Editors’ Note: This is the transcript version of the podcast we posted on July 6. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast embedded below, if you need any clarification. Enjoy!
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Rena Sherbill: Hello again, everybody and welcome back to the show. It is always great to have you listening. This week is no different. Super excited to bring you our guest today, Brad Thomas, REIT expert extraordinaire. He runs a marketplace service on Seeking Alpha called iREIT on Alpha.
For readers on Seeking Alpha, you probably know Brad already, for followers of REITs you probably know Brad already. I thought he was the perfect person to bring on to talk about cannabis REITs. Whether it’s a good play to get a deep dive on NYSE:IIPR, I know a lot of people, analysts even talking about IIPR. Don’t necessarily understand all the components because they don’t have a background in REITs. Brad certainly has that — brings a lot of insightful considerations into the space and this lane of the cannabis sector.
And as we navigate this, every have ever evolving world, and as we navigate this cannabis sector that, a lot of people still have faith in the MSOs. Some still have faith in the smaller players. But as Julian Lin spoke about, when he’s been on the past couple of times, there’s a certain benefit to getting into the REIT space. And Brad talks about that and whether cannabis investors should be looking into that. We talk about all the cannabis REIT players, we focus strongly on IIPR and NewLake Capital (OTCQX:NLCP), but we also get into AFC Gamma (NASDAQ:AFCG), Power REIT (NYSE:PW). So I hope you get a lot of edifying insights from this conversation. I know I did. Hope you enjoy it.
Brad, welcome to the Cannabis Investing Podcast. We’ve been in conversation for many years in Seeking Alpha. But it’s great to get you on the podcast.
Brad Thomas: It’s great to be here. And I really enjoy the relationship with Seeking Alpha. So it’s an honor.
RS: Yeah. It’s a mutual admiration. So we’re happy to have you. Thanks for joining us.
So you run a marketplace service on Seeking Alpha called iREIT on Alpha, you are a REIT expert. So what better person to have on the show to do a deep dive on cannabis REITs than you? So if you want to give the audience a little bit of background of how you got into covering the space and kind of maybe your general thoughts on it broadly, if you want?
BT: Sure. Well, we didn’t really pick up coverage on the cannabis sector until maybe three years ago that we’ve now — the sector has grown so rapidly. We’ve actually created our own property sector category. Not — it’s no longer diversified. It’s part of the what we call a cannabis real estate sector. And of course, there was one name that we started covering first called Innovative Industrial Properties. I’m sure we’ll talk about that here later, IIPR. They were the first mover. So they have that first mover advantage. And they’re also New York Stock Exchange listed.
And then you had several other cannabis REITs, who have entered the market both on the equity REIT side, which is where IIPR is as well, and also in the mortgage REITs side. So it’s definitely been interesting to cover this. And it’s certainly been a rollercoaster ride. So you definitely have to buckle up, if you’re going to invest in this sector, but it’s certainly interesting. And we’re fairly bullish overall with regard to cannabis these days.
So looking forward to chatting with you about some of the — about this — about the topic here.
RS: Yeah, definitely. So we had Julian Lin on a couple of times talking about NLCP, specifically, but also talking about how REITs are a nice way to kind of get into the cannabis space right now. Because, the whole market is down, and this is a nice way to get some income while you’re waiting for maybe the next catalyst to hit maybe that’s legislation, maybe that’s a thinking. But kind of a while you wait type of investment. How do you think about why maybe cannabis investors specifically or investors in general should be looking at cannabis REITs?
BT: Sure, well, Julian’s right. It’s definitely a great opportunity to invest in cannabis real estate or cannabis REITs. Really the overlying, I guess headwind with this sector is the fact that there’s no federal legalization. And so that has created the opportunity set for REITs to go out and do sell leasebacks, in other words, lease properties from cannabis operators who can utilize those funds to grow their cannabis businesses?
So in other words, there aren’t any federal banks Bank of America, Wells Fargo go down the list that will lend to these cannabis operators. So they are looking for real estate options to utilize the capital to grow the company. Obviously a big part of the whole cannabis industry is real estate. Without the real estate, there is no ability to manufacture a lot of the product and distribute the product.
