Item 1.
Financial
Statements
Innovative Industrial Properties, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per
share amounts)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Real estate, at cost:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
17,812
|
|
|
$
|
11,514
|
|
Buildings and improvements
|
|
|
78,049
|
|
|
|
51,315
|
|
Tenant improvements
|
|
|
10,829
|
|
|
|
5,901
|
|
Construction in progress
|
|
|
4,678
|
|
|
|
—
|
|
Total real estate, at cost
|
|
|
111,368
|
|
|
|
68,730
|
|
Less accumulated depreciation
|
|
|
(2,657
|
)
|
|
|
(942
|
)
|
Net real estate held for investment
|
|
|
108,711
|
|
|
|
67,788
|
|
Cash and cash equivalents
|
|
|
53,019
|
|
|
|
11,758
|
|
Short-term investments, net
|
|
|
3,983
|
|
|
|
—
|
|
Other assets, net
|
|
|
499
|
|
|
|
482
|
|
Total assets
|
|
$
|
166,212
|
|
|
$
|
80,028
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,179
|
|
|
$
|
1,082
|
|
Tenant improvements and construction payable
|
|
|
4,341
|
|
|
|
—
|
|
Dividends payable
|
|
|
2,713
|
|
|
|
1,198
|
|
Offering cost liability
|
|
|
21
|
|
|
|
41
|
|
Rents received in advance and tenant security deposits
|
|
|
6,868
|
|
|
|
4,158
|
|
Total liabilities
|
|
|
15,122
|
|
|
|
6,479
|
|
Commitments and contingencies (Notes 6 and 10)
|
|
|
|
|
|
|
|
|
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 September 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 September 30, 2018 and December 31, 2017, respectively
|
|
|
7
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
137,219
|
|
|
|
64,000
|
|
Accumulated deficit
|
|
|
(145
|
)
|
|
|
(4,464
|
)
|
Total stockholders' equity
|
|
|
151,090
|
|
|
|
73,549
|
|
Total liabilities and stockholders' equity
|
|
$
|
166,212
|
|
|
$
|
80,028
|
|
See the accompanying notes to the condensed
consolidated financial statements.
Innovative Industrial Properties, Inc.
Condensed Consolidated Statements of
Operations
(Unaudited)
(In thousands, except share and per
share amounts)
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$
|
3,716
|
|
|
$
|
1,495
|
|
|
$
|
9,639
|
|
|
$
|
4,074
|
|
Tenant reimbursements
|
|
|
210
|
|
|
|
64
|
|
|
|
365
|
|
|
|
64
|
|
Total revenues
|
|
|
3,926
|
|
|
|
1,559
|
|
|
|
10,004
|
|
|
|
4,138
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property expenses
|
|
|
210
|
|
|
|
64
|
|
|
|
365
|
|
|
|
64
|
|
General and administrative expense
|
|
|
1,442
|
|
|
|
983
|
|
|
|
4,393
|
|
|
|
4,204
|
|
Severance expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
113
|
|
Depreciation expense
|
|
|
703
|
|
|
|
217
|
|
|
|
1,715
|
|
|
|
553
|
|
Total expenses
|
|
|
2,355
|
|
|
|
1,264
|
|
|
|
6,473
|
|
|
|
4,934
|
|
Income / (loss) from operations
|
|
|
1,571
|
|
|
|
295
|
|
|
|
3,531
|
|
|
|
(796
|
)
|
Interest and other income
|
|
|
261
|
|
|
|
39
|
|
|
|
788
|
|
|
|
117
|
|
Net income / (loss)
|
|
|
1,832
|
|
|
|
334
|
|
|
|
4,319
|
|
|
|
(679
|
)
|
Preferred stock dividend
|
|
|
(338
|
)
|
|
|
—
|
|
|
|
(1,014
|
)
|
|
|
—
|
|
Net income / (loss) attributable to common stockholders
|
|
$
|
1,494
|
|
|
$
|
334
|
|
|
$
|
3,305
|
|
|
$
|
(679
|
)
|
Net income / (loss) attributable to common stockholders per share (Note 7):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.09
|
|
|
$
|
0.50
|
|
|
$
|
(0.21
|
)
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.09
|
|
|
$
|
0.49
|
|
|
$
|
(0.21
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,636,638
|
|
|
|
3,392,508
|
|
|
|
6,388,058
|
|
|
|
3,369,308
|
|
Diluted
|
|
|
6,785,800
|
|
|
|
3,392,508
|
|
|
|
6,534,300
|
|
|
|
3,369,308
|
|
Dividends declared per common share
|
|
$
|
0.35
|
|
|
$
|
0.15
|
|
|
$
|
0.85
|
|
|
$
|
0.30
|
|
See accompanying notes to the condensed
consolidated financial statements.
Innovative Industrial Properties, Inc.
Condensed Consolidated Statement of
Stockholders' Equity
(Unaudited)
(In thousands, except share amounts)
|
|
Series
A
Preferred
Stock
|
|
|
Shares
of
Common
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-In-
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
Stockholders’
Equity
|
|
Balance, December 31, 2017
|
|
$
|
14,009
|
|
|
|
3,501,147
|
|
|
$
|
4
|
|
|
$
|
64,000
|
|
|
$
|
(4,464
|
)
|
|
$
|
73,549
|
|
Net proceeds from sale of common stock
|
|
|
—
|
|
|
|
3,220,000
|
|
|
|
3
|
|
|
|
79,311
|
|
|
|
—
|
|
|
|
79,314
|
|
Net issuance of unvested restricted stock
|
|
|
—
|
|
|
|
64,653
|
|
|
|
—
|
|
|
|
(390
|
)
|
|
|
—
|
|
|
|
(390
|
)
|
Preferred stock dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,014
|
)
|
|
|
—
|
|
|
|
(1,014
|
)
|
Common stock dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,767
|
)
|
|
|
—
|
|
|
|
(5,767
|
)
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,319
|
|
|
|
4,319
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,079
|
|
|
|
—
|
|
|
|
1,079
|
|
Balance, September 30, 2018
|
|
$
|
14,009
|
|
|
|
6,785,800
|
|
|
$
|
7
|
|
|
$
|
137,219
|
|
|
$
|
(145
|
)
|
|
$
|
151,090
|
|
See accompanying notes to the condensed
consolidated financial statements.
