Real Estate Investment Trust IIP's $310 Million Revenues and Cannabis Sector Growth
2024-02-28
Innovative Industrial Properties (IIP), a prominent real estate investment trust (REIT) specializing in the cannabis sector, conducted its earnings call to review its financial performance and offer operational updates. The call was attended by key executives, including Alan Gold (Executive Chairman), Paul Smithers (President and CEO), David Smith (CFO), Catherine Hastings (COO), and Ben Regin (CIO).
During the call, the company discussed its financial results, highlighting total revenues of $310 million and adjusted funds from operations (AFFO) of $256 million in 2023. It was noted that the company achieved annual AFFO per share growth of 7% and committed capital amounting to $119.5 million during the year. Moreover, IIP executed new leases and letters of intent (LOIs) for five properties, representing over $140 million of invested capital. The company also bolstered its liquidity position and balance sheet by finalizing a new $45 million revolving credit facility.
The call also addressed the company's dividend performance, with IIP consistently increasing its annual dividends declared each year since its establishment in 2016. The most recent dividend declared in Q4 stood at $1.82 per share, aligning with the board's target dividend payout range of 75% to 85% of AFFO. In total, $7.22 of common stock dividends were declared throughout 2023.
Furthermore, the call delved into key aspects of the company's balance sheet and financial standing. IIP maintains a conservative and flexible balance sheet, boasting a 12% debt to total gross assets ratio. By the end of the fourth quarter, the company held over $175 million in total liquidity, encompassing cash, short-term investments, and availability under the revolving credit facility.
In terms of market developments within the cannabis industry, IIP highlighted the industry's growth in the US, with BDSA projecting a 10% increase in cannabis sales for 2024. The company also discussed the potential impact of rescheduling cannabis from Schedule 1 to Schedule 3 under the Controlled Substance Act, which could alleviate the hefty 280e federal taxes imposed on regulated cannabis operators.
The call also touched upon specific market updates, such as the situation in New York, where BDSA estimates that illicit competition drives over three-quarters of total sales. The tightening financial conditions affecting capital availability for the cannabis industry were acknowledged. The potential positive impact of rescheduling cannabis to Schedule III by the DEA, which could reduce the tax burden on regulated operators by $700 million annually, was highlighted.
Updates were provided on specific properties leased or previously leased to Parallel, Green Peak, and Kings Garden. It was mentioned that Green Peak entered receivership, leading to the company regaining possession of certain properties. Legal actions were initiated against Parallel and Kings Garden for possession and damages, resulting in the regaining of possession in Texas and Pennsylvania.
The call emphasized the company's leasing progress for vacant and under-development assets, as highlighted by the Chief Investment Officer. The company repossessed the Summit property in Michigan and executed a lease, with redevelopment slated for completion in Q1. Lease amendments with Goodness Growth and PharmaCann in New York were also mentioned, providing additional funding for expansion.
IIP's portfolio comprises 108 properties across 19 states, with 103 properties included in the operating portfolio. At year-end, the operating portfolio boasted a 96% lease rate. The company's tenant roster is well diversified, with no single tenant representing more than 16% of annualized base rent and no state accounting for more than 15% of annualized base rent.
The call also covered the company's financial metrics, encompassing rent collection, total revenue, AFFO, and dividends. In the fourth quarter of 2023, the company reported total revenue of $79 million and collected $700,000 of the $1.7 million due from Parallel, impacting Q4 rent collection statistics. Throughout 2023, 98% of contractual rent was collected on the operating portfolio. The AFFO for Q4 stood at $64 million or $2.28 per share. The quarterly dividend paid per share to common stockholders in January amounted to $1.82, with a payout ratio of 80% relative to AFFO. In Q4 of 2023, $21 million was allocated for building improvements and construction activities.
The company's credit metrics were discussed, with IIP maintaining a debt-to-gross assets ratio of less than 12% and a debt service coverage ratio exceeding 16 times. By the end of the fourth quarter, the company held over $175 million in total liquidity, comprising cash, short-term investments, and availability under the revolving credit facility. Additional liquidity was generated by utilizing their ATM program on a limited basis, issuing 101,000 shares of common stock for $9.6 million in net proceeds.
The call also outlined the company's investment approach for 2024, characterized by a cautious and opportunistic strategy akin to 2023. The Chief Investment Officer highlighted attractive new opportunities in the pipeline for revenue growth, including leasing activities in the development and operating portfolios. The market in New York was viewed optimistically, with incremental investments made in the state. Tenant partners were reported to be concentrating on enhancing profitability and margins amidst price compression in certain markets.
In conclusion, the earnings call provided valuable insights into IIP's financial performance, dividend consistency, balance sheet strength, market dynamics, property updates, and future growth prospects. The company remains optimistic about the cannabis industry's trajectory and its strategic positioning within it, focusing on prudent investments, leasing initiatives, and delivering value to its shareholders.