Shares of real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR) were lower by as much as 17.5% at one point this week, according to data from S&P Global Market Intelligence. At the start of trading on Friday, the stock had made up a little ground but was still sitting with a 13.5% loss since Monday. There are really two issues in play this week.
Innovative Industrial Properties basically owns hydroponic grow houses that it leases to marijuana producers. It is a picks-and-shovels play on the ongoing legalization of the drug, benefiting from what has basically been a land grab among pot producers eager to gain market share in a new and still-growing industry. That said, marijuana stocks in general have been doing relatively poorly for about a year or so. However, Innovative Industrial Properties, with its differentiated business model, managed to buck that trend and hit an all-time high in mid-November. Since that point, though, it seems that investors have been ready for a breather and the stock has been heading lower. That trend basically continued as 2022 got underway.
That said, there was a bit of news here. On Wednesday, management provided an update on the REIT’s 2021 investment and capital markets activity. It bought 29 facilities last year, which is good, as it shows that the landlord continued to grow its business. However, last month Innovative Industrial Properties exchanged $2.3 million in cash and issued 1,684,237 shares of common stock for $110.4 million worth of its 3.75% exchangeable senior notes due 2024. That’s not exactly a bad thing, as the company has reduced leverage. But stock issuances dilute current shareholders. Investors don’t like that type of thing. Given the broader downtrend in the stock price, it would be hard to attribute this week’s move solely to the stock issuance, but it certainly didn’t help any.
Innovative Industrial Properties is still in growth mode and tied to an exciting new market. It’s probably not appropriate for conservative investors, but for more adventurous types it is worth a closer look. That remains true even though growth gets harder and harder to achieve as a company gains scale, like this REIT has over the past few years. That said, growth-oriented stocks like Innovative Industrial Properties often chart jagged paths, and that can lead to opportunities. In fact, with the shares about 20% off of their November highs, the stock appears to be in its own personal bear market. There have been only two drawdowns over the past decade that were materially worse than that, one of which hit its nadir during the 2020 pandemic sell-off. Although Innovative Industrial Properties may not grow as fast in the future as it has in the past, that doesn’t mean that this unique marijuana play is past its prime.
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