Innovative Industrial Properties, Inc. (IIP)(NYSE: IIPR) announced that its rent collections have dropped from 100% at this time last year to just 92% for the month ending January 31, 2023. The company said it had collected 97% of its rent at the end of December. The company’s stock was plunging by over 14% on the news to lately sell at $94. This is a huge drop from the 52-week high of $211.
The cannabis REIT (Real Estate Investment Trust) outlined the various cannabis companies that have slipped in their rent payments.
Missed Rent Payments
IIP reported that SH Parent, Inc. also known as Parallel was in default on its obligations to pay rent at one of IIP’s Pennsylvania properties (approximately 2.9% of invested/committed capital). However, IIP did note that rent was paid in full through January 31, 2023, on all other IIP properties leased by Parallel.
In addition to Parallel, Green Peak Industries, Inc. (Skymint) was in default on its obligations to pay rent at one of IIP’s Michigan properties under construction (approximately 2.7% of invested/committed capital). However, rent was paid in full through January 31, 2023, on all other IIP properties leased by Skymint.
In California, Affiliates of Medical Investor Holdings, LLC (Vertical) were in default on their obligations to pay rent at IIP’s California properties (approximately 0.7% of invested/committed capital).
IIP also made changes to some lease agreements to include cross-default provisions and/or extend lease terms in exchange for limited base rent deferrals. One California property and one Michigan property leased by Holistic (approximately 1.8% of invested/committed capital in the aggregate) have used security deposits in order to pay the leases. In addition to that, one Missouri property leased by Calyx Peak, Inc. (approximately 1.2% of invested/committed capital) received a 100% base rent deferral through March 31, 2023, with pro-rata payback over the following 12 months and an extended term of the lease, with no other adjustments to lease terms.
There is also trouble with the Kings Garden, which has said it is looking for a merger. For now Kings Garden is paying rent for the four properties in California that it continues to occupy, including rent on the capital invested in the expansion project which is a part of the lease of one of the properties. However, there are two properties that were leased to Kings Garden and it seems the company is trying to get leave. The San Bernardino property (approximately 192,000 rentable square feet), which IIP said it is actively evaluating alternative non-cannabis uses for the property due to market conditions in California and changes in the zoning of the property. The Cathedral City property (approximately 23,000 rentable square feet), which IIP said it has executed a letter of intent to lease the property and is negotiating lease terms with the potential tenant. However, IIP said there can be no assurance that it will lease the property on the terms anticipated, or at all.
IIP says it now owns 110 properties located in 19 states, representing a total of approximately 8.7 million rentable square feet (including approximately 1.9 million rentable square feet under development/redevelopment). The company states that no tenant represents more than 14% of the total portfolio and no state represents more than 16% of the total portfolio. Parallel accounted for 10% of the company’s rental revenues and PharmaCann accounted for 12%. As Parallel defaulted on its debts, many were wondering if the company was continuing to pay rent on its properties and now that question has been answered. Multi-state operators (MSOs) represent 85% of the operating portfolio and public company operators represent 55% of the operating portfolio.
With regard to the balance sheet, the company stated the following:
12% debt to total gross assets, with approximately $2.6 billion in total gross assets.
Total quarterly fixed cash interest obligation of approximately $4.2 million.
No secured debt.
No debt maturities until May 2026, other than $6.4 million principal amount of 3.75% Exchangeable Senior Notes in 2024.
Blue Orca Capital, named for the killer fish, issued a short-seller report on cannabis REIT Innovative Industrial Properties (NYSE: IIPR) on Thursday. The stock fell over 7% on Thursday to close at $169.68 near its 52-week lows. Markets in the U.S. are closed on Friday for the Good Friday holiday.
The report wrote, “In the last 18 months, we think IIPR’s loan book appears to have degraded significantly as the sector has become more competitive and IIPR stretched for lower quality tenants in search of continuing growth. IIPR’s largest tenant is a failed SPAC that appears in severe financial distress and was recently sued by investors accusing it of securities fraud and being in effect a Ponzi scheme.” Green Market Report wrote about this exposure recently when it uncovered the extent to which IIP depends on rent from Parallel Cannabis.
