Essential Marijuana Sellers Are a Good Business for Their Landlords

The business of marijuana growing and processing is essential, according to many state governments. That has been a boon for owners of cannabis real estate during the coronavirus pandemic.

Source: WSJ | Published on June 2, 2020

Purchasing legal marijuana at a local dispensary using my card as a method of contactless payment.

Cannabis producers cultivate the plant in warehouses and process it into pills, vape kits and dried flowers that can be rolled into marijuana joints. Medical marijuana is legal in 33 states and in the District of Columbia, while recreational pot is legal in 11 states and in the District of Columbia.

Property investors typically purchase the warehouses and dispensaries from the operators, then lease the space back.

Doctors have prescribed marijuana for pain, nausea and muscle spasms, making it an essential business alongside pharmacies and grocery stores in much of the country. More than 20 states have designated the cannabis industry to be essential, allowing medical marijuana dispensaries, and in some cases recreational facilities, to stay open during shelter-in-place orders.

“The industry has quickly gone from a designation of ‘illegal’ to ‘essential’,” said Katie Barthmaier, chief executive officer of GreenAcreage, a real-estate landlord with five facilities.

Sales of inhalable marijuana products remained strong in the first quarter, said producers such as Green Thumb Industries and Curaleaf Holdings Inc., despite heightened concern about respiratory diseases related to Covid-19.

“Have we seen flower sales decline because of Covid? No, we have not seen a material decline,” said Tom Catherwood, managing director at BTIG REITs Research, referring to the smokable part of the cannabis plant.

Innovative Industrial Properties Inc., the only publicly listed landlord in the U.S. focused on cannabis facilities, has purchased five sites totaling around $176 million since March, when the pandemic’s spread led to nationwide lockdowns. It owns 49 medical cannabis cultivation facilities and seven dispensaries in 15 states.

Shares of the San Diego-based real-estate investment trust are up 54% since mid-March, outperforming the broader FTSE Nareit All Reits Index’s 19% gain over the same period.

Innovative Industrial Properties was also one of the top performing real-estate companies last year, at one point tripling its share price from the start of 2019.

GreenAcreage said it stopped acquisitions of warehouses when the pandemic started in March. The company worried that dispensaries could be forced to close.

The New York-based company said some operators started to offer curbside pickup and delivery as demand for cannabis remained steady even after early stockpiling.

There has been strong demand in Illinois, Pennsylvania and Florida. Total sales of medical marijuana in the Sunshine State through May 22 were up around 56% from roughly the same period in 2019, according to data from Florida Office of Medical Marijuana Use.

Still, there have been weaker cannabis sales in Massachusetts and Nevada due to tighter social-distancing orders and collapsed tourism in Las Vegas. Recreational-use cannabis was designated nonessential in Massachusetts, a reminder to investors that state regulatory issues remain a risk.

What’s more, the substance is illegal under federal law. Some investors in cannabis real-estate companies prefer not to publicize their holdings while potential investors are worried about compromising their relationships with their lenders and other stakeholders.

“For these institutions, they may stay sidelined until there is significant legislative reform at the federal level, which we believe is still likely to be several years out,” said Paul Smithers, chief executive officer of Innovative Industrial Properties.

Subversive Real Estate Acquisition REIT LP, based in Beverly Hills, Calif., raised $225 million in an initial public offering on Toronto’s Neo Exchange in February.

The company’s name came from its values of subverting the status quo and “is aligned with our mandate in a cutting-edge sector,” said Richard Acosta, chief executive officer of Subversive.