Innovative Industrial Properties, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company was an early-stage REIT-focused real estate business, formed in 2016, acquiring and leasing specialized industrial properties to state-licensed medical-cannabis operators. At quarter-end it owned two properties, in New York and Maryland. Financial amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q3 2017 | Nine months 2017 |
|---|---|---|
| Total revenue | $1.559 | $4.138 |
| Operating income (loss) | $0.295 | $(0.796) |
| Net income (loss) | $0.334 | $(0.679) |
| Net income (loss) per share, basic and diluted | $0.09 | $(0.21) |
| FFO / AFFO | $0.551 / $0.724 | $(0.126) / $1.535 |
| FFO / AFFO per share | $0.16 / $0.21 | $(0.04) / $0.46 basic |
Q3 operating and net margins were approximately 18.9% and 21.4%; nine-month operating and net margins were approximately -19.2% and -16.4%, respectively. These are calculated from reported results. Nine-month results included $1.548 million of non-cash stock-based compensation and $0.113 million of severance expense; AFFO adds these items back to FFO. Management cautions that FFO and AFFO are supplemental measures, not substitutes for GAAP results or operating cash flow.
- Cash flow: Nine-month operating cash flow was $1.496 million; investing cash outflow was $11.196 million, primarily real estate purchases; financing cash outflow was $1.099 million. Cash declined $10.799 million to $22.204 million.
- Balance sheet: September 30 total assets were $70.143 million, including net real estate of $46.592 million. Total liabilities were $10.183 million and stockholders’ equity was $59.960 million. The company reported no debt outstanding.
- Liquidity: Cash and cash equivalents were $22.204 million, of which $12.1 million was in short-term money-market funds and certificates of deposit. The company said cash on hand and operating cash flows, with potential future equity or debt issuance, were expected to meet liquidity needs; availability of capital on acceptable terms was not assured.
- Dividends: The company declared $0.15 per common share for each of Q2 and Q3; the Q3 dividend was payable October 13, 2017. The stated annualized rate was $0.60 per share, but future dividends are at the board’s discretion.
Changes, outlook, and notable items
- Prior comparable operating results were omitted because the company had no significant operations during the comparable 2016 period; management says period-to-period comparison is not meaningful. Active real estate operations began in December 2016.
- Maryland lease rent began after a three-month abatement that expired August 26, 2017. The company paid an additional $3.0 million for development milestones and accrued $5.9 million for tenant improvements at the property; that allowance was funded October 2, after quarter-end. Maryland total investment was approximately $16.9 million excluding transaction costs.
- After quarter-end, the company raised $15.0 million gross from an October 19 offering of 600,000 shares of 9.00% cumulative redeemable preferred stock. Preferred dividends rank senior to common dividends. It also acquired properties in New York (October 23) and Minnesota (November 8), with respective stated initial annual base rents of $660,000 and $600,000 and tenant-improvement commitments of up to $1.0 million each.
- Management expected revenue and expenses to rise as it acquired properties. The company intended to qualify as a REIT beginning with tax year 2017 and stated that it believed liquidity and capital sources were adequate, while acknowledging funding uncertainty. No specific earnings or investment guidance was provided.
- Key risks include cannabis remaining illegal under federal law; reliance on a small number of tenants and properties; tenant ability to pay; regulatory changes; concentration in New York and Maryland; competition for suitable properties; access to capital; and maintaining REIT qualification. The filing reported no material litigation known to management and no impairment losses at quarter-end.
Important facts for investors to verify
- Tenant payment capacity and lease performance, particularly given the portfolio’s concentration in two tenants and the company’s cash-basis rent recognition policy.
- Execution and funding of the Maryland tenant improvements, and whether the property generates rent at the terms disclosed.
- Use of preferred-stock proceeds, the cost and seniority of preferred dividends, and the impact of post-quarter property acquisitions on liquidity and returns.
- Progress toward REIT qualification and developments in federal and state cannabis regulation.
- Whether future acquisitions, financing availability, and common dividends remain consistent with management’s stated plans.