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There's a reason why Canopy Growth Corporation (NYSE: CGC ) could be one of the first marijuana stocks to be a real winner in the race to profitability. The reason is simply that Canopy is forward thinking with its various moves. Initiatives like its mega-sized deal with beverage giant Constellation Brands (NYSE: STZ ), partnerships into the burgeoning pet care market for CBD and its recent buyout of U.S.-focused Acreage Holdings have made CGC stock the king of the marijuana hill.
All have been designed to take CGC-grown products and get them into as many users as possible. They're also great for providing Canopy with plenty of extra funding. Which is why its latest move may be absolutely perfect for investors.
Canopy is seriously considering placing its greenhouse assets into a real estate investment trust (REIT).
The benefits to doing that could be a huge win for both CGC, its shareholders and potentially the shareholders of the REIT itself. In the end, it's just another example of how Canopy Growth could be the only marijuana stock you need to own.
CGC Stock Looks to Monetize Its Assets
Thanks to their vice-like nature, cannabis companies have had to get creative to when it comes to raising capital. Most banks won't lend to them and it's only recently that a few of them have been able to tap the debt markets with any success. And here, none have issued a straight corporate bond, they've all been convertible or hybrid debt deals. For Canopy, this has meant running a pretty conservative ship with low leverage and high assets on its balance sheet.
In order to fund its expansion efforts, it has turned to deals like its partnership with STZ. That gave CGC a cool $4 billion to play with, while Constellation gets access to Canopy's products for sale. But there are other ways to get needed funding, especially if you are asset rich.
To that end, CGC may be looking into a vehicle to hold its vast portfolio of greenhouses, processing facilities and other real estate assets. We're talking about a REIT.
In essence, REITs are a specialized tax structure designed to hold real estate assets. As long as they pay out 90% of their cash flows as dividends to investors, they are allowed to avoid the double taxation on dividends. Investors love them as this tax structure allows REITs to yield in the 4% to 7% range. Their cash flows are secured by the rents paid by their tenants. It turns out a greenhouse to grow marijuana is really no different than an office building or apartment. Someone rents the building and then cuts the landlord a check every month.
For CGC, this could be a great way to monetize its more than 5 million square feet of growing space. Canopy would mostly do a sale-leaseback transaction. This transaction would provide Canopy a huge initial cash infusion as it places these warehouses into a REIT and sells off the shares to the public. It would then rent its warehouses back from the REIT.
This sort of deal to monetize a firm's vast real estate assets is actually pretty commonplace. Troubled retailer Sears spun-out its holdings as Seritage Growth Properties (NYSE: SRG ) to raise cash. Darden Restaurants (NYSE: DRI) placed roughly 240 of its restaurant sites Four Corners Properties Trust (NASDAQ: FCPT ).
And while tax-free REIT spin-offs are now verboten by the IRS, they can happen in Canada and sale-leasebacks are still cool here in the U.S. In fact, CGC buyout target Acreage Holdings recently agreed to sell cannabis REIT GreenAcerage Real Estate. Incidentally, Acreage - and now Canopy - owns a 20% stake in GreenAcerage.
CGC Stock Investors Would Win As Well
But it's not just Canopy Growth that benefits in this sort of transaction. Investors will benefit as well.
For one thing, a REIT spin-off/sale brings in plenty of cash to CGC for expansion efforts. The firm estimates that the assets could be worth a "couple billion dollars." Canopy is looking to expand into the U.S. and Europe as the legalization of cannabis comes to fruition. That includes building out at least seven hemp processing facilities within the next 12 months. This will allow it to build scale, expand geographically and actually make the most out of its deals with Constellation and others. After all, it needs to the pot to sell.
Secondly, the spinout itself could be very beneficial to investors. Last summer, CGC completed the spin-off of its venture capital investment arm: Canopy Rivers Corporation. That spin-off has and did very well after being cut free and CGC was able to raise some much-needed capital. However, a Canopy REIT could do much better. Just look at the returns for cannabis-REIT Innovative Industrial Properties Inc (NYSE: IIPR ). It has doubled since the start of the year and pays a good 1.83% yield. There's no reason to believe that a REIT by the marijuana stock wouldn't have those kinds of returns behind it.
CGC Continues to Be At the Forefront
Now, Canopy hasn't officially announced that it's doing this, but it has mentioned it now twice this year alone. And considering that Acreage Holdings has already undergone a similar transaction and Canopy has done spin-outs before, there's a good chance that CGC will do this sooner than later. When it does, it'll be another prime example of why the firm is one of the best in the marijuana sector.
It keeps making forward-looking moves that will benefit investors for years to come. Its REIT plans are just another example of this and CGC stock remains a great long-term buy.
At the time of writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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