Innovative Industrial Properties, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income / (loss)
|
|
$
|
4,319
|
|
|
$
|
(679
|
)
|
Adjustments to reconcile net income / (loss) to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,715
|
|
|
|
553
|
|
Stock-based compensation
|
|
|
1,079
|
|
|
|
1,548
|
|
Amortization of discounts on short-term investments
|
|
|
(332
|
)
|
|
|
—
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
Other assets, net
|
|
|
(37
|
)
|
|
|
(882
|
)
|
Accounts payable and accrued expenses
|
|
|
97
|
|
|
|
538
|
|
Rents received in advance and tenant security deposits
|
|
|
2,710
|
|
|
|
418
|
|
Net cash provided by operating activities
|
|
|
9,551
|
|
|
|
1,496
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of investments in real estate
|
|
|
(27,177
|
)
|
|
|
(11,185
|
)
|
Reimbursements of tenant improvements and construction funding
|
|
|
(11,120
|
)
|
|
|
(11
|
)
|
Purchases of short-term investments
|
|
|
(65,151
|
)
|
|
|
—
|
|
Maturities of short-term investments
|
|
|
61,500
|
|
|
|
—
|
|
Net cash used in investing activities
|
|
|
(41,948
|
)
|
|
|
(11,196
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of offering costs
|
|
|
79,314
|
|
|
|
(276
|
)
|
Dividends paid to common stockholders
|
|
|
(4,267
|
)
|
|
|
(525
|
)
|
Dividends paid to preferred stockholders
|
|
|
(999
|
)
|
|
|
—
|
|
Taxes paid related to net share settlement of equity awards
|
|
|
(390
|
)
|
|
|
(298
|
)
|
Net cash provided by / (used in) financing activities
|
|
|
73,658
|
|
|
|
(1,099
|
)
|
Net increase / (decrease) in cash and cash equivalents
|
|
|
41,261
|
|
|
|
(10,799
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
11,758
|
|
|
|
33,003
|
|
Cash and cash equivalents, end of period
|
|
$
|
53,019
|
|
|
$
|
22,204
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Accrual for reimbursements of tenant improvements and construction funding
|
|
$
|
4,341
|
|
|
$
|
5,900
|
|
Accrual for common stock dividend declared
|
|
|
2,375
|
|
|
|
525
|
|
Accrual for preferred stock dividend declared
|
|
|
338
|
|
|
|
—
|
|
Accrual for stock issuance costs
|
|
|
21
|
|
|
|
190
|
|
See accompanying notes to the condensed
consolidated financial statements.
Innovative Industrial Properties, Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2018
(Unaudited)
1. Organization
As used herein, the terms "we",
"us", "our" or the "Company" refer to Innovative Industrial Properties, Inc., a Maryland corporation,
and any of our subsidiaries, including IIP Operating Partnership, LP, a Delaware limited partnership (our "Operating Partnership").
We acquire, own and manage specialized
real estate leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities. We have acquired
our properties through sale-leaseback transactions and third-party purchases. We lease our properties on a triple-net lease basis,
where the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term, including
structural repairs, maintenance, taxes and insurance.
We were incorporated in Maryland on June
15, 2016 and have elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of
1986, as amended (the "Code"), commencing with our taxable year ended December 31, 2017. We conduct our business through
a traditional umbrella partnership real estate investment trust, or UPREIT structure, in which our properties are owned by our
Operating Partnership, directly or through subsidiaries. We are the sole general partner of our Operating Partnership and own,
directly or through a subsidiary, 100% of the limited partnership interests in our Operating Partnership.
2. Summary of Significant Accounting Policies and Procedures
and Recent Accounting Pronouncements
Basis of Presentation.
The
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements.
This interim financial information should
be read in conjunction with the audited consolidated financial statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 2017.
Management believes that all adjustments
of a normal, recurring nature considered necessary for a fair presentation have been included. This interim financial information
does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2018.
Federal Income Taxes.
We believe
that we have operated our business so as to qualify to be taxed as a REIT for U.S. federal income tax purposes. Under the REIT
operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income. Assuming
our dividends equal or exceed our taxable net income, we generally will not be required to pay federal corporate income taxes on
such income. The income taxes recorded on our consolidated statement of operations represent amounts paid for city and state income
and franchise taxes and are included in general and administrative expenses in the accompanying condensed consolidated statements
of operations.
Use of Estimates.
The
preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make a number of
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting
period. Actual results may differ materially from these estimates and assumptions.
Acquisition of Real Estate Properties.
Our
investment in real estate is recorded at historical cost, less accumulated depreciation. Upon acquisition of a property, the tangible
and intangible assets acquired and liabilities assumed are initially measured based upon their relative fair values. We estimate
the fair value of land by reviewing comparable sales within the same submarket and/or region and the fair value of buildings on
an as-if vacant basis. Acquisition costs are capitalized as incurred. All of our acquisitions to date were recorded as asset acquisitions.
Depreciation.
We are
required to make subjective assessments as to the estimated useful lives of our depreciable assets. We consider the period of future
benefit of the assets to determine the appropriate estimated useful lives. Depreciation of our assets is charged to expense on
a straight-line basis over the estimated useful lives. We depreciate each of our buildings and improvements over its estimated
remaining useful life, generally not to exceed 35 years. We depreciate tenant improvements at our buildings over the shorter of
the estimated useful lives or the terms of the related leases.
We depreciate office equipment and furniture
and fixtures over estimated useful lives ranging from three to six years.
Provision for Impairment.
Another
significant judgment must be made as to if, and when, impairment losses should be taken on a property when events or a change in
circumstances indicate that the carrying amount of the asset may not be recoverable. A provision is made for impairment if estimated
future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are
less than the current book value of the property. Key inputs that we utilize in this analysis include projected rental rates, estimated
holding periods, capital expenditures and property sales capitalization rates. As of September 30, 2018, no impairment losses were
recognized.
Revenue Recognition.
Our
tenant leases are triple-net leases, an arrangement under which the tenant maintains the property while paying us rent and property
management fees. We account for our leases as operating leases. We recognize revenue for each of our properties on a cash basis
due to the uncertainty of collectability of lease payments from each tenant due to its limited operating history and the uncertain
regulatory environment in the United States relating to the medical-use cannabis industry. Contractually obligated reimbursements
from tenants for recoverable real estate taxes and operating expenses are included in tenant reimbursements in the period when
such costs are incurred. Contractually obligated real estate taxes that are paid directly by the tenant to the tax authorities
are not reflected in our consolidated financial statements.
Future contractual minimum rent (including
base rent, supplemental base rent (for one of our properties in New York) and property management fees) under the operating leases
as of September 30, 2018 for future periods is summarized as follows (in thousands):
Year
|
|
Contractual Minimum Rent
|
|
2018 (three months ending December 31)
|
|
$
|
4,353
|
|
2019
|
|
|
20,300
|
|
2020
|
|
|
20,950
|
|
2021
|
|
|
21,579
|
|
2022
|
|
|
21,055
|
|
Thereafter
|
|
|
272,247
|
|
Total
|
|
$
|
360,484
|
|
Cash and Cash Equivalents
. We consider
all highly-liquid investments with original maturities of three months or less to be cash equivalents. As of September 30, 2018,
approximately $49.8 million were invested in short-term obligations of the U.S. government and money market funds. As of December
31, 2017, approximately $8.9 million were invested in short-term money market funds and certificates of deposit.
Short-Term Investments
.
Short-term investments consist of obligations of the U.S. government with an original maturity at the time of purchase of
greater than three months. Investments are classified as held-to-maturity and stated at amortized cost.
Stock-Based Compensation.
Stock-based
compensation for equity awards is based on the grant date fair value of the equity investment and is recognized over the requisite
service period. If awards are forfeited prior to vesting, we reverse any previously recognized expense related to such awards in
the period during which the forfeiture occurs and reclassify any nonforfeitable dividends previously paid on these awards from
retained earnings to compensation expense.
Recent Accounting Pronouncements.
