Digging Deep Into The Weeds

fAs I discuss in my new book, The Intelligent REIT Investor Guide (available on Amazon.com), cannabis REITs—those that rent out land and buildings to marijuanaproducers—operate within a very complicated field.

However, thanks in part to four cannabis-focused REITs (three of which arepublic and one is private) and the strong capital flows carrying them along, thatcomplexity risk is being reduced. As I explain in Intelligent REIT Investor, a largemajority of the U.S. population now has some access to marijuana. Most, if notall, the places that have decriminalized it are implementing robust regulatedprograms to ensure product quality and safety, proper distribution andresponsible consumption.

Federal regulations have affected formal research into cannabis’therapeutic possibilities. But state-run studies show it could beworth examining the medical use of marijuana for diseases and conditions such as:

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Real Estate Investor

u HIV/AIDs u PTSDu Migraines u Lupus u General pain u Nausea (general and cancer- specific)u Seizures u Muscle spasmsu Multiple sclerosis u Arthritisu Parkinson’s disease u Alzheimer’su Terminal illness

At this time, cannabis continues to be federally classified as a Schedule I controlledsubstance under the Controlled Substances Act of 1970. That means possessing,cultivating, producing and distributing remains technically illegal on a national level.

Several bills have been introduced in Congress to change the classification of cannabis,at least to some degree. Financial regulations concerning cannabis are also being debated.

If the bills are passed, these measures would grant states the right to developtheir own programs (which they already are, just with bothersome restrictions). Butnone have managed to gain enough support yet, which is why federal and state lawsare so varied right now.

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ELECTION TO INAUGURATION PERFORMANCE

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Regulation uncertainty is also part of why the cannabis real estate market is so highlyfragmented. While that does present challenges for three related publicly traded REITs—Innovative Industrial (IIPR), Power REIT (PW) and AFC Gamma (AFCG)—it also providesenormous room to grow.

Plenty Of Opinions To Go Around

Of these three companies, Innovative Industrial is the only pure-play cannabis REIT.Founded in 2016 by REIT veteran Alan Gold, the company has since created a portfolio ofmore than five million rentable square feet spanning 16 states. Opinions vary about thelegalization of marijuana. On the anti-legalization side, objections include concernthat without proper precautions the country will turn into one unproductiveentity, and worry about the long-term personal effects of smoking pot, such ascausing or accelerating existing neurological issues.

Marijuana has also long-since been accused of being a gateway drug thatencourages people to try harder, more damaging and illegal substances. These areall valid arguments that should be properly explored.

One-Month Price Comparison Of Cannabis REITs

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Brad Thomas is the editor of the ForbesReal Estate Investor and the editor-at-large of The Property ChronicleNorth America. He has more than30 years of experience incommercial real estate andis a frequent contributor onForbes.com and Seeking Alpha.He has made appearances in Forbes,Kiplinger's, U.S. News & World Report, Money,NPR, Institutional Investor, GlobeStreet and

is a frequent guest speaker at NewYork University, Cornell University

and Georgetown University. He isalso the author of two booksand h i s t h i rd book , TheIntelligent REIT Investor, will be

available in the summer of 2021.He is currently the CEO of Wide

Moat Research, an equity researchfirm that delivers event analysis, stock ideas,and research for its customers and clients.

You have most likely heard these objections before, but the following is alesser-known take. According to Vox, a left-leaning publication, “Opponents oflegalization worry that fully allowing recreational marijuana use would make potfar too accessible and, as a result, expand its use and misuse. The major concernis that letting for-profit businesses—‘Big Marijuana’—market and sell cannabis maylead them to market aggressively to heavy pot users who may have a drugproblem. This is similar to what has happened in the alcohol and tobaccoindustries, where companies make much of their profits from users with seriousaddiction issues. Among alcohol users, for instance, the top [10%] of usersconsume, on average, more than 10 drinks each day.”

I want to mention that in my opinion Vox has a bad habit of playing fast and loosewith statistics. It cherry-picks information for its largely Millennial audience, too oftenpromoting what it thinks will get page views rather than providing the full story.

That said, it’s only fair to add the anti-big business platform to the reasonssome people are against marijuana. Perhaps you share these views. In which case,I respect your opinions and understand if it means you’re not comfortableinvesting in stocks like Innovative Industrial Properties.

Publicly traded stocks like this one—or those associated with tobacco, alcoholor even prisons—are called “sin stocks” because they capitalize on vices,something many investors prefer to avoid.

