Over the past 12 months, the amount of search
traffic driven by Innovative Industrial
Properties (NYSE: IIPR) barely registered
when compared to large cannabis producers like Aurora
Cannabis (NYSE: ACB). You might be
surprised to learn that over the same period, IIP's stock price has
soared 252% because it has something all the popular cannabis
companies don't: rising profits.
If you're surprised to see shares of a dull
landlord business outperforming marijuana stocks that receive heaps
more attention, there are a few things about this real estate
investment trust (REIT) that you should know.
Image source: Getty Images.
In the U.S., cannabis cultivators and processors
have a hard time finding banks willing to deposit the piles of cash
their businesses generate. That's because, at the moment, serving
customers engaged in federally illegal activity means risking their
license to operate in the country, which would equal a death
sentence for nearly any financial institution.
At the beginning of 2017, IIP owned just one
property, but banking restrictions have brought a steady stream of
cannabis cultivators right to IIP's doorstep. As of May 7, 2019,
the REIT owned 19 properties -- and they're all occupied by
state-licensed medical marijuana cultivators that have signed
Nearly all the cannabis industry giants, Aurora
Cannabis included, have been issuing new shares of their stock to
continue growing at any cost. For example, Aurora has increased its
outstanding share count by a whopping 176% over the past two years,
which means it needs to earn that much more in order to provide the
same return investors were expecting when they bought the
Assuming IIP's customers continue paying the rent
for 15 straight years, this company can look forward to a steadily
rising bottom line. Once you adjust for annual rent increases and
management fees, IIP's yield on capital invested in its first 19
properties will work out to around 14.8%.
During the first three months of 2019, IIP
collected $6.6 million in rent, which was 146% more than a year
earlier. Since tenants are responsible for maintenance and other
variable costs, a great deal of that money flows to the bottom
line. In the first quarter, adjusted funds from operations
(FFO) reached $5.3 million.
As a REIT, IIP doesn't have to pay any corporate
taxes as long as it distributes at least 90% of earnings directly
to its shareholders in the form of dividends.
Thanks to surging rental revenue, IIP's quarterly
dividend payment is growing by leaps and bounds. Recently, IIP
declared a second-quarter dividend that was 33% higher than the
first-quarter payout and 140% higher than a year earlier.
At $0.60 per share, IIP's dividend offers a
meager 1.9% yield that could grow significantly. The current payout
exceeds FFO generated in the first quarter by $0.05 per share, but
adjusted FFO during the first quarter rose 275% compared with the
In the second quarter, IIP acquired and entered
long-term leases with tenants in California and Pennsylvania. With
rent checks from new tenants that signed leases in April added to
the company's reliable revenue stream, the company should have no
problem meeting its latest obligation, and committing to further
Since businesses keep paying the rent until
they're done circling the drain, REIT profits can keep growing
through temporary bouts of trouble. Unfortunately, one of IIP's
larger tenants has a problem that's been developing for an entire
Recently, IIP expanded its investment in Green
Peak Innovations (GPI), Michigan's largest purveyor of licensed
cannabis, by $18 million, to $31 million. Sadly for GPI, inside
Michigan's busiest provisioning centers "licensed cannabis" is a
four-letter word because it's generally more expensive, and of much
lower quality than what they're used to.
Ever since Michigan's medical marijuana program
began in 2008, patients have been able to buy their medicine from
caregivers, and there aren't many hoops to jump through to earn a
caregiver license. As a result, there are thousands of small
operations growing their products in basements, garages, and pole
barns that they already own instead of spending eight-figure sums
on giant greenhouses that produce mediocre cannabis.
Provisioning centers in Michigan tend to carry
licensed cannabis, but they don't sell very much. That's because
they haven't stopped selling products produced by basic caregivers
who don't have any overhead. As a result, GPI is sitting on a ton
of ready-for-sale product that it can't sell at a profit.
GPI thinks it can produce a steady profit if
given a chance to sell mass-produced cannabis at a price of around
$45 for an eighth of an ounce, or 3.5 grams. Different
dispensaries take different markups, but those with the best
ratings on Weedmaps charge between $25 and $40 for the same amount
of carefully curated cannabis that mass-produced marijuana can't
compete with at any price.
Most states with new medical marijuana programs
have erected huge barriers that will keep big companies from
competing with the cottage industry that they're surrounded by. Of
course, strict regulations aren't very effective if rarely
enforced. In California, licensed dispensaries that play by all the
rules at great expense are currently getting squeezed by unlicensed storefronts
and delivery services that local authorities have little motivation
to shut down.
While IIP has what it takes to deliver huge
gains, it's probably best to wait and see if tenants in Michigan
and California are still able to pay their bills a year from
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Cory Renauer has no
position in any of the stocks mentioned. The Motley Fool recommends
Innovative Industrial Properties. The Motley Fool has a disclosure