President-elect Donald Trump did not show much support for marijuana policy reforms during his first term in office. However, prior to this year's presidential election, he supported President Joe Biden's stance on rescheduling cannabis from a Schedule I drug to Schedule III. He stated, “I believe it is time to end needless arrests and incarcerations of adults for small amounts of marijuana for personal use. We must also implement smart regulations, while providing access for adults, to safe, tested products.”
Only time will tell what Trump's stance on marijuana reforms will be during his second term, and whether federal legalization is even a possibility. Whatever the case, the cannabis industry is rapidly expanding. The global cannabis market is estimated to be worth $148.4 billion by 2031.
The legalization of cannabis in multiple U.S. states has helped many domestic cannabis players establish themselves. Nonetheless, many investors remain hesitant to invest in marijuana stocks because of the industry's volatility and strict regulations. There may be a safer option for investors seeking exposure to the industry.
A Safe Cannabis Investment
Innovative Industrial Properties (IIPR), also known as IIP, has carved out a unique position in the real estate investment trust (REIT) sector by concentrating on this burgeoning and controversial industry. It provides investors with a safer way to participate
So how does it work? IIP does not produce or sell cannabis. Instead, it acquires, owns, and manages specialized industrial properties from state-licensed operators before leasing them back to those operators to set up their regulated cannabis facilities. This is because despite state-level legalization, cannabis producers frequently face barriers to traditional banking and financing due to federal regulations.
IIPR's model benefits both parties. Cannabis operators free up capital held in real estate, while IIPR secures long-term tenants in a growing industry. In exchange, the REIT receives rent, which serves as the company's sole source of revenue.
Furthermore, IIP leases out these specialized properties under long-term, triple-net lease agreements lasting 14 years, ensuring recurring revenue for the company.
As of September 30, Innovative owned 108 properties in 19 states, 105 of which were operational and the rest were in development or redevelopment. The properties are strategically located in key cannabis markets with regulations that encourage both medical and recreational cannabis use.
The majority of its tenants are large and well-established multi-state operators (MSOs), including Curaleaf Holdings (CURLF), Trulieve Cannabis (TCNNF), Cresco Labs (CRLBF), and Green Thumb Industries (GTBIF), among others. These MSOs generate 91% of the company's annualized base rent. This relationship not only improves IIPR's revenue stability, but also establishes it as a key player in the cannabis supply chain.
IIPR has shown impressive financial growth over the years. Between 2018 and 2023, revenue increased from $14.8 million to $309.5 million, while earnings rose from $0.75 per share to $5.77 per share.
Total revenue in the most recent third quarter fell to $76.5 million, down from $77.8 million in the prior-year quarter. As a REIT, the company's AFFO (adjusted funds from operations) is used to calculate net earnings. Innovative's AFFO has grown steadily, allowing it to pay dividends on a consistent basis. However, in the third quarter, AFFO fell to $2.25 per share, down from $2.29 per share in the year-ago quarter.
Innovative, like most REITs, is legally required to distribute 90% of its taxable income as dividends. It offers an appealing forward yield of 7.1%, compared to the real estate average yield of 4.5%. In the previous quarter, IIP increased its dividend by 4.4% to $1.90 per share. It has increased its dividend over the last four years. While the yield is appealing, the forward FFO payout ratio of 93.5% is high unless the company works to consistently increase its FFO.
For the full year, analysts forecast the company’s FFO to decline by 3.06%, before rising by 2.95% in 2025.
IIPR stock is up 6.8% year to date, trailing the S&P 500 Index's ($SPX) 28.6% gain. Innovative, like most growth stocks, carries some risk. Although new players in the cannabis real estate market may pose a challenge, Innovative has a first-mover advantage. Its size and experience put it in a strong position to maintain its leadership.
Moreover, IIPR is expected to benefit from continued state-level legalization and the growth of the medical and recreational cannabis markets. Though federal legalization is not currently on the agenda under Trump's presidency, if and when that happens, cannabis operators may have access to traditional financing.
This could impact IIPR's sale-leaseback model. However, I believe the company's established market presence and expertise will allow it to adapt and thrive in new areas if it so chooses in a post-legalization environment.
What Is Wall Street’s Take on IIPR Stock?
Overall, Wall Street is moderately bullish on IIPR stock. Out of the seven analysts covering the stock, three rate it a "strong buy" with four recommending a “hold.”
Its mean target price of $132.40 suggests upside potential of nearly 23% from current levels. Plus, the Street-high estimate of $179 represents roughly 66.5% upside over the next 12 months.
The Key Takeaway
Innovative provides an appealing option for investors seeking exposure to the growing cannabis industry without directly investing in cannabis companies. Furthermore, its REIT business model generates consistent income through dividends, while its focus on cannabis properties provides growth potential as the industry expands.
However, given the risks associated with growth stocks, IIPR may be best suited to those with a higher risk tolerance and a long-term investment horizon.
