Innovative Industrial Properties (IIPR +0.63%), a real estate investment trust (REIT) focused on the U.S. cannabis industry, is slated to report its second-quarter 2022 results after the market close on Wednesday, Aug. 3. A conference call with analysts is scheduled for the following day at 1 p.m. ET. (Yes, that unusual time is correct.)
Investors will probably be approaching the report with a mix of optimism and caution. On the positive side, the marijuana company's revenue and profitability growth has been consistently strong since it went public in late 2016.
That said, investors are no doubt concerned about the financial health of the company's tenants. On July 15, Innovative Industrial Properties stock fell 14% after the company disclosed in a filing with the Securities and Exchange Commission (SEC) that one of its top-10 tenants, Kings Garden, defaulted on its July base rent, property management fees, and certain operating expenses. The dollar amount totaled about $2.2 million. Kings Garden leases six properties from IIP (as the company is often called).
One default -- even involving a major tenant -- in and of itself is not a cause for concern. However, it does present two related concerns: First, it's possible that this event could reflect an increasingly challenging operating market for cannabis growers and retailers and, thus, be a harbinger of things to come. Second, it suggests that IIP's underwriting standards might need improvement.
On the earnings call, management will almost surely discuss the financial robustness of the company's portfolio. Investors can also count on a discussion of proposed federal legislation related to marijuana company financing, most notably the CLIMB Act.
Image source: Getty Images.
Innovative Industrial Properties' key numbers
Here are the company's results from the year-ago quarter and Wall Street's estimates to use as benchmarks.
| Metric | Q2 2021 Result | Wall Street's Q2 2022 Consensus Estimate | Wall Street's Projected Change (YOY) |
|---|---|---|---|
| Revenue | $48.9 million | $69.0 million | 41% |
| Earnings per share (EPS) | $1.17 | $1.36 | 16% |
| Adjusted funds from operations (FFO)* | $1.64 | N/A | N/A |
Data sources: Innovative Industrial Properties and Yahoo! Finance. YOY = year over year. *Funds from operations (FFO) is a closely watched metric for companies organized as REITs. It adds depreciation expense back to net income and makes a few other adjustments to net income to reflect a REIT's cash flow.
For context, in the first quarter, IIP posted revenue of $64.5 million, an increase of 50% year over year. EPS rose 26% to $1.32, and adjusted FFO per share jumped 39% to $2.04. Wall Street had been looking for EPS of $1.36 on revenue of $63.3 million, so the company beat the top-line expectation, but fell short on the bottom line.
That said, REIT investors usually care more about the performance of FFO than that of earnings. That's because FFO performance drives changes in a REIT's dividend.
After last quarter's results were released, the company's shares rose in the day's after-hours trading. However, they closed down 5.5% the next day, which was probably largely due to overall market dynamics, as the market performed very poorly that day.
Last quarter's stock movement broke a welcome trend for IIP investors. In the two-day period following the release of the company's results for each of the four quarters of 2021, shares rose in the range of 5.5% to 7.3%.
NYSE: IIPR
Key Data Points
Acquisitions in the second quarter
Unlike for the last five consecutive quarters, IIP did not issue a press release soon after the second quarter ended summarizing its operating, investment, and capital markets activity for the quarter.
Based on my review of IIP's press releases and last quarter's earnings release, it seems the company made four acquisitions during the quarter. At the end of the quarter, it owned 111 properties across 19 states where marijuana for medical use is legal.