So real REITs are really a perfect setup for that. And again, it’s really been interesting to watch the state — the state level, the states — number of states to get have grown and grown. I think Rhode Island was the last state it picked up a couple of weeks ago. And even in South Carolina, we don’t have cannabis yet, but we probably will at some point. So I think there are now maybe 35 or 36 states that allow some form of cannabis operations. And that’s that list is growing.
So you see the states are continuing to add volume for these cannabis operators or territories. I should say. Whereas there’s still this overhang with the federalization and I think a big part of that has to do with — what is going to happen when and if these federal laws take place. And that’s the mystery that I think everyone’s trying to find out.
We’ve examined this topic in very granular detail, spoken with a number of the CEOs, in fact, all of the CEOs of every — of all the four publicly traded cannabis REITs. We have frequent interviews with them. I have one last week with IIPR CEO and CFO really trying to understand that big overhang out there because that really is what’s causing the share prices to fall this year, like we’ve seen so far.
I mean, we’ve seen IIPR is down about 55% year-to-date, AFC Gamma’s down around 32% year-to-date, NewLake Capital is down around 35%, year-to-date, and Power REIT which again is a nanocap, very smallcap company, they’re down at 1% year-to-date. And they have their own problems outside with federalization. But all of those have — have certainly suffered this year.
RS: Yeah. I mean, like the sector at large. I wanted to ask like about IIPR. What are your thoughts? It’s the REIT that everybody knew before they knew what a REIT was probably. And it was doing so fantastically for a while. How do you think about that REIT specifically? It’s kind of like I would say, the big brother in the space or big sister in the space. How do you think about that REIT in particular?
BT: Well, I mean, look, it’s a growth story. And I think for all of these cannabis REITs it’s definitely a growth story. And again, Julian’s right, there’s definitely an income play. These yields are up there now, given the depressed pricing. But the real story here is the growth that has generated these companies. So I appears again, first mover advantage, but they have some of the highest quality operators, which is really important, and they also have some of the highest quality real estate. So it’s important to understand that — and just because you’re a cannabis REIT, you got to understand exactly what are the drivers of that real estate.
So with IIPR specifically, this company is more of an — they fit more closer into the industrial real estate realm. I’ve actually visited a property several weeks ago, I was out in San Diego, attending a conference and I went out and looked at took a day and went and toured a property that is owned by IIPR, of course leased to multiple of their operators there.
And it was really an interesting to see, because I wanted to see the quality that real estate, as an investor in IIPR, full disclosure I am. I wanted to see where’s my — where’s my shareholder capital going into? What exactly are these significant allowances that are going into these properties? We know that there’s enormous costs related to heating in air systems and electrical and lighting and fertilization.
But I wanted to see that firsthand, because I envision — what I envisioned before I got there was a big warehouse, kind of like a Prologis, which is one of the peers PLD. Big warehouse that was maybe 150,000-200,000-300,000 square feet of open space. That’s not what I saw. First thing I saw is, when I went through I had to go through security. I haven’t had to do that with many other properties. So it’s a very secure building. I had to go through a guard gate to get in, give them a driver’s license. So that was interesting.
When I got in there. I walked around and had a tour of the property, but it’s not wide open space. There’s a number of sections that are sectioned out for their operations. For example, they have various staging rooms where they grow the cannabis and the reason — and they’re 5,000 square feet in each of those rooms. And you can see all the plants growing, but they stage those plants to grow at different times. And they do that for risk mitigation factors, because if there’s a plant crop that’s maybe has some, it’s not growing and there’s some type of germ or infection or whatever in the plant, it doesn’t affect all of their other plants in the property.
So that was really interesting. But I could see all of the properties as a developer for 30 years of my life. I know what up fits are. And I’ve built a lot of buildings. And so I could see that the cost that goes into these properties. And it’s pretty massive. And so these are built really customized for these operators, they are extremely mission critical for these operators.
But here’s the most important thing, the takeaway here is they have to have these licenses to operate. And these licenses are attached to these buildings and these building addresses. So arguably, there is value to having these licenses. And if there’s an operator that say, does not perform well in that property, for whatever reason, it could be mismanagement, or what have you, then the next operator can step back in that license is already in place, because that license is really designed with the space requirements and the upfit and all that money that goes in that property are correlated to the license.
