Should Canopy Growth Stock Be Part of Your Portfolio In 2022?

This Beaten-Down REIT Provides You Exposure to the High-Growth Cannabis Sector

Shares of Innovative Industrial Properties, a cannabis-focused REIT are down 61% from all-time highs allowing investors to buy the dip.

The last few weeks have been extremely brutal for stock market investors, as several macroeconomic factors have accelerated the sell-off in 2022. However, investors now have the chance to add fundamentally strong stocks to their equity portfolio and benefit from exponential gains over the long term.

You need to identify companies that are part of rapidly expanding markets, allowing them to increase the top line at a robust pace. The cannabis sector is one such sector in the U.S. that is forecast to touch $46 billion in 2025, up from $16 billion in 2020. Moreover, these numbers can move significantly higher if the U.S. legalizes marijuana for recreational use at the federal level.

Here, we look at one cannabis-focused real estate investment trust that can potentially derive outsized gains for investors.

An overview of Innovative Industrial Properties

Founded in 2016, Innovative Industrial Properties (NYSE: IIPR) is a real estate investment trust (REIT) operating in the cannabis sector. It combines the capital of multiple investors to acquire income-producing real estate assets. IIP partners with licensed cannabis operators as it acquires and leases back their real estate properties. So, cannabis operators have access to capital that can be used to expand production capabilities and reinvest in growth opportunities.

The company’s sale-leaseback agreements offer attractive alternatives to cannabis operators with limited access to traditional forms of capital, as marijuana is still illegal at the federal level.

At the end of 2021, 38 states in the U.S. and Washington, D.C. legalized medical marijuana, while 19 states legalized the recreational use of cannabis.

The recent wave of legalization has allowed IIP to increase sales from $14.78 million in 2018 to $204.55 million in 2021. Further, as a REIT, IIP has to distribute at least 90% of its taxable income to shareholders through dividends. As a result, IIP has an annual dividend payout of $7 per share, indicating a forward yield of 6.5%.

What next for IIPR stock and investors?

In Q1 of 2022, IIP reported revenue of $64.5 million, an increase of 50% year-over-year. Its net income stood at $34.7 million or $1.32 per diluted share, while AFFO (adjusted funds from operations) was $53.8 million or $2.04 per diluted share.

IIP paid a quarterly dividend of $1.75 per share in April, representing an increase of 17% compared to Q4 of 2021 and 33% higher than the year-ago quarter.

The company recently entered into a long-term lease agreement with Texas Original to acquire 25 acres of land for $12 million. IIP now owns 111 properties across 19 states as of June 15. 

The company continues to allocate capital to widen its portfolio of properties, which will drive revenue growth higher in 2022 and beyond. These acquisitions will also help IIP to keep increasing its dividend payout. In the last five years, IIP has increased its quarterly dividends by 63.5% annually.

IIP is expected to increase revenue by 40.6% year-over-year to $287.6 million in 2022, and by 22.5% to $353 million in 2023. Analysts also forecast adjusted earnings to rise from $4.55 per share in 2021 to $7.07 per share in 2023.

IIPR stock is trading 61% below all-time highs, valuing it at 10.2 times 2023 sales, and a forward price to earnings multiple of 15.5x, which is quite reasonable. Analysts have a 12-month average price target of $227 for IIPR stock suggesting an upside potential of 108% from current prices.

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