Our Innovative Industrial Properties Stock Prediction in 2019 (Buy or Sell?)
The marijuana industry is generating such intense investor interest, it’s spawning a wide variety of cannabis-linked assets beyond just individual public companies.
Case in point: With a market cap of $594.6 million, Innovative Industrial Properties (NYSE: IIPR) is actually a real estate investment trust (REIT) that acquires, owns and manages properties leased to experienced, state-licensed operators for regulated medical-use cannabis facilities.
Is Innovative Industrial Properties a compelling buy now for investors who seek alternate ways to profit from the marijuana boom? Or is it a sign of a market top and yet another red flag in the frothy marijuana space?
Below, we answer those questions and examine what 2019 might have in store for IIPR.
What Is Innovative Industrial Properties?
To make a IIPR prediction, we first must understand what this company does.
A REIT is a publicly held security that will purchase a piece of property, one that usually has some form of development on it, and then lease it out to one or more companies.
Under this business model, payments that the REIT receives from the tenants, which include rent and sometimes may include property taxes and other maintenance fees, exceed the mortgage payment that the REIT makes every year. By law, the REIT is required to distribute 90% of any excess net income to shareholders.
REITs tend to be popular with income and retired investors due to the high dividends. Because the price and value of real estate tend to increase over time, REITs also tend to increase in price and value over time.
Innovative Industrial Properties elected to be taxed as a REIT, commencing with the year ended December 31, 2017.
As of December 21, 2018, IIPR owned 11 properties that were 100% leased to state-licensed medical-use cannabis operators across nine states.
The company generated $6.4 million in rentals and reimbursements in 2017. For the first nine months of last year the company took in $10 million, which also resulted in net income of $4.3 million. Backing out $1 million in preferred stock dividend payments, the net income for the company was $3.3 million.
IIPR also has $57 million of cash on hand. The company is contractually guaranteed to receive almost $84 million in revenue over the next four years. The annual dividend is 2.42%.
How Has Innovative Industrial Properties Stock Performed?
- Over the past year, IIPR shares have gained 114.5% whereas the S&P 500 has lost 7.8% (see chart).
How Has Innovative Industrial Properties Stock Performed in 2017/2018?
- In 2017, Innovative Industrial Properties rose 73% whereas the S&P 500 gained 19%.
- In 2018, Innovative Industrial Properties rose 93% whereas the S&P 500 lost 5%.
Who Are Innovative Industrial Properties’ Rivals?
To assess our IIPR stock prediction, we must look at its competitors. There are no other REITs devoted to medical marijuana cultivators. Instead, let’s look at key marijuana stocks that are options for investors more interested in individual equities.
Curaleaf Holdings (CSE: CURA, OTC: CURLF)
Curaleaf Holdings, based in Wakefield, Mass., operates an integrated network of medical and wellness cannabis facilities throughout the U.S.
Curaleaf cultivates, processes, markets, and dispenses marijuana products in a range of forms, including flower, pre-rolls and flower pods, dry-herb vaporizer cartridges, concentrates for vaporizing, concentrates for dabbing, tinctures, lozenges, capsules, and edibles.
Curaleaf also provides non-cannabis management and consultative services to licensed cannabis operators, to assist with cultivation, extraction, production, and retailing.
Trulieve Cannabis (OTC: TCNNF)
Based in Quincy, Florida, Trulieve cultivates, distributes, and retails medical cannabis in the U.S.
The firm offers a suite of Trulieve branded products, including nasal sprays, capsules, concentrates, syringes, and cannabis flower in containers for vaporizers, topical creams, tinctures, and vape cartridges. The company distributes its products to 21 Trulieve branded dispensaries in Florida.
MedMen Enterprises (OTC: MMNFF)
Based in Culver City, California, MedMen cultivates, produces, distributes, and retails recreational and medicinal cannabis. Founded in 2010, the company recently expanded beyond its initial markets of California, Nevada, and New York.
With a market cap of $1.4 billion, MedMen currently operates 69 dispensaries and 17 cultivation and production facilities across 12 states.
Will Innovative Industrial Properties Stock Go Up in 2019 (Should You Buy?)
After recently covering several dubious marijuana-related stocks that have little to no revenue, it’s refreshing to come across a company that has a real business.
This REIT reminds us of the “picks-and-shovels” approach to the gold rush. Few miners got rich in the gold rush. Most of the people who got rich in the gold rush were those selling picks and shovels to the miners. The same principle applies to the “green rush.”
Innovative Industrial Properties is making money because marijuana cultivators need real estate to grow their product. The company also has arranged for all of its tenants to be triple net lease holders. That means they pay all the associated expenses associated with the property, including rents, property taxes, and other operating expenses. It’s a sweetheart deal.
The company has another big advantage. It has raised all its capital through its equity offering. It didn’t need to draw down any kind of a mortgage. Therefore it is purchasing its properties with cash, with no mortgages to pay. The infusions of money are used to pay operating expenses and dividends.
Because the real estate that IIPR is purchasing has been relatively inexpensive, the company will be able to purchase as many as two dozen additional properties before it either has to go to the equity or debt markets for additional financing.
If business tanks for the cultivators of medical marijuana, or if somehow legalization is impeded, the company owns the real estate that those businesses were sitting on. There is nothing that stops the REIT from developing that real estate into other income generating assets, or just selling the land outright.
Here’s a video that offers tips on investing in REITs.
Will Innovative Industrial Properties Go Down in 2019 (Should You Sell?)
There are risks with IIPR. The federal government so far hasn’t gone after state-legalized cannabis businesses. If Uncle Sam does, though, it would be a serious headwind for IIPR. On that basis, one might consider the REIT overpriced.
IIPR might be able to hit up the debt markets for more financing, but that’s not guaranteed, because many banks want nothing to do with marijuana businesses. Consequently, IIPR would need to get expensive private money. This means that the stock price better stay high if IIPR wants equity funding in the future.
Now, how does one even value a REIT like this? It’s not easy. It presently trades at 32x Adjusted Funds from Operations (AFFO). That’s really high for any REIT.
You must factor in all the possibilities for risk, given the cannabis market. That risk and the 32x AFFO multiple are arguments that the stock is overpriced.
Overall Innovative Industrial Properties Forecast and Prediction for 2019
So what is our IIPR stock prediction for 2019?
While the marijuana sector itself may experience a big decline as the sector hype wears off, we don’t think that this particular stock will get caught in such a selloff. It has a stable and flexible business.
Because state legalization continues to occur, the company in 2019 and beyond is likely to see more and more tenants joining its ranks, which means it will purchase more properties and lease out those properties.
As long as the trajectory continues in this direction, IIPR’s revenues and dividends should increase. Innovative Industrial Properties faces a prosperous year.