Why Innovative Industrial Properties Stock Is Down 58% This Year

What happened

Shares of Innovative Industrial Properties (IIPR -0.27%), a marijuana real estate investment trust (REIT), have taken a dive this year, falling with the rest of the marijuana sector. Investors have generally turned away from unprofitable growth stocks, which sums up most of the cannabis industry. In fact, after some initial excitement over marijuana stocks when Canada made recreational use legal, investors have shifted their attention elsewhere and stock valuations have fallen almost across the board in the cannabis sector. 

Innovative Industrial Properties (IIP) is profitable, but it depends on marijuana growers to rent its grow houses, so the company would be in jeopardy if the industry collapses.

According to data from S&P Global Market Intelligence, the stock was down 58% through the first half of the year. As you can see from the chart below, the stock has declined over most of the year.

^SPX data by YCharts

So what

IIP fell sharply out of the gate in 2022 as an operations update that included the acquisition of 29 new properties was not enough to impress investors. The stock lost 15% in its first three sessions of the year.

Shares of the marijuana REIT stabilized at the end of the month, and in its fourth-quarter report in late February, the company posted revenue growth of 59% to $58.9 million. Earnings per share increased from $0.91 to $1.14, and adjusted funds from operations (AFFO), which is generally considered to be a better measure of performance for REITs than earnings per share, rose from $1.30 to $1.85.

In March, the company raised its quarterly dividend to $1.75 per share, a 17% hike from its fourth-quarter dividend and a 33% hike from its dividend in the quarter a year ago.

In April, the stock fell as the company first announced a secondary offering of 1.6 million shares and then got hit by a short-seller attack later in the month. Blue Orca called IIP an “inflated cannabis bank” and said there was an “imminent risk of default” from IIP’s largest tenant. In its response, IIP accused Blue Orca of spreading disinformation and said it didn’t understand its business. Nonetheless, the stock fell 7% on the news.

Finally, IIP delivered another round of solid results in the first quarter with revenue increasing 50% to $64.5 million. Earnings per share increased from $1.05 to $1.32, and AFFO rose from $1.47 to $2.04.

The stock still fell on the news and drifted lower again in June.

Now what

Based on its current numbers, IIP looks like a bargain. The stock is trading at a price-to-earnings ratio of just 23 and it offers a dividend yield above 6%.

Growth and income are a rare combination in the stock market, and IIP’s prospects continue to look bright as more states legalize pot. With the stock down more than 50% this year, now looks like a great time to pick up some shares.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.