1 pot of broth too good to ignore
The cannabis industry may be struggling right now, but that doesn’t mean marijuana stocks aren’t worth investing in. Like any other evolving industry, it is bound to experience ups and downs. The industry’s growth is evident from the fact that even companies that don’t grow cannabis are reaping the benefits of rapid expansion.
Such a company is Innovative industrial properties ( IIPR -1.46% ). It’s not a pure cannabis business. It is a real estate investment trust (REIT) that provides capital solutions to medical cannabis companies in the United States. She has done extremely well in recent years; its recent exceptional fourth quarter results are proof of this. Another strong quarter pushed that stock up 7%. Let’s dig deeper.
Innovative has a unique business model
Cannabis is federally illegal in the United States, which is why cannabis companies struggle to find capital to set up large production facilities. Here, Innovative comes to the rescue. The company has devised a business model where it acquires these properties and then leases them to cannabis companies under a sale-leaseback system. In return, the business earns rental income, its only source of income, which has proven to be more than enough for it to excel so far.
Acquisitions boost Innovative’s revenue. The company acquired 37 new properties in 2021, bringing its total footprint to 103 properties (100% of its properties are leased) totaling 7.7 million leasable square feet in 19 states. Innovative’s weighted average lease term is 16.7 years, meaning it will continue to generate revenue for many years to come. It’s a relief for investors who fear that the federal legalization of cannabis in the United States will hamper Innovative’s growth.
While there is no positive movement toward federal legalization yet, state legalization continues to accelerate. In February, Mississippi became the 37th state to legalize medical marijuana. Innovative management believes it is highly likely that Nebraska, Idaho, Oklahoma, Arkansas, Missouri, Ohio, North Dakota and Maryland will legalize either form of cannabis this year.
Some of the Innovative’s tenants include popular cannabis players. Trulieve Cannabis, Cresco Laboratories, Curafeuille Holdingsand Green Thumb Industries have all seen a wave of expansion since 2020. These companies intend to expand aggressively this year, which will bring more business to Innovative.
An exceptional end to the year 2021
Total revenue jumped 59% year-over-year to $59 million, while net profit rose to $28.3 million from $21 million a year ago. year. For the full year, the company generated $204 million in revenue and $117 million in net profit, a 75% year-over-year increase.
Given the impressive and continued performance, analysts now expect total 2023 revenue to reach $280 million, a 139% jump from 2020 levels.
Management said the acquisition and leasing of new properties drove the successful 2021 performance. Innovative is also maintaining its balance sheet while growing revenue and earnings. He ended the year with $406 million in cash, cash equivalents and short-term investments.
Icing on the cake: Innovative is a dividend stock
Innovative is both a growth stock and an income stock, which makes it an even more attractive investment. It has a dividend yield of 3.1%, not very high but well above that of the S&P500 average of 1.3%.
But the important thing to consider when choosing a dividend stock is consistency of dividend payouts rather than just yield. Innovative increased its quarterly dividend payout by 28% year-over-year to $1.50 per share in the third quarter. This is the 12th time the company has raised its dividend since its IPO. Additionally, being a REIT, the company is legally required to return 90% of its net profits to shareholders. Regular dividend payments are also a sign that the company is increasing its profits at a steady rate.
In the case of a REIT, adjusted funds from operations (AFFO) is used to measure earnings remaining to be paid out as dividends (similar to net income for a non-REIT). In Innovative’s fourth quarter, AFFOs jumped to $48.5 million from $32 million a year ago.
Not growing cannabis protects Innovative from the challenges the industry faces. But some investors worry that federal legalization (if and when it happens) could hamper the growth of this stock, as cannabis companies would have an easier time raising capital from sources other than Innovative.
However, if legalization occurs, the legal market will expand to great heights. So there will always be small businesses that find it harder to get capital from financial institutions, turning to Innovative for help. As state legalization continues in 2022 and beyond, so will cannabis business expansion plans, increasing Innovative’s growth prospects.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.