You’re reading this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news. We no longer send these by email as we did in the past, but we post this and all of the newsletters on our website here.
Friends,
Last week, I pointed out how sharply Innovative Industrial Properties (NYSE: IIPR) had declined after the revelation on 12/20 that its largest tenant, PharmaCann, a private MSO, had failed to pay some of the December rents. The stock did pay its previously scheduled dividend of $1.90 per share, going ex-dividend on 12/31, but it also has dropped in price by $3.71 since the day before Christmas. The stock’s price fell 33.9% in 2024, including a very large drop in Q4 of 50.5%. There are three other cannabis REITs, and none fell by nearly as much:
From the chart above, one can see that IIPR fell more sharply than its peers in early November after the elections. In the piece last week, I conveyed that I now have a large position in my 420 Investor model portfolio in IIPR, and this remains the case (10.8% compared to a current weight in the index of 3.6%), and it is the only REIT that I include. I do follow one of the other three. The four REITs are in the index, representing 14.3% currently.
I wrote a bullish article in Seeking Alpha that was published on 12/22, and Brad Thomas, a REIT expert that I really respect, wrote a bullish piece that was published 12/26. Reading his article and the comments made on both articles as well, it seems that many investors fear that the dividend could get cut in the future. This is a risk!
The IIPR challenge is specific to IIPR, but each of the other three cannabis REITs face the same general risk of weakening MSOs, their customers. Two are mortgage REITs, and the other one is an equity REIT, like IIPR, but it is listed on the OTC, which reduces its audience. IIPR has a very concentrated tenant base, with its top 5 customers representing half its total rental revenue. NewLake Capital’s top 5 represent 65%. The two mortgage REITs have high exposure to their borrowers, with the Top 3 at Chicago Atlantic at 29% in 2023 and the Top 3 at AFC Gamma representing 57% as of Q3 in 2024.
Again, if rescheduling goes through as the DEA intends, it will wipe out 280E taxation, which will help the MSOs and, consequently, their landlords/lenders. If 280E fails to go away, I think that this will be detrimental to many of the MSOs and will pressure these REITs. The good news for them is that they can take the cultivation properties, but they may still recognize tremendous losses with an impact on their dividends.
In Q4, many of the MSOs declined by more than the REITS. Curaleaf, for example, a very large lessor of NLCP, fell 49%. I believe that IIPR, trading at a very slight premium to its tangible book value with a dividend yield in excess of 11%, looks good. This is run by a management team that has worked together for a long time and at multiple companies in several cases. The PharmaCann challenge may result in a hit, and the stock may drop further, but I think that these other companies could face challenges ahead too, especially if 280E fails to go away. I am rooting for the MSOs and for all of these REITs.
After wrapping up a horrible year for cannabis stocks, I am optimistic that things can and hopefully will get better this year. Joel and I wish all of our readers a Happy New Year!
Sincerely,
Alan
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is what we published this past week:
Exclusives
Cannabis Stocks End a Rough Year Roughly
One Part of the Cannabis Sector Rose in December
Capital Raises
Vireo Growth Raises $81 Million at $0.625 per Share
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