This is very similar to another sector that we cover in the gaming of casinos space, where we also see that licenses actually have a moat advantage for these real estate owners of casinos. And we see the same thing in the cannabis sector.
So that’s really an interesting point. And certainly there’s value that can be now abstracted from those properties that IIPR owns.
Now, that is — again, IIPR is on the higher end of the quality spectrum. If you go down to the lower end of the quality spectrum in real estate cannabis, you have greenhouses. Now, I’m not as bullish in the greenhouse space. And I’ll tell you why, because those buildings, first of all, they’re not as mission critical. Many of them are located in tertiary markets, places that it would be hard for me to travel to, like outside of San Diego. And so the replacement value of those properties are not nearly as high as you would have in the IPR portfolio. So we definitely feel like in terms of kind of the blue chips within the cannabis real estate sector, you definitely are looking at IIPR as the top quality cannabis REIT.
RS: You talked a little bit about the licenses and the tenants that are in these — that are leasing — that are taking these leases. What happens if the company goes under? What happens to the value of those leases — those licenses? What — how is the REIT protected from a company going under or are they?
BT: Yeah. Let me tell you another thing, too. And this is — I can answer that question. But first, I found something else interesting, I found out is that again, there’s no federalization. So, we deal with bankruptcy all the time in real estate. We’ve seen it a lot in retail, and we’re going to see a lot more of it in retail. Companies just go bankrupt, we have these federal laws that protect really the customer, the company from their creditors. But you don’t have that in cannabis.
So in other words — and you got to put your arms around this to think about this is that the operator cannot file bankruptcy. There’s no bankruptcy laws protect him. So that’s actually a landlord benefit. Because typically in a bankruptcy, the bankruptcy trustee can extend those kickout times and, and make those tenants have to — landlords have to wait longer and longer and longer to either evict the tenant and replace it with a new tenant. So you don’t have that with the cannabis space. Because again, there’s no federal laws that will protect the tenant. And that’s an interesting, really interesting point to think about going forward.
We haven’t seen with IIPR any defaults yet. Last time we checked and I spoke with the management team last week, they collected 100% of their rent even through the pandemic. So I’ve got a pretty good record for mitigating that risk. Now, certainly, there are going to be operators that fail. And there’ll be times when there’ll be some issues. Again, it could be mismanagement, it could be too much leverage, whatever the case is.
But again, when those companies have problems that landlord can swiftly, get the tenant out of the property and replace it with a new company, new operator. And again, they got — already got the space built out, it’s already got the licenses in place. So again, that’s what I’m referring to is that competitive advantage that the landlord has, because it already has that license in place, specifically customized for that real estate facility.
And, and part of that licensing is they only allow you to have so much of square footage of actually growing space or selling space. And so those licenses are already in place. So that’s really, I think, a really critical part to this, with IIPR. And again, I’ve got — we speak with this management team regularly. And again, this is our — one of our high conviction picks. So I’m really pretty deep into this, pretty deep in the weeds, I guess, pun intended.
But the management team really has done a good job, a great job of vetting these operators. And, again they’re not — nobody’s going to be perfect. I’m sure there’ll be a point in time where there’ll be operators that aren’t paying and they’ll have some problem tenants. But as of now they aren’t — they’re continuing to diversify, which obviously mitigates that risk as well. So there’s not as much concentration with one operator. So again, I feel like with IIPR, this is like the textbook kind of value investor pick because the earnings growth has been extremely extraordinary.
When the company went public, and I’ll just kind of give you some statistics and I’m going to use the AFFO, adjusted funds from operations earnings metric. But between 2017 and 2018, IIPR generated 100% annualized AFFO per share, between 2018 and 2019, they generated 144% of annualized growth, between 2019 and 2020 it was 53% growth and from 2020 to 2021 in a pandemic year, I might add, it generated — company generated 33% AFFO per share growth. 2021-2022, analyst estimates are 30% growth.
Now, this is where we kind of get to a point where what’s going to happen next? Now, we do rely on analysts’ estimates and we also rely on our own estimates. In terms of analysts’ estimates, IIPR is forecasted to grow between 2022 and 2023 by 19%, so they’re not going to grow as much and a lot of these analysts are already building into their models the potential for federalization. The other thing to consider with IIPR is cost of capital, that’s important for not only this REIT, but all REITs in general.
