If You'd Invested $5,000 in Innovative Industrial Properties Stock in 2018, Here's How Much You'd Have Today

Innovative Industrial Properties (NYSE: IIPR) is a standout among marijuana stocks. Unlike a great many other publicly traded companies in the weed industry, the cannabis-focused real estate investment trust's (REIT) shares have actually appreciated in price over the years. In fact, they've grown considerably since the company's December 2016 IPO, and are still well into positive territory despite a recent setback.

How has Innovative managed to buck the trend?

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Profiting from pot

Let's get the headline math question out of the way first. A $5,000 investment in Innovative Industrial Properties on its first day of trading would have more than tripled in value to about $17,500 at present. And that's before factoring in the regular payouts that it is obliged as a REIT to distribute. With dividends reinvested, that $5,000 would have grown into a position worth about $26,100.

Although it's classified as a marijuana company, Innovative Industrial Properties neither grows, processes, nor retails cannabis or its derivatives. Instead, it acts as a landlord for businesses engaged in those activities. This spares it from having to deal with the many headaches of the marijuana business, which include but are not limited to severe restrictions on financial services and a patchwork of legalization frameworks.

That doesn't mean it completely escapes risk, of course. In December, PharmaCann -- its No. 1 tenant in terms of both properties rented and lease revenue -- defaulted on its rent payments. This sparked a sell-off of the REIT's stock from which hasn't yet recovered. It is now more than a month since the default, and the discussions Innovative said it was holding with PharmaCann to find a resolution don't seem to have borne fruit.

Prior to that, however, Innovative was humming along profitably. Its tenant roster was a who's who of prominent weed players including Green Thumb Industries, Curaleaf Holdings, and Trulieve Cannabis.

Collectively, these businesses paid over $76 million in rental revenue in the third quarter, with other revenue making up around $474,000 of the REIT's top line. The total of almost $76.5 million was down a bit, although not alarmingly, from the prior-year quarter's $77.8 million.

Another factor setting Innovative apart from fellow cannabis companies is that it's consistently profitable. What it has been lacking recently is growth. Adjusted funds from operations (the most critical measure of profitability for a REIT) hit $64.3 million in Q3 -- a shade under the $64.8 million of the same period in 2023.

That stagnancy on the bottom line has meant no movement in that most crucial element for REIT investors: the dividend. Innovative has paid a quarterly distribution of $1.90 per share for four straight quarters, which is a bit atypical. In times of more robust growth, management declared dividend raises once or even several times per year. That said, the combination of its still-generous payout and its weakened stock price has driven its dividend yield to over 11%.

The mightiest growth engine of all

Innovative isn't firing on all cylinders at the moment, and the uncomfortable situation with its top tenant is worryingly unresolved. Yet I think this is an instance where investors can be contrarian and make some money from a stock many are currently shunning.

Firstly, one characteristic of the marijuana business is that a host of companies, large and small, are jockeying for success in the market. Even if the worst-case scenario comes to pass with PharmaCann (i.e., if it remains in default and then drops off the REIT's tenant list), there should be more than a few candidates willing and able to take its place -- either alone, if they're large enough, or in a cluster if they're not.

Secondly, I fervently believe de facto legalization is coming. The current jumble in which most (but not all) states have legalized pot under at least some conditions is confusing and pointless. Either Congress should decriminalize this drug and make it essentially legal, or the country should go back to the bad old days of full-on illegality. There is much support for the former view among voters, and sufficient understanding that criminalization of marijuana caused more problems than it solved. Sooner or later, at the federal level, the weed will be freed.

When that occurs, the pot industry should boom. Cannabis companies will come and go, but all will need suitable real estate to conduct their business. In the likely case that ever-profitable Innovative is still collecting coin from pot properties, it will do well in that bold and bright new era.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Green Thumb Industries, Innovative Industrial Properties, and Tilray Brands. The Motley Fool has a disclosure policy.