Shares of Innovative Industrial Properties (NYSE:IIPR) closed approximately 17% lower on January 19 following the fourth quarter (Q4) business update, which highlighted tenant issues. IIPR operates as a Real Estate Investment Trust (REIT) focusing on the regulated U.S. cannabis industry.
Providing the Q4 2022 business update, IIPR stated that it collected 94% of its rents in Q4, which is lower than 97% of rents collected for the full year.
The company indicated that three tenants (including SH Parent, Green Peak Industries, and affiliates of Medical Investor Holdings) were in default on obligations to pay rent. Further, two tenants received rent deferrals.
Highlighting rental collections and tenant issues, JMP Securities analyst Aaron Hecht said, “We are concerned that IIPR appears to be battling two of its larger tenants in Parallel and Green Peak Industries (12.6% of the company’s invested capital) over rent structure.”
Hecht downgraded IIPR to Hold from Buy and lowered his Fiscal 2022 and 2023 earnings per share (EPS) estimates.
Nevertheless, IIPR’s operating portfolio is fully leased. Furthermore, the long weighted average lease expiry term of 15.3 years is encouraging as it offers visibility over future cash flows. Also, IIPR’s real estate assets are well diversified, with no tenant accounting for over 14% of its total portfolio.
Is IIPR Overvalued?
Hecht highlighted that IIPR stock is trading at 12x his 2023 funds from operations (FFO) estimate, which is lower than the industrial group average of 21.2x. However, given the near-term challenges in the capital market and cannabis industry, the analyst views IIPR’s valuation as appropriate.
IIPR carries a Strong Buy consensus rating on TipRanks, reflecting four Buy and one Hold recommendations. Meanwhile, analysts’ average price target of $162.75 implies 76.73% upside potential from current levels. Overall, IIPR has a Smart Score of four on TipRanks, suggesting a Neutral outlook.
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