Innovative Industrial Properties Inc. (NYSE: IIPR) is the perfect introductory cannabis stock; it's profitable, pays a dividend, and is traded on a major U.S. exchange.
And when I was reviewing the company's latest earnings report, it confirmed IIPR has lived up to my expectations since I first brought it to your attention. I'll go over those details in a bit here.
Now, I know a lot of you have questions about Innovative Industrial's business model as well as the recent sector downturn. As a landlord to cannabis businesses, I especially understand the concern that recreational legalization could affect how the firm operates.
After all, it would seem that any property owner could just rent or sell their buildings to cannabis companies.
That's why today, I'm going to be showing you why Innovative Industrial has a long and bright future ahead of it. Plus, I'll explain exactly why its sales-leaseback model works.[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
There are a lot of real estate investment trusts (REITs) out there, and they operate in many different sectors.
Some own malls, some own cloud-computing centers, and some own traditional business properties.
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When full recreational legalization takes place, some REITs may look to start leasing their buildings to the cannabis industry, creating competition for Innovative Industrial Properties.
Or some may think that cannabis companies will just go out and buy their buildings when federal prohibition is defeated because banks will start handing out cash to this once illegal industry.
But here's the thing - banks don't want to loan to unprofitable companies. Even if cannabis is legalized, it's still a risky industry, and the executives at banks try to minimize their exposure to risk.
Even if some of that happens, Innovative Industrial is still going to be in business for a long time. How do I know this? I've got the facts right in front of me:
Running a successful cannabis business is a very cash-intense operation. From equipment to hiring qualified employees, it takes a lot to get one up and running.
And because every cannabis company that wants to be around for the long run needs to operate in multiple states, funding expansion is critical.
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Understanding that, Innovative Industrial offers a sales-leaseback opportunity that turns real estate into liquidity for growing cannabis companies. If a cannabis company owns its building, that building is nice to own on paper, but it's not doing much outside of that.
Innovative Industrial's solution is that cannabis companies sell their buildings to it, and Innovative then leases those buildings back to the cannabis companies.
With all that extra cash, cannabis firms can more quickly expand, grow their businesses, and increase their sales. That increased revenue can then help offset the rent.
For example, Cresco Labs Inc. (OTCMKTS: CRLBF) sold two cultivation and processing facilities to Innovative Industrial Properties for $46.3 million. Those properties will still be operated by Cresco under a lease agreement, and Cresco can use the cash to prepare for recreational sales in Illinois on Jan. 1, 2020.
And it also works out for IIPR.
Innovative charges a 10% to 16% base rent with lease terms between 10 to 20 years. It's consistent revenue for IIPR for long periods of time, and it has worked out so far, with Innovative's yield on invested capital reaching 13.8% as of Oct. 30.
As I said earlier in this report, I understand why some of our Members might initially be worried about Innovative Industrial as full legalization gets closer and closer in the United States.
But this sales-leaseback model isn't just in cannabis. Some of the biggest companies in the world perform these transactions because buying buildings isn't always the most efficient use of capital for some businesses.
For example - in 2015, Verizon sold and leased back its New Jersey operations center for $650 million.
That was a massive capital infusion all at once.
Now, whether Verizon used that money correctly is another story, but the point is that it had access to a ton of cash to help grow the business.
And with its long-term leases that will generate revenue for decades, if Innovative's current business structure ever were to falter, it has plenty of time to figure things out while it's raking in the cash.
Also, the founder and CEO of IIPR has sold a REIT specializing in biotech. He has a unique skillset that allows him to figure out profitable ways to lend to fast-growing companies that don't yet have profits. He can extend that skill to the cannabis industry, so he will be in business for a long time.
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