In case you didn't hear the recent news, Kalyx Development, a cannabis-focused REIT is coming to the Nasdaq via a merger with Atlantic Alliance Partnership Corp. (NASDAQ:AAPC). Also announced last week was Innovative Industrial Properties' (NYSE:IIPR) acquisition of a Maryland cannabis property.
Many readers are familiar with stocks and ETFs, but REITs are still a foreign concept to some. Since there will now be two different cannabis-focused REITs for investors to choose from, we figured it would be a good idea to go through the basics.
What is a REIT?
Simply put, "a REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate," according to the National Association of Real Estate Investment Trusts. REITS can hold a variety of different income-producing assets, offering investors unique exposure not found in traditional equities. Not all REITs are publicly traded, but the ones that are offer investors the same market transparency that ETFs and stocks have.
Even though a REIT is a real estate investment trust, think broader than a portfolio of apartments producing rental income. For instance, some REITs such as Annaly Capital Management (NYSE:NLY) is a mortgage real estate investment trust. There's also targeted REITs such as Care Capital Properties (NYSE:CCP), which is a "self-managed real estate investment trust with a diversified portfolio of skilled nursing facilities and other healthcare assets."
Not all companies can qualify as REITS. There are certain qualifications to become a REIT as mandated by the IRS. While there's a long list of more complex qualifications, the basics are as follows:
The proposed REIT must be a corporation, trust, or association.
The proposed REIT must be managed by one or more trustees or directors.
The proposed REIT must have 100 or more shareholders (not required until its 2nd tax year).
75% of more of the proposed REIT's gross income must come from rents from real properties, sales of real estate, or interest on mortgages.
The proposed REIT cannot be a financial institution (referred to in section 582(c)(2)), nor a subchapter L insurance company.
The proposed REIT cannot be closely held (more than 50% of its outstanding stock owned by 5 or fewer individuals). (The REIT does not have to meet this requirement until its 2nd tax year).
Applying these same concepts to the cannabis industry was a natural progression for the REIT industry. Just like there are REITs holding nursing facilities, there are finally REITs holding cannabis cultivation properties and more.
Kalyx for instance "owns and operates nine commercial properties comprising an aggregate of 653,000 square feet located in Arizona, Colorado, Oregon and Washington State and is one of the leading multistate providers of commercial real estate to state-licensed operators in the regulated cannabis industry."
Some of Kalyx's tenants include Golden Leaf Holdings (CSE:GLH), Strainwise, and more. This gives investors unique exposure to the industry through rental income as well as the potential for asset appreciation. To be clear though, Kalyx and Innovative Industrial Properties are not cannabis operators. They neither own or intend to own a financial industry in a cannabis business, and therefore do not touch the plant.
As investors wait for the completed merger between AAPC and Kalyx, they can take a look at Innovative Industrial Properties which launched on the NYSE back in November of 2016. As more and more states continue efforts to legalize forms of cannabis, we expect to see more opportunity for the REIT industry in the cannabis space.
In case REITs aren't your thing, check out the Horizons Medical Marijuana Life Sciences ETF which holds a basket of 16 leading cannabis companies.
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