Blazing A Trail For Cannabis REITs

Innovative Industrial Properties (IIPR) is a pioneer, to put it mildly.

It’s the only publicly traded company on the New York Stock Exchange that provides real estate capital to cannabis growers. Medical-use cannabis growers, specifically, but cannabis growers nonetheless.

The real estate investment trust (REIT) has begun blazing a trail in the medical marijuana industry in December 2016. And it hasn’t stopped forging forward ever since as it continues to expand its domain.

Forgive the pun, but it’s completely accurate to say that Innovative Industrial is growing like a weed. I first wrote favorably about it on September 16, 2019. And since then, shares are up more than 158% (as of August 31).

And I was late to the game on this one out of an abundance of caution. Early-in investors have achieved phenomenally higher returns.

Offered at $20 per share during its 2016 IPO, the REIT traded for almost $246 as August closed. We can’t expect this growth rate to be sustainable indefinitely, but even so…

IIPR continues to be a strong investment option. In fact, it’s positioned itself to remain profitable regardless of where federal marijuana use is headed.

State vs. Federal Opinions Benefits IIPR

Marijuana use is becoming increasingly accepted in the United States. So far, 36 states, D.C. and four out of five permanently inhabited U.S. territories have legalized medical-use cannabis.

IIPR states on its website:

This wave of adoption by states of medical-use cannabis programs has been driven by the rapidly evolving, overwhelming acceptance of Americans for medical-use cannabis as an alternative form of treatment for patients. 

Meanwhile, Tim Malloy, assistant director of the Quinnipiac University Poll, puts it this way:

“The baby boomers say no to the drug that helped define an era, while the millennials say bring it on. In between are enough voters to rubber stamp legalizing marijuana for recreation as well as medical reasons.

According to a 2019 Quinnipiac University Poll, 93% of voters support doctor-prescribed medical marijuana. So it’s no real surprise that the ArcView Group estimates sales of U.S. state-regulated cannabis will grow from $12.4 billion in 2019 to nearly $34 billion in 2025. 

Marijuana remains illegal at the federal level, however. Because of this, multistate operators often struggle to obtain loans from traditional sources.

Recognizing this area of need, IIPR offers sale-leaseback solutions to growers. This gives farmers cash while landing the REIT profitable long-term tenants.

As IIPR states on its website, it gives growers “the opportunity to redeploy the proceeds into their company’s core operations, allowing them to focus their resources on reaching as many patients as possible in need of treatment.”

Seeing Green in IIPR

This system has been mutually beneficial for growers, Innovative Industrial Properties, and investors alike. CEO Paul Smithers confirmed in a recent one-on-one interview I had with him that business continues to be extremely robust.

Naturally, as states adopt recreational programs for marijuana use, IIPR benefits further. Smithers explained that growers typically come to IIPR with requests for expansion capital after that kind of legislation passes.

Innovative Industrial Properties also keeps an eye on new medical states and isn’t unwilling to partner with smaller companies:

We’re not just focused 100% on the big [multistate operators]. We understand how we got started about four-and-a-half years ago. We did these deals with the smaller companies at the time. And those companies now are GTI, Curaleaf, PharmaCann.

If you’re unfamiliar with those names, let’s just say they’re not mom-and-pop operations anymore.

IIPR recently expanded a partnership with Harvest Health & Recreation, purchasing a Maryland facility for nearly $30 million. “It’s been a fun one for us to be able to close this one,” Smithers told me. Though, honestly, I’d say it’s safe to say he’s enthusiastic about all of his purchases.

“We also have a Florida deal we did earlier this year with Harvest for about $42 million,” he added. And it seems like another opportunity is always right around the corner. 

These expansion opportunities display the production efforts of growers as they race to keep pace with demand.

Innovative Industrial Has a Bright Future Ahead of It

Innovative Industrial Properties now owns 73 properties across 18 states, coming to roughly 6.6 million square feet in total. These properties have all been leased to state-licensed marijuana growers with average lease terms of 16.7 years.

Annual rent increases and property management fees are also factored into each lease. And this further allows for growth in IIPR’s business model.

In short, IIPR has positioned itself for flexible growth no matter how the federal government hashes out the details of legalizing marijuana. Which it is somewhat in the process of doing right now.

Senate Majority Leader Chuck Schumer’s heavily debated SAFE Act outlines a plan for regulating and taxing marijuana. This would allow small businesses access to government loans.

Then again, this is something that’s been talked about for months now, with no real movement forward.

IIPR isn’t concerned though. As Smithers told me: “Our operators have spent a lot of time and money establishing their business within the state border. Each of these operators has really perfected their business within the states.”

And since the federal government is leaving the states alone in this regard, current growth doesn’t seem set to stop.

In Conclusion…

As Rich Duprey states in “Could Innovative Industrial Properties Help You Retire a Millionaire?”:

Even if marijuana is never legalized federally and only incrementally creeps across the country state by state, Innovative Industrial Properties will still prosper as vertically integrated growers and retailers seeking to expand look for access to more capital.

If anything, some worry that cannabis REITs may go up in smoke if marijuana is legalized nationally.  However, IIPR has a great reputation in the community with deep-rooted relationships. Smithers states:

I think you can’t overstate how important it is to have that first-mover establish those relationships with the big operators… If you look at our history, we have numerous repeat deals with these operators. And that comes as a result of trust and a really good working relationship.

That’s why I continue to be bullish about the company.

Be careful about valuation. You don’t want to overdo it. But with its current prospects, I’m recommending it at $220.00 or below.

Just as casino REITs are successful despite having traditional financing options, I anticipate cannabis REITs would enjoy similar success.

I own shares in IIPR, PW, and AFCG.

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