Innovative Industrial Properties (NYSE:IIPR), a real estate company that focuses on the US medical cannabis companies, has continued its aggressive expansion. Last week, the company announced that it acquired a new property located in New Castle, Pennsylvania, from Holistic Industries. The acquisition is IIPR’s third transaction with Holistic Industries.
The property spans across approximately 7.4 acres, which includes approximately 108,000 square feet of industrial space. IIPR will pay approximately $8.9 million to Holistic Industries. Meanwhile, the company leased back the property to Holistic Industries in a long-term and triple-net lease agreement. IIPR agreed to reimburse up to $6.4 million to Holistic if it improves the property. So, IIPR’s total investment on the property could increase to $15.3 million.
In the press release, IIPR CEO Paul Smithers, said, “We have teamed with Holistic as their long-term real estate partner since the acquisition and lease of our Maryland property in 2017, and are thrilled to further expand our relationship with them in Pennsylvania, which continues to develop as one of the most vibrant medical cannabis markets in the United States. We greatly value our long-term relationship with the Holistic team, and look forward to supporting their real estate capital needs for many years to come.”
So far this year, IIPR has acquired 11 properties. As of June 10, the company owned 57 properties across 15 states. Together, the properties form 4.3 million square feet of rentable space. The company has leased 99.2% of its properties (in terms of square footage). The weighted-average remaining lease term for these lease properties was approximately 16 years. So far, IIPR has invested 769.8 million to acquire these properties, which excludes transaction expenses. Meanwhile, the company has committed $128.9 million to develop the properties.
Since IIPR reported its first-quarter earnings, Craig Hallum has lowered its target price from $95 to $75. Meanwhile, Compass Point raised its target price from $100 to $115. Overall, six analysts cover the stock. Among the analysts, 80% recommend a “buy,” while 20% recommend a “hold.” None of the analysts recommend a “sell.” As of June 12, analysts’ consensus target price was $106.90, which represents a 12-month return potential of 18.7% from its current stock price of $90.09.
Stock performance and my take on IIPR
So far this year, IIPR has returned 18.7%. The company’s aggressive expansion strategy, a delay in cannabis legalization at the federal level, and strong fourth-quarter earnings led to a rise in the company’s stock price. Meanwhile, IIPR’s first-quarter earnings were lower than expected. So far in 2020, the company has outperformed cannabis ETFs and its peers. YTD, the ETFMG Alternative Harvest ETF (NYSE:MJ) has fallen by 19.7%. Meanwhile, Curaleaf Holdings (OTCMKTS:CURLF), MedMen Enterprises (OTCMKTS:MMNFF), and Cresco Labs (NYSE:CL) have fallen by 8.4%, 51.4%, and 36.2%, respectively.
I have been bullish on IIPR for some time. The federal government still classifies cannabis as a Schedule 1 drug. So, cannabis companies, which need capital, can’t get banking services. Meanwhile, IIPR infuses the capital in these companies by acquiring their properties and leasing them back. The company collects a fixed fee from the companies as lease payments. So, the decline in cannabis prices doesn’t have much of an impact on IIPR’s margins. While many cannabis companies struggle to become profitable, IIPR has been reporting profits and distributing dividends consistently. So, I think that investors should continue to accumulate the stock on dips.