Innovative Industrial Properties (IIPR 1.11%), a leading real estate investment trust (REIT) specializing in the cannabis industry, presented its fourth-quarter results on Feb. 19. It met expectations with adjusted diluted earnings per share (EPS) of $1.36 against the analysts' consensus estimate of $1.36, and revenue of $76.7 million, which was slightly ahead of the expected $76 million. Meanwhile, adjusted funds from operations (AFFO) -- the key profitability metric used in assessing REITs -- came in at $2.22 per share. However, all of those metrics were below last year’s results.
| Metric | Q4 2024 | Q4 2024 Analysts' Estimate | Q4 2023 | % Change |
|---|---|---|---|---|
| EPS (diluted) | $1.36 | $1.36 | $1.45 | (6.2%) |
| Revenue | $76.7 million | $76.0 million | $79.2 million | (3.2%) |
| AFFO per share | $2.22 | N/A | $2.28 | (2.6%) |
Source: Analysts' estimates for the quarter provided by FactSet.
Company Overview
Founded to capitalize on the growing cannabis industry, Innovative Industrial Properties invests in properties built for cannabis cultivation and other industry-related activities. The REIT leases these properties to licensed cannabis operators under long-term agreements. Its strategy mitigates risk by embedding rent escalations into its lease terms, supporting steady and growing revenue streams. The sale and lease-back model helps cannabis businesses leverage their real estate to provide funding for their operations, while continuing to those sites to grow and process cannabis. Meanwhile, Innovative Industrial Properties secures predictable returns through its lease agreements.
The lack of movement on federal cannabis legalization still looms over the industry, and tenant stability remains a pressing concern for IIP due to default risks. However, IIP is positioned to take advantage of state-legal cannabis sales that are projected to rise significantly by 2027.
NYSE: IIPR
Key Data Points
Quarter's Highlights
In the fourth quarter, Innovative Industrial Properties grappled with several financial challenges. Its adjusted diluted EPS of $1.36 was down by 6.2% year over year as revenue dipped to $76.7 million, compared to $79.2 million in the previous year.
The key headwind came from significant tenant defaults, notably by PharmaCann, which constituted 17% of its rental revenue. The resolution of these defaults, through strategic tenant transitions and renegotiated deals, reflected the REIT's ability to manage tenant relationships. However, IIP identified tenant financial stability as a core concern, and it remains vulnerable due to its highly concentrated tenant base.
From a real estate perspective, after acquiring additional properties and expansions, IIP ended the quarter owning 109 properties, spread over 19 states, comprising over 9 million rentable square feet.
Looking Ahead
Management is optimistic about continued growth in the cannabis market. It plans to focus on enhancing its tenant base and expanding its footprint strategically to capture gains from the anticipated increase of state-legal cannabis sales, which are expected to reach $43.4 billion by 2027. Potential legislative actions could facilitate more robust market growth.
IIP's strategies remain centered on disciplined investments in real estate with a strong emphasis on tenant quality and lease expansions. Despite regulatory uncertainties and operational challenges, IIP’s robust liquidity position and strong debt management stance are designed to facilitate its continued growth trajectory.
