Economic concerns have led the S&P500 index down 13% since the start of the year. And since the stock market is actually a stock market, some stocks did a lot better and some a lot worse.
Down 61% and 31% so far this year, respectively, marijuana real estate investment confidence (REIT) Innovative industrial properties (NYSE: IIPR) and FPI warehouse STAG Industrial (NYSE: STAG) fall into this latter category. There is no guarantee that these stocks will not fall further in the short term. But in the long run, they should have nowhere to go but up. Here’s why.
1. Innovative industrial properties
Because marijuana is still federally illegal, sources of capital are limited for state-licensed cannabis operators. Innovative Industrial Properties was able to capitalize on this opportunity thanks to its first mover advantage. This has allowed the REIT to build a real estate portfolio of 111 properties in 19 states valued at $2.4 billion as of June 30, making it the largest backer of cannabis companies.
The cannabis REIT continued to build on its leadership in 2021, investing $714 million to acquire more properties. This explains how IIP recorded revenue of $204.6 million in 2021, a staggering 75% growth rate over 2020. And the company has adjusted operating funds (AFFO) per share increased 32.9% year-over-year to $6.66 in 2021. AFFO is a measure that adds significant non-cash charges such as amortization and depreciation to net income, as well as subtracting capital expenditures and routine maintenance amounts on properties.
In addition to the general market downturn, IIP shares have been hit hard this year due to the failure of its fourth tenant, Kings Garden, at 8% of stabilized rental revenue. The good news is that IIP should be able to find a replacement tenant, which could ultimately prove that this is just a glitch on the radar.
On the contrary, the short-term noise regarding Kings Garden could be an excellent buying opportunity for long-term investors. That’s because this panic pushed IIP’s dividend yield to an all-time high of 7.3%. And with 81.8% dividend distribution rate in the second quarter, the company’s dividend is well covered.
IIP may face more tenant defaults in the future, but the current valuation appears to reflect this. The stock trades at a trailing twelve month (TTM) price/AFFO per share ratio of just 12.5, which is a boon to IIP’s high growth potential.
2. STAG Industrial
With 551 industrial properties in 40 US states, STAG Industrial is a leading industrial REIT. Unsurprisingly, the company is also diverse. Amazon is its largest tenant at just 3.2% of annualized base rent (ABR). And its top 20 tenants represent less than 20% of overall ABR.
However, the company is concentrated where it counts, that is to say in e-commerce. About 40% of STAG Industrial’s real estate portfolio handles e-commerce business. This is encouraging as total e-commerce sales in the United States are expected to grow from $768 billion in 2021 to over $1.3 trillion by 2025. This should translate into a strong underlying demand for its properties going forward, which is why STAG Industrial expects same-store sales growth of between 4% and 4.5% 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 set to slow for many years to come, thanks to the more than $1 trillion addressable industrial real estate market. STAG Industrial is also unique in that it combines admirable growth prospects with a safe and market crushing dividend yield of 4.4%: the dividend payout ratio was manageable at just 67% in the first half of this year.
STAG Industrial trades at a TTM-core-FFO price ratio of just 15.6, making it an attractive choice for investors looking reliable monthly income.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Kody Kester has positions in Amazon and Innovative Industrial Properties. The Motley Fool holds positions and recommends Amazon, Innovative Industrial Properties and Stag Industrial. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.