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Here's How Marijuana's Top Dividend Stock Expects to Pay Shareholders More

By Dan Caplinger – Updated Apr 13, 2019 at 6:53PM

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Find out why cannabis-related real estate could be a goldmine for investors.

2019 has given marijuana stocks a nice rebound from tough conditions at the end of 2018, and the future looks brighter than ever for the cannabis industry. With a trend toward greater legalization and a boost in interest among consumers, companies that are helping boost pot production have seen impressive gains.

Innovative Industrial Properties (IIPR -1.55%) plays an indirect role in that growth by making real estate transactions that help medical marijuana cultivators in the U.S. find the facilities and space to meet their production needs. That real estate focus has made Innovative Industrial an attractive risk-reward profile, and more importantly for income investors, it's enabled the real estate investment trust to pay lucrative and growing dividends to its shareholders. Innovative Industrial has high hopes for its future, and it expects to keep boosting its payout over time if things continue to go well for the industry. Below, we'll look more closely at several things that Innovative Industrial's leadership team think will help bolster its prospects in the years to come.

Rows of cannabis plants under lights in a greenhouse.

Image source: Getty Images.

1. Innovative Industrial has an impressive portfolio

We own 13 properties in 11 states, totaling approximately 1.128 million square feet, which are 100% leased on a long-term basis to high-quality, licensed medical-use cannabis operators. -- Executive Chair Alan Gold

Innovative Industrial hasn't been in business all that long, but already the REIT has put together a portfolio of properties spread out across the entire nation. The company is based in San Diego, but that hasn't stopped Innovative Industrial from building out a strong presence in the Northeast, with facilities in Massachusets, New York, Pennsylvania, and Maryland. More recently, the REIT has added exposure to the key California market. It might seem easy to enter all these markets, but Innovative Industrial has done an admirable job in navigating the often restrictive regulation that each individual state imposes on cannabis facilities, and that's adding to its expertise in an important niche area for the marijuana industry.

2. Cannabis leases are profitable

Our current blended yield on these properties is 15.1%, with each lease providing minimum annual rental escalations ranging from 3% to 4%, with a weighted average remaining lease term of over 14 years. -- Gold

To be successful, it's not enough just to buy real estate and lease it to a cannabis company. You also have to be smart about structuring leases to protect your long-term interests. Innovative Industrial negotiates from a position of strength, and that's helped it obtain yields far higher than many commercial REITs are able to get on more conventional properties. That, combined with typical rent escalation clauses, should help the marijuana real estate specialist bring in even more income in the future.

Check out the latest earnings call transcript for Innovative Industrial Properties.

3. Recreational marijuana is a huge opportunity

If our medical growers, who maintain the medical license, choose to enter into the recreational market, there's nothing in our lease that prohibits that. So we'll leave that up to our growers: If they feel it's in their best interest to do a dual license and enter into the rec market, we do nothing to stop that. -- CEO Paul Smithers

Despite the ongoing fight between federal and state governments about the legal status of marijuana, the recent U.S. legalization of hemp products across the nation has led many to expect a gradual move toward fully allowing cannabis for both medical and recreational use. As the STATES Act, which would officially recognize states' rights to legislate marijuana use, works its way through Congress, odds of full legalization appear to be improving. Innovative Industrial is ready for the surge in demand that would accompany such a move, and it's ready to support its first-mover tenants who choose to make forays toward the recreational side of the business.

4. Innovative Industrial has plenty of untapped markets

Thirty-three states have legalized medical use cannabis by popular vote or legislative process, where a large majority of the U.S. population resides. -- Smithers

As good a job as Innovative Industrial has done to obtain properties in 11 states, there's twice that many states out there that have yet to see a presence from the cannabis REIT. Among them are key areas like Florida, New Jersey, and Washington. With plenty of capital available from recent sales of convertible debt, Innovative Industrial will work hard to expand further into key jurisdictions.

5. Dividend increases have already been impressive

We declared our seventh consecutive quarterly common stock dividend of $0.35 per share to stockholders of record as of Dec. 31, having generated $0.38 per diluted share in adjusted funds from operations in the fourth quarter. And we have followed that up with an announcement ... declaring our eighth consecutive quarterly dividend of $0.45 per share to stockholders of record as of March 29, representing a nearly 30% increase from the prior quarter and a testament to our property portfolio's operating performance and confidence in our pipeline of acquisitions. -- Gold

Innovative Industrial's strategy is paying off, and growth is only leading to more opportunities for the marijuana REIT. As the company finds more deals to finance and purchase, it's been able to see impressive income growth, and it's turned around and shared that wealth with shareholders. That's a cycle that's likely to continue for some time to come.

Marijuana investors have found Innovative Industrial to be a lucrative investment recently, and the momentum it's generated shows no immediate signs of slowing. As activity levels rise in the U.S. cannabis market, Innovative Industrial will be an important facilitator of real estate deals to support marijuana growers across the country.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.

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