So — but keep in mind, IIPR has one of the most lowest levered balance sheets in the REIT sector, something like 12% to 13% debt to equity on their balance sheet. I think — and it’s probably maybe Public Storage might be the only other REIT has lower leverage. And the reason they do is of course, they have all these preferred. So this is one of the most lowest levered balance sheets.
Obviously, what’s impacting them is their equity cost of capital which is around right now about 7%-6.9% on their AFFO, multiple or equity multiple. So they have an elevated cost of capital, that they can still continue to grow, they transact and this goes for — applies to all of the equity REITs. They transact around 12% — 11% or 12%. In other words, their cash on cash or what we call — referred to as the cap rate on the property is around 12%.
Now, what we expect and many analysts are expecting is that number is going to go down to some number, lower number because when federalization does exist, there will be banks. There’ll be public investors who will be able to utilize public capital to access the operators. And they’ll be other sources of capital. So the competitive landscape will be much more for IIPR.
Now that’s a negative, but let me point out the positives what happens in the what ifs. What happens when and if federalization occurs? First of all, it’s going to provide much more transparency for the operators. I would argue there will actually be publicly traded cannabis operators at that point, which means they’ll have better cost of capital. There’ll be more efficient business models, they’ll make more money because they’ll have that lower cost of capital. That will also mean that the quality of IIPR’s real estate should be better because their operators are better. So their values should — the property value should be enhanced. So I think that transparency is going to really be meaningful.
The other part of it, and this is the last point I want to make here about IIPR is that, again, going back to the low leverage, when federalization does occur, IIPR will be able to access debt like they never have been able to access and at a lower cost. And of course, they can lever up that portfolio and generate some pretty significant returns.
So even if IIPR was to generate 20% growth in ’23, at the level, we see the share price today, that still provides a tremendous opportunity set for investors to own shares in this company that is the market mover, the best — really the best class within the four REITs in our coverage spectrum.
RS: Yeah, that’s a nice way. That’s a nice way of explaining kind of all the things to like about it. And NewLake Capital, it’s getting a lot of love from a bunch of different places. What are your thoughts on that one?
BT: Sure. Well, I know Gordon DuGan. I’ve known for years, Gordon was the former CEO of W.P. Carey. Gordon is the Chairman at NewLake in LCP. NewLake is over the counter. They were not able to list on New York Stock Exchange, they cannot list on American Stock Exchange. And — so they’re kind of boxed in to the capital markets on that side. A lot of investors don’t want to own shares in a company that’s not on a major listing. And certainly, NewLake understands that.
They’ve been talking in previous earnings calls about other ways to get listed. I’ve got my own kind of reasons why first of all, is related to the New York Stock Exchange, I still don’t quite understand. And I’ve said this from day one, by the way. I still don’t quite understand how is it that. Remember, first of all REITs are federal laws, REITs going back to 1960 it’s all in my book, The Intelligent Read Investor Guide. But 1960 When REITs were formed in the Eisenhower administration. This is a law that Congress passed. It’s a federal REITs or federal laws that exist.
And so how is it that — a New York Stock Exchange company can get in — on the New York Stock Exchange? So there was clearly — I wouldn’t call it a loophole, but I’m not giving IIPR credit —
RS: But other people will.
BT: Well, yeah, exactly, exactly, quite well, believe me. I’ve heard it. I’ve heard it from other people. And — but, the fact is, they’re on the exchange, they’re there to stay. And there’s only one cannabis REIT on New York Stock Exchange. Now, so NewLake is somewhat boxed in right now. And now my understanding is — and I haven’t done all the research on the — to make this actual legitimate. But I will share this with you and your audience. And that is that the other company, AFC Gamma, they are listed on the American exchange, but they’re a mortgage REIT.
