Innovative Industrial Properties is a very strong growth stock and has shown, through its high profitability and business model, that it has great potential.
As of January 5, 2022, Innovative Industrial Properties owns 103 properties with a total of about 7.7 million rentable square feet in many U.S.
As of November 2021, REITs own approximately 503,000 properties around the United States, and the total market cap of the FTSE Nareit All REITs Index is $1.6 trillion.
The cannabis industry has grown significantly in size over the past few years as a result of expanding state legalization of marijuana and an increase in capital from different firms and investors.
Legality and regulation of the drug will continue to be an obstacle for cannabis companies as marijuana is illegal under federal law.
With medicinal marijuana still being illegal on the federal level and banks not being able to lend money to these businesses, IIPR made the most of this opportunity and purchased many of the existing cannabis properties and leased them back to the businesses.
The current competition for Innovative Industrial Properties is not very significant due to IIPR’s current large presence in the industry and its unique business model.
There are also additional requirements such as distributing at least 90 percent of its taxable income to its shareholders annually in the form of dividends and investing at least 75 percent of its total assets into real estate assets.
With the potential of new entrants leading to increased competition, it may be hard for Innovative Industrial Properties to control the prices of the real estate assets that it supplies.
Since cannabis operators do not have many options for purchasing real estate or raising capital, as they cannot go to traditional banks, they will be pretty dependent on companies like Innovative Industrial Properties for real estate.
Innovative Industrial Properties has a couple of substitutes but they are not as profitable as IIPR and don’t have as big of a presence in the cannabis industry.
This framework helps investors analyze what a company does well, what it can improve on, and what some of the risks are.
In addition, the company’s business model has led to consecutive increasing profits over the past five years and has allowed IIPR to accumulate wealth that can be used to finance future capital expenditures such as land and properties.
Compared to its competitors in its industry, IIPR is spending way less on R & D and as a result, their competitors may have an advantage with their development of new innovative products.
It can extend its operations to different countries and increase its presence and market share in both the real estate and cannabis industry.
This puts downward pressure on prices and if IIPR adjusts to these prices, it could lose revenue, but if it doesn’t, it could risk losing market share.
One is called BioMed Realty Trust which he sold to Blackstone for $8 billion and the other one is called Alexandria Real Estate Equities, which still plays a big role in the ownership, operation, and development of science and technology properties.
The COVID-19 pandemic did not put a toll on the company but in fact, helped push IIPR forward as revenues have increased 56.29% year over year.
The upward trend in investment properties is a good sign that the business will continue to grow and expand as the company continues to acquire more properties.
However, the negative working capital may not always be a bad sign because it could mean that instead of paying off its short-term obligations immediately, IIPR uses its collected assets to invest back into the company, hence allowing for future growth and expansion.
As Innovative Industrial Properties is purchasing industrial properties from cannabis operators and leasing the properties back to them, it creates constant and long-term cash flow for IIPR, which explains the strong increases in cash flow.
This is in the case that there are new entrants in the industry which may force Innovative Industrial Properties to lower its prices, decreasing its revenues and growth.
The bull case is when more states open up to legalize medicinal cannabis, allowing Innovative Industrial Properties to expand into those states, thus allowing the company to increase its revenues and grow even faster.
One of the main reasons that IIPR is getting so much demand over the past few years is that the cannabis operators have limited access to other capital sources.
While the rise in interest rates may be a good sign for Innovative Industrial Properties because they are the ones supplying the capital, the cannabis industry may take a hit.
Another risk for Innovative Industrial Properties is the increase in competition and entrants in the lucrative cannabis industry.
With opportunities to come and its unique sale-leaseback strategy in its business model, the company is able to set itself apart from its competition and dominate in its industry.
Disclosure: I/we have a beneficial long position in the shares of IIPR either through stock ownership, options, or other derivatives.