Unlike much of the rest of the marijuana industry, Innovative Industrial Properties (IIPR -0.46%), a cannabis-focused real estate investment trust (REIT), has actually had a very good year. Shares of the REIT are up 43% year-to-date, compared to a 50% or so decline for the Horizons Marijuana Life Sciences ETF and a 27% gain for the S&P 500.
Where the stalled momentum of federal marijuana legalization has caused the market to beat down cannabis stocks, that's arguably helped lift Innovative Industrial Properties, along with the strength of its business.
Because a national legalization effort is seen as perhaps the biggest stumbling block the REIT faces, the sudden slow walk by Congress to legalize or decriminalize marijuana ultimately helps Innovative Industrial.
I tend to discount the impact the legalization and regulation of cannabis will really have on the REIT's operations, which I'll discuss in more detail below. But with its stock having gained so much over the past year, let's take a closer look at whether an investor should buy shares now.
The elephant in the room
Perhaps we should first address the fears about what effects marijuana legalization would have. The argument goes that Innovative Industrial Properties business has profited because marijuana's classification as a controlled, dangerous substance limits the ability of cannabis stocks to access traditional financial institutions.
With few alternatives, pot producers readily sell their real estate to Innovative Industrial and other similarly-situated REITs in return for cash, which helps fund their expansion. If marijuana were legalized, these companies would be more readily able to go to banks and other lending institutions, limiting the ability of Innovative Industrial to grow as it has.
While that is certainly possible, I don't think the fears are warranted, and I point to the REIT industry itself as a case in point. The mortgage industry, commercial real estate, casinos, and gaming properties are all perfectly legal businesses and can go to banks for loans, yet they all have specialized REITs that are still thriving.
If marijuana is legalized, Innovative Industrial Properties will still be able to succeed. First, it has established relationships with some of the biggest, fastest-growing cannabis companies, and those won't readily be severed simply because marijuana becomes legal. Also, the REIT leases the properties back to the pot stocks under long-term arrangements. The average lease is 16.7 years, so even if the worst fears about legalization come true, Innovative Industrial's business wouldn't dry up over night, but would rather continue for well over a decade or more.
Lastly, banks and financial institutions won't be able to meet all the needs of cannabis companies, particularly smaller ones, so they will still need "non-traditional" financial channels -- and Innovative Industrial provides that for them, while allowing them to focus on what they do best: grow, cultivate, and process quality flower. I think legalization is an overblown concern.
Growing like a weed
That lets us turn to Innovative Industrial Properties' actual business, which has been solidly growing from the beginning. Specializing in the medical marijuana field, the REIT now owns 76 properties across 19 states, equal to some 7.5 million square feet, all of which were 100% leased to state-licensed marijuana growers.
Total revenues of $53.9 million in the third quarter represented a 57% increase from the year-ago period, which generated net income of $29.8 million, or $1.20 per share, up from $18.9 million, or $0.86 per share, last year. Adjusted funds from operations (AFFO), a critical profitability metric for REITs, was approximately $45 million, or $1.71 per share, well above the $27.9 million, or $1.28 per share it recorded in the year-ago period.
Because REITs are required to pay out almost all of their profits to shareholders as dividends, it's notable that Innovative Industrial hiked its dividend 28% in the quarter to $1.50 per share. It intends to reevaluate the dividend every six months, with any adjustments to be paid in the first and third quarters each year. The REIT's dividend has more than quadrupled since it went public.
Where to from here?
With almost $682 million in the bank, and less than $500 million in debt -- all of it unsecured -- Innovative Industrial Properties is financially secure.
Wall Street is looking for revenue to grow at a compounded rate of 29% over the next two years, with earnings before interest, taxes, depreciation, and amortization (EBITDA) nearly doubling in that time.
Analysts do think it's fairly valued at its current price, but with the marijuana industry still growing, Innovative Industrial's services as critical as ever, and the prospects for federal legalization cloudy, I see this stock growing a lot more in the future.
Innovative Industrial Properties is a cannabis stock to buy now and hold onto for decades to come, and an investment worth making today.