Property Ownership & Mangement
HQ: San Diego, California, USA
Facilities: in 12 states
Symbol: IIPR (NYSE)
Innovative Industrial Properties, Inc. is a Maryland REIT corporation (with HQ in San Diego) focused on the acquisition, ownership and management of industrial properties which it leases to licensed cannabis operators for their medical-use facilities. As a REIT, it must distribute at least 90% of its taxable income to its shareholders.
IPPR is essentially a finance company. It acts as a source of capital to cannabis operators. It often buys real estate from them and leases it back to them. This allows growers to redeploy their money into their core operations.
Market Cap: US $1.1 bil
Enterprise value: $1.1 bil
# of employees: 9
Primary: 12 states
IIPR is currently in 12 states, holding properties for roughly 20 companies. They have three properties each in MA, MI, CA and PA, two each in OH and NY, and one each in AZ, CO, IL, MD, MN, and NV
There are currently 33 states allowing medical cannabis on the state level, reaching a population of over 200 million people. Pain the main medical condition medical cannabis is used for. However, the medical conditions that states have approved for medical cannabis treatment also include glaucoma, HIV, cancer, nausea, spasms, MS, PTSD, migraines, arthritis, Parkinson’s, Alzeimer’s, lupus, spinal cord injuries, terminal illnesses and inflammatory bowel disease.
IIPR is growing fast. Just in 2019, it has bought 15 properties in six states, including five in CA. In total, it now owns and leases 26 properties to medical cannabis operators totaling over 2 million sf—of which about 600k sf is under development—and 100% is leased with an average 15-year lease. It has invested $263 million in properties and committed an additional $70 million to develop them. Its average current yield on invested capital is 14.6% on the 26 properties. It is essentially a finance company, with fewer than 10 employees, most of them senior and well paid. It does not handle the cannabis plant at all.
A typical lease for IIPR:
-Deal size – $5 to $30+ million
-Lease term – 10 to 20 years
-Initial base rent – 10% to 16% on total investment
-Annual base rent escalations – 3% to 4.5%
-Security deposit and corporate guaranty based on credit underwriting
-Transaction timeline – closing 30 to 60 days from signed purchase
Direct sales: None
Store networks: None
Supply Agreements: None
Vertically integrated: No
Horizontally diversified: Because they own 26 properties, they can tolerate some properties under performing. However, all its properties are subject to similar market conditions, so for example if the price of cannabis were to fall precipitously, it could affect all its lessors.
Outstanding shares (diluted): 9.8 mil
Revenue last year: $24.2 mil
Revenue rank in cannabis industry: 35th
Chairman: Alan D. Gold (Salary $1.4 mil)
CFO: Catherine Hastings (Salary $428 k)
CEO: Paul E. Smithers (Salary $728 k)
Counsel: Brian J. Wolfe (Salary $428 k)
IIPR has a strong brand reputation in the industry. It is the first publicly traded company on the NYSE to provide real estate capital to the medical cannabis industry.
Current share price: US $102.60
Price to Sales: 47
52 Week Low/High: $33 to $139
EV / Revenue: 46
After July 2019, IIPR sold 1.7 million shares of common stock in a public offering, raising $188.4 million. They expect to use the proceeds to buy more real estate and for general corporate purposes.
The risks of investing in any cannabis or hemp company are currently high given the newness of the market. The risks of investing in this company may be lower due to its being able to set comfortable leasing terms that build profit into its future years. However, if the price of cannabis falls a lot, it is possible that its lessors could have trouble paying these lease terms 10 years from now.
IIPR has a very impressive business model. They are essentially landlords to medical cannabis companies. These cannabis companies need cash to grow, so they sell their real estate to IIPR and lease it back. This allows them to deploy the money previously sunk into real estate, into operations. (Of course, this also means the cannabis firms never own their land or build real estate equity, and have rising real estate costs for the next 15 years (built in rent increases). This looks good for cannabis companies in the short term, but less so in the long term.)
This business model looks very good for IIPR, for the most part. They can write lease terms that guarantee them adequate and rising profit each year. Since they are a finance company, they need few employees, and they can pay them well.
Investors are enamored with IIPR, sending the stock price up to $100 a share, which is 47 times revenue. It’s forward Price to Earnings is 34, and its trailing P/E is 92. It trades at 32x its Adjusted Funds from operations, which is high even for REITs. This high stock price allows them to raise a lot of cash selling few shares, which minimizes share dilution—unusually good for cannabis investors. Many cannabis firms are deeply diluting their stock with equity raises.
IIPR is growing fast. In Q2 2019, it acquired 15 properties, for a total of 26. All are leased. They have an average return on invested capital of 14.6%.
This is a simplified business model compared to most cannabis companies which have many moving parts as they try to win or buy licenses, build facilities, grow cannabis (not easy or cheap), produce it, brand it, distribute and retail it. We think the demand for cannabis will remain strong and the market will grow as more states legalize it. The risk we see for IIPR is if the cannabis price falls dramatically, making it hard for lessors to make payments. But we think IIPR is carefully leasing properties in “safer” markets, such as states where there are a limited number of cannabis licenses and price should remain stable.
One of the many attractive points for this business, as mentioned, is that IIPR revenue has grown consistently and predictably. So investors have flocked to the stock.
But with the stock price so high now, it is still a good investment? Or is it over-priced? How big is the risk?
Typically REITs are favored by more conservative investors, for their stable income. It is hard to see this stock taking off. It is a type of company that eats cash, rather than generating it. It must find more money every few years to sink into real estate. So it is important that the company keep its stock price high so as not to dilute its stock in future equity raises.
But with all these considerations, we do think this company has a strong income ahead, in a growing market. Even if cannabis prices tank and their clients hit hard times, IIPR can sell their real estate.
With all this in mind, we think IIPR is a good investment offering investors stable income and growth in the coming years.