Not all that long ago, marijuana was a forbidden fruit everywhere in this country. Now it’s prescribed and/or sold for legalized fun in many places, and you can invest in the newly legitimate industry through multiple publicly traded companies.
That includes my favorite buy-and-hold real estate investment trust (REIT) right now: Innovative Industrial Properties (NYSE: IIPR). IIP is not a grower itself. It’s even more unique: This San Diego-based company buys and leases back specialized greenhouses and industrial facilities to companies that also depend on it for financing the whole thing.
That’s particularly important in an environment where marijuana may be legal in a state but lenders won’t work with growers because pot is still illegal under federal law. That severely limits the options, and IIP is filling the gap profitably.
For instance, in the first quarter that just ended, IIPR reported year-over-year growth of 103% in total revenue, 122% in net income, and 116% in adjusted funds from operations (FFO.) And its most recent dividend of $1.32 per share is a 32% increase over that payout a year ago and 6% higher than 4Q20.
An emphasis on continued growth
Meanwhile, the company is continuing a buying spree that includes three more deals just in May. IIP now owns 72 properties with 6.6 million feet of 100% occupied space under long-term triple net leases averaging a weighted 16.8 years. IIP had committed approximately $1.6 billion across its portfolio, including capital already invested and capital committed to future construction and tenant improvements.
IIP is now operating in 18 of the 36 states where medical marijuana is legalized, indicating room for expansion in that business. And it also, of course, could get into doing the same business for growers of recreational marijuana, although that would involve a whole different ball of regulatory wax and may not be as appealing for now.
For now, there’s little competition for doing exactly what Innovative Industrial Properties does as well as still plenty of room to roam.
The company’s stock closed on May 28 at $180.23 per share, 18.85% below its 52-week high of $222.08 per share reached on Feb. 24 and more than twice its 52-week low of $80.50 from May 29, 2020. It’s also nine times the IPO price of $20 per share from December 2016.
While that’s still significantly more expensive for its earnings than the typical REIT, IIP stock is still yielding a decent 2.93% based on an annual dividend of $5.28 per share.
The Millionacres bottom line
IIP is in an excellent position for long-term growth. Its business model is not as risky as it might seem at first blush, since it’s buying from and leasing back properties to established growers who have already navigated the compliance hurdles needed to get up and running.
Plus, it’s adding partners in an industry that doesn’t seem to be close yet to reaching its capacity. And no serious competition has emerged yet for exactly what it does. And when that happens, the effects probably won’t be immediate.
For instance, if the federal government legalizes cannabis -- which appears far from certain anytime soon -- it could still be a while before the banking regulators green light financing that end of the business.
That would give Innovative Industrial Properties plenty of time to adjust to a new environment that’s already old hat in the REIT business: triple-net leases that leave much of the work and expense to the occupants while the landlord, and its investors, reap their own rewards.
So, even when the wind is not so much at this industrial REIT’s back, there should still be plenty of momentum left to carry it profitably forward for years to come. I’m confident enough in its prospects that it’s one of the largest holdings in my own portfolio, and I plan to add to it.