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On Monday, Citizens JMP analyst Aaron Hecht maintained a Market Perform rating on Innovative Industrial Properties Inc. (NYSE: NYSE:IIPR) following recent tenant defaults. Innovative Industrial Properties disclosed on Friday that three of its tenants and one loan borrower defaulted on their payments, which came after PharmaCann, the company’s largest tenant, defaulted two weeks earlier. As a result, 27% of Innovative Industrial Properties’ rental and net operating income stream is now in default, representing an annualized revenue loss of $78 million, or approximately $2.85 per share of funds from operations (FFO)/funds available for distribution (FAD). According to InvestingPro data, the company maintains strong financial health with a current ratio of 2.82x, indicating sufficient liquidity to weather near-term challenges.
The company’s shares experienced a downturn in aftermarket trading and are expected to be volatile at Monday’s opening. The stock has already declined over 51% in the past six months, with InvestingPro data showing the current price at $63.75, well below its 52-week high of $138.35. Hecht noted that Innovative Industrial Properties’ management is taking a firm stance on lease agreements by refusing partial payments after the fallout with PharmaCann. This approach is considered aggressive, especially since the company has already seen a 16% reduction in its base rents, and the process of re-tenanting a property can take years. Despite these challenges, the company maintains an impressive 11.92% dividend yield.
Despite the challenges, the analyst believes that the current issues have been factored into the stock’s pricing. Innovative Industrial Properties is now trading at 11 times its estimated 2025 FFO, compared to the Citizens REIT index, which trades at 20 times. The analyst concluded that given the drop in investor sentiment due to operator defaults and the connection to an unfavored industry, the stock appears to be fairly valued at its current price. However, InvestingPro’s Fair Value analysis suggests the stock is currently undervalued, with additional metrics and insights available in the comprehensive Pro Research Report, which covers over 1,400 US stocks.
In other recent news, Innovative Industrial Properties reported fourth-quarter 2024 results, with Core Funds From Operations (FFO) reaching $2.03 per share, surpassing both analyst estimates and the consensus. Despite this positive outcome, the company is facing significant challenges due to tenant defaults. PharmaCann, a tenant responsible for a substantial portion of rental revenue, defaulted on leases affecting properties across multiple states, totaling approximately $2.7 million in unpaid rent. In response, Innovative Industrial Properties is in discussions with PharmaCann and may consider eviction proceedings if necessary.
Additionally, the company has expanded its at-the-market equity offering program to $500 million, with nearly $489.9 million worth of shares still available for sale. This expansion aims to raise capital for further investment in real estate assets. Analyst firms have reacted to these developments, with Compass Point downgrading the stock to Sell and lowering the price target to $50, and Piper Sandler adjusting its price target to $60 while maintaining an Underweight rating. Meanwhile, Citizens JMP maintained a Market Perform rating, noting the company’s need to address tenant issues to realign its stock valuation with historical norms. These recent developments reflect the ongoing challenges and strategic maneuvers Innovative Industrial Properties is undertaking amid a shifting cannabis industry landscape.
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