Wall Street is incredibly volatile at times, as investors succumb to the powerful grip of greed and fear. Right now, shares of real estate investment trust (REIT) Innovative Industrial Properties (IIPR -0.17%) are nose-diving in the face of investor fears. And yet, there are material reasons to like the long-term prospects for this niche REIT. Here's why you might want to continue to own this fast-growing landlord today.
That hurts
Since peaking in early 2021, Innovative Industrial Properties' stock is down around 40%. That's among the worst drawdowns of the REIT's fairly short existence (it came public via an IPO in 2016). It can be hard to sit tight through periods like this, but there's a very real reason to believe that the company's business remains strong.
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That's not to suggest that there are no risks here. Indeed, investor sentiment can, and obviously does, change rapidly. But to really understand Innovative Industrial Properties, you need to key in on its business model. The REIT basically buys assets directly from companies that grow marijuana and then leases them back to the seller. The new tenant, which was the former owner, generally agrees to take on most of the costs of operating the assets as well, in what's known as a net lease.
The goal here is for the seller to raise growth capital. For Innovative Industrial, the goal is portfolio growth. To put some numbers on that, the REIT owned no assets when it IPO'd and now has a portfolio of 108 properties. There is an additional positive here, as Innovative Industrial can also invest in its existing portfolio to upgrade and expand assets in exchange for more rent. Thus, as it gains scale, it has both external (acquisition) opportunities and internal ones.
The long and short of it
That brings up a recent short-seller report that questions Innovative Industrial's investments. The REIT strongly refuted the claims, saying:
In particular, it is IIP's opinion that this short-seller fails to have any comprehension of the scope of significant infrastructure improvements that are needed for the transformation of a standard industrial building to a mission-critical facility with the enhanced environmental controls and other building systems necessary for regulated cannabis cultivation and processing. In addition, the writers do not understand the process that IIP employs for underwriting those improvements, and that any IIP reimbursements relate only to verified, qualified improvements to the buildings for these purposes, and never as funding for any type of "loan" to be utilized for any other purpose.
But investors have been downbeat on the entire marijuana sector and the REIT's stock has, obviously, been weak. The short-seller report didn't help any. And yet Innovative Industrial's fundamentals remain strong. Most notably, the company's dividend was recently increased from $1.50 per share per quarter to $1.75, a huge 16% hike.
At the business level, things appear to be going quite well, too. In the first quarter of 2022, the company added four new properties. It also invested in improvements at four properties. It added a new tenant and expanded its relationship with five tenants. And, since the quarter ended, it has already bought another property with another new tenant. These are not the signs of a struggling company. If you are thinking long term, the current drawdown is more likely a buying opportunity than a reason to jump ship -- particularly since pot is an increasingly accepted product legally and socially.
Slowing, but not stopping
As Innovative Industrial expands its portfolio, its growth rate will likely slow. That's just basic math and not a sign of a faltering business model. That said, growth continues to be quite strong, as the REIT invests in new and existing assets. Meanwhile, ongoing, and strong, dividend growth suggests investors are being well rewarded for sticking out the volatility here. Indeed, nothing goes up or down in a straight line on Wall Street -- a fact that long-term investors should keep in mind with this still growing REIT.
