Innovative Industrial Properties Reports Second Quarter 2018 Results

SAN DIEGO–(BUSINESS WIRE)–Innovative Industrial Properties, Inc. (NYSE: IIPR) (the “Company”)
announced today results for the quarter ended June 30, 2018, the sixth
full quarter since the Company commenced real estate operations and
completed its initial public offering in December 2016.

Second Quarter 2018 Highlights

Financial Results

  • The Company generated total revenues of approximately $3.3 million in
    the quarter.
  • The Company recorded net income attributable to common stockholders of
    approximately $1.2 million for the quarter, or $0.17 per diluted
    share, and adjusted funds from operations (“AFFO”) of approximately
    $2.1 million, or $0.31 per diluted share.
  • The Company paid its fifth consecutive quarterly dividend of $0.25 per
    share on July 16, 2018 to stockholders of record as of June 29, 2018.

Acquisitions

  • In April 2018, the Company acquired an 89,000 square foot medical-use
    cannabis cultivation and processing facility in a sale-leaseback
    transaction with a subsidiary of Vireo Health, Inc. (“Vireo”) in
    Pennsylvania for an aggregate consideration of $8.6 million (excluding
    transaction costs), which includes an approximately $2.8 million
    tenant improvement allowance for additional improvements at the
    property.
  • In May 2018, the Company acquired a property in Massachusetts and
    entered into a long-term lease and development agreement with a
    subsidiary of PharmaCann LLC (“PharmaCann”) for the development of an
    approximately 26,000 square foot industrial facility and an
    approximately 32,000 square foot greenhouse facility, with the
    Company’s total investment in the acquisition and development of the
    property expected to be $18.5 million (excluding transaction costs).
  • Subsequent to the end of the quarter, in July 2018, the Company
    acquired a 55,000 square foot cannabis cultivation and processing
    facility in a sale-leaseback transaction with Holistic Industries,
    Inc. (“Holistic”) in Massachusetts for $12.75 million (excluding
    transaction costs).
  • Subsequent to the end of the quarter, in August 2018, the Company
    acquired a property in Michigan and entered into a long-term lease
    with Green Peak Industries, LLC (“GPI”) for an industrial facility
    that is expected to comprise approximately 56,000 square feet upon
    completion of development, with the Company’s total investment in the
    acquisition and development of the property expected to be $13 million
    (excluding transaction costs).

Portfolio Update and Acquisition Activity

Portfolio Update

As of August 10, 2018, the Company owned nine properties located in
Arizona, Maryland, Massachusetts, Michigan, Minnesota, New York and
Pennsylvania, totaling approximately 875,000 rentable square feet
(including approximately 114,000 rentable square feet under
development), which were 100% leased with a weighted-average remaining
lease term of approximately 15 years. As of August 10, 2018, the Company
had invested approximately $99.8 million in the aggregate (excluding
transaction costs) and had committed an additional approximately $26.3
million to reimburse certain tenants and sellers for completion of
construction and tenant improvements at the Company’s properties. The
Company’s average current yield on invested capital is approximately
15.7% for these nine properties, calculated as (a) the sum of the
current base rents, supplemental rent (with respect to the lease with
PharmaCann LLC at one of the Company’s New York properties) and property
management fees (after the expiration of applicable base rent abatement
and deferral periods for the PharmaCann Massachusetts and GPI Michigan
properties, respectively), divided by (b) the Company’s aggregate
investment in these properties (excluding transaction costs and
including aggregate potential development funding and tenant
reimbursements of approximately $26.3 million).

