Real estate investment trust (REIT) Innovative Industrial Properties (NYSE: IIPR) long benefited from being the only game in town in the marijuana space. Though, that's changing, with new players like AFC Gamma (NYSE: AFCG) and older names like Power REIT pivoting into the space. But don't fear, Innovative Industrial is still the name to beat in the pot REIT sector. Here's why.
1. A "long" history
Innovative Industrial Properties' initial public offering (IPO) was held in late 2016. The REIT inked its first acquisition later that year and has since grown its portfolio to 72 properties. While that's not huge in the grand scheme of things, you have to remember it's been around only five years or so. And, notably, the marijuana real estate niche really didn't exist before Innovative Industrial went public. So, despite its still modest size and youth, it is the old hand in the sector.
Competitor AFC Gamma only went public in March of 2021. And while Power REIT has been around for decades (it was created to own railroad property), it only decided to start investing more heavily in the marijuana sector in July 2019. These are still early days for the marijuana industry, but these two newcomers don't have the same history that Innovative Industrial has.
2. Size matters
To put an exclamation point on this issue, it's worth taking a quick look at the market caps here. Power REIT is a tiny $130 million company. AFC Gamma's market cap is around $350 million. And Innovative Industrial takes the bellwether spot, with a market capitalization of $5.1 billion.
This is important because the REIT structure is specifically designed to pass income to shareholders, leaving little behind to put toward investing in growth. So, size brings easier access to capital markets; thus, Innovative Industrial simply has a better foundation for growth. Investors are clearly rewarding it for its financial success, but some of that has to do with its longer history.
3. Plenty of room
To be fair, the marijuana industry is growing quickly. According to Innovative Industrial's estimates, the industry grew 50% between 2019 and 2020. And the roughly $20.1 billion in industry revenues in 2020 is projected to increase to $45.9 billion by 2025. So, there's plenty of room both for more participants and for continued strong growth at Innovative Industrial.
That said, size (and, thus, access to capital) and the REIT's first-mover advantage suggest it has a better chance of snagging good deals. Indeed, it has been working with some early industry leaders, building relationships that will be the foundations for future deals.
And there's always the opportunity to add to existing properties, with marijuana facilities growing with the companies as their needs increase. It's not that other REITs can't do something similar; Innovative Industrial just has a notable head start on the relationship front.
4. Different models
It's also important to point out that Innovative Industrial is the only pure-play marijuana landlord here.
AFC Gamma is a mortgage REIT, which means it lends to marijuana companies and uses their properties as collateral to back the loans. It's a very different approach, with the REIT looking to make the difference between its financing costs and the interest rates it charges. It doesn't actually own any marijuana properties. In fact, it would be a bad thing if it did end up taking ownership of a property because it would mean a customer defaulted on a loan.
Power REIT, meanwhile, owns its legacy railroad properties and renewable power assets, in addition to its marijuana-related properties. To a cynical mind, it might seem like the REIT is groping to find a sustainable business model.
Innovative Industrial is the only one that's laser-focused on owning marijuana properties, and if you want exposure to this emerging property niche, that just makes the best sense.
Everyone knows it
Given the different company sizes here, it's pretty obvious that Wall Street is aware of Innovative Industrial Properties' dominant industry position. And the REIT is hardly cheap, noting that its roughly 2.6% dividend yield is toward the low end of its yield history, albeit short.
However, the dividend has increased from $0.15 per share per quarter in 2017 -- when first initiated -- to $1.40. That's a huge change in a very short period of time and shows that Innovative Industrial is rewarding investors as it grows. So, for dividend-growth types, it's probably worth a deep dive even at current prices levels.
For reference, Power REIT isn't currently paying a dividend at all, and while AFC Gamma's 7.1% yield is notable, it hasn't even been paying dividends for a full year yet. All in, despite the new competition, Innovative Industrial is still the leading name in the marijuana REIT space, and it doesn't look like it's about to be toppled from that perch anytime soon.