Let's be honest: The marijuana industry hasn't produced too many winners for investors lately. But among the many struggling companies there are a few quality operators worthy of investment.
Here's a look at two that I believe are a cut above the rest: Innovative Industrial Properties (IIPR -0.17%) and Green Thumb Industries (GTBIF 3.56%).
1. Innovative Industrial Properties
The largest and most prominent of the marijuana real estate investment trusts (REITs) on the market, Innovative has one great advantage over other pot stocks: It isn't directly involved in the cultivation, processing, and retail of the product. Therefore, it carries almost none of the risk faced by such enterprises. Rather, as an REIT, it is a landlord to some of the top growers in the industry.
This is a mutually beneficial arrangement that works out particularly well for Innovative. It is big on sale-leaseback deals, in which -- as the name suggests -- companies sell their properties to the REIT, which then leases them back to the sellers (which are now tenants). Sale-leaseback is especially attractive in the cannabis business, since it's a tough gig and companies involved in it are frequently short of ready cash and often have no access to traditional banking credit.
Every few months, it seems, another state flips the switch on recreational legalization (the latest one, Minnesota, signed its legalization bill into law at the end of May). With that the weed business continues to grow and expand. Innovative is expanding right along with it -- over the past three years alone, revenue has jumped from less than $117 million in 2020 to almost $205 million the following year, to $276 million in 2022.
For the most part, when REITs take in more revenue, they also net more profit. Across the aforementioned stretch, Innovative's adjusted funds from operations (or AFFO, considered the most meaningful profitability metric for REITS) soared from 2020's $98 million to $175 million in 2021, and nearly $234 million last year.
Since we're dealing with REITs, which are required to pay out at least 90% of their net profits in the form of dividends, this has filtered down into a steadily increasing dividend. Since Innovative started paying out in mid-2017, a series of frequent and occasionally aggressive raises has lifted the quarterly dividend 12-fold to its current level of $1.80 per share. These days, that yields 9.6%, a high rate even for REITs.
2. Green Thumb Industries
Incidentally, one of Innovative's top tenants is Illinois-based Green Thumb Industries, a multi-state operator (MSO) that has skillfully maneuvered around more than a few of the weed business' hazards.
The first striking aspect of Green Thumb's operations is that the company is profitable. This is rare for an MSO, because numerous factors make the licensed marijuana market a real challenge. These include heavy competition in many locations, high taxation, lingering pressures from black-market product, and a dearth of opportunities for expansion.
So an MSO must be careful and strategic in its approach to the business, and Green Thumb's management has been. Unlike its competitors, quite a few of whom have weighed down their finances by shelling out for expensive acquisitions, Green Thumb has largely managed to grow organically.
The downside is that it doesn't have as big a footprint as some rivals. That said, it has placed outlets of its Rise dispensary in strong, proven markets (such as California), states that recently legalized and therefore are ripe for big expansions in their licensing regimes (like New York), and places that have only sanctioned medical marijuana but are likely to approve recreational sale/use in the future (Pennsylvania).
The upside to Green Thumb's approach, and it's a significant one, is that it has a cleaner balance sheet than many rivals, and manages to turn a profit.
This is a plus for the company, landing it in the black on the bottom line more often than not. And like its landlord Innovative, revenue has generally been on the rise, nearly doubling from less than $557 million in 2020 to $1.02 billion in 2022.
Analysts anticipate more growth. On average, they are forecasting that the company's top line will rise to $1.06 billion this year, to be followed by a leap to $1.16 billion for 2024. Even better, they forecast per-share profit to more than quadruple in 2023, then jump almost 60% higher the following year to $0.35 a share.
