Lone U.S. Cannabis REIT Trounces Peers in Legal Gray Area 

(Bloomberg) -- From the outside, the row of nondescript buildings in Hamptonburgh in upstate New York looks like any other U.S. warehouse complex. Inside, row after row of budding cannabis plants grow under bright lights and hundreds of security cameras.

The allure -- and potential -- of the marijuana industry has transformed the landlord, Innovative Industrial Properties Inc. into the best-performing U.S. real estate trust in the past 12 months. Shares rose as much as 5.3 percent Thursday in New York.

Innovative, America’s only publicly traded cannabis REIT, owns properties in eight states, where its tenants produce cannabis products. That makes it a high-reward, high-risk business -- for the same reason.

Marijuana is classified as a Schedule I controlled substance by the federal government, the same as heroin, though it’s legal under state law everywhere Innovative operates. That often means growers can’t find space with regular landlords, so Innovative, with little competition, can charge higher rents.

“The interest keeps improving over time but we’re still technically breaking federal law,” Catherine Hastings, Innovative’s chief financial officer, said in an interview. “There’s a lot of institutional investors, when looking at their risk criteria, that are still hesitant to invest even though we’re on the New York Stock Exchange.”

None of that has deterred investors. Innovative has returned 117 percent in the last 12 months. It yields an average of 15.7 percent across its nine properties, according to a regulatory filing. And the San Diego-based company just had its fourth funding round in October, including its initial public offering, raising $119.6 million, with the bulk of that coming from retail investors.

Lone U.S. Cannabis REIT Trounces Peers in Legal Gray Area 

Innovative is in a category all its own -- it’s an industrial REIT -- exempt from paying taxes as long as it passes most of its profits on to shareholders -- that is also the only NYSE-listed REIT in the cannabis business.

Yet its regulatory filings are filled with the kind of risk warnings that would give pause to even the boldest investors. The company tells investors that the U.S. Justice Department could decide to go after cannabis-related businesses, or the Internal Revenue Service could question its REIT status, since the company hasn’t requested and doesn’t intend to request a ruling from the IRS on its REIT status, the company said in a filing.

Sessions Resigns

On Wednesday, the risks faced by Innovative grew a little more opaque. U.S. Attorney General Jeff Sessions resigned. Under Sessions -- who once said “good people don’t smoke marijuana” -- the Justice Department reversed a policy that made enforcement of pot laws a low priority. Sessions gave U.S. attorneys discretion on whether to go after medical marijuana producers. Pot stocks, already bolstered by wins in the midterm elections, rallied on Sessions’s departure.

President Trump installed Matt Whitaker, Sessions’s chief of staff, as acting attorney general -- an official hardly considered weed-friendly. A former U.S. Attorney for the Southern District of Iowa, Whitaker cited his success “reducing the availability of meth, cocaine, and marijuana in our communities” in a resignation letter to President Barack Obama in 2009.

Yet for all those concerns, Innovative is also managing to help other businesses thrive.

Financing Troubles

For Vireo Health, a medical marijuana producer that operates out of an Innovative facility in Johnstown, New York, the company solved its financing difficulties.

“It’s not as if we could go into a commercial bank and get a mortgage on manufacturing facilities,” said Ari Hoffnung, Vireo Health’s chief executive. “Cannabis companies have to finance long-term assets with cash and that’s difficult and challenging for any business.”

The Vireo facility, on the site of the former Tryon Residential Center for Boys, which closed in 2010, is about 200 miles north of New York City. Innovative’s properties are also located in Arizona, Massachusetts, Maryland, Minnesota, Michigan, Colorado and Pennsylvania and it’s looking to enter California.

Michigan Referendum

On Tuesday, voters in Michigan, where Innovative is developing a facility for producer Green Peak Innovations, approved marijuana for recreational use. When Greek Peak hosted a job fair in October, it drew more than 500 applicants.

PharmaCann, which runs the 127,000-square-foot Hamptonburgh facility, said it spent $30 million to set up its business and comply with New York’s regulations.

Lone U.S. Cannabis REIT Trounces Peers in Legal Gray Area 

Working with Innovative “allowed us to take that $30 million and recruit our director of research and development, to outfit the facility with equipment and develop processes that New York state accepts,” said Jeremy Unruh, PharmaCann’s director of public and regulatory affairs.

For now, Innovative’s investors are more focused on the company’s rewards than its risks.

“Given where traditional industrial properties trade today, which is let’s call it a third of that, it seems like the risk adjusted return is pretty attractive,” said Dirk Aulabaugh, managing director of Green Street Advisors. “You’re taking more risk and you’re earning a return that would be commensurate with that risk."

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