What happened
The share price for Innovative Industrial Properties (IIPR -0.11%), a provider of growing facilities for medical marijuana producers, fell 24.6% in January, according to data provided by S&P Global Market Intelligence.
That drop is more like what befell go-go growth stocks than a real estate investment trust (REIT) that has already established an enviable record of dividend paybacks and total return since it went public a mere five years ago as the first publicly traded REIT in the cannabis business.
IIPR has drawn a lot of attention in the past year or two, even for a marijuana stock. The company's focus is buying and leasing back facilities to growers in the growing list of states that have legalized medical marijuana. That's a business that most traditional lenders won't touch as long as pot remains federally banned.
The share price decline looks like both profit-taking and reaction to newcomers adding to the competition. NewLake Capital Partners (NLCP 0.14%) was formed in 2019 and already has about 25 growers on its client list, and private equity operators are mixing into the fray now, too.
Image source: Getty Images.
So what
Growing competition and potential saturation of the market point to headwinds for Innovative Industrial Partners and its stock. But the company has a big head start, with more than 100 properties in 19 states. And they're all serving a market that's growing fast. There are 39 states where medical marijuana is legal, a number that grows each year, and the sales of legal marijuana overall are expected to double to about $46 billion annually by 2025.
Innovative Industrial Partners itself has boosted its dividend each of the past five years -- including by 376% in the past three years. The payout was raised twice in 2021 and the company has said it will review that payout every first and third quarter. Funds from operations (FFO), a key cashflow metric for REITs, has grown by a resounding 29% in the past year, and if that keeps up, there certainly could be more dividend growth to come.
Now what
Since going public at $20 a share in December 2016, Innovative Industrial Properties' stock has provided a total return of roughly 1,100%, scorching the S&P 500's 106% total return during those same years. The share price has plummeted from a high of $288.02 on Nov. 16 to about $187 now, pushing the dividend yield up to about 3.1%.
Bottom line: Innovative Industrial Properties is a profitable venture, and its ability to build in rent escalations on long-term leases means a steady, growing flow of income that should underpin its stock price while rewarding shareholders with growing quarterly paybacks.
This is a REIT still worth investing in for passive income and the potential for share price appreciation. I already have and intend to continue.
