Innovative Industrial Properties faces another shareholder lawsuit

Last year, cannabis real estate investment trust Innovative Industrial Properties (NYSE: IIPR) had a shareholder lawsuit against it dismissed. But last week, another class-action lawsuit was filed against the company, with shareholders alleging that the company misled them about declining fees.

The class action, which was filed by Alain Giraudon and other shareholders in the U.S. District Court of Maryland, asserts that company executives gave glowing reports about the business in its financial reports as well as on the earnings calls, while downplaying any properties that might be in trouble.

The complaint specifically targets one of the biggest portfolio holdings attached to PharmaCann, a company that could not pay rent in several locations. The shareholders allege that IIP knew this company was struggling and that its rental income was declining but still gave investors a rosy picture of the business with misleading public statements.

It’s all good

According to the complaint, when IIP announced its 2023 earnings, the company said, “Based on the strong historical and projected growth for the regulated cannabis industry, we expect to see significant spending by state-licensed cannabis operators on their existing and new state-licensed cannabis facilities.”

The company boasted that it had extensive experience in vetting its potential clients to meet its criteria. IIP also said it expected revenue to increase with contractual escalations, which meant the lease prices would rise as the contracts continued.

IIP also stated that it expected its clients to expand their properties, generating additional revenue, and that more states would legalize cannabis, creating more opportunities. It also noted that cannabis companies have difficulty accessing capital, which made its sale-leaseback deal solution attractive.

What about Pharmacann?

The complaint focuses on how IIP downplayed struggles with Pharmacann. In the REIT’s investor call for the fourth quarter of 2023, IIP said it gave the MSO an additional $16 million for construction funding. IIP also insisted during the call that there was a “tremendous amount of value in the asset.”

Fast-forward to the first quarter 2024 earnings call, and IIP again gave a glowing review of its business, mentioning that the company had no problems finding new tenants for properties in Michigan, where a client went out of business. Once again, IIP spoke about Pharmacann’s expansion plans and did not indicate that the company was in trouble.

The second-quarter earnings call followed a similar script of optimism, but angry shareholders claim that trouble was brewing. They allege that IIP knew it “was experiencing significant declines in rent and property-management fees in connection with certain customer leases.” The complaint also alleged that IIP knew these issues would hurt its ability to maintain FFO (funds from operations) and revenue growth and that its leasing operations were less profitable than the company had represented to investors.

Truth comes out

When IIP reported its third-quarter earnings in November 2024, the company informed investors that revenue from rent had declined, which caused the stock price to fall. The company’s net income fell 6% from the previous year for the same period, and funds from operations dropped 3% versus the previous year. This caused the stock price to tumble again.

IIP offset some of those declines by rents rising on other properties. Green Market Report wrote at the time that IIP was beginning to use security deposits to cover rent payments, but the company still did not give any indication that Pharmacann was in trouble.

By December, the REIT had to acknowledge that its largest portfolio holding with Pharmacann was in default. The stock declined again on the news.

The lawsuit alleges that IIP knew it was making false and misleading statements to investors by downplaying the trouble its portfolio was facing. The shareholders are asking the court for damages and to pay their legal fees.