Innovative Industrial Properties (IIPR -0.01%) might have found the key to driving gains in a market downturn. The real estate investment trust leases property to cannabis growers, avoiding direct involvement in that industry. Due to that approach and the recession-proof nature of its client's business, its expanding operations and rising dividend could continue to drive returns regardless of what happens to the overall market.

IIP's independence from market cycles

The focus on properties rather than products provides Innovative Industrial Properties (IIP) with many advantages. For one, it insulates the company from the ups and downs of the cannabis market. As a landlord, it receives steady cash flow every month to earn a profit.

Worker checks cannabis plant in greenhouse.

Image source: Getty Images.

Also, the company does not face the Schedule I restrictions of a marijuana producer or retailer. In fact, Schedule I restrictions ban bank loans to cannabis companies, driving businesses to its sale-leaseback program. Under this program, IIP buys a cannabis company's property and then leases it back to the former owner, thus providing the grower with needed capital. Additionally, the program generates cash flow for IIP while saving it from having to acquire and develop greenhouses and agricultural land on its own.

Furthermore, a market downturn should not significantly affect demand for the product it helps to support. Many users consume cannabis products for medical purposes, meaning the healthcare industry's resistance to downturns would probably also apply to IIP's clients. Additionally, products such as tobacco and alcohol sell in both good times and bad. Thus, one can assume that marijuana sales would remain largely unaffected by the fluctuations of the overall market.

Instead, its most pressing danger may ironically be legalization. Legal status would allow producers to get bank loans, thus reducing the need to sell their property to IIP.

However, Grand View Research forecasts a compound annual growth rate of 27% for the global cannabis industry through 2028. Such increases mean IIP could likely find tenants if business conditions forced it to build greenhouses speculatively. That growth may also help explain why its properties are 100% leased. 

Industry and company financials

The lease rate and ongoing expansion continue to boost the top and bottom lines of IIP. For the first six months of 2021, revenue of $92 million increased 102% compared with the first half of 2020. The company earned almost $55 million during the period. This was a 124% increase over the same time frame last year, a feat achieved by limiting the rise in total expenses to 64%.

Furthermore, adjusted funds from operations, a measure of the REIT's operating cash flows, came in at $81 million for the first six months of the year. This allowed IIP to cover its $34 million in dividends payable. Additionally, its dividend rose in each of the last six quarters, resulting in an annualized payout of $6 per share. At current prices, that amounts to a cash yield of about 2.6%. In comparison, the average yield for the S&P 500 now stands at about 1.3%.

IIP's stockholders also benefited as the company has morphed into a growth stock that dividend investors will also love. It has risen by more than 90% over the last 12 months. That has taken its P/E ratio to 58, up from about 43 one year ago. While that multiple might appear somewhat elevated, it could easily continue to move higher with the triple-digit percentage income increases.

IIPR Chart

IIPR data by YCharts.

Investor takeaways

Thanks to its ties to the cannabis industry, Innovative Industrial Properties has built a business model that can weather market downturns. The demand for marijuana should ensure its properties hold tenants, and the growth of the cannabis industry should foster significant increases in revenue, income, and dividends for the foreseeable future. While legalization could force it to seek new avenues for additional properties, the industry's massive growth could propel the company's expansion for years to come.