Acquisition Activity

On April 6, 2018, the Company acquired a property in Pennsylvania for
approximately $5.8 million (excluding transaction costs) in a
sale-leaseback transaction, comprising approximately 89,000 square feet
of industrial space. Upon the closing, the Company entered into a
triple-net lease for the entire property with a subsidiary of Vireo for
continued operation as a medical-use cannabis cultivation and processing
facility. The tenant is responsible for paying all structural repairs,
maintenance expenses, insurance and taxes related to the property, and
the lease provides that the Company will fund up to approximately $2.8
million as reimbursement for future tenant improvements at the property,
of which approximately $201,000 was funded as of June 30, 2018. The
initial annual base rent for the property is approximately $1.3 million,
or 15% of the sum of the purchase price and the tenant improvement
allowance made available for the property, and subject to annual
increases at a rate of 3.5%. The Company also receives a property
management fee under the lease equal to 1.5% of the then-current base
rent throughout the term. The initial term of the lease is 15 years,
with two options to extend the term for two additional five-year periods.

On May 31, 2018, the Company acquired a property in Massachusetts and
entered into a long-term lease and development agreement with a
PharmaCann subsidiary for an approximately 26,000 square foot industrial
facility and an approximately 32,000 square foot greenhouse facility on
the property. The purchase price for the property was $3 million
(excluding transaction costs). The PharmaCann subsidiary is expected to
construct the two buildings at the property, for which the Company has
agreed to provide reimbursement of up to $15.5 million (the
“Construction Funding”), of which approximately $2.4 million was funded
as of June 30, 2018. Assuming full reimbursement for the construction,
the Company’s total investment in the property will be $18.5 million.
Concurrent with the closing, the Company entered into a long-term,
triple-net lease agreement with the PharmaCann subsidiary, which intends
to operate the property upon completion of development as a cannabis
cultivation and processing facility in compliance with applicable state
and local law. The PharmaCann subsidiary is responsible for paying all
structural repairs, maintenance expenses, insurance and taxes related to
the property. The initial base rent for the property is approximately
$2.7 million, or 14.5% of the sum of the purchase price of the property
and the Construction Funding, subject to an initial six month base rent
abatement and annual increases at a rate of 3.25%. The Company also
receives a property management fee under the lease equal to 1.5% of the
then-current base rent throughout the term. The initial term of the
lease is 15.25 years, with two options to extend the term for two
additional five-year periods.

Subsequent to the end of the quarter, on July 12, 2018, the Company
acquired a property in Massachusetts for $12.75 million (excluding
transaction costs) in a sale-leaseback transaction, and entered into a
triple-net lease for the entire property with Holistic for continued
operation as a cannabis cultivation and processing facility comprising
approximately 55,000 square feet of industrial space. Holistic is
responsible for paying all structural repairs, maintenance expenses,
insurance and taxes related to the property. The initial annual base
rent for the property is approximately $1.9 million, or 15% of the
purchase price for the property, subject to annual increases at a rate
of 3.25%. The Company also receives a property management fee under the
lease equal to 1.5% of the then-current base rent throughout the term.
The initial lease term is 20 years, with three options to extend the
term of the lease for three additional five-year periods.

Also subsequent to the end of the quarter, on August 2, 2018, the
Company acquired a property in Michigan under development and expected
to comprise approximately 56,000 square feet of industrial space upon
completion. The initial purchase price for the property was
approximately $5.5 million, and the seller is responsible for completing
certain development milestones, for which the seller is expected to be
reimbursed approximately $5.3 million (the “Additional Purchase Price”).
GPI, the tenant at the property, is also expected to complete tenant
improvements for the building, for which the Company has agreed to
provide reimbursement of up to $2.2 million (the “TI Allowance”).
Assuming full payment for each step of the development, the Company’s
total investment in the property will be $13 million. Concurrent with
the closing of the purchase, the Company entered into a long-term,
triple-net lease agreement with GPI, which intends to use the facility
for medical-use cannabis cultivation and processing upon completion of
development. GPI is responsible for paying all structural repairs,
maintenance expenses, insurance and taxes related to the property. The
lease provides for an initial annualized aggregate base rent of
approximately $2.0 million, or 15% of the sum of the initial purchase
price, Additional Purchase Price and TI Allowance, subject to three
months of rent deferral at the beginning of the term that is amortized
over the remaining initial term. The aggregate base rent is subject to
3.5% annual increases during the term of the lease, and GPI is also
responsible for paying the Company a property management fee equal to
1.5% of the then-existing aggregate base rent. The initial term of the
lease is 15 years, with two options to extend the term for two
additional five-year periods.