The report went on to say, “Unlike with other REITs, IIPR cannot expect to recover the lost income from defaulting tenants because it appears that the actual values of its properties are substantially below their carrying value on IIPR’s balance sheet. IIPR’s stock has already priced in robust net income growth in FY 2022, meaning a repricing is likely given the risk of default at its primary tenant and the deteriorating fundamentals of other IIPR portfolio companies.”
Kings Garden Risk
Beyond the issues with Parallel Cannabis, Blue Orca also points to Kings Garden saying, “IIPR’s second largest tenant is a private California cannabis company, Kings Garden. In May 2021, its co-founder sued Kings Garden and its executives alleging unlawful and fraudulent conduct with respect to Kings Garden’s financial, regulatory and tax reporting. Notably, the lawsuit accused Kings Garden of falsifying books and records and of selling substantial quantities of illegal cannabis on the black market.” The report went on to say, “If we look at the portfolio of Kings Garden properties, based on the price paid by Kings Garden before flipping them to IIPR, we estimate that the residual value of the properties is a fraction of the carrying value of the properties on IIPR’s balance sheet and that even assuming a 10% yield, rent from a replacement tenant would likely be more than 80% lower.”
Blue Orca also suggests that falling cannabis stock valuations are another risk for IIPR because it makes it harder for cannabis companies to raise money. “This creates a cycle of equity raises and falling stock prices, raising their cost of capital. Most of these companies report negative net income and negative free cash flows. This matters because IIPR’s stock price is
contingent on the financial health of its tenant portfolio and the ability of its cannabis companies to continue to pay high lease rates over the next 15-20 years. We think falling share prices and deteriorating financials amongst IIPR’s borrowers should cause investors to reprice IIPR’s shares, given the mounting risks to its long-term loan book.”
IIPR Fires Back
IIP said the report was so flawed it did not warrant a response but gave one anyway. The company said, “In particular, it is IIP’s opinion that this short-seller fails to have any comprehension of the scope of significant infrastructure improvements that are needed for the transformation of a standard industrial building to a mission-critical facility with the enhanced environmental controls and other building systems necessary for regulated cannabis cultivation and processing. In addition, the writers do not understand the process that IIP employs for underwriting those improvements, and that any IIP reimbursements relate only to verified, qualified improvements to the buildings for these purposes, and never as funding for any type of “loan” to be utilized for any other purpose.”
Blue Orca finally noted, “We think of Parallel as the canary in the coal mine – demonstrative of broader risk that we believe exists across much of IIPR’s portfolio; long-term leases made to low credit quality tenants with significant downside in the event of default”
Parallel Cannabis’s debt issues have been exposed in the company’s lawsuit with some disgruntled investors. The lawsuit outlined the company’s defaults on its debt obligations and Curaleaf (OTC: CURLF) also noted in its filings that Parallel was no longer buying its Illinois properties saying it had “received correspondence from Parallel’s attorneys indicating that it will not be in a position to complete the acquisition of the Illinois Assets due to lack of financing and seeking to terminate its agreement to purchase the Illinois Assets. The company has asserted that Parallel’s actions have constituted material breaches of its agreement with Parallel and is exploring its options.” In other words, Curaleaf could sue Parallel or just shop the properties to someone else.
The money troubles at Parallel could spell problems with other companies it has agreements with and one of those is the cannabis REIT (real estate investment trust) Innovative Industrial Properties (NYSE: IIPR). 10% of the REIT’s rental revenues in 2021 came from Parallel. That makes it the second-largest tenant on the books for IIP, with PharmaCann being number one accounting for 12% of the rental revenue.
“These properties are located in some of the largest and strongest growth markets (PA and FL), in addition to TX, one of the largest states by population and estimated illicit cannabis consumption, where there continue to be significant inroads toward expansion of the existing program. Note that Parallel is one of only three license holders in the entire state of Texas, vertically integrated for cultivation, processing, and dispensing. We feel very comfortable with the demand for these properties in these states.,” said a spokesperson from IIP.
The company noted in its annual report that in June 2021, it amended its lease with a subsidiary of Parallel at one of its Florida properties, increasing the improvement allowance under the lease by $8.0 million to a total of $16.2 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.
