Innovative Industrial Properties Inc. (NYSE: IIPR) is the only dividend-paying cannabis company right now (though odds are it won't be the last).
I recommended it in mid-October 2018 at just above $43 a share.
We've had the chance to reap gains as high as 218% in the meantime, far outpacing the modest 7% gains seen on the S&P 500. That performance isn't surprising, given that this unique, rare stock sits right at the nexus of cannabis and real estate.
What is surprising, on the surface, is how the shares have fallen since the middle of July.
Cannabis' only dividend-payer has dropped from a July 11 intraday high of $139.53 to sit just above $104 at the time of writing.
Certainly nothing's happened since then to throw any cold water on marijuana's explosive growth; the march to federal de-scheduling and legalization has, if anything, sped up.
The drop has everything to do with a strategic move Innovative made - one that's ultimately fantastic news for shareholders with a long view and an appetite for three or four "rounds" of big profits.
I hope everyone's taking the opportunity to add to their IIPR position at these bargain prices, because they'll be a distant memory soon.
Here's why...
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Here's What's Happening with the Innovative REIT
Innovative Industrial Properties' leadership announced a secondary public offering of 1.3 million shares at $126 each on July 11. The offering is worth some $164 million, but $126 was well below the $137 value of available shares at the time of the announcement.
Management had a solid plan for the $164 million in fresh blood. In fact, Innovative is going to continue to do the same things that drove its stock price through the roof in the first place: It's going to acquire more industrial real estate to lease to more licensed cannabis operations.
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Investors gobbled the new shares right up. All the shares in the secondary offering were bought up, plus more shares the company had set aside to meet the additional demand.
Any way you slice it, the secondary offering was a success... So why the sharp decline?
Well, it's actually not uncommon for a stock to swoon when new shares hit the street; it's usually nothing to panic about.
The decline comes from simple profit-taking. Selling the news. All that extra capital is a chance for early investors (like us) to take some money off the table in anticipation for another leg up.
Even at $104, the shares are still up around 141% since October. There's plenty of headroom for this company to come back to and exceed its July highs, and plenty of cash with which to do it, too.
Here's how I expect Innovative will do that...
This REIT Earns Three Times as Much per Square Foot
As a real estate investment trust, Innovative isn't actually handling cannabis.
Rather, it invests in the industrial-use properties the cannabis industry uses, be it for cultivation or extraction.
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The rents Innovative can charge to cannabis operations are, to be blunt, fantastic; they can be two or three times higher than what traditional real estate companies can charge.
And under the terms of their lease agreements, they collect those high rents for, on average, anywhere from 10 to 15 years.
So this is long-term, high-income material - no wonder the demand for IIPR shares was so high management thought it'd be a good idea to offer 1.3 million more of them.
For a time, Innovative was slow to invest its cash. But it has picked up the pace to the point where it's invested around $160 million over the past three months. Despite this increased willingness to deploy cash, it can still manage to find properties for which it can charge such high rents.
So the $164 million it raised in this most recent offering could very well already be on its way into profitable investments.
Just look at the details of its latest deal...
This Could Be Just a Taste of Future Dealmaking
Innovative Industrial just inked a deal with Trulieve Cannabis Corp. (OTCMKTS: TCNNF) - the most profitable cannabis company operating in the United States.
The deal is structured as follows:
Innovative Industrial bought a property in Massachusetts for $3.5 million, which it will lease to Trulieve.
Trulieve intends to spend up to $40 million making improvements to the property. Innovative Industrial will then reimburse Trulieve, which would bring Innovative's total investment in the property to $43.5 million.
Trulieve will begin paying $4.7 million a year in rent to Innovative Industrial to start. The annual rent will increase from there for a period of 10 years.
This is a great arrangement for both companies, but more importantly, large, successful tenants locked into long-term, high-rent agreements will create perfect conditions for the next cannabis investment wave I mentioned late last month.
Get Ready for Cannabis' "Big Money" Wave
At least 16 state pension funds now own stakes in Innovative Industrial stock.
I'm talking big institutions like $237 billion California State Teachers' Retirement System, or the New York State Common Retirement Fund - the third-largest pension fund in the United States - with $210 billion in pension assets.
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These big institutions have hundreds of billions to work with, but they're still run by human beings who are just as excited as we are about cannabis and are looking to own it any way they can.
Trouble is - and this is a problem we don't have - the murky legal landscape for marijuana at the federal level is holding them back... for the time being.
These institutions see Innovative as a good risk, because it only owns real estate; it doesn't touch so much as a gram of the green stuff, and it's one step removed from any potential or perceived legal troubles.
But as I said, there are humans driving the decisions at these funds, and they won't stay on the sidelines for long. Cannabis revenue could grow 80% this year, and nobody wants to miss out.
That's a problem we don't have, because we moved into Innovative Industrial and other cannabis stocks early.
America's No. 1 Pattern Trader Joins the Cannabis Conversation
This man is a go-to expert on the markets for CNBC, Bloomberg, FOX Business, and more.
Wall Street bigwigs paid him $20 million for his pattern-spotting software.
And today, he wants to tell you how this same software can help you bring home 1,000% returns or more on the cannabis market - without buying a single stock.
Find out more information here.
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About the Author
Greg Miller started working on Wall Street in September, 1987, just a month before the “Black Monday” stock market crash.
During his career there, he became an expert in just about every kind of publicly traded security - from blue-chip and small-cap stocks to municipals, junk bonds, and derivatives. As a portfolio manager, Greg was responsible for over $500 million of assets in mutual funds and insurance company accounts.
After leaving the Street, he designed a successful options trading strategy and made lucrative tech investments for a financial publication. He has also helped develop new products and worked with other editors to hone their strategies. He’s always been dedicated to deep, fundamental research - and he always will be - because he believes buying the very best companies at the right price is the best way to amass wealth in the stock market.