And my understanding is, again, I haven’t gone and actually read the documentation to that effect. But I think a mortgage REIT is different, because it’s more of a financing vehicle than actually owning the real estate being an equity REIT. So that’s how I believe AFC Gamma has been able to kind of pivot into that. Maybe NewLake pivots into a mortgage REIT structure or potentially a hybrid of that structure, mortgage equity REIT to allow themselves to get listed there. That’s kind of where I think could happen. I don’t know that haven’t done all of our homework. We certainly will be asking, Gordon and his team about that in the near future. But that has been an issue for them for sure.
NewLake’s portfolio, and their business model is almost identical to IIPR. They look a lot of alike, which actually tells me why doesn’t. And I’ve written about this, why doesn’t IIPR buy NewLake, I mean, wouldn’t that make sense for some M&A to exist that would give NewLake investors ability to become list on New York Stock Exchange, if in fact, IIPR were to acquire NewLake. But I’ll have to let those two board of directors’ figure out how they want to do business, but that certainly solves one problem.
But NewLake, their portfolio does mirror IIPR, very similar assets, very higher quality industrial properties, no greenhouses. And right now, today — they’re all mostly equity REIT investments.
And then finally, I guess we’ll move into Power REIT. And Power REIT was a really great pick for us last year. We bought them in our little small cap portfolio, on top of my head, I think it was like 170% total return, we got out towards the end of last year out of that portfolio, then, of course, shares just crashed.
Since that time, we did reestablish a new very small, modest position. But that company is extremely, extremely speculative. And again, the quality of those properties are not nearly is solid is IIPR and NewLake in terms of the business models. I have big concerns over these greenhouses, and how much money goes into these greenhouses, recognizing that they can be built about anywhere. There’s not really a whole lot of specialization there. They’re not as mission critical as the IIPR, or NewLake Capital investments.
So I would tell you that for Power REIT, I would stay really cautious with that company, especially as small as it is, as volatile as it is. And it’s got a very small management team, there’s a lot of key risk key man risk associated with power REIT as well. So I would urge readers and the audience to be careful with that one. And in fact, the whole sector in general, clearly is volatile. And, again, but all of that really is riding on the federalization and when that occurs. I don’t think it’s going to be, if it will occur, because it’s just a matter of when or what time that will happen.
And again, I think these analysts have already pretty much built it into their models. I still think a 19% or 20%, earnings grower, paying a 6.3% dividend yield is exceptionally a strong buy right now. So we’re definitely really maintaining our bullish sentiment with regard to both IIPR and NewLake.
RS: Did you get out of PW, because you foresaw kind of that crash based on the viability of their tenants? Or was that just the timing?
BT: Yeah, it’s all the above. I mean, in terms of the small caps, especially these nanocap names, it’s just not worth it. I mean I’ve been around a long time, and you can make a quick buck on these companies be perfectly time on but, I’m not a market timer. I like long-term investments, I have found through years of experience, if not decades, that the best path to wealth creation is not trying to, pick some company that’s going to make you rich overnight. We’d like for we — I invest in the stocks, just like I invest in real estate. I want to have long-term income coming in, and I want to build my portfolio with long-term income.
Power REIT doesn’t pay a dividend. And again, that’s one key example. There’s — they had a lawsuit, they were involved in many years back regarding one of their tenants, which is a railroad, and because of that they have a net operating loss. So they just simply don’t pay out a dividend. And, it’s again, it’s hard for reconcile that with the — average investor or retiree. Because most of — most people who invest in REITs, like me, invest in the REITs for income.
RS: Right, right. So do you want to talk a little bit about AFC Gamma? Is it something that do you do like the fact that they’re able to be on a major exchange? Is that something that investors should be looking at as — like a reason to be bullish there?
BT: We’ve picked up coverage. I’ve actually — I’ve got an office in West Palm Beach, and I have met with Len and Robin, Len Tannenbaum is the CEO. He’s got an interesting paths, we’ve, written about that. So I won’t bore you on this call. But, some good, some bad. But I think, we’ve interviewed him quite a few times. He certainly knows the cannabis sector.
Some of the concerns that we’ve had with them more recently, and we’ve shared these with some with our subscribers. And iREIT on Alpha, just the conflicts of interest. They’ve got a separate BDC. And we’re really trying to get our arms around that and how does that really benefit the common equity holder if you’re not an investor in the BDC.
