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Down 15%, Is Innovative Industrial Properties a Buy?

By Eric Volkman – Jan 12, 2022 at 8:45AM

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The company is by far the most significant REIT specializing in the marijuana industry.

The marijuana industry is not currently popular with investors, to put it mildly. That's having a knock-on effect with cannabis real estate investment trust (REIT) Innovative Industrial Properties (IIPR 1.97%). Despite being a consistently profitable company that doesn't actually grow or sell any weed itself, Innovative is being punished like its peers; its share price is down by over 15% so far this young year.

A submerged stock price doesn't necessarily mean a company is a bargain, however. Let's explore whether Innovative stock is a good buy or a dangerous falling knife investors should avoid.

Cannabis flower in a bowl on top of U.S. currency.

Image source: Getty Images.

Buzz killers

The marijuana industry is out of favor at the moment chiefly because little to nothing is happening on the legalization front. Last year we saw a clutch of states individually opt to legalize medical and or recreational use of the drug, and there was quite a bit of noise by members of Congress about decriminalization on the federal level.

But sporadic, state-by-state legalization and legislative jabber don't do enough to move the needle on investor sentiment. Meanwhile, burdened by a host of challenges, including costs, a high degree of competition, and lack of access to a range of basic financial instruments in the U.S., most of the top names in the cannabis business lose money more often than not.

The beauty of Innovative being a marijuana REIT, though, is that it doesn't have to cope directly with any of these difficulties. Rather, it's simply the landlord for these businesses, taking in rent money for companies that need facilities where they can grow, process, and, in some cases, retail their product.

Innovative also likes to get itself into sale-leaseback deals, which are what they say on the label: The REIT buys a marijuana-purposed property from one of those  companies and leases it back to it as a tenant. This can be a win-win for both parties, as the seller gets a big infusion of much-needed cash while Innovative adds another facility to its portfolio.

Sale-leasebacks are a key reason Innovative has maintained its big lead as a leading, if not the leading,  marijuana REIT. As of Jan. 5, the company owned 103 properties located in well-established recreational and medical markets such as California, Colorado, and Illinois. It also has a big footprint in recent recreational legalizers like New Jersey and New York that will be massive markets soon.

Meanwhile, the list of tenants reads like a who's who of the marijuana industry. Powerful multi-state operators (MSOs) Trulieve Cannabis, Curaleaf, and Cresco Labs are all lessees (Trulieve recently became a more prominent one after its acquisition of Innovative tenant Harvest Health & Recreation finally closed last October).

Up, up, up in smoke

The numbers don't lie, and in Innovative's case they tell a revealing tale. In sharp contrast to the woes of the marijuana industry in general -- save for a few savvy operators that atypically book bottom-line profits such as Trulieve -- the REIT lands consistently in the black.

In fact, its top line and funds from operations (FFO, the top profitability metric for REITS) continue to rise notably. We can say the same for its dividend, which currently yields 2.6%. Witness:

IIPR Revenue (Quarterly) Chart

IIPR Revenue (Quarterly) data by YCharts.

IIPR Dividend Chart

IIPR Dividend data by YCharts.

 Even without such a top-down market shaker as federal decriminalization, analysts believe more growth is in store for Innovative -- collectively, they're predicting 38% growth year over year in revenue for 2022. FFO tends to move roughly in concert with the top line, so that line item should rise commensurately.

Marijuana is a tough game these days, but as the industry's top landlord, Innovative is quite an effective player. Given its growth prospects and the generally (though slowly) improving legal landscape, it has the potential to be a standout winner. I'd say it's definitely a buy, although since it operates in a challenging industry, it's suitable for more risk-tolerant investors.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns and recommends Cresco Labs Inc., Innovative Industrial Properties, and Trulieve Cannabis Corp. The Motley Fool has a disclosure policy.

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