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The company is an internally managed REIT that acquires specialized properties and leases them, generally on a long-term triple-net basis, to state-licensed cannabis operators.
Business context and portfolio
- At year-end, owned 66 properties in 17 states, totaling approximately 5.4 million rentable square feet, including about 2.0 million square feet under development or redevelopment. The portfolio was 99.3% leased by square footage, with a weighted-average remaining lease term of approximately 16.6 years. The Los Angeles property in tenant receivership and rent default was treated as not leased.
- During 2020, acquired 20 properties and raised approximately $1.0 billion net through common-stock offerings and at-the-market sales.
- Rental revenue concentration remained material: the six largest tenants represented 57% of 2020 rental revenue, including reimbursements. PharmaCann alone represented 18%.
Financial results and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Rental revenue, including tenant reimbursements | $116.9 million | $44.7 million | +162% |
| Income from operations | $69.7 million | $24.9 million | +180% |
| Net income attributable to common stockholders | $64.4 million | $22.1 million | +191% |
| Diluted net income per common share | $3.27 | $2.03 | +61% |
| FFO per diluted share | $4.72 | $2.88 | +64% |
| AFFO per diluted share | $5.00 | $3.27 | +53% |
| Common dividends declared per share | $4.47 | $2.83 | +58% |
| Cash flow from operating activities | $110.8 million | $44.9 million | +147% |
- Operating income margin was approximately 59.7% and net income attributable to common stockholders was approximately 55.1% of revenue, calculated from reported figures.
- Investing cash outflow was $1.027 billion, principally for property acquisitions, tenant improvements and construction funding. Financing cash inflow was $925.0 million, mainly from equity issuance, partially offset by dividends.
- Year-end cash and cash equivalents were $126.0 million, with $619.3 million of short-term government investments. Total assets were $1.768 billion and total liabilities were $243.1 million.
- Debt consisted of $143.75 million principal amount of 3.75% exchangeable senior notes due 2024; their balance-sheet carrying value, net of discount and issuance costs, was $136.7 million. Cash interest paid in 2020 was $5.4 million. The notes’ reported fair value was $397.7 million.
- At year-end, the company had approximately $250.7 million of tenant-improvement commitments outstanding. Its investment guideline generally caps aggregate borrowings at 50% of tangible-asset cost, subject to board discretion.
Material changes and unusual items
- Revenue growth primarily reflected properties acquired in 2019 and 2020, plus rent escalations and lease amendments. The company acquired 20 properties in 2020; rental revenue from those acquisitions was approximately $25.6 million for the year.
- Common shares outstanding increased from 12.6 million at year-end 2019 to 23.9 million at year-end 2020, substantially reflecting equity offerings and ATM sales.
- The company extended the maximum estimated useful life of buildings and improvements from 35 to 40 years prospectively from January 1, 2020. It reported that this reduced 2020 depreciation by approximately $1.4 million and increased diluted EPS by $0.08.
- Revenue is recorded on a cash basis because of uncertainty over tenant collectability and the cannabis regulatory environment. No impairment losses were recognized in 2020, 2019 or 2018.
- COVID-19-related temporary rent and property-management-fee deferrals were granted to certain tenants through June 2020. The company reported collecting 100% of contractual rent due for fourth-quarter 2020 and January and February 2021, except for partial payments by Vertical and the Los Angeles property, which was newly leased in January 2021.
Outlook, commentary and principal risks
- The filing provides no quantified earnings, acquisition or dividend guidance. Management expects to pursue further property acquisitions and tenant expansion funding, financed through operating cash flow and access to equity or debt markets, but cautions that capital may not be available on acceptable terms.
- Management stated that liquidity and capital sources were believed adequate for cash requirements. Future dividends depend on cash generation, debt service and accretive investments; the board determines distributions, and the company may fund them from sources other than operating cash flow.
- The principal sector risk is that cannabis remains illegal under U.S. federal law despite state legalization. Changes in federal enforcement policy, state programs or banking access could impair tenants, property values, rent collection and the company’s ability to operate or maintain REIT status.
- Other material exposures include tenant and industry concentration, tenants with limited operating histories and possible operating losses, tenant licensing and bankruptcy risks, specialized properties that may be difficult to re-lease, development-cost and completion risks, and competition or improved financing access for cannabis operators.
- Vertical made partial contractual rent payments late in 2020, with security deposits applied to rent and penalties. The Los Angeles tenant was in receivership and defaulted on rent throughout 2020; the property was leased to Holistic in January 2021.
- The company reported no pending or threatened litigation expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Current rent collection, lease status and tenant credit quality, particularly for Vertical and the replacement tenant at the Los Angeles property.
- Whether committed tenant-improvement and construction funding is completed on schedule and produces the expected rent and returns.
- Exposure to the largest tenants and states, and the capacity of tenants to pay rent from operating cash flow rather than financing or asset-sale proceeds.
- Federal and state cannabis-law developments, banking access and any implications for tenant operations, asset risk or the company’s REIT qualification.
- Dividend coverage against AFFO and operating cash flow, alongside the effects of further equity issuance and dilution.
- The exchangeable notes’ 2024 maturity, exchange terms and reported fair value relative to carrying value.