Innovative Industrial: A Cannabis Favorite

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The cannabis industry is here to stay, with acceptance growing across the country and a regulatory environment increasingly becoming amenable to the cultivation, sale, and usage of marijuana and its derivatives, observes Doug Gerlach, editor of Small Cap Informer.

While there are many penny stock promoters and shady opportunists operating in the Wild West fringes of the industry, few are the companies that might tempt more savvy investors.

One such business, however, is Innovative Industrial Properties, Inc. (IIPR) — a real estate investment trust (REIT) engaged in the ownership and management of industrial properties leased to state-licensed operators for regulated medical-use cannabis facilities.

IIRP was founded in December of 2016, and is the first publicly traded company on the New York Stock Exchange to provide real estate capital to the cannabis industry. The company’s focus is on purchasing and developing specialized industrial real estate properties for long-term lease to licensed cannabis operators. These operators usually have limited access to traditional financing, making Innovative Industrial Properties’ offerings quite attractive.

As of May 4, 2022, IIPR owned 109 properties, in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Texas, Virginia, and Washington.

Its property portfolio holds a total of 8.1 million rentable square feet (including 2.4 million square feet under development or redevelopment), with a weighted-average remaining lease term of approximately 16.4 years. The company’s initial lease terms with tenants are usually 15-20 years, and are 100% triple net.

In a triple net (or NNN) lease, the tenant or lessee pays all expenses of the property, including real estate taxes, building insurance, and maintenance, in addition to rent and utilities. These leases free IIPR from overhead and property management costs.

As of Dec. 31, 2021, 38 states and Washington, D.C. have legalized cannabis for medical use, and 19 states have legalized cannabis for adult-use. U.S. regulated cannabis sales grew around 52% in 2020 to $20 billion, and are expected to grow to greater than $45.9 billion by 2025, according to Marijuana Business Daily.

Industry watchers predict that all U.S. states will authorize cannabis for medical use by 2025, with nearly 50% of states permitted recreational use. According to a 2019 Quinnipiac University poll, 93% of adults in the U.S. support being able to use medical cannabis if recommended by a doctor.

Since 2017, the first year of its REIT election, Innovative Industrial has grown revenues from $6.4 million to $204.6 million, a 183.0% annualized rate. Funds from Operations per Share (FFO/S) have grown at a 78.5% rate in the same period. FFO/S is a more applicable metric than EPS for REIT analysis.

Growth is mediating to a more controlled rate. In the first quarter ended March 31, 2022, revenues grew 50.4% to $64.5 million, while FFO/S increased 40.4% to $1.83. The company acquired six properties in six states and added two new tenants while expanding relationships with seven more.

Analysts covering IIPR project revenues growth of 30% a year in the next two years, and EPS growth of 19% in the coming year. We have plotted a conservative 14.0% expectation of average annual revenues and FFO/S growth over the next five years.

At quarter end, Innovative Industrial Properties’ debt-to-total-assets ratio stood at 14%, with $2.2 billion in total assets, and an annual fixed cash interest obligation of approximately $16.9 million. The REIT has no debt maturing in 2022 or 2023.

Innovative Industrial Properties’ share price has been selling quite near its 52-week low, with a P/FFO ratio of 17.2 that is well below its 52-week high P/FFO ratio of 45.1. Assuming a return to a high P/FFO ratio of 20, the share price could reach $249.

On the downside, a further 20% price decline from here would cause the shares to sell at $88. This represents an upside/downside ratio of 6.2-to-1 and a potential total return of 22.0% including an 4.5% annual dividend yield. The recent yield of 5.2% is quite attractive as well.

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