1 growth share to buy and keep in the event of a market downturn
Innovative industrial properties (NYSE: IIPR) could have found the key to generating gains in the event of a market downturn. The Real Estate Investment Trust rents property from cannabis producers, thus avoiding any direct involvement in this industry. Due to this approach and the recession-proof nature of its clients’ businesses, its expanding business and increasing dividends could continue to generate returns, regardless of the development of the market as a whole. .
Independence of the IIP from market cycles
The focus on properties rather than products offers Innovative Industrial Properties (IIP) many benefits. On the one hand, this isolates the business from the ups and downs of the cannabis market. As the owner, he receives a steady flow of cash every month to make a profit.
In addition, the business is not subject to the Schedule I restrictions of a producer or retailer of marijuana. In fact, Schedule I restrictions prohibit bank lending to cannabis companies, spurring companies into its sale-leaseback program. Under this program, IIP purchases ownership of a cannabis business and then re-leases it to the previous owner, thereby providing the producer with the necessary capital. In addition, the program generates cash flow for IIP while eliminating the need to acquire and develop greenhouses and farmland on their own.
In addition, a market downturn should not significantly affect demand for the product it helps support. Many users consume cannabis products for medical purposes, which means the healthcare industry’s resistance to downturns would likely apply to IIP clients as well. Additionally, products such as tobacco and alcohol sell in good times and bad times. Thus, it can be assumed that marijuana sales would remain largely unaffected by fluctuations in the overall market.
Instead, its most pressing danger may ironically be legalization. The legal status would allow producers to obtain bank loans, thus reducing the need to sell their property to IIP.
However, Grand View Research predicts a 27% compound annual growth rate for the global cannabis industry through 2028. Such increases mean that the IIP could likely find tenants if business conditions forced it to build new homes. greenhouses in a speculative manner. This growth may also help explain why its properties are 100% leased.
Industry and corporate finance
The rental rate and continued expansion continue to increase IIP’s revenue and bottom line. For the first six months of 2021, revenue of $ 92 million increased 102% from the first half of 2020. The company earned nearly $ 55 million during the period. This is a 124% increase from the same period last year, a feat achieved by limiting the increase in total spending to 64%.
In addition, adjusted funds from operations, a measure of the REIT’s operating cash flow, was $ 81 million for the first six months of the year. This allowed IIP to cover its $ 34 million in dividends payable. In addition, its dividend has increased in each of the past six quarters, resulting in an annualized payout of $ 6 per share. At current prices, this equates to a cash return of around 2.6%. In comparison, the average yield of the S&P 500 now stands at around 1.3%.
IIP shareholders have benefited as well, as the company has turned into a growth stock that dividend investors will love, too. It has increased by over 90% in the past 12 months. This brought its P / E ratio to 58, down from around 43 a year ago. While this multiple might seem somewhat high, it could easily continue to rise with the triple-digit percentage income increases.
Takeaway for investors
Through its ties to the cannabis industry, Innovative Industrial Properties has built a business model that can withstand market downturns. Demand for marijuana is expected to ensure its properties hold tenants, and the growth of the cannabis industry is expected to drive significant increases in income, revenues and dividends for the foreseeable future. While legalization might force it to seek new avenues for additional properties, the massive growth of the industry could propel the company’s expansion for years to come.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.