Innovative Industrial's Business Model Fails, While Plymouth Shows Resilience

Group 1: Overview of Industrial REITs - Industrial real estate investment trusts (REITs) are currently offering enticing dividend yields and discounted adjusted funds from operations (AFFO) multiples compared to the broader industrial sector [1][2] - The low AFFO multiples are appealing to value investors, but sustainable business models are necessary for long-term earnings growth [2] Group 2: Tenant Issues and Company Performance - Innovative Industrial Properties, Inc. (IIPR) and Plymouth Industrial REIT, Inc. (PLYM) have faced tenant difficulties, highlighting a significant quality gap between discounted industrial REITs [3][9] - IIPR's largest tenant, PharmaCann, defaulted on its leases, which accounted for 17% of its rental income, leading to concerns about revenue replacement [5][12] - IIPR has been utilizing security deposits to cover rent payments, indicating ongoing struggles with rent collection [14][18] Group 3: Financial Metrics and Comparisons - IIPR's annual base rent (ABR) is reported at $310.8 million, with a rent per foot of$36.53, which is considered excessively high for industrial properties [20][37] - In contrast, PLYM's rent per foot is significantly lower at $4.79, suggesting that its properties are below market rent, which could be advantageous when replacing defaulted tenants [60][62] - PLYM has successfully replaced defaulted tenants with new ones at higher rents, demonstrating a more resilient business model compared to IIPR [52][63] Group 4: Market Valuation and Investment Outlook - PLYM is trading at a discounted AFFO multiple of 9.7X, while IIPR's stock is viewed as cheap for a reason, reflecting underlying business model weaknesses [45][64] - The market perceives PLYM's tenant issues differently due to its focus on real estate investment rather than tenant financing, which has resulted in a more stable revenue outlook [58][62]