Shares of Innovative Industrial Properties (IIPR 0.37%) are down by more than a third from its peak (in late 2021) over the past year. That's actually better than the broader marijuana sector, using Global X Cannabis ETF as a proxy, which is down some 75% or so since March 2021.
But don't get too caught up in the vicissitudes of Wall Street: Innovative Industrial is still putting up strong growth numbers, a trend that doesn't seem likely to end soon.
A quick breakdown
At its core, Innovative Industrial Properties is a net lease real estate investment trust (REIT). That means it generally buys properties from companies in sale-leaseback transactions, which require the tenant to pay most of the operating costs of the assets they occupy. The leases are generally long term in nature as well, with the REIT's average lease length at about 16.5 years today.
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The benefit for Innovative Industrial in all of this is fairly obvious: It gets a property with a long-term tenant. For the seller, which then becomes a tenant, the draw is the cash provided by the sale, which can be used to fund growth investments. It's probably as close to a win-win as you can get in the property sector. And since its initial public offering (IPO) in 2016, this REIT has grown dramatically and rewarded investors with huge dividend growth along the way.
So why is Innovative Industrial Properties' stock falling? Investors have a habit of taking things to extremes, and the marijuana sector is just another example of that trend. However, that doesn't mean the trends within the marijuana industry are materially different today then they were a year ago. Growth is still the name of the game.
Two big tailwinds
This is why investors shouldn't give up on Innovative Industrial Properties. Although its growth will slow as it expands, its expansion isn't over yet. The backstop for the REIT's growth is simple: Marijuana continues its march toward being legal in all 50 states. However, right now, it is only legal in 37 states for medical use and 18 for recreational use. In other words, there's still lots of room to grow geographically.
But that's not the only growth avenue, since there's also a social stigma associated with marijuana. So there's also expansion in demand that will come as the drug's use becomes more acceptable to more people. This is why Innovative Industrial believes that legal U.S. marijuana sales can grow from $18 billion in 2020 to $47 billion by 2026. So, the first reason to continue liking Innovative Industrial Properties is the growth opportunity of the industry it serves.
The second reason is that Innovative Industrial Properties continues to show it can capitalize on the industry-level opportunity. In 2021 the company increased the size of its portfolio by 37 properties to 103, growing its portfolio by around 50%. Today, it owns 105 properties. Although each new property at this point has less of an impact on the top and bottom lines, growth is clearly continuing. And there's no reason to expect the direction of this trend to change, given the marijuana industry's outlook.
IIPR Dividend Yield data by YCharts
Slower growth, but still attractive
In 2021, Innovative Industrial Properties increased its adjusted funds from operations (FFO) by an incredible 78%. Its dividend was raised a huge 28%. That kind of growth simply can't last, but even if growth were to slow to a third of these levels, it would still be robust for a REIT.
If you are a dividend growth investor, Innovative Industrial Properties looks like it still has ample room to run. And at over 3.2%, the dividend yield is relatively attractive compared to the broader market and the average REIT.
