Thanks in large part to surging gasoline prices, the consumer price index reading accelerated to 8.5% year over year in March 2022.
With the inflation rate at the highest level since December 1981, it's important to buy stocks that are capable of growing faster than inflation. The cannabis real estate investment trust (REIT) Innovative Industrial Properties (IIPR -0.82%) appears to be one stock that will trounce even inflation that's at a multi-decade high. Here are three reasons why.
1. The business model is steady
The first reason that IIP looks poised to continue delivering strong operating results in a highly inflationary business environment has to do with its reliable business model. The REIT acquires freestanding industrial and retail properties from state-licensed cannabis operators, which are then leased back to those same operators.
The appeal to cannabis companies is that they're able to tap into the equity from their real estate and use the capital proceeds to expand their business.
And in exchange, IIP's tenants agree to 15- to 20-year initial lease terms under which they pay all of the expenses associated with the property. This builds long-term visibility into the company's business model. And if lengthy triple-net lease contracts weren't enough, IIP's leases also come with annual lease escalators. Without even considering acquisitions, this alone helps IIP to keep pace with inflation in most environments.
This business model has allowed IIP's real estate portfolio to grow to 108 properties worth $2.1 billion across 19 U.S. states since its initial public offering in 2016. Even if one of IIP's tenants run into financial difficulty, this large portfolio could help to offset such an issue.
IIP's $714 million in acquisitions in 2021 and its annual lease escalators led its adjusted funds from operations (AFFO) per share to soar. The company posted $6.66 in AFFO per share in 2021, which works out to a sizzling 32.9% year-over-year growth rate.
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2. A promising industry outlook
Another reason to like IIP is that its impressive growth seems positioned to continue because of the industry's robust growth outlook.
This is because of the broad public favorability for marijuana legalization, for one, with 93% of Americans supporting medical marijuana legalization and 68% favoring full legalization of marijuana. In a polarized political environment, the support for marijuana legalization is a truly bipartisan issue.
This explains why analysts anticipate that 100% of U.S. states will legalize medical marijuana by 2025, and nearly 50% of U.S. states will legalize recreational marijuana use by that time. As a result, the U.S. regulated cannabis industry is expected to nearly triple from $18 billion in 2020 to $47 billion by 2026.
Eventual federal legalization of marijuana would provide IIP's existing tenants and potential tenants with access to traditional financing options through banks. This would weigh on IIP's growth prospects to some extent as there would be more competition against the company. But investors can look to the business models of other quality REITs like Realty Income as an example. Its tenants have access to typical financing options. But they still opt to sell and lease their real estate back from Realty Income because it's a quick and easy way to raise capital to reinvest back into their business and/or repay debts.
3. The balance sheet is rock-solid
IIP's great business model in a growing industry would be all for nothing if it didn't have the liquidity to fund future property acquisitions and keep the business growing.
Fortunately, IIP has $406 million of cash and capital earmarked for eventual tenant improvements and redevelopment projects. And despite its $2.1 billion real estate portfolio, the company has around $300 million in debt that isn't coming due until 2026. IIP's debt to asset ratio of about 15% is quite conservative and should translate into little difficulty for the company to secure future financing at favorable terms.
A stock that has something for everyone
IIP provides investors with the best of both worlds: A sustainable and market-crushing 4.6% dividend yield with a long runway of double-digit annual AFFO per share growth ahead.
The stock's dividend payout ratio in 2021 was 82%, which allows IIP to retain plenty of capital to purchase more properties and drive AFFO per share higher. And at the current $154 share price, investors can pick up IIP at a trailing-12-month price-to-AFFO-per-share ratio of just 23.1. This could make IIP an interesting pick for growth and income investors.
