Written by: Aditya Raghunath
Cannabis stocks have had a whirlwind journey in the last 20 months. Several pot stocks were trading at record highs in October 2018 when Canada legalized marijuana for recreational use. However, shortly after, investors were concerned with high valuation metrics for most marijuana stocks.
While Canada’s recreational and medical marijuana market will continue to rapidly expand over the next decade, this industry has already attracted a huge number of players. However, as cannabis is a highly regulated industry, the rollout of retail stores in major Canadian provinces was slower than expected that hurt companies in this space.
The pot industry has been impacted by several structural issues including oversupply, high inventory levels, mounting losses, rising competition, regulatory issues, health concerns over vaping, and a thriving black market among others, since the start of 2019. The COVID-19 pandemic has exacerbated the sell-off in marijuana stocks wiping off billions in investor wealth.
However, there is one ancillary cannabis company that might seem attractive for long-term investors at current prices. Innovative Industrial Properties Inc. (NYSE: IIPR) is a cannabis-focused real estate investment trust (REIT) that can create massive investor wealth in the next decade.
IIPR has exposure to the high-growth cannabis industry?
IIPR is focused on the acquisition, ownership, and management of specialized industrial properties that are leased to experienced, state-licensed operators for their cannabis facilities. It primarily acquires properties via sale-leaseback transactions and third-party purchases. IIPR leases its properties on a triple-net lease basis where the tenant is responsible for all aspects and costs related to the property for the duration of the lease term.
As mentioned above, most cannabis producers are grappling with widening losses. Further, cannabis is still illegal in the United States at the federal level, making it difficult for licensed producers to source debt funding via banks and other financial institutions. Here’s where IIPR’s business model can be a blessing in disguise for marijuana producers.
As licensed producers can lease production facilities, they will benefit from lower capital expenditure and higher cash flows. They will also have to raise significantly lower capital and can instead focus on core competencies.
IIPR is part of a growth industry and continues to acquire properties at an aggressive pace. In 2019, it acquired 35 properties comprising 1.9 million rentable square feet. At the end of last year, it owned 46 properties totalling 3.1 million rentable square feet.
Despite the onset of COVID-19, IIPR is still growing via acquisitions. As of June 10, 2020, it owns 57 properties totalling 4.3 million rentable square feet. These properties have a weighted average remaining lease term of 16 years, which means the company will benefit from a stable stream of recurring cash flows over the next decade and a half.
IIPR stock has returned 380% since IPO
IIPR stock went public at a price of $20 per share back in December 2016. Its currently trading at $95.6, indicating returns of 380% in less than four years. IIPR stock touched a record high of $139.53 last July and has since lost momentum due to weakness in the cannabis space and the COVID-19 pandemic.
IIPR recently announced a 6% increase in quarterly dividends. The company’s dividend per quarter now stands at $1.06 per share, indicating a forward yield of 4.43%. This means if you buy $100 shares of IIPR, you will generate $424 in annual dividend payments.
IIPR stock has a market cap of $1.8 billion and analysts tracking the firm expect company sales to increase 143.6% year-over-year to $108.8 million in 2020. Its revenue is then expected to grow by 50.6% to $163.9 million in 2021.
Comparatively, IIPR earnings are forecast to grow by 78.8% in 2020 and 37.2% in 2021. We can see that IIPR stock is trading at an attractive valuation given its forward price to earnings multiple of 26x. IIPR stock remains a compelling bet for long-term investors due to its valuation, expanding addressable market, and a tasty dividend yield.
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