Why Did Shares of Innovative Industrial Properties (IIPR) Drop More Than 30% Yesterday?

Yesterday, the market plummeted to levels we have not seen since 2017 as fears about the spread of the coronavirus mounted. Included in this plunge was Innovative Industrial Properties (IIPR), which dropped to $40.

Many investors are wondering if the recent plunge is justified or is IIPR just caught up in a massive round of panic selling.

First, let’s try to understand the reason the market sold off yesterday and why real estate companies, like IIPR, were hit so hard in general. The modern world has never seen a global pandemic like this. And at this point, there is not yet a cure or vaccine to treat COVID-19.

This creates massive uncertainty in the market, as countries rush to slow the spread of the virus. In this particular case, we believe that countries have to initiate a short but strict complete shutdown, and everyone will have to stay home for at least a month to stop the spread of the virus.

If that happens, we are hopeful that within the next 1-2 months the market will have a better understanding of how long this crisis will last, and what to expect.

Real estate on Wednesday was one of the worst-performing sectors on the market, as investors continued to flee to cash, as panic selling set in again. Investors are concerned now about how vacancy rates could skyrocket in a market that continues to be affected by the COVID-19 crisis.

IIPR acquires, owns and manages industrial properties leased to state-licensed operators for their regulated medical-use cannabis facilities.

For many companies, including IIPR, a one to two-month shutdown is possible, followed by a 12-18 month “period of caution,” as life returns back to normal. This is a situation that companies with healthy balance sheets can handle, but what if it takes even longer to slow the spread of COVID-19?

How this all affects IIPR is very simple. If companies are shutting down completely, many of IIPR’s tenants will be forced to shut down their operations. This in turn will result in lost revenues and there will be a higher chance that they could potentially default on their rental payments to IIPR.

A company like IIPR, which carries a fair amount of debt, is in a tough situation because of a much higher chance of default, resulting in earnings losses. The future of the entire real estate industry in our opinion sits on the federal government and how fast they can support American businesses.

On a brighter note, Roth Capital just recently initiated coverage on IIPR with a buy rating and a price target of $110. Scott Fortune from Roth Capital thinks that IIPR is well-positioned to facilitate cannabis companies with much-needed capital through its sale and leaseback strategy. Fortune thinks that the company’s ongoing acquisition strategy will drive growth and dividends down the road. Roth’s target price indicates well over 100% upside from current levels.

During times like these, there is lots of money to be made buying stocks but also immense risk.

That being said, as cautious long-term investors, though we believe that IIPR’s current valuation is attractive, we wouldn’t be going “all in” in buying the stock at these levels.

Instead, we look forward to the day when there is a slowdown in the number of confirmed coronavirus cases, and that will make us more confident in getting involved in IIPR.

IIPR shares fell $0.14 (-0.27%) in after-hours trading Thursday. Year-to-date, IIPR has declined -31.94%, versus a -25.27% rise in the benchmark S&P 500 index during the same period.

About the Author: Aaron Missere

Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More…

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