In March 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU 2016-09, Compensation — Stock Compensation; Improvements to Employee Share-Based
Payment Accounting ("ASU 2016-09"). The FASB issued ASU 2016-09 to simplify several aspects of the accounting for share-based
payment transactions, including classification of awards as either equity or liabilities, estimation of forfeitures, and classification
on the statement of cash flows. The Company’s adoption of ASU 2016-09 beginning on January 1, 2018 did not have a material
impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 outlines a comprehensive model for companies to use
in accounting for revenue arising from contracts with customers, and will apply to transactions such as the sale of real estate.
ASU 2014-09 is effective for years beginning after December 15, 2018 as a result of the Company’s election as an emerging
growth company. The majority of our revenues related to rental income from leasing arrangements, which is excluded from ASU 2014-09.
The Company is currently evaluating the impact that ASU 2014-09 will have on any non-lease components and revenues generated from
activities other than leasing.
In February 2016, the FASB issued ASU 2016-02,
Leases ("ASU 2016-02"), which introduces a lessee model that brings most leases on the balance sheet. Under this new standard
the large majority of operating leases are expected to remain classified as operating leases, and lessors should continue to recognize
lease income for those leases on a generally straight-line basis over the lease term. ASU 2016-02 is effective for years beginning
after December 15, 2019 as a result of the Company’s election as an emerging growth company, using a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements, with certain practical expedients available. In July 2018, the FASB issued ASU 2018-11, Leases –
Targeted Improvements ("ASU 2018-11"), which provides an additional (and optional) transition method to recognize the
cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2018-11 also provides lessor
with the practical expedient to not separate non-lease components from associated lease component under limited circumstances.
We are continuing to evaluate this guidance and the impact to us, as both lessor and lessee, on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments — Credit Losses, which changes the impairment model for most financial assets and certain other instruments.
For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies will be required to use
a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowances for losses.
For available-for-sale debt securities with unrealized losses, companies will measure credit losses in a manner similar to what
they do today, except that the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities.
Companies will have to disclose significantly more information, including information they use to track credit quality by year
of origination for most financing receivables. Companies will apply the standard’s provisions as a cumulative-effect adjustment
to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This standard is effective
for years beginning after December 15, 2020 as a result of the Company’s election as an emerging growth company with early
adoption permitted. The Company is in the initial stage of evaluating the impact of this new standard.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments, which clarifies or provides guidance
relating to eight specific cash flow classification issues. The standard should be applied retrospectively for each period presented,
as appropriate. This new standard is effective for years beginning after December 15, 2018 as a result of the Company’s election
as an emerging growth company. The impact of this new guidance will depend on future transactions, though the impact will only
be related to the classification of those items on the statement of cash flows and will not impact the Company’s cash flows
or its consolidated results of operations.
In February 2017, the FASB has issued ASU
2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the
Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets ("Subtopic 610-20"). A
contract may involve the transfer of both nonfinancial assets and financial assets (e.g., cash and receivables). The amendments
clarify that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial
asset. The amendments also define the term in substance nonfinancial asset. The amendments clarify that nonfinancial assets within
the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example,
a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. A contract
that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20
if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial
assets. The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset
promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The amendments are effective at
the same time Topic 606, Revenue from Contracts with Customers, is effective. This new standard is effective for years beginning
after December 15, 2018 as a result of the Company’s election as an emerging growth company. We do not expect this amendment
to have an effect on our consolidated financial statements.
Concentration of Credit Risk
. Our
properties are located in the states of Arizona, Maryland, Massachusetts, Michigan, Minnesota, New York and Pennsylvania. The ability
of any of our tenants to honor the terms of its lease is dependent upon the economic, regulatory, competition, natural and social
factors affecting the community in which that tenant operates. During the three months ended September 30, 2018, the tenant at
one of our properties in New York, the tenant at our property in Maryland and the tenant at our property in Arizona accounted for
36%, 18% and 17%, respectively, of our rental revenues. During the nine months ended September 30, 2018, these same tenants accounted
for 41%, 20% and 17%, respectively, of our rental revenues. During the three and nine months ended September 30, 2017, the tenant
at our property in New York accounted for 86% and 94% of our rental revenues, respectively. At September 30, 2018, one of our properties
in New York, our property in Maryland and our property in Arizona accounted for 27%, 15% and 15%, respectively, of our net real
estate held for investment.
We have deposited cash with a financial
institution that is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. As of September 30,
2018, we had cash accounts in excess of FDIC insured limits. We have not experienced any losses in such accounts.
3. Common Stock
As of
September 30, 2018, the Company was authorized to issue up to 50,000,000 shares of common stock, par value $0.001 per share, and
there were 6,785,800 shares of common stock issued and outstanding.
On January 22, 2018, the Company issued
3,220,000 shares of common stock, including the exercise in full of the underwriters’ option to purchase an additional 420,000
shares, resulting in net proceeds of approximately $79.3 million, after deducting the underwriters’ discounts and commissions
and offering expenses.
On October 9, 2018, we issued 2,990,000 shares of common stock, including the exercise in full of the
underwriters’ option to purchase an additional 390,000 shares, resulting in
in
net proceeds of approximately $113.9 million, after deducting the underwriters' discounts and commissions and offering expenses.
4. Preferred Stock
As of
September 30, 2018, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value $0.001 per share,
and there were issued and outstanding 600,000 shares of 9.00% Series A Cumulative Redeemable Preferred Stock, $0.001 par value
per share (the “Series A Preferred Stock”). Generally, the Company is not permitted to redeem the Series A Preferred
Stock prior to October 19, 2022, except in limited circumstances relating to the Company’s ability to qualify as a REIT and
in certain other circumstances related to a change of control/delisting (as defined in the articles supplementary for the Series
A Preferred Stock). On or after October 19, 2022, the Company may, at its option, redeem the Series A Preferred Stock, in whole
or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends
on such Series A Preferred Stock up to, but excluding the redemption date. Holders of the Series A Preferred Stock generally have
no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether
or not consecutive) and in certain other circumstances.
5. Dividends
The following table describes the dividends
declared by the Company during the nine months ended September 30, 2018:
Declaration
Date
|
|
Security Class
|
|
Amount
Per
Share
|
|
|
Period Covered
|
|
Dividend
Paid Date
|
|
Dividend Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 15, 2018
|
|
Common Stock
|
|
$
|
0.25
|
|
|
January 1, 2018 to March 31, 2018
|
|
April 16, 2018
|
|
$
|
1,696
|
|
March 15, 2018
|
|
Series A preferred stock
|
|
$
|
0.5625
|
|
|
January 15, 2018 to April 14, 2018
|
|
April 16, 2018
|
|
$
|
338
|
|
June 15, 2018
|
|
Common Stock
|
|
$
|
0.25
|
|
|
April 1, 2018 to June 30, 2018
|
|
July 16, 2018
|
|
$
|
1,696
|
|
June 15, 2018
|
|
Series A preferred stock
|
|
$
|
0.5625
|
|
|
April 15, 2018 to July 14, 2018
|
|
July 16, 2018
|
|
$
|
338
|
|
September 14, 2018
|
|
Common Stock
|
|
$
|
0.35
|
|
|
July 1, 2018 to September 30, 2018
|
|
October 16, 2018
|
|
$
|
2,375
|
|
September 14, 2018
|
|
Series A preferred stock
|
|
$
|
0.5625
|
|
|
July 15, 2018 to October 14, 2018
|
|
October 16, 2018
|
|
$
|
338
|
|
6. Investments in Real Estate
On April
6, 2018, we acquired a property in Pennsylvania for approximately $5.8 million (excluding transaction costs of approximately $115,000)
in a sale-leaseback transaction. Upon the closing, we entered into a long-term, triple-net lease for the entire property with a
subsidiary of Vireo Health, Inc. to operate a medical-use cannabis cultivation and processing facility. The lease provides that
we will fund up to approximately $2.8 million as reimbursement for future tenant improvements at the property, of which approximately
$2.5 million was incurred and approximately $2.1 million was funded as of September 30, 2018.
