4 High-Flying Cannabis REITs That Are Growing Like A Weed | Seeking Alpha

Cannabis leaf on green traffic light. Cannabis and marijuana legalization concept.

Bet_Noire/iStock via Getty Images

I couldn’t remember the last time I devoted an entire article to talking about cannabis-related real estate investment trusts (REITs). also known, perhaps less impressively, as marijuana stocks.

Reading: Marijuana reit

Calling the product in question “cannabis” makes it sound a lot more professional, doesn’t it? and regardless of your personal opinion on this particular vegetation, facilitating, cultivating, processing and selling it is a profession.

a legal one too.

at least it’s legal.

I’ll get to that in a bit, right after answering my own question about when I last wrote about cannabis reits. Apparently, it wasn’t that long ago.

On November 11, not even two months later, I posted “cannabis real estate is hot.” It seems like it’s been a lot longer than that, but my alpha item search page doesn’t lie. so I won’t argue.

In case mid-November seems like a long time ago to you, or if you didn’t get to read the article in the first place, let’s once again review where cannabis stands as an industry.

I’m sure it’s not federally approved…only federally accepted to a certain extent. Naturally, that leaves it in a very strange space.

It’s profitable anyway, especially for landlords who rent from them. in fact, the very oddities of current legislation are part of why cannabis reits today find themselves in such impressive financial positions.

the current situation of cannabis

to cite us facts. uu.:

“While marijuana remains illegal at the federal level under the Controlled Substances Act of 1970, the us. uu. it has become a patchwork of state-determined drug-related laws. some states have legalized recreational marijuana, others allow medicinal use and/or cbd oil, some states have simply decriminalized the plant, and a handful follow federal guidelines.”

considering the big fuss over each new state voting on these various measures…it’s safe to say that the feds know about these blatant acts of disregard for national law. but they do nothing to stop them other than make interstate action legally impossible.

That and the inconvenience of obtaining adequate financing.

Due to current federal legislation, most financial institutions simply won’t lend to them. which is an absolute pain for these companies, unless they partner with select partners.

This is where cannabis reits come in, essentially serving as banking alternatives. more often than not, they buy properties from existing growers and then lease them to them.

That way, growers get what they need (fast cash) and their new owners get the promise of steady monthly income, often through significantly long contracts. It is a win-win for both parties. plus, as more states legalize marijuana use in one form or another, there will be more for both sides to work on.

I think 37 states have legalized medical marijuana and 18 now allow recreational use. and who knows which state will pass more permissible laws next. this is a midterm election year, so we could see more openings to vote.

Without a doubt, industry experts believe that something will change in their favor in the future. the legal cannabis industry is expected to grow from $16 billion in 2020 to more than $40 billion in 2025.

Should Cannabis Reit Investors Worry?

Now that you know all that, it’s perfectly understandable if you’re thinking that the federal permit would really hurt the case for cannabis reits.

If these operations can get financing anywhere, why would they continue to deal with landlords?

Honestly, I don’t expect that to be a problem at all, considering the good relationships these reits are building with major producers. Not to mention, the men and women who run them are savvy, experienced businessmen. they understand their market and how to manage it.

In short, I see them as survivors despite everything.

but so far, well, this is what I wrote in November:

“one of the politicians from my home state (south carolina), nancy mace, wrote cannabis legislation that is being circulated for comment. entitled state reform law, it is expected to be officially presented later this month.

“mace, a Republican, advocates marijuana legalization that seems like a compromise between mere deprogramming (another Republican proposal that seeks to protect states that have legalized marijuana, but not much else) and much more complex proposal by democratic leadership.

“according to kyle jaeger of marijuanamoment.net, ‘this is yet another development in what has proven to be an active year of cannabis reform on capitol hill,’ adding:

“‘Getting Republicans on board could be critical to getting anything across the finish line, and the mace move seems designed to appeal to states’ rights and the business interests of conservative colleagues on their side. aisle while incorporating some of the restorative justice and fiscal elements largely favored by progressives.'”

So far, that hasn’t gone anywhere that I know of. which is more or less expected, I admit.

That’s what marijuana proposals at the federal level seem to do: stall. unlike earnings, cannabis reits keep accumulating.

