Top Picks 2019: Innovative Industrial Properties (IIPR)

01/03/2019 5:00 am EST

Focus: REITS

Tony Daltorio

Editor, Investors Alley Premium Digest

It's called a number of names — pot, marijuana, cannabis — and it is now legal for medicinal use by prescription in 33 states and for recreational use in 10 states, asserts Tony Daltorio, editor of Growth Stock Confidential.

And that number is likely to climb as the number of Americans that favor its legalization climbed over 60% for the first time ever recently, with a remarkable 94% supporting medical uses for marijuana.

As recently as 2013, legally sanctioned medical marijuana was worth only about $1.5 billion in sales. However, according to the research firm ArcView Group, sales of legal cannabis in North America are expected to grow from just $6.8 billion in 2016 to $24.5 billion in 2021. That is a very impressive 28% compound annual growth rate (CAGR).

The number may even be higher thanks to research being done currently. There are at least 160 cannabinoids and as many as 500 terpenes and flavonoids in the cannabis plant, all of which can be separated out and then mixed and matched. In fact, one Israeli researcher has synthesized 22 different versions of THC (Tetrahydrocannabinol) to treat specific neurological conditions.

A specialty REIT focused on this sector is Innovative Industrial Properties (IIPR). It has or will acquire and manage specialized industrial properties leased to state-licensed operators for their regulated, medical marijuana facilities.

It intends to acquire these properties through sale-leaseback transactions as well as third-party purchases. It is the only publicly traded REIT that invests in pot-related properties.

The company leases its properties on a triple-net lease basis, where the tenant is responsible for all aspects of and costs associated to the property and its operation during the lease term, including maintenance, taxes and insurance.

The REIT structure is perfect since it allows a third-party to own the real estate and lease the property back to the operator with a long-term agreement in a tax-efficient manner.

This is an important point to remember — the rates at which these sale and leaseback transactions for the cannabis industry are financed far exceeds the rates typically available in other industries. Therefore, REITs focused on cannabis are able to earn high rates of return.

The progress this company has made since its December 2016 IPO is remarkable. It has added additional properties bringing the total to 10 with 952,000 square feet of rentable space, which was 100% leased with a weighted-average remaining lease term of 14.7 years.

The company is already generating total revenues of roughly $4 million quarterly, representing an increase of more than 150% over the past year! Its adjusted funds from operations ("AFFO") has soared more than 250% from the prior year.

Innovative Industrial has turned into a consistent dividend payer and has raised the quarterly dividend from $0.15 to $0.25 cents to now $0.35 cents. I expect this trend of rising payments to continue as the company continues to grow.

Bottom line: the marijuana industry is one that is 'growing like a weed' and that makes the stock a buy. Innovative Industrial is our top pick for aggressive investors in the coming year.

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