For several years, Innovative Industrial Properties (IIPR 0.37%) was the only publicly traded REIT to specialize in the operation and leasing of real estate in medical marijuana properties. Being the first and only company in the space paid off big for IIPR and its shareholders, myself included. IIPR produced an annualized return of 67% for the past five years, and share prices grew over 1,000% during that time.
IIPR's explosive growth has left some investors feeling they missed their chance to invest in this budding sector, but IIPR has new competition. NewLake Capital Partners (NLCP 0.34%) is the latest publicly traded REIT to offer medical marijuana real estate leasing. While the company is very much in its early growth stage, could this mean IIPR is in trouble?
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A closer look at NewLake Capital Partners
Founded in 2019, this Connecticut-based company went public in August 2021. NewLake Capital, like IIPR, uses a sale-leaseback structure to acquire properties. It purchases property from an existing medical marijuana operator and then leases the space back to them using a long-term net lease. This investing model offers liquidity for the operator, which can be quite challenging, given marijuana is still illegal at the federal level, while providing NewLake with long-term cash flow secured by real estate.
At the start of 2022, NewLake had 29 properties in its portfolio located in 11 states, for a total of 1.5 million square feet of leasable space. Its 11 tenants, including several publicly traded marijuana operators, are primarily in the cultivation industry, with the remaining 10% in the retail field. Occupancy and rent collections remain at 100%, something the company has maintained since its inception in 2019.
How NewLake compares to IIPR
The companies are very similar in that their business models and portfolios operate in many of the same states and markets and derive income in the same manner. The big difference is the scale and size of the companies. IIPR owns or has an interest in 105 properties in 19 states totaling $7.9 million square feet of leasable space. But it wasn't always the giant we see today.
When IIPR went public in late 2016, it had just one property in its portfolio and $30 million in committed capital. Compared to NewLake Capital, which has $345 million in committed capital and 29 properties in its portfolio today, NewLake is already further established than IIPR was in its early years.
NewLake Capital also has the benefit of having zero debt and $168 million of cash on hand -- putting it in a solid position for expansion using a proven business model for growth. IIPR, while at a very low debt-to-asset ratio of 15%, still has debt obligations, having a total of $472 million in debt and $406 million in cash and cash equivalents on hand.
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Is IIPR in trouble?
Right now, it appears NewLake Capital is very much on its way to following the footsteps of IIPR. It's achieving the same explosive year-over-year growth momentum as IIPR is, with NewLake's revenues up 138% year over year (YoY) as of Q3 2021. Funds from operations (FFO), an essential metric for valuing REITs, went from a net loss of $1.67 per share to a net profit of $0.80 per share for the nine months ended 2021.
But there's no guarantee this momentum will continue. The huge boost in 2021 performance was primarily due to a merger that helped the company increase its portfolio by 19 assets and generate $2.5 million in revenue growth. Fourth-quarter 2021 and full-year earnings will provide more color on its performance, but its earnings in the new year, without major acquisitions in its recent history, will better indicate if it can maintain this accelerated growth. NewLake is getting a much later start, which means it is faced with increased competition, not just from IIPR but also marijuana SPACs and non-publicly traded companies.
Competition is nothing new for IIPR. It's been competing with operators in the private space its entire career. NewLake being an alternative investment option may drive some investment dollars away for a short period, but really the companies offer two different things. IIPR offers reliability, a strong track record, and an established portfolio for investors. NewLake offers growth potential, but with a lot of risks and unknowns through into the mix -- a far cry from the stability IIPR offers.
Growth opportunities in the cannabis industry may not be as big as they were five years ago but are definitely still there. Until marijuana is approved on a federal level, something that isn't expected anytime soon, there will be demand for the services offered by both NewLake and IIPR.
NewLake's IPO, share prices have fallen 20% year to date. Part of this is poor timing, given the volatility in the market right now. Meanwhile, IIPR share prices are down 29% year to date.
Meaning both are trading at a notable discount. For more risk-tolerant investors, today's deflated share price could be a good time to buy, but I personally will be waiting to see how NewLake's performance progresses in the coming few quarters before investing.
