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7 Reasons Why You Should Be Investing in Cannabis REITs

By Liz Brumer-Smith - Feb 5, 2022 at 7:00AM
Fresh green marijuana leaf lies atop a loose pile of hundred dollar bills.

7 Reasons Why You Should Be Investing in Cannabis REITs

Cannabis REITs are budding with opportunity

Cannabis REITs -- real estate investment trusts (REITs) that lease real estate space in the medical marijuana industry -- have become one of the most popular REITs to invest in over the past few years. Major demand and lack of alternative funding sources have created unparalleled growth in a short period of time, leading to incredible returns for investors.

If you're on the hunt for new high-growth, reliable, dividend-paying REIT stocks, here are eight reasons why you should consider investing in cannabis REITs.

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Marijuana leaves framing a U.S. flag.

1. Federal laws reduce financing options

Marijuana is still illegal on a federal level, with no signs of legalization happening anytime soon. That means each state that has approved marijuana for medical or recreational use is limited on how they can finance and grow their business.

Since banks and other lending institutions are federally regulated, marijuana operators cannot secure traditional financing -- such as a business loan or mortgage -- to purchase, improve, or expand their business or real estate. Thus, they are forced to find funding in the private market.

ALSO READ: Without Banks, Cannabis Companies Are Turning to Crypto

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An up-close view of a flowering cannabis plant growing indoors.

2. The business model works

REITs are especially appealing for existing marijuana operators because of their unique business model. Both Innovative Industrial Properties (NYSE:IIPR) and NewLake Capital Partners (OTC: NLCP), the two publicly traded cannabis REITs, use a sale-leaseback model to acquire properties.

That means the REIT buys the property and leases it back to the existing operator, giving the company the much-needed capital to grow its business further. As long as marijuana remains illegal at the federal level, sale-leaseback programs from REITs like this, in addition to private financing, are the only options for producers.

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A large road sign with an arrow and the word Legal Marijuana.

3. A lot of room to grow

Currently, only 36 states and the District of Columbia have legalized medical marijuana. That leaves a lot of room for growth. The five newest states to legalize marijuana for medical or recreational use -- Alabama, Connecticut, New Mexico, New York, and Virginia -- are expected to generate as much as $5.1 billion in annual sales after four years.

Every state added to the docket means more tax revenues for the state and room for expansion for cannabis REITs.

ALSO READ: Will the US Legalize Marijuana in 2022?

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Cannabis leaves and upward arrow on background of hundred dollar bills.

4. Marijuana sales are rising

Marijuana sales have risen steadily over the past decade. Thanks to the coronavirus pandemic, 2020 was a blockbuster year as people attempted to cope with the pandemic and spent more time at home.

Sales slumped a bit in 2021 compared to 2020, as the world slowly started to reopen, but it still hit $25 billion. Seven of the 11 states tracked in a recent report from the Marijuana Project Policy had their biggest year of marijuana tax revenues, translating into their biggest sales year on record.

Marijuana use isn't expected to decline sharply -- if anything, use will increase as it becomes more widely accessible.

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Cannabis growing in greenhouse.

5. There's little competition in the space

For an industry growing at an insane speed, you might be surprised to learn that there are only two publicly traded companies to choose from.

Innovative Industrial Properties was the first REIT to serve the cannabis industry back in 2017. It remains the largest REIT in the industry today and has an incredible track record of providing a 1,110% return on investment in just over five years.

NewLake Capital, the newest REIT on the scene, is having a rough start, falling 13% since its initial public offering (IPO) in 2021. Market volatility is definitely presenting challenges, but its size and recent performance often mean IIPR is the more appealing investment.

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The word Growth spelled out with blocks aligned on an upward-sloping line.

6. Cannabis REITs have performed incredibly well

IIPR has been the poster child for growth among REITs since its IPO. Quarter after quarter, the company beats expectations and has seen funds from operations (FFO) per share -- a metric showing the REIT's profitability -- grow 861% since it first went public.

Revenues have also increased over 1,720% during that same time -- an incredible performance by all measures.

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The word Dividends written on a blue sticky note sitting next to a roll of cash.

7. Cannabis REITs can offer reliable dividends

For REITs to benefit from certain tax advantages, including paying zero corporate tax, they are required to pay 90% of their taxable income in the form of dividends.

That equates to higher-than-average dividend returns for investors. IIPR, the first and largest cannabis REIT, has increased its dividend payout 900% since its IPO. Although today, its dividend return sits just below 3%.

ALSO READ: Love Dividends? Buy These 2 REITs

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Person smiling while looking at phone.

Cannabis REITs offer ease of investing

REITs provide everyday investors ease and access to industries and high-quality real estate properties that would otherwise be inaccessible. Since shares can be purchased through a standard brokerage account for a few hundred dollars, it's an easy way to gain exposure to this high-growth sector.

Liz Brumer-Smith owns Innovative Industrial Properties. The Motley Fool owns and recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.

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