I mean rolling.

interview with a cannabis reit: innovative industrial properties

As most of you probably know, I conduct interviews with CEOs and other company executives at ireit en alpha. and on december 2nd, i was able to post one with innovative industrial properties(iipr) chief executive officer paul smithers and chief financial officer catherine hastings.

for those who don’t know, iipr is accurately described as:

“…the pioneering real estate investment fund for the medical cannabis industry…we believe our sale and leaseback and other real estate solutions offer an attractive alternative to licensed medical cannabis operators that have limited access to traditional financing alternatives.”

and judging from my interview, he’s optimistic about the future.

hastings, for his part, does not downplay the current importance of reits to the industry:

“…having that ability to grow as this industry grows and being on the same level as those multi-state carriers as they expand their platform is critical for them. I also think people downplay the importance or difficulty of simply operating and executing a cannabis-related real estate transaction. it’s hard.”

However, he added, industrial innovation has made amazing strides in the last five years. he has become extremely adept at making things happen for both himself and his tenants.

In short, you can close the trades your traders want to be a part of. but without losing any of those offers. as smithers said:

“We have an average 3% integrated escalator. and we have a weighted average lease term of approximately 16.5 years…

“As far as talks with traders and inflation, I think if you’re a successful trader, you still have excellent margins. so they can still do really well. maybe your operating expenses will increase. maybe the payroll will go up. but yes, in those states, most of the states that we are in, the price of cannabis is high.”

See also: Is Lyft (NASDAQ:LYFT) Using Debt In A Risky Way? – Simply Wall St News

naturally, that’s by design.

innovative industrial reit continued…

iipr does not go where it is not wanted. and because he’s the best, he gets to make deals with the best in those profitable places.

so, there’s not much concern here that your tenants won’t be able to continue paying rent as usual.

also, although hastings openly admitted that, five years ago when he started, his only options were stocks and using his common stock to grow. however, last May, it was able to make its first bond offering.

How times have changed for this pioneering owner.

“We are delighted to have options for raising capital and to be able to have a non-dilutive method of leveraging our portfolio…and I think we see the value of managing going forward with a little more leverage to the portfolio now that we have this option.”

You also have your program on the market, giving you even more room to advance opportunistically. so i don’t think smithers was bragging when he said that :

“If we maintain the status quo at the regulatory level and don’t see a lot of new equity options on the market, I think we can see some really spectacular growth. if it will be the same as we have had in the last one, two, [or] three years, I don’t know…

“but just talking to our [multi-state] carriers and what are their growth plans and how do they target states (pennsylvania, ohio, texas, alabama), all these states that are ready to really take off. ”

As such, he sees more incredible opportunities for iipr.

Innovative Industrial Properties Fast Facts

interviewing a new cannabis reit: newlake capital partners

I can’t exactly say “next was” newlake capital partners (otcqx:nlcp) since I spoke with their president in November. but it was another interview worth promoting here today anyway.

as its president, gordon dugan, noted, it is “the only trust in the cannabis space that has collected 100% rent” during the pandemic. the company describes itself as:

“…a leading provider of real estate capital for state-licensed cannabis operators. Founded in 2019, we are a triple-net leasing fund that acquires industrial and commercial properties through sale-leaseback transactions, third-party purchases, and build-to-suit projects. our tenants are some of the leading carriers in the us. uu. state-licensed cannabis industry, and we are a trusted partner for your real estate needs.”

With a market capitalization of around $700 million, it is the second largest cannabis reit in existence. As Dugan puts it, “IIPR is obviously way ahead as number one. but we are way ahead as number two.”

And again, not even innovative industrial properties can say they collected 100% of their rent during the worst of the closures. That gives newlake every bragging right, something Dugan is not afraid to capitalize on.

As he sees it, “that’s a testament to the quality of our portfolio.”

It’s true that he might as well have a chip on his shoulder judging by the following comments:

“…the new york stock exchange and the nasdaq have taken the position that owners of real estate that is leased to cannabis companies cannot list…not sure why they allow iipr it’s on the list. I think it’s wrong there’s not two ways to do it, but they do it. and they protected it because it got under the coal memo a few years ago.”

again, this is clearly a touchy subject. but he seems to be making the most of it.

continuation of the capital of newlake…

dugan noted that the otc market his company is listed on is “surprisingly good.” big foreign companies that want to list adrs… community banks… those are the otc brothers to be found.

As for the latter, they’re big, well-managed and right in the middle of the plate companies, he says. therefore, it removes the sting of liquidity driven trading by major carriers. in addition:

“I think there is a reason why mortgage rates have come up with very complicated ways to get listed on the major exchanges. but I don’t understand a mortgage fee that can’t foreclose on real estate. therefore, if you make a loan on borrowed real estate and they are unable to repay it, by statute, the mortgaged property funds are incapable of foreclosure.

