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Innovative Industrial Properties on an Expansion Spree

03 Jan Innovative Industrial Properties on an Expansion Spree

Innovative Industrial Properties Inc (NYSE: IIPR), a Real Estate Company focussed on acquiring, developing, leasing and managing Cannabis facilities in the regulated market, announced the signing of two sale-leaseback agreements with subsidiaries of GR Companies Inc. (Grassroots) for approximately 105,000 square feet of industrial space, located in Pennsylvania and North Dakota.

Grassroots is one of the leading multi-state cannabis operators and has interests in multiple states such as Illinois, Pennsylvania, Maryland, Ohio, North Dakota, Nevada, Michigan, Oklahoma, Vermont, Connecticut and Arkansas. The deal follows close on the heel of IIP’s and Grassroots deal for licensed cannabis cultivation and processing facilities in Illinois in October 2019, making it IIP’s second and third acquisitions and leases with Grassroots.

IIP has entered into a long-term, triple-net lease agreement for each property in consideration for approximately $24.1 million (excluding transaction costs). Grassoots will use the facilities for the cultivation and processing of Cannabis, in addition to making additional tenant improvements such as 35,000 square foot redevelopment at the Pennsylvania property, for which IIP will provide aggregate reimbursement of up to approximately $13.2 million, making its total investment in the two properties an estimated $37.3 million.

Innovative Industrial Properties (NYSE: IIPR)

Market Cap: $873M; Current Share Price: 73.63 USDChart
Data by YCharts

Paul Smithers, President and Chief Executive Officer of Innovative Industrial Properties, Inc, commented

“We are thrilled to partner again with Grassroots as their real estate capital partner in Pennsylvania and North Dakota, on the heels of our transaction with Grassroots’ Illinois facility in October. Grassroots is an operator with a proven track record of bringing the highest quality products to market, resulting in tremendous brand recognition and patient and consumer loyalty. We are proud to team with them once again on these two facilities, providing an efficient capital solution for them to focus on expanding their presence in both states.”

The Global legal marijuana market is likely to reach over USD 66.3 billion by the end of 2025, as per a report by Grand View Research, Inc, growing at a CAGR of 23.9%. There is a growing acceptance of the curative effects of cannabis, with some countries such as Canada and certain states of U.S legalizing the use of Marijuana for medical and recreational use. Research has time and again shown that cannabinoids (CBD), extracted from the cannabis plant, have varied medical uses with minimal side effects, making it a sought after alternative to traditional pharmaceutical options.

The U.S, where the use of cannabis has only been legalized in 33 states for medical use and 11 states for recreational use, is one of the largest untapped markets for Marijuana, with an estimated value of over USD 11.9 billion in 2018, which is likely to grow at a CAGR of 24.1% from 2019 to 2025. There have been series of mergers and acquisitions in the Cannabis space, which have seen consolidation of major players such as Aurora Cannabis (NYSE: ACB), Canopy Growth, Curaleaf etc, in the anticipation of legalization of marijuana in the U.S by the end of 2019.

However the cultivation of cannabis, and a reliable supply and distribution chain, is still a major challenge that the industry at large is grappling with. The need of the hour is a consistently high quality product that is economical and cost-efficient to grow. An increasing number of players in the industry are realizing the importance of tailor made services that address the issues faced by cannabis cultivators, ranging from how to grow the best quality weed with limited resources such as water and land at their disposal to how to address the challenges in transportation and distribution to areas beyond their immediate markets.

The Cannabis industry is on a consolidation spree. Major players in the market are joining ranks, to gain strategic advantage, in case of legalization of Marijuana in newer markets such as U.S and Europe. They are acquiring partners with substantial cultivation capabilities, for instance Hexo Corp (NYSE: HEXO), which recently acquired Newstrike, now has a cultivation space of over 1.8 million square feet and a production capacity of 150,000 kg of cannabis annually. In addition it also has a 1 million square-foot greenhouse in Gatineau, Quebec that currently yields over 14 tonnes of cannabis annually.

Innovative Industrial Properties Inc (IIP) is one of the leading providers of real estate for regulated cannabis industry in the U.S. The Company has the distinction of being the first publicly traded cannabis real estate company on the New York Stock Exchange. The Focus of the Company is on partnering with well-capitalized, experienced medical-use cannabis operators in states with a favorable medical-use regulatory environment. The strategy of IIP revolves around acquiring and leasing back real estate locations from licensed medical-use cannabis growers, thereby acting as a source of capital.

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IIP acquires industrial and retail properties from well-capitalized state-licensed medical-use cannabis operators and then leases it back to them under long-term absolute net lease agreements. The Company works with licensed operators across product categories such as cultivation, processing, distribution and retail. They not only provide a source of capital to state-licensed operator but also enable them to focus on their core operations and enjoy a higher return on their investment.

The Company has a nationwide presence and a portfolio consisting of specialized industrial and greenhouse buildings and 100 percent leased to state-licensed medical-use cannabis growers that have robust medical-use regulatory environments. The Company’s grower network has companies such as The Pharm ( Arizona), California Portfolio (California), The Green Solution (Colorado), Trulieve (Florida), Pharmacann (Massachusetts) and Green Leaf (Pennsylvania) to name a few.

Risk Assessment

  • The Company is targeting the U. S regulated cannabis industry, specifically the medical-use cannabis sector. The industry is poised to reach $30.4 billion by 2023 and has a growing number of registered users of legalized medical cannabis. In May 2018 , there were over 2.1 million registered medical users, who were using cannabis for treatment of a wide range of medical conditions such as Cancer, HIV/AIDS, pain, seizures, multiple sclerosis, Parkinson’s and Alzheimer’s to name a few. This offers a great opportunity for the Company to cater to a growing demand for quality real estate.
  • IIP has 46 properties in 14 states, each of which is fully occupied, a testimony to the burgeoning demand for medical cannabis. The Company is one of the largest financiers for medical cannabis growers in the U.S and offers extremely attractive deals as part of its property acquisition strategy. This is one of the reasons it has managed to grow substantially as it addresses a very pressing need for capital in the industry.
  • With the passage of the Safe Banking Act and the possibility of cannabis being legalized in the U.S, there are concerns that the Company will face increased competition from traditional banks, other real estate firms and private equity players, affecting its growth and returns. However the Company will be able to leverage the vast experience of its management team and its expertise in underwriting to mitigate any negative impact.
  • The Cannabis Industry is governed by stringent regulations and is fraught with uncertainty, the Company will have to be prepared to adapt to any changes in policies or regulatory framework and capitalize on new opportunities that may arise in the future such as heavy taxation or clamp-down on operations.
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    Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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