Shares of cannabis REIT Innovative Industrial Properties (NYSE: IIPR)
rebounded off their 50-day line earlier this month as the stock consolidates below its September 7 high of $253.61. This pullback and subsequent uptrend look healthy, and the stock may be poised for gains in the near term.
Innovative Industrial Properties, which went public in December 2016, bills itself as the "pioneering real estate investment trust for the medical-use cannabis industry." The company provides real-estate financing to the medical cannabis industry.
Innovative Industrial Properties acquires retail and industrial properties from state-licensed medical cannabis companies. It then leases the properties back under long-term, absolute net lease agreements.
Under an absolute net lease, the tenant pays base rent, along with all costs associated with building maintenance and repair. The tenant is also responsible for insurance premiums and property taxes.
According to IIPR, "We focus on well-capitalized companies that have successfully gone through the rigorous state licensing process and have been granted a license in the state where the property is located."
Pass-Through Benefits Of REITs
Under the structure of a real estate investment trust, investors join forces to acquire income-producing properties. One characteristic of REITs that appeals to investors is the requirement that 90% of taxable income be passed through to shareholders as a dividend.
IIPR returned 27.61% in the past three months, 35.20% year-to-date and 109.55% in the past year. Shares closed Friday at $244.88, down $0.82, or 0.33% in lower-than-normal volume.
IIPR is not alone among cannabis REITs that have been top performers in recent months.
Another cannabis REIT is Power REIT (NYSEAMERICAN: PW). This company's focus is expanding its real estate portfolio of controlled environment agriculture greenhouse properties for food and cannabis cultivation.
This REIT has been around since the 1960s, when regulators first OK'd the REIT structure. It originally focused on railroad infrastructure, but has expanded into other areas over the decades. Shares advanced 23.81% in the past three months, 26.51% year-to-date and 93.52% in the past year.
Power REIT shares closed at $51.69 Friday, up $2.29, or 4.64%, in trading volume 149% above average. Intraday, the stock reached a high of $52, clearing its previous high of $51.95, reached on February 16.
So which is the better stock?
The answer is that frustrating phrase: It depends.
If you are looking for a pure-play entree into the cannabis business, then IIPR is a good solution. At a time when cannabis producers and distributors are struggling when it comes to price appreciation, IIPR is currently a leading stock that gives you exposure to a very specific angle of the cannabis industry. IIPR's tenants are locked into leases, which may be difficult to exit in the event that other aspects of the business show signs of trouble.
In addition, the pass-through structure of a REIT assures that investors own an income-producing asset.
Both REITs Show Strong Fundamentals
Of course, that last point is also true for Power REIT. However, if you are looking for something that is more of a pure cannabis play, Power REIT doesn't quite fit that bill. Nonetheless, it's a strong price performer, and also boasts an according to data compiled by MarketBeat.
Either REIT would be an excellent portfolio addition, but if you're interested specifically in the cannabis industry, then check out the eight quarters in a row of triple-digit revenue growth at IIPR. Earnings growth rates have been a bit more erratic, although the company has been profitable every year since 2017.
For the full year, analysts see the company earning $6.72 per share, up 38% from 2020. Next year, Wall Street pegged earnings at $9.28 per share, up another 38%.
Could IIPR be a long-term investment, rather than just a trade to nab some quick gains?
Very likely, yes.
There's a good possibility cannabis will be legalized on the federal level within the next few years. Even without full legalization, it's likely that banking and tax regulations will change to become more favorable to the industry, which will spur growth.
Before you consider Innovative Industrial Properties, you'll want to hear this.
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