Innovative Industrial Properties IIPR Stock Forecast & Analysis

Innovative Industrial Properties IIPR stock is a REIT based out of San Diego, California that invests in real estate dedicated to cannabis production and processing.  The important thing to note is that Innovative Industrial Properties is a REIT.  For me, I am looking to invest in cannabis stocks that are hands-on, pure plays.  The reason is simple: That is where the money is… or, will be.  For Innovative Industrial Properties, investing in the real estate infrastructure, with a lease-back, is fundamentally a real estate play that has a twist.  Therefore, when I think of IIPR stock I typically shy away from as a potential investment because IIPR is not a pure-play cannabis stock.  Instead, it is a real estate investment that is involved in cannabis.  Still, I wanted to do the IIPR stock forecast & analysis because, as it turns out, there is a short-seller attack on IIPR stock.

This makes IIPR stock an interesting headline-maker at the moment.

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REITs in the time of Rising Interest Rates

In the meantime, despite there being new information coming in from IIPR stock, the real moves with this REIT are driven by the economic outlook of IIPR and the REIT industry.  Interest rates are very likely to move higher from inflation numbers that are too high.  And, my thinking is that inflation numbers are going to continue to remain higher as the jobs sector is too robust.

A perfect example of what is going on with the economy is the recent increases in the jobs market.  Jobs data came in very hot for the month of July.  This would show that there is likely to be a lot more work to be done by the Federal Reserve.  If jobs remain too robust, and wage increases continue higher, this will push inflation numbers upward.

The Federal Reserve is likely to be facing higher, and nagging inflation numbers throughout the first part of next year.  I do not believe that inflation is magically going to drop to on-target numbers and remain there.  I believe that the ripple-through effects of the robust jobs data will continue throughout the economy and inflation numbers will persist at higher levels for some time.  This would mean the Federal Reserve is going to need to raise interest rates further.

Innovative Industrial Properties in the future

Like all REITs, higher interest rates will make it more difficult for REITs to grow at the same pace; growth is likely to slow down for Innovative Industrial Properties.  This will mean that although I expect IIPR stock to move higher, this is more of an eventuality versus the current level being a starting point.  I believe that IIPR stock is likely to move lower in the coming weeks.  And, as interest rates get pushed higher, the effects on the broader stock market are going to be felt throughout.  I look for continued moves lower and then a resumption of a more gradual pace upward for IIPR stock.

Innovative Industrial Properties

What is a REIT

In order to understand how IIPR stock functions, you first need to understand what is a REIT.  A REIT is a Real Estate Investment Trust.  The shortest definition of a REIT is that it is a publicly traded investment vehicle in an income-producing real estate investment portfolio.  A REIT may own, operate, or finance real estate.  So, 75% of the investments must be in real estate, Treasuries, or cash.  And, 75% of the income must be derived from rents, interest, mortgages that finance real estate, or the sale of real estate.  Then, 90% of profits are returned to investors via dividends.

In the case of IIPR, the derives its income from a portfolio that is invested in real estate that is focused in cannabis investments.

Are REITs good investments?

Innovative Industrial Properties IIPR stock Forum & Discussion under short seller

This is a philosophical question that, should you be looking at REITs as an investment vehicle you may see them as a potential investment opportunity.  As it turns out, REITs, from a historical return basis, are some of the best investments you can have.  If you think about this, it makes sense.  REITs only invest in real estate.  Real estate has historically gone higher over many years’ time.  And, the rents on real estate also goes higher over time.  Given that, as real estate value continues higher, investments in these REITs will go higher as well.

IIPR stock under short attack

  • Innovative Industrial Properties IIPR stock Weekly Chart

As it turns out, for no particular reason why, I looked up the chart on IIPR over the weekend to see what was going on with the REIT.  And, as you can expect, I was surprised to see that the REIT was heading lower.  That did not make much sense to me seeing how asset prices are heading higher and higher.

Looking up at the Dow REIT, a chart on the Dow Jones Equity REIT, this is a pretty good example of what REITs have been doing over the past few days and quarters.  While there are concerns of interest rates heading higher, which would affect asset prices over a longer term, mostly, REITs are still heading higher, if not sideways.

But, for IIPR, as the chart above shows, there is a continuous movement downward based upon a short-seller attack.

The Nature of a Short Attack

A short attack is when an individual, or firm, sells stock short in the hopes that the stock price will fall.  And, if the stock price does fall, the short-seller would profit.  In this case, already there is a move lower in IIPR stock.

The quick on the thesis that the short-seller has is that IIPR has in its portfolio Parallel assets and that since Parallel failed to go public the assets held by IIPR are degrading. In essence, Blue Orca Capital believes that IIPR is a sophisticated bank operating under the umbrella of a REIT and that this model will not work out.

I disagree with this thesis.

There were two main questions I have regarding this:

  • Is there merit in the short attacker’s thesis for selling IIPR stock?
  • Are REITs going to go lower because of interest rate increases?

Let’s look at the concept of a “bank” first.

Nature of a REIT & IIPR Stock

First, IIPR is a REIT and, as I mentioned above, REITs are investment vehicles.  But, a REIT as an investment vehicle is also encoded in law via the Tax Code.  A REIT functions within these laws.  And, through the transitive property of mathematics it is safe to assume that since IIPR is a REIT they are functioning in this capacity and are operating lawfully.

