Real estate industry veteran Alan Gold wants to make it clear that his new San Diego-based company’s mission is about the property, not the pot.
Innovative Industrial Properties Inc., which recently began trading on the New York Stock Exchange after a $67 million initial public offering of stock, is a real estate investment trust focused on legal, medical-use cannabis cultivation and processing facilities in nine states that have legalized the production and sale of marijuana for doctor-approved uses.
The REIT will be buying existing production facilities from their current licensed operators, then leasing them back to those proprietors; it is not currently interested in building new facilities on its own.
“It’s a very simple business model,” said Gold, the new company’s founder and executive chairman. “We acquire buildings, collect rents from our tenants and build value for the shareholders.”
Life Science Veteran
Its leaders say there are some parallels between the new real estate investment company and two others where Gold earlier was among the co-founders – the life-science-focused Alexandria Real Estate Equities Inc. and San Diego-based BioMed Realty Trust Inc., both now among the nation’s largest owners in that property segment.
Gold and the company’s CEO, Paul Smithers, see the new firm’s role as similar to that played by REITs that have helped nurture emerging biotech and pharmaceutical companies focused on life-saving medical breakthroughs, by allowing them to tend to their own operations rather than real estate management matters.
“Our tenants don’t want to be dealing with real estate issues,” said Smithers, an attorney who previously served as co-founder and chief legal officer of Iso Nano International LLC, a maker of advanced materials used in industries including aerospace and electronics.
In addition, Gold said the sale-leaseback arrangement gives companies in the medical-use cannabis industry a crucial influx of capital to help them maintain and expand their core businesses. He noted that many traditional lenders, such as banks, must abide by federal charters that do not allow them to participate financially in any industry not officially authorized by the U.S. government.
While many states have legalized medical-use marijuana and several, including California, have recently moved toward legalizing recreational purchases, federal law still deems any marijuana sales illegal.
Focus on Industrial Space
The new REIT’s first acquisition typifies what it will be looking for in the future. Gold’s company in December closed on a $30 million purchase and lease-back of PharmaCann LLC’s newly built, 127,000-square-foot medical-use cannabis cultivation and processing facility in New York.
Gold said the company will be scouting for future buying opportunities in New York and other states that have officially recognized the medical value of cannabis, following mounting evidence of marijuana’s effectiveness as a palliative treatment for numerous illnesses.
Those other states currently include California, Illinois, Maryland, Arizona, Washington, Nevada, Massachusetts and Oregon. Other states could provide more facility acquisition opportunities in the long run as marijuana sales are legalized.
Innovative Industrial Properties will generally be focused on buying properties operated by state-licensed growers under lease-back terms of 15 years. The leases will be what is known in the real estate industry as “triple net,” where the tenant not only pays rent, but also property taxes, insurance, maintenance and related regular costs associated with operating the building.
Gold said the company should be helped by the fact that it is the first publicly traded company of its kind, and that it is starting out with zero debt on its books; its first investors include a good balance of individual and institutional players. The company’s stock began trading on Dec. 1 at $20.25 per share and has generally remained near that level, closing Jan. 24 at $18.70.
Demand Increasing
While it is relatively uncharted territory as a real estate investment, the cannabis industry as a whole raised more than $1 billion in operating capital in North America during 2016, according to financial consulting firm Viridian Capital Advisors.
“The legalization of marijuana for recreational and medical use in several states may portend greater demand for low-quality industrial space,” the real estate research firm Green Street Advisors noted in a recent report.
Green Street analysts said California’s recently passed Proposition 64, which legalized recreational marijuana, “will likely generate incremental industrial demand” in markets such as Sacramento. Outside of California, the Denver market has seen a rising flow of capital into cannabis warehouses since recreational marijuana was legalized in 2012, though Green Street analysts said future tightening of state laws or national deregulation poses risks to that market’s industrial fundamentals.
While he will be watching for potential changes in enforcement policy by the new Trump administration, which could turn out to be business-friendly to the cannabis industry, Gold said he does not expect the company’s current operating model to be significantly impacted in the immediate future by what happens in D.C.
Familiar Company
Officially, Innovative Industrial Properties describes itself as a self-advised, Maryland-registered corporation. Smithers said the company currently employs six at its main office in Rancho Bernardo, where it is leasing space in a larger suite owned by BioMed Realty.
Gold, a 30-year real estate industry veteran, previously was chairman and CEO of BioMed, which was acquired in 2015 by New York-based Blackstone Group in a deal valued at $8 billion. Gold left BioMed in mid-2016 and started Innovative Industrial Properties in the fall of that year.
Many of the new REIT’s executives have worked with Gold for much of his career. For instance, Gary Kreitzer, the current company’s vice chairman, was a fellow executive with Gold at both Alexandria and BioMed. President and CEO Smithers previously worked with several of the new firm’s executives in his past jobs and in related real estate transactions.
