Nothing goes up or down in a straight line on Wall Street. When it looks like that’s what’s happening, it’s time to step back and take a closer look.
One area where this general warning has proved notable is the marijuana sector, which was skyrocketing in late 2020 and early 2021, but has since been heading steadily lower. Innovative Industrial Properties (NYSE: IIPR), despite a sizable price decline and the current bear market, still looks like a great option in the space. Here’s why.
A special niche
There’s an argument to be made for marijuana being something of a Wild West. First there’s the legal uncertainty, and then there’s the fact that there are a lot of small players vying for market share. The build-out has been huge and so has the industry’s growth, with industry sales expanding from $18 billion in 2020 to $24 billion in 2021. That’s 37% growth in a single year.
Meanwhile, the industrial buildings that house pot-growing facilities are anything but generic boxes. They require special licensing where marijuana is legal, they have special zoning requirements, and they are highly regulated with a long list of safety and compliance rules to follow.
If Innovative Industrial Properties were to experience a vacancy, there’s a good chance another grower would want to rent a property. In fact, the worst-case scenario for this real estate investment trust (REIT) is to redevelop an asset as a more-general warehouse.
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With Innovative Industrial’s stock price down some 50% from its high-water mark, it seems like the bearish attitude here could be a bit overdone.
A strong future
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There are a few reasons for this. First, Innovative Industrial has a first-mover advantage, as it was among the few offering capital to the pot sector in the early days. It now has over 100 properties that it largely acquired using sale-leaseback transactions. The average lease length, meanwhile, is a very impressive 16.4 years. So it has long-term relationships with some of the industry’s most notable names, which should help the REIT keep growing via sale-leaseback acquisitions, ground-up development, and expansions of existing assets.
Then there’s the fact that marijuana is currently legal in 38 U.S. states for medical use and 18 for recreational use. That means there’s still more room to go before the U.S. market is fully open, let alone saturated, which helps explain why Innovative Industrial is expecting industry sales to nearly double to $46 billion by 2026. Even if some pot growers fall to the wayside, there’s still a huge opportunity here.
Given the complexity of grow houses, Innovative Industrial looks highly likely to benefit as something of a pick-and-shovel marijuana play. The REIT isn’t looking to find gold selling pot, but it can still make a lot of money as it helps the miners (in this case pot growers) reach for their riches.
An opportunity
The broader marijuana sector is clearly out of favor right now, but it seems like investors are throwing the baby out with the bathwater when it comes to Innovative Industrial Properties. If you can see the long-term opportunity, you can sit back and collect the REIT’s generous 5.4% dividend yield while you wait for Wall Street to figure out that this pot stock is a little different from the rest.
And don’t forget that it has increased its dividend every year since 2017, taking the quarterly payout from $0.15 per share to a huge $1.75, making the REIT a great way to grow your long-term passive income stream.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.
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