This Unusual Pot Stock Is Thriving Amid the Cannabis Boom

The cannabis boom amid the coronavirus pandemic benefited the marijuana industry to a large extent. That said, U.S. cannabis companies, even with a limited legal market, outshone their Canadian counterparts. The Canadian pot industry is still challenged with regulatory hold-ups, fewer legal stores than anticipated, and rising black market sales…

The marijuana boom also proved beneficial even for companies that do not directly grow or produce marijuana. One such pot-related company is Innovative Industrial Properties (NYSE:IIPR), a real estate investment trust (REIT) that acquires properties from medical cannabis companies and leases them back.

Because marijuana is illegal at the federal level, some investors are hesitant about cannabis companies. This unconventional pot stock offers a safe choice for those investors because it has no direct involvement with cannabis. The company had an excellent 2020 and an even better start to 2021, with strong first-quarter results. Let’s recap how it performed and see what can we expect from its upcoming second-quarter results due tomorrow, Aug. 5.

Will Innovative turn in another record quarter?

Investors are hoping to see another outstanding quarter from Innovative’s Q2 earnings. The company has been churning out exceptional quarterly reports and the credit goes to its business model. Most cannabis companies struggle to set up large production facilities due to lack of access to capital. That’s where Innovative comes into the picture — it acquires properties from medical cannabis companies, then leases them back to the sellers. Both benefit from this arrangement; the cannabis companies get capital, and Innovative gets revenue through rental income. 

In its first quarter ended March 31, its total revenue jumped 103% year over year to $43 million. Rising revenue also brought in another quarter of profits. Net income grew to $26 million from $12 million in the year-ago period, and adjusted funds from operations (AFFO) surged by 117% to $38 million for the quarter. For a REIT, AFFO plays the same role as net earnings do for a non-REIT. It determines how much cash is available to be paid to shareholders as dividends. 

For the period between Jan. 1 and May 5, Innovative acquired three new properties, as well as additional land at an existing property. As of May 5, it owned a total of 69 properties in 18 U.S. states; 100% of its properties are rented out.

Even if Innovative somehow fails to garner any new tenants over the course of a year, it can continue to earn increased rental income because of the annual rent raises that are part of its leaseback guidelines. Some of Innovative’s tenants include popular U.S. cannabis companies Cresco Labs, Trulieve CannabisCuraleaf Holdings, and Green Thumb Industries. These companies have been expanding at an exceptional rate, which leads me to believe they will need more of Innovative’s help.

This business model has helped Innovative not only grow its revenue and profits but also safeguard itself from the volatility of the marijuana industry. It ended its Q1 with $661.4 million in cash, cash equivalents, and short-term investments, and no debt.

States’ legalization ramp-up is a winning factor

Wall Street analysts estimate Innovative will report revenue of $45 million for the quarter, an 85% year-over-year increase. For full-year 2021, analysts expect revenue to be around $194 million, further rising to $269 million in 2022. Analysts also expect a net earnings increase of…

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