A Marijuana Stock You Can Actually Count On
“I like the profits from marijuana stocks, but I don’t like that you have to guess all the time,” my neighbor Larry told me the other day.
Larry is not alone. Most people, including the so-called experts on Wall Street, are playing a guessing game when it comes to weed stocks.
Sentiment toward this sector is known to be fast-changing. And the cliché that “past performance does not guarantee future results” couldn’t be more accurate.
We have seen weed stocks make double-digit gains in one day, only to be followed by a sharp drop in the following trading session.
The blunt reality is that in the cannabis industry, even if a company reports strong results in one quarter, it doesn’t mean investors will cheer for it.
What about guidance?
Well, show me a CEO who’s not optimistic about their own company’s outlook.
In other words, past numbers don’t mean that much, and you can’t always count on management’s guidance.
This makes marijuana stock investing sound like a tough job, right? I mean, no one wants to play a guessing game with their hard-earned money.
Well, that’s why I’ve taken a liking to Innovative Industrial Properties Inc (NYSE:IIPR) lately.
A Unique Opportunity for Marijuana Stock Investors
Based on its name, you’d think that Innovative Industrial Properties Inc is in the real estate business. And you’d be right.
Headquartered in San Diego, California, IIPR is a real estate investment trust (REIT) that owns 11 properties totaling 1.03 million square feet. (Source: “Leading Provider of Real Estate Capital for the Medical-Use Cannabis Industry,” Innovative Industrial Properties Inc, January 22, 2019.)
Now, I know what you are wondering.: aren’t we talking about marijuana stocks? Why am I looking at a REIT?
Well, here’s the neat part: while IIPR operates in the real estate business, it is not your average mall REIT or office REIT. Instead, the company focuses exclusively on owning and managing facilities that are used to grow and process cannabis for medical use.
And that is a huge opportunity.
In the U.S., 33 states—home to more than 200 million people—have legalized cannabis for medical use.
According to ArcView Market Research, regulated cannabis sales in North America are expected to surge from $9.1 billion in 2017 to $28.9 billion by 2022. That would translate to a compound annual growth rate (CAGR) of 26%. (Source: Ibid.)
By providing the real estate capital necessary for producers to grow and process medical-use marijuana, IIPR is essentially selling shovels in the new gold rush.
And for those still wondering whether a real estate company can truly be considered a play in the booming marijuana industry, look at its stock chart.
Innovative Industrial Properties Inc Stock Chart
Chart courtesy of StockCharts.com
That’s right; over the past 12 months, investors of this “boring” real estate stock enjoyed a return of over 150%.
Also, note how resilient the company was during the last market sell-off.
As we know, the U.S. stock market had a massive downturn in the fourth quarter of 2018 and marijuana stocks took some of the biggest losses.
While some weed stocks have bounced back this year, many others are still deep in the doldrums.
In fact, the North American Marijuana Index, which tracks 46 cannabis stocks operating in the U.S. and Canada, returned -1.9% in the past 12 months. (Source: “North American Marijuana Index,” The Marijuana Index, last accessed February 11, 2019.)
IIPR stock also slipped during the last market sell-off, but it quickly got back on its feet and started delivering profits to investors again.
And that’s not even the best part about this business. The reason why I believe every marijuana stock investor should consider IIPR is that the company offers something that’s rarely seen in the world of marijuana stocks: a future that you can predict with a degree of certainty.
What Marijuana Stock Investors Can Expect From Innovative Industrial Properties Inc
You see, most marijuana stocks are telling a growth story. These stories look very promising and will likely bring huge returns once the companies realize their potential.
But the reality is that not every story will come true. There will be many marijuana companies achieving their ambitions, but not every weed stock is going to be a future winner.
With Innovative Industrial Properties Inc though, investors don’t have to worry about how the story turns out. This is because the company’s story is backed by hard assets.
As I said, the company portfolio consists of 11 properties totaling 1.03-million rentable square feet.
These properties are located in Arizona, Colorado, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, and Pennsylvania—all of which have legalized medical marijuana.
According to the company’s latest investor presentation, 100% of those properties were leased as of December 21, 2018—with a weighted average lease term of 14.8 years. (Source: Innovative Industrial Properties Inc, op cit.)
This should provide top-notch cash flow visibility for the company.
And these are triple-net leases, meaning the tenants, rather than the landlord, are responsible for paying the insurance premiums, maintenance costs, and property taxes—allowing the landlord to keep more of its rental income.
Better yet, the lease agreements usually come with annual escalations of three to four percent. So as time goes by, IIPR will see its income stream rising.
Here’s the best part: the company is not standing still. It’s constantly on the lookout for acquisitions of existing, redeveloped and under-development industrial buildings with enclosed greenhouse facilities. IIPR expects to earn initial yields in the mid-teens from future acquisitions—a very lucrative business, to say the least.
At the end of the day, keep in mind that because IIPR needs to maintain its REIT status, it has to pay a dividend. If an investor purchased the stock today, they would earn an annual yield of 2.2%.
When weed stocks are surging, dividends don’t seem like much. But when sentiment changes, these cash payments can give investors peace of mind.
Add it all up and you’ll see that Innovative Industrial Properties Inc is a unique play in the cannabis industry. Its story may not sound as exciting as those of some other weed stocks, but it’s a company whose next quarterly performance is something you (and my neighbor Larry) don’t have to guess about.