Innovative Industrial Properties: Impressive Dividend Growth (NYSE: IIPR)

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It seems that Innovative Industrial Properties, Inc. (NYSE: IIPR) has become a somewhat predictable pattern for me. I write the stock, a few months pass and the stock sells. I buy others, I write the stock, and stocks are selling. I don’t know if third time is the charm, but I’m sitting here writing it one more time after buying another piece of stock. I think most of the selling is due to broader market conditions rather than issues with the company.

The valuation is close to the cheapest level in the company’s history, and I think we’ve been waiting for a rally for a long time. If the stocks continue to fall, I will have to seriously consider selling other positions, because IIPR with a 5% return is a no-brainer in my opinion. I’m starting to get to the point where the opportunity cost of doing other jobs I don’t like as much doesn’t make sense anymore.

Investment thesis

IIPR is the largest cannabis REIT in the public markets, and it has been the best performing REIT for the past 5 years. It is also one of the worst performing REITs in 2022, as stocks have nearly halved since the start of the year. The company continues to add new properties to the portfolio, and its focus on the cannabis sector allows the company to generate huge cap rates and significant rent escalations. Valuation is about as cheap as it’s ever been, and investors can earn a 5% return that continues to grow about as fast as any company. I am still adding to my position in the IIPR, and dividend growth investors might consider buying stocks at these levels.

Q1 update

IIPR added 4 properties to the real estate portfolio in the first quarter, for a total of $62.4M, as well as 3 properties in April for $75.2M. I think we will continue to see IIPR grow at an impressive rate due to the regulatory framework and limited competition. It seems like cannabis regulatory reform has been a few years away for at least four years now, but the IIPR will be able to thrive even after financial regulation of the industry begins to loosen. The lead and the relationships they have built will allow them to continue to be one of the major players in the cannabis real estate industry, even if the big banks start to play in the sector.

Summary of Innovative Industrial Properties

Summary of IIPR (innovativeindustrialproperties.com)

NewLake Capital Partners (OTCQX:NLCP) and Advanced Flower Capital Gamma (AFCG) both went public in 2021, but are not nearly the size or scale of IIPR. I own all three, but I think the IIPR is the least risky option of the three. Both have larger dividends, but NLCP is not listed on a major exchange and AFCG is still managed externally. Once these issues are resolved, it would eliminate the main sticking points for investors in both companies and, I believe, allow for faster growth in the long term. This certainly doesn’t make IIPR risk-free, but at the current valuation, the risk/reward ratio is massively skewed to the upside.

Evaluation

As I mentioned earlier, the IIPR is currently close to its cheapest valuation in history. Stocks have rarely traded below 20 times price/FFO, and this has proven to be a buying opportunity in the past. The stock now sits at a price of 19.7x/FFO, which is well below its average multiple. I’ve shortened the Fast Graphs timeline to remove the absurd growth of the first two years as a public company, but I think we’re looking at double-digit FFO/equity growth for a long time with the IIPR.

IIPR/FFO price

Price/FFO (fastgraphs.com)

While I think the decline in share price is a short-term thing, it does mean that IIPR won’t get its money’s worth on its equity issues to fund further acquisitions. If this remains so for an extended period, the company would be wise to explore debt opportunities instead. The company has a strong balance sheet and plenty of firepower to add leverage if it’s a more attractive alternative to equity financing.

The other thing that I think is going to happen over the next 12 to 24 months is a major multiple expansion from here. I think a price/FFO of 25x is a reasonable floor, but I think a multiple of 30x could be easily justified with the growth of the business. Even if we don’t hit a 30x multiple, investors are still looking for double-digit returns from here. I also think you’re not going to find many 5.1% returns growing as fast as the IIPR.

The dividend

I first bought IIPR in the summer of 2020 when the quarterly dividend was $1.06 per share. The dividend is now $1.75 per share and the company is expected to continue to increase every two quarters. I think the 5.1% yield is a gift for investors looking for the best of both worlds for income. Often, investors have to choose between current earnings or dividend growth, but the IIPR has both in spades right now. I don’t think the 5.1% return will last long, but I would buy while it does.

Call options for the brave

I’ve steered away from options for the most part as I’ve concentrated my portfolio over the past six months. However, for investors looking for a small lottery ticket on the IIPR, I believe there are several opportunities for investors familiar with an options chain.

IIPR Equity Option Chain

January 2023 Options Chain (closes 05/16) (schwab.com)

I’ve chosen the longest possible chain that expires in January 2023 (I have no desire to trade options less than six months old), but if you think like me – that IIPR might go along with the second half of 2022 – OTM call options could be an interesting trade in the short to medium term. The strike depends on your risk tolerance, but the first strikes I would consider would be $160, $180, and $200. If stocks continue to fall, I might take a flyer on a $200 strike in my retirement account. For now, I’ll stick to regular sharing.

Conclusion

IIPR is one of my favorite REITs and is quickly becoming one of my most important positions. I can’t wait to see how stocks perform over the next two years, as I think there’s going to be multiple expansion combined with impressive dividend growth on a 5.1% yield to boot. The company continues to add properties to its real estate portfolio, and I think the company will do very well even if the regulatory environment changes.

For investors as optimistic as me and familiar with options, the January 2023 calls could be an interesting way to take advantage of potential returns with the IIPR. For now, I’m adding to my position in IIPR common stock, and I think investors looking for a rare combination of current income and dividend growth might want to do the same.

About Catherine Wilson

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