Marijuana stocks vaulted into the limelight in 2018, and their performance in 2019 has generally been extremely strong. As more states have embraced cannabis by legalizing it for medical or recreational purposes, the opportunities for cannabis producers to capitalize on strong and rising demand have grown.
Given the incentive to invest available capital toward future growth, most marijuana stocks don't pay a dividend. Innovative Industrial Properties (NYSE:IIPR) is different, though, in that its business model essentially requires that it pay a healthy dividend to cannabis investors. By investing in real estate that's best suited for cannabis-growing operations and the related needs of producers, Innovative Industrial has been able to join the small number of profitable marijuana-industry companies. Recently, the marijuana-focused real estate investment trust gave its latest presentation in which it made its case for why it's so optimistic about its future.
A strong executive team
Perhaps the most valuable asset that Innovative Industrial Properties has is its leadership team. Executive chair Alan Gold has extensive experience in the real estate industry, and as co-founder of the privately held BioMed Realty Trust, Gold worked to find suitable laboratory and office properties for life sciences companies. CEO Paul Smithers has 35 years of legal and regulatory experience, while CFO Catherine Hastings has an appropriate mix of accounting and real estate background.
Much of the rest of Innovative Industrial's leadership team came from BioMed Realty as well, including its general counsel, controller, and director of investments and finance. That gives the team a unified vision and base of experience to share, and extending that knowledge into the cannabis space is a natural move given the current industry environment.
A solid strategy
Innovative Industrial has a sharp focus in its strategic vision. The REIT wants approved licensees for medical cannabis as its tenants and partners, and with 33 states and the District of Columbia having approved programs for medical cannabis, Innovative Industrial's addressable market is large.
Acquiring promising industrial buildings takes effort, especially given that Innovative Industrial hopes to find facilities that have enclosed greenhouse space. Yet the REIT doesn't expect to find properties that are move-in ready. Instead, it understands that acquisition investment will typically include things like upgrades to HVAC systems, electrical infrastructure, plumbing, lighting, and security systems. By choosing properties that can provide initial yields on invested capital in the mid-teens on a percentage basis and will see rent escalate gradually over time. With a current yield on invested capital of 14.7%, Innovative Industrial is squarely in line with that target, and it sees itself building a foundation for long-term prosperity.
Some real estate investment trusts take on huge amounts of leverage in order to maximize immediate returns. Innovative Industrial has taken a more conservative approach, but it's already paying off for investors. The company started paying dividends in its second quarter of operations, and payouts have tripled since then, rising to $0.45 per share each quarter currently.
To date, Innovative Industrial has raised just over $400 million in capital, and it's already invested or committed more than $250 million of that money to projects. Yet because it's been smart about raising capital through a mix of stock offerings and debt, the REIT's debt amounts to less than 34% of total assets.
A growing market
Finally, Innovative Industrial sees positive factors in the market helping its business. Cannabis sales in the U.S. are expected to rise from $8.6 billion in 2017 to $22.2 billion in 2022, and that doesn't even fully take into account the possibility of a major restructuring of federal and state laws regulating marijuana. With overwhelming popular support for medical marijuana, Innovative Industrial's current business model looks sustainable for the long run.
Even with all the attention cannabis investing has gotten lately, things in the U.S. are just getting started. Innovative Industrial is positioned well on the ground floor of marijuana-related real estate, and its niche continues to look promising as growing interest in pot as an investment continues.