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Investing in Medical Use Cannabis Facilities: A Real Estate Investor's Guide

[Updated: Mar 03, 2021 ] Apr 06, 2020 by Matthew DiLallo
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Most investors are familiar with the traditional ways to invest in real estate. Tried-and-true property classes like purchasing an income-producing office building or a multifamily unit have well-known risk and return profiles. That makes them easily understood investment opportunities for beginning investors.

However, there are many other ways to invest in real estate, including a few weirder options. One of the more unusual methods is medical-use cannabis facilities. Here's a look at this emerging property class, which overlaps the healthcare, industrial, and farmland real estate sectors.

What are medical-use cannabis facilities?

Medical use cannabis, or medical marijuana, was first legalized in California in 1996. Many other states have legalized it in the years since then, with the count currently at 33 plus the District of Columbia. They've authorized it to treat several conditions, including cancer, epilepsy, Crohn's disease, and PTSD.

The marijuana plant contains more than 100 different chemicals known as cannabinoids that each have a different effect on the body. The most widely used ones for medical purposes are Delta-9-tetrahydrocannabinol (THC) and cannabidiol (CBD).

The medical marijuana industry needs these chemicals so that they can produce drugs and other treatment options. This supply must come from state-licensed growing facilities, which often include industrial buildings and enclosed greenhouses, so they can safely grow the plants and extract the cannabinoids for medical-use cannabis companies.

How to invest in medical-use cannabis facilities

There are two ways to invest in medical-use cannabis facilities:

Direct investment in developing or acquiring a medical use cannabis facility is riskier than other commercial real estate options. An investor would need to make sure the property satisfied all the state's medical guidelines and that it had issued a license to the grower that leases the property. If the facility or tenant fails to meet a state's requirements, it could ban the facility from producing medical-use marijuana.

A real estate investor's other option is to buy a REIT focused on owning medical-use cannabis facilities. Innovation Industrial Properties (NYSE: IIPR) is the first and (currently) only publicly traded real estate company focused on the regulated U.S. cannabis industry. As of early March, the company owned 53 properties in 15 states, including those under development. It buys these properties from licensed growers and then leases them back under long-term triple net contracts. The company also signs build-to-suit agreements, where it develops facilities for licensed growers.

Those agreements provide the company with growing streams of cash flow that it uses to pay a dividend and acquire additional medical-use cannabis facilities. Innovation Industrial Properties has grown briskly in recent years. In 2019 -- its third full year as a public company -- Innovation expanded its portfolio from 11 properties in nine states to 51 in 15 states.

Those new additions boosted its adjusted funds from operations (AFFO) per share by 144%, which helped support a 122% increase in its dividend over the past year. That fast-paced profit and dividend growth are why Innovation Industrial Properties was one of the best-performing REITs last year.

While Innovation Industrial Properties is the first and only publicly traded REIT focused on medical-use cannabis facilities, others might soon follow in its footsteps. Last year, for example, GreenAcreage Real Estate Corp. completed a private placement that raised $141 million. This non-traded REIT could eventually complete an initial public offering to raise more cash so that it can pursue additional sale-leaseback and build-to-suit transactions with medical marijuana growers.

A fast-growing real estate segment

As more states legalize marijuana for medical use, it will drive the need for more growing and processing facilities. Those growers will need capital to expand, which they can get by completing sale-leaseback and build-to-suit transactions with real estate investors, including REITs such as Innovation Industrial Properties. That growth makes this a compelling sector for real estate investors seeking lots of upside potential.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.