Cannabis is a $9.3 billion industry in the U.S., encompassing medicinal marijuana, legal recreational marijuana, CBD oil and non-intoxicating hemp. Medical Marijuana Inc. estimates it could grow to $30 billion by 2025. SCT contributing editor Beth Mattson-Teig spoke with Richard Acosta, founder and CEO of Inception REIT, a non-traded REIT focused on net-lease, cannabis-focused properties. He also is CEO of Subversive Real Estate Acquisition REIT, which focuses on cannabis-related real estate and trades on Canada’s NEO Exchange.
How has the pandemic impacted the U.S. cannabis industry?
There was a strong initial spike in sales after the first stay-at-home orders began trickling in and after President Trump announced that people should begin taking social-distancing precautions. We think of that as the pantry-loading effect, where folks were stocking up their medicinal and recreational cannabis. There have since been more normalized consumption volumes with a pretty profound rotation away from dried cannabis for smoking into edibles and other forms of consumption that don’t involve inhaling or sharing any smoke.
Have dispensaries been allowed to remain open during shelter in-place orders?
The vast majority of states that have recreational and medicinal programs have deemed cannabis as an essential business. One notable exception is the state of Massachusetts, which closed all of its recreational stores but is allowing medicinal stores to continue operating. In Nevada, all stores can remain open for delivery only, so it is a state-by-state designation.
“You will see some forced combination of M&A as these companies fight for survival. What that means is that the companies left standing are going to be the stronger companies that are able to raise money”
What will the industry look like on the other side of COVID-19?
The consumer is starting to lean more on e-commerce delivery services for things like food, and cannabis is no exception. I think that will be an enduring effect for cannabis consumers, with delivery services that are now being built out very quickly. There also are more new customers coming in and discovering the product as an alternative to alcohol. Capital markets have certainly dried up, so you will see some forced combination of M&A as these companies fight for survival. What that means is that the companies left standing are going to be the stronger companies that are able to raise money as needed and are going to be more resilient going forward.
Recreational marijuana is now legal in 11 U.S. states, and medical marijuana is legal in 33. What is happening with state-level cannabis legislation?
All movement towards state legalization has been put on pause due to other priorities around managing the pandemic. When things normalize, people will look at this as a revenue-generating industry. Pre-COVID, there was a lot of strong interest from Governor Cuomo in New York with respect to legalizing recreational marijuana. We’re expecting a ballot initiative in Arizona, and there is also interest from Florida.
Inception REIT acquires net-lease, cannabis-focused properties like Sweet Flower, a cannabis dispensary with four locations in Los Angeles
Could COVID-19 spur legalization of marijuana or accelerate existing legislation as a means to generate needed tax income?
Federal, state and county governments are spending a lot of money. They are putting forth as many resources as they need to contain this pandemic while they are bringing in less tax receipts, so on the other side of this, if you are looking for ways to right-size your budget, you are going to be looking to industries like cannabis to help you do that.
How are landlord views of cannabis-related businesses changing?
It is no secret that retail real estate is being decimated. I think you will see landlords view this industry more favorably as it continues to showcase its recession-resistant qualities and emerge as a more stable tenant base. So there will be wide adoption from retail landlords as they look to continue generating footfall and filling vacant space.
“On the other side of this, if [governments] are looking for ways to right-size your budget, you are going to be looking to industries like cannabis”
Do you think you could find more acquisition opportunities on the other side of COVID-19?
Yes, no question. We live at the intersection of cannabis and real estate. In both industries, you have very attractive dynamics taking place, in that they will help drive better valuations for us as investors. On the cannabis side, we’re seeing a divergence between the haves and have-nots from a credit-quality perspective.
On the real estate side, we’re starting to see early signs of repricing that is being led by unease in the finance world. All of that leads to better opportunities for us as cannabis real estate investors. [Subversive Real Estate Acquisition REIT] raised $225 million in our January IPO, and we haven’t deployed any of that yet, so we are in an interesting position where we are flush with cash and we are monitoring the opportunities.
Register here for ICSC's upcoming webinar Cannabis Tenants: Evaluating an Emerging Use. On April 30, industry experts will discuss changes to the cannabis industry resulting from COVID-19 and will offer advice on how to access emerging opportunities from the expanding market.
