To date, the East Coast has lagged the West Coast in its marijuana policy reform. On July 1st, Massachusetts became the first state to legalise cannabis for adult recreational use. This, in my opinion, opens the door to the eventual legalisation across the entire East Coast. In particular, the state of New York! Boom.
These two marijuana stocks could really capitalise on the boom. And what a boom it will be.
A new report predicts that New York is set to grow into the second largest cannabis market in the United State behind California. The New York City Comptroller predicts the legal, adult-use marijuana market at some $3.1 billion per year in New York State, about $1.1 billion of that in New York City.
In turn, the Comptroller's Office estimates that this market could conservatively yield annual tax revenues of as much as $1.3 billion total at the State and City levels. That assumes a combination of state and local sales and excise taxes in line with what other jurisdictions have passed that could yield up to $436 million in revenues for the State, $336 million for the City, and some $570 million for localities outside of the city."
If correct, $3.1 billion in annual sales would make New York the second largest cannabis marker in the US behind California, with recreational cannabis sales expected to top $5 billion in 2019.
New York legalised medical cannabis in 2014. The program got off to a slow start mainly because medical cannabis can only be prescribed for a limited number of conditions. However, over time, the list of applicable conditions has widened substantially. This is in line with what has been seen in every state that legalised marijuana for medicinal use. And of course, medicinal marijuana has been shown to be the gateway to eventual recreational legalisation. And this seems to be playing out.
In January 2018, Governor Andrew Cuomo requested a report from the New York Department of Health on recreational cannabis that was just delivered a few weeks ago. The report concluded that "the positives outweigh the negatives."
The New York Department of Health recreational Cannabis report
"Regulation of marijuana benefits public health by enabling government oversight of the production, testing, labelling, distribution, and sale of marijuana. The creation of a regulated marijuana program would enable NYS to better control licensing, ensure quality control and consumer protection, and set age and quantity restrictions."
Following on from this, the New York Health Department recently enacted emergency measures that allow for the use of medical cannabis for conditions currently treated by opioids. Then the New York State Department of Financial Services released a report encouraging banks to do business with medical cannabis and hemp companies. And finally, on August 1, they declared there will be no further convictions for the possession of marijuana (to a point).
These signals are creating a clear message – New York's medical cannabis program is expanding rapidly and setting the stage for recreational cannabis to go legal within 18 to 24 months. If – no scratch that – when it happens, there are two companies that are very well placed to take advantage of this massive market opportunity.
The two companies you want to own to take advantage of the New York marijuana boom
The first, MedMen Enterprises (CNSX: MMEN, OTC: MMNFF), is a US (Canadian listed) cannabis company with growing operations in New York. These guys are really trying to position themselves as the market-leader in how marijuana is dispensed. They recently opened a flagship dispensary on Manhattan's Fifth Avenue, a high-traffic urban location that is one of the most exclusive and expensive in the world, and right opposite the WeWorks flagship office block. Great positioning. In addition to Manhattan, Medmen operates locations in Buffalo, Syracuse, and Lake Success.
There massive point of difference is how the store is designed and setup. Comparison to the Apple stores is both warranted and noticeable. The strains of marijuana are displayed in patented holders that allow the weed to be both magnified and smelt, in order to identify the unique terpene fragrances. Their LA store regularly has queues, that line around the block, for access.
In addition, the staff is exceptionally well trained and armed with the latest seed-to-sale software housed on iPads. The entire experience is designed to educate the consumer and create a customer loyalty environment. It's working. Make no mistake about it.
The opportunity is oh so close
Medmen just went public in early June. Since then they have not performed well, albeit in a weakened market. In truth, their IPO valuation was off the charts. $2 billion valuation on effective $9 million in annualised sales was crazy. The market agreed and the shares have been under pressure since the listing. While we still believe their valuation to be out of whack, their prospects are undeniable.
They operate a vertically integrated model that ensure quality and margin are kept up across the value chain. They have state of the art facilities in Nevada and are replicating that in New York State. Their brand is strong and they are certainly well positioned for growth in their native markets.
We are very bullish on MedMen and continue to closely monitor the stock for an entry point. If you're a long-term investor – buy and hold they call it – then the market value and current price shouldn't be of too much of an issue. These guys could well shake up to be one of the big winners in the long run.
The second company to take advantage of the New York marijuana boom
The second company poised to take advantage of the potentially giant New York market is Innovative Industrial Properties (IIPR), a US-based cannabis company with a growing presence in New York.
Innovative Industrial Properties (IIPR)
IIPR acquires or builds huge industrial cannabis greenhouses and then leases those facilities to cannabis producers. The company operates as a Real Estate Investment Trust (REIT). The big benefit to this is that by law REIT's have to pay out 90% of the profit they make. True to this, IIPR has been paying out $0.25c per quarter in dividends. This equates to around a 4% yield on the investment in dividends alone. Very attractive.
Its current portfolio includes six properties located in Arizona, Maryland, Minnesota, New York and Pennsylvania, for total rentable square footage of 700,000 that is 100% leased. Leases with growers are typically structured as long-term triple-net leases, where the tenant is responsible for all aspects and costs of the property and its operation during the lease.
Their model is very attractive as an investment as they are an "ancillary company" meaning they do not "touch the plant". For this reason, they have no threat of federal intervention from the DOJ (if this ever eventuated) and they offer a very attractive benefit to the growers.
- They have an opportunity to get their capital out of a building they own. IIPR buy the property (hence giving cash back to the grower that can be used for WC) and then lease the property back to the tenant
- They offer small to medium growers the opportunity of getting their greenhouses set up, without the massive capital costs and outlays usually associated with this. A plug-and-play solution for the cultivation companies.
Their current New York-based properties
Here is a quick rundown of IIPR's operations in New York.
- Hamptonburgh, New York
- Rentable Sq. ft: 127,000
- Type: Industrial and Greenhouse
- Percentage Leased: 100%
- Tenant: PharmCann LLC (www.pharmacann.com)
- Perth, New York
- Rentable Sq. f: 40,000
- Type: Industrial and Greenhouse
- Percentage Leased: 100%
- Tenant: Minnesota Medical Solutions, LLC (a subsidiary of Vireo Health)
IIPR has been one of the best performers in The Green Fund's Paper Portfolio and the stock price has doubled over the past 12 months. We see enormous potential for this company as the market opens up, and with it, the number of companies looking to produce and manufacture marijuana to support the demands these markets will generate.
MedMen Enterprises and Innovative Industrial Properties are very well placed to take advantage of the blossoming New York marijuana markets and will benefit greatly once the state legalises cannabis for adult recreational use. The two stocks are perfect to take advantage of this growth. We already have IIPR in the portfolio and will look to add MedMen when we beleive the entry point is right.
And they told you money doesn't grow on trees.