On May 31, 2018, we acquired a property
in Massachusetts and entered into a long-term lease and development agreement with a subsidiary of PharmaCann LLC (“PharmaCann”)
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 $3.0 million (excluding transaction costs of approximately $30,000). The PharmaCann
subsidiary is expected to construct the two buildings at the property, for which we have agreed to provide reimbursement of up
to $15.5 million (the “Construction Funding”), of which approximately $5.6 million was incurred and approximately
$3.2 million was funded as of September 30, 2018. Assuming full reimbursement for the construction, our total investment in the
property will be $18.5 million. Concurrent with the closing of the purchase of the Massachusetts property, we 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.
On
July 12, 2018, we acquired another property in Massachusetts for $12.75 million (excluding transaction costs of approximately $27,000)
in a sale-leaseback transaction. Upon the closing, we entered into a triple-net lease for the entire property with Holistic Industries,
Inc. to operate a cannabis cultivation and processing facility.
On August 2, 2018, we acquired a property
in Michigan for approximately $5.5 million (excluding transaction costs of approximately $29,000). Upon the closing, we entered
into a triple-net lease for the entire property with Green Peak Industries, LLC ("Green Peak”) to operate a medical-use
cannabis cultivation and processing facility upon completion of development. The seller of the property is responsible for completing
certain development milestones for the building, for which the seller is expected to be reimbursed approximately $5.3 million
(the "Additional Purchase Price")
, of which
approximately $4.3 million was incurred and approximately $3.2 million was funded as of
September 30, 2018. Green Peak is also expected complete certain tenant improvements, for which we have agreed to provide reimbursement
of up to $2.2 million (the "TI Allowance"), of which no amount was incurred or funded as of September 30, 2018. Green
Peak also has a one-time right to request an additional tenant improvement allowance of up to $8.0 million (the "Additional
TI Allowance") for additional improvements to the property, subject to satisfaction of conditions set forth in the lease.
If we make available the Additional TI Allowance, the base rent shall be adjusted to reflect our total investment in the property.
In addition, the term of the lease shall be automatically extended to the date that is 15 years from the date that the Additional
TI Allowance is made available. If we fund the full amount of the Additional Purchase Price, the TI Allowance and the Additional
TI Allowance, our total investment in the property is expected to be $21.0 million. If we do not make the Additional TI Allowance
available to Green Peak, Green Peak shall have the right to purchase the property, subject to satisfaction of conditions set forth
in the lease, at a price equal to the greater of (a) the appraised value of the property and (b) the value determined by dividing
the then-current base rent by ten percent.
Including all of our
properties, during the nine months ended September 30, 2018, we capitalized costs of approximately $15.6 million relating to
tenant improvements and construction activities at our properties, of which approximately $11.2 million was funded as of September 30, 2018.
7. Net Income / (Loss) Per Share
Grants of restricted stock of the Company
in share-based payment transactions are considered participating securities prior to vesting and, therefore, are considered in
computing basic earnings per share under the two-class method. The two-class method is an earnings allocation method for calculating
earnings per share when a company’s capital structure includes either two or more classes of common stock or common stock
and participating securities. Earnings per basic share under the two-class method is calculated based on dividends declared on
common shares and other participating securities (“distributed earnings”) and the rights of participating securities
in any undistributed earnings, which represents net income remaining after deduction of dividends accruing during the period. The
undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage
of each security to the total number of outstanding participating securities. Earnings per basic share represents the summation
of the distributed and undistributed earnings per share class divided by the total number of shares.
Through September 30, 2018, all
of the Company’s participating securities received dividends at an equal dividend rate per share. As a
result, distributions to participating securities for the three and nine months ended September 30, 2018 have been included
in net income attributable to common stockholders to calculate net income per basic and diluted share. For the nine months
ended September 30, 2017, the Company incurred a net loss. As such, 108,639 of unvested restricted shares outstanding at
September 30, 2017 have been excluded from the calculation of net income / (loss) per diluted share for the three and nine
months ended September 30, 2017 as the impacts were anti-dilutive. Computations of net income / (loss) per basic and diluted
share (in thousands, except share data) were as follows:
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income / (loss)
|
|
$
|
1,832
|
|
|
$
|
334
|
|
|
$
|
4,319
|
|
|
$
|
(679
|
)
|
Preferred stock dividend
|
|
|
(338
|
)
|
|
|
—
|
|
|
|
(1,014
|
)
|
|
|
—
|
|
Distribution to participating securities
|
|
|
(52
|
)
|
|
|
(16
|
)
|
|
|
(127
|
)
|
|
|
(32
|
)
|
Net income / (loss) attributable to common stockholders used to compute net income / (loss) per share
|
|
$
|
1,442
|
|
|
$
|
318
|
|
|
$
|
3,178
|
|
|
$
|
(711
|
)
|
Weighted average common share outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,636,638
|
|
|
|
3,392,508
|
|
|
|
6,388,058
|
|
|
|
3,369,308
|
|
Diluted
|
|
|
6,785,800
|
|
|
|
3,392,508
|
|
|
|
6,534,300
|
|
|
|
3,369,308
|
|
Net income / (loss) attributable to common stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.09
|
|
|
$
|
0.50
|
|
|
$
|
(0.21
|
)
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.09
|
|
|
$
|
0.49
|
|
|
$
|
(0.21
|
)
|
8. Fair Value of Financial Instruments
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the
measurement date. Accounting guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that
may be used to measure fair value:
Level 1—Observable inputs that reflect
quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Includes other inputs that
are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that
are supported by little or no market activities, therefore requiring an entity to develop its own assumptions.
At September 30, 2018, cash equivalent
instruments consisted of $4.8 million in short-term money market funds that were measured using the net asset value per share that
have not been classified using the fair value hierarchy. The fund invests primarily in short-term U.S. Treasury and government
securities. Short-term investments consisting of certificate of deposits and obligations of the U.S. government are stated at amortized
cost, which approximates their relative fair values due to the short-term maturities and market rates of interest of these instruments.
The carrying amounts of financial instruments
such as cash equivalents invested in certificates of deposit, receivables, accounts payable, accrued expenses and other liabilities
approximate their relative fair values due to the short-term maturities and market rates of interest of these instruments.
|
9.
|
Common Stock Incentive Plan
|
Our board of directors adopted our 2016
Omnibus Incentive Plan (the "2016 Plan") to enable us to motivate, attract and retain the services of directors, employees
and consultants considered essential to our long-term success. The 2016 Plan offers our directors, employees and consultants an
opportunity to own our stock or rights that will reflect our growth, development and financial success. Under the terms of the
2016 Plan, the aggregate number of shares of our common stock subject to options, restricted stock, stock appreciation rights,
restricted stock units and other awards, will be no more than 1,000,000 shares. The 2016 Plan has a term of ten years from the
date it was adopted by our board of directors.
