A real estate investment trust (REIT) can sometimes offer a safer way to put your money to work in an industry. Rather than directly investing in a company that produces goods, with a REIT, the business you invest in can do well as long as it continues to collect rent from its tenants.
Many marijuana producers are not profitable, which is why REITs serving the industry can be risky. And there's a new development that could make these types of investments even riskier than they already are.
The illegality of cannabis could work to tenants' advantage
A big problem with the cannabis industry today is that marijuana remains illegal at the federal level. Although dozens of states across the country permit either medical or recreational use of marijuana, without federal legalization, it still operates as an illicit industry.
One consequence is that it makes it hard to obtain banking services and explains why there have been multiple (unsuccessful) efforts to pass a banking bill so that cannabis producers don't have to hold excessive amounts of cash at their dispensaries.
Some investors might argue that stringent laws could restrict growth and hinder companies. On the flip side, a lack of regulation means that businesses simply aren't as safe as those operating in other industries. And without a legal footing to stand on, it could make cannabis REITs vulnerable to tenants that stop paying bills.
A multi-state operator tries to get out of paying rent
There's a lawsuit pending that all cannabis investors should be paying close attention to. It involves multi-state operator MedMen Enterprises (which Tilray Brands could potentially end up acquiring) and nearly $1 million in rent that the company owes to its landlord, Thor Equities.
What's concerning is that MedMen doesn't dispute that it stopped paying rent, but instead argues that, "as [Thor Equities] well knows, however, it is not entitled to judicial enforcement of the Lease and the Guaranties or the damages it seeks because the distribution and sale of marijuana and the lease of real estate for such purposes is still illegal under Federal law."
If MedMen can get out of paying all or part of the rent that it owes, that can set an incredibly dangerous precedent for other REITs within the industry.
One stock that could become even riskier than it is today as a result of this is cannabis REIT Innovative Industrial Properties (IIPR 0.14%).
IIP already has a problem tenant on its hands
In July, Innovative Industrial Properties (IIP) disclosed that a key tenant, Kings Garden, defaulted on its rent payments and property management fees. It has since filed a lawsuit against the tenant.
NYSE: IIPR
Key Data Points
The approximately $2.2 million per month in lost rent and fees from Kings Garden might not cripple IIP, which generates around $250 million annually. But in the big picture, it's a concern for investors because the current economy could put more companies under financial strain if the country enters a recession. And if MedMen obtains a favorable ruling in its lawsuit, that could embolden other cannabis producers to shirk on their rent bills to save money in an economic downturn.
Are cannabis REITs too risky to invest in?
Cannabis REITs are by no means safe investments largely because you're relying on the success of the REIT's tenants, which in many cases are businesses that lose money and are burning through cash. But if your goal is to obtain some exposure to the marijuana industry without taking on too much risk, cannabis REITs such as IIP can be suitable investments and better alternatives to producers like Canopy Growth or Tilray Brands, which are unprofitable and struggling to grow.
While IIP and similar investments don't make for safe stocks to own in general, they can still be good buys relative to other cannabis stocks -- as long as you're OK with the risk. At 21 times earnings, IIP trades at an earnings multiple that is more or less in line with the S&P 500 average of 19. Plus it offers an attractive dividend yield of around 7%.
