The economic problems have caused the S&P 500 Index to be down 13% to date. And because the stock market is really a stock market, some stocks have performed much better and some much worse.
Down 61% and 31% this year, respectively, real estate marijuana investment trust (REIT) Innovative Industrial Properties (IIPR 1.18%) and warehouse REIT STAG Industrial (STAG 1.01%) fall into the latter category. There’s no guarantee that these stocks won’t fall further in the short term. But in the long run, they will have nowhere to go but up. Here’s why.
Innovative industrial properties
Because marijuana remains federally illegal, sources of capital for state-licensed cannabis operators are limited. Innovative Industrial Properties was able to take advantage of this opportunity through a first mover advantage. This allowed the REIT to build a portfolio of 111 properties in 19 states worth $2.4 billion as of June 30, making it the largest financier for cannabis companies.
In 2021, the cannabis REIT continued to leverage its leadership by investing $714 million to acquire more properties. That explains how IIP reported $204.6 million in revenues in 2021, which was a whopping 75% growth during 2020. And the company’s adjusted funds from operations (AFFO) per share is up 32.9% year-over-year for 2021 to $6.66. AFFO is a metric that adds significant intangible charges such as depreciation and amortization to net income, and subtracts capital expenditures and ongoing real estate operating expenses.
In addition to the broader market downturn, IIP stock has been hit hard this year by the default of the fourth-largest tenant, Kings Garden, at 8% of stabilized rental income. The good news is that IIP should be able to find a new tenant that can eventually prove to be just a minor blip on the radar.
If anything, the short-term tumult associated with King’s Garden could be a great opportunity for long-term investors. That’s because this panic has boosted IIP’s dividend yield to 7.3%. And with a dividend payout ratio of 81.8% in the second quarter, the company’s dividend is well covered.
IIP may have to deal with more tenant defaults in the future, but the current valuation seems to take that into account. The stock trades at the end of a 12-month (TTM) price-to-earnings (AFFO) ratio of just 12.5 per share, which is a bargaining chip for IIP’s high growth potential.
STAG Industrial.
With 551 industrial properties in 40 U.S. states, STAG Industrial is a major industrial REIT. Not surprisingly, the company is also diversified. Amazon is its largest tenant at just 3.2% of its annual base rent (ABR). And its top 20 tenants are less than 20% of its total ABR.
Nevertheless, the company is concentrated where it counts, as far as e-commerce is concerned. About 40% of STAG Industrial’s real estate portfolio is in e-commerce. This is encouraging because total U.S. e-commerce sales are expected to grow from $768 billion in 2021 to more than $1.3 trillion by 2025. That should lead to strong underlying demand for real estate in the future, so STAG Industrial predicts same-store sales growth in the 4% to 4.5% range for 2022. For context, that would be the highest same-store sales growth rate in the company’s history.
And that growth doesn’t look like it will slow down for years, thanks to the industrial real estate market, which has more than $1 trillion to offer. STAG Industrial is also unique in that it combines excellent growth prospects with a safe dividend yield of 4.4%.
STAG Industrial trades at a TTM price-to-earnings ratio of just 15.6, making it an attractive choice for investors looking for reliable monthly income.