Financial Results

The Company generated total revenues of approximately $3.3 million and
$6.1 million for the three and six months ended June 30, 2018,
respectively, and total revenues of approximately $1.3 million and $2.6
million for the three and six months ended June 30, 2017. The increases
in both periods were due to the Company’s acquisition of new properties
and the annual escalation of base rent for two of the Company’s leases.
Base rent under the lease with the PharmaCann subsidiary for one of the
Massachusetts properties is abated until November 30, 2018, and base
rent under the lease with GPI at the Michigan property is deferred until
November 2, 2018.

For the three months ended June 30, 2018, the Company recorded net
income and net income per diluted share of $1.2 million and $0.17,
respectively; funds from operations (“FFO”) and FFO per diluted share of
$1.7 million and $0.26, respectively; and AFFO and AFFO per diluted
share of $2.1 million and $0.31, respectively. For the three months
ended June 30, 2017, the Company recorded a net loss and net loss per
basic and diluted share of ($422,000) and ($0.13), respectively; FFO and
FFO per basic share of ($247,000) and ($0.07), respectively; and AFFO
and AFFO per diluted share of $471,000 and $0.13, respectively.

For the six months ended June 30, 2018, the Company recorded net income
and net income per diluted share of $1.8 million and $0.27,
respectively; FFO and FFO per diluted share of $2.8 million and $0.44,
respectively; and AFFO and AFFO per diluted share of $3.5 million and
$0.55, respectively. For the six months ended June 30, 2017, the Company
recorded a net loss and net loss per basic and diluted share of ($1.0)
million and ($0.31), respectively; FFO and FFO per basic share of
($677,000) and ($0.20), respectively; and AFFO and AFFO per diluted
share of $811,000 and $0.23, respectively.

FFO and AFFO are supplemental non-GAAP financial measures used in the
real estate industry to measure and compare the operating performance of
real estate companies. A complete reconciliation containing adjustments
from GAAP net loss available to common stockholders to FFO and AFFO and
definitions of terms are included at the end of this release.

Teleconference and Webcast

Innovative Industrial Properties, Inc. will conduct a conference call
and webcast at 10:00 a.m. Pacific Time (1:00 p.m. Eastern Time)
on Monday, August 13, 2018 to discuss the Company’s financial results
and operations for the second quarter ended June 30, 2018. The call will
be open to all interested investors through a live audio webcast at the
Investor Relations section of the company’s website at www.innovativeindustrialproperties.com,
or live by calling 1-877-328-5514 (domestic) or 1-412-902-6764
(international) and asking to be joined to the Innovative Industrial
Properties, Inc. conference call. The complete webcast will be archived
for 90 days on the company’s website. A telephone playback of the
conference call will also be available from 12:00 p.m. Pacific
Time on Monday, August 13, 2018 until 12:00 p.m. Pacific Time on Monday,
August 20, 2018, by calling 1-877-344-7529 (domestic), 855-669-9658
(Canada) or 1-412-317-0088 (international) and using access code
10122741.

About Innovative Industrial Properties

Innovative Industrial Properties, Inc. is a self-advised Maryland
corporation focused on the acquisition, ownership and management of
specialized industrial properties leased to experienced, state-licensed
operators for their regulated medical-use cannabis facilities.
Innovative Industrial Properties, Inc. intends to elect to be taxed as a
real estate investment trust. Additional information is available at www.innovativeindustrialproperties.com.

