Innovative Industrial Properties, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The company is an internally managed REIT acquiring and leasing specialized industrial properties to state-licensed medical-cannabis operators, generally under triple-net leases.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $6.823 million | $2.764 million; up 147% |
| Net income | $3.641 million | $0.945 million |
| Net income available to common stockholders | $3.303 million | $0.607 million |
| Diluted EPS | $0.33 | $0.09 |
| Operating cash flow | $6.158 million | $1.355 million |
| Cash and cash equivalents at period-end | $59.224 million | $42.076 million at March 31, 2018 |
| Short-term investments at period-end | $197.729 million | $120.443 million at December 31, 2018 |
| Total assets / stockholders’ equity | $420.408 million / $268.376 million | $281.466 million / $264.292 million at December 31, 2018 |
Rental revenue rose 146% to $6.576 million, mainly from properties acquired in 2018 and 2019, rent escalations and lease amendments. Operating income was $3.440 million versus $0.724 million. Reported total expenses were $3.383 million versus $2.040 million. The filing does not provide a clearly identified margin measure; calculated operating margin was approximately 50% versus 26%.
Net cash used in investing was $93.843 million, including net purchases of short-term investments and real estate-related spending. Financing provided $133.859 million, primarily from the notes issuance. The company reported $59.224 million cash plus $197.729 million in short-term investments at quarter-end.
In February, the operating partnership issued $143.75 million principal amount of 3.75% exchangeable senior notes due February 2024. Their balance-sheet carrying value was $133.196 million after discounts and issuance costs; fair value was reported as $181.125 million. Notes are unsecured and guaranteed by the company and subsidiaries. Interest expense was $0.792 million for the quarter, including non-cash amortization.
Common dividends declared were $0.45 per share for the quarter; Series A preferred dividends were $0.5625 per share. Preferred stock carries a 9% rate. Supplemental non-GAAP measures were FFO of $4.521 million ($0.47 basic per share) and AFFO of $5.292 million ($0.55 basic per share); these are not substitutes for GAAP earnings or operating cash flow.
Business developments and material changes
- At March 31, 2019, the company owned 13 properties in 11 states, all 100% leased, totaling approximately 1.128 million rentable square feet; weighted-average remaining lease term was approximately 14.3 years.
- During the quarter, it acquired two properties for $7.410 million before additional development/reimbursement obligations. It reported aggregate investment of $162.3 million and a further $36.6 million committed for tenant and construction work.
- The company’s portfolio and cash resources expanded, while it added substantial debt through the exchangeable notes. Common shares outstanding rose from 9.776 million at year-end to 9.806 million.
- After quarter-end, it acquired a five-property Southern California portfolio for approximately $27.1 million and a Pittsburgh property for $6.3 million, with up to $10 million of additional tenant-improvement reimbursement for Pittsburgh.
Outlook, risks and unusual items
No numerical earnings or investment guidance was provided. Management said it expected liquidity needs to be met with cash, operating cash flows and potential debt or equity financing, and believed available sources were adequate, while cautioning that financing may not be available on acceptable terms. Contractual minimum rent was reported at $538.722 million, including $388.385 million thereafter; collection remains subject to tenant and industry risks.
- Medical cannabis remains illegal under U.S. federal law. Regulatory changes could affect tenants’ ability to operate, pay rent, or renew leases.
- Tenant and asset concentration is material: PharmaCann leases generated approximately 31% of Q1 rental revenue; one New York property represented 18% of net real estate. The Maryland tenant contributed 10% of rental revenue.
- Competition for properties and alternative financing for cannabis operators could raise acquisition costs or weaken lease terms. The filing specifically discussed the proposed SAFE Banking Act as a possible source of greater competition if enacted.
- Commitments included $7.9 million in tenant-improvement allowances, $5.2 million and $17.8 million in Massachusetts and Ohio construction funding, and $2.4 million tied to California development milestones. These are in addition to subsequent-event commitments noted above.
- Management recognized no impairment losses and reported no known litigation expected to have a material adverse effect. Revenue is recorded on a cash basis because of uncertainty about tenant collectability and the regulatory environment.
- Disclosure controls were judged effective as of March 31, 2019; the filing reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Tenant rent-paying capacity, lease concentration and the effect of federal or state cannabis regulation on continued operations.
- Completion, funding requirements and expected returns for committed development and tenant-improvement projects.
- Whether cash, short-term investments and future financing will cover acquisitions, debt service and REIT dividend requirements.
- Terms and potential dilution or cash-settlement effects of the exchangeable notes; compare carrying value with their reported fair value.
- Subsequent acquisitions, including final costs, tenant performance and the Pittsburgh reimbursement commitment.
- Reconcile reported GAAP earnings and cash flows with management’s FFO, AFFO and current-yield measures when assessing dividend sustainability.