A summary of the activity under the 2016
Plan and related information is included in the table below.
|
|
Unvested
Restricted
Shares
|
|
|
Weighted-
Average Date
Fair Value
|
|
Balance at December 31, 2017
|
|
|
106,839
|
|
|
$
|
18.01
|
|
Granted
|
|
|
76,732
|
|
|
$
|
29.72
|
|
Vested
|
|
|
(22,330
|
)
|
|
$
|
18.60
|
|
Forfeited (1)
|
|
|
(12,079
|
)
|
|
$
|
18.67
|
|
Balance at June 30, 2018 and September 30, 2018
|
|
|
149,162
|
|
|
$
|
23.89
|
|
|
(1)
|
Shares that were forfeited to cover the employees’ tax withholding obligation upon vesting.
|
The remaining unrecognized compensation
cost of $2.6 million will be recognized over a weighted-average amortization period of approximately 1.9 years as of September
30, 2018.
10. Commitments and Contingencies
Tenant Improvement Allowances
.
As of September 30, 2018, we had approximately $4.4 million of commitments related to tenant improvement allowances (excluding
the Additional TI Allowance which has not been made available and is contingent on satisfaction of certain conditions), which generally
may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease.
Construction Funding.
As of September 30, 2018, we had approximately $9.9 million of commitments relating to the Construction Funding for the development
of two buildings which the tenant has agreed to use commercially reasonable efforts to complete by August 31, 2019.
Additional Purchase Price.
As of September 30, 2018, we had approximately $1.0 million of commitments relating to
certain
development milestones for the property in Michigan, which the seller is required to complete by December 31, 2018
.
Office and Equipment Leases
. As
of September 30, 2018, we had approximately $188,000 outstanding in commitments related to our office and equipment leases, with
approximately $23,000 to be paid in the remainder of 2018, approximately $90,000 to be paid in 2019, and approximately $75,000
to be paid in 2020.
Environmental Matters
. We follow
the policy of monitoring our properties, both targeted acquisition and existing properties, for the presence of hazardous or toxic
substances. While there can be no assurance that a material environmental liability does not exist, we are not currently
aware of any environmental liabilities that would have a material adverse effect on our financial condition, results of operations
and cash flow, or that we believe would require disclosure or the recording of a loss contingency.
Litigation
.
We
may, from time to time, be a party to legal proceedings, which arise in the ordinary course of our business. We are not aware of
any pending or threatened litigation that, if resolved against us, would have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
11. Subsequent Events
On
October 3, 2018, the Company issued 2,990,000 shares of common stock, including the exercise in full of the underwriters’
option to purchase an additional 390,000 shares, resulting in net proceeds of approximately $113.9 million, after deducting the
underwriters’ discounts and commissions and offering expenses.
On October 30, 2018, the Company acquired an approximately 58,000 square foot industrial property in Colorado
for approximately $11.3 million (excluding transaction costs) and entered into a long-term, triple-net lease with The Green Solution,
LLC for continued operation of a cannabis cultivation facility.
ITEM 2.
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read
in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. We make
statements in this report that are "forward-looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. In particular, statements pertaining to our capital resources, portfolio performance and results of operations
contain forward-looking statements. Likewise, our statements regarding anticipated growth in our funds from operations and anticipated
market and regulatory conditions, our strategic direction, demographics, results of operations, plans and objectives are forward-looking
statements. Forward-looking statements involve numerous risks and uncertainties, and you should not rely on them as predictions
of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we
may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that
they will happen at all). You can identify forward-looking statements by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "seeks," "approximately," "intends,"
"plans," "estimates" or "anticipates" or the negative of these words and phrases or similar words
or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. The following factors,
among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking
statements: our business and investment strategy; our projected operating results; actions and initiatives of the U.S. or state
governments and changes to government policies and the execution and impact of these actions, initiatives and policies, including
the fact that cannabis remains illegal under federal law; availability of suitable investment opportunities in the medical-use
cannabis industry; concentration of our portfolio of assets and limited number of tenants; our understanding of our competition
and our potential tenants' alternative financing sources; the estimated growth in and evolving market dynamics of the medical-use
cannabis market; the demand for medical-use cannabis cultivation and processing facilities; the expected medical-use or adult-use
cannabis legalization in certain states; shifts in public opinion regarding medical-use cannabis; the state of the U.S. economy
generally or in specific geographic areas; economic trends and economic recoveries; our ability to access equity or debt capital;
financing rates for our assets; our expected leverage; changes in the values of our assets; our expected portfolio of assets; our
expected investments; interest rate mismatches between our assets and our borrowings used to fund such investments; changes in
interest rates and the market value of our assets; rates of default on leases for our assets; the degree to which any interest
rate or other hedging strategies may or may not protect us from interest rate volatility; impact of and changes in governmental
regulations, tax law and rates, accounting guidance and similar matters; our ability to qualify as a real estate investment trust
(“REIT”) and, once qualified, maintain our qualification as a REIT for U.S. federal income tax purposes; our ability
to maintain our exemption from registration under the Investment Company Act of 1940; availability of qualified personnel; and
market trends in our industry, interest rates, real estate values, the securities markets or the general economy.
The risks included here are not exhaustive,
and additional factors could adversely affect our business and financial performance, including factors and risks included in other
sections of this report. In addition, we discussed a number of material risks in our Annual Report on Form 10-K for the year ended
December 31, 2017, as updated in Item 8.01 in our Current Report on Form 8-K filed with the SEC on May 31, 2018, in Part II
– Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, and in Part II – Item 1A below.
Those risks continue to be relevant to our performance and financial condition. Moreover, we operate in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such
risk factors, nor can it assess the impact of all such risk factors on our Company's business or the extent to which any factor,
or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Any forward-looking statement made by us speaks only of the date on which we make it. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as
may be required by law. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating
the information presented in the Company's filings and reports.
The purpose of this Management's Discussion
and Analysis ("MD&A") is to provide an understanding of the Company's consolidated financial condition, results of
operations and cash. MD&A is provided as a supplement to, and should be read in conjunction with, the Company's condensed consolidated
financial statements and accompanying notes.
Overview
As used herein, the terms "we",
"us", "our" or the "Company" refer to Innovative Industrial Properties, Inc., a Maryland corporation,
and any of our subsidiaries, including IIP Operating Partnership, LP, a Delaware limited partnership (the "Operating Partnership").
We acquire, own and manage specialized industrial properties
leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities. We have acquired and intend
to continue to acquire our properties through sale-leaseback transactions and third-party purchases. We lease and expect to continue
to lease our properties on a triple-net lease basis, where the tenant is responsible for all aspects of and costs related to the
property and its operation during the lease term, including structural repairs, maintenance, taxes and insurance.
