The First Cannabis IPO in the U.S. Was Just Approved
Our last article on 57 marijuana stocks was a big hit and we felt good about spreading the message that out of those 57 stocks, the majority are just over-the-counter (OTC) trash. The opportunities we’re seeing are the big Canadian growers like Canopy Growth and Aphria and also the private companies that are making good inroads with financial backing from the likes of tech visionary Peter Thiel. What’s most notable is that there is a great deal of enthusiasm for investing in cannabis stocks, and presumably a cannabis IPO, by many cannabis users.
One of our readers sent us an interesting question the other day which was this. If marijuana is still a Schedule 1 controlled substance and illegal according to federal law, can U.S. citizens get in trouble for investing in Canadian “medical” marijuana stocks? That’s an interesting question but what about investing in stocks in the U.S. that are related to marijuana? Right now there is the usual OTC garbage floating around but there are not any cannabis stocks being traded on a major exchange, that is, until this week. The first cannabis IPO was just approved to trade on a major exchange, the NYSE.
Established as a corporation on June 5th 2016, Innovative Industrial Properties has barely had enough time for the ink to dry on their corporate application before filing to become the first cannabis IPO to trade under the ticker IIRP. The Company is a REIT which is simply explained by the below definition taken from REIT.com:
REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.
The man behind this venture, Alan D. Gold, is a veteran of the real estate industry having founded two NYSE listed REITs already; BioMed Realty Trust (NYSE:BMR) and Alexandria Real Estate Equities (NYSE:ARE). IIPR plans to make investments ranging from $5 million to $30 million for properties ranging in space from 25,000 to 150,000 square feet of space. Their first property is a 127,000-square foot industrial property located on 37 acres in Montgomery, New York with a purchase price of approximately $30 million. IIRP expects to acquire their first property with the net proceeds of this offering. They have also identified an additional $88 million worth of properties, an amount which is based on the sellers’ asking prices which means they’ve actually been actively having conversations with the present owners.
One of the interesting pieces of information in the filing was some market research that estimates the size of the cannabis market in the U.S. as follows:
According to ArcView Market Research, or ArcView, nationwide sales of legal cannabis grew to $5.4 billion in 2015, up from $4.6 billion in 2014, of which approximately 92% consisted of medical-use sales. Demand is expected to remain strong in 2016, with legal markets projected to grow to $6.7 billion, according to ArcView, a 24% increase over 2015, as new state medical-use markets, including Nevada, Illinois, Massachusetts and New York, continue to expand. According to ArcView, by 2020, legal market sales are expected to grow to approximately $21.8 billion, of which estimated medical-use sales are expected to be approximately $10.2 billion.
Right now there is a whole lot of uncertainty about what stance the new attorney general will take towards pot legalization. Let’s be frank here. This whole medical marijuana thing is the elephant in the room that nobody talks about. We all used to joke about having glaucoma in order to get a prescription but the last time we checked, pretty much anyone we knew that smoked cannabis had managed to easily score a medical marijuana card. It was as easy as walking in and asking for one. If the new attorney general wants to clamp down on this, all he has to do is speak the words and those doctors are going to clam up tighter than that joint you just rolled. You think any doctor is going to take the risk of having their medical license revoked just so you can enjoy smoking weed? No way.
Our astute reader that asked us about the legalities of buying cannabis stocks hit the nail on the head. How can it possibly be legal to invest in a company that leases property to people that grow an illegal plant? Yeah yeah, it’s a plant and it shouldn’t be illegal because it has all these miracle properties. We get it. The point is that this stuff is touchy. Have you noticed how hesitant many financial media sites are to talk about cannabis stocks? This subject remains very taboo yet the New York Stock exchange has approved IIPR to trade as the first cannabis IPO which is quite amazing and an excellent sign for all those startups that will be looking for an eventual exit. Forbes published an article on this topic and said that NYSE and NASDAQ declined to comment on this which shouldn’t come as a big surprise.
The whole purpose of a REIT as an investment vehicle is to provide predictable income streams that are then divested to shareholders in the form of dividends. Why take the risk with IIPR when there are many other REITs that will serve the same purpose but without the risk? It seems like the potential for upside is limited while the downside could be horrible should the new attorney general move to start clamping down on all the “medical marijuana usage”. On the other hand, with all the hype we’ve been seeing around cannabis stocks, we’re not going to be surprised if this cannabis IPO goes on a tear in the first few days of trading. Just be aware that the fundamentals behind a REIT provide limited upside because by nature, a REIT is an investment vehicle that is structured to provide stable, predictable cash flows.
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