So, conflicts of interest are big. And when I see companies that have conflicts of interest, in fact, going back to Power REIT, Power REIT is also an investor in the — in one or several of the operators. And that poses conflicts of interest. Of course, they’re disclosed. But, I still believe that conflicts of interest aren’t really going to create long-term value for me as an investor. And we found that out quite a bit over the years, when we’ve seen companies that generally are not managing their interests of their investors are usually going to underperform.
And so we’re cautious with AFC Gamma. He’s got good experience in the space. He’s accessing the capital markets. And — but I really believe from a commercial mortgage REIT, which is how they’re classified, there are better opportunities with less risk. You really have to have the appetite for that type of exposure. I know they’ve got — I don’t know what their yield is today. But I know it’s a higher yield, that there are probably, better opportunities out there for much lower risk.
And so overall, my view of this is — if you’re going to invest in cannabis, first of all, you’ve got to have that stomach for it. And if you’re going to invest in that space, invest in the number the top brand, the most dominant player who has the scale advantage, who has the relationships and the cost of capital advantage.
And again, if you compare IIPR who has very little debt, and AFC has a lot of debt, there are mortgage REIT, you can see. It’s just a lot riskier value proposition for investors. So I’m not saying it’s not a good investment, but you have to really recognize the risk that comes along with the mortgage REITs space. And again, mortgage REITs payout 100% of their earnings per share mostly. And so it’s a more volatile ride. And we think there’s a larger chance of dividend cut as it relates to company like AFC Gamma versus IIPR, which we think the dividend is very stable today. They’ve got a very sound payout ratio. I think it’s around 80%, maybe 82% to 83% on AFFO. So they’ve got cushion there, they’ve been able to grow that dividend since they went public.
So again, overall, if you’re going to be in that space, my takeaway is you want to own IIPR. That is the dominant player, maybe a little bit of NewLake. NewLake is interesting. But again, they still have that conundrum of not having the listing on a major exchange.
RS: I wanted to ask you a question that we were asked on Twitter. And I’m curious what your answer is, and they were talking about tenant improvements that most cannabis REITs balance sheet. And they were wondering what happens in the case of a default? How valuable that tenant improvement is?
BT: Sure. I got a really good example. And this is not an apples-to-apples example. But again, I’ve got 30 years of experience, so I’ll share it with you. One of my first deals was a building that I sold an investor here in South Carolina, the company was called Top Food Services. They were in the vending machine business. I sold that building for like $2 million. I didn’t own it, I sold it for some investors. And that was a big deal for me back then, by the way. And within five months, the company Top Food Services was not publicly traded, much like these cannabis operators. So I went to the Dun & Bradstreet, we tried to do our due diligence, and we felt like they had pretty decent financials, they would be able to pay the rent.
Well, lo and behold, five months into the sale of that property. They quit paying rent, and they went out of business. Now Top Food Services was a building very much like I saw with IIPR. It was a maybe a 40,000 square foot building, it was cut up in a lot of different sections. It was very specialized. It had — it was basically it was a big kitchen, and they were making sandwiches for a lot of the local industries and preparing them and shipping them out. So it was it was cut up in all these different sections.
And I thought to myself, the young real estate investor back then, I thought this is going to be really hard. And the people that I sold this building to, I was concerned, because they weren’t going to get their rent check of 175,000 a year or something, whatever that was. And we had that building leased back up to a complaint to a subsidiary of Engelhardt Chemical Company within six months.
And because they came in and they used 90% of this — of the floor drains and the heating and air and the plumbing and all this stuff. And it was a great location. It was much like IIPR it was an industrial park, curb and gutter, security guards, all the stuff that a company would really want to have. And it was really not that big of a deal. And they actually got more rent than the previous tenant that had, I guess, filed bankruptcy or went out of business.
So the point of that is, I can tell you with the IIPR portfolio and this makes me feel a lot better especially it’s great that I can go into these buildings and that really has been helpful for me as an analyst not only to tour this product. We get all the REIT sectors that we cover is kind of do these boots on the ground series. And we do that at iREIT on Alpha for our members. But I would say that these properties can be equipped, and I can see many uses coming back in there really flex space type buildings, so they can be caught up in many flexible type of applications.
