Is Innovative Industrial Properties in Trouble?

How long can Innovative Industrial Properties (IIPR) continue to float serenely above its peers? Innovative, the leading real estate investment trust (REIT) in the marijuana industry, seems to be defying gravity when compared to the rest of the pack. Over the past year, its share price has…

risen significantly more than most cannabis companies. Not only that, it’s also beating several top REITs while doing so. Yet what comes up must come down, as we all know, so let’s see if Innovative risks a crash and burn.

Doubly special

Companies in and associated with the marijuana business are unpopular just now. Every weed company investor is looking forward to full legalization and/or decriminalization, but given the current political climate, that’s not likely in the near future. Piecemeal, state-by-state legalization is encouraging; however, that’s not progressing quickly, and at any rate is not as sweeping as the top-down federal lawmaking.

And that’s only one factor limiting the upside of cannabis stocks. Because weed stubbornly remains a Schedule I substance under U.S. drug law, pot companies are hampered by numerous restrictions, among them a lack of access to even the most basic financial services.

As a result, cannabis companies are rarely profitable. Investors can be a tough bunch and withstand many setbacks. What they have little tolerance for is constant, consistent losses.

That’s a big reason Innovative, as the leading landlord in the pot industry, is such a star among that crowd. It habitually books a profit, and thanks to the thirst for capital from struggling marijuana businesses, the company can readily acquire properties through sale-leaseback deals. As any equity REIT observer knows, all things being equal, a growing portfolio tends to mean higher revenue and profitability.

Innovative is not only an outlier in the marijuana industry — it’s nearly unique as a REIT too. It is one of the very few specialty cannabis REITs on the market and far and away the most prominent one.

Time for a buzzkill

Profitability and growth are fine characteristics, but they don’t always translate to share prices. This isn’t the case with Innovative, whose stock has not only outperformed its fellow weedies; it’s also ahead of numerous top REITs. Its one-year share price gain of 13.3% eclipses star retail specialist Realty Income, up a little more than 10%, for example, and trounces American Tower, which is up less than 1%.

Because of this growth, Innovative’s dividend — always a crucial consideration for REIT investors — is a rather low yielder compared to other REITs, at only 2.9% for the trailing 12 months.

Realty Income’s payout (which, by the way, is dispensed monthly as opposed to Innovative’s more standard quarterly) yields 4.4%. That level also happens to be roughly the average of all equity REITs.

Smoke or pass along

So let’s get to the nitty-gritty: Considering, are the high times over for Innovative’s relatively pricey and low-yielding stock?

I don’t believe so. Succeeding in not one but two (marijuana and REIT) sectors commands a share price premium on its own, plus Innovative is still growing robustly. Last year, for example, its annual revenue rose 75% from 2020, while its non-GAAP (adjusted) funds from operations (FFO, the best profitability yardstick in the REIT world) shot 78% higher.

Those rates are not only impressive for the usual slow-growing REIT sector; they’re approaching levels often seen with hot young tech companies.

While Innovative might not hit those growth figures in the future, I feel there’s still plenty of unburned product in its pipe.

Cutthroat politics aside, there is vast public support for legalization and/or decriminalization at the federal level, and before we all grow much older, it’ll probably be pushed through by Congress. Even before that, more states are almost certain to legalize recreational sale and use.

And let’s not forget, that while several states recently did approve recreational use — specifically, big and populous New York — others have yet to open their markets.

So the services Innovative provides and the ready capital it can hand over in those ever-popular sale-leaseback deals will continue to be strongly in demand. This REIT, then, is…

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