Having the fortunate status of being the only publicly traded pure cannabis REIT in the U.S. has led Innovative Industrial Properties (IIPR) to deliver stunning returns and portfolio growth since its IPO in 2016, explains Nikolaos Sismanis, editor of Top 10 REITs.
Having the fortunate status of being the only publicly traded pure cannabis REIT in the U.S. has led Innovative Industrial Properties to deliver stunning returns and portfolio growth since its IPO in 2016.
While shares have declined roughly 56% year-to-date, the stock has still returned a jaw-dropping 600% over the past six years. The heavy pressure the stock has been under lately is due to concerns over the cannabis industry slowing down amid saturation, as well as a lack of trust in the company’s tenants, many of which are currently recording losses.
Nevertheless, Innovative Industrial’s performance has consistently shown no bumps. It remains one of the fastest-growing REITs in the world, with its acquisitions being consistently accretive on a per-share basis.
Last year, Innovative Industrial acquired 37 properties, while six more properties have been acquired year-to-date. To illustrate how accretive these acquisitions are, Innovative Industrial’s AFFO/share should land close to $7.73 for fiscal 2022, implying year-over-year growth of 22.5% despite the additional share issuances utilized to fund these acquisitions.
The figure is utterly impressive, considering that Innovative Industrial’s acquisition spree has slowed down significantly while the cannabis industry is presently facing headwinds due to its commodity-like characteristics and a surplus of producers.
With Innovative Industrial enjoying tremendous AFFO/share growth, the company has been raising its dividend at a swift pace, often sequentially. Its most recent dividend hike was by 2.9% to a quarterly rate of $1.80. However, the 2.9% hike compares to the prior dividend rate. Year-over-year, the dividend actually grew by 20%, in line with the REIT’s strong AFFO/share expansion trajectory.
We particularly like Innovative Industrial’s dividend prospects because the combination of rapid dividend increases and the violent share price decline has resulted in the stock’s dividend yield currently standing at a substantial 6.4%.
This is a hefty dividend yield, which is quite strange to see, given that both AFFO/share and dividends-per-share are likely to keep growing in double-digits over the medium term. It certainly implies an attractive buying opportunity in our book.
Of course, there are some risks to consider, and Mr. Market’s skeptical view regarding the company’s tenants should be taken into account. For instance, in Q3, the company did not collect contractual rents totaling $5.7 million from two tenants whose financial conditions deteriorated.
However, this is the first such incident to happen, as Innovative Industrial had only posted 100% rental collections prior. Further, the company did withhold approximately $2.6 million from these tenants’ security deposits, largely mitigating this hit. And even with that, its revenues and AFFO/share grew by 31.6% and 24.6%, respectively.
Overall, we believe that Innovative Industrial Properties stock is the perfect vehicle to play the cannabis boom relatively safely. Instead of speculating which cannabis producer will dominate the market in the long run, you can profit off of what all of these producers need, which is specialized property.
Accordingly, the sector’s blossoming can be taken advantage of while benefiting from the rock-solid rental revenues Innovative Industrial Properties generates and the growing dividends it pays out.