So, and think about it. I mean, even if cannabis were to go away today, another agricultural use could go in. They’ve got fertilization in there, there’s all types of things that can be utilized that doesn’t have to be cannabis. So I feel a lot better as an investor in the IIPR portfolio, having gone into these properties, and also applying that to my background as developer. Because you’re right. I mean, there’s a lot of there’s a lot of capital that goes into these spaces. But they’re not they they’re not perfectly built, they don’t have to be built for the cannabis sector. I think there are many alternative uses, lab space, life sciences, a never ending number of uses, agricultural.
So I just think that IIPR when you look at it on the price chart, which I’m looking at it now. roughly $110 I think it is $110 a share at a 14.5 multiple. I mean, this company is virtually price for going out of business. I mean, they’re just — and they’re not — even there’s no way. This real estate has tremendous value.
So we’re staying long the position I believe in and I’m really the management team has a lot to do with this our rating. Because we think they’ve got an excellent management team. The CFO is I think, one of the best in the in our coverage spectrum. And so I’m really, like I said, I’m maintaining bullish, it’s hard. I know with the selloff we’ve had with cannabis. But I think the real estate has value, the management team has value. And we think that the federalization could actually be a benefit for the industry and for IIPR.
RS: It’s interesting what you’re talking about kind of different ways that they can play with real estate. And I was going to ask you that like, as a real estate guy, because it’s interesting in the cannabis industry, you’re seeing some companies that are getting ready to switch over, some agricultural farm to growing cannabis or waiting for the U.S. to open up and they’re going to change their, tomato fields to cannabis fields.
How do you think about the real estate because they’re not all of these cannabis companies are going to make it? Some may pivot, some may not make it at all. But how do you think about the value that a lot of companies have just in the real estate that they have? Or even if the greenhouses go away, or what have you, but the land itself? How do you — can you speak to us a little bit about how you think about that?
BT: Yeah, well, first of all, you know, we cover the farming sector. And one of the things was interesting, there’s two farming REITs that’s Gladstone Land, land and the uniform farmland partners, FPI. And we’ve asked both of these CEOs, why don’t they get into the cannabis growing business? And that’s a legitimate question, very profitable. And one of them didn’t say no. And the other one said, hell no, which is interesting. But they’re just not interested at this time. And I think, again, a lot of this has to do there’s an overhang. I mean, it’s a huge overhang, and that’s what’s reflected in the share price. And that is — there are certain banks that just will not conduct business, cannabis business. And so that law passes, there’s just going to be limited uses of capital.
I believe that once this federalization occurs, I’ve considered a catalyst. It’s not an overhang. This is what’s really — I don’t see the disconnect. I think there’s so many benefits to this, that are going to help the cannabis industry. The market views is there’s going to be with IIPR specifically, there’s going to be so much competition. And there will be enhanced competition.
And certainly, they’re not going to be able to generate cash on cash returns at 12%. But even if it’s 9%, and by the way, 9% is the number that skilled nursing property straight at, you can still generate pretty impressive growth with 9%-10% return.
So I just really believe that the market has really priced this way too cheap. And eventually, I think there’ll be some normalization. I get it. I don’t think we’ll see another 100% a year growth out of IIPR. But I think again, 20%-25% and answer your question, I think in terms of real estate, it’s just going to come down to the competitive landscape, and how many other people are going to be learning.
There are other — by the way, there are other private, there’s quite a few and you probably know this better than anyone because you have a podcast on the cannabis podcast. But there are other private sources of capital as well. There’s many other alternative ways to play cannabis. But in the real estate space specifically, I just think, having IIPR in the first mover advantage makes a lot of sense and owning this type of property. The greenhouses are — I haven’t visited one, so I’ll probably need to do that.
And again, they’re hard to get to. But I just — I don’t know if that’s certain — that’s really a sustainable model to be investing in. It’s very high risk. And I know it can be high returning. I mean our shares generated over 170% last year. But there’s a tremendous amount of risk on the table. And I just think investors really need to know that. And I think right now, given the margin of safety that exists with IIPR. It’s a tremendous buy for this company right now.
RS: Despite the kind of pluses and benefits that come with federal legalization, do you feel like IIPR given the market, given the state of the industry given the legal side of things, that there’s real benefit and it taking longer for there to be federal legalization?