About The Editor

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Even if you chose not to invest in sin stocks, I hope you will still find valuein this article as it’s good to get another perspective, even if only tostrengthen your own.

More Neutral Views Of The DebateI can’t say that I’m completely pro cannabis legalization myself, but I have seenmany compelling arguments for it. As I mentioned, some studies show that it canbe very effective in treating asthma, physical pain, inflammatory bowel diseases,nausea, anxiety and depression.

According to the very well-respectedMayo Clinic, “Studies report thatmedical cannabis has possible benefitsfor several conditions. State laws varyin which conditions qualify people fortreatment with medical marijuana…Depending on the state, you may qualifyfor treatment with medical marijuana ifyou meet certain requirements andhave a qualifying condition.”

Along with the ones listed earlier,this includes Alzheimer’s disease, LouGehrig’s disease (amyotrophic lateralsclerosis or ALS), HIV/AIDs, cancer and glaucoma.

Medical marijuana could also beprescribed for treating any discomfort or pain associated with the numerousmedical conditions. For instance, the American Cancer Society (ACS) notes itspotential benefits in “reducing nausea and vomiting linked to chemotherapy.”

As far as I know, nobody is saying it’s a cancer cure. Although last decadethere were plenty of pharmaceutical companies experimenting with thatidea. Perhaps the scientific curiosity behind it at least lives on today,considering how the ACS adds that it “… supports the need for morescientific research on cannabinoids for cancer patients and recognizes theneed for better and more effective therapies that can overcome the often-debilitating side effects of cancer and its treatment.

Studies showthat cannabis canbe very effective intreating asthma,inflammatorybowel diseases,nausea and anxiety

“

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The Society also believes that the classification of marijuana as a Schedule 1controlled substance by the U.S. Drug Enforcement administration imposesnumerous conditions on researchers and deters scientific study of cannabinoids.”

Which brings us to the real politics of the issue. The Society’s final thoughton the matter is that it hasn’t “taken a position on legalization of marijuanafor medical purposes” one way or the other. Again, it wants to see more

research done before it willweigh in. For the record, so doesthe Mayo Clinic.

But, again, the federalgovernment already has taken aposition. To the U.S. DrugEnforcement Agency (DEA),marijuana is an illegal substancethat can’t be prescribed,possessed or sold. Not in anyform or any strain. The onlything it will allow is CBD(cannabidiol), a substancederived from the hemp plant.

The CDC cites marijuana as“the most commonly used illegaldrug” in the country. Not that it’sdoing anything to enforce the lawsthat make the plant legal on astate-by-state level. It’s lettingthose governments make up theirown mind, essentially flouting Uncle Sam as they see fit.

So far, as I understand it, the federal government hasn’t taken any steps tostop states from voting to legalize marijuana. Instead, the medical andrecreational weed industries are flourishing in large portions of the country, soldby legitimate businesses bringing in taxpayer funding to their local governments.

The medicaland recreationalweed industries areflourishing in largeportions of the U.S.,sold by legitimatebusinesses bringingin taxpayer fundingto their local governments

“

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Innovative Industrial Properties Innovative Industrial provides real estate capital for the medical-use cannabisindustry. And while it’s very new to the scene, it’s got a lot going for it. (I’ll resistthe urge to make a “high” joke.)

Founded in December 2016, the business is proud to claim the title of “firstpublicly traded company on the New York Stock Exchange… to provide real estatecapital to the medical-use cannabis industry.” That gives it both a niche and afirst-in edge.

IIPR buys specialized industrial real estate assets for the regulated medical-usecannabis industry. The company states that it, “believes that its sale-leasebackand other real estate solutions offer an attractive alternative to state-licensedmedical-cannabis operators that have limited access to traditional financingalternatives.”

These limitations are thanks to the remaining federal laws against marijuanaand the continuing stigma surrounding the plant. Banks oftentimes don’t wantanything to do with marijuana farmers for fear of government reprisal, meaningthe farmers themselves have to get creative.

While Innovative Industrial purchases land outright when the price is right, itssale-leaseback methodology gives state-licensed growers instant “loans,” as it

The Pharm in Willcox, Arizona. Source: innovativeindustrialproperties.com

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were. That is capital it can deploy intoother assets that ultimately expand itsability to succeed. With that goal inmind (and its own profit, of course),Innovative Industrial has acquired andintends to continue to purchasemedical-use cannabis facilities instates that permit medical-usecannabis operations.

