In February, Innovative Industrial Properties (IIP) expanded its real estate partnership with Kings Garden, a licensed cultivator in Southern California’s Coachella Valley. The move came after San Diego-based IIP’s original 2019 acquisition of several Kings Garden facilities, a sale-leaseback deal that saw Kings Garden go from owner to tenant and convert Kings $ 27.1 million in cash provided.
The sale-leaseback model has become an integral part of the cannabis M&A landscape. It is a real estate transaction in which an owner sells properties with the intent to remain tenants and rent the space to free up capital while running on-site operations. IIP was founded in 2016 and is known as a Real Estate Investment Trust (REIT). It is among the best known companies using this strategy in the cannabis industry, allowing IIP to invest in real estate with integrated tenants and cash flow. The company owns real estate operated by dozens of licensed cannabis companies in 18 states. Each company is structured as a triple net leasing with the partner of IIP on site. (A triple net lease is a real estate contract where the tenant pays all real estate costs including property taxes, insurance, maintenance, utilities, etc.)
In the case of Kings Garden, it was a symbiotic relationship. With the February transaction, Kings Garden’s presence was expanded to include adjacent properties. Because IIP, which invests in medical facilities, views its tenants as partners, the company worked with Kings Garden to identify suitable opportunities. This resulted in a $ 1.4 million purchase, upcoming building construction, and a new lease in this case. IIP is acquiring more properties and Kings Garden is acquiring the space it needs to grow.
“We greatly appreciate the long-term relationship we have built with our industry-leading partners at IIP over the past few years,” said Michael King, Kings Garden Chairman and CEO, in a press release about the deal. “Between the November 2020 contract and the November 2020 contract, IIP Kings Garden is expected to reimburse just over $ 76 million for construction. This is significant in that it paves the way for indoor operations with a total area of 665,000 square feet and sales of over $ 300 million in 2023. ”
This latest transaction will provide Kings Garden with an additional 180,000 square feet of industrial space and build on its goal of producing 140,000 pounds of finished cannabis product annually, according to the press release.
“Our successive transactions with Kings Garden are a good example of the focus of our business model: We want to serve our tenants as a flexible, long-term real estate capital partner and move quickly and promptly in order to provide flexible capital solutions in the further course to expand their business,” said Paul Smithers , CEO and President of IIP, told CBT.
With M&A trends stalling over the course of 2020, REITs like IIP offered cannabis operators an alternative way to raise cash and remove liabilities from their balance sheets.
“In the end,” Smithers said, “the tenant operator retains full operational control of their mission-critical facility while unlocking the real estate capital previously invested in their facilities and allowing them to get back to work.” Put that non-dilutive capital back into your business for much higher returns. ”
This is not necessarily a deal on market terms. According to Smithers, IIP is focused on understanding the needs of its tenant partners and “then tailoring real estate capital solutions to meet those needs.” This could include investing in more real estate on behalf of growers over time, for example to increase on-site production capacity, as was the case with Kings Garden earlier this year.
“We take a holistic view of each transaction, focusing specifically on the tenant and their management, financial profile and track record while analyzing the specific market and regulatory dynamics of the state,” said Smithers.
Most of IIP’s properties are specialized industrial (indoor growing) properties, although the company has greenhouses in its portfolio that includes assets from companies such as Cresco Labs, GTI, Curaleaf and Trulieve.
From January 2020 to February 2021, IIP made 22 acquisitions in 11 countries and changed 23 existing leases in 10 countries. It’s an ongoing process, like almost everything else in the cannabis room.
