One of the keys to identifying REITs trading at bargain levels in the current market is to watch what insiders are doing, observes Tim Melvin, editor of The 20% Letter.
If officers and directors are selling shares, they do not think they are trading at cheap valuations. If they are buying large amounts of stock, however, it is a good indication that they expect outsized returns over the next few years.
The shares of Innovative Industrial Properties (IIPR) have been hammered this year, declining by more than 60%. Executive chairman Alan Gold finally had enough and recently broke out his checkbook, making purchases on two separate days in August and picking up almost $200,000 worth of additional shares.
Innovative Industrial is a REIT that deals with the cannabis industry. In case you haven’t been paying attention, 2022 has been a terrible year for cannabis-related stocks. The knock seems to be that cannabis companies are struggling, so occupancy and rent collection might become an issue for Innovate Industrial.
On top of that, the company is involved with a lawsuit with a tenant who has refused to pay rent. That lawsuit aside, the truth is that the cannabis industry will survive.
Marijuana will be removed from the Schedule I drug list, I suspect in 2023, and decisions about cannabis will be kicked back to the states. As has been the case with sports gambling, the states will legalize it, as they all want the tax revenues that can come from that.
Innovative Industrial has built relationships with cannabis companies that will help it remain a leader in cannabis real estate long after legalization has occurred. The REIT is yielding over 7% right now. The shares trade at just 13 times FFO, and they should be trading at a premium, not a discount, to other REITs.
When everyone is in love with real estate again, I expect to be able to sell this REIT for much higher prices than we can buy it today. Insiders seem to share my enthusiasm.