IIPR is confident that its businessmodel is built on a concretefoundation and likes to highlight aQuinnipiac University 2019 poll thatfound a whopping 93% of surveyedadults support doctor-prescribedadult usage.

No doubt, it’s data like that behindthe ArcView Group’s projection that the state-regulated cannabis industry in theU.S. was worth $12.4 billion in 2019 and are estimated to be worth $34 billion by2025. IIPR is well positioned to take a noteworthy portion of that. IIPR knows itsindustry, and its industry knows the company.

Two months ago, I interviewed the company’s CEO, Paul Smithers, and its CFO,Catherine Hastings. When I asked about demand, Smithers took the opportunity tobrag a little about his “strong tenant base.” He understandably wasn’t shy aboutadmitting that he was “really, really excited” about the way things are going: “Mostof the leading MSOs [multistate operations] in the country are our tenants. And asthey come back for expansion capital, they come back to us as their capitalpartner. So, we’re seeing quite a bit of demand for our capital from the existingportfolio basis to expand.”

That’s why it isn’t uncommon to see a REIT headline about a new property IIPRbought—complete with a long-term tenant already attached to it. One suchexample this year is the 329,000 square-foot property in Pittsburgh,Pennsylvania, purchased for about $41.8 million. As soon as that transactionwas complete, it also had a long-term, triple-net master lease signed and

We’re see-ing quite a bit ofdemand for ourcapital from theexisting portfoliobasis to expand...they come back tous as their partner

“

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sealed with a subsidiary of one of the largest privately held multistate cannabisoperators in the country.It’s not usual for REITs to be growth investments. ButInnovative Industrial is managing that title quite nicely and it has since itdebuted. Those who bought IIPR when it went public now have a 1,061% four-year total return, or 73.8% annualized.

The majority of these returns did not come from dividends. As I said, IIPR ismuch more of a growth stock than a value stock. But it does have a dividend yieldof 2.8%. Innovative Industrial Properties started paying a dividend in mid-2017 at$0.15 per share per quarter. Since then, the payout has been bumped up 11 times,increasing to $1.40 per share annually. During my interview with Hastings she said,“we’re so appreciative of that dividend. We’re very proud of the fact that we’vebeen able to provide that to our common [shareholders].” I’m sure its shareholdersare pleased, too.

IIPR: Price Correlated With Fundamentals

Source: FastGraphs

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Admittedly, when it comes to stock growth and dividend growth, I obviouslycan’t predict how much longer this pace is going to persist, but I do believe itwill keep growing, and at a worthwhile pace. Analysts are expecting it to grow35% this year and in 2022. Its price to adjusted funds from operations (AFFO)multiple is 34x.

The REIT recently achieved an 81 (out of 100) Relative Strength Rating fromInvestor’s Business Daily. IBD indicates that companies that can pass a score of 80on its scale tend to outperform from there.

As I stated earlier, I understand if some of you want to pass on this month’spick for ethical reasons. But for me, I see many reasons to own this medicalmarijuana-specific landlord—more than enough to tip my scales in its favor.

Buy Innovative Industrial Property (IIPR) at up to $220.00 per share. That’s a 5%discount based on the recent price of $208.50 per share. IIPR maintains a Buyrating because we believe this stock could return at least 25% annually based onthe strong catalysts supporting the cannabis sector.

SWAN PortfolioNow that we’ve looked at the new addition of Innovative Industrial Properties tothe portfolio, let’s turn to our already existing positions in the Sleep Well At NightPortfolio, starting with last month’s featured REIT. Note: payout ratios listed hereare based on AFFO; those in REIT Lab are based on FFO.

Omega Healthcare Investors (OHI)Omega’s balance sheet is in the best shape ever and the payout ratio is also muchsafer (90.7% based on AFFO, versus 100% in 2018). The company will be reportingearnings on Monday, August 2 after the market closes with a conference call tofollow the next day. In the meantime, it’s declared a cash dividend of $0.67 pershare, payable on August 13 to shareholders on record as of August 2.

Buy up to $40.00 per share. Shares now trading at $37.50 with a dividend yield of 7.2%.

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W. P. Carey (WPC)WPC recently closed on three industrial investments valued at $137 millionconsisting of five operationally critical properties net leased to industry-leadingtenants thereby taking investment volume year-to-date to about $900 million witha weighted-average lease term of 22 years.

WPC is rated a hold. Shares now trading at $80.57 with a dividend yield of 5.2%. Buy on a pullback below $80.00 per share.