IIPR does a buy-leaseback program that is helpful to new cannabis companies.  First, IIPR will acquire a piece of property from a cannabis company.  Then, they may make improvements or other investments in the property.  It is believed that IIPR is overpaying for the real estate up front and that this is a hinderance for high-performance.  But, IIPR is then leasing back the property at a rate of some 11% – 14% yields.  The idea is that since IIPR is doing this, they are in fact operating as a bank because cannabis is not federally legal yet.

Meh… I don’t see that.

I would suggest that you are going to pay a higher price for any asset if you are getting a yield of between 11% – 14%; the nature of investing and capitalism.  So, while the purchase price may be high, the rate of yield is commensurate.  And, keep this in mind: Cannabis companies are not at all disposed of picking up and moving in a quick fashion.  If there is a long-term lease, and it has a high yield, that would tell me there are long-term profits with a high initial entry point.  Mind you, though, that as a landlord, IIPR will be on the hook for maintenance costs but, that will have been factored in to the equation.

Is the purchase/lease-back a banking entity?

I think the idea that IIPR is a sophisticated “bank” because they acquire properties and lease them back is an investing thesis searching for a rationale.  As mentioned above, a REIT may only invest in certain types of assets in a certain manner.  And, a REIT must get its income from rents, mortgages, or interest.  This is what IIPR is doing.

Keep in mind that cannabis is not federally legal at this time.  Although, it appears that there is a lot of forward momentum with cannabis federal legalization.  That would solidify the businesses that IIPR has as tenants.  And, the process of lending an amount above the acquisition price is hardly new in real estate.

IIPR has already paid a certain price for the assets involved.  And, they are also getting the 11% – 14% yield from the rents.  The cannabis companies are likely to need some up front cash as they build up their businesses.  And, leasing back the properties after bringing in some increased capital gains may make sense to the cannabis companies.

But, there is one more thing: Real estate prices are continuing higher and higher at very fast rates. What is considered overpaying up front now will look very short-sighted once the value of these assets exceeds the purchase price over time… especially with the yield of 11% – 14%.

Will real estate values continue higher?

The thing to ask is are real estate values going to continue higher?  IIPR is invested in real estate.  And, the valuations of these holdings are going to increase just as any other piece of real estate.  But, IIPR is earning a much higher yield than what might be typical.

While it is very possible that real estate may head lower based upon increasing interest rates, the eventuality is that real estate will eventually head back higher.  While there is likely to be a period where IIPR is under water on its acquisition price, eventually these valuations will exceed the values of these prices.  And, IIPR will earn a higher yield all the while.

Keep in mind, a cannabis producer cannot easily pick up and move to a new location.  First, they are locked into a lease.  Second, they will increase all kinds of costs during the process.  So, IIPR’s investments are very likely to pan out.

Will IIPR’s business go bust?

One of the things that Blue Orca Capital is focusing on is that Parallel failed to IPO.  Parallel is one of IIPR’s tenants.  The claim is that Parallel is a Ponzi scheme.  Okay… maybe it is.  And?  Innovative Industrial Properties has some $1.3B in assets on its books.  This is but one.  Blue Orca Capital’s thinking is that if Parallel defaults they could only get 70% of the current value of the rental rates.  But, do we know if Parallel is even going to default entirely?  And, it represents about $75M of the $1.3B on the books for IIPR.  Still, that could be something to consider.

Second, there is another business that is a tenant of IIPR that is also accused of fraud.  Again, this is a small portion of the total portfolio.

But, Blue Orca Capital also posits that a lot of cannabis companies are nearing default with debts.  That does not coincide with a lot of the reports we are getting where cannabis companies are refinancing at better terms and have been raising capital.  What I found interesting is that the response from IIPR to the short-seller was basically to brush them off stating that the report had false and misleading statements.

I can tell you that many cannabis companies are in fact raising capital and working to improve their financial foundation and not what Blue Orca has stated in its short-seller report.

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Innovative Industrial Properties IIPR stock is Profitable

For now, IIPR is profitable. They have just printed about $4.35 profit off of about 25.6M shares outstanding.  This is a current yield of approximately 3.25%, above the 10-year yield.  But, future projects are for increased earnings which has the potential to drive the yield per share higher.  This will likely drive investors to this higher yield.

If you look at the final chart above you can see that IIPR versus the Dow REIT benchmark shows that IIPR had actually outperforming the Dow REIT on a percentage basis.  Lately, IIPR is below this level.  That may be a buying opportunity for an astute investor.

Looking to the outcome

I do not see the short seller’s rationale that two of its holdings are going to take down IIPR in a meaningful manner.  And, the idea that this business model employed by IIPR is going bust seems a bit stretched.

That being said, IIPR stock has succumbed to selling and the price has been falling.  It remains to be seen what will happen with Parallel and whether or not they bust.  And, as for the other outfit mentioned, this has also yet to be a heavy burden on IIPR.

Still, IIPR is going lower and it may be that this is driven by the fact that REITs in general may be going lower.  The move lower in IIPR may be from the short selling and a megaphone.  But, as for IIPR, they are profitable and look to continue to be.  That might be a reason to give pause to the shorts that maybe they have made their profit targets.

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