Innovative Industrial Properties, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company is a REIT that acquires and leases specialized real estate to state-licensed cannabis operators, primarily under triple-net leases.
Financial performance
Amounts below are in millions of dollars, except per-share data.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $3.926 | $1.559 | $10.004 | $4.138 |
| Operating income (loss) | $1.571 | $0.295 | $3.531 | ($0.796) |
| Net income (loss) | $1.832 | $0.334 | $4.319 | ($0.679) |
| Net income (loss) attributable to common stockholders | $1.494 | $0.334 | $3.305 | ($0.679) |
| Diluted EPS | $0.21 | $0.09 | $0.49 | ($0.21) |
| FFO per diluted share | $0.32 | $0.16 | $0.77 | ($0.04) |
| AFFO per diluted share | $0.38 | $0.21 | $0.93 | $0.44 |
- Q3 operating margin was approximately 40%, versus 19% a year earlier; nine-month operating margin was approximately 35%, compared with a loss from operations in 2017. Revenue growth primarily reflected new property acquisitions and rent escalations.
- Nine-month operating cash flow was $9.6 million, investing cash flow was negative $41.9 million, and financing cash flow was positive $73.7 million. Cash and cash equivalents ended the period at $53.0 million; short-term investments were $4.0 million.
- Total assets were $166.2 million and total liabilities $15.1 million at September 30, 2018. The company reported no debt outstanding. Stockholders’ equity was $151.1 million.
- Common dividends declared were $0.35 per share for Q3 and $0.85 per share for the first nine months; the Series A preferred stock carries a 9% dividend.
Changes, capital and portfolio
- Compared with Q3 2017, Q3 2018 revenue increased to $3.9 million from $1.6 million, and common-stockholder earnings rose to $1.5 million from $0.3 million. Nine-month results moved from a net loss attributable to common stockholders to $3.3 million of income.
- General and administrative expense increased year over year in Q3, principally due to compensation, public-company and travel costs. Depreciation increased with property acquisitions and funded improvements. Higher interest income reflected larger interest-bearing balances and rates.
- A January 2018 common-stock offering generated approximately $79.3 million net proceeds. After quarter-end, an October offering generated approximately $113.9 million net proceeds. At September 30, the portfolio comprised nine properties, all leased, across seven states; certain properties were under development.
- Future contractual minimum rent was reported as $360.5 million, including $272.2 million thereafter. These contractual amounts are not a guarantee of collection.
Outlook, risks and unusual items
- No specific earnings or acquisition guidance was provided. Management said it expects to fund investment, dividends and operations through cash on hand, operating cash flow and equity or debt offerings, and considered available liquidity adequate, while cautioning that capital may not be available on acceptable terms.
- Management recognizes lease revenue on a cash basis because of tenant operating histories and uncertainty in cannabis regulation. Tenant concentration is material: three tenants generated 71% of Q3 rental revenue; the largest alone generated 36%.
- Key risks include cannabis remaining illegal under federal law, uncertainty about federal enforcement and the expiration/renewal of congressional protections, potential additional exposure if tenants undertake adult-use operations, tenant concentration, regulatory change, competition for investments and access to capital.
- Commitments included approximately $4.4 million for tenant improvements, $9.9 million for construction funding and $1.0 million for Michigan development milestones. The company reported no material pending litigation, no recognized property impairment and no off-balance-sheet arrangements.
- After quarter-end, the company acquired a Colorado property for approximately $11.3 million and entered a long-term triple-net lease. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Tenant rent-paying capacity and the effect of federal and state cannabis-law developments on tenants, leases and property values.
- Tenant concentration and collectability, particularly the New York tenant’s contribution to rental revenue.
- Funding, completion and rent commencement for development projects and outstanding improvement commitments.
- Use of offering proceeds, future equity issuance and the board’s discretion over dividend levels.
- Portfolio size disclosure: the filing gives approximately 894,000 rentable square feet in one overview passage and approximately 875,000 elsewhere; confirm the intended figure.