Compass Point says Innovative Industrial needs ‘creativity’ after tenant default

Compass Point analyst Merrill Ross, who previously downgraded Innovative Industrial Properties (IIPR) to Neutral from Buy with a price target of $78 on December 20 after the company reported a default by PharmaCann on all leases, explains that the order of magnitude of the cross-default triggered the firm’s rating downgrade and price target cut as at the time the firm did not know if PharmaCann was “on the brink, or if this was an isolated event.” The firm now thinks this default was a negotiating tactic on the part of both parties and that PharmaCann wants only to exit its lease in Warren, arguing that Innovative Industrial is “wielding a big stick in the cross-default provision.” However, the firm also thinks the “clock is ticking for both companies,” because PharmaCann cannot afford to be evicted from the five other grow facilities and Innovative’s critical negotiation “calls for creativity” as it cannot afford to fail to collect 17% of its revenue for any period of time and still maintain the dividend. The firm adds that it needs to see “a light at the end of the tunnel before we can find a price point where the stock of IIPR represents a buying opportunity.”