A Pot Stock for Risk-Averse Investors?
If you think pot stock investing is all about sunshine and rainbows, think again. While the industry is filled with fast-growing businesses, it also comes with substantial risk for investors.
For instance, cannabis companies saw their stock prices take a massive hit during the market sell-off earlier this year, and many of them are yet to make a full recovery. To give you an idea, the North American Marijuana Index is still down 18.6% year-to-date.
Mind you, this is not the first time for pot stocks to go on a roller coaster ride. Because the industry is still at a nascent stage and filled with uncertainty, shares of marijuana companies remain volatile.
That’s why many risk-averse investors have been standing on the sidelines, even though everyone wants a piece of the action in what is undoubtedly one of the fastest-growing industries.
The good news is, there is a pot stock worth considering even for the most risk-averse investor: Innovative Industrial Properties Inc (NYSE:IIPR).
IIPR has a very different business model compared to other pot companies. The company does not own any dispensary, nor does it grow any weed. It does not have any processing facility and it does not sell any vape kits.
Instead, Innovative Industrial Properties owns, manages, and acquires specialized industrial properties that are leased to experienced, state-licensed operators for medical cannabis facilities.
In other words, IIPR is a landlord to the medical marijuana industry.
As a matter of fact, this company is a pioneer in the business. It’s the first and only real estate company on the New York Stock Exchange that focuses on the legal cannabis industry in the United States.
One of Innovative Industrial Properties’ strategies is to pursue sale-leaseback transactions. Basically, the company acquires freestanding industrial and retail properties from state-licensed medical cannabis operators. Then the properties are leased back to the operators under long-term, net lease agreements.
To a medical marijuana operator, a sale-leaseback transaction can free up capital that was previously tied up in real estate. The operator can put the proceeds into its core operations and grow its business. To Innovative Industrial Properties Inc, such a transaction can provide a predictable stream of rental income.
A typical sale-leaseback transaction for IIPR would have a lease term of 10 to 20 years, with initial base rent being around 10% to 16% on total investment. The lease contracts usually contain annual base rent escalators of three percent to 4.5%, so over time, Innovative Industrial Properties’ rental income stream can grow.
Expanding Presence Despite COVID-19
Now, as we know, the outbreak of COVID-19 has changed the economy quite a bit. Over the past few months, a lot of businesses have slowed down (if they were not ordered to close their doors completely).
But Innovative Industrial Properties has managed to get quite a few deals done during this period.
For instance, on April 22, the company closed an acquisition of a 115,000-square-foot industrial property in Michigan. (Source: “Innovative Industrial Properties Acquires Michigan Property and Expands Real Estate Partnership With Cresco Labs,” Innovative Industrial Properties Inc, April 22, 2020.)
At the same time, it entered into a long-term, triple-net lease agreement for the property with a wholly owned subsidiary of Cresco Labs Inc (OTCMKTS:CRLBF, CNSX:CL). That was the Innovative Industrial Properties’ fourth acquisition and lease transaction with Cresco.
On June 10, IIPR announced that it had completed a sale-leaseback deal with Holistic Industries, Inc. (Source: “Innovative Industrial Properties Acquires Pennsylvania Property and Expands Real Estate Partnership With Holistic Industries,” Innovative Industrial Properties Inc, June 10, 2020.)
That property, with about 108,000 square feet of industrial space on 7.4 acres of land, will continue to be operated by Holistic Industries as a medical cannabis cultivation and processing facility.
Then on July 1, the real estate company closed another sale-leaseback deal with Cresco, marking its fifth acquisition and lease deal with the well-known cannabis operator. (Source: “Innovative Industrial Properties Acquires Massachusetts Property and Expands Real Estate Partnership With Cresco Labs,” Innovative Industrial Properties Inc, July 1, 2020.)
This property, which is located in Massachusetts, consists of around 118,000 square feet of industrial space. Upon the completion of redevelopment, a Cresco subsidiary will use it as a cannabis cultivation, processing, and dispensing facility.
More recently, Innovative Industrial Properties bought an 111,000-square-foot industrial property in Blue Anchor, New Jersey for $5.5 million (excluding transaction costs). (Source: “Innovative Industrial Properties Acquires New Jersey Property and Enters Into Long-Term Lease With Curaleaf,” Innovative Industrial Properties Inc, July 14, 2020.)
As soon as that deal closed, the company entered into a long-term, triple-net lease agreement for the property with a subsidiary of Curaleaf Holdings Inc (OTCMKTS:CURLF, CNSX:CURA), another major player in the U.S. pot industry.
