From the outside, the row of nondescript buildings in Hamptonburgh in upstate New York looks like any other U.S. warehouse complex. Inside, row after row of budding cannabis plants grow under bright lights and hundreds of security cameras.
The allure -- and potential -- of the marijuana industry has transformed the landlord, Innovative Industrial Properties Inc. into the best-performing U.S. real estate trust in the past 12 months.
Innovative, America’s only publicly traded cannabis REIT, owns properties in eight states, where its tenants produce cannabis products. That makes it a high-reward, high-risk business -- for the same reason.
Marijuana is classified as a Schedule I controlled substance by the federal government, the same as heroin, though it’s legal under state law everywhere Innovative operates. That often means growers can’t find space with regular landlords, so Innovative, with little competition, can charge higher rents.
“The interest keeps improving over time but we’re still technically breaking federal law,” Catherine Hastings, Innovative’s chief financial officer, said in an interview. “There’s a lot of institutional investors, when looking at their risk criteria, that are still hesitant to invest even though we’re on the New York Stock Exchange.”
None of that has deterred investors. Innovative has returned 117 percent in the last 12 months. It yields an average of 15.7 percent across its nine properties, according to a regulatory filing. And the San Diego-based company just had its fourth funding round in October, including its initial public offering, raising $119.6 million, with the bulk of that coming from retail investors.
Innovative is in a category all its own -- it’s an industrial REIT -- exempt from paying taxes as long as it passes most of its profits on to shareholders -- that is also the only NYSE-listed REIT in the cannabis business.
Yet its regulatory filings are filled with the kind of risk warnings that would give pause to even the boldest investors. The company tells investors that the U.S. Justice Department could decide to go after cannabis-related businesses, or the Internal Revenue Service could question its REIT status, since the company hasn’t requested and doesn’t intend to request a ruling from the IRS on its REIT status, the company said in a filing.
Sessions Resigns
On Wednesday, the risks faced by Innovative grew a little more opaque. U.S. Attorney General Jeff Sessions resigned. Under Sessions -- who once said “good people don’t smoke marijuana” -- the Justice Department reversed a policy that made enforcement of pot laws a low priority. Sessions gave U.S. attorneys discretion on whether to go after medical marijuana producers.