We were incorporated in Maryland
on June 15, 2016, and believe that we have operated and intend to continue operating our business so as to qualify to be taxed
as a REIT for U.S. federal income tax purposes. We conduct our business through a traditional umbrella partnership real estate
investment trust, or UPREIT structure, in which our properties are owned by our Operating Partnership, directly or through subsidiaries.
We are the sole general partner of our Operating Partnership and own, directly or through a subsidiary, 100% of the limited partnership
interests in our Operating Partnership. As of September 30, 2018, we had six full-time employees.
As of September 30, 2018, we owned nine properties that were 100% leased to state-licensed medical-use
cannabis operators and comprising an aggregate of approximately 894,000 rentable square feet (including approximately 114,000 square
feet under development) in Arizona, Maryland, Massachusetts, Michigan, Minnesota, New York and Pennsylvania.
Emerging Growth Company
We have elected to be an emerging growth
company, as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). An emerging growth company may
take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise
generally applicable to public companies. As an emerging growth company, among other things:
|
·
|
we are exempt from the requirement to obtain an attestation and report
from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act;
|
|
·
|
we are permitted to provide less extensive disclosure about our executive
compensation arrangements;
|
|
·
|
we are not required to give our stockholders non-binding advisory
votes on executive compensation or golden parachute arrangements; and
|
|
·
|
we have elected to use an extended transition period for complying
with new or revised accounting standards.
|
We may take advantage of the other provisions
until the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering, or December
31, 2021; or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company
upon the earliest to occur of: (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion,
(ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which would occur if the market value of our common stock that is held by non-affiliates
exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which
we have issued more than $1 billion in non-convertible debt during the preceding three-year period.
Factors Impacting Our Operating Results
Our results of operations are affected
by a number of factors and depend on the rental revenue we receive from the properties that we acquire, the timing of lease expirations,
general market conditions, the regulatory environment in the medical-use cannabis industry, and the competitive environment for
real estate assets that support the regulated medical-use cannabis industry.
Rental Revenues
We receive income primarily from rental
revenue generated by the properties that we acquire. The amount of rental revenue depends upon a number of factors, including:
|
·
|
our ability to enter into leases with increasing or market value rents
for the properties that we acquire; and
|
|
·
|
rent collection, which primarily relates to each of our tenant's financial
condition and ability to make rent payments to us on time.
|
The properties that we acquire consist
of real estate assets that support the regulated medical-use cannabis industry. Changes in federal law and current favorable state
or local laws in the cannabis industry may impair our ability to renew or re-lease properties and the ability of our tenants to
fulfill their lease obligations and could materially and adversely affect our ability to maintain or increase rental rates for
our properties.
Conditions in Our Markets
Positive or negative changes in regulatory,
economic or other conditions, drought, and natural disasters in the markets where we acquire properties may affect our overall
financial performance.
Competitive Environment
We face competition from a diverse mix
of market participants, including but not limited to, other companies with similar business models, independent investors, hedge
funds, hard money lenders and other real estate investors, as well as potential tenants (cannabis operators themselves), all of
whom may compete with us in our efforts to acquire real estate zoned for cannabis cultivation and production operations. Competition
from others may diminish our opportunities to acquire a desired property on favorable terms or at all. In addition, this competition
may put pressure on us to reduce the rental rates below those that we expect to charge for the properties that we acquire, which
would adversely affect our financial results.
Operating Expenses
Our operating expenses include general
and administrative expenses, including personnel costs, stock-based compensation, and legal, accounting, and other expenses related
to corporate governance, public reporting and compliance with the various provisions of U.S. securities laws. We generally structure
our leases so that the tenant is responsible for taxes, maintenance, insurance, and structural repairs with respect to the premises
throughout the lease term. Increases or decreases in such operating expenses will impact our overall financial performance.
Our Qualification as a REIT
We have been organized and believe that
we have operated and intend to continue operating our business so as to qualify to be taxed as a REIT for U.S. federal income tax
purposes. Shares of our common stock are subject to restrictions on ownership and transfer that are intended, among other purposes,
to assist us in qualifying and maintaining our qualification as a REIT. In order for us to qualify as a REIT under the Code, the
relevant sections of our charter provide that, subject to certain exceptions, no person or entity may own, or be deemed to own,
by virtue of the applicable constructive ownership provisions of the Code, more than 9.8% (in value or number of shares, whichever
is more restrictive) of the aggregate of our outstanding shares of stock or more than 9.8% (in value or number of shares, whichever
is more restrictive) of our outstanding common stock or any class or series of our outstanding preferred stock.
Results of Operations
We were formed on June 15, 2016. We commenced
active real estate operations on December 19, 2016 with the acquisition of our first property in New York. As of September 30,
2018, we owned nine properties that were 100% leased to state-licensed medical-use cannabis operators and comprising an aggregate
of approximately 875,000 rentable square feet (including approximately 114,000 square feet under development) in Arizona, Maryland,
Massachusetts, Michigan, Minnesota, New York and Pennsylvania.
Investments in Real Estate and Leasing Activities during
the Nine Months Ended September 30, 2018
For a discussion of investments in real estate and leasing activities
during the nine months ended September 30, 2018, please see Note 6 in the Company’s Notes to the Condensed Consolidated Financial
Statements included in this report.
Comparison of the Three and Nine Months Ended September
30, 2018 and 2017
As a result of the timing of our formation
in June 2016, and the initial public offering and commencement of real estate operations with the acquisition of our first property
in December 2016, we expect revenue and expenses to increase in future periods as we acquire additional properties. The following
table sets forth the results of our operations (in thousands):
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$
|
3,716
|
|
|
$
|
1,495
|
|
|
$
|
9,639
|
|
|
$
|
4,074
|
|
Tenant reimbursements
|
|
|
210
|
|
|
|
64
|
|
|
|
365
|
|
|
|
64
|
|
Total revenues
|
|
|
3,926
|
|
|
|
1,559
|
|
|
|
10,004
|
|
|
|
4,138
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property expenses
|
|
|
210
|
|
|
|
64
|
|
|
|
365
|
|
|
|
64
|
|
General and administrative expense
|
|
|
1,442
|
|
|
|
983
|
|
|
|
4,393
|
|
|
|
4,204
|
|
Severance expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
113
|
|
Depreciation expense
|
|
|
703
|
|
|
|
217
|
|
|
|
1,715
|
|
|
|
553
|
|
Total expenses
|
|
|
2,355
|
|
|
|
1,264
|
|
|
|
6,473
|
|
|
|
4,934
|
|
Income / (loss) from operations
|
|
|
1,571
|
|
|
|
295
|
|
|
|
3,531
|
|
|
|
(796
|
)
|
Interest and other income
|
|
|
261
|
|
|
|
39
|
|
|
|
788
|
|
|
|
117
|
|
Net income / (loss)
|
|
|
1,832
|
|
|
|
334
|
|
|
|
4,319
|
|
|
|
(679
|
)
|
Preferred stock dividend
|
|
|
(338
|
)
|
|
|
—
|
|
|
|
(1,014
|
)
|
|
|
—
|
|
Net income / (loss) attributable to common stockholders
|
|
$
|
1,494
|
|
|
$
|
334
|
|
|
$
|
3,305
|
|
|
$
|
(679
|
)
|
Revenues
.
Rental.
