Forget The Growers! You Want To Own The Landlord

Innovative Industrial Properties is technically an industrial REIT, but in reality, it’s a niche triple net lease specialty REIT. It was founded in 2016 as the only REIT to rent commercial grow space to licensed medical cannabis growers in the US. Today the REIT owns 10 ten properties located in:

  • Arizona
  • Colorado
  • Maryland
  • Massachusetts
  • Michigan
  • Minnesota
  • New York
  • Pennsylvania

These 10 properties total approximately 952,000 rentable square feet (including approximately 114,000 rentable square feet under development). They are leased under very long-term leases (average remaining lease 14.7 years) under what’s called “triple net leases”. The way it works is that IIPR will buy a grow facility from a cannabis company and then lease it back to them at rents that create a cash yield on investment (based on sale price) of about 15% (average across its property base is actually 15.7%). The tenant not just pays the rent, but also the maintenance cost, property taxes, and insurance. IIPR is literally just the landlord and its leases have 3% to 4% annual rental escalators built in meaning that tenant rent rises about 3.5% per year, or nearly double the rate of inflation.

To give you an idea of just how profitable these leases are, consider this. Triple net leases are most popular in retail REITs, where cash yields range from 5% to 8%. Annual escalators usually run 1% to 2%. The average triple net lease is able to buy a property for an investment spread (cash yield minus cost of capital) of 1% to 3%. That’s good enough to grow adjusted funds from operation or AFFO/share over time. AFFO is the REIT equivalent of free cash flow and what funds the dividend.

IIPR has a cost of capital of just 3.1% and is targeting 15% cash yields on new properties. That means about 12% investment spreads or roughly six times the industry average. And its rent rises at double the industry average, meaning that the REIT will become more profitable over time. In fact, YTD AFFO margin (AFFO/revenue) is already 60% which is close to the industry average. And that’s despite this REIT being extremely small (10 properties, $12 million TTM revenue and $435 million market cap). As it gets bigger its administrative costs (like paying executives and running the head office) will get spread out over exponentially more revenue and its AFFO margin will soar. Within a few years, if it continues to acquire properties quickly (three in the past four months) IIPR could easily become the most profitable REIT in America.


About the Author: Adam Galas


Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. His goal is to help people learn how to harness the power of dividend growth investing. Learn more about Adam’s background, along with links to his most recent articles. More...