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Innovative Industrial Properties: Expect a Higher Dividend for Investors

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Innovative Industrial Properties: Expect a Higher Dividend for Investors

Investing in the cannabis industry is not for everyone, but for those willing to embrace it, there may be a golden opportunity with Innovative Industrial Properties (NYSE: IIPR). Known for pioneering greenhouses for cannabis cultivation, IIPR is now transitioning from high capital expenditure and rapid growth to slower, more sustainable profitability. While the shift has triggered fear among investors, it has also created a chance to buy the stock at a discounted price.

IIPR has experienced a significant correction of about 80% over the past two years, but it has recently rebounded. Any potential pullback in the stock price should be viewed as an opportunity to invest in an undervalued stock with a sizable dividend. In fact, I rate Innovative Industrial a buy under $80 per share.

How Margin Of Safety Investing Analyzes Innovative Industrial

At Margin of Safety Investing, we analyze investments based on four key components:

  • Secular trends impacting the business
  • Government and central bank policy affecting the company
  • Fundamental and financial factors within the framework of a standard SWOT analysis
  • Technical and quant analysis of price movements for a stock, which signals developing uptrends and downtrends

For IIPR, there are several positive secular trends. The cannabis industry is shifting from illegal to legal markets, and cannabis use is on the rise while alcohol consumption is falling. Additionally, as more states legalize cannabis, the market is becoming more normalized. With a projected growth to $200 billion by 2030 and estimates suggesting legal cannabis sales could reach $70-80 billion by that time, IIPR is well-positioned to benefit from this evolving industry.

Government policies are also favorable for IIPR. The decriminalization of cannabis at the federal level is gradually shifting the marijuana market to legal corporate distribution. The SAFE Banking Bill, which would allow financial institutions to provide services to cannabis-related businesses, has passed the House multiple times and is making progress in the Senate. If enacted, the bill could open up capital for the industry and further fuel IIPR’s growth.

Strengths Of Innovative Industrial

One of IIPR’s core strengths is its desirable triple net leases with an average term of 14.7 years. With a market cap of over $2 billion and enterprise value approaching $2.4 billion, IIPR is the largest player in the cannabis real estate space. This financial scale provides an advantage in a growing industry and ensures stability in rent payments. Innovative Industrial also has one of the lowest leverage balance sheets among REITs, with a debt-to-total gross assets ratio of 12%, strong debt service coverage, and no significant debt maturities until 2026.

Weaknesses Of Innovative Industrial

While IIPR has numerous strengths, it is important to consider potential weaknesses. The company does not yet have a credit rating due to its relatively recent incorporation, and its growth rates have experienced a significant slowdown. Rent collection rates have dipped occasionally, but Innovative Industrial has been able to mitigate these challenges with security deposits and the ability to find alternative renters. Additionally, there have been oversights in vetting certain tenants, as seen with the Kings Garden default situation. While it can be attributed to the emerging nature of the industry, it raises the need for cautious consideration.

Opportunities For Innovative Industrial

IIPR’s opportunities lie in the continued improvement of the cannabis industry and potential favorable legislation. As the cannabis market matures, weaker players will fade away, leaving stronger companies. If the SAFE Act passes, it could unlock significant capital and banking services for cannabis businesses. Coupled with the projected growth in cannabis use and the ongoing shift from illegal to legal distribution, IIPR could experience substantial revenue and profit growth. There is also the possibility of acquisition by a larger REIT or finance company eyeing the cannabis industry.

Threats For Innovative Industrial

The chief threat for IIPR is the possibility of management taking on bad tenants in an industry that fails to turn profitable. The cannabis industry is still susceptible to collapse, and if IIPR finds itself with tenants unable to sustain their businesses, it could lead to financial difficulties. Another potential threat is the emergence of big competitors attempting to replicate IIPR’s strategy. However, a takeover scenario could provide a margin of safety if the company is undervalued.

Technical & Quant Analysis For Innovative Industrial

Technical analysis of IIPR indicates the potential for a breakout to test prior high prices of around $200 per share. Momentum indicators and Elliott Wave analysis both suggest an upward trend, with potential short-term pullbacks serving as buying opportunities.

Cannabis ETFs Versus Innovative Industrial

While Innovative Industrial is a REIT, it can be compared favorably to the top cannabis ETFs such as the AdvisorShares Pure US Cannabis ETF (MSOS) and the ETFMG Alternative Harvest ETF (MJ). There is considerable overlap in the top holdings of these ETFs and the companies that Innovative Industrial rents to, including Green Thumb, Curaleaf, and Trulieve. As an investor, you can choose between an ETF or a combination of both IIPR and an ETF for diversification.

An Added Margin Of Safety For Innovative Industrial

In addition to its involvement in the cannabis industry, IIPR has the potential to capitalize on the growing interest in greenhouse farming. With climate change and suburban development leading to a loss of farmland, greenhouse farming offers a promising solution. If cannabis profitability falls short of expectations, IIPR’s properties can easily be repurposed for growing other produce.

Investing Thoughts On Innovative Industrial

Innovative Industrial Properties offers investors a substantial dividend and undervalued assets, making it an attractive buy at current prices. With favorable industry trends, a solid balance sheet, and potential legislative developments, IIPR has the potential to be a profitable investment. Investors should consider accumulating the stock during pullbacks and view it as a long-term opportunity.