The increase in rental revenue is related to
our acquisition of new properties and the annual escalation of base rent on two of our leases.
Tenant Reimbursements.
The increase in tenant reimbursements
revenue is related to the timing of when the insurance and property tax expenses were incurred at the respective properties and
reimbursed by the respective tenants.
Expenses
.
Property Expenses.
The increase in property expenses
is related to the timing of when the insurance and property tax expenses were incurred at the respective properties.
General and Administrative Expense
. The increase in general
and administrative expense during the three months ended September 30, 2018 compared to the three months ended September 30, 2017
is primarily the result of higher cash compensation, public company and travel costs. The increase in general and administrative
expense during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 is primarily driven
by higher cash compensation, public company, travel and occupancy costs, partially offset by an approximately $469,000 decrease
in non-cash stock-based compensation. Compensation expense for the three and nine months ended September 30, 2018 included approximately
$386,000 and $1.1 million in non-cash stock-based compensation, respectively. Compensation expense for the three and nine months
ended September 30, 2017 included approximately $173,000 and $1.5 million in non-cash stock-based compensation, respectively.
Severance Expense.
During the nine months ended September
30, 2017, we incurred $113,000 in severance expense related to the cessation of employment of one of our executive officers in
June 2017.
Depreciation Expense.
The increase in
depreciation expense is related to the depreciation on our acquisitions and reimbursements for tenant improvements and
construction activities during the respective periods.
Interest and Other Income.
Interest and other
income for the three and nine months ended September 30, 2018 is primarily related to interest earned on our cash and cash equivalents
and short-term investments. Interest and other income for the three and six months ended September 30, 2017 related to interest
earned on our cash and cash equivalents. The increase in interest income was due to higher interest bearing balances and interest
rates.
Preferred Stock Dividend
. Preferred stock dividend
relates to the dividend on the 9.00% Series A cumulative redeemable preferred stock issued in October 2017.
Liquidity and Capital Resources
Liquidity is a measure of our ability to
meet potential cash requirements. We expect to use significant cash to acquire our target properties, pay dividends to our stockholders,
fund our operations, and meet other general business needs.
Sources and Uses of Cash
We derive all of our revenues from the
leasing of our properties, collecting rental income and operating expense reimbursements based on contractual arrangements with
our tenants. This source of revenue represents our primary source of liquidity to fund our dividends, general and administrative
expenses, property operating expenses and other expenses incurred related to managing our existing portfolio and investing in additional
properties. To the extent additional resources are needed, we expect to fund our investment activity generally through equity or
debt issuances either in the public or private markets. Where possible, we also may issue limited partnership interests in our
Operating Partnership to acquire properties from existing owners seeking a tax-deferred transaction.
On January 22, 2018, we issued 3,220,000
shares of common stock in a public offering, including the exercise in full of the underwriters' option to purchase an additional
420,000 shares, resulting in net proceeds of approximately $79.3 million, after deducting the underwriters' discounts and commissions
and offering expenses.
On October 9, 2018, we issued 2,990,000 shares of common stock, including the exercise in full of the
underwriters’ option to purchase an additional 390,000 shares, resulting in
in
net proceeds of approximately $113.9 million, after deducting the underwriters' discounts and commissions and offering expenses.
We have filed a shelf registration statement,
which was subsequently declared effective by the SEC, which may permit us, from time to time, to offer and sell common stock, preferred
stock, warrants and other securities to the extent necessary or advisable to meet our liquidity needs. We expect to meet our liquidity
needs through cash on hand, cash flows from operations and cash flows from sources discussed above. We believe that our liquidity
and sources of capital are adequate to satisfy our cash requirements. We cannot, however, be certain that these sources of funds
will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs. Our investment
guidelines also provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets
at the time of any new borrowing, subject to our board of directors' discretion.
Operating Activities
Cash flows provided by operating
activities for the nine months ended September 30, 2018 and 2017 were approximately $9.6 million and $1.5 million,
respectively. Cash flows provided by operating activities were generally from contractual rent and security deposits from
our properties, offset by our general and administrative expense.
Investing Activities
Cash flows used in investing activities for the nine months ended September 30, 2018 were approximately
$41.9 million, related to the purchases of investments in real estate and funding of a portion of the tenant improvement allowances,
Construction Funding and Additional Purchase Price and net purchases and maturities of short-term investments. Cash flows used
in investing activities for the nine months ended September 30, 2017 were approximately $11.2 million primarily related to the
purchases of investments in real estate.
Financing Activities
Net cash provided by financing activities
of approximately $73.7 million during the nine months ended September 30, 2018 was the result of approximately $79.3 million in
net proceeds from the sale of 3,220,000 shares of common stock, offset by dividend payments of approximately $5.3 million to common
and preferred stockholders and approximately $390,000 related to net share settlement of equity awards to pay the required withholding
taxes upon vesting of restricted stock for certain employees.
During the nine months ended September
30, 2017, we paid approximately $276,000 of stock offering costs related to our initial public offering, approximately $298,000
related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain
employees, and approximately $525,000 in dividends to common stockholders.
Dividends
We have elected to be taxed as a REIT under
the Code, commencing with our taxable year ended December 31, 2017. To qualify as a REIT, we must meet a number of organizational
and operational requirements, including the requirement that we distribute currently at least 90% of our ordinary taxable income
to our stockholders. While we most recently paid a dividend on shares of common stock at an annual dividend rate of $1.40 per share,
the actual dividends payable in the future will be determined by our board of directors based upon the circumstances at the time
of declaration and, as a result, the actual dividend payable in the future may vary from the current rate. The decision to declare
and pay dividends on shares of our common stock and preferred stock in the future, as well as the timing, amount and composition
of any such future dividends, will be at the sole discretion of our board of directors in light of conditions then existing, including
our ability to generate cash flows and make accretive new investments, earnings, financial condition, capital requirements, debt
maturities, the availability of debt and equity capital, applicable REIT and legal restrictions and general overall economic conditions
and other factors.
Contractual Obligations
As of September 30, 2018, we had
approximately $4.4 million outstanding in commitments related to tenant improvement allowances (excluding the Additional TI
Allowance, which has not been made available and is contingent on satisfaction of certain conditions), which generally may be
requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease,
approximately $9.9 million outstanding in our commitments relating to the Construction Funding for the development of two
buildings which the tenant has agreed to use commercially reasonable efforts to complete by August 31, 2019, and
approximately $1.0 million outstanding in commitments relating to the
Additional
Purchase Price for the completion of certain development milestones for the property in Michigan, which the seller is
required to complete by December 31, 2018
.
Additionally, we had approximately $188,000 outstanding in commitments related to our office and equipment leases, with
approximately $23,000 to be paid in the remainder of 2018, approximately $90,000 to be paid in 2019, and approximately
$75,000 to be paid in 2020.
Funds from Operations and Adjusted Funds from Operations
Funds from operations (“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 our 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. We believe that by excluding the effect of depreciation,
FFO and FFO per share can facilitate comparisons of operating performance between periods. We report 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. We calculate 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.
Our 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 our financial performance
or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative
of funds available to fund our cash needs, including our 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.
