No industry is as hot as the marijuana industry right now. Within the U.S. alone, sales of state-regulated cannabis will grow to more than $22 billion by 2022, according to the Arcview Group, up from $8.6 billion in 2017. And this doesn't account for the possibility of federal legalization during this time.
Within this explosive market, one company, in particular, is delivering scorching gains to shareholders.
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Marijuana-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR +0.20%) has seen the value of its stock surge 47% so far in June -- and an incredible 250% in the past year. Fueling these gains is the company's proven strategy of turning medical marijuana facilities into cash for its shareholders.
As a REIT, Innovative Industrial Properties pools investor capital and uses it to acquire income-producing real estate. In IIP's case, it purchases regulated facilities used to grow medical marijuana and leases them to state-licensed producers. These tend to be industrial buildings with enclosed greenhouses. IIP then upgrades their electrical, plumbing, lighting, and security systems to make them suitable for cannabis growers.
IIP owns 21 properties in 11 U.S. states comprising more than 1.5 million rentable square feet. These buildings generate strong returns on invested capital of nearly 15%. They also produce bountiful, recurring cash flow, with average lease lengths or more than 15 years.
With the cannabis industry expanding rapidly, these buildings are in high demand. And by briskly growing its portfolio of properties, IIP is enjoying sharp increases in revenue and profits. In the first quarter of 2019, IIP's net rental revenue, earnings per share, and adjusted funds from operations (AFFO) per share surged 146%, 267%, and 135%, respectively, compared to the prior-year period.
A relatively low-risk way to profit from the cannabis boom
Besides being profitable -- a rarity in the marijuana industry -- several aspects of Innovative Industrial Properties' business help to reduce risk for investors.
The company rents its properties to state-licensed producers under long-term, triple-net leases. Thus, tenants pay property taxes, building insurance, and maintenance expenses, in addition to their rent payments. This helps to insulate Innovative Industrial Properties from escalating costs.
Additionally, these lease agreements include annual rent increases of 3%-4%. This helps to grow IIP's revenue and profits above the rate of inflation, even without purchasing any new properties.
Moreover, Innovative Industrial Properties has a seasoned management team with a prudent approach to leverage. Executive chairman Alan Gold co-founded two real estate companies, Alexandria Real Estate and BioMed Realty, which was acquired by Blackstone for $8 billion in 2015. CEO Paul Smithers, meanwhile, has more than 35 years of legal and regulatory experience within the real estate industry. Together, they've helped to drive IIP's growth without the use of excessive leverage. IIP's debt-to-gross-assets ratio checks in at a conservative 34%.
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Sweet, beautiful cash
Perhaps the most intriguing reason to invest in Innovative Industrial Properties is its rapidly growing dividend. The REIT recently boosted its quarterly cash payout to $0.60 per share. That was a 33% increase from the previous quarter and a 140% jump from the prior-year period. At current prices, IIP's dividend equates to an annualized yield of about 2%.
The yield would be even higher had Innovative Industrial Properties' stock not appreciated as much as it has over the past year. But even after torrid gains, IIP's shares can currently be had for less than 40 times analysts' earnings estimates for 2020 -- a fair price to pay for a business growing at triple-digit rates.
And the explosive growth of the marijuana market is likely to help this budding REIT implement many more dividend increases in the years ahead. Income-seeking investors may want to consider buying some shares of Innovative Industrial Properties today.
