Thinking About Buying Marijuana Real Estate Stocks? Consider This First

By: , Contributor

Published on: Jan 24, 2020

Here are the marijuana real estate stocks that are performing the best (and the worst).

Marijuana stocks have received tremendous hype as recreational sales have become legal in some form or another across more than half of the United States. As a current or prospective real estate investor, you may be interested in investing in the greenhouses that hold marijuana. After all, with an industry as hot as the marijuana market, isn't it wise to get an early start on the greenhouses that are housing the cannabis itself?

The short answer is no. Weed stocks are among the most volatile investments on the market right now due to several unknowns in the future of legalization. As of now, marijuana has been legalized in some form in 33 states, according to the National Conference of State Legislatures. However, there is no way of knowing when marijuana will be legalized across the nation, and it could take longer than investors have the patience for.

Which marijuana real estate stocks are performing well right now?

Innovative Industrial Properties

Innovative Industrial Properties (NYSE:IIPR) is a cannabis-focused real estate investment trust (REIT) that buys facilities that grow and process marijuana. Innovative Industrial Properties then leases the facilities for 10 to 20 years on average, collects rental income, and adds annual rental increases that are typically around 3.25%.

Here's how Innovative Industrial Properties' business model works: In a sale-leaseback agreement, a company in need of funds sells a cultivation or processing asset to a property management company in return for cash. In this case, they sell the asset to Innovative Industrial Properties, which then leases the property back to the seller for an extended period of time -- usually 10 to 20 years.

In doing so, Innovative Industrial Properties reaps the rewards of rental income and passes along annual rental increases that are higher than the inflation rate. Along with modest organic growth derived from annual rental increases and property management fees that are based on these higher rental rates, Innovative Industrial has a low-cost business model with high cash flow fueled by multistate operators' inability to receive funding from banks in the United States.

Innovative Industrial Properties has been generating quarterly profits with consistency for some time now and is currently up 67%. After beginning 2019 with 11 properties, it ended the year with 46 properties spanning 14 states. Additionally, the company's average yield on its $489.3 million in invested capital is 13.6%, meaning it'll have a complete payback of its investments in just over five years.

Which marijuana real estate stocks should I avoid?

1. Aurora Cannabis

Despite being held by 523,848 users on trading app Robinhood, making it the most-held stock on the app, Aurora Cannabis (NYSE:ACB) has lost nearly 75% since hitting its annual closing high in mid-March 2019. Beyond that, Aurora Cannabis recently listed a $17 million greenhouse for sale on January 6, 2020, which implies "massive writedowns," according to an MKM Partners analyst.

2. MedMen Enterprises

After losing nearly four-fifths of its market value since January 2019, MedMen Enterprises (OTC: MMNFF) has become one of the worst pot stocks in the industry. For one thing, MedMen Enterprises spends significantly more than it makes. To put that into perspective: Its fiscal Q4 2019 revenues were $42 million, whereas its losses increased to $83 million. In addition to their financial losses, MedMen Enterprises has also experienced high executive turnover and recently suspended a $682 million PharmaCann acquisition -- which is probably for the best considering they can't afford it.

3. HEXO

Despite experiencing a closing high in April 2019, HEXO (NYSE:HEXO) had a less-than-favorable year in the subsequent months, losing more than 80%and shedding 54% of its value by the end of 2019.

Perhaps most concerning of all is that HEXO ended its most recent Q4 2019 quarter with less than CA$55 million in cash, which does not include CA$18.8 million in restricted cash. That said, HEXO did raise $25 million (in U.S. dollars) in December 2019 by selling its common stock at a substantial discount to its previous day's closing price. However, with the industry facing as many near-term challenges as it currently is, its cash position remains concerning.

Key Takeaways

When considering an investment strategy, it is always strongly advised to conduct thorough research or speak with a financial advisor. These stock predictions are merely suggestions based on each company's prior growth and setbacks and should be used in conjunction with your own research.

The marijuana real estate market has shown volatility over the past 12 months or so since cannabis is not yet fully legal in the United States. You're always advised to exercise caution when investing in the stock market, and this is particularly true for the cannabis market.

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TMFAmandaSapio has no position in any of the stocks mentioned. The Motley Fool recommends HEXO. and Innovative Industrial Properties. The Motley Fool has a disclosure policy.