Innovative Industrial Properties, Inc.

Long-Term Lease with GTI: Innovative Industrial Properties, Inc. (NYSE: IIPR) is a real estate company focused on the acquisition, ownership and management of specialized industrial properties leased to state-licensed operators for their regulated medical-use cannabis facilities. The company has recently announced that it has closed a sale-leaseback transaction with Green Thumb Industries Inc. for its licensed cannabis cultivation and processing facility for a purchase price of $20.3 million (excluding transaction costs).

Substantial Rise in Rental Income:The company has recently announced the results for its quarter ended 30 September 2019, wherein it reported an increase of 201% in its rental revenues to $11.2 million. This was primarily driven by the acquisition and leasing of new properties, additional tenant improvement allowances provided to tenants at certain properties that resulted in base rent adjustments, and contractual rental escalations at certain properties. Net income recorded a rise of 314% to $6.2 million for the quarter, owing to various acquisitions during the period. IIPR also paid a quarterly dividend of $0.78 per share on October 15, 2019 to common stockholders,representing a 30% increase from its second quarter of 2019.

Financial Performance (Source: Company Reports)

What to Expect:The company expects continued growth in industry and increasing momentum towards legalisation of medical use of cannabis under state law. Despite this, the company believes that current state of federal law creates significant uncertainty and risks related to the use of suchfacilities for adult-use cannabis operations. The company, in the month of July 2019, completed underwritten public offering of 1,495,000 shares of common stock for net proceeds of approximately $180.1 million. In September 2019, the company entered into agreements with respect to equity distribution with three sales agents and may offer and sell through an “at-the-market” offering program up to $250 million in shares. The company has recently sold its common stock for approximately $46.9 million. It expects to use the proceeds from these offerings to invest in specialized industrial real estate assets that support the regulated cannabis cultivation and processing industry and for general corporate purposes.

Stock Recommendation: Prior to acquisitions done by the company, revenues of the company were majorly derived from eleven properties, posing concentration risk. In addition, tenants were generally start-up businesses with limited histories of operations and have not been profitable yet or have been profitable only for a short period of time. Since the start of 2019, the company has been on acquisition spree. The company recently completed the acquisitions and leases of four dispensary locations in Michigan for a total investment of approximately $9.0 million, including reimbursement for certain tenant improvements, and entered into long-term leases with Green Peak Industries, LLC for operation as licensed dispensaries. The company has substantially increased its portfolio and owns 41 properties as on 06 November 2019 from 11 properties as on December 2018. The addition of properties might alleviate the concentration risks. However, we would like to wait how these developments pan out, moving forward.

At the closed market price of $82.84, the stock is available at a price to earnings 57.93x, higher than the industry median of 20x. EV/EBITDA of the company stands at 35.4x as compared to the industry median of 17.7x. The stock has gained ~64.8% in the last one year, however, corrected ~24.8% in the last three months. Thus, considering the sector specific risks, recent acquisitions and its impact on the company's financial books, current trading levels and valuation slightly moving to a higher side, we suggest a "Hold" for investors having a position in the stock; and overall, a wait and watch stance on the stock at the current market price of $82.84, down by 3.09% on November 19, 2019.

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