INNOVATIVE INDUSTRIAL PROPERTIES INC (IIPR) stock intrinsic value fair value estimate & owner earnings analysis

Innovative Industrial Properties is a real estate investment trust. At the end of 2025 it owned 111 properties in 19 states, primarily leased on a triple-net basis to state-licensed cannabis operators, meaning the tenant is responsible for structural repairs, maintenance and operating costs. It does not grow or sell cannabis; it is a landlord, and its fortunes depend on whether its tenants can keep paying rent. Of its 109 operating properties, 96.7% were leased at year-end with a weighted-average remaining lease term of 12.8 years. It also has a smaller life-science lending business: $100 million lent to IQHQ under a credit facility, $50 million invested in IQHQ preferred stock, and a commitment to acquire up to $120 million more preferred stock in tranches through the second quarter of 2027. Debt history worth knowing: the 2025 annual report carried an auditor's warning about the company's ability to continue as a going concern, because $291.2 million of 5.50% notes matured in May 2026 and the company lacked the cash to repay them. The company repaid those notes in May 2026 using $402.5 million of new 6.0% exchangeable notes due 2029 and about $150 million of new secured term loans, and says the doubt has been resolved. The price of that fix is a higher interest bill, which we build into the valuation. What the business earns. We measure owner earnings as cash from operations, minus the swings in rent received in advance and other working-capital items, minus stock compensation (a real cost even though it is not paid in cash). We deduct no maintenance spending, because tenants bear it under the leases; the roughly $31 million the company put into new properties and tenant-improvement draws in 2025 bought additional rent and is not upkeep. On that basis owner earnings were $6.94 per share in 2025 ($197.1 million), $8.31 in 2024 and $8.18 in 2023. As a cross-check, 2025 net income of $118.2 million plus $74.1 million of depreciation plus $4.8 million of other non-cash items also equals $197.1 million. The large depreciation charge is added back automatically; because the buildings are maintained by tenants, the real decay risk sits in the tenant and lease-term assumptions below rather than in the earnings level. Which years describe the business today. Earlier years came from a business that was still adding rent quickly, before the 2025 defaults. Rent collection broke down beginning in 2025: PharmaCann stopped paying on nine leases ($29.2 million owed at year-end), and 4Front, Gold Flora and TILT were declared in default (together about 11.6% of annualized rent). Revenue fell from $308.5 million in 2024 to $266.0 million in 2025. We therefore use 2025 alone as the starting level, not the higher 2023 and 2024 years, part of whose rent has since stopped. The first half of 2026 supports it: revenue was $132.3 million against $131.3 million in the second half of 2025, and cash from operations was $100.9 million against $95.5 million. Growth check. Owner earnings per share fell 16.5% in 2025 (from $8.31 to $6.94). Our base case assumes a further 3% decline in its first year, which is a smaller drop than 2025's. The reason the drop should not repeat is that the defaults driving 2025 are already in the base: revenue and operating cash flow were flat between the second half of 2025 and the first half of 2026. We do note that second-quarter 2026 revenue was $63.3 million against $69.0 million in the first quarter. Adjustments to 2025 for facts already true. First, in July 2026 Parallel defaulted on two Florida leases and said it had ceased operations there and would vacate; it paid $16.1 million of rent in 2025, so we remove that. Second, the new financing raises annual interest by roughly $20.5 million net after the old 5.50% notes are gone (6.0% on $402.5 million, term loans at 6.67% to 10.0%, less the retired notes' interest). Third, the 9.00% preferred stock now outstanding (5.67 million shares of $25 each, $141.7 million in total) costs about $12.8 million a year in dividends and is paid before common holders. After these, the starting level is about $147.6 million a year, or $5.35 per share on 27.57 million shares outstanding at June 30, 2026. Base case: $38.65 per share. The $147.6 million starts declining 3% a year for seven years as some tenants keep defaulting and re-letting does not fully replace them; contractual rent increases are not credited separately. From year 8 rents run off evenly to zero by year 19, which matches the 12.8-year weighted-average remaining term. We assume no rent beyond lease terms because nothing signed extends past them. The preferred stock's $141.7 million claim is deducted at the end of that period. Bear case: $18.26 per share. Named risks: the company's annual report says many tenants have limited operating histories, lack sustained profitability, and expect to keep losing money in 2026 while relying on cash on hand; the largest tenants include Ascend, Green Thumb, Curaleaf, The Cannabist Company, Trulieve, Cresco and Holistic. We assume another 25% of rent (about $61 million, from $243.7 million of 2025 rent collected) is lost by 2028 with no replacement, that the $402.5 million of exchangeable notes is refinanced in 2029 at 10% (the top of the rate range on the new term loans), adding about $16 million a year of interest, and that leases run off between years 5 and 15. The company also carries more than $600 million of new exchangeable notes, term loans and revolver borrowings, and its $150 million life-science loans and preferred stock are exposed to a private borrower. Bull case: $55.15 per share. The levers are ones management is already working: about 21.5% of rent (PharmaCann at 9.9% plus 4Front, Gold Flora and TILT at 11.6%) is in default, and the company says it has signed roughly 877,000 square feet of new leases across five properties this year at low leasing cost. We assume half of that rent (about $26 million) is replaced and the Parallel properties are re-let at their old rent ($16 million), both by year 3, with no further erosion and the same run-off from year 8. What we left out and why. We give no value to new acquisitions, the future IQHQ tranches, contractual rent increases on paying tenants, or the $204.7 million of cash held at June 30, 2026, which is earmarked for those commitments and for tenant-improvement draws. Nothing is credited past the ends of leases. Debt principal is not deducted separately; interest is already charged in owner earnings, and the refinancing risk sits in the bear case. Some 2026 details (the Parallel default, the notes repayment and the new financing) come from the company's public announcements and quarterly report rather than the full quarterly filing text. What would make this wrong: a wave of defaults beyond the bear case (many tenants are unprofitable and face significant debt maturities, according to the annual report), or, on the upside, faster re-leasing of the vacated properties at old rents. Margin-of-safety price: $20.00, near the bear case and about 48% below base, because tenant credit is the dominant risk and the company only recently refinanced.