IIP warns investors in its filing that “Lease payment defaults by any of our tenants or a significant decline in the value of any single property would materially adversely affect our business, financial position and results of operations, including our ability to make distributions to our stockholders. In addition, failure by any of our tenants to comply with the terms of its lease agreement with us could require us to find another lessee for the applicable property.”
Not only is IIP exposed to Parallel, but so are all the ETF’s holding the shares of IIP. In other words, if IIP feels any pain from Parallel, then so will the ETF’s holding IIP. According to ETF.com, “The largest holder of IIPR is the iShares Core S&P Small-Cap ETF (IJR), with approximately 1.71M shares. Investors may also find of interest that the ETF with the largest allocation to IIPR stock is AdvisorShares Pure Cannabis ETF (YOLO), with a portfolio weight of 16.94%. On average, U.S. ETFs allocate 1.08% of IIPR to their portfolios. Additionally, IIPR is a favorite stock for Vanilla and Active ETFs. It is also most likely to belong to Broad-based ETFs. The best-performing ETF in the past 12 months with IIPR as a holding is the Pacer Benchmark Industrial Real Estate SCTR ETF (INDS), with a return of 30.65%.” ETF.com lists the following cannabis ETF’s with exposure to IIPR.
IIP also tells investors that “If a bankrupt tenant decides to give up (reject) a lease, any claim for breach of the lease is treated as a general unsecured claim in the tenant’s bankruptcy case, subject to certain exceptions for collateral and guarantees. In the event one of our tenants is permitted to seek bankruptcy protection in the U.S., our general unsecured claim would likely be capped at the amount the tenant owed us for unpaid rent prior to the bankruptcy unrelated to the termination, plus the greater of one year of lease payments or 15% of the lease payments payable under the remaining term of the lease, but in no case more than three years of lease payments.”
“In addition to the cap on our damages for breach of the lease, even if our claim is timely submitted to the bankruptcy court, there is no guaranty that the tenant’s bankruptcy estate would have sufficient funds to satisfy the claims of general unsecured creditors. Finally, a bankruptcy court could re-characterize a net lease transaction as a disguised secured lending transaction. If that were to occur, we would not be treated as the owner of the property but might have additional rights as a secured creditor. This would mean our claim in bankruptcy court could be limited to the amount we paid for the property, which could adversely impact our financial condition. Any bankruptcy, if allowed, of one of our tenants would result in a loss of lease payments to us, as well as an increase in our costs to carry the property.”
To be sure, Parallel has lots of incoming revenue, and bankruptcy hasn’t even entered the conversation, but if the debts can’t be paid, can the rent be paid? Having said that, IIP can likely find another tenant to take over a facility but how long would that take and what amount of disruption would that cause until that happens? In the case of Texas, with only three license holders, there is a limited audience for the property within the cannabis industry. The other states would have an easier time finding another tenant quickly, but if the worst happened and the company chose to restructure, could IIP be left mired in the courts? Or Parallel may be able to compartmentalize its financial problems and continue making the rent payments while it attempts to solve its debt issues. Either way, the domino effect on the ETF’s is likely to be felt if things go horribly wrong.
Last week Innovative Industrial Properties, Inc. (NYSE: IIPR) announced that its operating partnership, IIP Operating Partnership, LP had launched a $300 million offering, but on Friday after the market closed, the company quietly pulled it. The company’s filing stated that it “determined not to proceed with its proposed public offering of $300 million of senior notes due 2027 previously announced on February 1, 2022, due to market conditions.” IIP stock has tumbled from approximately $286 in November 2021 to lately sell at $193.
The cannabis REIT (real estate investment trust) had originally planned to use the net proceeds from the offering to invest in specialized industrial real estate assets used in the regulated cannabis industry that are consistent with its investment strategy, and for general corporate purposes. The notes were to include a 3.75% Exchangeable Senior Notes due 2024 and 5.50% Senior Notes due 2026. As of September 2021, the company had $127 million in cash and cash equivalents.