This press release contains statements that the Company believes to
be “forward-looking statements” within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. All
statements other than historical facts are forward-looking statements.
When used in this press release, words such as the Company “expects,”
“intends,” “plans,” “estimates,” “anticipates,” “believes” or “should”
or the negative thereof or similar terminology are generally intended to
identify forward-looking statements. Such forward-looking statements are
subject to risks and uncertainties that could cause actual results to
differ materially from those expressed in, or implied by, such
statements.
Investors should not place undue reliance upon
forward-looking statements.
The Company disclaims any obligation
to update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.

INNOVATIVE INDUSTRIAL PROPERTIES, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share amounts)

   
Assets   June 30,

2018

  December 31,

2017

Real estate, at cost:
Land $ 14,819 $ 11,514
Buildings and improvements 57,105 51,315
Tenant improvements 7,313 5,901
Construction in progress   4,366      
Total real estate, at cost 83,603 68,730
Less accumulated depreciation   (1,954 )   (942 )
Net real estate held for investment 81,649 67,788
Cash and cash equivalents 21,185 11,758
Short-term investments, net 57,419
Other assets, net   1,446     482  
Total assets $ 161,699   $ 80,028  
Liabilities and stockholders’ equity
Accounts payable and accrued expenses $ 2,908 $ 1,082
Dividends payable 2,034 1,198
Offering cost liability 31 41
Rents received in advance and tenant security deposits   5,141     4,158  
Total liabilities   10,114     6,479  
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.001 per share, 50,000,000 shares
authorized: 9.00% Series A cumulative redeemable preferred stock,
$15,000 liquidation preference ($25.00 per share), 600,000 shares
issued and outstanding at June 30, 2018 and December 31, 2017
14,009 14,009
Common stock, par value $0.001 per share, 50,000,000 shares
authorized: 6,785,800 and 3,501,147 shares issued and outstanding at
June 30, 2018 and December 31, 2017, respectively
7 4
Additional paid-in capital 139,546 64,000
Accumulated deficit   (1,977 )   (4,464 )
Total stockholders’ equity   151,585     73,549  
Total liabilities and stockholders’ equity $ 161,699   $ 80,028  
 

INNOVATIVE INDUSTRIAL PROPERTIES, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2018 and 2017

(Unaudited)

(In thousands, except share and per share amounts)

   
For the Three Months Ended

June 30,

For the Six Months Ended

June 30,

  2018       2017     2018       2017  
Revenues:
Rental $ 3,246 $ 1,289 $ 5,923 $ 2,579
Tenant reimbursements   68    

    155      
Total revenues   3,314     1,289     6,078     2,579  
Expenses:
Property expenses 68 155
General and administrative expense

1,474

1,466

2,951

3,221

Severance expense 113 113
Depreciation expense   536     175     1,012     336  
Total expenses   2,078     1,754     4,118     3,670  
Income / (loss) from operations

1,236

(465 )

1,960

(1,091

)

Interest and other income   306     43     527     78  
Net income / (loss) 1,542 (422 ) 2,487 (1,013 )
Preferred stock dividend   (338 )       (676 )    
Net income / (loss) attributable to common stockholders $

 

1,204

 

 

$

 

(422

 

)

 

$

 

1,811

 

 

$

 

(1,013

 

)

Net income / (loss) attributable to common stockholders per share:
Basic $ 0.18   $ (0.13 ) $ 0.28   $ (0.31 )
Diluted $ 0.17   $ (0.13 ) $ 0.27   $ (0.31 )
Weighted average shares outstanding:
Basic 6,635,651 3,364,948 6,261,708 3,357,515
Diluted 6,783,674 3,364,948 6,406,466 3,357,515
Dividends declared per common share $

0.25

$

0.15

$

0.50

$

0.15

 

INNOVATIVE INDUSTRIAL PROPERTIES, INC.