As you pointed out, “there has to be some sort of structural downside to that.”

The bottom line, however, is that he 1) knows that many investors are concerned about Newlake’s IPO. but 2) that hasn’t stopped him from seeing “pretty good volume” that can help “grow the business”…ultimately achieving even more where it came from.

I also found it interesting that he thinks there’s a good chance a bipartisan solution will emerge this year. And, for the record, that’s not something he’s afraid of. in any case, he welcomes you.

even as is:

“We have a list of target markets. and I think the best way to describe our strategy from day one has been limited licensing states: states where licensing is highly regulated. the production and sale of cannabis is highly regulated in illinois, in massachusetts… pennsylvania, new jersey, new york will be in that category. and allows operators to earn money, which allows operators to pay your rent.

“…we believe that in those states, licensing acts a bit like a moat around businesses. they have their own value. you can’t just rent a warehouse and start growing cannabis and start selling it.”

and believe it or not, that makes newlake capital easier in many ways. “It’s more understandable and predictable” how traders make and keep their money, he says.

I will include one more quote from him that I think is very relevant to this cannabis trust overview:

“If you want to make an analogy, we are in the first entries. we are like gambling several years ago. there is all this opportunity. it’s still getting very high cap rates. there’s a chance to be really big.”

He says hats off to iipr for growing up as fast as he has. “they are the vici [vici] of cannabis”. but newlake wants to be that too. “and therefore room for more than one” in this space.

interviewing a mof cannabis: advanced range of floral capital

Now, this next interview was in July. I interviewed Leonard Tannenbaum, CEO of Advanced Flower Capital Gamma (AFCG) during that warmer month. but I still see the chat as relevant.

NewLake Capital Fast Facts

This is how the company describes itself:

“advanced flower capital gamma… is a leading provider of institutional loans to high-quality cannabis companies across the country in all aspects of production: cultivation, processing and distribution. we offer loans and related facilities, typically secured by substantial assets [that] are based on a repeatable process that seeks out high-profile, creditworthy borrowers. With years of combined lending and real estate experience, AFC Gamma’s principles are now focused on the exponential growth of the cannabis industry.

By the way, since it’s a mortgage mutual fund in this area, it’s listed in a major index. It has been “a roller coaster ride as” the first nasdaq cannabis lender. and although he knows that “there will be others… it’s always good to be the first.”

To start AFC, tannenbaum put more than $50 million of his own money to work. he essentially saw the opportunity and went for it. so it’s more than a little personal.

As for federal legislation related to the larger industry, Tannenbaum believes certain states will spend billions of dollars to support it individually. it benefits them to keep things locked up within their own borders.

Your senators know it. Furthermore, he doesn’t think Biden would support a nationwide passage anyway.

See also: ServiceNow, Inc. (NOW) Q2 2022 Earnings Call Transcript | The Motley Fool

That said, a safe pass would be especially good, he noted, despite the additional competition.

“Although we may still see some yield compression from state-owned banks entering the market, that will be offset by our borrowing capacity and borrowing costs. so we can borrow cheaper.”

however, you were right that nothing major (or minor) happened last year in this regard.

advanced floral capital gamma continued…

so how are cannabis deals financed? he asked and answered that question for me:

“You can finance it with shares, you could certainly finance it with sale-leasebacks, which has been a traditional form of financing. and now you can finance it with a loan.”

He’s not betting on any major industry moves at the federal level right away. but definitely one in the next five years. in which case,

“if you’re a borrower, why would you sign a 15-year sale and leaseback when you can borrow for 3-5 years and refinance cheaper and not be stuck with 13%-12% more escalators, than in effect is a much higher form of capital?”

Clearly, he’s not a fan or afraid of his stock market competition.

“Some of these leaseback companies boast of their average maturities of more than 15 years. well, borrowers are still at it and they say, ‘well, we don’t want to do that,’ right? “We want to control our destiny.”

Because of that dynamic, Tannenbaum and, he says, “any true industry insider” expects 15 industry winners to emerge.

“look. this is like farming, right? it’s cannabis. they’re industrial… and so you’re looking at a consolidation move over the next year or two.”

he thinks it’s “pretty exciting” to watch. but he’s also pretty busy making things happen in his own area of ​​expertise. Like the other REITs mentioned here, AFC Gamma is very careful about where it invests. at last check, it wasn’t working much or at all in california, washington, oregon, or colorado.