At the beginning of January, IIP reported that it owned 103 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Texas, Virginia, and Washington, representing a total of approximately 7.7 million rentable square feet (including approximately 2.5 million rentable square feet under development / redevelopment). As of January 5, 2022, IIP had invested approximately $1.7 billion across its portfolio (consisting of purchase price and construction funding and improvements reimbursed to tenants, but excluding transaction costs) and had committed an additional approximately $316.1 million to reimburse certain tenants and sellers for completion of construction and improvements at IIP’s properties. The company said that these statistics did not include an $18.5 million loan from IIP to a developer for construction of a regulated cannabis cultivation and processing facility in California and up to $55.0 million that may be funded between June 15, 2022 and July 31, 2022 pursuant to IIP’s lease with a tenant at one of IIP’s Pennsylvania properties, as the tenant at that property may not elect to have IIP disburse those funds and pay IIP the corresponding base rent on those funds.
Ina short span of time, (from October 1, 2021 through January 5, 2022), IIP made 29 acquisitions (including 28 new properties and the acquisition of certain facilities at an existing property) for properties located in California, Colorado, Michigan, North Dakota and Pennsylvania, and executed one lease amendment to provide an additional improvement allowance at a property located in Massachusetts. In these transactions, IIP established new tenant relationships with Gold Flora, LLC, Medicine Man Technologies, Inc. (Schwazze), and Southwest Alternative Care, LLC (Kaya Cannabis), while expanding existing relationships with Columbia Care Inc., Curaleaf Holdings, Inc., LivWell Holdings, Inc. and Temescal Wellness of Massachusetts, LLC.
After the market closed on Wednesday, cannabis REIT company Innovative Industrial Properties, Inc. (IIP) (NYSE: IIPR) reported its third quarter earnings with total revenues growing 57% to $53.9 million over the prior year’s third quarter. This beat that average analyst estimate on Yahoo Finance for revenue of $52 million. The stock was rising by over 4% to lately sell at $271.
IIP attributed the increase to the acquisition and leasing of new properties, in addition to contractual rental escalations and amendments at certain properties to provide additional improvement allowances that resulted in adjustments to rent.
Rental revenues for the quarter ending September 30, 2021 and 2020 included approximately $1.4 million and $2.8 million, respectively, of tenant reimbursements for property insurance premiums and property taxes.
IIP reported net income attributable to common stockholders of approximately $29.8 million for the quarter, or $1.20 per diluted share, and adjusted funds from operations (AFFO) of approximately $45.0 million, or $1.71 per diluted share (Note: AFFO per diluted share for the period includes the dilutive impact of the assumed full exchange of IIP’s $143.75 million of exchangeable senior notes (the Exchangeable Senior Notes) for shares of common stock). This also beat the estimates for earnings of $1.16 per share.
The company noted that from July 1, 2021 through October, made five acquisitions (including four new properties and additional land expansion at an existing property) for properties located in California, Illinois, Maryland, Missouri and New York, and executed four lease amendments to provide additional improvement allowances at properties located in Illinois, Maryland, Massachusetts and Michigan.
The REIT paid a quarterly dividend of $1.50 per share on October 15, 2021 to common stockholders of record as of September 30, 2021, representing an approximately 28% increase over the third quarter 2020’s dividend. As previously announced, going forward as a general matter, IIP’s board of directors expects to evaluate adjustments to the level of IIP’s quarterly common stock dividend every six months, with any adjustments expected to be declared in the first quarter and third quarter of each year.
Following the close of the market on Tuesday, cannabis REIT (Real Estate Investment Trust) Innovative Industrial Properties, Inc. (IIP) (NYSE: IIPR) posted its operating, investment, and capital markets activity from April 1, 2021, through today. The company’s first quarter ended in March, but since that time IIP has been very active.
IIP said that from April 1, 2021, through Tuesday, it has made four acquisitions for properties located in Massachusetts, Michigan, and Pennsylvania, and executed three lease amendments to provide additional tenant improvements at properties located in Florida and Pennsylvania. In these transactions, IIP said it established new tenant relationships with Sozo Companies, Inc. and Temescal Wellness of Massachusetts, LLC, while expanding existing relationships with Green Peak Industries LLC (Skymint), Harvest Health & Recreation Inc., Jushi Holdings Inc., and Parallel.
In addition, on June 25, 2021, IIP said it closed on a construction loan with a developer for the construction of a regulated cannabis cultivation and processing facility in California. IIP said it is expected to lend up to $18.5 million to the developer for the construction of an approximately 102,000 square foot building. Following completion of development of the property, IIP said it has an option to purchase the property and may execute a negotiated lease with an affiliate of the developer or with another third party if IIP determines to exercise its purchase option.