 

CONDENSED CONSOLIDATED FFO AND AFFO

For the Three and Six Months Ended June 30, 2018 and 2017

(Unaudited)

(In thousands, except share and per share amounts)

   

The table below is a reconciliation of net income / (loss) to FFO
and AFFO for the three and six months ended June 30, 2018 and 2017.

 
For the Three Months Ended

June 30,

For the Six Months Ended

June 30,

  2018     2017     2018     2017  
Net income / (loss) attributable to common stockholders $

1,204

$

(422 )

$

1,811

$

(1,013

)

Real estate depreciation   536   175     1,012   336  
FFO available to common stockholders

1,740

(247 )

2,823

(677

)

Stock-based compensation 363 605 693 1,375
Severance expense     113       113  
AFFO available to common stockholders $

2,103

$

471  

$

3,516

$

811

 
FFO per share — basic $ 0.26 $ (0.07 ) $ 0.45 $ (0.20 )
FFO per share — diluted $ 0.26 $ (0.07 ) $ 0.44 $ (0.20 )
AFFO per share — basic $ 0.32 $ 0.14   $ 0.56 $ 0.24  
AFFO per share — diluted $ 0.31 $ 0.13   $ 0.55 $ 0.23  
Weighted average shares outstanding — basic

6,635,651

3,364,948

6,261,708

3,357,515

Weighted average shares outstanding — diluted

6,783,674

3,521,473

6,406,466

3,513,243

 

FFO and FFO per share are operating performance measures adopted by the
National Association of Real Estate Investment Trusts, Inc. (“NAREIT”).
NAREIT defines FFO as the most commonly accepted and reported measure of
a REIT’s operating performance equal to “net income (loss), computed in
accordance with accounting principles generally accepted in the United
States (“GAAP”), excluding gains (or losses) from sales of property,
plus depreciation and amortization related to real estate properties,
and after adjustments for unconsolidated partnerships and joint
ventures.”

Management believes that net income (loss), as defined by GAAP, is the
most appropriate earnings measurement. However, management believes FFO
and FFO per share to be supplemental measures of a REIT’s performance
because they provide an understanding of the operating performance of
the Company’s properties without giving effect to certain significant
non-cash items, primarily depreciation expense. Historical cost
accounting for real estate assets in accordance with GAAP assumes that
the value of real estate assets diminishes predictably over time.
However, real estate values instead have historically risen or fallen
with market conditions. Management believes that by excluding the effect
of depreciation, FFO and FFO per share can facilitate comparisons of
operating performance between periods. The Company reports FFO and FFO
per share because these measures are observed by management to also be
the predominant measures used by the REIT industry and by industry
analysts to evaluate REITs and because FFO per share is consistently
reported, discussed, and compared by research analysts in their notes
and publications about REITs. For these reasons, management has deemed
it appropriate to disclose and discuss FFO and FFO per share.

Management believes that adjusted funds from operations (“AFFO”) and
AFFO per share are also appropriate supplemental measures of a REIT’s
operating performance. The Company calculates AFFO by adding to FFO
certain non-cash and infrequent or unpredictable expenses which may
impact comparability, consisting of non-cash stock-based compensation
expense and severance expense.

The Company’s computation of FFO and AFFO may differ from the
methodology for calculating FFO and AFFO utilized by other equity REITs
and, accordingly, may not be comparable to such REITs. Further, FFO and
AFFO do not represent cash flow available for management’s discretionary
use. FFO and AFFO should not be considered as an alternative to net
income (loss) (computed in accordance with GAAP) as an indicator of the
Company’s financial performance or to cash flow from operating
activities (computed in accordance with GAAP) as an indicator of the
Company’s liquidity, nor is it indicative of funds available to fund the
Company’s cash needs, including the Company’s ability to pay dividends
or make distributions. FFO and AFFO should be considered only as
supplements to net income (loss) computed in accordance with GAAP as
measures of operations.

Contacts

Innovative Industrial Properties, Inc.
Catherine Hastings
Chief
Financial Officer
(858) 997-3332