With IIPR sliding the past few days, this is what you need to do…
I’ve received a few questions lately about one of my favorite cannabis plays – Innovative Industrial Properties Inc. (NYSE: IIPR).
In the past month, it has declined by 38%. There are a few reasons for the decline, some of which make sense.
Other reasons are misjudgments the market is making.
I think that IIPR represents a good, though not outstanding, value at these levels and that it’s at or near its bottom.
To remind you, Innovative Industrial is a real estate investment trust (REIT) that invests in cannabis facilities. Generally, it buys the facilities from the companies that built them and leases them back to those same companies.
IIPR gets a better-than-market return on its assets, and the tenants get much-needed cash to grow their businesses.
IIPR was the very first report produced by the National Institute for Cannabis Investors – we sent it out for free to everyone who signed up for the American Cannabis Summit last October.
Shareholders Are Taking Profits
One reason the stock is down is because it was up!
Those of you who purchased IIPR stock when you got that first report have seen this stock more than double.
In fact, many of you now own the stock for “free,” having sold half your position when it first doubled. Peeling some profits off of winners is prudent financial management, and we’re not the only ones who have done it.
IIPR’s stock began with a huge run in May, running up 60% in a month, and some of the people who made profits are selling shares.
People selling their shares for profit makes sense, but it can send the stock price lower in just a few days.
Fortunately, when a stock price declines because of profit taking, it’s temporary.
But the market also has some fundamental concerns.
What the Market Thinks
The first one is the prospect of a cannabis banking bill coming out of the Senate and gaining the signature of Donald Trump.
A bill like the SAFE Banking Act would be huge boon for most of the cannabis industry, of course.
But it’s a fair question whether it would hurt IIPR. The idea is that when the big banks come rushing in with capital, IIPR will face competition for the sale-leasebacks it arranges for its customers.
Competition would lower the returns IIPR gets, and Innovative could technically be worth less because of that.
I think this concern is real, but it’s also exaggerated.
Banks are unlikely to offer long-term loans to cannabis companies even if the SAFE Banking Act passes. As you know, most of these companies are not yet making profits – they’re still growing and they are investing even faster than revenues are growing as they try to position themselves for dominance.
Well, banks don’t like to loan to unprofitable companies, even when they know profits are down the road. We will see some lending, but long-term mortgages to build cannabis facilities won’t happen.
IIPR’s CEO, Alan Gold, previously built and sold a REIT that specialized in labs and offices for the biotech industry. That industry has always been legal and banks have not been important players there for the same reason I think they’ll mostly stay out of financing cannabis facilities.
The tenants are not currently profitable, even though they will be in the future.
What Gold is doing with IIPR is a repeat of what he did with his prior company, and that will not change just because the banks get permission to do something they do not want to do.
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The other big concern is kind of the opposite from the completion argument.
Here, the concern is dilution.
And the idea behind this concern is that IIPR is an aggressive share issuer. Growing companies need capital, so Innovative Industrial is a frequent issuer of new shares.
But are these shares dilutive to current shareholders?
So far, the answer is no. As the cannabis industry sees the benefits of leasing rather than owning its real estate assets, IIPR is getting bigger, better, more credit-worthy tenants at the same economics it was previously getting from smaller, riskier tenants.
Any current shareholder should be thrilled to see the company raising money to put to work under those circumstances.
Its previous equity raises have not hurt current shareholders one bit. This is a company that has quadrupled its dividend in just two years, and it has done that by raising new money and putting it to work.
My Final Thoughts on IIPR
Finally, there are the dual challenges of yield and book value.
Here, it’s fair to say that the stock had gotten ahead of itself. At the peak stock price of $137.62, IIPR had a yield of only 1.75%. Compared to the 3.85% forecasted dividend yield of the Charles Schwab REIT ETF, that’s kind of skimpy.
Likewise, the price was over four times the published book value of its assets. REIT investors get pretty nervous when valuations get that high – these are supposed to be relatively conservative investments.
After its recent decline, IIPR has a much more reasonable forward yield of 2.8%.
That’s still less than the Charles Schwab ETF, but most investors share my belief that IIPR’s dividends will continue to grow faster than other REITS. Book value is still high for a REIT, but with that large and growing dividend, I think most investors will get over their other valuation concern fairly easily.
So is IIPR a buy at these levels?
I think it is a buy.
It’s not monstrously undervalued the way many pure-play cannabis stocks are, but it’s got some growth, including increasing dividends, from this level.
It’s also a much lower-risk investment at this level than it was at its high.
Executive Director, National Institute for Cannabis Investors
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16 responses to “Here’s Why the IIPR Stock Price Is Sliding”
September 09 2019