Cresco Labs (CRLBF 5.13%) is a pure-play U.S. cannabis company based in Chicago, while Innovative Industrial Properties (IIPR -0.17%), based in San Diego, is the best-known cannabis real estate investment trust (REIT). One thing the two companies have in common, along with many other cannabis companies, is that their shares are struggling.
Cresco's shares are down more than 66% over the past year, while Innovative's are down by more than 52%. Few marijuana stocks have been immune to the conditions affecting these two. A glut of cannabis is hurting profit margins for multi-state operators (MSOs). Inflation and higher interest rates are making it harder for companies such as Cresco to grow and making Innovative's cannabis tenants more tentative. Which of the two stocks is a better buy? Let's see.
The bad and the good for Cresco Labs
The biggest concern for Cresco is that its revenue has been dropping. Its merger with Columbia Care is expected to boost business, because it would increase the company's retail blueprint to more than 100 stores. But that merger's closure has been pushed back to June 30 from the earlier March 31. The companies reasoned that the extension will allow them to finalize divestiture agreements and obtain regulatory approvals.
The extra time has not been good for Cresco. When it initially agreed to buy Columbia Care in March 2022, the deal was to be an all-stock deal worth $2 billion, with Cresco Labs paying Columbia Care investors 0.5579 shares of Cresco stock for each share of Columbia Care.
When the deal was announced, Cresco was paying a premium of 16% on Columbia Care's shares. Now, with Cresco trading at $1.87 and Columbia Care at $0.64 as of Monday's close, Cresco would be paying a premium of 63% on Columbia's shares.
If the deal doesn't happen, Cresco will still be one of the larger MSOs, which should help it be one of the survivors in the industry. The company has 61 operating dispensaries across 10 states, including 10 in its home state of Illinois and 25 in Florida.
In the third quarter, Cresco reported revenue of $210 million, down 2% year over year, thanks to cannabis price compression and competition from other retailers. It wasn't all bad news. The company maintained its status as the No. 1 cannabis wholesaler with $93 million in sales in the quarter. The company clocked a net loss of $3.24 million in the quarter, but that was an improvement over the $8.3 million it lost in the second quarter and a big improvement over the $263.4 million it lost in the same period in 2021.
The bad and the good for Innovative Industrial Properties
Innovative owns 119 properties that it leases to cannabis companies across 19 states, including roughly 8.6 million rentable square feet, with 1.6 million square feet in development or redevelopment.
The company's stock took a dive when it announced on Jan. 18 that three of its tenants had defaulted on their rent. In the company's fourth-quarter earnings call, CEO Paul Smithers said the company is filing for actions against Parallel Cannabis at its Pennsylvania property as well as its property in Texas, which is still being built. Parallel is up to date on rent for the two properties in Florida that it leases from Innovative. Despite the difficulties, the company was able to collect on 92% of its rents on its operating portfolio in February.
The other two Innovative tenants that had difficulty paying rent, Green Peak and Kings Garden, are now current, with Kings Garden looking at a potential merger with another company.
Even with those issues, the company's finances appear to be in good order. Innovative reported fourth-quarter and full-year earnings on Feb. 2, showing records in full-year revenue, net income, and adjusted funds from operations (AFFO). Yearly revenue was reported as $276.4 million, up 35%, net income came in at $153 million, up 36%, and AFFO was $233.7 million, up 34%.
The fourth-quarter numbers showed little sign of distress as well. Quarterly revenue was reported as $70.5 million, up 20% year over year. Net income stood at $41.2 million, up 45.5% over the same period in 2021, and AFFO was reported as $59.6 million, up 22.7% year over year.
Perhaps the best reason to buy Innovative stock is for the company's strong dividend, which it has raised every year since it went public in 2016. Last year, Innovative increased its dividend by 2.8% last year to $1.80 per quarterly dividend, which works out to a yield of around 8.53%.
There's a chance the company will raise its dividend again this month. The dividend appears to be well covered with an AFFO payout ratio of 84.9%, considered within the safety guidelines for a REIT, which is required to spend 90% of its taxable income on dividends. With its average lease length of 15.3 years, Innovative has a reliable cash flow to service its dividends.
Both good choices, but one is riskier
I like Innovative over Cresco because the bad news of rent defaults has already likely been priced into Innovative's stock price and the company's financials remain solid. Cresco's cost cutting is helping its bottom line, but the economics of the purchase of Columbia Care will likely be another shock to the stock's price and the company's continued losses are concerning.
In the long run, I think both companies have the ability to be standing by the time cannabis is made legal at the federal level, which is when the economics of the business get better for the remaining cannabis companies.
