Innovative Industrial Properties Inc: A Pot Stock That Can Weather the Next Storm

This Pot Stock Could Be Special

By now, almost everyone knows about the potential of pot stocks. But what investors also know about is the inherent risk with this nascent industry. Sure, there are plenty of fast-growing cannabis operators, but given the portion of the market that’s yet to be opened, it’s hard to say which companies will be the winners in the long run.

That’s why it might be worthwhile to check out Innovative Industrial Properties Inc (NYSE:IIPR).

Innovative Industrial Properties stock isn’t a pot stock in the traditional sense. The company doesn’t grow any pot, nor does it process or manufacture any cannabis-derivative products. Instead, it provides real estate capital to the medical cannabis industry.

Innovative Industrial Properties Inc focuses on the acquisition, ownership, and management of specialized properties leased to experienced, state-licensed operators for their regulated medical cannabis facilities.

One specific opportunity for the company is sale-leaseback transactions. Innovative Industrial Properties acquires freestanding properties from state-licensed medical cannabis operators and then leases the properties back to them under long-term, absolute net lease agreements.

To medical cannabis operators, a sale-leaseback transaction provides a source of capital, which they can redeploy into core operations and growing their business. To Innovative Industrial Properties Inc, such a transaction allows it to earn a steady stream of rental income.

A typical sale-leaseback transaction with Innovative Industrial Properties would have a size of $5.0 million to more than $30.0 million, a lease term of 10 to 20 years, an initial base rent of 10% to 16% of total investment, and annual base rent escalations of three percent to 4.5%. (Source: “Sale/Leaseback Opportunities,” Innovative Industrial Properties Inc, last accessed June 7, 2021.)

If you’re familiar with commercial real estate, you know that those terms are great for the buyer, since the transaction allows the buyer to collect not only sizable rental income right from the start, but also higher payments as time goes by.

As of May 5, Innovative Industrial Properties’ portfolio consisted of 69 properties in 18 states. (Source: “Investor Presentation,” Innovative Industrial Properties Inc, last accessed June 7, 2021.)

The properties totaled approximately 6.2 million rentable square feet, including about 2.3 million rentable square feet under development/redevelopment. They were 100% leased and had a weighted average remaining lease term of 16.7 years.

Furthermore, the company provides real estate capital to established operators, including industry leaders like Curaleaf Holdings Inc (CNSX:CURA, OTCMKTS:CURLF), Trulieve Cannabis Corp (CNSX:TRUL, OTCMKTS:TCNNF), and Green Thumb Industries Inc (CNSX:GTII, OTCMKTS:GTBIF).

My point is, even though the U.S. cannabis industry faces uncertainty, Innovative Industrial Properties Inc’s business model and portfolio mean it can generate predictable cash flows through thick and thin.

It helps that the company is structured as a real estate investment trust (REIT), meaning it has to distribute at least 90% of its taxable income to investors through dividends.

Most pot stock investors probably aren’t deliberately looking for dividends, but who wouldn’t mind collecting some extra cash from a solid marijuana stock?

Besides, the dividends from IIPR stock have been on the rise. A year ago, the REIT had a quarterly dividend rate of $1.00 per share. Today, the amount stands at $1.32 per share, a 32% increase in a period when numerous businesses were impacted by the COVID-19 pandemic. (Source: “Dividend History,” Innovative Industrial Properties Inc, last accessed June 7, 2021.)

Don’t forget, the nature of the REIT’s business—combined with its growing dividends—means it attracts long-term investors.

I’m sure there are short-term speculators trading IIPR stock, too. But having a strong appeal to long-term investors can work wonders in a volatile environment.

Just take a look at the chart below.

The green line shows the path of Innovative Industrial Properties stock, whereas the black line shows the performance of the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ, OTCMKTS:HMLSF), an exchange-traded fund that tracks the performance of the North American Marijuana Index.

Innovative Industrial Properties Inc (NYSE:IIPR) Stock Chart

Chart courtesy of StockCharts.com

As the above chart shows, over the past two years, IIPR stock not only delivered much better total returns than the Horizons Marijuana Life Sciences Index ETF, but also had smaller pullbacks when there’ve been changes in sentiment. Again, it’s the fundamentals of this pot stock that makes it so resilient.

First-Quarter 2021 Results

If you look at the REIT’s financials, you’ll see that, despite being on the relatively boring side of the cannabis industry, Innovative Industrial Properties Inc churns out very impressive growth rates.

In the first quarter of 2021, the company generated $42.9 million of total revenue, which more than doubled the $21.1 million it earned in the same period in 2020. (Source: “Innovative Industrial Properties Reports First Quarter 2021 Results,” Innovative Industrial Properties Inc, May 5, 2021.)

Its net income came in at $25.6 million, representing a 122% increase year-over-year.

Like other REITs, Innovative Industrial Properties also reports adjusted funds from operations (AFFO). In the reporting quarter, the pot stock’s AFFO was $1.47 per diluted share, marking a substantial improvement from the $1.12 per diluted share generated in the year-ago period.

Analyst Take

If you go to the mainstream financial media, you’ll see plenty of headlines on why stock market investors should be worried right now.

Nothing grabs attention more than fear, but the reality is, after a huge rally over the past year, equities may take a break. For high-momentum stocks—including many pot stocks—a break could lead to a retracement of prior gains.

That said, I’m bullish as ever on the future of the U.S. cannabis industry, but for investors who don’t want the big swings that are often associated with pot stocks, Innovative Industrial Properties stock deserves a serious look.