Cannabis REITs are a developing trend in the cannabis industry. In a sector full to the brim with cultivators and retailers, REITs, or Real Estate Investment Trusts, offer investors a way to play the space without depending on a marijuana grower.
One of the biggest cannabis REITs at present is Innovative Industrial Properties (NYSE:IIPR). Considered the pioneer, IIPR was the first to bring the REIT model into the cannabis space. So far in 2019, IIPR stock has skyrocketed; shares currently sell for $108 USD—a 140% increase year-to-date.
So what is Innovative Industrial Properties doing that has the sector so excited? What exactly is a cannabis REIT?
What is the Cannabis REIT Business Model?
A Real Estate Investment trust raises funds from outside sources and then uses this capital to purchase cannabis facilities or property from a cannabis company. It then leases the same property back to that firm. The business model can vary, of course, but effectively, the result is the same.
There are several benefits of this model for cultivators and investors.
Looking at cultivators first, partnering with a cannabis REIT (or selling your assets to lease them again) frees up much-needed cash that otherwise would be tied up in real estate. This allows growers to focus more cash into areas that need it the most, especially in the early stages of business—such as brand and product development. After all, cannabis REITs are buying company assets worth millions of dollars. Receiving that sizeable influx of cash can help growers flourish.
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As stated, this business model will also benefit many investors and here's why: Because a cannabis REIT doesn't actually grow marijuana, it avoids much of the legal and regulatory issues that are still materializing in the space. Moreover, it is providing an important resource to the industry—cash to help fund growth. Therefore in backing these shares, investors know they are taking a piece of the cannabis pie, but have less to worry about in terms of individual operational performances, or laws and regulations that may greatly impact key revenue drivers of a standard cannabis cultivator.
Another favorable mention is that a REIT is required by law to distribute at least 90% of its taxable income to its shareholders as dividends. Further, those dividends are deductible from the REIT’s taxable income. Therefore investors can be certain to be paid out more often from this type of cannabis investment.
And according to Lexology:
"It helps that most REIT dividends qualify for a 20% deduction under the new tax law, so REIT shareholders in the highest 37% tax bracket will be taxed at a 29.6% rate on qualified REIT dividends—making REITs a more attractive investment class for many people."
The Pioneering Cannabis REIT
As this business model is new to the cannabis sector, there is only a handful of established REITs that investors should watch.
But the market pioneer, Innovative Industrial Properties, is arguably the biggest at present.
IIPR shares have skyrocketed so far this year, outperforming the broader cannabis space and, over the course of the year, has gained as much as 165%. Currently, they are selling for $106.95 USD on the NYSE.
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Due to the nature of its model, Innovative Industrial Properties has not only climbed at a highly impressive rate but has also paid out sizeable dividends to its investors. It is one of only a few cannabis stocks that has paid out to investors in this new industry.
Operational success has improved, too; the number of properties now under its control stands at 22.
Watch Out For
There is a consideration for investors regarding the REIT model. REITs generate more income by adding to their property listing. To buy more properties, the company must raise capital from somewhere because most of its profits are paid out to investors as dividends. As such, often, the solution is to issue more stocks, and if this occurs, the value of existing shareholders' position is diminished.
Baring that in mind, however, the benefits of this business model might outweigh the downside. For one, it offers investors peace of mind over a standard cultivation play. The knowledge of receiving dividends as "little but often" will be a preference for some, especially as the industry remains volatile in these early days.
What are your thoughts? Do you like the cannabis REIT model? Would you invest?
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Featured Image: DepositPhotos © violetkaipa
