Innovative Industrial Properties: Growth, Income and Speculation
A REIT Not For The Faint Of Heart
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One of my best REIT investments ever has been Innovative Industrial Properties Inc (IIPR). Though I’m not sure that is much of an accomplishment considering that it is probably the only speculative REIT I have ever invested in. A perfect investment for growth investors, income investors, but need to be aware that it is a bit speculative as well.
(Source)
REITs are simple, “REIT” simply stands for “real estate investment trust.” Essentially, a business that buys properties and leases them out to individuals. They then pay out this income to shareholders. These investments are required to pay out 90% of their taxable earnings. This isn’t an easy figure to, well, figure out. They don’t slap it anywhere on their earnings releases so unless you have some inside information, chances are you won’t know what their taxable earnings are. With that being said, most will pay out over this amount.
There are tons of different styles of REITs out there. REITs for every industry and sector that buildings can be bought for exists. There are even mortgage REITs or “mREITs.” They don’t invest in buildings though, they provide financing on mortgages and mortgage-backed securities. This would be different than the equity REITs that IIPR is, and where I prefer to invest in REITs that actually own physical properties.
You know, those buildings and properties that always “depreciate” come tax time, but miraculously “appreciate” in value when it comes time to sell to a buyer.
Investment Objectives
In investing there are what I would call 4 distinct categories for objectives.
There is the growth objective. Investments that we anticipate growing in share price due to being involved in a growing industry, like marijuana (this becomes important later.)
There is also an income objective, investors that are looking for dividends to be paid from their investments. Potentially if the investor is in retirement, but not always the case. Since most of these companies are relatively more stable and larger companies, it can just be a function of where an investor feels comfortable investing. Some investors even choose to invest in dividend growth stocks. Again, dividend growth an important factor in today’s discussion.
Another objective is speculation. This is where investors are basically gambling, whether it be a contrarian play or a company on the brink of collapse that might make it. Overall, I believe this is a more open-ended objective as speculation can mean something different to each individual.
Perhaps, speculation can come from a highly overvalued marijuana REIT stock - that benefits the most as long as it stays illegal on a federal level…just for example.
Then finally, the objective of capital preservation. The boring stuff, investments in cash or treasuries. Anything that provides for high liquidity and high safety.
Innovative Industrial Properties Lots Of Growth, Dividend Growth and Speculation
Now, for the more interesting bit. The discussion on IIPR itself. I believe IIPR fits the category of 3 of the above 4 investment objectives. Naturally, something in the speculation camp would not exist in the capital preservation camp.
IIPR has been rocketing higher at an accelerated rate. Over the last 1-year alone they have returned nearly 147%.
IIPR is involved in providing facilities for growers of medical-use cannabis. This has been an exciting area of growth as the industry becomes more widely adopted.
Innovative Industrial Properties, Inc. targets medical-use cannabis facilities for acquisition, including sale-leaseback transactions, with tenants that are licensed growers under long-term, triple-net leases. We believe this industry is poised for significant growth in coming years, and our highly experienced management team is focused on being a creative capital provider to this industry through the long-term ownership of cultivators’ mission-critical facilities.
Being a newer industry, IIPR is getting a jump start where other large REIT players aren’t participating yet. They have been adding properties to their line-up, growing like a “weed” practically.
In their Q3 earnings, they increased total revenue by 197%. Though off of a low base and it came to $34.3 million for the quarter, they are just getting warmed up, after all. In that quarter they acquired five more properties. This was good for approximately 448k more in rentable square feet.
They aren’t just concentrated in one state either. They have operations over several states of the geographically diverse U.S.
(Source - IIPR Presentation)
This incredible growth has translated into adjusted funds from operations or “AFFO” to have increased incredibly fast as well. Of course, these are funds that can be used for paying out dividends to shareholders. “Third quarter 2020 AFFO and AFFO per diluted share for the quarter increased by 192% and 49% from the prior year’s third quarter, respectively.”
This has resulted in the IIPR being able to reward shareholders with rather aggressive dividend increases. The latest dividend being a raise of 6% from the previous announcement at $1.24 per share.
(Source - Seeking Alpha)
This was also a continuation of their quarterly raises. They had paused for two quarters in 2020, for reasons that would probably be related to COVID-19.
However, year over year this was a 24% increase. A massive 254%+ increase from two years ago and a 727% increase from their original quarterly dividend of $0.15 per share. Even after these types of increases, the yield comes to only around 2.52% due to the appreciation of this stock that’s been on fire.
Speculation
All this being said, here is the speculation part. The big risk here is that they essentially are the only player in the cannabis facility leasing business. This has primarily been because the big financial institutions haven’t stuck their foot into the marijuana financing business. If and when it ever becomes legal on the federal level - there is likely to be more competition.
That doesn’t mean IIPR folds overnight. However, the incredible growth rates they have been experiencing will surely hit a wall as they will have competition.
Similarly, IIPR is small. So percentage increases seem massive. Of course, it is still impressive. But you don’t see Microsoft (MSFT) or Apple (AAPL) growing revenue at hundreds of percentages. This is because the base of what they are growing off of is already huge.
With this significant growth, comes a lot of investor attention. So much so, that the REIT has been bid up significantly. I’m glad I got in when I originally invested but don’t know if I could pull the trigger again today or not.
Consensus NAV at the end of 12/31/2020 was $102.42 - comparing that to today’s trading price of $196.64 as of typing. That works out to an eye-popping 92% premium pricing to NAV! Though the growth might be there to justify it for some.
(Source - Google Finance)
Another thing to be aware of is the constant shares being offered. Some of it is through an at-the-market offering that most investors won’t notice. However, some are more disruptive when they go all in at once and offer millions of new shares publicly.
This isn’t unique to IIPR. In fact, it is rather standard for REITs in how they grow. The difference here is the premium pricing is providing even more incentive for the management to be selling these shares. In my mind, it is positive but can make this volatile ride even more volatile. From their quarterly earnings:
In July, IIP completed an underwritten public offering of 3,085,867 shares of common stock, including the exercise in full of the underwriters’ option to purchase an additional 402,504 shares, resulting in net proceeds of approximately $248.2 million.
In September, IIP issued 474,000 shares of common stock for net proceeds of approximately $58.1 million under its “at-the-market” equity offering program.
Overall, an investor jumping on this wild ride would have to realize that there are significant risks. That being said, I view it as one interesting investment that combines growth, income (significant dividend growth here!) and speculation. I mentioned this was one of my best REIT investments. Well, it ranks as one of my best investments so far (always looking at the bright side,) as a long-term holding. My yield on cost is over 5.6% now - and I only wish I had taken a bigger chance.
Disclosure: Long IIPR, MSFT
This is not investment advice but for entertainment purposes only. Any decision to buy or sell is solely made by that individual. Speak with a financial professional to develop an investing plan that is right for your own objectives and goals.