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Innovative Industrial Properties (NYSE: IIPR) to Benefit from New York Cannabis Legalization

Edibles on the A-Train

Written by Jeff Siegel
Posted February 8, 2017

Well, a new legalization bill has been sponsored in New York.

Check it out …

nylegal

My first thought upon looking at this is, why are people still referring to cannabis as “marihuana.” This isn’t 1936 and the government is no longer bankrolling propaganda films designed to scare you into believing that if you consume cannabis you’ll jump out of a window.

Semantics aside, if the bill were to become law, New Yorkers would be permitted to possess up to two ounces of cannabis flower without getting hassled, fined, arrested, or accidentally falling on the concrete in front of a police officer.

At the moment, New York does allow for the sale and consumption of medical cannabis, but in order to get it, you pretty much have to be dying. And then you have to jump through all kinds of hoops to get your prescription and actually buy the product.

Truth is, New York’s medical cannabis law was essentially designed to fail. But all it did was put off the inevitable while shortchanging the state by missing out on hundreds of millions of dollars in tax revenue.

Of course, as a libertarian, I find the whole notion of taxing cannabis sales just as offensive as taxing anything else. But I’m not here today to talk about my political beliefs or why taxation is theft. Instead, I’d like to take a closer look at how one stock could do quite well if that Senate bill becomes law.

Innovative Industrial Properties

The company is called Innovative Industrial Properties (NYSE: IIPR).

IIPR is a cannabis REIT that acquires specialized industrial real estate assets that are used for growing medical-use cannabis and operated by state-licensed growers.

Management focuses on properties with sophisticated technology and infrastructure to meet specific (and mandated) quality standards for medical-use cannabis. Concurrently with the company’s acquisition of these properties, it enters into leases with the state-licensed growers under long-term, triple-net lease agreements. So aside from being a REIT, the company also serves as a source of capital to these licensed cannabis growers by entering into sale-leaseback transactions with them for their specialized industrial real estate.

With these triple-net lease arrangements, the tenant is responsible for taxes, maintenance, insurance and structural repairs, as well as base rent. The lease terms are typically set at a minimum of fifteen years with renewal options exercisable by the tenant, and with contractual annual rent adjustments.

One of the advantages with IIPR is that by selling the property and building to the company, and then leasing it back from the company, growers can redeploy their proceeds into core operations, allowing them to yield a higher return than they would get if they owned the property outright.  This is a very big deal for an industry where access to conventional capital is still hard to come by.

Now last December, IIPR officially closed a sale-leaseback transaction with PharmaCann, acquiring PharmaCann's newly-constructed 127,000 square foot medical-use cannabis cultivation and processing facility in New York.

This particular lease provides for an initial base rent of $319,580 per month, subject to annual increases of the greater of 4% or 75% of the consumer price index. The lease also provides for a property management fee payable to IIPR equal to 1.5% of the then-current base rent throughout the term, and supplemental base rent for the first five years of the term at a rate of $105,477 per month.

Supplying the Demand

At the moment, PharmaCann, as well as other New York producers, are only growing enough to supply a medical cannabis program that’s quite limited in size. But if this bill were to pass, there would be a spike in demand for cannabis with a very limited supply in terms of production facilities in which to grow it.

This would result in a rush of new producers entering the space and a huge opportunity for IIPR.

Of course, IIPR isn’t confined by the borders of a New York market, but it’s established position in New York certainly gives it an advantage.

Now all we have to do is wait for the politicians in New York to get their acts together, legalize cannabis for medical purposes and adult use, and finally put an end to a prohibition that has hurt so many innocent people while siphoning the tax dollars of so many hard-working New Yorkers.

I give it no more than three years.

By 2020, cannabis will be fully legalized in the greatest city in the world. IIPR will be in the perfect position to pounce, and I’ll be enjoying a small bag of edibles on the A Train. It doesn’t get much better than that.

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