Most of the companies in the cannabis space aren’t doing particularly well these days. An excess supply of the product, combined with a weak economy caused by the COVID-19 pandemic, has caused the market to crater to some degree. One firm that’s an exception to this, though, is Innovative Industrial Properties (IIPR), but that’s because it’s not your typical cannabis firm. Instead of growing and selling the product or products associated with it, the firm operates as a REIT that buys up properties, repairs them if need be, and leases them out under long-term contracts to the companies that do grow cannabis. The past month has proven to be a wild and productive time for Innovative. Between additional investments and a major share issuance, the company has been preparing itself for the future. So long as the market continues to reward the firm for these types of maneuvers, Innovative could prove to be a reasonable long-term prospect.
Some asset moves
Just like in the month of May, Innovative has been on a spending spree. On June 10th, for instance, the firm acquired a 108,000 square foot facility set on 7.4 acres of land in Pennsylvania in exchange for $8.9 million. For the current firm leasing the asset, it also agreed to reimburse improvement costs of up to $6.4 million, bringing its aggregate investment into the property up to $15.3 million. June 22nd the firm saw a different kind of move, agreeing to increase its reimbursement on a sale-leaseback location involving Green Leaf in Pennsylvania by $30 million from $13 million to $43 million.
Also in recent weeks, Innovative has closed other deals. One, in Massachusetts (which was announced on July 1st), involved a 118,000 square foot building that it acquired for $7.8 million. This excludes transaction costs. That particular asset is designated as a triple-net lease, which means that Innovative will find itself not worrying about many of the costs that landlords often have to contend with. In addition to paying the purchase price of the land in this sale-leaseback transaction, the company agreed to reimburse the tenant for $21 million in improvements to the property, bringing its investment into it up to $28.8 million.
Between Michigan and Ohio, the company made some revisions to properties it owns as well. In Michigan, Innovative agreed to adding $17 million in improvements to one 115,000 square foot property. In Ohio, meanwhile, they agreed to do the same, but for $13.5 million for its 50,000 square foot facility. The cost of these improvements, as well as in other disclosed improvements during the month, resulted in adjustments being made to the terms the company struck with the businesses leasing from them. Specifics here were not disclosed, but in short the firms leasing these more expensive properties are likely paying Innovative more than they were previously.
A big share issuance
In order for Innovative to continue investing in properties like it has been, the firm has to come up with a great deal of cash. Through its own operations, it is generating some, but not enough to keep up this pace. As an example, consider the firm’s results so far this year. Revenue of $21.13 million in the first quarter far surpassed the $6.82 million seen the same time last year. The same can be said of net income, which grew from $3.30 million in the first quarter last year to $11.53 million in the first quarter this year. Over the same period of time, operating cash flow soared from $4.60 million to $19.57 million. On an annualized basis, this last metric gives the firm significant cash, but even that pales in comparison to what it needs to match its commitments. Consider, for proof, that just the investments announced in June (plus the Massachusetts investment announced July 1st), total $104.6 million.
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To maintain this kind of trajectory without tapping into too much debt, Innovative has had to tap the equity market. About a month ago, the firm issued 1.55 million shares of itself for gross proceeds of $115 million. This works out to about $74.16 per unit. Though you might think that this move would cause investors to fear for the future and push shares lower as a result, the opposite has come to pass. Investors see the returns generated by the assets acquired, combined with the long contract rates (with a weighted-average term on existing contracts of 16.2 years), and they find themselves happy to pay for a piece of the action.
This latest issuance by Innovative is a bit larger. In late June, management initially announced its plan to sell off 1.80 million shares of itself, plus up to 270,000 shares to its underwriters. Recognizing the market’s appetite for its shares and the ability to use the cash it raises to buy properties with long duration contracts, management ended up upsizing this offering to 2.68 million units. At $83.85 per share, this resulted in the company’s gross proceeds coming out to $225 million. The new amount offered to underwriters is 402,504 units, increasing the amount of cash raised by Innovative up to as much as $258.75 million. You would think, once again, that perhaps this would harm the business, especially given its small $1.75 billion market cap, but the opposite was true. As of this writing, shares of Innovative are going for $93.76 apiece. A similar raise at this price, meanwhile, would have implied cash proceeds of up to $289.33 million.
Right now, Innovative is an interesting company. The firm continues to grow and because of this alone it’s difficult to value. The ability of the business to keep on issuing shares, effectively diluting shareholders, but doing so while adding to the value they have, is unique and won’t last forever. In the meantime, though, management would be unwise to ignore this opportunity to supercharge growth and generate long-term shareholder value.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.