Instead, it’s the limited license statuses that are attractive. “We know how to secure licenses, and we think that’s really important because the supply and demand dynamics in those states are much, much better.”

much better, in fact, that he was able to initiate a second secondary offer shortly before the interview. “ it takes time to rise and scale,” she acknowledged. but she doesn’t expect it to happen any less from now on.

AFC Gamma Fast Facts

interview a cannabis reit: power reit

The last interview I will cover in this article is the most recent. I just posted it on Friday, so it’s as new as new in this regard.

so I’m giving you the one and only power reit(pw), which was my best performing pick of 2021, which was a resounding success, and probably once in a lifetime.

david lesser is the CEO of that company and he provided a very informative conversation, as expected. But before we get to that, here’s the company description.

again, according to their website, power reit:

“… owns real estate related to properties for controlled environment agriculture (greenhouses), renewable energy and transportation… in July 2019, power reit announced an expanded approach to acquisitions. In addition to its existing high-quality real estate holdings related to transportation infrastructure and alternative energy, Power Reit is expanding its focus to include agricultural holdings with a focus on… controlled environment agriculture (CEA).

“cea is an innovative method of growing plants that involves creating optimized growing environments for a given crop indoors. power reit intends to focus on cea-related real estate to grow food and cannabis.”

as the website also says, and as it reminded me less during the interview – the company actually dates back to the 1960s. so it is one to recognize and respect. and while its new broader goal is to focus on food crops, all of its transactions under this plan “to date have focused on cannabis cultivation.”

and, hey,

A pound of cannabis in the world today sells for much more than a pound of lettuce, therefore the benefits of a cannabis greenhouse in many cases may seem much better. ”

power reset continued…

As I said, lesser had some very interesting things to say, including professional details about power reit. for example:

“we remain a relatively small-cap reit. but because of that small size, the transactions that we’re doing with these very, very generous returns are really driving tremendous growth. and that’s what drove shareholder returns…and why we continue to think we have a good road ahead.

“… first of all, we are not a mortgage investment fund. we are focused on real estate ownership. And as I said, our asset class: our real focus is as a greenhouse game: as a kind of… technology game around greenhouses as an asset class. most other companies are really moving away from greenhouses because, in my opinion, they don’t seem to understand that this is the sustainable approach to growing not all crops, but certain crops.”

He sees it as a good business model, including more limited forays into outdoor farms, because greenhouses are unbeatable for growing “indoor” crops. they cost significantly less to build and operate than more robust facilities…starting with the comparative amount of energy they consume.

And, as with the other cannabis games mentioned above, it has a growth plan that is consistently succeeding:

We just announced about a week ago that we had contracted debt service, which I think is really a game changer for our cost of capital relative to the competition.

“We contracted a line of credit that will grant us debt at an interest rate of 5.52%. we can retire that debt over a one-year draw period and then have it fully amortized over the next five years. it’s a good chunk of debt that allows us to finance additional growth right in front of us.”

At this rate, it’s on track to “point to some guidance” for annual funds from operations (ffo) of $4.60-$5.20 per share.

Power REIT Fast Facts

in conclusion…

now, reit or not, it’s not paying dividends right now. It’s definitely more of a growth play than a revenue play at the moment.

Obviously, it was worth the ireit on alpha members investing last year anyway. but keep that in mind, and the rating, if you want to participate this year.

but this is what I really want to take away from the interview: a more informed opinion on the federal legislation on cannabis.

“My personal feeling is that we are a long way from federal legalization. no matter how many times people talk about it, and people talk in the industry about how they’re pushing it, the reality is that in order to declassify… a drug from a class 1 drug, it has to go through a significant amount of study to prove that the benefits – the medical benefits – outweigh the risks. and that work just hasn’t been done. again, although I’m not an expert, I think legalization is a long way off.”

so there you have it: multiple and often completely contradicting viewpoints on the national state of the cannabis industry. and yet each of the aforementioned reits are optimistic about their individualized prospects within it.

again, be careful about the valuation if you are going to get involved in these assets. Top flight or not, you never want to overpay for an investment.

But with that said, I don’t think they’ll be going away anytime soon. And neither should you.

See also: The Top Female CEOs In Tech | MyWallSt Blog

Related Articles

Leave a Reply

Your email address will not be published.

Back to top button