Innovative Industrial Properties (IIPR 4.75%), a real estate investment trust (REIT) focused on the U.S. cannabis sector, reported strong fourth-quarter 2021 results late last month.
In the fourth quarter, revenue soared 59% year over year to $58.9 million, driven primarily by the acquisition and leasing of new properties, along with contractual rental increases at certain properties. As of Feb. 23, the date of the earnings release, IIP (as the company is sometimes called) owned 105 properties in 19 states where marijuana for medical use is legal.
The quarter's earnings per share jumped 25% to $1.14, and adjusted funds from operations (FFO) -- a key profitability metric for REITs -- surged 42% to $1.85 per share.
Despite the company's continued strong financial performance, in 2022, the stock was down 22.2% through March 18, while the S&P 500 and Nasdaq Composite indexes (including dividends) were underwater by 6.1% and 11.1%, respectively. Growth stocks are interest-rate sensitive, so they've been hit particularly hard over the last several months because of the string of Federal Reserve interest rate increases that likely loom on the horizon. (This year's first increase -- for 0.25% -- occurred last week.)
The stock remains a huge winner, however, for full-year periods of two years or more. Over the last three years, it's returned 162%, compared with the broader market's 66% return over that period.
Earnings releases tell only part of the story. Here are three key things you should know from Innovative Industrial Properties' fourth-quarter earnings call.
Image source: Getty Images.
U.S. legal marijuana industry growth remained robust in 2021
From CEO Paul Smithers' remarks:
[T]he cannabis industry continued its strong growth trajectory in 2021, after having exhibited a resiliency and strength that was truly unique versus other industry categories. While there has been some offsetting, slowing of the industry's sales growth due to the feeding of multiple rounds of fiscal stimulus, and the general loosening of pandemic-related restrictions, annual U.S. legal cannabis sales are still estimated to have grown to $25 billion in 2021, up from a tremendous year in 2020, at about $20 billion.
Management's estimate of the U.S. legal marijuana industry's revenue increasing to about $25 billion in 2022 from about $20 billion in 2021 equates to annual revenue growth of about 25%. Strong industry growth has been providing a brisk tailwind to IIP's business.
At another point on the earnings call, executive chairman Alan Gold said that the U.S. legal cannabis space's revenue grew 50%-plus in 2020. The slowdown in annual growth from 2020 to 2021 is no reason for concern. Growth will be faster in some years than others depending on several factors, such as the number of new states legalizing marijuana for medical and recreational use. Moreover, the pandemic skewed growth dynamics.
A strong balance sheet
From chief financial officer Catherine Hastings' remarks:
We believe we continue to have one of the strongest balance sheets in the REIT industry. ... [Our balance sheet has] only 15% debt to total growth assets. We have a portfolio of strong cash flows and are growing our AFFO 78% year over year. [The 78% refers to adjusted FFO growth for full-year 2021.]
There was a lot of talk from Hastings and Gold about the company's balance sheet. This is an important topic for investors in all companies, but most especially in ones that are rapidly growing and pay a dividend. Indeed, many investors buy REITS for their dividends. On that note, IIP stock is currently yielding about 3.4%.
The company's strong balance sheet provides it with many options -- in both the equity and debt markets -- to raise funds to continue to help fuel its growth. Moreover, it also means IIP can "continue to be strategic as to when we want to raise additional capital," as Hastings said.
Portfolio diversification by tenant and state
From remarks by Ben Regin, vice president for investments:
As we have grown, we've continually diversified our portfolio, both in terms of geographic and tenant concentration. And as we stand today, no state and not one of our 27 tenants represents more than 15% of our total committed investments.
IIP doesn't have many of its eggs in one basket. Right now, if the company lost one tenant, the worse-case scenario would be that it would lose 15% of its revenue. That said, 15% is still a fairly high concentration, so hopefully this number will come down, at least a little.
This topic raises the question: What are IIP's largest tenants? Its top 10 tenants are: 1. PharmaCann, 2. Parallel, 3. Ascend Wellness Holdings, 4. Columbia Care, 5. Kings Garden, 6. Trulieve Cannabis, 7. Green Thumb Industries, 8. Cresco Labs, 9. Holistic Industries, and 10. Curaleaf Holdings. (The boldfaced companies are publicly traded.)
