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This Unusual Pot Stock Is Thriving Amid the Cannabis Boom

By Sushree Mohanty – Aug 4, 2021 at 5:49AM

Key Points

  • This unconventional pot stock offers an indirect entry to the volatile cannabis industry.
  • It is profitable and also pays a dividend.
  • The stock has surged by 105% over the past 12 months, and second-quarter results could boost that even further.

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Investors are hoping to see another outstanding quarter from this marijuana stock.

The cannabis boom amid the coronavirus pandemic benefited the marijuana industry to a large extent. That said, U.S. cannabis companies, even with a limited legal market, outshone their Canadian counterparts. The Canadian pot industry is still challenged with regulatory hold-ups, fewer legal stores than anticipated, and rising black market sales.

The marijuana boom also proved beneficial even for companies that do not directly grow or produce marijuana. One such pot-related company is Innovative Industrial Properties (IIPR -5.13%), a real estate investment trust (REIT) that acquires properties from medical cannabis companies and leases them back.

Because marijuana is illegal at the federal level, some investors are hesitant about cannabis companies. This unconventional pot stock offers a safe choice for those investors because it has no direct involvement with cannabis. The company had an excellent 2020 and an even better start to 2021, with strong first-quarter results. Let's recap how it performed and see what can we expect from its upcoming second-quarter results due tomorrow, Aug. 5.

cannabis leaves and stack of coins.

Image source: Getty Images.

Will Innovative turn in another record quarter?

Investors are hoping to see another outstanding quarter from Innovative's Q2 earnings. The company has been churning out exceptional quarterly reports and the credit goes to its business model. Most cannabis companies struggle to set up large production facilities due to lack of access to capital. That's where Innovative comes into the picture -- it acquires properties from medical cannabis companies, then leases them back to the sellers. Both benefit from this arrangement; the cannabis companies get capital, and Innovative gets revenue through rental income. 

In its first quarter ended March 31, its total revenue jumped 103% year over year to $43 million. Rising revenue also brought in another quarter of profits. Net income grew to $26 million from $12 million in the year-ago period, and adjusted funds from operations (AFFO) surged by 117% to $38 million for the quarter. For a REIT, AFFO plays the same role as net earnings do for a non-REIT. It determines how much cash is available to be paid to shareholders as dividends. 

For the period between Jan. 1 and May 5, Innovative acquired three new properties, as well as additional land at an existing property. As of May 5, it owned a total of 69 properties in 18 U.S. states; 100% of its properties are rented out.

Even if Innovative somehow fails to garner any new tenants over the course of a year, it can continue to earn increased rental income because of the annual rent raises that are part of its leaseback guidelines. Some of Innovative's tenants include popular U.S. cannabis companies Cresco Labs, Trulieve Cannabis, Curaleaf Holdings, and Green Thumb Industries. These companies have been expanding at an exceptional rate, which leads me to believe they will need more of Innovative's help.

This business model has helped Innovative not only grow its revenue and profits but also safeguard itself from the volatility of the marijuana industry. It ended its Q1 with $661.4 million in cash, cash equivalents, and short-term investments, and no debt.

States' legalization ramp-up is a winning factor

Wall Street analysts estimate Innovative will report revenue of $45 million for the quarter, an 85% year-over-year increase. For full-year 2021, analysts expect revenue to be around $194 million, further rising to $269 million in 2022. Analysts also expect a net earnings increase of 52% to $1.11 per share in Q2 and to about $4.70 per share for all of 2021, climbing up to $6.47 per share in 2022. Note that these estimates only take into account Innovative's existing properties. With more states legalizing marijuana, cannabis companies' increasing need for property space could boost Innovative's revenue and profits further.

It is a good time to buy this stock

An added perk of investing in this pot stock is that it pays dividends, with a current yield of 2.6%. However, when looking at a dividend stock, consistency matters more than yield. The company has been consistently paying and also increasing its dividend since it went public in 2016. On June 15, it announced a quarterly dividend of $1.40 per share, a hike of 32% year over year. It also marked the 11th dividend increase for the company since its initial public offering. As a REIT, it is legally required to pay out 90% of its taxable income as dividends. Its rising AFFO is a sign that it will continue to pay dividends.

Many investors worry about the ways federal legalization will change Innovative's future -- when it happens, cannabis companies will have easier access to capital from banks and financial institutions. Though this remains a risk, Innovative could still be able to work with cannabis cultivators who would need more capital besides that raised from financial institutions. And for now, until federal legalization happens, Innovative's future looks bright as more and more states continue to legalize marijuana. It is in a stable financial position to continue expanding and boosting its revenue and profits further, making it a hot cannabis stock to include in your portfolio right now.

Sushree Mohanty has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Cresco Labs Inc., Green Thumb Industries, Innovative Industrial Properties, and Trulieve Cannabis Corp. The Motley Fool has a disclosure policy.

Stocks Mentioned

Innovative Industrial Properties Stock Quote
Innovative Industrial Properties
IIPR
$118.05 (-5.13%) $-6.39
Green Thumb Industries Stock Quote
Green Thumb Industries
GTBIF
$13.52 (-13.53%) $-2.12
Curaleaf Stock Quote
Curaleaf
CURLF
$6.47 (-14.53%) $-1.10
Trulieve Cannabis Stock Quote
Trulieve Cannabis
TCNNF
$13.59 (-9.14%) $-1.37
Cresco Labs Stock Quote
Cresco Labs
CRLBF
$3.63 (-5.66%) $0.22

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

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