Pot firms shed as­sets as fi­nance op­tions dry up

Sale-lease­back real es­tate trans­ac­tions are now a key life­line

The Peterborough Examiner - - BUSINESS - KRIS­TINE OWRAM BLOOMBERG

pot com­pa­nies are in­creas­ingly sell­ing off their real es­tate as other sources of fi­nanc­ing dry up.

With cannabis stocks down nearly 60 per cent since their highs in March, pro­duc­ers that pre­vi­ously re­lied on is­su­ing shares to raise money have been left with few al­ter­na­tives, par­tic­u­larly in the U.S. where the drug re­mains fed­er­ally il­le­gal.

Sale-lease­back trans­ac­tions have stepped in to fill the void, be­com­ing a key fi­nan­cial life­line for an in­dus­try that needs cap­i­tal to fund ex­pan­sion.

In­no­va­tive In­dus­trial Prop­er­ties Inc., the largest cannabis-fo­cused real es­tate in­vest­ment trust and the only pub­licly traded one, has done $375.6 mil­lion (U.S.) worth of deals in 2019 and the pace has picked up over the course of the year, ac­cord­ing to its chief ex­ec­u­tive of­fi­cer.

“It’s be­com­ing more and more at­trac­tive for op­er­a­tors be­cause of the scarcity of al­ter­na­tives out there,” said Paul Smithers, CEO of San Diego-based In­no­va­tive, which is more com­monly known by its stock sym­bol IIPR. “Our pipe­line has never been more vig­or­ous than it is to­day.”

With pot il­le­gal fed­er­ally in the U.S., many com­pa­nies in the in­dus­try strug­gled to find land­lords will­ing to rent space and ended up own­ing prop­erty. Now, they’re us­ing those as­sets to get cap­i­tal, par­tic­u­larly with in­vestors wary of putting their money into weed.

The le­gal mar­i­juana in­dus­try has de­vel­oped more slowly than ex­pected in both the U.S. and Canada and in­vestors have taken no­tice: in the week ended Oct. 25, cannabis com­pa­nies raised a to­tal of $26.8 mil­lion in eq­uity and debt, com­pared with $707.8 mil­lion in the same pe­riod of 2018, ac­cord­ing to Virid­ian Cap­i­tal Ad­vi­sors.

This has ben­e­fited REITs like IIPR, which owns 38 U.S. cannabis prop­er­ties to­talling 2.8 mil­lion rentable square feet. As of Oct. 30, IIPR’s yield on in­vested cap­i­tal was 13.8 per cent.

The model has also proven to be pop­u­lar with in­vestors, with IIPR’s stock up 70 per cent year-to-date com­pared with a 42 per cent de­cline in the BI Global Cannabis Com­pet­i­tive Peers in­dex.

“When we talk to in­vestors, they get com­fort that we are a real es­tate com­pany fore­most,” Smithers said in a phone in­ter­view.

“We’re not un­like a util­ity. We’re the picks and shov­els, if you will.”

To be sure, the use of sale-lease­backs, which are pop­u­lar in other in­dus­tries, could wane in pop­u­lar­ity if other fi­nanc­ing op­tions be­gin to open up. The SAFE Bank­ing Act aims to al­low banks to do busi­ness with le­gal cannabis com­pa­nies and could make it eas­ier for U.S. pot firms to raise money.

For now, the real es­tate trans-Cap­i­tal-hun­gry ac­tions are pro­vid­ing an im­me­di­ate cash in­fu­sion, and many deals are struc­tured to re­im­burse sell­ers for the cost of fu­ture im­prove­ments made to the prop­erty.

Own­ing your real es­tate is some­times not the most ideal use of cap­i­tal, said Joe Caltabi­ano, pres­i­dent of Cresco Labs Inc., which re­cently sold two Illi­nois prop­er­ties to IIPR for $32.8 mil­lion.

Other U.S. cannabis com­pa­nies have taken a dif­fer­ent ap­proach, spin­ning off their real es­tate as­sets into a REIT. MedMen En­ter­prises Inc. cre­ated Tree­house REIT in Oc­to­ber 2018 and GreenAcrea­ge Real Es­tate Corp. was formed in May to ac­quire prop­er­ties from Acreage Hold­ings Inc.

Cana­dian pot gi­ant Canopy Growth Corp. has also said it’s con­sid­er­ing a real es­tate in­vest­ment trust.

GreenAcrea­ge com­pleted a $141-mil­lion pri­vate place­ment in Au­gust and is work­ing to close trans­ac­tions with Acreage worth more than $70 mil­lion.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.