The first medical marijuana real estate investment trust (REIT) to hold its IPO on the New York Stock Exchange has underperformed this year and many investors have moved to the sidelines with the firm.

So far this year, Innovative Industrial Properties, Inc. (IIPR) has seen the price of its stock fall almost 3% and the REIT has not yet lived up to its expectations.

Early Innings of a Growth Cycle

Today, the NYSE-traded cannabis real estate firm announced its second quarter financial results which represents the second full quarter since the company commenced real estate operations.

During the quarter, Innovative Industrial recorded a $422,000 net loss on $1.3 million in revenue. When compared to the prior quarter, revenue was unchanged and this is because currently, the company’s only source of revenue is from the rent paid by PharmaCann at the medical marijuana cultivation facility in New York, which was one of two properties owned by the REIT as of June 30th.

In May, Innovative Industrial purchased the Alaking Property in Maryland for approximately $8.2 million (including $185,000 in transaction costs), with an additional $3 million payable to the seller upon completion of certain development milestones and an additional $4 million payable to the tenant as reimbursement for certain tenant improvements. Assuming full payment for each step of the development, the property’s total cost will be $15 million.

Maryland to Become a New Revenue Stream

At the time of this announcement, the company also announced a long-term, triple-net lease with tenant Holistic Industries LLC for the entire property. The lease provides for an initial annualized aggregate base rent of 15% of the sum of the initial purchase price, any additional seller reimbursement and any reimbursed tenant improvements, subject to three months of rent abatement at the start of the term.

After the quarter ended, the seller completed the agreed-to development milestones and on August 1st, the company paid the additional reimbursement of $3 million to the seller. As a result, Holistic's initial annualized base rent at the Alaking Property increased by $450,000 (15% of the $3 million reimbursements) to $1.65 million.

Will Need to Raise Capital for Acquisitions

In the earnings report, Innovative Industrial said that it had identified and was in various stages of reviewing approximately $100 million of additional potential properties for acquisition.

To complete these acquisition, the company would have to raise cash. As of June 30th, Innovative Industrial reported to have $25,756,000 in cash and cash equivalents.

We will be keeping an eye on how this part of the story progresses. Raising capital has not been as easy as it looks for the company. During the IPO, Innovative Industrial raised significantly less capital than expected.

A Story to Watch

We have become more favorable on Innovative Industrial over the last few months, but remain on the sidelines with the shares.

Over the coming quarters, we expect to see revenue growth as Innovative will start to collect rent off the Alaking Property. The base rent for the property is subject to an initial rent abatement of three months.

While we are favorable on the acquisition pipeline update, we would have preferred more visibility into the states it is targeting. We are favorable on Innovative Industrial’s opportunity but believe the company needs to show more success before we can buy into its future.