Please ensure Javascript is enabled for purposes of website accessibility

Is Innovative Industrial Properties a Buy?

By Zhiyuan Sun - Mar 22, 2021 at 6:11AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This enterprise has made a fortune off the U.S. marijuana boom without ever coming into contact with pot plants. Here's how.

Innovative Industrial Properties (IIPR 0.84%) is an intriguing stock. The real estate investment trust (REIT) has a price-to-sales valuation of 23 and a price-to-earnings valuation of 60. That is far more expensive than the average 12 times earnings of its REIT peers.

Yet investors don't seem to care at all. Over the past year the stock is up a stunning 242%, far outpacing the S&P500's 69% return over the same period. Just what is behind the hype for such a seemingly overvalued stock?

Woman weighing hemp seeds at a dispensary.

Image source: Getty Images.

The nation's leading marijuana landlord 

The answer is cannabis. Innovative Industrial owns 67 marijuana dispensaries across 17 states. The company has invested $1.42 billion into these properties. Last year its rental income amounted to $117 million, representing a massive increase over the $45 million it had in 2019. The average length of its leases was 17 years.

Stunningly, the company has leased 100% of its dispensaries and collected 100% of its rent due. Its tenants include many notable marijuana growers, like Cresco Labs (CRLBF 2.76%)Trulieve (TCNNF 2.78%), and Green Thumb Industries (GTBIF 6.82%). What's more, the company accumulated very little leverage in accomplishing its spectacular results. Its debt-to-asset ratio stands at less than 10%. As icing on the cake, Innovative Industrial stock also posts an annual dividend yield of 2.3%.

The company is poised to benefit from a Wild West-esque marijuana market. Thirty-six U.S. states (plus Washington, D.C.) have already legalized medical cannabis, while another 15 have given the green light to recreational cannabis. In the past two years, the REIT has increased its net income by more than tenfold to $64.4 million.

The typical REIT has only grown earnings by 12% per year in the past five years, so one can see why Innovative Industrial stock is trading at such premiums. By simply sitting back and collecting rent, the company essentially frees itself from commodity-cycle fluctuations. In addition, it does not have to invest anything into materials and labor to actually grow any cannabis. That is why the company's net margin stands so high at 55%.

What's the verdict? 

The exciting thing about Innovative Industrial is that it will remain the largest financing source for wannabe marijuana dispensaries in the nation for quite a while. Right now, banks cannot issue loans to cannabis companies, as the drug is still illegal under federal law. Since the Biden administration only supports decriminalization of the drug -- but not federal legalization -- this basically guarantees Innovative Industrial's monopoly status.

Each investment in a dispensary costs the company roughly $30 million, generating steady yields and a perfect rent collection rate. By 2025, the U.S. cannabis market could double to $41 billion from $20.1 billion today. For these reasons, I think Innovative Industrial is on a fierce path to growth, and would highly recommend marijuana investors add it to their watchlists.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Innovative Industrial Properties Stock Quote
Innovative Industrial Properties
$131.21 (0.84%) $1.09
Green Thumb Industries Stock Quote
Green Thumb Industries
$13.00 (6.82%) $0.83
Trulieve Cannabis Stock Quote
Trulieve Cannabis
$15.16 (2.78%) $0.41
Cresco Labs Inc. Stock Quote
Cresco Labs Inc.
$4.09 (2.76%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.