IIPR Stock: Missed the Rally? More Upside Is Likely
Stock Analysis & Ideas

IIPR Stock: Missed the Rally? More Upside Is Likely

Story Highlights

IIPR’s first-quarter results showcase resilience in a challenging real estate environment bolstered by prudent capital management and a sustained high-demand property portfolio. With the potential for record profits this year and a strong balance sheet, IIPR stock could see further upside despite its market-beating rally of the past year.

IIPR stock (NYSE:IIPR) has undergone a notable rally over the past year. Specializing in industrial cannabis properties, the REIT’s stock has surged by 57% during this period, beating its peers by a wide margin. In comparison, the largest ETF in the sector, the Vanguard Real Estate ETF (NYSEARCA:VNQ), has gained just 3% during the same period. Despite worries about missing the rally, IIPR’s strong balance sheet and potential for record profits this year suggest further upside ahead. For this reason, I remain bullish on the stock.

IIPR has outperformed VNQ in the past year.

Q1-2024 Results: Thriving in a Tough Real Estate Environment

Innovative Industrial Properties kicked off Fiscal 2024 on a strong note, showcasing robust Q1 results that highlighted its ability to thrive even in a tough real estate landscape. The company’s quality portfolio kept producing resilient cash flows and sustained elevated occupancy levels. Further, the REIT strengthened its balance sheet, which is now one of the healthiest among its peers and can support strong profitability despite rising rates. Let’s take a deeper look.

Property Acquisitions Pause, Focus Shifts to Capital Management

IIPR was a serial property acquirer before interest rates started to rise about two years ago. Leveraging its premium stock valuation, the company would frequently issue shares to fund property acquisitions, which proved to be accretive to its profitability.

However, the landscape shifted dramatically with the rise of interest rates, which prompted investors to shift away from REITs. Coupled with concerns among investors regarding a potential dividend cut from IIPR, this led to a substantial downturn in the company’s shares throughout 2022 and 2023, ultimately putting an end to this trend.

During this tougher period, IIPR has focused on prudent capital management. To illustrate, in Q1, IIPR maintained ownership of 108 properties, mirroring last year’s portfolio size. This deliberate pause in expansion safeguarded dividend coverage while bolstering the company’s balance sheet. Further, it has now positioned IIPR to pursue a more aggressive growth strategy once the macro conditions improve.

In Q1, a significant move in capital management took place when the company opted to exchange $4.3 million principal amount of 3.75% exchangeable senior notes due 2024 for a blend of cash and shares of “IIP” common stock before maturity. Additionally, IIPR settled the outstanding $100,000 principal amount upon maturity in February. Thus, IIPR’s current debt effectively includes solely its $300 million worth of notes maturing in 2026, resulting in an excellent debt-to-total-gross-assets ratio of a mere 11%.

Potential for Record Profits This Year Isn’t Far-Fetched

With the company’s property portfolio remaining in high demand among cannabis producers and its streamlined balance sheet mitigating the impact of rising rates, the possibility of IIPR posting record profits in FY2024 isn’t far-fetched. After all, as I mentioned earlier, IIPR entered 2024 on a high note despite the tough real estate market environment.

More specifically, for Q1, IIPR recorded revenues of about $76.1 million, down 1% compared to the prior year period. The minor decline was due to two reasons. First, it was because of $5.6 million in property management fees from properties IIPR regained possession of in Q1 of last year. Additionally, there was a $1.5 million decline in recognized rent due to lease reclassification since the start of 2024.

In other words, no operational or tenant issues took place during the quarter. This illustrates IIPR’s strong lease profile, whose weighted average duration term remains at 14.8 years.

In the meantime, interest expenses amounted to just $4.4 million, down from $4.5 million last year, which reflects the company’s recent capital management moves and overall clean balance sheet. Thus, while the slightly higher share count did impact the per-share figure of AFFO (adjusted funds from operations, a cash-flow metric used by REITs), the impact was minimal. Specifically, AFFO/share came in at $2.21, relatively stable compared to $2.25 last year.

Given that rental escalations throughout the rest of FY2024 are likely to boost revenues against subdued interest expenses, the chance of another year of record AFFO/share (from last year’s $9.08) seems decent.

Is IIPR Stock a Buy, According to Analysts?

Wall Street seems to have a more prudent view of the stock following its recent rally. In particular, Innovative Industrial Properties features a Hold consensus rating based on one Buy and four Hold ratings assigned in the past three months. Still, at $123.00, the average IIPR stock price prediction implies 16% upside potential.


I believe that Innovative Industrial Properties has, thus far, navigated the challenges of a tough real estate market with resilience and strategic foresight. While rising interest rates continue to heavily impact most of its sector peers, the company’s Q1 results highlight the qualities of its property portfolio and leadership’s prudent capital management.

Looking ahead, IIPR could post record profits this year. Further, its clean balance sheet positions it for a bold expansion course once the macro landscape improves. Therefore, shares could have further upside potential despite their already massive rally over the past year.


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