With the arrival of Joseph Biden in the American Presidency, there were high hopes for cannabis and full legalization was largely seen as a given. But so far, nothing has changed, resulting in tumbling cannabis stock prices. But there has been one benefactor: commercial real estate companies involved in leasing cannabis greenhouses; the one publicly listed company has risen over 200% since 2020.
The cannabis business is in a delicate moment. Cannabis stocks have been down for 7 months as disillusionment grips the markets and stock market declines are already significant. With the arrival of Biden the industry exploded in euphoria and with the Democratic majority in the Senate, investors took it for granted that nationwide legalization was here. Now, time has passed and nothing has changed and, having all the political resources for it, investors understand that the possibility of legislation in the short to medium term is fading.
But the fate of cannabis is not sealed; the industry, the laws regulating it, and consumers are changing every day. To stay up to date, download our free cannabis news app.
Cannabis Sector Depressed
With the sector depressed, an alternative winner has emerged. Hundreds of funds dedicated to leasing property to the cannabis industry are striking gold this 2021 in the US and the legal limbo between states that approve consumption and the national government has made them one of the most important players in the market.
Producing companies, being part of a controversial cannabis sector that is still not legal, are facing serious problems to finance themselves and find credit lines with which to buy land on which to place their plantations. This is where funds that have seen this situation as an opportunity come in. Their role consists of obtaining the money and the loans to lease the land to the cannabis producers with superlative profitability.
Financial Institutions Hesitant to Get Involved in Cannabis
The consulting firm RCCB explains that “banks and other financial institutions often refuse to do business with cannabis companies” because of “reputational damage and because they are assets that are subject to seizure by many federal authorities”. In addition, they point out that something as common as acquiring insurance “is really complicated” and, in the case of obtaining it, “it becomes very expensive”.
The leading cannabis greenhouse real estate company, Innovative Industrial Properties (IIP). With more than $2 billion in assets under management and a third of its business in cannabis, it achieves a return of more than 17% on each of the properties it leases to growers. The last one it closed was a lease with Gold Flora for more than $60 million.
The Pelorus fund is also a regular in this type of operations and, according to its latest letter to investors, it obtains an average return of 15% for this business. But it is also managing to redirect million-dollar loans to this activity. It has recently obtained a loan from the Federal Deposit Insurance Corporation in the amount of 20 million dollars. A public credit line with an interest rate of 4.75%, which it will invest in buying land for leasing and from which it expects a return of more than three times that amount.
The Only Listed Company Has Appreciated 225% Since 2020
Returning to Innovative Industrial Properties, it is the only company involved in cannabis real estate that is listed on Wall Street. And proof of the success of this business model is its performance on the stock market, which is already up 49% in 2021 and 251% since 2020.
The success of this fund on the stock market contrasts with the generalized falls experienced by the cannabis sector. Canopy Growth, one of its main exponents, is down 51% in 2021. This is one of the biggest setbacks, but not the only one, Aurora Cannabis falls by 30%, a figure almost identical to that of Cronos Group (-32%), another of the sector’s major players. Only Tilray achieved annual gains (14%), but it is coming from a 50% drop in 2020.
These are only those who market cannabis; the reality for producers is similar. Some of the majors, such as Curaleaf Holdings and Jushi Holdings have fallen more than 28% in just three months.
Long-Term Cannabis Opportunities
Despite the downturn, in the long term many analysts see the cannabis sector as viable for significant upside in the long term. The reason for this is that despite the fact that possible US legalization seems further and further away, consumption of this product at a national level is becoming more and more established.
Currently, 78% of US states have already legalized the use of cannabis for medicinal purposes and 42% for recreational purposes. Moreover, it is only fully prosecuted in five states. It is currently a market that generates 1.8 billion euros in Canada and California alone has collected more than 1 billion dollars in cannabis taxes.
In the US as a whole, cannabis already accounts for nearly 17.9 billion and, according to estimates made by the company leafly.com, by 2020 it will have experienced a boom of more than 60% growth. The sector’s employers’ association in the North American country is talking about an annualized growth of 16% over the next five years.
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First published in eleconomista.es, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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