Nothing goes up or down in a straight line on Wall Street. When it seems to be like that is what’s taking place, it is time to step again and take a more in-depth look.
One space the place this common warning has proved notable is the marijuana sector, which was skyrocketing in late 2020 and early 2021, however has since been heading steadily decrease. Innovative Industrial Properties (IIPR 3.04%), regardless of a large value decline and the present bear market, nonetheless seems to be like a terrific possibility in the area. Here’s why.
A particular area of interest
There’s an argument to be made for marijuana being one thing of a Wild West. First there’s the authorized uncertainty, after which there’s the truth that there are a variety of small gamers vying for market share. The build-out has been big and so has the trade’s progress, with trade gross sales increasing from $18 billion in 2020 to $24 billion in 2021. That’s 37% progress in a single yr.
Meanwhile, the economic buildings that home pot-growing services are something however generic packing containers. They require particular licensing the place marijuana is authorized, they’ve particular zoning necessities, and they’re extremely regulated with a protracted listing of security and compliance guidelines to comply with.
If Innovative Industrial Properties had been to expertise a emptiness, there is a good probability one other grower would need to hire a property. In reality, the worst-case situation for this actual property funding belief (REIT) is to redevelop an asset as a more-general warehouse.
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With Innovative Industrial’s inventory value down some 50% from its high-water mark, it looks as if the bearish angle right here may very well be a bit overdone.
A powerful future
There are a number of causes for this. First, Innovative Industrial has a first-mover benefit, because it was among the many few providing capital to the pot sector in the early days. It now has over 100 properties that it largely acquired utilizing sale-leaseback transactions. The common lease size, in the meantime, is a really spectacular 16.4 years. So it has long-term relationships with among the trade’s most notable names, which ought to assist the REIT continue to grow by way of sale-leaseback acquisitions, ground-up improvement, and expansions of current belongings.
Then there’s the truth that marijuana is presently authorized in 38 U.S. states for medical use and 18 for leisure use. That means there’s nonetheless extra room to go earlier than the U.S. market is absolutely open, not to mention saturated, which helps clarify why Innovative Industrial is anticipating trade gross sales to almost double to $46 billion by 2026. Even if some pot growers fall to the wayside, there’s nonetheless an enormous alternative right here.
Given the complexity of develop homes, Innovative Industrial seems to be extremely prone to profit as one thing of a pick-and-shovel marijuana play. The REIT is not seeking to discover gold promoting pot, however it will possibly nonetheless make some huge cash because it helps the miners (in this case pot growers) attain for his or her riches.
The broader marijuana sector is clearly out of favor proper now, however it looks as if traders are throwing the infant out with the bathwater in terms of Innovative Industrial Properties. If you’ll be able to see the long-term alternative, you’ll be able to sit again and acquire the REIT’s beneficiant 5.4% dividend yield when you watch for Wall Street to determine that this pot inventory is a bit of totally different from the remaining.
And do not forget that it has elevated its dividend yearly since 2017, taking the quarterly payout from $0.15 per share to an enormous $1.75, making the REIT a good way to develop your long-term passive earnings stream.