IIPR – The Cannabis Property Mogul

Over the past 12 months, one of the best-performing stocks has been Innovative Industrial Properties.

The Real Estate Investment Trust (REIT) has been on a phenomenal run, having established themselves as an industry leader. The company's business model remains profoundly lucrative – at least for the time being.

Innovative Industrial Properties (IIPR) is a self-advised Maryland corporation focused on the acquisition, ownership and management of specialised industrial properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities. 

Innovative Industrial Properties targets medical-use cannabis facilities for acquisition, including sale-leaseback transactions, with tenants that are licensed growers. 

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. 

Innovative Industrial Properties was the first marijuana REIT listed on the NYSE — and one of the only cannabis-based companies that have been allowed such a prestigious listing. REITs, by law, have to pay at least 90% of their pre-tax income as dividends to their shareholders. That can lead to some really great returns for long-term investors. In fact, today, the only real way to invest in the marijuana industry and receive a decent dividend pay-out is to invest in a REIT. 

The Model

The company has a pretty simple premise: it acquires cannabis facilities and rents them out to licensed growers and producers. These are industrial real estate properties that can allow their tenants to meet the quality standards for medical-use cannabis and provide the space and technology needed to run a successful cannabis company.

Option 1 – Sale/Leaseback
  • Cannabis cultivator and producers fit out a warehouse/property in order to meet the licensing requirements related to the environment, security and quality controls
  • IIPR then purchases the property for cash, allowing the growers to turn a fixed asset into short term capital that can be put to better use in the business
  • IIPR enters into a minimum 15 years, triple-net lease
  • The tenant pays all of
    • Taxes
    • Maintenance
    • Insurance, and
    • The Base rent – which is annually adjusted
Cannabis Industry
Option 2 – Plug and Play
  • IIPR purchases warehouses and other dilapidated buildings
  • They fully refurbish and kit out the building to be perfectly suited for cannabis production and cultivation
  • Those companies with a legal license to produce can now move in and start producing without the heavy burden of the enormous start-up capital required to fit out a greenhouse
  • This assists the grower with their cash flow and IIPR gets a well-above market-related rental for the property

As a landlord, you can get much better returns than you can in the cannabis space. There simply aren't many other options. Unless they come up with millions in funding and have deep enough pockets to stay afloat during the years it takes to get a new facility up and running, most companies are best off paying a premium for a space that is ready to roll.

One of IIPR's clients is PharmaCann, a medical marijuana company that currently pays $319,580 a month in rent and $105,477 per month in property management fees. Earlier in the year, MedMen bought PharmaCann for a record (at that time) $650 million. 

As the demand for cannabis grows with each new state that legalises both recreational and medical cannabis, the list of prospective tenants grows for Innovative Industrial Properties. It continues to acquire new facilities to bolster its portfolio of properties.

Cannabis needs to be grown somewhere. The problem is that setting up a large-scale growing operation can cost millions and millions of dollars. Upstart companies can't always afford to do that — especially in the U.S., where financing from traditional banks can be all but impossible, and where every Multi-State Operator (MSO) is required to be vertically integrated given that cannabis cannot be transported across State lines (even from one legal state to the other)

Their acquisition strategy is to act as a source of capital to these licensed medical-use cannabis growers by acquiring and leasing back their real estate locations. 

By selling the property and building to IIPR, and then leasing it back from IIPR, growers have the opportunity to redeploy the proceeds into their company's core operation and yield a higher return than they would otherwise get from owning their own real estate.

Any of our readers should know by now that we value management more than anything else whilst the cannabis industry is still nascent in size and regulation. The chairman, Alan Gold, is a serial entrepreneur and has had success in this area before.

Mr. Gold served as chairman, chief executive officer, and president of BioMed Realty Trust, (formerly NYSE: BMR), a REIT specialising in acquiring, leasing, developing and managing laboratory and office space for the life science industry, from its inception in 2004 through the sale of the company to affiliates of Blackstone Real Estate Partners for $8 billion in January 2016.

The Portfolio

At the time of writing, IIPR owns 27 properties. These are 100% leased under long-term triple-net leases – of mostly 15 years or more when new – with licensed medical cannabis growers.

The company has been rapidly acquiring new properties in states where medical (and increasingly recreation) cannabis is legal. That would be places like Arizona, California, Colorado, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New York, Ohio, and Pennsylvania.

One of these is TreeHouse which for the moment is still private, but has plans to list in the coming months. They are almost a carbon copy of IIPR, however, their strategy is less about the cultivation and production facilities and more about the retail space, which could end up being the right model.

We say this, as once the US legalises at the Federal level, the MSOs will not have to establish cultivation and production facilities in each state, and could consolidate creating immediate economies of scale. This could severely impact the tenant pool for IIPR. 

Indeed even the upcoming SAFE Banking Act would enable cannabis companies to access banking facilities normally available to businesses and this could then be used to build out facilities at much lower expenses than via the triple-net rentals IIPR charges. Something for investors to watch closely.

Disclaimer: Past performance is not an indicator of future performance.

Financials 

Innovative Industrial Properties (IIPR) reported its FYQ2 2019 earnings in August, and the results were solid. The company reported rental revenue of $8.3 million, representing a 155% year-on-year increase, with acquisitions and leasing new properties driving this performance.

Total sales came in at $8.6 billion for Q2, representing a 160% increase over the corresponding quarter in 2018. On July 15, the company paid a quarterly dividend of $0.60 per share, up 140% year-on-year.

The hyper-growth is courtesy of $167 million in acquisitions in 2019, totaling 15 properties in six states. All of IIPR's properties are 100% leased, with weighted cash yield of 14.6%.

Earlier in the year, IIPR sold 1.6 million new shares, netting about $190 million to fund future property acquisitions.

"We do have additional capacity given the fact that we raised additional common equity to perhaps take on more debt than we have on the balance sheet right today, although our preference does lean more towards the equity side of our balance sheet."

– Alan Gold, IIPR Chairman

The beauty of the model is the fact that any capital raises are actually really beneficial to shareholders (unlike the massive dilution that shareholders of other companies experience), provided the company puts this capital to work. Based on their history this is very likely.

For investors worried about the declining cannabis prices with oversupply on the horizon, IIPR represents the best way to play the ancillary cannabis market. It's still speculative and has its risks, but for the moment (given the Federal illegality of cannabis), there is significant growth potential in its future. 

We are very bullish on IIPR and have them as a BUY recommendation, and you can view Innovative Industrial Properties' company profile here.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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