The marijuana sector isn’t deemed safe because it’s not yet legal everywhere. But this U.S. marijuana company does everything by the books.
The long-term trend is clear: marijuana will eventually be legal in every state in the U.S., just as it is across Canada.
Long term, therefore, intelligent investments in the companies that will be among the leaders of this industry in the years ahead will do very well.
The trouble is, the stocks in this sector are notoriously volatile. Many are small. Many are thinly traded. Many are still losing money. And many lack the support of institutional investors, in part because of the nationwide illegality of marijuana.
So what’s the best way for a risk-averse investor to get in on this long-term trend?
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The Safest Marijuana Stock Today
I suggest Innovative Industrial Properties (IIPR), which might just be the safest marijuana stock on U.S. markets.
For starters, Innovative Industrial Properties, which I’ll call IIP (not to be confused with the ticker symbol, IIPR) doesn’t sell marijuana—it doesn’t even touch it.
IIP is a Real Estate Investment Trust (REIT), which means not only that its business is totally legal in every state in the U.S., but that it has access to traditional funding sources—which it can then pass on to the marijuana growers and producers that are its customers.
In a typical deal, known as a sale-leaseback, a marijuana grower sells its building to IIP, and then leases it back, typically with a long-term triple-net lease, so that the marijuana company gets immediate cash to grow its business, and IIP gets a guaranteed stream of revenue.
And where does IIP gets its money from, to buy these businesses? From big investors (like BlackRock, which owns 16% of the shares, and Vanguard, which owns 8%) and small investors like you. And what you get, because this is a REIT, is a big fat dividend, which currently means a yield of 4.43%—plus the potential for capital appreciation as the company grows.
IIPR is thus a great candidate for a diversified portfolio of marijuana stocks. In fact, there’s no other company like it, as IIPR is the only publicly traded REIT focused on serving the marijuana industry. It’s the safest marijuana stock you can buy.
IIP’s first-quarter results were released last month, and there was a lot to like.
Revenues were $21.1 million, up 210% from the prior year’s first quarter and adjusted funds from operations (AFFO) (which REITs use instead of earnings) were $17.8 million, or $1.12 per diluted share, up 107% from the year before.
As of May 6, IIP owned 55 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Nevada, North Dakota, Ohio, Pennsylvania and Virginia, totaling approximately 4.1 million rentable square feet (including approximately 1.3 million rentable square feet under development/redevelopment), which were 99.1% leased (based on square footage) with a weighted-average remaining lease term of approximately 15.9 years.
And the cash level is healthy. At the end of the quarter, IIP had $108.3 million in cash and cash equivalents and $272.9 million in short-term investments, totaling $381.2 million.
Those are excellent results in anyone’s book (I love companies growing at triple-digit rates)—but analysts were expecting just a little more, and thus the stock sold off a bit in response, before bouncing back in the weeks since. Still, trading at 90, it’s way off its peak above 130 last June (when many other cannabis stocks peaked), and markedly below its pre-virus levels around 105. Thus, despite the recent run-up, this is a good entry point in IIPR.
So let’s take a look at what IIP has been doing.
From January 1, 2020 through early May, IIP acquired nine properties, totaling approximately 1.1 million rentable square feet, in Colorado, Florida, Illinois, Massachusetts, Michigan, Ohio and Virginia.
In these deals, IIP established one new tenant relationship (with Parallel, the corporate parent company of Surterra Wellness), but the remainder of the deals were with existing tenants—Ascend Wellness Holdings, Cresco Labs, Green Leaf Medical, Green Thumb Industries and LivWell Holdings, Inc.
In short, much of IIP’s business has come from repeat customers, who are leaders in their industry.
The Coronavirus Effect
The main reason for the slightly disappointing quarterly report was, of course, the coronavirus, which has disrupted commerce in a variety of ways.
For IIP, which has had “in-depth discussions with each of its tenants in March and April as they navigate this unprecedented pandemic,” that’s resulted in adjustments with three of its 21 tenants to provide “temporary rent deferrals, structured to apply a portion of the security deposit IIP holds under each lease to pay April rent in full, defer rent for May and June in full, and provide for the pro rata repayment of the security deposit and deferred rent over an 18-month time period starting July 1.”
In short, the adjustments are minor, and as business slowly returns to normal, IIP can count on remaining the go-to REIT for the industry.
Top Notch Management
Last but not least, I want to mention management. At the top of the company is Executive Chairman Alan Gold, who previously helmed BioMed Realty Trust (a REIT specializing in space used for the life science industry) for 12 years until it was acquired in 2016. He knows what he’s doing.
In last month’s report, Gold commented, “One of the pillars of our business strategy has consistently been a conservative, flexible balance sheet, and we believe we are exceptionally well positioned to not only weather this unprecedented health crisis and economic disruption, but to continue to make real estate investments on a long-term basis with best-in-class tenant operators.”
I believe him, which is why IIPR is the safest marijuana stock to buy today, and one of the long-term winners in my Cabot Marijuana Investor advisory. To learn what other marijuana stocks I’m currently recommending, click here.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More
*This post has been updated from an original version.