BT: Yeah, actually, I interviewed the CEO last week. And I asked him that question. And I’m going to read you real quickly his comment, if you don’t mind because that —
RS: No, that’s great.
BT: Because he’s very much involved. That’s why I think interacting with these management teams is really helpful. So I’m going to read you directly from, I also want to say that if we look at safe banking, is getting a lot of headlines again.
If safe banking passes in its current form, we’re very happy with that, because of what that would do. We don’t think it’s going to create any meaningful competition in its current state. But what it does is it’s good for the operators or operator tenants. So if they have different past of bank loans, that makes them a better risk for us.
Also continued, we welcome safe banking. And I think it’s got a better chance than it did a month ago of getting through Congress by the end of the year. We’re seeing some movement with Chuck Schumer now. And I think he’s pretty much thrown in the towel for his large, comprehensive bill. And we’ve heard that he’s meeting with Sherrod Brown, who’s the Chairman of Banking. And we’ve also — we’ve always said that if there’s going to be any type of reform, it’s got to go through the Senate.
And if we get any movement with Sherrod Brown’s committee, that’s a good sign. Because he’s always said, I’m not going to look at any type of safe banking until it’s got some type of social equity component. And now we have the HOPE Act, and I’m let I’m getting down in the weeds here, but the HOPE Act would expunge state level non-violent convictions.
So if there’s a combination of those two, I think safe banking does have a better than 50-50 shot of getting through Congress by the end of the year. I said less than 50-50 three months ago, but we’re definitely having some movement with Schumer now removing the roadblock.
So that was from last week interview I had with Paul Smithers at IIPR.
RS: That’s interesting. That’s interesting. Any kind of parting thoughts, before I let you go, anything that we left out or that you feel like is worth paying attention to in the REIT space?
BT: Yeah, I would first just like to always put this as closure. I mean, cannabis is interesting. We do cover it. We have nothing — there four REITs. So it does, it’s a classification for us. But I would just caution your audience, maintain adequate diversification. I don’t have a whole lot of exposure in the cannabis sector. It’s very tempting right now, especially with IIPR, I could see the company really generating some really solid returns. Again, once this overhang is removed, but I would just say — remind your audience to maintain diversification.
You know me by now I’ve been in Seeking Alpha for over 12 years now. And we really believe diversification and focusing on quality businesses with quality balance sheets, quality real estate, and that’s the key. And so, we focus on companies like Realty Income (O) and Prologis. And these are A-rated companies that we really build our core portfolios around. And so IIPR is not a core position is definitely more of a satellite play. And I’m happy to be on this on this interview. And thank you very much. And I love this sector, but I would just caution people not to put all your eggs in one basket. This could definitely be opportunistic, but you’ve got to be realistic as well.
RS: Yeah, I would say realistic, no pun intended. I’m going to extend the pun to Realty and realistic. Maybe that’s a stretch. Brad I really enjoyed having you on is really, really great talking to you about this. And it’s really nice to get a deep dive on the REIT space. I think from a REIT guy and not necessarily from a cannabis person. So it’s really nice to get that kind of expertise.
Where can the audience find you?
BT: Sure. Well, of course, all over Seeking Alpha. And we have the product there, iREIT on Alpha. We also launched a product recently called iREIT Live, which is our newsletter. It’s only $99 a year. So I guess I’ll give myself a plug here. But we have iREIT Live $99 a year there. iREIT on Alpha, which has all the tools and all the features and all these interviews like the one we just referenced here just a few minutes ago.
Thanks so much for listening to the Cannabis Investing Podcast. Subscribe or follow us on Seeking Alpha, Apple podcast, Spotify or Stitcher and we’d really appreciate it if you left us a review on Apple podcast. It helps other investors find our show and makes us feel fantastic.
If you have feedback or questions, we’d love to hear from you at rena+canpod@seekingalpha.com. Nothing on this podcast should be taken as investment advice of any sort. I’m long Trulieve, Khiron, Isracann Biosciences, the Parent Company, Ayr Wellness, and the ETF MSOS. Subscribe to us on Apple Podcasts, Spotify or Stitcher. Thanks so much for listening and see you next time.
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