By Andrew R. Lines, MAI, Principal, CohnReznick
The second in a series of CohnReznick interviews with companies working to address the cannabis industry's lack of traditional financing sources.
Given the scarcity and high cost of capital for cannabis operators, Innovative Industrial Properties Inc (NYSE: IIPR) stands out among the few debt-based options in the cannabis credit desert. With 25 acquisitions in the last three years that have garnered the real estate investment trust (REIT) more than 1.9 million square feet of cultivation space, IIP is one of the few financing options to offer operators a quick injection of cash without requiring any equity in return.
Q: You have a group with a history of working together in a sophisticated regulatory environment. Tell us a bit about that?
Smithers: Most of the IIP team comes from Biomed Realty, which was formerly a NYSE-listed life sciences REIT. It was taken private by Blackstone in early 2016. After Blackstone's acquisition of Biomed Realty, the team began exploring opportunities for a company exclusively focused on the medical-use cannabis industry. We were looking to capitalize on the rapidly shifting regulatory environment, and popular opinion – as well as the high-demand barrier to entry – and scarcity of capital. We got the team together, and went public in December 2016.
Q: Right now, you are on record of having total real estate assets of $332 million. With such significant market share, how do you think about your competition?
Smithers: We're certainly not the only option, but we think we're the best option. We get many calls from potential tenants who want to know about our sale-leaseback program. When they seek other options, they find that other capital sources want an equity position in return. Before you know it, these growers are giving away a big chunk of their company. When they do an analysis, they discover that our program is a much better option for them.
Q: So, assuming there are still major challenges in the banking industry for the near term, do you expect a lot of deals to be available to you?
Smithers: I look at our pipeline, and it's never been stronger. People ask us all the time about what happens when cannabis is deregulated and all the banking institutions come in. We expect to see some cap-rate compression, but we will be uniquely positioned to take advantage of that. Right now, we have no mortgage debt. So, if and when there is a deregulation, we'll be able to take advantage of that. And more importantly, our view is that we're not going to see any significant deregulation movement for the next two to four years. And that gives us a long runway to continue with our sale-leaseback program.
Q: Your company is mainly focused on cultivation centers, as opposed to dispensaries or labs. Will that continue to be your philosophy?
Smithers: It's been our market to date. But this market is rapidly changing, so we're looking at other opportunities as well. Some portfolio-type opportunities have come to us, and those do include some retail dispensaries. So, if we see an opportunity that we think makes sense for a group of retail assets, we'd certainly take a look at that. We're not limited just to cultivation facilities.
Q: Are there certain states you lean toward because the states have manifested certain regulations in terms of agribusiness?
Smithers: In this industry, we favor more regulation. I know that sounds counterintuitive to where you want to be in business. But in this case, it's very important. The single most important asset growers have is their license to do business. Each state has a regulatory program in place, and that includes a long list of what to do and what not to do. The states have regular inspections, they have surprise inspections. And if there is a problem, that puts the license at risk.
Q: I understand you just closed on a new facility in Michigan. Tell us about it.
Smithers: Yes: Emerald Growth Partners. It's a great company. Its CEO, Randall Buchman, has been a medical grower since 2009. Randall was on the [Michigan] Marijuana Advisory Panel. So, they are well positioned in Michigan. Marijuana Business Fact Book gave Michigan an "A" for business opportunity, in part because it's got the second-largest patient base in the nation, as well as the new plan for adult use. So, we think Michigan is a really exciting opportunity.
Q: What was IIPR's reaction to the new Illinois bill legalizing recreational use? You already have one facility here, right?
Smithers: We still focus on the medical cannabis market, but we understand that the trend is certainly for states to develop – along with a medical program – a recreational program. And we welcome that. We want our growers to succeed in their market. If that means that they choose to, along with their medical license, seek out a recreational grow license, there is nothing we do to prohibit that. So, with Governor Pritzker's [support] in the Illinois market for a recreational program, we think it can only be a positive for our existing growers there. We are very excited to see how the Illinois program rolls out, since it is the first program to be developed legislatively at the inception. We are hopeful that some of the bumps other state rollouts have experienced can be avoided.
Q: Your stock has skyrocketed since 2016. What's the key to your success?
Smithers: I think that the business has done well because we have a pretty simple business plan, and (most importantly) we've been able to execute on it. And when we tell our investors that we'll be able to place capital within a 6- to 9-month timeframe, and we'll be able to get yields in the 13-15% range, we've been able to do that. We were fortunate to get the NYSE listing when we did. And I think that gives a lot of comfort to investors. They like the liquidity, and they like the fact that we're on the NYSE as opposed to some other index in the states or in Canada.
- The lack of traditional bank financing continues to be a major challenge for the industry. This has led several operators to explore other financing options.
- IPP offers a sale-leaseback program, which provides state-licensed operators with capital by acquiring and leasing back their capital without giving up equity.
- The heavily regulated nature of the industry is seen as a positive for IPP, because in most cases the actual license is the most valuable asset of the operator.
- Michigan and Illinois are two attractive markets, due to their strong medical patient bases and momentum behind legalization of recreational use.
Check back for the third interview in this series focusing on new trends in the cannabis finance market.
For more information, contact CohnReznick.com.
This content has been prepared for informational purposes, is general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without first obtaining professional advice specific to, among other things, your individual facts, circumstances, and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees, and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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