Two cannabis REITs, NewLake Capital Partners Inc. and GreenAcreage Real Estate Corp., will be merging into one. The combined firm will have $325 million in assets across nine states and 24 properties.
The business model
The combined REITs are landlords to both cannabis growing sites as well as dispensaries. Tenants include Curaleaf Holdings, Columbia Care, Cresco Labs, and Trulieve Cannabis.
As landlords, they typically buy properties from cannabis companies and then lease them back. This often happens because cannabis isn’t currently federally legal, meaning growers and stores have a tough time getting traditional bank financing.
While these landlords are landlords in the traditional sense, they are also essentially acting as bankers as well. Not only are they providing space for the cannabis companies to operate: the REITs are also essentially a source of funding growth. David Weinstein, CEO of GreenAcreage, who will be CEO of the new entity as well, explained, "This deal creates a leading player in cannabis real estate to provide capital for real estate build-out."
According to NewLake’s CEO Anthony Coniglio, who will be president and CIO of the merged entity, the industry will need upwards of $15 billion of real estate in the next five years.
As mentioned, cannabis is still federally illegal, so all growing and sales have to be done within the same state. For example, all cannabis sold in Massachusetts has to be grown and processed in Massachusetts. Legalization in more states and at the federal level will likely shift business models in turn.
Cannabis and logistics merge?
We’ve seen a lot of technology adoption in industrial warehouses during COVID, from flexible leases to automation. Will we soon see these in the cannabis real estate industry, too?
Take a look at what Bloom Automation is up to. The company has built a machine to robotically trim cannabis. While this is a highly specialized part of the process, one would expect things to continue to head in this direction as more states adopt and federal legalization gains more traction.
The Millionacres bottom line
There’s no question that Cannabis REITs have been both lucrative and hot in their short history. Innovative Industrial Properties (NYSE: IIPR), for example, had its dividend increase by 680% since the REIT's IPO up through January.
That being said, we’ll have to keep an eye on how a couple of things unfold. What happens to the industry when and if cannabis becomes federally legal? How will this impact the return profile if Cannabis REITs aren’t stepping in for bankers, and how will the returns look in a more mature industry?