IIPR Stock: Why Marijuana REITs Offer Big, Stable Returns

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Innovative Industrial Properties

“What’s your favorite marijuana stock?” is something I get asked all the time. People expect me to say Canopy Growth Corp (NYSE:CGC) or Aurora Cannabis Inc (OTCMKT:ACBFF, TSE:ACB), given that those are two of the biggest marijuana stocks on the market.

However, I always come back to a little-known pot stock called Innovative Industrial Properties Inc (NYSE:IIPR).

For those who’ve never heard of Innovative Industrial Properties, it is a real-estate income trust (REIT) that specializes in marijuana properties. And, more importantly, shares of IIPR stock appreciated 90% in the last 52 weeks.

Chart courtesy of StockCharts.com

What makes IIPR different from Aurora and Canopy is that it doesn’t grow or sell marijuana. The company deals in land. So if you’re worried about an oversupply in the marijuana market, or if you have moral qualms about investing in grow-ops, this is a stock you want to consider.

I’m a big fan of these alternative investments. Fewer people know about them, or care, which means they often trade at significant discounts to their intrinsic value. Ignorance creates opportunity, in other words.

For example, if you look at CannaRoyalty Corp (OTCMKTS:CNNRF, CNSX:CRZ), which streams income from small marijuana projects, you’ll find it trades at much lower multiples than some of the big pot producers.

IIPR stock is in the same boat. Its valuation, though ascendant, is still far below where it should be—and that’s what makes it so appealing.

Recent IIPR Stock News

On August 2, IIPR announced a $13.0-million deal to acquire and lease property in Michigan. (Source: “Innovative Industrial Properties Acquires Michigan Property and Enters Into Long-Term Lease with Green Peak Industries,” Innovative Industrial Properties, August 2, 2018.)

The facility will be used for marijuana production and processing, though IIPR itself is responsible for neither of those operations. 

Here are some details:

  • Cost of Assets: IIPR is paying $5.5 million for the property, which is located in Dimondale, Michigan, southwest of Lansing.
  • Cost of Incentives: If the seller achieves “certain development milestones,” it will receive $5.3 million in incentive bonuses.
  • Tenant Agreement: IIPR will lease the property to Green Peak Industries LLC, a pot producer that’s pre-qualified for large-scale cultivation, processing, and provisioning.  
  • Cost of Upgrades: IIPR is reimbursing Green Peak for $2.2 million in improvements to the property. Bear in mind those improvements could improve resale values.
  • Timeline: The initial contract specifies a 15-year lease, with two five-year extensions as optional.
  • Total Cost: All in, the deal should run IIPR about $13.0 million.

When you consider the amount of money most cannabis firms are spending on facility construction, $13.0 million looks like a relatively small outlay. Better still, Innovative Industrial Properties will start collecting rent almost immediately after taking possession.

Heck, it’s already paying dividends.

IIPR’s eight other properties generated $2.68 million in revenue during the first quarter. This led to $607,000 in net income, a sizeable enough profit for the firm to pass $0.25 per share back to shareholders. (Source: “Innovative Industrial Properties Reports First Quarter 2018 Results,” Innovative Industrial Properties, May 9, 2018.)

By contrast, other marijuana companies are waiting for Canada to implement nationwide legalization on October 17. Their growth depends on increases in recreational demand, which, if we’re being honest, is laden with political risk.  

If you don’t want to make investments with that much political risk, I’d say real estate might be your entry point to the marijuana market. At least there you’ll see regular profits and dividends.  

“We are very pleased to enter into this long-term relationship with Green Peak,” said Paul Smithers, President and Chief Executive Officer of IIPR.

“With this acquisition, we have acquired nine properties across seven states, continuing our diversification and growth, while remaining focused on executing in line with our rigorous underwriting standards.” (Source: “Innovative Industrial Properties Acquires Michigan Property and Enters Into Long-Term Lease with Green Peak Industries,” Innovative Industrial Properties, August 2, 2018.)

IIPR Stock Forecast

How does the future look for Innovative Industrial Properties stock? In a word: bright.

The company is active in seven of the nine U.S. jurisdictions that allow recreational sales of marijuana. And with several more states in line to join, I’d say the sky is the limit for IIPR stock.

Money doesn’t seem to be an issue either.

Innovative Industrial Properties is already cash positive, so rather than raise more capital, it can simply rely on profits from existing properties to fund expansion, thereby ensuring that existing shares won’t be diluted.

Don’t forget the lease agreements come in 15-year increments, giving IIPR stability that other marijuana companies don’t have.

Analyst Take

Bullish. Bullish. Bullish. That’s how I feel about IIPR stock, especially at its current level of $33.06. I suggest that all retail investors interested in the cannabis boom, particularly those with low-risk tolerances, should take a close look at this stock.