Cannabis and Hemp Sector Ideas

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>>> Innovative Industrial Properties has big advantages


Motley Fool

9-18-21


https://www.fool.com/investing/2021/09/18/3-marijuana-stocks-you-can-buy-and-hold-for-the-ne/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article


Innovative Industrial Properties' stock has risen more than 24% this year. There are several things that make Innovative a great long-term cannabis stock: relatively low risk, a high dividend, and a decent-sized moat for a business model.

The risk is low because, unlike the other two stocks, Innovative is a real estate investment trust (REIT) that doesn't deal directly with marijuana, so it has little to worry about in terms of federal or state laws regarding the sale of cannabis.

It is a REIT that buys and leases back properties to cannabis companies, offering immediate cash in return for long-term triple-net leases. This model produces steady funds from operations for IIP. While it is possible a cannabis client could have financial difficulties and not be able to pay rent, Innovative could easily turn around and rent the facility to another cannabis company. Ironically, the biggest risk to Innovative is the potential federal legalization of cannabis sales. That would lead to more traditional financing being opened to cannabis companies, so they may not need to sell their facilities to raise cash. However, that's still a long way off -- and even then, I think fledgling cannabis companies will still try to free up cash by selling their properties and entering a long-term lease.

Innovative's moat stems from its first-mover's status as a cannabis REIT. Since it started in 2016, the company has grown to 74 properties across 18 states, with a total of 6.8 million rentable square feet. Smaller REITs, such as AFC Gamma and Power REIT, have started to move in on what is a lucrative space, but those two companies' market caps combined are less than 10% of Innovative's $5.62 billion market cap. Innovative has a big edge in experience, name recognition, and funds.

In its second-quarter earnings report, the company reported adjusted funds from operation (AFFO) of $81.4 million through six months, compared to $38.8 million for the same period in 2020. Its six-month revenue was $91.7 million, compared to $45.4 million year over year.

Innovative just raised its quarterly dividend 32% to $1.40 a share, offering a yield of 2.45%. Since the company began offering a dividend in 2017, it has increased its dividend 833%. This is one of the biggest reasons that Innovative is a good long-term cannabis investment -- those dividends combine with the company's stock growth to provide a solid total return. The dividend is well-covered, with an AFFO-to-dividend-payout ratio of 85%, and the company says it plans to keep it within a range of 75% to 85%.

Making the best decision for the long haul

Of the three marijuana stocks, Curaleaf is having the most explosive growth. Thanks to its share price being down for the year, it presents a great entry point. Trulieve's deal to purchase Harvest Health will also fuel big-time growth and it looks like a better deal than Curaleaf because of the bad publicity.

Innovative Industrial Properties has more risk than the other two stocks in the long-term thanks to the possibility of federal legalization of marijuana, but I still see it having the least amount of short-term danger and the highest rate of total return.

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