Innovative Industrial Properties (IIPR): 2019 Top Picks' Mid-Year Update

07/12/2019 5:00 am EST

Focus: REITS

Tony Daltorio

Editor, Investors Alley Premium Digest

Tony Daltorio, contributing editor to Growth Stock Confidential, chose Innovative Industrial Properties (IIPR) as his top speculation for 2019. The stock has since risen 172%. Here's his update on the marijuana-related REIT.

The reasons to own Innovative Industrial  — the only publicly traded REIT focused on the pot sector — remain in place. Nearly one in four Americans now reside in a jurisdiction where the adult use of cannabis is legal, and 33 states regulate medical marijuana access by statute.

No state has ever repealed a marijuana legalization law, and two-thirds of adults — including majorities of self-identified Democrats, Republicans and independents — endorse making the plant legal, according to the latest Gallup Poll.

U.S.-regulated cannabis sales grew to $8.6 billion in 2017, including $5.9 billion of medical-use cannabis sales. Legal sales of cannabis here in the U.S. are forecast by the research firm ArcView Market Research to reach $22.2 billion by 2022.So saying that marijuana in the United States is a growth industry is an understatement.

IIPR has or will acquire and manage specialized industrial properties leased to state-licensed operators for their regulated, medical marijuana facilities. As of June 24, 2019, the company had 22 properties with 1.658 million square feet of rentable space. These properties were 100% leased with a weighted average lease length of 15.3 years.

The company leases these 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. IIPR has a target with initial yields in the mid-to-low teens provided by absolute triple-net leases with annual escalations of 3% to 4%.

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 exceed 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. In the first quarter of 2019, Innovative Industrial Properties generated rental revenues of approximately $6.6 million, representing a 146% increase from the year ago period! Its adjusted funds from operations ("AFFO") — $0.54 a share — soared 275% from the prior year.

IIPR is a consistent dividend payer, and one that likes to raise the quarterly dividend as its revenues rise, due to its expansion. In the latest quarter, the company paid a dividend of $0.45 per share, an approximate 29% jump from the prior quarter and an 80% increase from the year ago period.

I expect this trend of rising dividend payments to continue as the company continues to grow. Bottom line — the marijuana industry is one that is 'growing like a weed', making IIPR a buy on any pullbacks.

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