Every kind of investor should take a long look at Innovative Industrial Properties (NYSE:IIPR). It’s not a stretch to say that IIPR stock has it all.

For income investors, IIPR stock offers an attractive dividend. Growth investors should love IIPR’s profile.

There’s a case for value investors, particularly of the GARP (growth at a reasonable price) persuasion. Even the technicals look reasonably solid at the moment, in a market where momentum has been a huge factor.

To be sure, no stock is perfect. But IIP, particularly among cannabis names, looks as close as you can get.

How Innovative Industrial Properties Works

Innovative Industrial Properties is an REIT (real estate investment trust) that focuses on the medical-use cannabis industry in the U.S.

What IIP does is build and acquire cannabis-related real estate assets: growhouses, processing facilities and dispensaries. It then leases those assets to producers and retailers of medical cannabis across the country.

Those leases are win-win. Particularly in newer markets, cannabis producers and retailers don’t have capital access to build their own facilities. The still-intact national prohibition on marijuana adds another monkey wrench: many federally-regulated banks still don’t want to lend to cannabis companies, even in states where the product is legalized.

IIPR fills the gap. It currently has 67 properties across 17 states. According to a presentation earlier this month, every single one is leased at the moment.

There’s plenty of room for additional growth. Including results from the November elections, 36 states now allow for the medical use of cannabis. IIPR can grow within existing markets as well, while also driving rent increases over time.

This is an attractive, smart business model. And while the company doesn’t have the market to itself, no other company has a portfolio that’s nearly as large.

Impressive Growth and a Solid Valuation

Indeed, we’ve already seen the power of the business model. IIPR has posted truly impressive growth since it went public back in 2016.

This is a business that started from zero only a few years ago. In 2020, it generated revenue of $117 million. AFFO came in at $98 million. (AFFO stands for “Adjusted Funds From Operations.” It’s a common measure of REIT profitability, as high depreciation artificially depresses reported net earnings.)

Both figures grew sharply year-over-year. Revenue rose 162%. Adjusted funds from operations (AFFO) per share increased 53%, as it did sell some stock to fund its 2020 growth.

2021 results will improve as well. IIP has continued to add more properties to their portfolio. There’s room for even more activity. Beyond that, we’ll see more states open up — and more patients in existing states as medicinal cannabis gains wider acceptance. Growers will need IIPR properties to meet that demand.

Despite all that good news, IIPR stock hardly looks expensive. It trades at about 43x 2020 AFFO. Add in the full-year earnings power of the recently acquired properties and the multiple probably gets in the 30x range.

That’s expensive by REIT standards, admittedly — but there few, if any, REITs growing at this pace. And, as an REIT, IIP offers both tax benefits at the corporate level and a healthy dividend.

Indeed, the stock’s yield currently sits at 2.95%. 10-year Treasury yields are at a 14-month high yet remain well below 2%.

Again, IIPR stock seems to have it all: growth, income and a reasonable if not downright cheap valuation.

What Goes Wrong With IIPR Stock

So the question then becomes: what goes wrong? Or, put another way, why does this opportunity exist?

I can think of two core reasons. First, the combination of attributes offered by IIP leaves the stock in something of an odd spot. Income investors aren’t used to investing in or even looking for cannabis plays. Cannabis investors have generally focused on Canadian producers or U.S. multi-state operators (MSOs). The stock doesn’t have a built-in investor base — yet.

Second, this is a new market, and IIPR is entering into long-term contracts with what often are immature and sometimes speculative businesses. Some investors are worried that the REIT is taking on too much credit risk given some state markets look something like the “Wild West.”

Certainly, a medicinal cannabis grower is a riskier tenant than a retailer with an established multi-decade history, or a Triple-A rated industrial company. But that’s where IIP’s scale comes in.

A portfolio of three or five or even ten properties creates significant credit risk. One or two failed businesses can have a significant impact on near- to mid-term results.

But at 67 properties, IIP’s diversification is a big edge.

Meanwhile, according to its Form 10-K filed with the U.S. Securities and Exchange Commission, IIP did have a tenant default at a Los Angeles property. That company went into receivership (ie, bankruptcy). By January of this year, there was a new tenant installed.

As long as demand for medicinal cannabis is there, IIP’s risk is manageable and acceptable. Its combination of growth, profitability and valuation, meanwhile, is difficult to find anywhere in the sector, let alone the market.

In other words, those manageable risks are certainly worth taking, for the potential rewards in IIPR stock.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

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