Innovative Industrial Properties, Inc. (IIPR) is the first and only real estate investment trust (REIT) listed on the New York Stock Exchange focused solely on the regulated U.S. cannabis industry. The company has carved out a unique niche by acquiring and leasing specialized industrial properties to licensed, experienced cannabis operators. Innovative Industrial Properties’ strategic positioning and disciplined approach have enabled it to deliver consistent returns to shareholders even in the face of broader industry headwinds.
Business Overview and History
Innovative Industrial Properties was incorporated in Maryland on June 15, 2016, with the goal of providing real estate capital solutions to the burgeoning legal cannabis market. The company’s strategy involves acquiring properties through sale-leaseback transactions and leasing them back to experienced, state-licensed cannabis operators on triple-net leases. This model allows Innovative Industrial Properties to generate stable rental income while freeing up capital for its tenants to invest in their core cannabis cultivation and production operations.
IIPR conducts its business through a traditional umbrella partnership real estate investment trust (UPREIT) structure, with the company as the sole general partner of its operating partnership and owning 100% of the limited partnership interests. In its early years, IIPR grew its portfolio through sale-leaseback transactions and third-party purchases of properties leased to regulated cannabis operators.
By the end of 2020, the company had significantly expanded its portfolio, owning 69 properties across 16 states and investing over $1 billion in the aggregate. At that time, IIPR’s portfolio was 100% leased with a weighted-average remaining lease term of 16.7 years.
The company faced some challenges in 2021 and 2022 as the regulated cannabis industry experienced headwinds, including increased competition from the illicit market, financial pressures on operators, and delays in obtaining state and local approvals. This led to IIPR taking possession of a few properties and working with certain tenants on lease amendments. However, the company was able to re-lease most of these properties to new qualified operators.
As of September 30, 2024, Innovative Industrial Properties has continued to scale its portfolio, now comprising 108 properties across 19 states. The company’s portfolio now includes over 9 million rentable square feet, including 618,000 square feet of properties currently under development or redevelopment. Innovative Industrial Properties’ weighted average remaining lease term stands at an impressive 14 years, providing long-term cash flow visibility.
Financials and Operational Highlights
Innovative Industrial Properties’ financial performance has been a testament to the strength of its business model. For the nine months ended September 30, 2024, the company reported total revenues of $231.8 million, a 0.6% increase compared to the same period in 2023. Net income attributable to common stockholders came in at $120.4 million, or $4.16 per diluted share.
The REIT’s adjusted funds from operations (AFFO), a key metric for REITs, reached $192.8 million, or $6.75 per diluted share, for the nine-month period. This represents a 0.3% increase year-over-year, showcasing Innovative Industrial Properties’ ability to generate consistent cash flows.
For the most recent fiscal year (2023), IIPR reported revenue of $309.51 million, net income of $165.59 million, and operating cash flow (OCF) of $255.54 million. Free cash flow (FCF) for 2023 was also $255.54 million.
In the most recent quarter (Q3 2024), IIPR generated revenue of $76.53 million, net income of $39.65 million, OCF of $65.12 million, and FCF of $102.11 million. However, the company experienced a year-over-year revenue decline of 1.65% in Q3 2024. This decline was primarily driven by a $3 million loss in revenue for properties regained possession of, $1.3 million in rent received but not recognized due to lease reclassifications, and $1.3 million in contractually due rent and fees that were not collected.
Liquidity
Innovative Industrial Properties maintains a rock-solid balance sheet, with a debt-to-total-gross-assets ratio of just 11% as of September 30, 2024. The company’s interest coverage ratio stood at a robust 17 times, underscoring its strong solvency and financial flexibility. As of the same date, Innovative Industrial Properties had over $220 million in total available liquidity, including $147.1 million in cash and cash equivalents and $87.5 million in undrawn capacity on its revolving credit facility.
The company’s debt-to-equity ratio is 0.15, and its current and quick ratios both stand at 1.05. IIPR recently expanded its revolving credit facility to $87.5 million, all of which was undrawn as of November 2024, providing additional financial flexibility.
Navigating Industry Challenges
The regulated cannabis industry has faced its fair share of headwinds in recent years, including ongoing federal-state legal conflicts, tax and regulatory uncertainties, and persistent competition from the illicit market. Innovative Industrial Properties has demonstrated its resilience by working closely with its tenants to navigate these challenges.
For example, the company worked constructively with tenant ForeFront Ventures to address construction delays at its Illinois facility, ultimately reaching an amicable agreement that included rent concessions. Similarly, Innovative Industrial Properties regained possession of a property in Massachusetts after the previous tenant, Temescal Wellness, encountered difficulties, and the REIT is now seeking to re-lease the asset to another qualified cannabis operator.
Despite these occasional tenant-specific challenges, Innovative Industrial Properties’ portfolio has remained largely stable, with 95.7% of its operating properties leased as of September 30, 2024. The company’s diversified tenant base, which includes many of the largest and most experienced multi-state cannabis operators, has helped mitigate risk and contributed to its consistent performance.
It’s worth noting that there is an ongoing federal securities class action lawsuit filed against the company and certain officers in April 2022, alleging false and misleading statements. The lawsuit is still ongoing, and its potential impact on the company remains to be seen.
Looking Ahead
As the regulated cannabis industry continues to evolve, Innovative Industrial Properties remains cautiously optimistic about its growth prospects. The company is closely monitoring developments at the federal level, including the potential rescheduling of cannabis from Schedule I to Schedule III, which could unlock new avenues for expansion and access to capital.
Innovative Industrial Properties is also selectively pursuing new investment opportunities, focusing on high-quality assets and experienced tenants. The REIT’s strong balance sheet and ample liquidity provide it with the financial flexibility to capitalize on strategic acquisitions when the right opportunities arise.
The company expects the re-leasing activity achieved in 2024 to contribute meaningfully to long-term earnings, though the timeline to rent stabilization may differ between properties due to state/local approvals, regulatory requirements, and some rent abatement negotiations. IIPR is closely monitoring the progress of tenant ForeFront and expects rent collection from ForeFront to be well below contractually due for Q4 2024.
The broader regulated cannabis industry is expected to grow at a compound annual growth rate (CAGR) of over 9% from 2023 to 2028, which could provide tailwinds for IIPR’s business in the coming years.
Conclusion
Innovative Industrial Properties has carved out a unique position in the regulated cannabis industry, leveraging its specialized real estate expertise to provide stable, long-term income to shareholders. Despite the challenges facing the broader cannabis market, the REIT’s disciplined approach, diversified portfolio, and robust financial position have enabled it to deliver consistent returns. As the industry continues to mature, Innovative Industrial Properties is well-positioned to navigate the evolving landscape and capitalize on future growth opportunities.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.