Innovative Industrial Properties, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed February 24, 2022. The filing reports annual results and includes quarterly data for Q4.
Business context
IIP is an internally managed REIT that acquires specialized industrial properties and leases them, generally on a triple-net basis, to state-licensed cannabis operators. At year-end, it owned 103 properties across 19 states, totaling approximately 7.7 million rentable square feet, including 2.5 million square feet under development or redevelopment. Weighted-average remaining lease term was 16.6 years. The company reported acquiring 37 new properties during 2021.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Rental revenue, including tenant reimbursements | $204.6 million | $116.9 million | 75% |
| Income from operations | $135.4 million | $69.7 million | $65.6 million increase |
| Net income attributable to common stockholders | $112.6 million | $64.4 million | 75% |
| Diluted GAAP earnings per common share | $4.55 | $3.27 | 39% |
| AFFO | $175.0 million | $98.1 million | 78% |
| Diluted AFFO per common share | $6.66 | $5.01 | 33% |
| Common dividends declared per share | $5.72 | $4.47 | 28% |
Q4 2021 net income attributable to common stockholders was $28.3 million and diluted AFFO per share was $1.85. Operating cash flow was $188.7 million, versus $110.8 million in 2020. Investing activities used $384.1 million; financing activities provided $155.8 million. Year-end cash and cash equivalents were $81.1 million, restricted cash $5.3 million, and short-term investments $324.9 million.
Total assets were $2.085 billion and total liabilities were $472.9 million. Year-end debt comprised $300.0 million principal of 5.50% senior notes due 2026 and $33.4 million of 3.75% exchangeable notes due 2024. No debt principal was due in 2022 or 2023. Annual fixed cash interest obligations were approximately $17.8 million. Management stated the company was in compliance with the notes’ covenants and believed liquidity and capital sources were adequate.
Material changes and unusual items
- Revenue growth reflected acquisitions, lease amendments and rent increases. The 20 properties acquired in 2020 contributed $67.8 million of 2021 rental revenue, compared with $25.6 million in 2020; properties acquired during 2021 contributed $18.6 million.
- General and administrative expense rose 62% to $23.0 million, primarily from higher employee compensation, additional hires, and increased public-company, travel and occupancy costs. Stock-based compensation was $8.6 million, up from $3.3 million.
- Interest expense increased to $18.1 million, principally following issuance of the 2026 notes. The December exchange of $110.4 million principal of exchangeable notes for 1,684,237 common shares and approximately $2.3 million cash reduced remaining exchangeable-note principal to $33.4 million and generated a $3.7 million induced-exchange loss.
- In 2021, the company issued $300 million of 2026 notes and received an investment-grade rating. It paid approximately $132.3 million in common and preferred dividends. Common shares outstanding increased to 25.6 million from 23.9 million at year-end 2020.
- In 2020, three tenants received temporary rent and property-management-fee deferrals; the company reported no additional deferrals through year-end 2021. It records lease revenue on a cash basis because of tenant collectability uncertainty and cannabis-sector regulatory risk.
Outlook, risks and contingencies
The filing provides no formal earnings or acquisition guidance. Contractual minimum rent under operating leases was $258.7 million for 2022, rising to $297.6 million in 2026; these contractual amounts are not company guidance and depend on tenant performance and lease terms. The company expects to fund liquidity needs through operating cash flow and equity or debt financing, but cautions that capital-market access on acceptable terms is not assured. It had approximately $269.8 million of outstanding improvement-allowance commitments, a $5.6 million remaining construction-loan commitment, and a possible additional $55.0 million funding under a Pennsylvania lease if the tenant elects it.
Risks emphasized include cannabis’s continuing illegality under U.S. federal law; potential enforcement, forfeiture and banking constraints; tenant defaults and limited tenant operating histories; tenant, industry and geographic concentration; changing state laws and licensing; refinancing and capital-access risk; development delays and costs; environmental and property-specific liabilities; and REIT qualification and tax risks. The five largest tenants generated 47% of rental revenue, with the largest contributing 12%. Pennsylvania represented 15.9% of rental revenue and Illinois 14.1%.
Management reported no material adverse COVID-19 impact on 2021 results, while noting future effects remained uncertain. No impairment losses were recorded in 2021 or 2020. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The company reported no pending or threatened litigation expected to have a material adverse effect.
Most important facts for investors to verify
- Tenant rent-payment capacity, collections and the proportion of rent supported by operating cash flow rather than asset-sale proceeds or other cash on hand.
- Exposure to the largest tenants and states, including any tenant consolidation, credit deterioration, license issues or lease amendments.
- Progress, costs and timing for properties under development or redevelopment, and funding requests against the improvement-allowance commitments.
- Federal cannabis-law and banking developments, and their potential effect on tenants, property values, financing and REIT tax status.
- Dividend coverage and funding sources, alongside debt covenants, the 2024 and 2026 maturities, and the potential dilution from exchangeable notes and future equity issuance.