All about Investing

1 Pot Stock Too Good to Ignore

Related categories

Analysts see an upside of 49% for this pot stock for the next 12 months.

The cannabis industry might be struggling now, but that doesn't mean marijuana stocks aren't worth investing in. Like any other evolving sector, it is bound to experience highs and lows. The growth of the industry is evident from the fact that even companies that do not grow cannabis are reaping the benefits of the rapid expansion.

One such company is Innovative Industrial Properties (IIPR -0.03%). It is not a pure-play cannabis company. It is a real estate investment trust (REIT) that offers capital solutions to medical cannabis companies in the U.S. It has been doing tremendously well the last few years, its recent exceptional fourth-quarter results are proof of that. Another solid quarter made this pot stock soar 7%. Let's dig in deeper.

Image source: Getty Images.

Innovative has a unique business model

Cannabis is federally illegal in the U.S., which is why cannabis companies find it hard to procure capital to set up large production facilities. Here, Innovative comes to the rescue. The company has designed a business model wherein it acquires these properties and then leases them to the cannabis companies in a sale-leaseback system. In return, the company earns rental income, its only source of revenue, which has proven more than enough for it to excel so far.

Acquisitions drive Innovative's revenue. The company acquired 37 new properties in 2021, bringing its total footprint to 103 properties (100% of its properties are leased out) totaling 7.7 million rentable square feet in 19 states. Innovative's weighted-average lease term is 16.7 years, meaning it will keep generating revenue for many years to come. This is some relief for investors who worry U.S. cannabis federal legalization will put a dent in Innovative's growth.

Though there isn't any positive movement toward federal legalization yet, state legalization continues to ramp up. In February, Mississippi became the 37th state to legalize medical marijuana. Innovative's management believes there is a strong likelihood Nebraska, Idaho, Oklahoma, Arkansas, Missouri, Ohio, North Dakota, and Maryland could legalize either form of cannabis this year. 

Some of the Innovative's tenants include popular cannabis players. Trulieve Cannabis, Cresco Labs, Curaleaf Holdings, and Green Thumb Industries have all been on an expansion spree since 2020. These companies have plans to expand aggressively this year, bringing in more business for Innovative.

An outstanding end to 2021

Total revenue surged 59% year over year to $59 million, while net profit grew to $28.3 million from $21 million in the year-ago period. For the full year, the company generated $204 million in revenue and $117 million in net profits, a year-over-year surge of 75% each.

Looking at the continued impressive performance, analysts now expect 2023 total revenue to grow to $280 million, a 139% jump from 2020 levels.

Management stated that the acquisition and leasing of new properties drove the fruitful 2021 performance. Innovative also maintains its balance sheet while growing revenue and profits. It ended the year with $406 million in cash, cash equivalents, and short-term investments.

The icing on the cake: Innovative is a dividend stock

Innovative is both a growth and an income stock, which makes it an even more attractive investment. It has a dividend yield of 3.1%, not sky-high but much higher than that of the S&P 500 's average of 1.3%.

But the important thing to consider while choosing a dividend stock is the consistency in dividend payments rather than just the yield. Innovative hiked its quarterly dividend payment by 28% year over year to $1.50 per share in the third quarter. This marks the 12th time the company has increased dividends since its initial public offering. Moreover, being a REIT, the company is legally bound to pay 90% of its net earnings back to shareholders. Consistent dividend payments are also a sign the company is growing its earnings at a steady rate.

In the case of a REIT, adjusted funds from operations (AFFO) are used to measure earnings left to be paid as dividends (similar to net income for a non-REIT). In Innovative's Q4, AFFO surged to $48.5 million versus $32 million in the year-ago period.

Not growing cannabis keeps Innovative safe from the challenges the industry faces. But some investors worry that federal legalization (if and when that happens) would dampen the growth of this stock, as cannabis companies would find it easier to procure capital from sources other than Innovative.

However, if legalization happens, the legal market will expand to great heights. So there will still be smaller companies that would find it harder to obtain capital from financial institutions, turning to Innovative for help. As long as state legalization continues in 2022 and years to come, so will expansion plans for cannabis companies, augmenting growth prospects for Innovative.


Leave your comment