IIPR Stock’s Decline in Price Presents an Opportunity
There was hope for the federal decriminalization of recreational cannabis when President Joe Biden won the presidential election in 2020, but it didn’t happen. There’ve been some positive developments, though. As of this writing, 24 states and D.C. have legalized recreational marijuana.
At this point, it’s unknown if recreational cannabis will be legalized at the federal level, but if it does get legalized, it won’t be by the current administration.
A company that initially exploded due to optimism about the recreational marijuana market is Innovative Industrial Properties Inc (NYSE:IIPR), a real estate investment trust (REIT) that’s focused on providing specialized regulated properties to state-licensed cannabis operators.
A REIT is a fantastic way to generate income, since the mandate of this type of structure is to pay out a minimum of 90% of the company’s taxable income in the form of dividends.
As of June 30, 2023, Innovative Industrial Properties owned a network of 108 properties in 19 states. The properties represented about 8.9 million rentable square feet, including about 1.6 million rentable square feet under development or redevelopment. (Source: “Company Profile,” Innovative Industrial Properties Inc, last accessed May 8, 2024.)
Innovative Industrial Properties stock’s price has pulled back significantly after setting a record high of $288.02 in November 2021. As of this writing, it’s down by 63% from that high.
On the plus side, IIPR stock is currently trading above its 50-day moving average (MA) of $99.65 and 200-day MA of $88.32. Its chart is flashing a golden cross pattern, which is a bullish crossover formation that appears when a stock’s 50-day MA is above its 200-day MA.
Chart courtesy of StockCharts.com
Steady Revenues & Profits
Innovative Industrial Properties Inc reported double-digit and triple-digit revenue growth from 2019 through 2022. Its revenue compound annual growth rate (CAGR) for the period was 62.2%. The REIT’s revenue growth slowed to 12.0% in 2023, but that year’s revenues were its highest on record.
Given the current uncertainty in the cannabis industry, it’s not a surprise to see Innovative Industrial Properties’ revenue growth rate slow until there’s more positive news.
Analysts estimate that the company will increase its revenues by 3.6% to $320.7 million in 2024 and 4.1% to $333.8 million in 2025. (Source: “Innovative Industrial Properties, Inc. (IIPR),” Yahoo! Finance, last accessed May 8, 2024.)
| Fiscal Year | Revenues (Millions) | Growth |
| 2019 | $44.7 | N/A |
| 2020 | $116.9 | 161.7% |
| 2021 | $204.6 | 75.0% |
| 2022 | $276.4 | 35.1% |
| 2023 | $309.5 | 12.0% |
(Source: “Innovative Industrial Properties Inc.” MarketWatch, last accessed May 8, 2024.)
Innovative Industrial Properties Inc has consistently generated gross margins above 90%, as the following table shows.
| Fiscal Year | Gross Margin |
| 2019 | 97.1% |
| 2020 | 95.8% |
| 2021 | 97.8% |
| 2022 | 96.2% |
| 2023 | 92.0% |
On the bottom line, Innovative Industrial Properties Inc has been consistently profitable on a generally accepted accounting principles (GAAP) earnings-per-share (EPS) basis, setting a record high in 2023.
Analysts expect the company to report a small earnings increase to $5.93 per diluted share in 2024 and $5.81 per diluted share in 2025. The numbers could go much higher if the legal climate for cannabis improves. (Source: Yahoo! Finance, op. cit.)
| Fiscal Year | GAAP-Diluted EPS | Growth |
| 2019 | $2.03 | N/A |
| 2020 | $3.27 | 60.6% |
| 2021 | $4.55 | 39.5% |
| 2022 | $5.52 | 21.2% |
| 2023 | $5.77 | 4.5% |
(Source: MarketWatch, op. cit.)
Innovative Industrial Properties Inc’s funds statement shows four straight years of negative free cash flow (FCF) prior to the surfacing of positive FCF in 2023.
| Fiscal Year | FCF (Millions) | Growth |
| 2019 | -$38.7 | N/A |
| 2020 | -$178.7 | -349.7% |
| 2021 | -$185.8 | -4.0% |
| 2022 | -$139.8 | 24.8% |
| 2023 | $105.5 | 175.5% |
(Source: MarketWatch, op. cit.)
The capital expenditures required to build facilities are relatively high. As such, Innovative Industrial Properties Inc had a total debt of $300.9 million at the end of 2023. This was offset by cash of $141.7 million and strong working capital. (Source: Yahoo! Finance, op. cit.)
At this time, the company has easily covered its annual interest expenses with higher earnings before interest and taxes (EBIT). Its interest coverage ratio at the end of 2023 was extremely strong at 11.3 times.
| Fiscal Year | EBIT (Millions) | Interest Expense (Millions) |
| 2020 | $72.2 | $6.5 |
| 2021 | $130.4 | $16.4 |
| 2022 | $171.3 | $17.0 |
| 2023 | $181.7 | $16.1 |
(Source: Yahoo! Finance, op. cit.)
Innovative Industrial Properties Inc’s Piotroski score—an indicator of a company’s balance sheet, profitability, and operational efficiency—is 6.0. This is well above the midpoint of the Piotroski score’s range of 1.0 to 9.0.
Look for Innovative Industrial Properties Stock’s Dividends to Grow
IIPR stock’s quarterly dividend in April was $1.82 per share. (Source: “Dividend History,” Innovative Industrial Properties Inc, last accessed May 8, 2024.)
As of this writing, this represents a forward yield of 6.65%. Its five-year average dividend yield is lower at 4.87%, but this is due to a previously higher share price. (Source: Yahoo! Finance, op. cit.)
Given Innovative Industrial Properties Inc’s move to positive FCF and expectations of higher earnings over the next two years, I expect its dividends to continue rising.
| Metric | Value |
| Dividend Growth Streak | 7 Years |
| Dividend Streak | 8 Years |
| 10-Year Average Dividend Yield | 5.0% |
| Dividend Coverage Ratio | 1.3 |
The Lowdown on Innovative Industrial Properties Inc
Recently, Innovative Industrial Properties stock’s price has been down significantly, but I like the contrarian opportunity it represents—especially as the cannabis industry grows and the U.S. government becomes more pot-friendly.
In the meantime, IIPR stockholders can get compensated with high-yield dividends for assuming risk.
Note that institutional ownership of Innovative Industrial Properties Inc is relatively strong, with 478 institutions holding 73.6% of the company’s outstanding shares (as of this writing). The company’s top two institutional investors are BlackRock Inc (NYSE: BLK), with an 18.05% stake, and The Vanguard Group, Inc., with a 15.54% stake. (Source: Yahoo! Finance, op. cit.)
Moreover, company insiders have been net buyers of Innovative Industrial Properties stock, purchasing a net 26,912 shares over the last six months.