By now you’ve probably noticed that most cannabis-related businesses are a lot better at raising money than they are at making it. Cannabis companies have started holding conference calls to discuss the three-month period ended June, and so far only a handful have reported a profit.
How did these three report an operating profit while most of their peers lost money? Let’s take a closer look at the way they’re making money now to see if they can keep it up…
|Adjusted Operating Profit Q2 2019
|Management and retail
|Innovative Industrial Properties (NYSE:IIPR)
|CV Sciences (OTC:CVSI)
1. MariMed: This isn’t going to work much longer
This cannabis producer squeezed out the largest adjusted operating profit in the second quarter, but the means by which it accomplished this feat isn’t going to work forever. MariMed’s still transitioning from its former role as an advisory firm for smaller canna-businesses to a seed-to-sale operator and hemp seed wholesaler.
In the first half of the year, MariMed spent $20 million to acquire hemp seeds from an unrelated party that GenCanna agreed to buy for $25.2 million.
While it looks as if MariMed found a way to make money as a hemp seed dealer, it’s important to realize that MariMed basically sold the seeds back to itself. Through a convoluted process, MariMed purchased a 33.5% ownership interest in GenCanna for $30 million this February.
Instead of a $5.2 million profit, MariMed’s still at least $24.8 million in the hole on this deal, and probably a whole lot more. That’s because MariMed borrowed $17 million at double-digit interest rates to buy the seeds it sold to GenCanna.
2. Innovative Industrial Properties: Real estate boom
This real estate investment trust (REIT) leases cannabis facilities across the country, and business is booming. In the second quarter, rental revenue soared 155% from the previous-year period, and the bottom line climbed even faster. Adjusted funds from operations (FFO) jumped 176% to $0.59 per share.
As a REIT, IIP is required to distribute nearly all its profits to shareholders, and the company’s not shy about it. IIP has bumped its payout 140% higher over the past year, and a slate of new tenants locked into 15-year leases that include annual rent increases is pushing profits higher.
At recent prices, IIP stock offers a 2.3% dividend yield, which is even with the Dow Jones Industrial Average. Unless tenants suddenly stop paying rent, IIP will have to bump its payout a lot higher before 2019 is finished. So far this year, IIP has spent a combined $167.3 million to raise the number of properties in its portfolio to 26, from just 11 properties at the beginning of 2019.
All of IIP’s properties are leased with an average remaining term that works out to 15.5 years with scheduled rent increases. Altogether, IIP expects an annual return on invested capital of around 14.6% from the 26 buildings in its portfolio, and there doesn’t seem to be any lack of demand for the type of financing that only IIP provides…
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