At first glance, Innovative Industrial Properties Inc (NYSE:IIPR) does not seem like a typical pot stock. The company does not produce any pot, nor does it operate any extraction facility or dispensary.
And yet, it could be one of the best opportunities for pot stock investors at the moment.
Headquartered in San Diego, CA, Innovative Industrial Properties is a real estate investment trust (REIT). Unlike most REITs, this one doesn’t own any apartment buildings, office towers, or shopping malls. Instead, it focuses exclusively on the acquisition, ownership, and management of specialized industrial properties leased to experienced, state-licensed medical cannabis operators.
According to Innovative Industrial Properties’ latest investor presentation, its portfolio consisted of 61 properties located in 16 states. Those properties totaled approximately 4.5 million rentable square feet. (Source: “Investor Presentation,” Innovative Industrial Properties Inc, August 12, 2020.)
The REIT’s main strategy is sale-leaseback transactions. Basically, Innovative Industrial Properties buys properties from state-licensed medical cannabis companies and then leases the properties back to them under long-term, net lease agreements.
This is a win-win situation. To the medical marijuana operators, sale-leaseback transactions provide them with a source of capital, which they can use to expand their operations. To Innovative Industrial Properties Inc, the deals lead to a predictable stream of rental income.
If you’ve been following the legal cannabis industry, you’d know that the most talked-about pot stocks tend to be those of cannabis growers. But Innovative Industrial Properties’ business deserves attention too.
The REIT’s typical sale-leaseback transaction would have an initial base rent that’s 10% to 16% of its total investment, and an annual base rent escalation of three percent to 4.5%. In the real estate business, those numbers are quite impressive. (Source: “Sale/Leaseback Opportunities,” Innovative Industrial Properties Inc, last accessed November 9, 2020.)
Of course, this year, things have been quite a bit different for commercial landlords. Due to the impact from the COVID-19 pandemic, business has deteriorated across industries, with some companies shutting down permanently. For many property owners, collecting rent has been a challenge.
Innovative Industrial Properties, though, has been doing just fine. In the REIT’s second-quarter earnings conference call, Catherine Hastings, chief financial officer, said the following:
…we’ve collected 100% of contractually due rent across our total portfolio for the months of April, May, June and July, other than for our Los Angeles property, including full repayment of July rent and pro rata repayments of the security deposit and deferred rent from the 3 tenants that were under the rent deferral program. We have also not executed rent deferrals for any additional tenants other than these 3 tenants.
(Source: “Innovative Industrial Properties, Inc. (IIPR) CEO Paul Smithers on Q2 2020 Results – Earnings Call Transcript,” Seeking Alpha, August 6, 2020.)
As a matter of fact, the company has grown its business despite the COVID-19 headwinds.
In the second quarter of 2020, its adjusted funds from operations (AFFO)—a critical measure of a REIT’s operating performance—came in at $21.0 million. That represented a whopping 263% increase from the $5.8 million of AFFO earned in the year-ago period. (Source: “Innovative Industrial Properties Reports Second Quarter 2020 Results,” Innovative Industrial Properties Inc, August 5, 2020.)
Don’t forget, REITs are tax pass-throughs: as long as a REIT distributes at least 90% of its profits to investors through dividends, it does not have to pay income tax at the corporate level.
In other words, if a REIT is running a growing business, chances are it’s also dishing out bigger dividend checks to its shareholders.
Indeed, looking at IIPR stock, its current quarterly dividend rate is $1.17 per share, which is 50% higher than the $0.78 per share it paid for the corresponding period last year. Moreover, since this pot stock paid its first cash dividend in July 2017, its quarterly payout has grown by a staggering 680%. (Source: “Dividend History,” Innovative Industrial Properties Inc, last accessed November 9, 2020.)
With Innovative Industrial Properties stock trading at $113.28 apiece, the REIT offers an annual dividend yield of 4.1%. This is a cash return that shareholders get regardless of the price of IIPR stock.
Looking around, a lot of pot companies are still burning cash. Innovative Industrial Properties’ ability to return cash to investors on a regular basis makes it stand out.
Obviously, there will be uncertainty ahead, but the REIT’s business is backed by long-term agreements. Innovative Industrial Properties’ latest investor presentation showed that its properties were 99.2% leased, with a weighted average lease length of 16.1 years. (Source: Innovative Industrial Properties Inc, August 12, 2020, op. cit.)
Combined with a high-quality tenant base, the company is well positioned to generate recurring cash flows.
Innovative Industrial Properties Inc (NYSE:IIPR) Stock Chart
Chart courtesy of StockCharts.com
At the end of the day, keep in mind that, in the U.S., medical marijuana is now legal in 33 states and Washington, D.C. More than 200 million Americans live in these areas, and sales of medical pot have been booming.
Innovative Industrial Properties Inc is the first and only publicly traded company on the NYSE that provides real estate capital to the medical pot industry. The company has delivered enormous returns to investors since its initial public offering in December 2016.
In just the past 12 months (see the above chart), IIPR stock has climbed by more than 50%. Given the bright outlook of the medical cannabis sector in the U.S., I wouldn’t be surprised to see this marijuana real estate company grow alongside the booming industry.