There are plenty of growth possibilities in cannabis. More and more U.S. states are likely to follow the 33 -- plus Puerto Rico and the District of Columbia -- that have legalized medical marijuana and the 11 (plus D.C., but not Puerto Rico) that have legalized it for adult recreational use.
However, there's also plenty of competition among growers, and few cannabis companies are showing a profit. Consequently, it's been a rough year for the shares of pot stocks. The Alternative Harvest ETF (NYSEMKT:MJ), which tracks the industry, is down more than 23% year to date.
One marijuana stock that's up, however, is Innovative Industrial Properties (IIP), a fast-growing real estate investment trust (REIT) that was founded in 2016 and is the first company on the New York Stock Exchange to provide real estate capital to the medical-use cannabis industry.
I recently purchased IIP stock. It caught my eye when I was researching stocks, and my only concern was whether it was priced a bit too high (it has a price-to-earnings ratio of 44). It turns out my worries were for naught.
Three reasons I like Innovative Industrial Properties stock:
1. Solid fundamentals leading to growing revenue and profits
In the second quarter, the company announced revenue of $24.3 million, an increase of 183% year over year. It boasts 14 consecutive quarters of increased revenue and 12 consecutive quarters of increased earnings. The company reported net income of $13 million, up 263% over the same period in 2019.
IIP keeps adding to its portfolio, buying industrial and greenhouse buildings, and has quickly found tenants for its new properties. Since April, it has bought eight properties totaling 775,000 square feet of space. It's spent $226.9 million on those purchases and on improvements to those and existing properties.
In most cases, Innovative Industrial Properties buys a building and the land surrounding it from a medical-use cannabis company that already has a license to operate in a particular state. Then IIP leases that property back, giving growers capital to invest in production; meanwhile, IIP collects rent in triple-net leases, which push most costs -- such as taxes, insurance, and utilities -- to the renter. There's stability built into the model, as the average age of the leases is just more than 16 years. The company said its debt-to-total-gross-assets ratio is a solid 12%.
While some of the company's renters have seen business fall because of the pandemic, IIP said all of its renters paid what they owed in April, May, June, and July, not counting one Los Angeles company in receivership. Of the company's 4.5 million square feet of space, 99% is under a long-term lease, Executive Chairman Alan D. Gold said in the company's second-quarter earnings call.
2. While you're watching the share price rise, you also get a nice dividend
Management has raised the dividend payout by more than 600% since the first installation in 2017. Most recently, it raised its quarterly dividend to $1.06 a share, a 77% increase year over year. As a REIT, the company is required to distribute at least 90% of its taxable income through dividends. The current yield on its dividend is 3.2%. Compared with some respected REIT exchange-traded funds (ETFs), the company's share price has had superior growth this year.
3. There's still growth ahead
IIP's share price has climbed more than 60% year to date, but I see more growth ahead. As cannabis companies expand, that provides opportunity for IIP. While some marijuana ballot initiatives have been slowed by the pandemic, several states remain poised to legalize marijuana for the first time.
Maine, after passing a recreational marijuana referendum in 2016, is scheduled to finally allow the sale of recreational marijuana on Oct. 9. New Jersey, Montana, South Dakota, and Arizona all have referendums to allow recreational cannabis on their 2020 ballots, and Idaho, Mississippi, Nebraska, and South Dakota all have ballot measures that would allow medical cannabis.
The global market for medical marijuana is expected to have a 20% compound annual growth rate through 2027, according to a study by Data Bridge Market Research. IIP is already an established name and is in a great position to benefit from that growth.