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Fundasy Investing recently invested in a small-cap stock, Innovative Industrial Properties, in November and December with an average price of $76.99 and a forward dividend yield of 5.2%. Below is our analysis of this company and why we invested in this long term position.
Innovative Industrial Properties, IIPR, is a Cannabis Real Estate Investment Trust (REIT). Their business model, in a nut shell, is to buy medical marijuana properties and lease them back to the owners for that “rent money.” Their current yield is 13.3% on capital invested. Which for you narks, that’s a fancy way of saying: for all the property they own, 13% each year is paid back in rent. For example, you own a really small weed shack for $100, somehow, and the local delinquent dealer pays you $13 each year to grow there. Also, your landlord will raise the rent 3-4% each year and charge you an extra 1.5% just for “managing” the property. Not a bad gig! Except, these are actual medical marijuana companies that have strict regulations on how they have to grow their kush.
Now for financial stuff. They are getting really “high” rent rates because as you know marijuana is federally…illegal. So, these medical marijuana companies can’t get loans to expand or renovate their facilities. IIPR noticed this and has been providing capital to these companies and purchasing more and more properties.
| Date | Sep 2018 | Jan 2019 | May 2019 | Dec 2019 | Jan 2020 |
| # properties | 9 | 11 | 21 | 42 | 46 |
Each property is worth millions of dollars apiece though. With all their properties they have $617 million invested, and with a 13.3% yield that’s revenue of $82 million annually. This is all on their website by the way, http://investors.innovativeindustrialproperties.com/events-and-presentations , so we noticed this and at the time the company had: a $900 million evaluation, 14 times forward expected funds from operation (FFO), 40 properties (6 less than it currently owns), and was paying a 4+% dividend.
Now, the company has a simple business model and they only have 11 employees…this means their margins are great and its an efficient money making machine. The point is, they’re growing and their margins are improving. But, are they growing in a way that actually benefits you as a shareholder?
Since bush as previously mentioned.. is illegal, IIPR cannot use debt to buy these properties. So instead they issue shares. Now, the REIT sector as a whole is a bunch of suckers that pay really high evaluations. Mostly because all the revenue is rent and it’s considered more stable. Therefore, the dividends are reliable. IIPR has taken advantage of this and has been raising capital at 15-25 times FFO, just to turn around and invest all of it for a 13% yield (FFO: 7.7 times – Expenses). So all the money that they’re raising, they’re essentially doubling the yield on that capital! And they’ve raised money twice in the last year. Then, the stock price goes up because they’re earning more money, they raise more capital at a lofty evaluation, and the cycle continues. The stock price can’t get too low from an evaluation standpoint either, because they have a great yield and are constantly growing it Y/Y. Therefore, until they can’t make as much money from their rents and their yield goes down, this will be a great pick going forward. The evidence is shown in their EPS growth and their continued operating excellence. Due to this strategy, each share is becoming more valuable and is paying out more money as dividends each year to you as an investor. Simply Wall Street shows it best:
Why would the yield go down? Probably if the federal gov’ment decided to legalize Aunt Mary. But luckily for all the people that want to make money..this guy runs the Senate!
To play devil’s advocate, if marijuana is legalized then it will decrease IIPR’s yield and it will increase competition. However, it also will allow the company to use debt to leverage it’s returns and keep growing. Even the worst case scenario for this company has its upsides. It is risky, but the returns for a company like this will make you feel high on top of the world.
To finish up, IIPR is a great company with a focused way to grow and make more money. It isn’t exactly a bargain at its current price after a 25% plus run up, so if there’s any 10% plus pull backs in the near future it wouldn’t be a terrible place to start a position.
As always, be friendly to your fellow neighbors, subscribe, and remember, do hugs, not drugs.
***Here at Fundasy, we are long with IIPR and like to put our money where our mouth is. We strongly recommend that any investor do their own research before investing and not rely on our data for their entire investment decision.
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