Innovative Industrial Properties (IIPR -0.82%), a real estate investment trust (REIT) that specializes in purchasing and leasing industrial space to medical marijuana operators, is one of the fastest-growing stocks within the REIT industry.
The company, which had an incredible run since it went public in late 2017, saw share prices grow 968% in just five years' time. But today's market volatility and growing concern over the federal legalization of marijuana have pushed share prices down 22% in 2022 at the time of this writing.
Is it still a buy?
Why the plunge?
Despite 2021 being another strong year for Innovative Industrial Properties, investors' confidence in the future of the company is wavering. Market volatility is only adding fuel to the fire; at one point, share prices were down as much as 30% in 2022. Concern over the legalization of marijuana at the Federal level is really hurting the stock's value. But I personally don't see this as a major threat to the company.
Because large financial institutions are regulated on a federal level, marijuana operators aren't able to go to a bank to get a loan or mortgage when liquidity or cash is needed. That's where IIPR comes in. IIPR buys existing real estate from medical marijuana operators, leasing it back to them over the long term, a strategy referred to as a sale-leaseback. This model is beneficial for both IIPR and the existing operators because the sale provides the company with much-needed cash to help expand the business.
Image source: Getty Images.
Is Federal legalization likely?
Right now, there are currently four bills advocating for cannabis reform in one or more chambers of Congress. One of these would directly impact IIPR's business model -- the SAFE Banking Act of 2021. The bill would allow marijuana operators to receive conventional financing like loans and store money in federally regulated banks. This is the sixth time this bill was cleared in the chamber, having passed the House in April 2021, but has sat idle in the Senate ever since.
New York Senator Chuck Schumer is in the process of finalizing a massive cannabis reformation bill called the Cannabis Administration and Opportunity Act (CAOA) , which has gotten a lot of attention and traction. Keep in mind, though, that several bills before proposing similar changes have not been passed, so history doesn't help these new bills' chances.
Federal legalization of cannabis is a massive, massive change that would have enormous implications for our entire policing, jailing, and banking systems. For that reason, I believe state-by-state legislature will continue to be the path forward, meaning the need for IIPR isn't going anywhere anytime soon. What's more, the availability of banking and conventional funding like loans doesn't mean companies will completely stop doing sale-leaseback transactions.
Image source: Getty Images.
Is IIPR a buy?
IIPR had an incredible 2021. Revenues and net operating income (NOI) grew by 75% each, while adjusted funds from operation (AFFO), a key metric in illustrating a REIT's profitability, increased 78% year over year. These numbers aren't an anomaly; this type of double-digit and even triple-digit growth have been common for Innovative Industrial Properties. The company was 100% leased at the start of 2022, and it issued a 17% dividend increase for investors, putting today's dividend return around 2.8%.
Legalization at the Federal level would certainly slow the monumental growth IIPR is seeing, but it wouldn't make its business model obsolete. Private money is frequently used in real estate, helping fill a void from traditional financial institutions. So even if it is passed federally, there isn't a huge cause for concern. In the short term, I think there is still a lot of room for IIPR to grow. Currently, it operates in 19 states, leaving 18 other states that have legalized some use of cannabis to expand into if desired.
IIPR is well funded, led by a strong management team, pays attractive dividends, and operates in an underserved market that is rapidly growing, all of which make it a definite buy. I personally own shares in IIPR and don't plan on selling anytime soon. Today's 22% discount could be an opportune time for those not invested to jump in.
