Can innovative industrial properties survive the rest of 2022?
Innovative industrial properties (NYSE: IIPR), a real estate investment trust (REIT) serving the regulated cannabis industry, posted notable gains in the second quarter of 2022. Meanwhile, in the early spring, it raised funds via a sale of common shares , which helped her reduce her debt while continuing to grow the business. But, he’s already spent some of that, has a large debt due in 2026, just defaulted on a lease obligation, and then there’s this pervasive regulatory lag at the state and federal level. All of this leaves investors with the same question: will IIP’s latest investments pay off in these difficult economic times?
The top and bottom lines increased in the second quarter
Total IIP revenue was $70.5 million, up 9.3% sequentially and 44% year-on-year driven by the acquisition and lease of new properties, combined with rent increases. The company owns 110 properties across the country and 80% of those are attributable to multi-state operators (MSOs). Net income increased 98% sequentially to $40.2 million with a net profit margin 57%, a remarkable figure because this is the money left over after the IIP has paid its bills. One thing he did with those funds on July 15 was his shareholders, who had invested as of June 30, a dividend of $1.75 per share, or $7.00 for an annual dividend rate.
Finally, he said in his recent investor call that he had 12% debt to total gross assets, with approximately $2.5 billion in total gross assets, representing a total annual obligation. fixed cash interest of approximately $16.7 million. Luckily for IIP, most of the $300 million in debt — except for $6.5 million in senior exchangeable notes — isn’t due until 2026.
Dwindling cash has prompted the company to raise funds
IIP’s cash has steadily declined throughout 2021, from $156 million in the second quarter of 2021 to just over $43 million, a 72% decline, at year-end and no leaving him with no choice but to borrow more or sell shares to replenish his bank coffers. On April 5, when the stock was trading at $205 per share, the company launched an underwriting offering of approximately 1.5 million shares at $190 apiece, raising approximately $330.9 million. of total net product. Not too shabby a transport for just a 7% stock dilution.
Since April, the stock’s value has fallen 55% – some of that attributable to a major tenant default – to just over $91 per share as of this writing, investors don’t know. were certainly not satisfied. IIP says they will use the money to invest in specialty industrial properties used in the cannabis industry and for business expenses, a promise he has already kept, leaving him with only $45 million in the bank. at the end of the second quarter of 2022.
He quickly invested the money, but will it work?
With its stock sale behind it, Innovative Industrial Properties wasted no time and purchased four new facilities in Arizona (adult and medical use), Maryland (small medical with an adult use initiative on the November ballot ), Massachusetts (medical and adult use), and Texas (very limited medical). Initiate five lease adjustments to fund facility improvements in Illinois, Michigan, New York and Pennsylvania (all medical and adult use, except Pennsylvania, which is medical only and two years or more at adult use), new investments and facility improvements represent a $239.4 million investment for the company.
These investments can help IIP build new relationships and strengthen ties with big companies like curafeuille (OTC: CURVE), Green Thumb Industries (OTC: GTBIF), PharmaCann and Sozo Health. This is good news for the company. Unfortunately, not all news was good last quarter for IPI.
One of its tenants, Kings Garden, defaulted on its $2.2 million one month’s rent and management fees on his six properties for the month of July. But if the problem continues for a year, it could result in a loss of more than $26 million. This storyline is still unfolding as Kings Garden and IIP work on a possible new deal. The company said default would represent 8% of total revenue and 7.4% of capital investments, management further explains that the highest risk any of its tenants exposes the company to is 14%, trying to reassure investors that it is protected from the fallout of another potential default by the tenant.
IIP’s finances appear to be in good shape for the remainder of 2022, and with its new partners consisting of some of the biggest MSOs in the country like Green Thumb and Curaleaf, it is ready to leverage these new contracts to begin repay its 2026 debt and increase its cash in the bank. However, the IIP may still be vulnerable if more tenants, 90% of which are production/processing facilities and the most expensive to run, default. And with the cannabis industry slumping from its 2020 peak, federal adult use policy change potentially stalled, states like Pennsylvania and Maryland dragging their feet toward adult use, and just the uncertainty associated with cannabis production, future defects are plausible.
IIP’s cash in the bank is a metric to watch for the next two quarters, as a continued decline may indicate that it needs to raise more money. Despite the customer default issues, IIP’s relatively lower valuation and its relationship with some large MSOs could make it a buy for investors who think new investments will take shape and aren’t a bit worried about volatility in their portfolio due to ongoing economic problems. unfold. But for everyone else, the jury is still out.
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Lucas Barfield has no position in any of the stocks mentioned. The Motley Fool fills positions and recommends Green Thumb Industries and Innovative Industrial Properties. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.