IIPR: A Cautionary Tale of Bud and Balance Sheets

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Innovative Industrial Properties, or IIPR as the initiates call it1, is currently experiencing a period best described as… challenging. The stock has performed with the grace of a drunken troll over the past five years, losing over three-quarters of its value. A year ago, one might have considered it a growth stock. Now? Let’s just say it’s providing excellent lessons in risk management, though mostly to those who didn’t heed them in the first place. The quarterly pronouncements are due on February 23rd, and the question isn’t whether there will be bad news, but how bad. A discerning investor—one who prefers to buy moats, not mirages—should consider a few things before attempting to catch this particular falling bud.

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1. The Numbers Tell a Tale (and it’s not a happy one)

The last quarterly report was, shall we say, less than stellar. Revenue dipped by a respectable 15.4% year-over-year, while Adjusted Funds From Operations—the metric REITs cling to like life rafts2—sank by 23%. Analysts, those oracles of moderate accuracy, are predicting a similarly gloomy picture for the current quarter, with revenue expected to fall further and earnings remaining…flat. A modest beat of expectations might offer a temporary reprieve, a brief illusion of recovery. But that’s rather like polishing a particularly tarnished gnome—it might look better, but it’s still a gnome.

2. A Dividend That May Wilt

The current dividend yield of 16.4% is… arresting. It’s the sort of number that attracts investors like moths to a very brightly colored, possibly dangerous flame. The problem? It’s unsustainable. IIPR is currently paying out more than it’s earning, a situation that can’t continue indefinitely without resorting to alchemy or, worse, more borrowing. A dividend cut is not merely possible; it’s increasingly probable. And when the income stream dries up, those who were attracted by the yield will likely flee, driving the price down further. It’s a classic example of financial gravity at work—what goes up on borrowed time must eventually come down with considerable force.

3. Rescheduling: A Ray of Hope (or a Fool’s Errand?)

The potential rescheduling of cannabis at the federal level—moving it from Schedule I to Schedule III—could provide a much-needed boost. Currently, cannabis businesses are hampered by Section 280E of the tax code, which prevents them from deducting normal business expenses. Rescheduling would alleviate this burden, improving profitability. However, let’s not mistake a potential improvement for a guaranteed salvation. IIPR’s recent troubles stem from tenant defaults—companies unable to pay their rent. A change in tax law won’t magically fix a fundamentally flawed business model. The previous quarter saw revenue hit by almost $15 million due to tenant issues with PharmaCann, Gold Flora, TILT and 4Front—a rather ignominious list, if you ask me.

4. Diversification: Spreading the Risk (and the Thin Gruel)

IIPR has recently invested $270 million in IQHQ, a life sciences REIT. This is, ostensibly, a diversification strategy—a way to reduce reliance on the volatile cannabis market. It’s also, if you look closely, a rather desperate attempt to find a new source of income. The investment is structured as a series of loans and preferred stock purchases, yielding between 13.5% and 15%. It’s essentially IIPR acting as a bank, albeit one with a distinctly optimistic view of its own creditworthiness. While diversification is generally a good thing, it doesn’t magically transform a struggling REIT into a thriving one. It merely spreads the thin gruel across a wider base.

In conclusion, IIPR presents a fascinating case study in risk management, market speculation, and the enduring allure of a good story. It’s a stock for those who enjoy a challenge, a gamble, and a healthy dose of skepticism. For the rest of us, there are plenty of other moats to explore.

1

The initiates, of course, being those who believed the hype.

2

Adjusted Funds From Operations. A metric designed to make a bad situation sound slightly less bad.

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2026-02-20 22:13