Real estate investment trusts, or REITs (pronounced "reets"), aren't known for being the most exciting investments, but Innovative Industrial Properties (IIPR 0.28%) is a big exception. This REIT specializes in commercial properties occupied by state-licensed operators of legal marijuana facilities.
After terrible stock performance in 2022, this solid business is looking like a bargain as we head into 2023, and not just for growth investors. Here's a bit about Innovative Industrial Properties and why I plan to add this high-dividend stock to my portfolio in 2023.
Innovative Industrial Properties, in a nutshell
Innovative Industrial Properties serves a unique niche by providing real estate capital to the legal cannabis industry. As of September 2022, the company owned 111 properties in 19 states, most of which are industrial in nature (such as production facilities).
It's certainly an interesting opportunity. Legalized cannabis sales are expected to nearly double over the five-year period though 2026 to $52 billion annually. Because their products are still illegal on the federal level, it can be very difficult for operators to fund their real estate needs through a bank or other traditional means.
Despite the exciting, high-growth nature of its target market, Innovative Industrial Properties is built for stability. Its tenants sign triple net leases with initial terms of 15 to 20 years, with annual rent increases built in. To illustrate the stability, Innovative Industrial Properties' rent collection rate has never fallen below 97%, even during the COVID-19 pandemic lockdowns.
A beaten-down stock but a great business
Even though the real estate sector hasn't exactly been a good performer in the market downturn, REITs have generally been spared from the violent swings we've seen in many growth stocks.
That's not the case with Innovative Industrial Properties. It traded like a growth company during the 2020-2021 speculative boom, along with many other marijuana stocks, rising by 300% from the start of 2020 through the stock's late-2021 peak.
Since that point, the stock has completely reversed course, giving back nearly all of its 2020 and 2021 gains. With the stock 65% below the highs, Innovative Industrial Properties pays an attractive 7.3% dividend yield and trades for just 13.4 times funds from operations (FFO, or the REIT version of earnings). Although its payout ratio is on the high end for a REIT, the dividend is covered by the company's FFO.
The company remains highly profitable and has grown significantly since the last time it traded for a sub-$100 share price. The company's property count has increased by more than 70% since the beginning of 2020, and this could be just the starting point. Plus, the portfolio is 100% leased.
What's more, Innovative Industrial Properties has a rock-solid balance sheet with extremely low debt for a real estate investment trust. Its interest expense is extremely low, and the little debt it does have is at a fixed rate.
A solid all-around play on cannabis infrastructure
Innovative Industrial Properties is an excellent (and discounted) play on the long-term growth of the legalized marijuana industry, without the excessive risk that comes with most so-called marijuana stocks. This is a well-run, profitable business that could be a fantastic combination of growth and income, setting up patient long-term investors for market-beating total returns.
