Innovative Industrial Properties (IIPR 0.65%), the nation's largest cannabis-focused real estate investment trust (REIT), has been a nightmare for its shareholders for some time now. The stock is down by more than 79% over the past five years and off by more than 37% in the past year alone.
The REIT is scheduled to report its fourth-quarter results on Feb. 23. If you're thinking about buying this beaten-down stock ahead of that report, here are four key factors to consider.
NYSE: IIPR
Key Data Points
1. Analysts are expecting another down quarter
Innovative Industrial Properties had a disappointing Q3. Revenue fell 15.4% year over year to $64.7 million, while adjusted funds from operations (AFFO) -- the preferred profitability metric for REITs -- sank 23% to $1.60 per share.
The average analyst's revenue estimate for Q4 is $66.1 million, down from $76.5 million in Q4 2024. And the consensus earnings prediction is for $1.36 per share, equal to the same quarter last year.
The good news is that, with a relatively low bar, Innovative's shares could get a nice bump if it beats analysts' estimates, as it did in Q3.
Image source: Getty Images.
2. The stock could be a dividend trap
Innovative's share price decline has been made somewhat less painful for its investors thanks to its $1.90 per share quarterly dividend. At the stock's current price, that makes its dividend yield a whopping 16.4%. The question is, how long can Innovative sustain its payout at this level? Its dividend-to-AFFO ratio is 111%, indicating it is paying out more money than it is generating. That trend is unsustainable, so a dividend cut could be coming. Considering that anyone who is holding onto the stock at this point is probably more attracted to it as an income investment, that could send many investors to the exits, further driving down the stock's price.
3. The rescheduling of cannabis would be a boon
If the federal government reclassifies cannabis as a Schedule III drug, as it appears on track to do, that would allow the REIT's tenants to deduct their regular business expenses, making them more profitable. If those tenants become more financially stable, that should ease many of its current problems.
The primary reason that Innovative's revenue took a hit in Q3 was that many of its clients had difficulty paying their rent. As it noted in the earnings release, its top line was hit in particular by "a $14.9 million decrease due to tenant defaults for properties leased to PharmaCann, Gold Flora, TILT and 4Front." It also took a $500,000 hit on properties that it either took back or sold, and lost $900,000 in tenant reimbursement revenue, mainly due to defaults.
4. Diversifying into life sciences gives IIPR more balance
In October, Innovative inked a deal to invest $270 million into IQHQ, a private life sciences REIT. That deal kicked off with a $100 million investment into a 3-year revolving credit facility to IQHQ, yielding 13.5%. Between then and mid-2027, it will also make a series of investments totaling $170 million in IQHQ preferred stock, yielding 15%. It's also set to receive warrants in IQHQ as it meets various funding milestones. Warrants are like coupons that lock in Innovative's right to buy IQHQ stock at a fixed, low price in the future.
The investment gives Innovative exposure to a different space than cannabis. The key point is that the REIT is essentially acting as a bank, with terms that are tilted in its favor.
