Marijuana is a smoking hot niche today, with industry watchers providing massive growth projections for demand as the drug’s legal availability increases. The stocks associated with the sector are hot, too. One interesting way to play the space without actually buying a marijuana grower is through a real estate investment trust (REIT) like Innovative Industrial Properties(NYSE:IIPR).
This fast-growing REIT is rewarding investors with big dividend growth, which might be tempting to income investors looking for a way to jump into the marijuana sector. However, most should think carefully about that choice.
A solid pot stock
The first thing to understand about Innovative Industrial Properties is that it is, in fact, a wonderful way to invest in the pot industry. Since it doesn’t actually grow marijuana, it sidesteps the still material legal and regulatory issues involved in the space. Moreover, it is providing an important resource to the industry — cash to help fund growth.
Essentially, Innovative Industrial buys growing facilities from marijuana growers who instantly rent the property back under long-term leases. That allows the grower to keep using the property and provides it with cash that it can put toward expanding its business (or, perhaps, to reduce leverage). Innovative Industrial, meanwhile, expands its portfolio and gets a new long-term lease. It’s a win-win scenario that allows Innovative Industrial to grow along with the industry.
Furthermore, for those who might still be a little concerned about the legal issues surrounding marijuana, Innovative Industrial provides a bit of a backstop. Not only does it sidestep legal issues by being a landlord, but it theoretically could repurpose the properties it owns and lease them to companies not involved with pot. A marijuana grower would probably have a much harder time repositioning itself, if it were even possible.
As a relatively new REIT with a unique niche, Innovative has been growing like a weed. To put a number on that, it ended 2018 with around a dozen properties, and by mid-2019, it had 22. It has become a vital source of capital to the some of the biggest names in the industry.
Now add in the income the REIT legally has to direct toward shareholders and Innovative starts to look enticing for dividend investors interested in the marijuana space, a fast-growing sector not exactly known for income. Innovative’s swiftly expanding portfolio has also led to incredible dividend growth, with the most recent increase coming in at a massive 33%. If you are looking for a relatively safe way to invest in the marijuana industry while also generating some income, Innovative is a great option.
More than one fly in the ointment
That said, income investors should think carefully before making a buy call here. For starters, even after rapid dividend growth, the yield is a miserly 1.8% (you could easily get that much by investing in an S&P 500 index ETF). Like the marijuana growers that Innovative Industrial counts as tenants, the REIT’s shares have been bid up by Wall Street’s hype machine. To put a number on that, the stock is up more than 500% since its late 2017 IPO. It has clearly gotten caught up in the marijuana investing craze. While its business has physical assets to backstop it, that doesn’t mean it will be able to live up to the currently high expectations built into the price of virtually all marijuana-related stocks…
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