Innovative Industrial Properties
On Tuesday, Innovative Industrial Properties (IIPR) gained nearly 6.2% and closed at $132.3. The stock has risen since the beginning of June. As of Tuesday, Innovative Industrial Properties has gained as much as 57% since January 4.
Innovative Industrial Properties is a specialized REIT. REITs are usually slow moving stocks. However, Innovative Industrial Properties focuses on real estate properties. The properties will be leased and operated as medical cannabis facilities in the US. The company focuses on properties that will be used to produce and cultivate cannabis for medical use.
Canopy Growth (WEED) (CGC) and Aurora Cannabis (ACB) are in the direct business of cultivating and producing cannabis for medical and recreational use. The companies are exposed to strict regulatory oversight. Innovative Industrial Properties doesn’t have as much exposure to these regulations.
Medical cannabis companies that lease property from Innovative Industrial Properties must operate a legitimate business within the regulatory boundaries. Currently, cannabis is an illegal substance in the US at a federal level.
Innovative Industrial Properties owns properties in Arizona, Colorado, Maryland, New York, and a few other states. The company has ~1.8 million square feet of rentable land. Currently, Innovative Industrial Properties owns 23 properties.
On Monday, Innovative Industrial Properties announced that it acquired a property in Michigan for $4.8 million. The property consists of ~145,000 square feet of space for industrial use. Along with the acquisition, the company also entered into a triple net lease agreement with one of Ascend Wellness Holdings’ (AWH) subsidiaries. Previously, Innovative Industrial Properties entered into a similar real estate transaction with AWH in Illinois for an~ 75,000 square-foot facility under a similar triple net lease agreement.
What’s a triple net lease?
Before we discuss the acquisition more, let’s look at what “triple net lease” means. Under the lease agreement, the lessor, which in this case is Innovative Industrial Properties, retains the ownership of the property. The lessee, which in this case is AWH’s subsidiary, will be responsible for property taxes, building maintenance and repair costs, and insurance. Innovative Industrial Properties will only be collecting rent from the lessee. The rent is usually lower under a triple net lease agreement. Since Innovative Industrial Properties doesn’t have to bear the burden of the above-mentioned costs, the triple net lease arrangement is relatively low risk.
Currently, 100% of the company’s properties are leased. Innovative Industrial Properties had a weighted average long-term lease period of 15.6 years on its properties. The long-term lease period provides more stability and visibility to the property’s rental income, which makes it suitable for low-risk investors.
While the investment in the property is $4.8 million, the total investments in the property will go up by $15 million to $19.8 million following property redevelopment. AWH will be responsible for completing the redevelopment. Innovative Industrial Properties will reimburse AWH after the redevelopment.
Innovative Industrial Properties could initiate similar deals with AWH in the future. Potential deals might be driving Innovative Industrials Properties stock higher. In a press release, AWH’s CEO and co-founder, Abner Justin, said, “The IIP team has been a great real estate partner and key capital source to fund our multi-state expansion initiatives.”
As the market for medical cannabis grows in the US, Innovative Industrial Properties could benefit from increased activity. Cannabis companies will need real estate solutions.
Potential hemp business
Innovative Industrial Properties could grow due to hemp legalization in the US. More companies will look for real estate solutions in the US. Hemp has several applications ranging from raw materials for edibles to CBD for medical purposes. To learn more, read Investing in the Cannabis Industry.
Canopy Growth is already developing a hemp industrial park in New York. The company acquired ~380,00 square feet in Kirkwood, New York. Canopy Growth will focus on extracting CBD for developing cannabis products for medical use.
Analysts’ target price
Currently, very few analysts cover Innovative Industrial Properties. According to data provided by Reuters, three analysts recommended a “buy” for the next 12 months. The target price was $154, which was significantly higher than $85.5 in June.
Jim Cramer’s advise
Jim Cramer, the host of CNBC’s Mad Money, isn’t very optimistic about Innovative Industrial Properties. After the recent rally, he thinks that Canopy Growth is much safer than investing in a REIT with a market capitalization of 1 billion. Cramer backed Canopy Growth due to its investment in Constellation Brands (STZ).
Canopy Growth has been going through its own internal restructuring. Recently, Bruce Linton left the company. To learn more, read Aftermath of Canopy Growth’s Developments Last Week.