The table below is a reconciliation of net income / (loss) to FFO and AFFO for the three and nine months
ended September 30, 2018 and 2017
(in thousands, except
share and per share amounts):
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income / (loss) attributable to common stockholders
|
|
$
|
1,494
|
|
|
$
|
334
|
|
|
$
|
3,305
|
|
|
$
|
(679
|
)
|
Real estate depreciation
|
|
|
703
|
|
|
|
217
|
|
|
|
1,715
|
|
|
|
553
|
|
FFO available to common stockholders
|
|
|
2,197
|
|
|
|
551
|
|
|
|
5,020
|
|
|
|
(126
|
)
|
Stock-based compensation
|
|
|
386
|
|
|
|
173
|
|
|
|
1,079
|
|
|
|
1,548
|
|
Severance expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
113
|
|
AFFO available to common stockholders
|
|
$
|
2,583
|
|
|
$
|
724
|
|
|
$
|
6,099
|
|
|
$
|
1,535
|
|
FFO per share — basic
|
|
$
|
0.33
|
|
|
$
|
0.16
|
|
|
$
|
0.79
|
|
|
$
|
(0.04
|
)
|
FFO per share — diluted
|
|
$
|
0.32
|
|
|
$
|
0.16
|
|
|
$
|
0.77
|
|
|
$
|
(0.04
|
)
|
AFFO per share — basic
|
|
$
|
0.39
|
|
|
$
|
0.21
|
|
|
$
|
0.95
|
|
|
$
|
0.46
|
|
AFFO per share — diluted
|
|
$
|
0.38
|
|
|
$
|
0.21
|
|
|
$
|
0.93
|
|
|
$
|
0.44
|
|
Weighted average shares outstanding — basic
|
|
|
6,636,638
|
|
|
|
3,392,508
|
|
|
|
6,388,058
|
|
|
|
3,369,308
|
|
Weighted average shares outstanding — diluted
|
|
|
6,785,800
|
|
|
|
3,501,147
|
|
|
|
6,534,300
|
|
|
|
3,509,166
|
|
Critical Accounting Policies
Our condensed consolidated financial statements
have been prepared in accordance with GAAP, which require us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial
statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially
from those estimates and assumptions. Set forth below is a summary of our accounting policies that we believe are critical to the
preparation of our condensed consolidated financial statements.
Acquisition of Rental Property, Depreciation and Impairment
In order to prepare our condensed consolidated
financial statements according to the rules and guidelines set forth by GAAP, many subjective judgments must be made with regard
to critical accounting policies. One of these judgments is our estimate for useful lives in determining depreciation expense for
our properties. We depreciate each of our buildings and improvements over its estimated remaining useful life, generally not to
exceed 35 years. We depreciate tenant improvements at our buildings over the shorter of the estimated useful lives or the terms
of the related leases. If we use a shorter or longer estimated useful life, it could have a material impact on our consolidated
results of operations.
Management must make significant assumptions
in determining the fair value of assets acquired and liabilities assumed. Upon acquisition of a property, we allocate the purchase
price based upon the relative fair values of all assets acquired and liabilities assumed. Acquisition costs are capitalized as
incurred. All of our acquisitions have been recorded as asset acquisitions.
Another significant judgment must be made
as to if, and when, impairment losses should be taken on our properties when events or a change in circumstances indicate that
the carrying amount of the asset may not be recoverable. A provision is made for impairment if estimated future operating cash
flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current
book value of the property. Key inputs that we utilize in this analysis include projected rental rates, estimated holding periods,
capital expenditures, and property sales capitalization rates. If a property is held for sale, it is carried at the lower of carrying
cost or estimated fair value, less estimated cost to sell. The carrying value of our real estate is anticipated to be the largest
component of our condensed consolidated balance sheet. Our strategy of primarily holding properties, long-term, directly decreases
the likelihood of their carrying values not being recoverable, thus requiring the recognition of an impairment. However, if our
strategy, or one or more of the above assumptions were to change in the future, an impairment may need to be recognized. If events
should occur that require us to reduce the carrying value of our real estate by recording provisions for impairment, they could
have a material impact on our consolidated results of operations.
Revenue Recognition and Accounts Receivable
Our existing tenant leases are and future
tenant leases are generally expected to be triple-net leases, an arrangement under which the tenant maintains the property while
paying us rent and property management fees. We account for our leases as operating leases. We recognize revenue for each of our
properties on a cash basis due to the uncertainty of collectability of lease payments from each tenant due to its limited operating
history and the uncertain regulatory environment in the United States relating to the medical-use cannabis industry. Contractually
obligated reimbursements from tenants for recoverable real estate taxes and operating expenses are included in tenant reimbursements
in the period when such costs are incurred. Contractually obligated real estate taxes that are paid directly by the tenant to the
tax authorities are not reflected in our consolidated financial statements.
Stock-Based Compensation
Stock-based compensation for equity awards
is based on the grant date fair value of the equity instrument and is recognized over the requisite service period. If awards are
forfeited prior to vesting, we reverse any previously recognized expense related to such awards in the period during which the
forfeiture occurs and reclassify any non-forfeitable dividends previously paid on these awards from retained earnings to compensation
expense.
Income Taxes
We have been organized to operate our business
so as to qualify to be taxed as a REIT, for U.S. federal income tax purposes. Under the REIT operating structure, we are permitted
to deduct dividends paid to our stockholders in determining our taxable income for U.S. federal income tax purposes. As long as
our dividends equal or exceed our taxable net income, we generally will not be required to pay U.S. federal income tax on such
income.
The Tax Cuts and Jobs Act was enacted in
December 2017 and is generally effective for tax years beginning in 2018. This new legislation is not expected to have a material
adverse effect on the Company's business and contains several potentially favorable provisions.
Adoption of New or Revised Accounting Standards
As an "emerging growth company"
under the JOBS Act, we can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act
of 1933, as amended, for complying with new or revised accounting standards. In other words, an "emerging growth company"
can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. An "emerging
growth company" may opt out of the extended transition period for complying with new or revised accounting standards. A decision
to opt out, however, is irrevocable. We have elected not to opt out of such extended transition period, which means that when a
standard is issued or revised and it has different application dates for public or private companies, we can adopt the standard
for the private company. This may make comparison of our financial statements with a public company that either is not an "emerging
growth company" or is an "emerging growth company" that has opted out of using the extended transition period difficult
or impossible as different or revised accounting standards may be used.
Impact of Real Estate and Credit Markets
In the commercial real estate market, property
prices generally continue to fluctuate. Likewise, during certain periods, the U.S. credit markets have experienced significant
price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor
the commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy
accordingly.
Off-Balance Sheet Arrangements
We have no unconsolidated investments or
any other off-balance sheet arrangements.
Interest Rate Risk
We have not issued any debt and have no
debt outstanding, so we are not exposed to interest rate changes. At this time, we have no plans to issue debt instruments. It
is possible that a property we acquire in the future would be subject to a mortgage, which we may assume.
Impact of Inflation
We enter into leases that generally provide
for limited increases in rent as a result of increases in the U.S. Consumer Price Index (typically subject to ceilings) or fixed
increases. We expect these lease provisions to result in rent increases over time. During times when inflation is greater than
increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.
Seasonality
Our business has not been, and we do not
expect our business in the future to be, subject to material seasonal fluctuations.