Postal Realty (PSTL)This USPS landlord is now part of both the Russel 2000 and Russell 3000 indices.Postal Realty raised its dividend 8.5% to $0.2225 per share, with a payable date ofAugust 27 to shareholders on record as of August 13.

In addition, the business update the REIT provided early last month includedsome very positive news, including collecting 100% of its rents in the secondquarter and successfully acquiring 71 properties for around $30 million, minusclosing costs. Thanks to one fee simple property in Hawaii, it now owns and/ormanages buildings in all 50 states.

Buy up to $20.00 per share. Shares now trade at $19.43 with a dividend yield of 4.5%.

Realty Income (O) Speculation and analysis about Realty Income’s pending acquisition of Vereit (VER)continues, as does the merger itself.

In mid-July the REIT declared its 613th consecutive common stock monthlydividend. And it likely has plenty more updates to share on August 2, when itreports its second-quarter 2021 earnings.

Early last month, Realty closed on a 9.2 million share underwritten publicoffering of its common stock, which raised about $594 million before taking intoaccount any offering expenses. There was also a debut green bond offering around

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the same time. The public proffering was for £400 million of 1.125% seniorunsecured notes due July 13, 2027 and £350 million of 1.750% senior unsecurednotes due July 13, 2033.

Realty Income is rated a hold. Shares are now trading at $71.04 with a dividendyield of 4.0%. Buy on a pullback below $70.00 per share.

Healthcare Trust of America (HTA)The REIT announced investment activities of more than $617 million, whichincludes about $257 million of current investments and a development pipeline ofabout $360 million. CEO Scott Peters said, “Now more than ever, our focus is onutilizing HTA’s unique capabilities and positioning to grow our portfolio andincrease concentration in our key markets. HTA declared a $0.32 per sharedividend that is well covered (payout ratio is 84.4% based on AFFO).

Buy up to $29.50. Shares are now trading at $28.66 with a dividend yield of 3.8%.

Medical Properties (MPW) The company announced in July that it has entered into definitive agreements toacquire five general acute care hospitals from Tenet Healthcare for about $900million. While this adds more tenant concentration risk to the portfolio, we believethe pure play hospital REIT is well-positioned to continue to grow its dividend. Thepayout ratio (based on AFFO) is 91%.

Buy up to $22.75. Shares are now trading at $20.86 per share with a dividend yieldof 5.4%.

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Iron Mountain (IRM)Iron Mountain will report its second-quarter results on August 5. We’re sure it willdiscuss its much-talked-about agreement to purchase a data center near theFrankfurt Airport in Germany for €76 million. Iron Mountain has been our top pick inthe SWAN portfolio, returning more than 30% since we added shares February 26.

IRM is rated a hold with a dividend yield of 5.6%. Buy on a pullback below $38.00.

City Office REIT (CIO)City Office owns high-quality office properties in 18-hour cities and as we suspected,the company has performed extremely well as a result of the migration to states likeFlorida, Texas, Arizona and California. Shares have returned more than 28% since wefirst purchased shares in the REIT on March 26. The company collected more than99% of first-quarter 2021 contractual base rent and we expect similar results for thesecond quarter.  CIO will release its second-quarter financial results on August 5.

Buy up to $14.00. Shares are now trading at $12.95 with a dividend yield of 4.6%.

Equity Comm. Conv. Pref. Shares Series D (EQC-D) We sold out of this position in July.

New Residential Investment (NRZ-B) NRZ is a hold. Buy on a pullback below $24.50.

“SWAN PORTFOLIO

Position Ticker DescriptionReference

DateReference

PriceCumulative Dividends

Dividend Yield

Recent Price

Return Since

Buy Rating Recommendation

Realty Income O Net lease REIT 1/6/2021 $59.65 $2.34 4.0% $71.04 21.4% Hold Buy up to $70.00Healthcare Trust of America HTA Healthcare REIT 1/6/2021 $26.92 $3.57 3.8% $28.66 10.0% Buy Buy up to $29.50Medical Properties Trust MPW Healthcare REIT 1/28/2021 $20.65 $2.72 5.4% $20.86 3.8% Buy Buy up to $22.75New Residential Investment NRZ-B Preferred 2/26/2021 $23.23 $3.84 7.0% $25.14 12.1% Hold Buy up $24.50Iron Mountain IRM Diversified REIT 2/26/2021 $34.60 $3.58 5.6% $43.92 30.5% Hold Buy up to $38.00City O"ce CIO O"ce REIT 3/26/2021 $10.32 $2.90 4.6% $12.95 28.4% Buy Buy up to $13.50Postal Realty Trust PSTL Net lease REIT 4/28/2021 $19.39 $1.13 4.5% $19.43 1.3% Buy Buy up to $20.00W.P. Carey WPC Net lease REIT 5/28/2021 $74.38 $1.41 5.2% $80.57 9.7% Hold Buy up to $80.00Omega Healthcare OHI Healthcare REIT 6/28/2021 $36.35 † 7.2% $37.50 3.2% Buy Buy up to $40.00Innovative Industrial Properties IIPR Diversified REIT 7/27/2021 $210.86 † 2.7% $210.86 NA Buy Buy up to $220.00

