Chances are, there's at least one investment you passed up years ago that you still kick yourself for today. One that made people into millionaires. There are other opportunities like that out there today, and hopefully you won't pass one up again.
Could Innovative Industrial Properties (NYSE: IIPR) be one of those opportunities? We're going to take a look at who they are, where they're headed, and what it would take for their share price to skyrocket.
Who is Innovative Industrial Properties?
IIPR is an industrial real estate investment trust (REIT) that acquires, owns, and manages properties leased to experienced and licensed operators of regulated medical cannabis facilities. A strategy of theirs that has proven to be successful so far is their sale-leaseback program. With this strategy, Innovative Industrial Properties purchases the real estate from currently operating facilities with a proven track record and then leases the properties back to them.
IIPR's business model
One of the first concerns many people have when looking at a REIT like IIPR is the quality of their tenants due to the nature of the industry. However, IIPR carefully selects tenants that are well capitalized and have a healthy balance sheet, positive income, and a clean record of compliance with their respective state's regulations. IIPR's tenant roster includes some of the largest medical cannabis facility operators in the country.
IIPR's sale-leaseback program provides the medical cannabis industry something that's difficult for marijuana businesses to obtain: capital. Since cannabis still has a federal ban, it is quite difficult for companies in this industry to find financing. Selling their real estate to IIPR provides them with capital to reinvest into their businesses.
IIPR also provides its new tenants a lot in the way of tenant improvements, which is also a major benefit to medical cannabis operators with little financing options available. The cost of these tenant improvement allowances get added into the leases, creating an additional income source for IIPR.
Innovative Industrial Properties is one of the newer kids on the block, founded in December of 2016. Since then, their revenue has gone from $6.42 million in 2017 to $14.79 million in 2018 and $44.67 million in 2019. The rest of 2020 should show significantly more growth, as their first-quarter revenue was $21.13 million.
IIPR currently has 51 properties in 15 states, with 98.9% of their 3.2 million rentable square feet leased. Of those leases, the weighted average of their lease terms is 15.6 years.
Currently, 33 states have legalized medical or recreational use of marijuana. This leaves a lot of room for growth as more states begin to legalize its use.
For 2020, there are three states with medical marijuana initiatives on the November ballot: South Dakota, Mississippi, and Nebraska. In addition, eight other states have medical marijuana bills currently in the House or Senate. Other states that have had bills fail in the past are expected to begin introducing new legalization bills.
As more states legalize the medical use of cannabis, IIPR will see significant growth opportunities, especially since many of their current tenants will likely be some of the first to expand into these states.
Marijuana use has become widely accepted throughout the United States, with 60% of Americans supporting the legalization of adult marijuana use and 95% supporting doctor-prescribed medical marijuana use.
U.S.-regulated cannabis sales reached $10 billion in 2018 and are expected to grow to $30.4 billion by 2023. With IIPR's foothold in the industry, they should be well positioned to see substantial growth over the next five years as this industry soars.
IIPR risk factors
All REITs, as well as all other investments, come with risks. We're going to look at some of the important risk factors to consider that are specific to IIPR.
Keeping up with industry growth
It seems like a pretty safe bet to say that the cannabis industry is going to continue growing, and at an increasing rate. While this gives IIPR an excellent growth opportunity, they will have to raise a lot of capital to match the industry's pace.
The REIT's management has to be careful as to how it raises capital to fund new acquisitions. Taking on a lot of debt quickly can really hurt their balance sheet while waiting for the increase in funds from operations (FFO) from the new investments.
In May, Innovative announced a public offering of 1 million common shares to fund the acquisitions of new investment properties. This will help fund their current growth but will make it more difficult to raise capital through more stock sales later without putting too much strain on the price of their shares.
It may sound like it would be great news for Innovative if federal regulations were relaxed, but once financial institutions begin lending to operators, there won't be as much demand for IIPR's sale-leaseback opportunities and tenant-improvement allowances. Operators may have more options for their real estate and financing needs.
It's inevitable that financial institutions will begin lending to cannabis businesses at some point, but happening too soon could put a lot of resistance on Innovative's expected growth over the next five years. However, it doesn't appear that either of the 2020 presidential candidates have any plans to address federal marijuana regulations in the near future.
On the other hand, regulation changes in the other direction could have a negative impact on Innovative's tenants. As state laws and local ordinances change, some operators might face new limits on the amount of cannabis they can cultivate. They may even find themselves competing with other cannabis businesses to be able to continue operating in their local area, as some local municipalities add ordinances limiting the number of facilities allowed to operate in their jurisdiction.
IIPR owns specialty properties that are very specific to the cannabis industry. As they face vacancies, they will likely be limited to leasing to other marijuana businesses. If they aren't able to for any reason, they might be forced to sell properties at a loss if they can't easily be repurposed.
Is IIPR the next millionaire-maker opportunity?
I don't think there's any question that Innovative Industrial Properties presents a great opportunity to get into a REIT that's poised to experience some exceptional growth over the next three to five years. I believe there's a lot of money to be made with this company between an increasing price and dividend income. However, I can't see there being quite enough room in the market for this to be the next rags-to-riches buy opportunity. I do think it is likely to make some risk-tolerant investors very happy with their purchase, though, and a long-term investment in this REIT could very well turn into a million-dollar holding down the road.
Dividend Yield: 4.43%
Market Cap: $1.784 billion