AAWH - Innovative Industrial Properties: Don't Fall In Love With Its Dividend Yields

2023-05-22 09:00:00 ET

Summary

• IIPR has plunged by -31.84% YTD and -74.1% since its peak in November 2021, triggered by the unlikely federal legalization and peak recessionary fears.
• Even if the SAFE Banking Act successfully passes in 2023, we suppose funding may remain tight in the cannabis industry, exacerbated by the recent banking meltdown.
• Combined with the sustained price compression and its tenants' lack of profitability, IIPR's rental collection and dividend safety remain uncertain.
• Then again, we are already seeing hints of a pivot by the management, with the San Bernardino location likely converted to a mixed-use development, including a self-storage component.
• Assuming so, we may see IIPR diversify its offerings to include the less risky industrial tenants, at a time when cannabis operators are struggling to stay afloat.

The Pessimistic Sentiments Win Over Decent Execution

Innovative Industrial Properties' ( IIPR ) prospects appear to be decent for now, attributed to the 98% of rental collected in the latest quarter ( +4 points QoQ / -1 YoY ). While $4.2M or 5.5% of its FQ1'23 revenues is attributed to the application of security deposits, its total rental deposits remain relatively stable QoQ and YoY at $58.66M.

In addition, the cannabis REIT has minimal debt maturing over the next few years, only $4.43M in 2024 and $300M in 2026, suggesting its improved liquidity ahead, significantly aided by the $243.17M in AFFO over the last twelve months [LTM] and $232.4M in annualized AFFO by FQ1'23.

Furthermore, IIPR managed to repossess its Summit and Michigan locations by mid-March 2023, previously leased to Green Peak, with the REIT already in the process of finding new cannabis operators, similar to the Texas property, previously leased to Parallel. This is on top of Kings Garden already resuming its rental payments by early 2023.

Then again, investors still need to pay attention to the health of the cannabis REIT's top few tenants, such as Ascend Wellness Holdings ( OTCQX:AAWH ), Curaleaf Holdings ( OTCPK:CURLF ), and Trulieve Cannabis ( OTCQX:TCNNF ), since they remain GAAP unprofitable by the latest quarter despite the improved operating efficiencies.

This is on top of the sustained cash burn witnessed in Columbia Care ( OTCQX:CCHWF ) and Green Thumb Industries ( OTCQX:GTBIF ) thus far. Combined with the sustained price compression and rising inflationary pressures, IIPR's rental collection and dividend safety remains somewhat uncertain until the Fed pivots and the SAFE Banking Act passes.

IIPR YTD Stock Returns (Adjusted For Dividends)

Therefore, it is unsurprising that IIPR continues to trade rangebound after the FQ1'23 earnings call, otherwise, declining by -33.44% YTD compared to the SPY at +9.93%. These point to the negative sentiments surrounding the stock and the unlikely cannabis federal legalization in the near term.

While the cannabis REIT's properties may eventually be converted into other industrial/ greenhouse spaces and medical facilities, we are less certain about its prospects in the latter, especially due to the similar issues faced by many medical REITs thus far.

For example, Medical Properties Trust (NYSE: MPW ) and Omega Healthcare Investors (NYSE: OHI ) both experienced rental collection problems from their lease operators, with many either undergoing restructuring or asset sales .

Then again, MPW may be worse off since it reports an eye-watering short interest of 18.91%, compared to OHI at 8.89% and IIPR at 10.71% at the time of writing, underscoring the potential volatility ahead, with the latter already plunging by -74.1% since its peak in November 2021.

On the other hand, a diversification into industrial spaces may be a viable strategy for IIPR, since the segment already comprises up to 90% of its existing facilities, although much of the greenhouse spaces may require intensive retrofitting.

IIPR has already hinted at this cadence in the recent earnings call, with the San Bernardino location likely converted to a mixed-use development instead, including a self-storage component. While the discussion is still underway, it is unsurprising that the REIT has sought to manage its risks at a time when cannabis operators are struggling to stay afloat.

In addition, its logistics/ industrial REIT peers, such as Prologis (NYSE: PLD ) and STAG Industrial (NYSE: STAG ), continue to perform excellently with minimal rental defaults, despite the uncertain macroeconomic outlook and upended global supply chain issues.

Nonetheless, we must also highlight that these conjectures are highly speculative, given the IIPR management's "focus on purchasing specialized industrial real estate assets for the regulated cannabis industry, " with the San Bernardino location likely being an outlier. We suppose more updates may be offered in the next earnings call.

However, with pessimistic sentiments ruling over cooler heads during this peak recessionary environment, we suppose it may be more prudent to reel in any hopes from the supposed SAFE Banking Act , especially since the recent banking meltdown has resulted in tightened lending to big companies, much less to cannabis-related industries.

IIPR's 6Y Price/ AFFO per share

The same outlook has also been reflected in IIPR's NTM Price/ AFFO per share valuation of 8.11x, trading near its 6Y lows of 7.62x. The stock is also trading lower than its 1Y mean of 11.27x and 3Y pre-pandemic mean of 22.62x. This cadence is likely attributed to the market analysts' underwhelming AFFO projection at a CAGR of +3.3% through FY2024, compared to the +88.5% observed between FY2019 and FY2022.

IIPR 5Y Stock Price

Therefore, while IIPR may look attractive here at its all-time 4Y lows, we suppose more retracements may occur ahead, likely to retest the March 2020 bottom of $60 or worse, the Q4'18 support levels of $45s. As a result of the potential volatility, we prefer to rate the stock as a Hold (Neutral) here. The time to add is not here yet.

Income-seeking investors must not fall in love with its 12.06% forward dividend yields as well, against the 3Y average of 3.74%, since its rich yields may not be sufficient to cover the potential decline in its stock price ahead.

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