THE BULL CASE
GROWTH IN PROFITABILITY
During 2019, the company acquired 35 properties, comprising approximately 1.9 million additional rentable square feet. At the end of FY2019, it owned 46 properties that were 100% leased to state-licensed medical-use cannabis operators. So far, in 2020, IIPR has acquired 16 properties. Since the year-end FY18, the dividend has been raised four times and has increased by 300.2%. While it seems the dividend growth has been incredible, the payout ratio has been maintained below 90% over the past four years. The stock is trading at a forward P/AFFO of 23.7, and as a result, its current dividend yield is 3.7%, and that is assuming management doesn't increase the next dividend.
THE FUTURE OF THE INDUSTRY
During the pandemic, Cannabis was deemed an essential business, and demand in the industry has been resilient throughout the pandemic. IIPR relies on acquiring properties that it can lease to the fast-growing US Multi-State operators. IIPR leases properties on long-term, triple-net leasing arrangements with state-licensed medical-use cannabis operators, and which are subject to contractual rental rate increases. The growth in the number of operators and proliferation in the number of states allowing Cannabis has been phenomenal over the past few years and should continue for the foreseeable future. The November election should see several more states vote to have a medical or recreational program. Other catalysts are:
The SAFE Banking Act
The bill will protect financial institutions working with state-approved cannabis companies. Raising money in the cannabis industry had been challenging, as the current law prevents banks from getting involved in a federally illegal product.
The STATES Act
This one aims to harmonize federal and state cannabis laws by turning to the state's decisions on cannabis policy. The bill is expected to be discussed during the year and would be a game-changer for the industry, should it pass.
The MORE Act
House lawmakers are preparing for a September floor vote on legislation – The Marijuana Opportunity, Reinvestment, and Expungement Act (MORE) Act — to remove marijuana from the federal Controlled Substances Act. The forthcoming vote would mark the first time since the passage of the Controlled Substances Act of 1970, which placed Cannabis in the same category as heroin as a Schedule I controlled substance, that a Congressional chamber has voted to remove marijuana from its prohibitive classification. Passage of The MORE Act is essential to truly right the wrongs of federal marijuana criminalization, and to once and for all allow the majority of states that have legalized Cannabis for either medical or adult-use to embrace these policies free from the threat of undue federal prosecution or interference.
IIPR MANAGEMENT TEAM
Alan Gold is the executive chairman of IIPR's board of directors. Prior, Gold served as chairman, CEO, and president of BioMed Realty Trust Inc. (formerly NYSE: BMR), a REIT specializing in acquiring, leasing, developing, and managing laboratory and office space for the life science industry. BioMed Realty was sold to Blackstone for ~$8 billion in 2016. Before BioMed Realty, Gold was a co-founder, president, and director of Alexandria Real Estate Equities, Inc. (NYSE: ARE), a publicly-traded urban office REIT. Gold has also served on the board of directors of other REITs (NYSE: CTT, ATT); his highly successful career in the REIT space spans over 30 years.
Paul Smithers, IIPR's president, CEO, and director is the founder of the company and ISO Nano International LLC, a designer and manufacturer of advanced materials for use in the aerospace, consumer goods, electronics, and safety industries. Mr. Smithers is also a Member of The State Bar of California with 33 years of legal experience in the state, which was first to legalize medical Cannabis.
Katherine Hastings, CFO, has 22 years of industry experience and is the former Vice President and internal auditor of BioMed.
Brian Wolfe is Secretary, Vice President & General Counsel of Innovative Industrial Properties, Inc. Mr. Wolfe is also a Member of the San Diego County Bar Association and Member of The State Bar of California.
Ben Regin is the Director-Investments & Finance at Innovative Industrial Properties, Inc. He previously was Senior Associate-Investments at BioMed Realty Trust, Inc.
Gary Kreitzer is Vice Chairman with 37 years of experience in commercial real estate. Also, he was a co-founder of Alexandria Real Estate Equities.
REITs base nearly all of their future projects' financing either through debt or equity and not from retained earnings since most earnings are being distributed. Having public equity in the cannabis space has allowed IIPR to issue new shares and acquire properties quickly. This is harder to achieve for private cannabis REITs.
IIPR CAPITAL RAISES
Concerning recent financing, in May, IIPR completed a follow-on public offering of common stock, raising net proceeds of about $115 million, including the exercise in full of the underwriters' option to purchase additional shares. In July, the company completed another follow-on public offering of common stock, raising gross proceeds of about $259 million, including the exercise in full of the underwriters' option to purchase additional shares. This brings IIPR's total capital raised to approximately $1.4 billion from the IPO follow-on common stock offerings, Series A preferred stock, exchangeable senior notes, and ATM program. As of the Q2 earnings call in early August, approximately 77% or $1.1 billion of raised capital has been committed in the aggregate under the company's leases.
THE BEARISH CASE
An argument of the bear case against IIPR has been on the potential weakness of tenants – most of IIPR's tenants are newly formed companies in a still nascent industry. However, with cannabis sales booming during the stay-at-home economy, the company's tenants have not been significantly negatively affected due to COVID-19. Only three out of the company's 23 tenants were provided temporary rent deferrals for the months around April to June. The trust agreed to use their security deposits as a form of repayment. At the same time, these tenants have the next 18 months, starting July 1, to essentially replenish their security deposits.
Other than these three tenants, IIPR collected 100% of contractual rent due for April, May, June, and July 2020 across IIPR's total portfolio. In our view, this testifies to the overall strength of the company's tenant base. The company's tenants did not significantly lag with rental payments despite the adverse economic environment brought by the coronavirus pandemic.
Another concern is a Biden/Harris win leading to federal decriminalization in the near-term and allowing traditional financing institutions to provide capital to cannabis operators. If banking institutions came into the sector, there would be cap-rate compression, but IIPR currently has no mortgage debt. So leveraging the balance sheet would help offset the rate compression.
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