In April, short-seller Blue Orca Capital released a troubling report about Innovative Industrial Properties (IIPR 0.06%). Among other things, it alleged that the company was a "marijuana bank masquerading as a REIT" and that the company's top tenant was in default.
Short-sellers often have an agenda -- trying to get a stock's price to crash. But the proof is usually in the numbers, which I'll focus on in the latest quarterly report from Innovative Industrial Properties (IIP), which it released last week.
Image source: Getty Images.
Sales continue to soar
For the three-month period ending March 31, IIP reported $64.5 million in revenue, representing a year-over-year increase of 50%. IIP notes that the increase resulted from acquisitions and adding more properties to its portfolio.
It was a case of the same old story for IIP, which has been nothing short of a growth beast over the years. In 2019, its revenue was a much more modest $6.8 million for the same period. Today, its net income alone is far more than that.
IIP generates a strong bottom line because, like many real estate investment trusts (REITs), its expenses don't weigh down its business, allowing it to bank much of that incremental revenue as profit.
The company's margins remain strong
Source: Company filings. Chart by author.
There was a shrinking of IIP's profit margin this past quarter, largely due to rising interest expenses. However, by and large, the company's operations and costs as a percentage of revenue look identical to how the business performed in the prior-year quarter. There are no obvious signs of distress to suggest a significant tenant has stopped paying bills or that IIP is in any trouble.
IIP's earnings call focuses on tenants mentioned in the short-seller report
When the short-seller report initially came out, IIP's management didn't say much other than it was untrue. But on its latest earnings call, management did zero in on two of the tenants the report said were in trouble: Parallel and Kings Garden.
Although IIP didn't specifically call out the short-seller report in the call, it's clear this was an attempt to alleviate concerns relating to it. IIP went over the history and growth of both cannabis companies. It also confirmed not only that Parallel paid May's rent but also that "there's been no discussions about rent relief." Executive Chairman Alan Gold referred to Kings Garden as having "one of the best reputations for product quality and consistency."
While IIP demonstrated its familiarity with the businesses, the discussion centered more on their growth than financial strength, which investors likely would have appreciated. After all, many businesses in the cannabis sector have been growing rapidly, and that can sometimes be their undoing. If IIP was going to try to discredit the report, it could have done a better job of going after its main points instead of indirectly addressing it.
Has IIP done enough to win back investors?
Since releasing its earnings report on May 4, shares of IIP have continued to fall. Given that the markets haven't been terribly strong this year, with the S&P 500 down more than 15% year to date, the drop may not necessarily be indicative of the company's performance. However, the stock's steep 50% decline in 2022 suggests it's also much more than just a downturn in the markets that is behind the sell-off.
Although IIP did post a strong earnings report, it definitely feels like the company missed an opportunity on its earnings call to definitely identify where the short-seller report was wrong. By indirectly responding to it, I'm not convinced that will be enough to satisfy concerned investors.
Is the stock a buy?
IIP has the potential to be a solid income stock to hold for the long haul. Its 5.2% dividend yield is more than three times the size of the average S&P 500 yield of 1.4%. And at a price-to-earnings (P/E) multiple below 30, its valuation is more tenable than when its shares traded at over 40 times trailing profits.
However, I would still avoid the stock for now. There didn't appear to be enough in the company's latest earnings report and call to likely put the short-seller report to rest. And at more than 26 times earnings, IIP is still trading at a bit of a high premium (the S&P 500's P/E ratio is less than 23).
Shares of IIP could come further down in the months ahead, and investors may want to wait for at least another earnings report before making a decision on the pot stock.
