Innovative industrial properties: Bull vs. Bear

Innovative industrial properties (NYSE: IIPR) has carved out a unique opportunity in the marijuana industry: to lend money to pot companies in exchange for taking over the management of their real estate through sale and leaseback agreements.

The Real Estate Investment Trust (REIT) has done for cannabis what businesses in the same situation have done for residential housing, offices, retail and even healthcare. Yet Innovative Industrial’s service was even more vital to the industry, as banks lending money to pot stocks are currently illegal.

Still, it’s not all blue skies and, uh, green grass for the REIT. Here’s why there is actually a bearish case for Innovative Industrial Properties alongside the bullish thesis.

Image source: Getty Images.

Bear case: competition could happen

Keith Speights: Let me first admit that I am a bull in disguise when it comes to innovative industrial properties. I personally own the stock and have had excellent feedback. I still consider it a great choice to buy. However, I think there are strong arguments to be made against the IIP.

The biggest threat to cannabis REIT is that competition could intensify. Of course, IIP already has rivals. But the potential of federal cannabis reform could open the door to much more intense competition.

This could happen through changes to federal banking laws. Currently, banks are reluctant to provide services to cannabis operators due to restrictive regulations. This makes IIP’s real estate capital a particularly attractive alternative for cannabis companies in need of capital. But if federal laws are revised, we could see many cannabis operators turning to banks instead of IIP.

It is also possible that the federal decriminalization of marijuana will prompt more REITs to enter the market. I suspect that some players who have been hesitant to jump into the fast growing cannabis industry with federally illegal marijuana might change their mind if the laws are changed.

The IIP share is trading at almost 40 times expected earnings. This is a premium valuation which assumes continued strong growth. But if competition intensifies, the company’s growth could be threatened – and high-profile stocks could lose momentum.

Person standing in a marijuana field with outstretched arms.

Image source: Getty Images.

Bull case: pot stocks will always need access to more money

Rich Duprey: I don’t disagree with my colleague Keith that a solid deal can be made for REIT Industrial Innovative Properties marijuana, and I agree that of all the risks it faces, federal legalization of cannabis could be the most important.

Still, since we’re pretty much on the same page with the bullish and bearish arguments, let’s dig deeper into the bearish bugaboo a bit and see why investors don’t need to worry too much about legalization or decriminalization.

As my friend notes, given that US banks are currently prohibited from lending money to stocks of marijuana due to the pot’s classification as a controlled dangerous substance, lifting that stigma could see the money tap of the traditional financial institutions are opening up wide. As cannabis companies look to Innovative Industrial for the necessary funds to finance their growth, a wave of rivals throwing money at them could hurt the REIT’s growth.

But it won’t. The example I like to use is the casino industry, which has full access to funding from banks and other lending institutions, but still looks to gambling-focused REITs like Properties of Vici, Games and leisure properties, and MGM Growth Properties for money.

Why? Because casinos, like marijuana growers, are not real estate moguls; instead, they want to run gambling dens. Likewise, pot stocks don’t want to own and operate the real estate associated with their growing and processing facilities, but would rather keep their focus on what. they know best, producing their branded strains of marijuana.

As the first and leading REIT targeting marijuana, Innovative Industrial has established relationships with many of the industry’s largest multi-state operators (MSOs), and they will continue to return for more transactions in the future.

Additionally, smaller cannabis players will not be able to get all the money they need from traditional lenders, and they will look to REIT for their financial needs beyond what a bank can give them.

Innovative Industrial owns 76 properties in 19 states, representing approximately 7.5 million square feet, 100% of which is leased and with an average lease term of 16.7 years. So even if legalization could result in the unwinding of the REIT business, it would still have many years of income stream ahead of it.

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.

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