The cannabis market has exploded over the past decade, helping Innovative Industrial Properties (IIPR -1.98%), which specializes in purchasing and leasing real estate to marijuana operators, become one of the hottest real estate investment trusts (REITs) in the market today.
Share prices have grown 10x in just five years' time, but concern surrounding the federal legalization of cannabis is creating a lot of volatility for the company today. If you're wondering if IIPR is still a buy, here are three reasons to consider buying the stock and one reason to sell.
An amazing track record
IIPR has done an incredible job at creating value for its shareholders and achieving accelerated year-over-year growth. Since its IPO in 2016, the company has grown from one property in 2016 to 103 properties in 19 states today. Its funds from operations (a key metric for REITs that is similar to earnings per share) grew by 2,280% while net income grew by over 7,000% and revenue by 3,000%.
Consistently providing double-digit and triple-digit growth isn't an easy feat, but it's something the company has consistently done year over year without compromising its dividend yield or taking on too much debt. At the end of 2021, its net debt was 15% of its gross assets, which is far below the target ratio of 40% or below, and its dividend yield today sits at around 2%.
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Room to grow
Thirty-seven states, including the District of Columbia, have legalized marijuana use for medical or recreational purposes. Considering IIPR only operates in 19 states, there is a lot of room for the company to grow. In 2021 IIPR expanded into Washington, Texas, and Missouri, while also adding notably to its portfolio in its existing markets. It made 31 acquisitions in 2021 and has $406 million behind it to help further expand its portfolio moving forward.
The stock is on sale
General stock market volatility and growing concern over cannabis legalization has put IIPR on sale. Share prices are down 30% from November 2021 highs despite the company having a really strong 2021. Today's discount means it's trading at roughly 29 times its adjusted funds from operations, which is on the richer side of valuation for REITs in general and is hardly a value buy compared to other high-growth stocks. But given the unique market exposure IIPR provides investors within the cannabis industry and its strong past performance, today's price still makes it a valuable buy.
Image source: Getty Images.
Legalization could hinder growth long term
The legalization of cannabis would allow marijuana operators to have a much wider and likely cheaper cost of capital through traditional lending institutions, which isn't great news for IIPR and its long-term growth prospects. However, its business wouldn't be completely obsolete.
For some investors, the fact that future growth isn't guaranteed is a deal-breaker, but personally, I don't see it as a major cause to sell. I own IIPR and plan to hold this company for the long haul. It's a super reliable company with room to grow and it provides a solid dividend return. There are always gives and takes with an investment, and no stock is without risks. In the scheme of things, there is a lot going on for IIPR, but only you can determine if it's the right investment for you.
