Real estate investment trusts (REITs) offer investors unique exposure to the nascent cannabis industry. Rather than investing in a single stock that directly grows or distributes marijuana-related products, REITs invest in real estate used by cannabis companies, earning reliable income through rent or mortgage interest.

While there are several cannabis REITs to invest in today, two of the most prominent are Innovative industrial properties (IIPR -0.41%) and Gamma CAF (AFCG 1.21%). Let’s take a closer look at each company to see how they compare to determine which is the best buy today.

The case of Innovative Industrial Properties

Innovative Industrial Properties (IIP) was the first cannabis REIT to enter the market, going public in late 2016. Being the first major provider to serve this largely underserved market has helped IIP achieve incredible growth and rapid expansion in one year to the next.

Over the past five years, IIP has grown its net operating income and adjusted funds from operations by 137% and 197%, respectively, on a compounded annual basis. These are two important measures that illustrate the profitability of a REIT. This outstanding performance has enabled the company to increase its dividend by more than 1,000% for a total of 14 dividend increases in six years, attracting the attention of investors in droves.

However, the past year has been difficult for this cannabis leader. A class action lawsuit over IIP’s lack of transparency with investors about potential default by its tenants has caused share price volatility. Then, a few months after the complaint was filed, one of its five main tenants, Kings Garden, defaulted. Its share price fell as a result, with the stock down 63% since last year.

The ongoing lawsuit and the default of the tenant will certainly cause more volatility for the company. And being in the finicky real estate and cannabis business, there’s always a chance that more tenants will default in the future. But its last quarter was strong and analysts’ outlook is still positive. The company also increased its dividend again, now offering investors a hefty 7.2% yield.

The case of AFC Gamma

Becoming public in 2021, AFC Gamma does not have the same track record as IIP. But that doesn’t mean the company doesn’t offer the same explosive growth. AFC Gamma does not buy or rent real estate directly like IIP. Instead, it creates guaranteed loans to established cannabis operators to fund things like business expansions, home improvements and property acquisitions – something that is desperately needed in the marijuana industry since regulations federal authorities restrict operators’ access to capital.

AFC Gamma’s yield to maturity, a commonly used metric to illustrate a loan’s return on investment, is 18%, which is almost unheard of in the mortgage industry. 100% of the loans in its portfolio are reimbursed and the generation of new business is booming. In the second quarter of 2022, it funded $154.7 million in new loan commitments and increased its net interest income by 128%.

The lack of funding available to cannabis businesses means they should have steady business for years to come, even as legislation like the SAFE Act improves accessibility to capital. Its dividend is extremely attractive at 12.3%, more than 10 times the S&P 500, and still relatively sheltered at 81% of its distributable profit.

Why AFC Gamma might be a better buy

AFC Gamma’s dividend yield is higher and slightly safer than IIP’s. Additionally, REIT has more favorable prices today, and it doesn’t face the same default and litigation challenges as IIP, making it the better marijuana stock of the two today. However, I think both companies are worthwhile long-term investments for investors who are optimistic about the future of the cannabis industry and are willing to endure more volatility.

Store

Dividend yield

Dividend payout ratio

Prizes at winnings

Innovative industrial properties

7.2%

84%

17.67x

Gamma CAF

12.3%

81%

8.3x

Source: Author’s calculations based on company revenue and YCharts.

New marijuana laws or regulations could negatively impact businesses in the same way, and both are likely to fail in the future. It’s simply a part of doing business in the real estate and mortgage industry.

However, the upside potential of the cannabis industry is still enormous. And for the right investor, the reward of those actions can outweigh the risk. I think both companies have great long-term growth potential and I see them rebounding as the cannabis industry grows and changes.

Liz Brumer-Smith holds positions in innovative industrial properties. The Motley Fool fills positions and recommends innovative industrial properties. The Motley Fool has a disclosure policy.