Why's Everyone Talking About This Marijuana Stock?

Dan Caplinger, The Motley Fool

Updated Fri, Nov 30, 2018, 5:45 PM

The rise and fall of marijuana stocks has gotten a lot of attention, with some investors having gotten into cannabis companies at exactly the wrong time. Since the legalization of recreational pot in Canada just last month, many fast-growing marijuana producers have seen their shares lose 30% or more of their value, and some fear that more obstacles could lead to further declines.

Yet amid this negative sentiment among cannabis investors, one marijuana stock stands out as having not only avoided a big pullback but pushed upward toward new highs. The secret of this company is that rather than trying to grow marijuana itself, it instead provides vital assistance to producers in the industry by offering them one of the most important resources they need in order to succeed. As a result, despite the pressures on the companies that cultivate and grow cannabis, this marijuana play has remained successful -- and could remain so for the foreseeable future.

Rows of marijuana plants inside a greenhouse with rows of lights above.

Image source: Getty Images.

Giving cannabis companies what they need most

If you want to grow marijuana, the one thing you need is space. The companies that have made the biggest splash in the marijuana industry are the ones with the largest production, and most of the leading players in the space have ambitious plans to build state-of-the-art greenhouses and other facilities in order to boost capacity that much further.

That strategy's fine for a company like Canopy Growth (NYSE: CGC), which has attracted billions in investment from a major beverage giant. But for an up-and-coming new cannabis grower with limited access to capital, it's far easier to turn to Innovative Industrial Properties (NYSE: IIPR) to get the space they need.

Innovative Industrial Properties is a real estate investment trust (REIT) that specializes in developing and leasing out production facilities for medical marijuana. Based in San Diego, Innovative Industrial has capitalized on the growing number of states in which cannabis for medical use is legal, attracting investment from shareholders and then working collaboratively with marijuana producers to find real estate assets that will meet their needs.

The marijuana REIT's business model works in two ways. For clients that are just getting into the business, Innovative Industrial can work to find the ideal space to meet their needs and then work out arrangements for a long-term lease relationship. For more mature marijuana companies that have already built out facilities of their own, Innovative Industrial can enter into sale-and-leaseback transactions, whereby the REIT buys the real estate from the cannabis company in exchange for a long-term lease.

Why Innovative Industrial deserves attention

Despite being just two years old, Innovative Industrial has already stood out in the marijuana investing universe. Some of its biggest accomplishments include:

Paying a dividend. As an REIT, Innovative Industrial is required to pay 90% of its taxable income to shareholders. That's led to six quarterly dividend payments so far, and the amount of those dividends has already more than doubled since its first payment in mid-2017, including a 40% increase just last quarter that gives the stock a 2.7% dividend yield.
Building up assets. Innovative Industrial has reported recent acquisitions in Massachusetts, Michigan, and Colorado, giving it 10 facilities in eight different states. All of them are fully occupied, with lease terms averaging almost 15 years, and the REIT is optimistic about its future pipeline.
Attractive lease terms. Upstart cannabis companies have fairly high credit risk from a landlord's perspective, but Innovative Industrial has done a good job of securing good deals with its tenants. Rents typically begin at roughly 10% to 16% of the REIT's investment in the property, and Innovative Industrial builds in escalation clauses for 3% to 4.5% annual rent increases to share in its tenants' long-term success.

Those early results have led to strong stock performance. The REIT's shares have soared more than 160% in the last year, and in the past six weeks, Innovative Industrial is up 17% in a period in which most cannabis-related investments have posted much larger losses.

A promising beginning

Even with its success thus far, Innovative Industrial is just getting started. The company raised more than $100 million in a secondary stock offering recently, and despite its recent investments, the REIT still had more than $50 million in cash on its balance sheet as of Sept. 30. Given the potential to expand more broadly to serve a rising number of marijuana growers, Innovative Industrial is making its case to be the pure-play cannabis real estate investment.

When most stocks in an industry are down, it pays to look at how winners are bucking the trend. Innovative Industrial has found a creative way to support its cannabis-company clients, and that's what's making it a marijuana stock to pay attention to in the months and years to come.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.

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