Before we begin, I want to disclose that I personally own shares in Innovative Industrial Properties and don't plan to sell these shares anytime soon. I feel the company is in a unique underserved niche that currently faces very little competition with significant growth potential. But there are a lot of factors to consider before investing.
Leading the way in medical marijuana
Innovative Industrial Properties owns 62 properties totaling 6.2 million square feet across 18 states. The company leases its real estate to state-licensed cannabis operators who use the property for a variety of medical-marijuana-related activities such as cultivation, distribution, and manufacturing.
Its portfolio, which is 100% leased on long-term net leases as a part of a sale-leaseback transaction, averages 16.7-year lease terms and produced $42.9 million in revenue in the first quarter of 2021 and $116.9 million in all of 2020.
Quarter after quarter and year after year, the company manages to grow its adjusted funds from operations (AFFO), net income, and revenues. Q1 2021 saw a 103% jump in revenues, 31% increase in AFFO, and 46% gain in net income. These types of gains don't go unnoticed. Over the past five years, the company's share price has grown over 67%, with share prices being at all-time highs right now.
While dividend payouts have increased as the company's grown, it's hardly keeping pace with share price growth. Investors can expect a roughly 2.5% return -- hardly anything to get excited about.
What investors can get excited about, though, is the medical marijuana and marijuana industries' potential for growth. Cannabis-related sales grew over 52% from 2019 to 2020, and its expected sales in this industry will double by 2025, meaning there is huge long-term potential for IIPR to continue to grow. Right now, the company operates in 18 states, despite 36 states having legalized medical marijuana.
In Q2 2021, IIPR made four new acquisitions adding properties in Michigan, Massachusetts, and Pennsylvania for a total of $70.65 million. The company, which is very well-positioned financially, has roughly $122.1 million in cash and cash equivalents and a staggering 7.8% debt-to-gross-assets ratio. This puts the company in a favorable position to continue to expand its growth over the coming years.
Is the company a buy right now?
IIPR is hardly a secret. Its mega growth has put it on the map for most investors, meaning the company could be seen as overvalued when it comes to its current performance. Its price-to-AFFO, a common indicator as to whether a stock is overvalued, is 40 times -- far above the standard 10 times to 30 times range.
The challenging part of price-to-AFFO here is that each quarter, the company's performance improves, meaning investors are betting on continued growth to justify the cost of the company. Historically, this has paid off, but that isn't guaranteed. It's likely the company will continue to face competition in this field as medical marijuana becomes more widely accepted.
Ultimately, I feel the company is a buy, but I will be the first to say the company is trading at a premium. As an investor, you have to make a personal choice as to whether you're willing to pay inflated prices to gain access to the company's portfolio and potential growth in this sector.