Yes, the proportion of Innovative industrial properties (WKN: A2DGXH) is experiencing a really bad stock market year 2022. If we look at Eurochart, we see a minus of 59.3%. In absolute terms, the shares have collapsed from EUR 219.40 to currently EUR 89.34. In US dollars, the minus is even higher. The weak euro is a bit flattering here.
But the real question is: Why are Innovative Industrial Properties so underperforming in 2022? I see three reasons: A high valuation with rising interest rates, a short seller and the beginning of operating problems among tenants. Well, is it still a chance?
Innovative industrial properties: That’s why 60% is in the red!
Innovative Industrial Properties started from a high valuation. The dividend yield, meanwhile, was at a record high of less than 3% and approached 2%. Even that did not seem too expensive. In times of low interest rates and combined with intact, well-double-digit percentage growth, a price-to-FFO ratio in the 1930s seemed reasonable with such a dividend.
Times are changing. And so are interest rates. With the Fed’s rising key interest rates, not only does the dividend yield of 2% and a profit return of 3% appear less attractive. No, but the funds borrowed can also take their toll. This, in turn, weighs on growth and is for me one of the reasons why the stock corrected.
But there are other reasons. A short seller has embraced Innovative Industrial Properties and, despite the obvious and not really secretive business model, is talking about illegitimate financing of the cannabis industry. Cannabis remains illegal at the U.S. state level. Banks must therefore not trade with the industry. What will become of it? Maybe nothing. But the accusation is only in the room.
Finally, Innovative Industrial Properties announced that a major tenant, Kings Garden, has defaulted on its payment obligations. This, in turn, raises concerns that the cannabis industry may face a downturn in times of inflation and rising interest rates. In this setting, a higher unemployment rate would be an operational brake on cannabis REIT. At least that risk is now in the room.
Not the best year!
As a result, we can say that Innovative Industrial Properties in 2022 has gone from a healthy dividend growth stock to a minor issue. Although one can critically question what is exaggerated and whether there are possibilities. Either way, with a whopping 7.6% dividend and a price-to-FFO ratio of just over 11 on an adjusted basis, the stock is getting cheaper and cheaper. There have been stable yields in the past, even with growth in some cases.
Maybe you should also ask yourself what the worst case scenario is. If management were forced to halve the dividend to retain cash, it would still fall by more than 3%. It does not seem wrong either. But decide for yourself if the risk is worth the chance. In any case, the stock of this cannabis REIT is not unattractive. Just rated differently.
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Vincent owns shares in Innovative Industrial Properties. The Motley Fool owns and recommends shares in Innovative Industrial Properties.