Modern Industrial Properties (NYSE:IIPR) carved out for itself a singular alternative within the marijuana trade: Loaning pot firms cash in alternate for taking on administration of their actual property by way of sale-leaseback preparations.
The real estate investment trust (REIT) has accomplished for hashish what equally located firms have accomplished for residential housing, workplace house, retail, and even healthcare. But Modern Industrial’s service was much more important to the trade as a result of banks loaning cash to pot shares is presently unlawful.
But it isn’t all blue skies and, um, inexperienced grass for the REIT. This is why there’s really a bearish case for Modern Industrial Properties alongside the bull thesis.
Picture supply: Getty Photos.
Bear case: Competitors might be coming
Keith Speights: Let me first acknowledge that I am a bull in bear’s clothes with regards to Modern Industrial Properties. I personally personal the inventory and have loved nice returns from it. I nonetheless view it as a great pick to buy. Nevertheless, I do suppose there’s a strong bear case to be made towards IIP.
The largest menace for the hashish REIT is that competitors might be coming in a significant method. Certain, IIP has rivals already. However the potential of federal hashish reform might open the door to far more intense competitors.
A technique this might occur is thru modifications to federal banking legal guidelines. At the moment, banks are leery of offering providers to hashish operators due to the restrictive rules. This makes IIP’s actual property capital an particularly engaging different for hashish firms needing capital. But when federal legal guidelines are revised, we might see many hashish operators flip to banks as an alternative of IIP.
It is also doable that federal decriminalization of marijuana might spur extra REITs to enter the market. I believe that some gamers which have been reluctant to leap into the fast-growing hashish trade with marijuana unlawful on the federal stage might change their tune if the legal guidelines are modified.
IIP inventory trades at practically 40 instances anticipated earnings. That is a premium valuation that assumes continued sturdy development. But when competitors heats up, the corporate’s development might be in jeopardy — and the high-flying inventory might lose its momentum.
Picture supply: Getty Photos.
Bull case: Pot shares will nonetheless want entry to more cash
Rich Duprey: I do not disagree with my colleague Keith {that a} strong bear case may be made for marijuana REIT Industrial Modern Properties, and I agree that of all of the dangers it faces, federal legalization of cannabis might be the largest.
But since we’re just about on the identical web page with each the bull and bear arguments, let’s dig a bit deeper into the bearish bugaboo and why buyers needn’t be too involved with legalization or decriminalization.
As my good friend notes, as a result of U.S. banks are presently prohibited from loaning cash to marijuana stocks due to pot’s classification as a managed harmful substance, lifting that stigma might see the spigot of money from conventional monetary establishments turned large open. Since hashish firms flip to Modern Industrial for the funds wanted to finance their development, a wave of rivals throwing cash at them might dent the REIT’s development.
Nevertheless it will not. The instance I like to make use of is the on line casino trade, which has full access to financing from banks and different lending establishments, but nonetheless turns to gaming-focused REITs like Vici Properties, Gaming & Leisure Properties, and MGM Progress Properties for cash.
Why? As a result of casinos, like marijuana growers, aren’t within the enterprise of being actual property moguls; as an alternative, they need to run playing homes. In the identical method, pot shares do not need to be within the enterprise of proudly owning and working the actual property related to their cultivation and processing amenities, however would favor preserving their consideration on what they know finest, producing their branded strains of marijuana.
As the first and foremost REIT targeting marijuana, Modern Industrial has established relationships with most of the largest multistate operators (MSOs) within the trade, and they’re going to proceed to return for extra offers sooner or later.
Furthermore, smaller hashish gamers will not have the ability to get all the cash they want from conventional lenders, and they’re going to flip to the REIT for his or her monetary wants past what a financial institution may give them.
Modern Industrial owns 76 properties across 19 states, equal to some 7.5 million sq. ft, 100% of which is leased and which has a mean lease time period of 16.7 years. So even when legalization probably would trigger the REIT’s enterprise to change into unwound, it will nonetheless have a few years of income streams forward of it.
This text represents the opinion of the author, who might disagree with the “official” suggestion place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even one in every of our personal — helps us all suppose critically about investing and make selections that assist us change into smarter, happier, and richer.
