Innovative Industrial Properties (NYSE: IIPR) is the first, and currently the only, real estate investment trust (REIT) to provide real estate capital to the medical marijuana industry. IIPR has grown tremendously since it first became public in 2016. Investors who first purchased shares of this company shortly after it became public have been handsomely rewarded, with share prices up 339% since its 2018 highs. But where is the company headed? Let's take a deeper dive into Innovative Industrial Properties' growth plan and see where it may be in five years.
Where Innovative Industrial Properties is today
Innovative Industrial Properties now owns and/or manages 63 properties in 16 states with $126.1 million in annualized revenues. The company largely acquires properties through their sale-leaseback program, which allows existing, qualified, and licensed businesses in the cultivation, processing, distribution, and retail medical cannabis fields to gain liquidity by selling the property to IIPR while maintaining their operations through a long-term triple net lease.
Revenues as of the third quarter of 2020 were up 196% when compared to the same quarter of the previous year. Adjusted funds from operations (AFFO) increased 192% from the same quarter the previous year. Dividends also increased 10% from the previous quarter and are up 50% from Q3 2019 dividend prices. Innovative Industrial Properties is also extremely well-positioned financially, with virtually no debt beyond $143.7 million of unsecured debt, making for a 9.4% debt-to-gross-assets ratio. Rent collection averaged 100% from July to October of 2020, a period of time in which many REITs struggled with occupancy and rental collections. Their average remaining lease term is 16.2 years with a well-established, diverse range of tenants.
Where Innovative Industrial Properties seems headed
Right now, Innovative Industrial Properties is the only publicly traded REIT investing in medical cannabis facilities, but another cannabis real estate company recently announced their plans to become a publicly traded REIT. Despite new competition, there is still plenty of demand to go around. 2019 medical cannabis sales grew 37% from 2018, and sales are projected to increase 40% in 2020 from 2019. Medical cannabis is being used to treat both minor and major chronic illnesses including arthritis, cancer, HIV/AIDS, Alzheimer's, and beyond.
In the recent election, two new states, South Dakota and Mississippi, approved the use of medical marijuana, bringing the total number of states having legalized the use of medical marijuana to 36 states and 4 territories. ArcView Market Research estimates that all states will have legalized medical cannabis by 2025 and estimates that sales will reach $34 billion by the same year. There's clearly a strong and increasing demand for this field, and IIPR's growth strategy allows them to serve the expanding industry.
If the company continues to maintain its current growth trends, which have exceeded 143% or more year over year since 2017, we can expect to see revenues around $563 million or more by 2025, assuming an average increase of 75% over the next five years to compensate for increased competition and scale. With that, expect AFFO and dividends will continue to grow in line with revenues. With that being said, those projections are rather conservative given the company's track record. It's very likely IIPR could surpass these figures.
Dividends for the company have increased by $1.02, or 680%, since 2017 with payout ratios ranging from 71% to now around the 90% to 92% range providing roughly 3.2% to 3.6% return for investors. Based on the company's current balance sheet, I expect it to maintain similar ratios and returns for investors as revenues grow.
2025 looks strong for Innovative Industrial Properties
As more and more states legalize medical cannabis, the company will have further opportunities to expand into new markets. While IIPR hasn't publicly shared a specific growth plan, based on current activity, it appears they will continue to utilize their sale-leaseback structure while expanding their current partnerships with existing tenants to help fuel growth. I personally own shares in IIPR and would love to buy more. Their growth prospects look strong, and the opportunity for the marijuana industry remains optimistic.