With that, IIPR’s portfolio now consists of 59 properties in 16 states totaling about 4.5 million rentable square feet (including around 1.5 million rentable square feet under development or redevelopment).
If you don’t like risk, the following numbers should sound appealing: as of July 14, the properties in Innovative Industrial Properties Inc’s portfolio were 99.2% leased, with a weighted average remaining lease term of approximately 16.1 years.
It helps that the company does business with high-quality tenants. As I mentioned earlier, IIPR recently leased properties to well-known pot companies Cresco and Cureleaf.
Its top tenants also include Green Thumb Industries Inc (OTCMKTS:GTBIF, CNSX:GTII) and Trulieve Cannabis Corp (OTCMKTS:TCNNF, CNSX:TRUL). (Source: “The Leading Provider of Real Estate Capital for the Medical-Use Cannabis Industry,” Innovative Industrial Properties Inc, last accessed July 21, 2020.)
With an almost fully leased portfolio, long lease terms, and high-quality tenants, Innovative Industrial Properties should be able to collect a steadily increasing rental income stream in the years ahead.
Innovative Industrial Properties Inc Is a Resilient Pot Stock
Of course, like other weed stocks, IIPR stock is not immune to market volatility. When the U.S. stock market crashed in March, the share price of this pot real estate company also tumbled.
But, as the chart below shows, Innovative Industrial Properties stock quickly bounced back and is actually up 27.6% year-to-date, substantially outperforming the North American Marijuana Index.
Innovative Industrial Properties Inc (NYSE:IIPR) Stock Chart
Chart courtesy of StockCharts.com
And that’s not even the best part about IIPR stock.
You see, pot stocks have always been volatile, which means, if you are a trader, there are many big swings that could become trading opportunities.
However, if you are a buy-and-hold type of investor, you will likely find this level of volatility a bit unnerving. Even with the most established pot companies trading on major U.S. stock exchanges, buying at the wrong time could leave you deep in the red.
And while IIPR stock showed its resilience in the last market sell-off, it will also have its ups and downs. As is the case with any publicly listed company, there is no guarantee that its share price will not go down the next day, no matter how solid its business is.
The neat thing is, other than share-price appreciation, there is another way through which Innovative Industrial Properties Inc investors can make money: dividends.
That’s right, despite the fact that the legal pot industry is still just getting started, this company actually returns cash to investors on a regular basis.
And I should point out that dividend payments are at the discretion of a company’s board of directors.
That is, we can have a company with a tumbling share price, but if the board decides to pay a dividend, investors can expect a check to arrive in the mail. As a result, having a reliable dividend policy can give investors a reason to hold onto a company’s shares in a market downturn.
But of course, a company’s board may also reduce the dividends. And we have seen quite few of those instances from companies in all kinds of industries during the COVID-19-induced downturn.
Should that be a concern for IIPR stock investors?
Well, the company’s business could take a hit, and management did talk about some rent deferrals in the first-quarter earnings report. Given the timing of COVID-19-related business closures, the impact of the pandemic on second-quarter financial results will likely be bigger for most companies, and we’ve seen that from companies that have reported results so far.
While Innovative Industrial Properties is yet to report its second-quarter earnings, the company did something that should be reassuring to investors: raised its dividend.
On June 15, IIPR’s board of directors declared a quarterly cash dividend of $1.06 per share, a six percent increase quarter-over-quarter and a whopping 77% increase year-over-year. The dividend was paid on July 15 to shareholders of record as of June 30. (Source: “Innovative Industrial Properties Declares Second Quarter 2020 Dividends,” Innovative Industrial Properties Inc, June 15, 2020.)
Note that, since the company’s initial public offering in December 2016, its dividends have only been increasing. (Source: “Dividend History,” Innovative Industrial Properties Inc, last accessed July 21, 2020.)
In this day and age, earnings can be adjusted, but dividends are still cold, hard cash that companies pay to their shareholders. By getting a substantial raise to its dividend rate, IIPR stock has provided investors with peace of mind in this period of economic uncertainty.
Ultimately, don’t forget that, although COVID-19 could be a source of headwinds for many pot companies in the short term, the long-term outlook for the industry remains bright.
Legal cannabis sales in the U.S. grew 34% year-over-year in 2019 to $12.2 billion, and that number is expected to reach more than $31.0 billion by 2024. As the leading real estate company for the legal marijuana industry, Innovative Industrial Properties Inc is well positioned to capitalize on that trend.