Innovative Industrial Properties (NYSE:IIPR), a cannabis industry-focused real estate investment trust (REIT), reported first-quarter 2020 results after the market closed on Wednesday.  

Shares fell 5.5% in after-hours trading on Wednesday. We can attribute the market's initial reaction to the company's revenue and earnings missing Wall Street's consensus estimates. This after-hours performance doesn't bode well for Thursday's performance, but the wild card is the earnings call. It's scheduled for 1 p.m. EDT on Thursday. The information management shares on the call could affect the stock either positively or negatively.  

Here's how the quarter worked out for Innovative Industrial Properties (also known as IIP) and its investors. 

Innovative Industrial Properties' key numbers

Metric

Q1 2020

Q1 2019

Change

Revenue 

$21.1 million $6.8 million 210%

Operating income

$12.3 million  $3.4 million 262%

Net income

$11.5 million $3.3 million  249%

Earnings per share (EPS)

$0.72 $0.33 118%

Adjusted funds from operations (AFFO)*

$17.8 million $5.3 million 236%

AFFO per share

$1.12 $0.54 107%

Data source: Innovative Industrial Properties. *Adjusted funds from operations (AFFO) is a closely watched metric for REITs, as it's the main driver of dividend changes. 

For the quarter, Wall Street was looking for EPS of $0.75 on revenue of $21.4 million, so IIP fell a little short of both expectations.

Revenue growth continues to be driven largely by the acquisition of new properties, with contractual rental increases at some properties also contributing.

As for its balance sheet, the company ended the period with $108.3 million in cash and cash equivalents and $272.9 million in short-term investments, totaling $381.2 million.

For context, in the fourth quarter of 2019, revenue jumped 269% year over year to $17.7 million. EPS soared 225% to $0.78, and adjusted FFO per share surged 211% to $1.18.  

Marijuana leaf in vertical position with rainbow colors in backgroud.

Image source: Getty Images.

What happened with Innovative Industrial Properties in the quarter (and since the quarter ended through May 6)?

  • It paid a quarterly dividend of $1.00 per share on April 15 to stockholders of record as of March 31, representing an increase of about 122% from the year-ago period.
  • During the quarter, IIP acquired seven properties -- two in Ohio, two in Colorado (both retail/dispensaries), and one each in Illinois, Virginia, and Florida -- and it acquired an additional two properties after the end of the quarter through May 6, one each in Massachusetts and Michigan. This marks a considerable slowdown in acquisition activity. In the prior quarter, the company bought 15 properties (though six were dispensaries, which are smaller transactions than industrial properties), and added five more properties after that quarter ended through the date of that earnings release. 
  • In January, the company "completed an underwritten public offering of 3,412,969 shares of common stock, including the exercise in full of the underwriters' option to purchase an additional 445,170 shares, resulting in net proceeds of approximately $239.6 million," according to the earnings release.
  • In January, it "issued shares of common stock for net proceeds of approximately $78.2 million under an 'at-the-market' equity offering program."

Here's the current snapshot of Innovative Industrial Properties' portfolio, taken from the earnings release:

As of May 6, IIP owned 55 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Nevada, North Dakota, Ohio, Pennsylvania and Virginia [15 states -- no new states since last earnings release], totaling approximately 4.1 million rentable square feet (including approximately 1.3 million rentable square feet under development/redevelopment), which were 99.1% leased (based on square footage) with a weighted-average remaining lease term of approximately 15.9 years. 

Coronavirus pandemic effects 

The company had in-depth discussions with each of its tenants in March and April about how they're being financially affected by the COVID-19 pandemic. Here's what the company said in the earnings release about the topic:

In light of those discussions, IIP worked with three of its 21 tenants to provide temporary rent deferrals, structured to apply a portion of the security deposit IIP holds under each lease to pay April rent in full, defer rent for May and June in full, and provide for the pro rata repayment of the security deposit and deferred rent over an 18 month time period starting July 1.

Pursuant to these amendments, a total of $743,000 of security deposits that IIP holds in cash were applied to the payment of rent for April; and a total of approximately $1.5 million in rent was deferred for May and June. The total of this amount, $2.3 million, represents approximately 3% of IIP's total revenues as reported for the three months ended March 31, 2020, annualized.

What management had to say

Here's part of what Executive Chairman Alan Gold had to say in the earnings release:

One of the pillars of our business strategy has consistently been a conservative, flexible balance sheet, and we believe we are exceptionally well positioned to not only weather this unprecedented health crisis and economic disruption, but to continue to make real estate investments on a long-term basis with best-in-class tenant operators.

Looking ahead

Despite the challenging environment, IIP still turned in a robust quarter. 

Many investors were likely disappointed at IIP's slowdown in acquisition activity and that it missed Wall Street's expectations on both the top and bottom lines. The slowdown can easily be explained by the pandemic, which has been interrupting the usual pace of many business transactions and activities. The revenue and earnings misses were relatively small.

The company doesn't provided official guidance. But on the earnings call, management will probably provide a general outlook. For the second quarter, Wall Street is modeling for EPS of $0.87 on revenue of $25.6 million, representing growth of 190% and 197%, respectively, year over year.