Innovative Industrial Properties (NYSE: IIPR) is tied into an industry that has huge growth potential. That, in turn, means the real estate investment trust's (REIT's) outlook is bright. It could easily help you reach millionaire status, but don't hit the buy button until you really understand what this REIT does and what it means for the niche industry it serves.
So... what does it do?
The name Innovative Industrial Properties isn't terribly specific, though it does highlight that this REIT is focused on industrial assets. The innovative part is because it operates in the marijuana sector, which is increasingly finding acceptance in the United States. And it is a potentially big business, with Grand View Research projecting the marijuana sector will grow to an $84 billion industry by 2028, suggesting a huge 14% compound annual growth rate.
Tapping directly into that hints that Innovative Industrial Properties is still in the early stages of a huge growth opportunity. But what exactly does this REIT actually do? The answer isn't as easy as it may at first seem. At a simple level, Innovative Industrial owns grow houses and other marijuana-focused properties. A grow house is a pretty specialized asset, so this is a notable focus since it would require big changes to convert a grow house to another use. But as long as the marijuana industry is still growing, the REIT should be able to deal with vacancies in stride.
That said, Innovative Industrial uses the net lease model, in which it buys properties from companies and then leases them back under long-term contracts. Those contracts often include regular rent escalations and require the tenant to pay for most of the operating costs of the assets they occupy. Companies are willing to do this because it allows them to continue using what are usually important properties while at the same time generating cash from the asset sale that they can put toward other purposes, like growing their marijuana business.
An advantageous position
So, when you step back just a little, Innovative Industrial Properties is more than just a landlord. It is actually a key funding source for the marijuana sector as it looks to expand. The fact that marijuana is still working its way toward acceptance as a legal substance is a huge benefit for Innovative Industrial Properties because other more traditional funding sources aren't currently competing for the business. Indeed, banks have been reluctant to embrace marijuana companies because of the risk that they could run afoul of current laws.
As long as this situation persists, Innovative Industrial Properties has an important edge. And it has rewarded investors for taking on the risk of investing in the sector, with its dividend payments growing from $0.15 per share per quarter in 2017 to a huge $1.24 per share in the final quarter of 2020. The stock is up more than 800% over that span! If trends like this continue, it could easily make investors millionaires.
While there's likely material long-term potential here, don't get overly excited. The future may not be as exciting as the past. That doesn't mean that Innovative Industrial Properties doesn't have millionaire-maker potential, just that there's likely to be a slowdown in the REIT's growth rate over time. Why?
First, the company has grown its business by growing its portfolio. As the portfolio expands, it needs more and more activity to achieve future growth. So, in the early days, buying one or two properties had a big impact on the top and bottom lines. Today, with the portfolio at 68 properties, it simply takes more to move the needle. And that isn't a one-time issue, as Innovative Industrial grows so does the hurdle for future growth. There's a potentially long runway ahead here, but slower is the likely trend on the growth front.
Second, marijuana is increasingly being legalized. Right now, Innovative Industrial fills a funding void that companies can't easily meet in other ways. However, if the current legalization trends continue, that opportunity won't last forever. And, eventually, the REIT will have to compete more with other sources of capital. That isn't to suggest it won't continue to be an important funding source, only that growth could slow once capital providers, like banks, are more comfortable operating in the marijuana space.
Priced for success
Innovative Industrial Properties is a fairly young company, so its dividend yield history isn't very long. That said, the current 2.6% yield is, at best, middle of the range here. This suggests that the shares are probably fully valued and certainly not on the sale rack. But, given the long-term growth opportunity, that might not be a bad deal for dividend growth-oriented investors looking to build a seven-figure portfolio. However, you need to go in knowing the unique way in which this growing REIT serves the marijuana industry and why the future is likely to be different (read slower growth) from the recent past.