This San Diego company is banking on medical marijuana cultivation with $175 million planned IPO

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Citing momentum in the medical marijuana industry, a San Diego-based real estate investment trust (REIT) focused on acquiring medical-use grow facilities has set its sights on the public market.

Innovative Industrial Properties on Monday filed registration documents for a future $175 million initial public offering, according to U.S. Securities and Exchange Commission filings. Renaissance Capital and New Cannabis Ventures both reported on the filing Monday evening.

Innovative Industrial Properties plans to sell 8.75 million shares at an offering price of $20 per share and the company would have a market value of $201.7 million. The company applied to have its shares traded on the New York Stock Exchange under the ticker “IIPR.”

Whether those shares would trade on the NYSE is another question, said Matthew Kennedy, an analyst with Renaissance Capital, a Greenwich, Conn.-based manager of IPO-focused exchange-traded funds (ETFs).

“There hasn’t been a history of companies like this going public, so it’s hard to say what its reception might be,” Kennedy said.

The IPO market in 2016 has been the least active year since the financial crisis, and companies that have been able to go public have priced below their peers, he said. That considered, Innovative Industrial Properties is testing relatively unproven waters.

IPO investors and underwriters alike tend to be fairly risk-adverse, he said. And without a clear direction from the federal government on the cannabis industry, these types of companies may face more challenges when they try to execute IPOs, he added.

Two cannabinoid-related biopharmaceutical firms, GW Pharmaceuticals and Zynerba Pharmaceuticals, are trading on the Nasdaq following their public offerings; however, Denver-based cannabis social media company MassRoots Inc. this year failed in its bid to be listed on the Nasdaq, he said.

“I think it would be a pretty major (feat) if this company did list on the NYSE,” Kennedy said. “I think the more firsts you have, the easier it is to get more deals like this done.”

One potential selling point for Innovative Industrial Properties is the track record of executive chairman Alan Gold, Kennedy said. Gold took REITs BioMed Realty Trust and Alexandria Real Estate Equities Inc. public and sold BioMed to the Blackstone Group in an $8 billion deal that closed earlier this year.

Innovative Industrial Properties’ offering date has not yet been set. At the earliest, it could occur on Nov. 11; however, considering the election and Thanksgiving holiday, the offering might take place in mid-December or early December, Kennedy said.

Here’s a quick look at this ancillary cannabis industry company vying for the public market, according to information filed with the SEC:

Who’s behind it:
Innovative Industrial Properties lists its executive chairman and principal stockholder as Gold, a real estate industry veteran who co-founded BioMed Realty Trust Inc., an REIT focused in life-sciences lab and office space; and Alexandria Real Estate Equities Inc., an urban office REIT focused on science and technology campuses. Both BioMed (BMR) and Alexandria (ARE) were listed on the NYSE. Executive team includes CEO Paul Smithers, former chief legal officer of advance materials maker Iso Nano; and several others with REIT-specific experience including Robert Sistek, formerly of CoreSite Realty Corp.; Gregory Fahey, of Realty Income Corp.; and Andrew Fenton, of Real Estate Management Services Group.

What the IPO will fund: The purchase of 10 to 20 properties.

What properties are being eyed:
The company’s first potential deal in the wings is a $30 million transaction with PharmaCann for a 70-acre property in Montgomery, N.Y., with facilities totaling 127,000 square feet. Company officials have identified another $88 million worth of deals that likely will be in the form of sale-leasebacks with long-term, triple net leasing agreements.

About PharmaCann:
Founded in late 2015, the company holds one of five licenses granted in New York for the cultivation and dispensing of medical-use cannabis. The company operates four medical dispensaries in Illinois and three in New York. PharmaCann is not yet profitable, but Innovative Industrial Properties expects that the rent will be paid from the sale of the property or cash on hand, initially.

Assessing the market conditions: Innovative Industrial Properties, in its registration filing, cited several “favorable environment” conditions for its planned IPO, including expected continued sales growth; a shift in public opinion; the federal government’s current “relaxed enforcement posture”; and limited access to capital by industry members.

States that are target markets: For now, Arizona, California, Illinois, Maryland, Massachusetts, Nevada, New York, Oregon and Washington.

Risk factors: The company listed more than two-dozen statements of potential risk, including: no operating history; no current properties; the potential for a shift in federal policy; a likely startup-heavy tenant base; the REIT status may be put at risk if the company is deemed to be subject to IRS Code 280E; if the medical cannabis cultivators cease operations, the company would have to lease to non-cannabis companies that would pay lower rents.

Current financials: The company, which was founded in June and incorporated in Maryland, has cash on hand of $508 as of Sept. 30, 2016, and $375,508 in total liabilities and stockholders’ equity. Factoring in the proposed IPO, the company estimates that it would have $132.7 million in cash and $162.8 million in equity for that same period.

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