Real estate investors who want to get in on the cannabis growing boom currently only have one easily accessible option: to invest in industrial REIT Innovative Industrial Properties (NYSE: IIPR). However, that's about to change, as a new real estate investment trust (REIT) focused on the sector plans to go public later this month. Here's a look at the latest entry in this fast-growing market.
Subverting the usual path to market
Usually, REITs go public via an initial public offering (IPO). However, this new REIT plans to take a unique path to become publicly traded. Currently known as Inception REIT, the company is taking part in a nearly $183 million transaction to turn a special-purpose acquisition company (SPAC) called Subversive Real Estate Acquisition REIT (OTC: SBVRF) into a publicly traded REIT. It's the first instance of a SPAC converting into a public REIT.
The qualifying transaction will see the SPAC-turned-REIT acquire 10 properties with 690,000 square feet of gross leasable area for $97.4 million. It will also acquire or originate five first-lien mortgages secured by properties with 810,000 square feet of gross leasable area for $85.4 million. The SPAC expects to close this transaction October 30.
Meanwhile, it has entered into binding agreements to acquire two more properties with 40,000 square feet for $17.9 million, which should close during the fourth quarter. The pro forma portfolio will consist of 81.2% industrial properties, 11% retail locations, and the remaining 7.8% a hybrid of the two. Eight of the properties are in California, two in Florida, and one each in Nevada, Arizona, Maryland, Michigan, Ohio, Pennsylvania, and Washington state.
An income and growth REIT
That initial portfolio will provide the new REIT with steady cash flow, backed by long-term triple net leases and mortgage agreements. The REIT plans to pay out a meaningful portion of that cash flow via a monthly dividend, which should have an initial yield of 7.5%. That payout stands out in the REIT sector, as it will be one of the few paid monthly. Meanwhile, the yield will be well above the current average of 4.2%, making it quite attractive to income-seeking investors.
Meanwhile, the new REIT has a "robust pipeline, including asset purchase options," according to executive chairman Michael Auerbach. It currently has three options and an estimated $500 million of total potential acquisitions in the pipeline. Longer term, it sees the estimated property value of U.S. cannabis real estate reaching $30 billion by 2030, which should drive additional sale-leaseback acquisition opportunities.
Future deals should enable the REIT to grow its cash flow and dividend. That's been the case for Innovative Industrial Properties, as it has completed a steady diet of acquisitions since going public, including eight properties worth $191.5 million during the second quarter. That growth has allowed the REIT to boost its dividend by 50% over the past year. It has also enabled it to generate superior total returns of more than 660% since its IPO in late 2016, blowing past the S&P 500's 68% total return during that time frame.
An intriguing new option for REIT investors
When Subversive formally converts into a REIT later this month, it will offer real estate investors another way to invest in the fast-growing cannabis sector. On top of that, it will provide income investors with a new monthly dividend option. Those characteristics make this REIT look quite attractive, as that combo could enable it to join Innovative Industrial Properties in producing market-smashing total returns.