NLCP - Cannabis REITs: Weeding Out The Weak

• Cannabis REITs - a perennial performance leader over the past half-decade - have been slammed in 2022 amid concerns over tenant financial health given the sharp re-pricing of risk and tighter financial conditions.
• Owning the "Pharmland" - the physical real estate - had been one of the few cannabis plays that was working amid a decade-long stretch of dismal investment performance from broader cannabis ETFs.
• Marijuana legalization has progressed at the state level, but federal legalization efforts remain stalled, a "double-edged sword" for cannabis REITs that thrive in the murky legal environment, but also need healthy operators.
• The sale-leaseback model - whereby REITs provide financing for the facility build-outs - has come under scrutiny, but this lease format is not uncommon across the net-lease sector, and our research finds that tenant credit risks appear to be adequately considered and covered.
• Cannabis REITs have faced remarkably few tenant non-payment issues - so admittedly the model remains somewhat untested - but we believe that the regulatory framework of limit-license states that are effectively tied to the property grants cannabis REITs significant protection that isn't fully appreciated by market participants.

For further details see: