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Cannabis REITs: Weeding Out The Weak


  • Cannabis REITs - a perennial performance leader over the past half-decade - have been slammed in 2022 amid concerns over tenant financial health given the sharp re-pricing of risk and tighter financial conditions.
  • Owning the "Pharmland" - the physical real estate - had been one of the few cannabis plays that was working amid a decade-long stretch of dismal investment performance from broader cannabis ETFs.
  • Marijuana legalization has progressed at the state level, but federal legalization efforts remain stalled, a "double-edged sword" for cannabis REITs that thrive in the murky legal environment, but also need healthy operators.
  • The sale-leaseback model - whereby REITs provide financing for the facility build-outs - has come under scrutiny, but this lease format is not uncommon across the net-lease sector, and our research finds that tenant credit risks appear to be adequately considered and covered.
  • Cannabis REITs have faced remarkably few tenant non-payment issues - so admittedly the model remains somewhat untested - but we believe that the regulatory framework of limit-license states that are effectively tied to the property grants cannabis REITs significant protection that isn't fully appreciated by market participants.
  • This idea was discussed in more depth with members of my private investing community, Hoya Capital Income Builder. Learn More »

Cannabis Farm Greenhouse

kmatija/iStock via Getty Images

This is an abridged version of the full report published on Hoya Capital Income Builder Marketplace on June 19th.

REIT Rankings: Cannabis

Is the pot party over? Coming down from a seemingly never-ending 'high' since emerging onto

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This article was written by

Hoya Capital profile picture

Alex Pettee is President and Director of Research and ETFs at Hoya Capital. Hoya manages institutional and individual portfolios of publicly traded real estate securities.

Alex leads the investing group Hoya Capital Income Builder. The service features a team of analysts focusing on real income-producing asset classes that offer the opportunity for reliable income, diversification, and inflation hedging. Learn More.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of RIET, HOMZ, IIPR, AFCG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Hoya Capital Real Estate ("Hoya Capital") is a research-focused Registered Investment Advisor headquartered in Rowayton, Connecticut. Founded with a mission to make real estate more accessible to all investors, Hoya Capital specializes in managing institutional and individual portfolios of publicly traded real estate securities, focused on delivering sustainable income, diversification, and attractive total returns. A complete discussion of important disclosures is available on our website (www.HoyaCapital.com) and on Hoya Capital's Seeking Alpha Profile Page. Nothing on this site nor any published commentary by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Investing involves risk. Loss of principal is possible. Investments in companies involved in the real estate and housing industries involve unique risks, as do investments in ETFs, mutual funds, and other securities. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing. Hoya Capital, its affiliate, and/or its clients and/or its employees may hold positions in securities or funds discussed on this website and our published commentary. A complete list of holdings is available and updated at www.HoyaCapital.com.

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Comments (23)

Hoya Capital profile picture
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@Hoya Capital I am long NLCP, but there is one thing I have not figured out. Will cannabis REITs suffer when there is federal legalization, making regular financing available to the cannabis industry, and reducing the extra high rents paid to REITs for their current purchase/leasebacks?
wildpitcher profile picture
I have a speculative position in IIPR. In hindsight, I bought too high, so I'm underwater. They keep stuffing dividends into my chubby cheeks, though. And my how those dividends are growing.

I would not touch these cannabis REITs with a 30 foot pole. Once these MSOs start to go bankrupt they will not be able to continue to pay rent on their properties. The properties cannot be easily transitioned or repurposed in which case when enough of these MSO can no longer pay rent these REITs will quickly fold right behind them.
@Randol33 US MSOs can’t file for bankruptcy protection. With the REIT having legal claim on the property which is tied to the licenses, the grow facility is the lifeblood of the operation and the absolute last thing operators will stop paying if they come under pressure. While I agree these are purpose built buildings and more difficult to find alternate suitors in the event of default, the underwriting process, the state, and the proper clientele selection will reduce risk. Some bear arguments have hinged on the idea that growing weed is no different than growing tomatoes and that the likes of IIP are over paying for facilities. So either these facilities are too complex to repurpose or they are not complex enough to warrant higher prices. Wish everyone would get on the same page……..
From the chart, it looks like illicit use has remained steady, and all that the legalization has done is increase volume. My reading on the industry is that the states where it is legal are so regulatory burdensome, that illegal growers/seller still have the advantage.
@StoneSmasher there in lies the opportunity. No legal sales to almost 25B in less than 10 years with only 2/3 medical and 1/3 rec legal states. When was the last time you bought bath tub gin? This is still a nascent industry and it takes time to eradicate the black market. Took 20 years after alcohol prohibition.
Weed out the politians in the way.
@Investerlou And, while you're at it, weed out misspellings. ;-)
KostoGaNix profile picture
What is your perspective on the Blue Orca attack on IIPR?

Additionally, I wonder to what extent AFC Gamma's business model is threatened by the SAFE Banking ACT. Mr. Tannenbaum says that they will still be able to offer cheaper loans than the bank, but will this still be profitable in the long run?
Hoya Capital profile picture
@KostoGaNix I think if it was submitted to SA, the editors would have bounced it back and required more supporting evidence and a spell check.

On AFCG - If we ever do see SAFE Banking passed, I think it's far less of a potential issue for equity REITs than mortgage REITs. The sale-leaseback model should continue to be an attractive source of financing even if traditional bank lending was readily available.
@Hoya Capital True, but also common sense should tell you big banks are not going to increase their risk portfolios and jump into an industry they know little about that was formally an illicit business. The more likely scenario are lending institutions acquiring certain cannabis REITs with the proper management team who have strong capital market backgrounds along with hands on cannabis experience. REITs with expertise and broad connections to the space will be gobbled up by the big lenders to enhance their portfolios. Provides them more security in the due diligence process with a team who can properly determine secure loans within the space with the advantage of repurposing assets at a premium via default through deep industry connections. IIPR advertised this weakness in their due diligence on Parallel who represents a big chunk of their portfolio.
Thanks for your article!
I picked one stock : $AFCG.
Do you think I made a good choice ?
@Centrino Just my $0.02, but i wouldn't touch AFCG with a ten foot pole. The quality of management there is very questionable, IMO. There's just too much negative history for me to get over.
Hoya Capital profile picture
Thanks, @Centrino! We own IIPR and AFCG in the RIET High Dividend Yield Index.
@Centrino I also picked one and picked AFCG. I have a small position, about 1/3 of regular full position , while I watch to see if Tannenbaum screws it up . I will probably buy up to about 1/2 position if all goes well for the next two quarters
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