Final week, Progressive Industrial Properties (IIPR -2.38%), an actual property funding belief (REIT) centered on the U.S. hashish sector, reported stable third-quarter outcomes

Income jumped 32% yr over yr to $70.9 million, pushed primarily by the acquisition and leasing of latest properties, together with contractual rental will increase at sure properties. Earnings per share elevated 10% to $1.32, and adjusted funds from operations (FFO) — a key profitability metric for REITs — grew 25% to $1.71 per share.  

As of Nov. 3, IIP (as the corporate is usually known as) owned 111 properties (109 working and two underneath building) throughout 19 states the place marijuana for medical use is authorized.  

Earnings releases inform solely a part of the story. Listed below are two key issues it’s best to know from Progressive Industrial Properties’ Q3 earnings name.

A powerful stability sheet

Rates of interest are sharply rising and there’s widespread concern a few attainable recession. On this atmosphere, the well being of an organization’s stability sheet is very necessary. That is notably true for firms that function in extremely curiosity rate-sensitive industries, resembling actual property. 

Many REIT traders depend on dividends for present revenue. So, a REIT’s stability sheet energy is essential for this group of traders. IIP’s inventory is presently yielding about 6.4%. 

From CFO Catherine Hastings’ remarks:

[W]e proceed to take care of probably the most conservative stability sheets within the business actual property trade with 12% debt to whole property, no materials maturities till 2026 and a debt service protection ratio in extra of 15 instances.

The debt-to-asset ratio (typically known as the debt ratio) reveals the share of an organization’s property which can be financed with debt. This metric may be expressed as a ratio (0.12) or as a share (12%). This metric is low for IIP as a result of the corporate has primarily been elevating capital by issuing inventory. 

As factors of comparability, the 2 largest industrial REITs by market cap, Prologis and Public Storage, had debt-to-asset ratios of 30% and 42%, respectively, within the third quarter.  Public Storage’s comparatively excessive debt leverage will increase the inventory’s danger stage within the present rising-interest fee atmosphere.

The debt service ratio measures an organization’s capacity to pay its debt obligations from its working money move.

2. Tenant lease assortment 

From Govt Chairman Alan Gold’s remarks:

Hire assortment for IIP’s working portfolio was 97% for the 9 months ended September 30, 2022, with solely tenants Kings Backyard and Vertical not paying their full contractual lease. As we famous in our [Securities and Exchange Commission (SEC) Form] 8-Okay filed in September, we entered right into a confidential conditional settlement settlement with Kings Backyard. We’re restricted at this juncture as to what we will focus on. 

For now, Kings Backyard continues to occupy 4 of the properties underneath that settlement, whereas relinquishing two of the properties (each in California) which can be underneath improvement again to us. 

Kings Backyard was IIP’s fifth largest tenant (by whole investments, together with dedicated investments) as of the tip of final yr, so it is incapacity to completely pay its lease presents extra concern than when a smaller tenant (resembling Vertical) is struggling financially. Kings Backyard defaulted on rents in July. 

That stated, IIP is comparatively diversified by tenant and geography, which helps management the magnitude of the unfavorable affect from such a scenario. On the finish of final yr, no single tenant represented greater than 15% of the corporate’s whole dedicated investments.

It is excellent news for traders that IIP has a letter of intent (LOI) for a long-term lease at one of many former Kings Backyard properties that is underneath improvement. A LOI is not a lease, nevertheless, so it is not but a executed deal. It is also a constructive that it took simply over a month of selling this property to acquire a LOI. 

As to the opposite former Kings Backyard property underneath improvement, which is in San Bernardino, Gold stated that with the present difficult authorized hashish market in California, the corporate is “evaluating all attainable makes use of for that property, together with non-cannabis makes use of.”

Ben Regan, VP of Investments, added that “Vertical, a tenant of ours in Southern California that represents lower than 1% of the corporate’s whole invested capital and contractual rents, has been making partial funds over time.”

Whereas these defaults are unlucky, the corporate’s lease assortment fee of 97% for its working portfolio over 9 months continues to be stable. These conditions are certain to happen now and again with even the very best managed property portfolios.



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