4 things about innovative industrial properties that smart investors know
Innovative industrial properties (NYSE: IIPR) is one of the most prominent and stable competitors in the cannabis industry, but you won’t find it selling joints. In fact, when it comes to joints, it is a Buyer. When a medical marijuana business needs money to grow but only has real estate on hand, it can sell the joint. in law) where he grows cannabis to IIP, which then re-leases him as the owner.
As evidenced by its continued efforts to build an empire of medicinal cannabis production facilities, IIP is not a real estate investment trust (REIT). For now, it is the only one of its kind. And while the stock could benefit massively from the big changes that would come with the legalization of cannabis in the United States, savvy investors know there are a handful of powerful but more subtle factors in its favor that deserve to be known.
1. Vacancies are highly unlikely
The beauty of Innovative Industrial’s business model is that there is very little chance that any of its properties will be vacant. As mentioned earlier, the company does sale-leaseback transactions in which it purchases operating cannabis cultivation facilities and then re-leases them to the previous owners immediately thereafter. The occupants of the unit stay where they are, and their business takes over their ongoing rent payments to the new owner, IIP.
Even though the tenants were at risk of being insolvent before the leaseback, the injection of money from the sale of their property is probably enough to grease the wheels for a while – assuming a near-insolvent business can pass. strict control of IIP guaranteed, of course.
All in all, the combination of properties leased upon acquisition and careful appraisal of potential tenants is a rock-solid defense against vacancies. As of July 6, IIP’s holdings were 100% leased, and it’s entirely reasonable for investors to assume that this will continue to be the case for the foreseeable future, even if the company acquires new premises.
2. The income from existing leases increases every year and the property value could also
One of the best features of this stock is that it doesn’t rely on the growth of its underlying market (cannabis) to continue to expand its revenue base.
Even if IIP does not do any sale-leasebacks in a given year, it will still earn more rent money than the previous year. The reason is quite simple: it is mandatory. Under the terms of most of its leases, the company insists on annual rent increases of up to 4.5%.
Obviously, this means that his rental income is compounded over time. And with most of its leases lasting 10 to 20 years, there is ample time for individual lease income to grow, grow and grow. Currently, for all of its properties, the weighted average remaining lease term is 16.7 years.
It is important to note that IIP real estate could also increase in value over the long term. When its tenants wish to make certain additions or modifications to their accommodation, the company reimburses them part of the costs. The value of the units then increases, as other cannabis companies might want to use the new facilities. This is favorable for shareholders, as it allows IIP to continue to reinvest some of its excess cash in its collection and leaves it better prepared to obtain higher rates from future tenants.
3. The dividend will probably continue to increase
Since its inception in the second quarter of 2017 at $ 0.15 per share, IIP’s dividend has increased to $ 1.40 in the second quarter of 2021. And although its growth has stagnated at times for a few quarters, the company has so far always managed to increase it soon after.
While its current dividend yield of around 2.81% isn’t particularly appealing to new investors, the allure of a sharply increasing payout over time is hard to deny. Every time the dividend goes up, holders see the base price of their shares go down.
In the most recent increase, announced on June 15, payment increased 6% from the previous quarter and 32% from the second quarter of the previous year.
Savvy investors also recognize that IIP’s dividend is extremely secure. As long as he has tenants, there is not much that can threaten his bottom line.
4. Legalization could be a mixed blessing
Part of the appeal of IIP to its tenants is that they may find it difficult to obtain financing through traditional channels like banks. As cannabis is still federally illegal in the United States, many payment processors and other financial institutions refuse to work with medicinal marijuana companies. Thus, IIP fills the void by giving them access to capital.
But it’s unclear whether tenants will still need his services if marijuana is legalized nationwide. Once banking restrictions are relaxed, it could be more lucrative for businesses to simply take out a loan and retain control over their real estate. This would make it much more difficult for IIP to acquire new tenants and new properties, although it could still rely on income from its existing leases.
At the moment, management appears to view the growth of the company’s total addressable market as a positive thing. And the company could potentially work with growers who need cash in addition to the capital raised from traditional banking institutions after legalization. In short, savvy investors realize that legalization can be a wildcard.
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.