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3 Reasons You Can Confidently Add This Stock to Your Portfolio

By Sushree Mohanty – Oct 21, 2021 at 6:55AM

Key Points

  • Innovative Industrial Properties provides an indirect entry to the cannabis sector.
  • Its unique business model is helping its revenue and profits grow at a fast rate.
  • Consistent dividend payments make Innovative a safe bet in a volatile market.

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Looking for a safe investment option in the cannabis industry? This growth stock is the best bet.

The ups and downs in the marijuana sector make investors skeptical to invest in pot stocks. This makes it easier for Innovative Industrial Properties (IIPR 1.97%) to attract investors by allowing them unconventional access to the cannabis sector. It is a real estate investment trust that provides real estate solutions to medical cannabis companies.

As the marijuana sector continues to expand, so is Innovative. The company has been growing revenue and profits exceptionally well in the last few quarters. Its recent second-quarter results ended June 30 were more than impressive. Let's take a look at why investors can confidently add this stock to their portfolio.

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An indirect entry to the cannabis sector

The illegality of marijuana in the U.S. prevents some investors from investing in pot stocks, even though their place in a budding market can provide ample growth opportunities. Here, Innovative Industrial offers an unconventional way of investing without being exposed to the classic risks of the sector.

Due to legal restrictions, cannabis companies can have a harding time procure capital to set up large production facilities. Innovative buys these properties and leases them back to cannabis companies in a sale-leaseback system. Its only source of income is rental revenue, which is growing at an amazing rate, thanks to the expansion of cannabis companies. Its second-quarter total revenue jumped 101% year over year to $49 million, while profit doubled to $29 million from $13 million in the year-ago period.

Outstanding growth opportunities

Innovative's unique business model has allowed it to grow rapidly especially when the cannabis industry is booming. Innovative now owns 75 properties in 19 states totaling 7.3 million square feet of space. More good news is that 100% of its properties are leased out by cannabis companies. In the period between July 1 and Oct. 1, the company has made four acquisitions (that includes three new properties and land expansion at one of its existing properties).

Its tenants include popular cannabis players Cresco Labs, Trulieve CannabisCuraleaf Holdings, and Green Thumb Industries. These companies are on an expansion spree to spread their footprint nationally, and if they continue to lean on Innovative, the real estate investment trust (REIT) will have a bright future ahead. Innovative is also in a stable financial position for continued growth. It ended its second quarter with $806 million in cash, cash equivalents, and short-term investments, and no debt.

A dividend-paying stock

The icing on the cake of investing in Innovative is its ability to pay consistent dividends. As a REIT, Innovative is legally obligated to pay 90% of its taxable income back to shareholders. The company has not only been paying dividends regularly, but also increasing them. On Sept. 15, the company announced a 28% year-over-year quarterly dividend hike to $1.17 per share. This marks the 12th dividend increase since its initial public offering in December 2016.

Thanks to its rising adjusted funds from operations (AFFO), which grew 105% year over year to $43 million in its Q2, the company is able to increase its dividend. AFFO is similar to net earnings for a non-REIT, which determines how much of the profits can be paid out as dividends. 

Innovative's dividend yield of 2.3% is not sky-high at the moment, but is better than that of S&P 500's average yield of 1.3%. But the fact that the company's revenue and AFFO are surging gives me faith that it will continue increasing and paying dividends -- and that is what investors should look for in a good dividend stock.

Some risk remains, but still a safe bet

Not being a pure-play cannabis company keeps Innovative safe from many of the typical sector-related risks. However, some investors wonder if after federal legalization (when it happens) pot companies will have easy access to capital from banks and financial institutions and might not need Innovative's help anymore.

No doubt, this remains a potential problem, but Innovative could still continue to work with other cannabis companies that require more capital in a freer legal landscape. Moreover, Innovative's leasing agreement runs for years (the weighted average lease term is 16.6 years), so it will continue to bring in rental revenue for many years to come, no matter any near-term changes to financing rules at the federal level. As long as state legalization keeps ramping up, so will the expansion plans for cannabis companies, allowing Innovative to grow drastically and making it a hot cannabis stock to include in your portfolio 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.

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