Innovative Industrial Properties, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The company is a REIT that owns specialized properties leased primarily on a triple-net basis to state-licensed cannabis operators.
Business context and portfolio
- At quarter-end, the company owned 68 properties in 18 states; all were reported 100% leased. The portfolio comprised approximately 5.9 million rentable square feet, including approximately 2.1 million square feet under development or redevelopment. Weighted-average remaining lease term was approximately 16.7 years.
- During the quarter, it acquired three properties for approximately $28.6 million, and capitalized approximately $93.7 million and funded approximately $64.2 million for tenant improvements and construction.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Rental revenue | $42.9 million | $21.1 million; up 103% |
| Operating income | $27.7 million | $12.3 million |
| Net income | $25.9 million | $11.9 million |
| Net income attributable to common stockholders | $25.6 million; $1.07 basic and $1.05 diluted per share | $11.5 million; $0.72 basic and diluted per share |
| FFO attributable to common stockholders, diluted | $36.3 million; $1.39 per share | $16.4 million; $1.03 per share |
| AFFO attributable to common stockholders | $38.4 million; $1.47 diluted per share | $17.8 million; $1.12 diluted per share |
| Operating cash flow | $42.6 million | $19.6 million |
- Revenue growth mainly reflected properties acquired in prior periods, lease escalations and rent changes associated with increased tenant-improvement allowances; current-quarter acquisitions contributed approximately $0.9 million.
- General and administrative expense increased to $5.6 million from $3.3 million, primarily due to compensation, hiring and public-company costs. Depreciation rose to $8.8 million from $4.9 million as properties and improvements entered service. Interest and other income fell to $0.1 million from $1.4 million, largely due to lower investment yields.
- At March 31, total assets were $1.798 billion, including net real estate of $1.134 billion, cash and cash equivalents of $122.1 million, and investments of $539.3 million. Total liabilities were $280.3 million and stockholders’ equity was $1.518 billion.
- Debt consisted of $143.75 million principal amount of 3.75% exchangeable senior notes due February 2024, carried at $137.2 million net of discount and issuance costs. The notes are unsecured and may be exchanged for cash, shares or a combination, at the partnership’s option. Their reported fair value was approximately $391.7 million.
- Quarter-end cash, cash equivalents and restricted cash decreased $3.9 million to $122.1 million. Investing activities used $13.0 million; financing activities used $33.4 million, including approximately $30.1 million of common and preferred dividends. Operating cash flow included a $7.5 million increase in rent received in advance and tenant security deposits.
Material changes, outlook and risks
- Common dividends declared were $1.32 per share for the quarter; Series A preferred dividends were $0.5625 per share. The company must distribute at least 90% of taxable income to maintain REIT qualification and says dividend capacity depends on cash generation, debt service and accretive investment opportunities.
- No specific earnings, revenue or investment guidance was provided. Management said available cash and short-term investments, operating cash flow and potential equity or debt issuance were expected to meet liquidity needs, while noting funding sources may not be available on acceptable terms.
- As of March 31, the company had approximately $263.9 million of tenant-improvement allowance commitments. Contractual minimum rent under operating leases totaled approximately $4.251 billion over future periods; this is contractual rent, not a forecast of collections.
- Subsequent to quarter-end, the company acquired a Michigan property for approximately $15.6 million and agreed to reimburse up to approximately $14.4 million in tenant improvements. In April, it also increased a Pennsylvania tenant’s improvement allowance by $30 million, to approximately $40 million, with a corresponding base-rent adjustment.
- Key risks include cannabis remaining illegal under U.S. federal law, tenant credit and industry concentration, competition for properties and alternative sources of tenant financing, regulatory changes, and potential effects of COVID-19. The five largest tenants represented 47% of Q1 rental revenue; PharmaCann alone represented 13%. Management reported no material adverse COVID-19 impact on results or financial position as of quarter-end, but warned a prolonged outbreak could have adverse effects.
- The company records property rental revenue on a cash basis because of regulatory uncertainty and uncertainty about tenant collectability. No impairment losses were recognized in either comparative quarter. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Tenant rent-paying capacity, lease collections and concentration, including the status of prior COVID-related deferrals and security deposits.
- Timing and funding of the substantial tenant-improvement commitments, and whether rent adjustments adequately compensate for the additional investment.
- Liquidity available after dividends and planned property investment, and the terms and dilution implications of any future capital raising.
- Exchangeable-note exchange or repayment exposure at maturity, given the gap between carrying value and disclosed fair value.
- Whether federal or state cannabis regulation, market competition or tenant access to financing changes the company’s acquisition opportunities and lease economics.