Innovative Industrial Properties (NYSE: IIPR), a real estate investment trust (REIT) focused on the cannabis sector, reported strong fourth-quarter and full-year 2018 results last Wednesday, with its semiannual analyst conference call following on Thursday.
For the quarter, the San Diego-based REIT's revenue jumped 110% to $4.8 million. Operating income surged 215% to $1.8 million, net income rocketed 720% to $2.3 million -- which translated to earnings per share (EPS) soaring 243% to $0.24 -- and adjusted funds from operations (AFFO) leaped 65% to $0.38 per share. AFFO is a key profitability metric for REITs, as it's the main driver of dividend changes.
Earnings releases tell only part of the story. Management's comments during earnings calls can often reveal key insights about a company's prospects and strategy. Here are five things you should know from Innovative Industrial Properties' Q4 earnings call.
Image source: Innovative Industrial Properties.
Profit yield on portfolio
From Executive Chairman Alan Gold's remarks:
Our current blended yield on these properties is 15.1%, with each lease providing minimum annual rental escalations ranging from 3% to 4%, with a weighted-average remaining lease term of over 14 years.
Innovative Industrial's current portfolio yield of 15.1% is strong. With the data that Gold mentioned, along with a strong pipeline of potential acquisitions, the REIT's future looks promising.
The company's portfolio currently includes 13 properties in 11 states, totaling nearly 1.3 million square feet. All are fully leased to licensed medical-use cannabis growers. In 2018 the company acquired six properties in five states in which it previously didn't operate, and it has acquired two properties so far in 2019. The 11 states in which it operates are New York, Massachusetts, California, Illinois, Arizona, Maryland, Michigan, Colorado, Pennsylvania, Ohio, and Minnesota.
Powerful dividend growth
The dividend topic was covered in the company's earnings release and my earnings article, but it's important enough to include here.
As I recently wrote, the REIT "paid a quarterly dividend of $0.35 per share on Jan. 15 to stockholders of record as of Dec. 31, representing an increase of 40% year over year." At Friday's closing price, shares are yielding 2.24%. "On March 12, Innovative Industrial Properties announced its eighth consecutive quarterly dividend of $0.45 per share, which will be paid on April 15 to stockholders of record as of March 29. This dividend represents a 29% increase from IIP's fourth-quarter dividend and an 80% increase from its first-quarter 2018 dividend."
Data by YCharts.
2019's acquisition activity has started off strong
From Gold's remarks:
We see [2018's] momentum continuing in 2019, acquiring our first property in California and executing another transaction with PharmaCann in Ohio. [Chicago-based PharmaCann is in the process of being acquired by Los Angeles-based MedMen Enterprises.]
We have about $47 million of transactions under contract. We have just under $40 million of transactions under letter of intent. We have another $10 million in final negotiation.
The two properties Gold references were acquired this year before March 14, the date of the earnings call. Two acquisitions within the span of a month and a half bodes well for the company's growth in 2019. In fact, Gold has characterized Innovative Industrial Properties' pipeline of potential acquisitions as "extremely strong," which perhaps isn't surprising given the robust growth in the U.S. medical marijuana market. The overall market in existing states is growing, and new states continue to give the green light to cannabis for medical use. Currently, 32 states have legalized medical marijuana.
Entrance into the California market in 2018
From CEO Paul Smithers' remarks about the California market, where the company owns one property purchased earlier this year:
California was the first state to permit the use of cannabis for medicinal purposes ... in 1996. In November 2016, California voters approved the ... sale of cannabis for adult use, with first licenses issued in 2018. With 40 million people, ArcView expects California's regulated cannabis spending to grow to $5.6 billion in 2022, just modestly below the entire estimated 2022 market for all of Canada. [Emphasis mine.]
We are thrilled to finally be in California and to be working with our operator in Sacramento, who is also one of the first operators to receive its permanent adult-use and medical-use cannabis retailer license in the state.
It's obviously a big positive that Innovative Industrial Properties entered the Golden State's cannabis market this year, given the market's huge growth potential. While Canada has recently been getting much press for being the first industrialized county to legalize marijuana, California is arguably the bigger story. At some point in the not-too-distant future, legal cannabis sales in the U.S.'s most populous state are likely going to overtake those in the country to our north.
Tenants are not prohibited by lease to enter their state's recreational marijuana market
From Smithers' remarks:
If our ... growers who maintain [their] medical [marijuana] license choose to enter into the recreational market, there's nothing in our lease that prohibits that.
This one speaks for itself, and is something some investors might have wondered about, with more states legalizing or considering legalizing cannabis for recreational use.
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