Prices as of July 27, 2021. *Returns include dividends. † No dividends accumulated yet as positions have been open for less than 45 days

PREFERRED PICK UPDATE

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GLOSSARYAdjusted Funds From Operations (AFFO):A measure of a real estate company's cashflow generated by operations that tries tobetter evaluate a REIT’s real situation thanfunds from operations (FFO) can. AFFO iscalculated by taking FFO (defined in itsown entry) and subtracting normalizedrecurring expenditures that a REITcapitalizes and amortizes that arenecessary to maintain its properties andrevenue stream. This can include leasingcommissions, tenant improvementallowances, new paint, carpeting, etc. AFFOalso subtracts “straight-lined” rents fromrevenue, depreciation and development-related expenditures.

Another name for this general assessmentis cash available for distribution (CAD) orfunds available for distribution (FAD). Allthree are cash-based evaluations of recurringearnings after debt services and regularcapital reserves are taken into account.Therefore, they’re very useful in determining if a REIT can cover its dividend.

Capitalization Rate: A property’s netoperating income according to its purchaseprice. As a general rule, high cap rates indicatehigher returns and greater perceived risk.

Carrying Costs: Expenses such as propertytaxes, interest and leasing costs attachedto assets under development.

Funds From Operations (FFO): The mostaccepted measure of REIT operatingperformance, it is typically calculated asnet income plus real estate depreciationand amortization minus net income gainson real estate plus net income losses onreal estate plus or minus adjustments fornon-controlling partnerships plusimpairments, all according to generallyaccepted accounting principles (GAAP).

Net Asset Value (NAV): The market value ofa company's properties and other assetsminus the market value of all its liabilitiesand obligations.

Net Operating Income (NOI): A popularmeasurement of a REIT’s income that iscalculated by taking property-derived grossincome (mostly from rent) minus operatingexpenses such as property taxes, propertyinsurance, maintenance expenditures andutilities. NOI does not account for depreciation,income tax or financing expenses.

Triple Net Lease: A lease in which thetenant, rather than the owner, isresponsible for operating expenses,insurance premiums and property taxes—an arrangement that is often applied toindustrial and retail property rentals.

Source: Wells Fargo Research

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Forbes Real Estate Investor TermsSome of you have asked about terms usedthroughout the newsletter so we include asummary of definitions that we hope youfind helpful. You might not find every wordor reference used in each issue, but the following will help you better understandthe fundamentals of this advisory.

Buy: A prospective company’s market pricemust be at least 5% below our Fair ValuePrice (also our Target Price) to be considered abuy. While we may like a company’s fundamentals and prospects for profitability,we will not issue a buy rating unless it is atleast within our price target.

Hold: A stock that is worth holding onto butcurrently does not merit buying additionalshares or initial purchase.

Sell: We do not have many sell ratings, but ifwe do include one, it means the company isgrossly overpriced, the fundamentals arepoor or a combination of both.

Trim: A call to sell a portion of your position in aparticular stock if it has become somewhatpricey, and we want to lock in certain levels ofsure-thing profits.

IQ Score: Stands for intelligent quality and isour 0-100 based quality scoring model. TheIQ model considers dozens of data points toderive a single easy to comprehend number.

An IQ Score above 90 indicates an extremelyhigh-quality company. REITs with IQ scoresbelow 50 are more susceptible to price anddividend changes.

SALSA: Stands for “safe and lasting seekingalpha.” It is our term for A REIT that is a promising investment but is not safe enough to be considered a SWAN.

SWAN: Stands for “sleep well at night,” whichis our way of describing a blue-chip invest-ment. For a company to be labeled a SWAN,it must meet certain tests of quality, including dividend safety, conservative debt metrics and diversification.

“If you were todistil the secret of soundinvestment into threewords…we venture themotto, margin ofsafety.”

“- Benjamin Graham in

The Intelligent Investor