Being the first publicly traded real estate investment trust (REIT) to offer investors exposure to the budding marijuana market by purchasing and leasing real estate to licensed marijuana operators made Innovative Industrial Properties (IIPR -0.17%) (IIP) an attractive buy for investors. The company's stellar post-IPO performance has only made it more attractive to investors, who have seen IIP's share price shoot up over 1,300% to reach its peak in late 2021.
But thanks to recent market volatility, among other concerns for the company's future, Innovative Industrial's stock price has taken a tumble -- down 53% from its $286.21 high. Its recent sell-off is making it hard for investors to decide whether now is the time to buy or sell. So, let's take a deeper look. Here are three reasons to buy the REIT and one reason to sell.
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Buy: Solid performance
The legalization of medical or recreational marijuana in a growing number of states has helped marijuana stocks explode over the last decade, and IIP has certainly been no exception to those benefits. The company went from owning one property during its IPO in late 2016 to today holding 110 properties across 19 states. Year after year, its metrics for profitability have grown at an incredible rate. IIP generated $64.5 million in the first quarter, representing 50% year-over-year growth. The company recorded $34.7 million in net income, up 36% compared to the year-ago quarter, adjusted funds from operation (AFFO) hit $53.8 million, up 40% year over year.
It has issued several millions of dollars' worth of shares over the last year to help it raise capital for new acquisitions, which has a dilutive effect on its shares. But with that considered, IIP's performance still remains incredibly strong. Its debt ratios are super-low, with a trailing-12-month debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of under 2. Since the REIT average is around 5 times EBITDA, that multiple places the company in a solid financial position.
Buy: An attractive valuation
Given IIP's rise to becoming one of the most popular cannabis stocks, its share prices had been rather richly valued for several years. At its peak in November 2021, IIP's adjusted price-to-FFO ratio, which works similarly to the price-to-earnings (P/E) ratio, was around 45 times. Today IIP is trading at 20 times its FFO, which places it much more in line with other REITs and what is typically considered to be a fair valuation for its performance.
Buy: Reliable dividend returns
REITs are famed for their reliable dividend payments because they are required to pay at least 90% of taxable income in the form of dividends. IIP has increased its quarterly dividend 13 times over the last six years, and its return today is just over 4.5%, over three times that of the S&P 500. Its most recent dividend raise was in Q1 2022 when it increased its dividend payment by 16%. Its dividend payout as a percentage of its FFO is 85%, which means it's in a stable position to maintain its payments moving forward.
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Sell: Concerns about growth potential
I have no plans to sell my shares in IIP anytime soon. In fact, I think the beating that its share price has taken recently makes this a great time to reinvest in the stock. However, for some investors, there are looming concerns over future growth that could sway some to sell.
More specifically, there is apprehension about how IIP's business model will fare in the event of federal legalization. Since this would open the door to alternative and possibly more favorable financing solutions for operators, it could put a dent in its ability to expand and grow revenues long term. Another challenge for the company is the recent class-action lawsuit that was brought against IIP with allegations of misinformation about its business model and lack of transparency surrounding its tenant performance.
These issues are valid concerns, but not ones which I personally consider to be crippling to the company's future. Private capital in the real estate space will always be needed, and given the company's tremendous experience in leasing real estate, it can always pivot to further its growth down the line. Long-term investors who can ride out the turbulence to come could be handsomely rewarded down the line, and today's low prices can't be beaten.
