Profiting From a Booming Industry
Investing in new industries can be risky. That’s why, even though quite a few pot stocks have shot through the roof, many investors are still standing on the sidelines.
That said, I want to show you a marijuana stock that’s worth considering, even for the most risk-averse investor: Innovative Industrial Properties Inc (NYSE:IIPR).
Compared to the smaller pot stocks trading over the counter, IIPR stock looks like a heavyweight player. The company is listed on the New York Stock Exchange and has a market capitalization of over $920.0 million at the time of this writing. Yet, at first glance, it doesn’t seem like a typical weed stock.
You see, Innovative Industrial Properties Inc is actually structured as a real estate investment trust (REIT). If you are familiar with REITs, you’d know that they are basically giant landlords.
But IIPR is no ordinary landlord. The company specializes in the acquisition, ownership, and management of industrial properties leased to pot companies.
The tenants are usually experienced, state-licensed operators that use the properties as regulated medical cannabis facilities. As a result, the REIT has climbed on board the marijuana profit train.
Just take a look at the Innovative Industrial Properties stock chart and you’ll see what I mean. At the beginning of this year, the company was trading at $45.91 per share. Today it’s around $78.50, marking a year-to-date gain of over 70%!
Innovative Industrial Properties Inc (NYSE:IIPR) Stock Chart
Chart courtesy of StockCharts.com
As you’d expect from a soaring ticker, Innovative Industrial Properties’ business has been firing on all cylinders.
According to its latest earnings report, IIPR generated $11.2 million of rental revenue in the third quarter of 2019, which more than tripled the $3.7 million earned in the year-ago period. (Source: “Innovative Industrial Properties Reports Third Quarter 2019 Results,” Innovative Industrial Properties Inc, November 6, 2019.)
Net income came in at $6.2 million, or $0.55 per share for the quarter. To put that in perspective, the company’s net income was $1.5 million in the third quarter of 2018. In other words, the REIT achieved a bottom-line growth rate of 314% year-over-year.
Also, because Innovative Industrial Properties is structured as a REIT, one of the key performance metrics is adjusted funds from operations (AFFO). In the third quarter of 2019, the company earned AFFO of $9.5 million, representing a whopping 270% increase year-over-year.
One of the main reasons behind such impressive growth rates is the company’s acquisition strategy, which includes sale-leaseback transactions. Since the beginning of this year, IIPR has purchased 30 properties in nine states. This brings the total number of properties in its portfolio to 41.
These properties, which comprise approximately 2.8 million rentable square feet, are diversified across Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Nevada, Ohio, and Pennsylvania—all states that have legalized medical marijuana.
The best part is, while the cannabis industry is still in its early stage, IIPR’s business is established enough to appeal to risk-averse investors.
You see, as of November 6, the company’s portfolio was 100% leased, with a weighted-average remaining lease term of about 15.5 years. (Source: Ibid.)
With a perfect occupancy rate and long lease terms, IIPR can generate a predictable stream of cash flow. For investors who don’t like risk, this pot stock’s business model would certainly be reassuring.
And that’s not all. As a REIT, Innovative Industrial Properties is required to return at least 90% of its profits to shareholders through dividends. Right now, the company has a quarterly dividend rate of $0.78 per share.
Note that dividends are cash returns that shareholders get no matter what the company’s stock price is doing. So even if there is a market-wide sell-off and IIPR stock tanks, investors can still earn that cash return through the company’s dividend payments.
At the current share price, Innovative Industrial Properties stock offers investors an annual dividend yield of four percent.
What’s even more impressive is that the payout hasn’t stayed the same.
The company made its first dividend payment—an amount of $0.15 per share—on July 14, 2017. So, in just over two years, IIPR’s payout has grown by a staggering 420%. (Source: “Dividend History,” Innovative Industrial Properties Inc, last accessed November 29, 2019.)
If you are worried that the REIT might be paying out a bit too much, don’t be. In its most recent quarter, Innovative Industrial Properties’ AFFO translated to $0.86 per share, which provided more than enough coverage for the cash dividend declared during the quarter.
Keep in mind that, in this day and age, earnings are often adjusted. But dividends are still cold, hard cash paid to shareholders. That’s why, in many cases, dividend growth can be interpreted as a more genuine sign of strength than earnings growth.
Compared to most pot companies that are essentially producers, Innovative Industrial Properties Inc has a very different business model. Its model not only looks safer, but it has delivered enormous returns to shareholders.
For risk-averse investors who want to get some exposure to the fast-growing legal cannabis industry, IIPR stock is worth checking out.