While publicly-traded Innovative Industrial Properties wasn’t the first Real Estate Investment Trust (REIT) focused on the cannabis industry, it was the first to go public and remains the only one at this time. The company conducted an IPO in late November 2017 at $20 per share and listed on the New York Stock Exchange with the symbol “IIPR”, and it traded below that price for more than a year. The IPO itself, while not particularly successful given that the company fell far short of its goals, was truly a milestone for the cannabis industry, and, fifteen months later, IIPR looks to be on track to grow its portfolio of cannabis cultivation and production properties.
Why a Cannabis REIT?
Due to federal illegality, cannabis operators struggle with access to capital and are typically not able to borrow money from banks or other lenders. For cultivators, the cost of acquiring a facility are a substantial upfront investment, and leasing facilities can be challenging and risky. The REIT structure allows a third-party to own the real estate and improvements and lease them back to the operator with a long-term agreement in a tax-efficient manner.
The rates at which these sale and leaseback transactions in the cannabis industry are financed far exceeds the rates typically available in other industries. REITs focused on cannabis are able to earn high rates of return and offer their investors some diversification.
A Rough IPO
IIPR announced its pending IPO in October 2016, intending to sell 8.75 million shares at $20 per share in a deal underwritten by Ladenburg Thalmann, which was later joined by Compass Point Research and Trading , Aegis and National Securities Corporation. The background of management was one of the key aspects of the offering, as Executive Chairman Alan Gold had experienced success with two specialty REITs in the healthcare space, including Alexandria Real Estate Equities and BioMed Realty, which had been acquired earlier in the year for $7 billion.
In advance of the IPO, the company had entered into a definitive agreement to purchase a 127K sq. ft. facility in New York owned by PharmaCann for $30 million, or approximately 19% of the expected net proceeds from the IPO. It had also suggested that it had over $88 million of potential deals in the review stage.
Instead of selling 8.75 million shares, as planned, the company ended up selling 3.35 million shares, raising net proceeds of about $61 million, which meant that the initial property represented almost 50% of the company’s assets, well above its guidelines for 30% maximum exposure to any single borrower or 25% to any single asset. Additionally, insiders gave up all of their founder shares in order to make the IPO work.
The IPO was poorly received, selling off quickly and never trading above the IPO price of $20 in the first year: