Can innovative industrial real estate survive the rest of 2022? – The colorful fool | Vette Leader

Innovative industrial properties (IIPR 2.15%), a real estate investment trust (REIT) serving the regulated cannabis industry, posted notable earnings for the second quarter of 2022. Meanwhile, it raised funds through a sale of common stock in the spring, which helped keep its debt low while continuing to grow the company. But it’s already spent some of it, has big debt maturing in 2026, had just defaulted on a lease obligation, and then there’s that ubiquitous state and federal regulatory delay. All of which leaves investors with the same question: Will IIP’s recent investments pay off in tough economic times?

The top and bottom lines increased in the second quarter

IIP’s total revenue increased 9.3% sequentially and 44% year-on-year to $70.5 million, driven by new property acquisitions and leases combined with rent increases. The company has 110 properties across the country, 80% of which are attributable to Multi-State Operators (MSOs). Net income grew 98% sequentially to $40.2 million with a 57% net income margin, a remarkable number given that this is the money left over after IIP pays its bills. One thing it did with those funds on July 15 was its shareholders, who through June 30 had invested a dividend of $1.75 per share, or $7.00 for an annual dividend payment.

Finally, in its most recent investor call, it said it has 12% debt to total gross assets, with total gross assets of about $2.5 billion, for a total of about $16.7 million in annual fixed cash interest obligations. Fortunately for IIP, the majority of its $300 million debt — excluding $6.5 million in senior exchangeable notes — is not due until 2026.

Declining cash levels prompted the company to raise money

IIP’s cash on hand steadily declined throughout 2021, falling from $156 million in the second quarter of 2021 to just over $43 million, a 72% decrease, by the end of the year, leaving it with no choice but to than borrow more or sell stocks to replenish his bank vault. On April 5, when the stock was trading at $205 per share, the Company initiated an underwritten offering of approximately 1.5 million shares at $190 per share for total net proceeds of approximately $330.9 million. Not too shabby for only 7% stock dilution.

Since April, the stock’s value has fallen 55% — part of which is due to a major tenant default — to just over $91 a share as of the writing of this article, certainly investors weren’t pleased. IIP says they will use the money to invest in specialty industrial real estate used in the cannabis industry and for corporate spending, a promise they’ve already delivered on, leaving them with just $45 million by the end of Q2 2022 – Have dollars in the bank.

The money was quickly invested, but will it work?

Backed by its stock sale, Innovative Industrial Properties wasted no time in purchasing four new facilities in Arizona (adult use and medical), Maryland (small medical with an adult use initiative on November’s vote), Massachusetts (adult use and medicine), and Texas (very limited medical). Five rental adjustments to fund facilities in Illinois, Michigan, New York and Pennsylvania (all medical and adult use except Pennsylvania which is medical only and two or more years away from adult use), the new investments and facilities represent a represents a $239.4 million investment for the company.

These investments can help IIP build new relationships and strengthen relationships with large companies such as curaleaf (CURLF 1.24%), Industries with a green thumb (GTBIF 2.50%), PharmaCann and Sozo Health. This is good news for the company. Unfortunately, not all news was good for IIP in the last quarter.

One of its tenants, Kings Garden, defaulted on its $2.2 million monthly rent and management fees for its six properties for the month of July. However, if the problem stretches over a year, it could result in a loss of over $26 million. This scenario is still playing out as Kings Garden and IIP work on a possible new agreement. The company said the outage would account for 8% of total sales and 7.4% of capital investments. Management goes on to explain that the highest risk one of its tenants is exposing the company to is 14%, trying to reassure investors that it is protected from the consequences of another potential – client default.

IIP’s financials appear to be in good shape for the remainder of 2022 and with its new partners comprised of some of the country’s largest MSOs such as Green Thumb and Curaleaf, the company is poised to leverage these new deals to to begin paying off his 2026 debt and increasing his cash in the bank. However, IIP can still be vulnerable if more tenants, 90% of which are manufacturing/processing facilities and cost the most to manage, default on their obligations. And as the cannabis industry tumbles from its 2020 peak, state adult-use guidelines may falter, states like Pennsylvania and Maryland drag their feet toward adult use, and just the general uncertainty surrounding cannabis production future failures plausible.

IIP’s balance in the bank is a metric to watch for the next two quarters, as a sustained decline could indicate more cash needs to be raised. Despite issues with one customer default, IIP’s relatively lower valuation and its relationship with some large MSOs could make it a buy for investors who believe the new investments will develop and who have low volatility in their portfolio due to the ongoing economic problems do not mind unfold. But for everyone else, the jury is still out.

Lukas Barfield has no position in the stocks mentioned. The Motley Fool has positions in and recommends Green Thumb Industries and Innovative Industrial Properties. The Motley Fool has a disclosure policy.

Leave a Comment