A singular force in a budding industry
I want to start by emphasizing that I purchased shares in Innovative Industrial Properties before it was on most investors' radars. This allowed me to purchase shares when they were still relatively discounted in relation to the value they delivered (and would continue to deliver over the next three years).
Innovative Industrial Properties was the first and only real estate investment company focused exclusively on leasing industrial properties for the medical marijuana industry. Marijuana is a cash-based business, making leveraging assets -- including real estate -- extremely tough for most marijuana operators.
IIPR filled the void by purchasing real estate and leasing it to licensed operators while using a creative sale-leaseback model that provides existing and well-established operators with liquidity. After selling the property to IIPR, the company then leases it back from them over the long term. This provides IIPR with consistent, reliable income secured by real estate and gives the operator the cash injection needed to grow its business.
Being the first has its benefits
Because Innovative Industrial Properties was the first to really hone in on this niche, it's been able to capture a significant market share over the past three years. In the third quarter of 2018, the company had nine properties in seven states under management. As of August 2021 -- just three years later -- the company owns, manages, or has interest in 73 properties in 18 states.
IIPR's net income grew 1,838% during that time, while adjusted funds from operations (AFFO) rose 1,573%.
IIPR is still incredibly well-positioned with huge growth potential, but it isn't at the level it was three years ago. The company is now facing new market competitors, with a growing number of private REITs poised to go public, specializing in the same niche industry as IIPR. Its incredible performance has also drawn many investors' eyes and, in some ways, has made its share price overvalued.
Despite increased competition, IIPR is well-positioned financially to continue to profit and expand as more states legalize marijuana for medical use. In 2018, 30 states plus Washington, D.C., had approved medical marijuana use. Today, that number is 36 and growing. Some forecast that by 2025, all states will have approved the use of medical marijuana.
Its high isn't over
Innovative Industrial Properties' great debt ratios, market exposure, and potential for market expansion make it a prime buy-and-hold opportunity for investors. I personally plan to hold on to my shares in this company for the long haul and look forward to seeing what new heights the company reaches.