Innovative Industrial Properties (NYSE:IIPR), which owns and leases properties to companies involved in the cannabis sector, reported robust fourth-quarter and full-year 2018 results after the market closed on Wednesday. 

The market's reaction was muted, with shares closing essentially unchanged -- down 0.2%, to be exact -- on Thursday. That's probably due to high expectations already being built into the price of the stock, which has returned a whopping 71.3% in 2019 through Thursday, far outpacing the S&P 500's 12.6% return.

Here's how the quarter worked out for the company that's organized as a real estate investment trust (REIT) and its investors.

Innovative Industrial Properties' results: The raw numbers

Metric

Q4 2018 

Q4 2017

Year-Over-Year Change**

Total revenue (rental revenue plus tenant reimbursements)

$4.78 million

$2.28 million

110%

Rental revenue (the important revenue metric)

$4.70 million

$2.22 million 

111% 

Operating income

$1.81 million 

$573,000

215%  

Net income

$2.33 million

$284,000

720%

Earnings per share (EPS)

$0.24

$0.07

243%

Adjusted funds from operations (AFFO)*

$3.63 million 

$817,000

344% 

AFFO per share

$0.38 

$0.23

65%

Data source: Innovative Industrial Properties. *Adjusted funds from operations (AFFO) is a closely watched metric for companies organized as REITs, as it's the main driver of dividend changes. **Percentages calculated using figures from financial statements, not the abbreviated ones listed in table.

In the quarter, Innovative Industrial Properties' (IIP) revenue growth was driven by the acquisition of new properties and the annual increase of base rent for select properties. For some context, last quarter, IIP's revenue, EPS, and AFFO per share increased 152%, 133%, and 81%, respectively, year over year. 

Fourth-quarter revenue slightly beat the $4.6 million that Wall Street was looking for. While EPS fell a bit short of the $0.26 consensus estimate, AFFO per share -- the more important profitability metric for REITs -- edged by the Street's expectation of $0.37.

For full-year 2018, rental revenue jumped 128% year over year to $14.34 million, driven primarily by acquisitions, along with contractual rental increases at some properties. Net income was $5.63 million, or $0.75 per share, compared with a new loss of $395,000, or $0.13 per share, in 2017. AFFO soared 314% to $9.73 million, which translated to AFFO per share doubling to $1.34.

Marijuana plants in a greenhouse with building's supporting structure and fans shown.

Image source: Getty Images.

What happened with Innovative Industrial Properties in the quarter?

  • It 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 Thursday's closing price, shares are yielding 1.96%. 
  • IIP acquired two properties during the quarter and two after the quarter ended through March 13, the date of the earnings release. Leases are triple net, with tenants responsible for paying property taxes, insurance, and maintenance costs. 
  • During the quarter (October), it "acquired a 58,000 square foot cannabis cultivation facility in Colorado for approximately $11.3 million (excluding transaction costs) and entered into a long-term lease with The Green Solution," according to the earnings release.
  • During the quarter (December), IIP "acquired a 75,000 square foot medical-use cannabis cultivation and processing facility in Illinois and entered into a long-term lease with a subsidiary of Ascend Wellness Holdings" for $25 million, excluding transaction costs.
  • After the quarter ended (February), the company "acquired a 43,000 square foot industrial property in California and entered into a long-term lease with an experienced operator, which intends to operate the facility for cannabis cultivation upon completion of redevelopment, with IIP's total investment ... expected to be approximately $11.5 million (excluding transaction costs)."
  • After the quarter ended (March), IIP "acquired a property in Ohio and entered into a long-term lease with a subsidiary of PharmaCann ... for ... facilities that are expected to comprise a total of 58,000 square feet upon completion of development, with IIP's total investment ... expected to be $20.0 million (excluding transaction costs)."  

Big dividend hike just announced

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.

What management had to say

On the semiannual analyst conference call, Innovative Industrial Properties Executive Chairman Alan Gold summed up the company's activity in 2018 and ts current portfolio: 

[W]e acquired six properties in five new states, which included both follow-on transactions with our tenant partners ... and new tenant relationships. We see that momentum continuing in 2019, acquiring our first property in California and executing another transaction with PharmaCann in Ohio. ... 

As of today, we own 13 properties in 11 states, totaling approximately 1,128,000 square feet, which are 100% leased on a long-term basis to high-quality, licensed medical-use cannabis operators. 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. 

Looking ahead

Innovative Industrial Properties doesn't provide guidance. On the earnings call, Gold commented on the company's pipeline, which he views as "extremely strong":

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. We have a very strong and growing pipeline beyond that, with very strong tenants.

In addition to being interested in acquiring assets in the company's existing states, IIP also aims to "penetrate new states, such as Florida," Gold said.