It’s a mere week out from Election Day.
And one of the less-covered topics that will be on ballots is legalized marijuana.
So, today, I thought it would be prudent to look at cannabis real estate investment trusts (REITs). Or, put more simply, marijuana-specific landlords.
We’ll look at what they do… how they do it… and the investment implications if that’s “your thing.”
For the record, I do understand the subject is controversial. Moreover, I respect if you’d prefer to stay away from it as an investment.
Honestly, from a personal standpoint, I’m not sure how I feel about cannabis legalization either. Despite what the advocates would lead you to believe, it’s highly addictive (especially by today’s strands) and does act as a gateway drug.
At the same time, fighting the illegal cannabis trade is a losing proposition, just like alcohol was during prohibition.
It’s that very uncertainty that keeps me writing about cannabis REITs. That and how interesting the field is with equally intriguing profit potential.
Perhaps the most important reason why I bring it up again today, however, comes down to relevance. Like it or not, marijuana legalization is in our faces and on our ballots every election cycle.
This time around, Nebraska, North Dakota, South Dakota, and Florida voters will be voting about it.
Incidentally, Massachusetts – which already allows recreational marijuana – is voting on psychedelics now… perhaps a strong “slippery slope” argument against cannabis. And, perhaps, another REIT sector in the making.
Until then, here’s what you need to know about the current most controversial landlord type you can choose – or choose not – to buy.
Here’s How Cannabis REITs Got Started
The history of legalized cannabis in the U.S. dates back to 1996 with California’s Compassionate Use Act. That opened the door to doctor-prescribed usage, or medical marijuana.
It was a very big deal at the time since the federal government very clearly labeled any kind of marijuana as a Schedule 1 drug under the Controlled Substances Act of 1970. Uncle Sam allowed for some legal research done on cannabis, but that was it.
Yet the feds did nothing when California decided to step out of line those 28 years ago. And they’ve done nothing against the subsequent states that followed since.
As of October 2024, over a quarter of U.S. states have authorized cannabis to some degree.
Twenty-four let adult residents use cannabis for any reason, while another 14 give doctors the right to prescribe it. Just don’t try to take any onboard a flight.
You risk federal jail time that way.
I have to stress that strange situation because it’s the very premise on which cannabis REITs are built. Because while a business might be legitimate in a state’s eyes…
Banks and other traditional lenders aren’t buying. They don’t want to have anything to do with marijuana until Federal law gives the all-clear.
And since that hasn’t happened yet – more about that in a minute – that puts weed growers in a financial bind on where to access cash and other financial services.
Cannabis REITs can come to their rescue, however, by buying marijuana-suitable land and then renting it out to growers and manufacturers. This is most often through sale-leaseback deals, where they’ll buy the land from a grower who wants to keep growing there.
This gives the original owner an instant infusion of cash and the REIT an instant renter. No advertising necessary.
Better yet, for the landlord, these contracts are almost always triple-net in nature. That means the renter pays for structural repairs, ongoing maintenance, taxes, and insurance.
They also pay higher rent in this case. Since marijuana growers have such a short list of financiers to turn to, they’re willing to pay higher costs to those that are available.
There’s a proper business balance here, of course. Cannabis REITs don’t want to financially overwhelm their clients; they want to keep them in business to pay rent for years to come.
But once that balance is found, there’s a lot of money to be made. Under the right conditions, of course.
The Current Downsides and Future Upsides of Cannabis REITs
Cannabis REITs were flying high for several years, including, and perhaps especially, Innovative Industrial Properties (IIPR).
The first and only one of its kind listed on the New York Stock Exchange, it made its market debut in late 2016 at under $17 per share. And while it did next to nothing for the next year or so…
The stock went on to hit a high of almost $280 by early November 2021 as marijuana legislation efforts really sped up state by state. The commodity was in demand, and investors rewarded it handsomely for that increase.
Until they realized the ramifications.
Put simply, much of the price plunge shown above is due to an oversaturated market. Demand for marijuana definitely has skyrocketed.
But so have the number of businesses interested in providing it.
While banks are still staying away, so many other players now want a piece of the pie, from growers and manufacturers to shops. What was once an easy sell with a limited product is now something anyone can access from any number of sources.
That has hurt cannabis growers and, therefore, cannabis landlords as well. And while savvy REITs can and do navigate that crowded landscape every day, it comes with consequences…
Including tenants who just can’t hack it.
Another area of financial concern here is the possibility of federal marijuana laws actually passing. If that happened, marijuana REITs would face much greater competition in their current sale-leaseback tactics, to say the least.
Though, on that note, I will point out that legislation never gets anywhere in Congress. Some members like talking about it every few years to gin up voter enthusiasm.
But that’s about it.
Now, if Trump wins, that could change. Robert F. Kennedy Jr. will almost certainly be part of his administration, and he’s very behind the cannabis movement.
Harris – even though she prosecuted plenty of marijuana cases during her time as California district attorney – has also come out in favor of legal cannabis.
However, it’s still ultimately up to Congress to get something passed. Which I’m not even a little confident about anymore.
I also think it’s worth pointing out Grand View Research’s report on the global legal marijuana market from January… and how it’s expected to grow to $102.24 billion by 2030.
“The market is expected to expand at a [compound annual growth rate] of 25.7% from 2024 to 2030,” it writes, thanks to an:
… increase in [the] rate of legalization of marijuana for medicinal and adult-use/recreational marijuana, growing adoption of these products for the treatment of chronic ailments, and rise in a number of new product launches…
No matter your feelings about the product itself, the investment implications are intriguing.
A well-placed, well-managed cannabis REIT should be able to take advantage of that kind of growth. And that’s why we’ll continue to track the sector on behalf of subscribers.
Regards,
Brad Thomas
Editor, Wide Moat Daily