As far as REITs go IIPR’s 3.1% yield isn’t especially high. But as far as dividend stocks go it’s pretty nice, especially given that the dividend is expected to grow 140% by the end of 2020. And given that the payout ratio is already below 100% (sustainable) and expected to fall to 74% by the end of 2020, the dividend appears low-risk (as far as coverage ratio goes). Dividend safety is also enhanced by a pristine balance sheet with no debt (though not because management has a choice).

What will ultimately make IIPR a great investment is the cash flow growth rate since REITs tend to be priced as a function of AFFO. If analysts are right about the REIT being able to maintain 40% growth rates through 2028, then hands down IIPR becomes the best stock you can own for the next decade, period. Personally, I think that, given the size of the addressable market, and its incredibly scalable business model (gets more profitable over time as the REIT achieves economies of scale) 20% CAGR growth over 10 years is reasonable. That translates into 15% to 20% dividend growth over time and total returns of 18.1% to 23.1%. If IIPR surprises me even a bit to the upside then the stock could increase your investment (including dividends and dividend reinvestment) by 10 fold in the next 10 years. That’s far better return potential than you’re likely to get from other cannabis stocks. Not just because their valuations are currently stretched but also because cannabis growers are selling a commodity product and thus are likely to become less profitable over time (margin compression).

Meanwhile, IIPR is trading at 32.4 times analyst estimates of 2018 AFFO and 16.3 times 2019 estimates (forward P/AFFO ratio). The P/AFFO ratio is the REIT equivalent of a PE ratio.

  • Price/2018 AFFO: 32.4
  • Price/2019 AFFO: 16.3 (REIT average P/AFFO 16.1)
  • Growth Rate Baked Into Current Price: 12%
  • Expected Growth Rate: 20% to 40%
  • Fair Value P/AFFO: 44.1 to 80.5
  • Discount To Fair Value: 27% to 60%

Even the 2018 estimate is only baking in 12% long-term growth which is far below what the REIT should be able to achieve (assuming nothing in the risk section happens). Based on a formula developed by Benjamin Graham, Buffett’s mentor and the father of modern value investing, a reasonable P/AFFO for a REIT growing at 20% over the long-term is 44.1. That implies IIPR is about 27% undervalued, and if analysts are right then the stock might be as much as 60% undervalued.


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...