Real estate investment trusts (REITs) have become popular among investors seeking to diversify their portfolios and gain exposure to real estate without the hassle of direct property ownership. According to Nareit, a trade association for REITs operating in the United States, approximately 170 million Americans own the investment vehicles through their retirement plans and other funds.
The investment type has grown in popularity because the vehicles enhance a diversified portfolio due to their lower correlation to equity indices, and they typically display less volatility in total return driven by quarterly dividends. In particular, a REIT’s long duration and quarterly yield are attractive to family offices and other investors seeking to generate current income and build long-term value from appreciation in the underlying real estate.
Cannabis REITs represent an emerging subsector of the $1.1-trillion market. Focused on cultivation facilities, processing space, and retail dispensaries, the subsector allows investors to tap into the growth of the marijuana market while enjoying the benefits of real-estate investment. In addition to offering investors a dividend yield of nearly double the typical equity REIT, cannabis trusts have been growing available funds from operations, a key measure of free cash flow, at a much faster pace than the industry average.
Despite their potential, cannabis REITs remain relatively unknown and therefore underinvested by retail and institutional investors—meaning they offer a promising, untapped avenue for portfolio diversification.
REITs offer a compelling avenue for investors to gain exposure to the dynamic and rapidly expanding cannabis industry while leveraging the stability and benefits of real-estate investments. As the industry continues to evolve and mature, REITs present unique opportunities for portfolio diversification, steady income, and potential growth. However, investors must remain vigilant about the regulatory landscape and inherent risks within the sector.
Additionally, cannabis REITs are poised to play a significant role in the future of real estate and investment. By understanding the nuances and key aspects, investors can position themselves strategically to benefit from the burgeoning market. With careful consideration and informed decision-making, the trusts can be a valuable addition to a well-rounded investment portfolio, offering the potential for stability, growth, and income in an emerging industry.
Diversification and risk management
REITs provide a diversified way to invest in the cannabis industry. By taking a stake in a broad portfolio of properties rather than relying on a single business, investors spread their risk across multiple tenants, industries, and geographic locations. This can help stabilize returns, reduce the impact of any single tenant’s execution on the overall portfolio’s performance, and minimize exposure to localized economic or regulatory challenges.
Steady income through dividends
By law, REITs must distribute at least 90 percent of their taxable income to shareholders annually. This ensures that investors can enjoy regular, often predictable income, as long as the properties generate consistent rental revenue. Additionally, this income is typically more reliable than other forms of investment returns, making REITs an attractive option for income-focused investors looking for a dependable stream of dividends, even in fluctuating markets.
Tax advantages
REITs benefit from a tax structure that avoids double taxation. The trusts generally do not pay corporate income tax (as long as they distribute 90 percent of their taxable income as dividends), leading to more favorable tax treatment compared to most other investment types. Investors pay taxes on the dividends at their individual tax rates, and in certain instances taxes may be reduced using the qualified business income deduction, further enhancing tax efficiency as an investment vehicle.
Leverage growth potential
The cannabis industry is expanding, driven by increasing state legalization and growing acceptance of the plant for both medical and adult use. REITs stand to benefit from this expansion as demand for specialized real estate focused on the industry continues to rise, along with the need for cultivation and retail spaces. This growth potential can lead to increased rental income, property values, and long-term capital appreciation over time.
Leverage specialized expertise
Investing in properties within highly regulated industries requires specialized knowledge and expertise due to the unique challenges. Cannabis REITs typically employ experienced professionals who understand the nuances of cannabis real estate, ensuring properties are leased to quality tenants that can meet rental obligations over the fifteen to twenty years of the lease term.
Provide liquidity and accessibility
Publicly traded REITs offer liquidity and accessibility that direct private investments often lack. Investors can easily buy and sell shares on stock exchanges, providing flexibility, lower transaction costs, and ease of entry compared to the complexities of investing directly in real estate. This accessibility allows investors to adjust their positions quickly in response to market conditions.
Higher yields
Cannabis REITs often offer higher dividend yields compared to traditional REITs, reflecting the higher risk associated with the industry. Investors should weigh the potential for higher returns against the inherent risks, including regulatory uncertainty, evolving legislation, market volatility, and the financial instability of some cannabis operators in this emerging industry sector.
Future opportunities
As the industry matures, cannabis REITs may face both challenges and new opportunities. Potential changes in federal laws, shifts in market demand, evolving competition, and advancements in cannabis technology within the industry all may impact performance. Staying informed, adaptable, and proactive will be key for investors looking to capitalize on this dynamic and rapidly evolving sector.
President, CEO, and board of directors member Anthony Coniglio oversees NewLake Capital Partners Inc.’s portfolio of internally-managed investments. A real estate investment trust, New Lake provides capital to state-licensed operators through sale-leaseback transactions, third-party purchases, and build-to-suit projects.
