The Right REIT for Cannabis Growers

11/03/2020 5:00 am EST

Focus: REITS

Tony Sagami

Editor, Weiss Ratings LLC's Weiss Ultimate Portfolio

Legal marijuana sales were estimated to be between $10.6 and $13 billion last year and this market is projected to exceed $25 billion by 2022. Clearly, marijuana is a big growth industry and that means opportunity, asserts Tony Sagami, editor of Weiss Ultimate Portfolio.

Innovative Industrial Properties (IIPR) —one the fastest growing REITs in the world — has a simple business model: It builds and acquires cannabis production, distribution and retail properties and rents them out to licensed growers and producers.

It owns 61 properties in 16 states with 4.5 million square feet; Arizona, California, Colorado, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New York, Ohio and Pennsylvania.

IIPR is not only the largest cannabis landlord in the U.S., but it has no problem keeping its properties full. Its portfolio is 99.2% rented out with a weighted average lease term of 16.1 years.

Talk about a money machine. IIPR rents out all its properties on triple-net leases, which is where the tenant agrees to pay the property expenses such as real estate taxes, building insurance and maintenance, in addition to rent and utilities.

From 2017 to 2019, IIPR increased its funds from operation or “FFO” (the REIT equivalent of EPS) by an astonishing 312%. Its 70% profit margin is unheard of in the real estate industry and that makes it one of the most profitable REITs in the world.

Cannabis cultivators, distributors and retailers face a very real struggle to finance their businesses because of regulatory challenges. That’s where IIPR steps in.

On the surface, IIPR looks like a traditional landlord but it also provides a desperately needed source of capital to these state-licensed cannabis operators.

As a REIT, Innovative Industrial has to pay out 90% of its taxable income in dividends. IIPR pays a $1.17 per share quarterly dividend, which translates into a 3.8% dividend yield.

Lastly, I don’t expect the election to have any meaningful impact on IIPR. Both Biden and Trump have said that states should decide their own commerce laws regarding marijuana; if anything, that is a positive tailwind for the REIT.

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