Capital Markets Activity
On May 25, 2021, IIP issued a $300 million aggregate principal amount of unsecured senior notes. The sale of the notes generated net proceeds of approximately $293 million, after deducting the initial purchaser’s discounts and commissions and offering expenses. The notes bear interest at 5.50% per annum, payable semi-annually in arrears on May 15 and November 15 of each year, until the maturity date of May 25, 2026. IIP said it intends to use the net proceeds from the offering to invest in specialized industrial real estate assets that support the regulated cannabis industry that is consistent with its investment strategy, and for general corporate purposes.
As of July 6, 2021, IIP owns 72 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Texas, Virginia, and Washington, representing a total of approximately 6.6 million rentable square feet (including approximately 2.2 million rentable square feet under development/redevelopment), which were 100% leased with a weighted-average remaining lease term of approximately 16.7 years.
As of July 6, 2021, IIP had invested an aggregate of approximately $1.6 billion (consisting of the purchase price and development and tenant reimbursement commitments funded, but excluding transaction costs) and had committed an additional approximately $347.8 million to reimburse certain tenants and sellers for completion of construction and tenant improvements at IIP’s properties, which does not include an $18.5 million loan from IIP to a developer for construction of a regulated cannabis cultivation and processing facility in California.
Jushi Holdings Inc. (OTCMKTS: JUSHF) said it is planning a $50 million expansion project in Scranton, Pennsylvania which is expected to create more than 100 more new jobs in the Scranton area. The company said it plans to nearly double the square footage of its subsidiary’s grower-processor facility from approximately 90,000 sq. ft. to more than 160,000 sq. ft. in a phased expansion.
In 2019, the company opened the medical marijuana dispensary BEYOND / HELLO Scranton.Jushi already employs 70 people in the Scranton area and once this expansion is completed, it will have added 17 new jobs to the region. For the expansion, the company also plans to hire all local construction, electricians, and vendors for its expansion efforts.
“The medical cannabis market in Pennsylvania is rapidly growing and with our products in high-demand, this investment will significantly expand our cultivation capacity and market share,” said Jim Cacioppo, Chief Executive Officer, Chairman, and Founder of Jushi. “This is a robust operating environment and with the market intelligence gained through our eight currently operating BEYOND / HELLO™ retail dispensaries, we believe that patient demand for high-quality, medical-grade cannabis products is still far from being satisfied. We are very excited by the opportunity ahead of us in Pennsylvania, and as one of the fastest-growing jobs sectors in the U.S., Jushi and its subsidiaries look forward to bringing additional new local jobs and tax dollars to the region and further investing in Scranton’s economy and community.”
Pennsylvania’s Republican legislature continues to block the adult-use legalization measure despite the state’s widening budget gap. PA Governor Tom Wolf has been pushing for the legalization of cannabis for adults and looking for ways to close the budget gaps. If adult-use legalization were to pass in PA, the cannabis industry would likely double to triple in size, which would only create more taxes for state and local coffers and jobs in PA. The state is also facing pressure from its border with New Jersey which is planning on fast-tracking the legalization of adult-use cannabis. This could negatively impact the medical market in the state.
Jushi said that the majority of the approximate 70,000 sq. ft. expansion project will be focused on increasing the facility’s canopy space, which upon completion will nearly triple to approximately 98,000 sq. ft. In a statement, the company said that the first phase of the expansion is expected to come online in mid-2021 and the final phase will be completed by the second quarter of 2022. In total, Jushi expects to invest approximately $50 million in the expansion project, which is expected to create more than 100 new jobs in the Scranton area. Jushi (through its subsidiary Pennsylvania Medical Solutions, LLC), will work with Innovative Industrial Properties Inc. (NYSE: IIPR) (through its subsidiary IIP-PA 1 LLC) to partially finance the expansion project via an upsize to the existing lease agreement between the parties. The expansion project is subject to the company’s successful completion of certain milestones, including receipt of all local and state approvals and permits, and the finalization of a mutually agreed lease amendment with Innovative Industrial Properties Inc. related to the Facility.
The company reminded investors that it recently completed an expansion project in the third quarter of 2020, which included increasing the facility’s indoor cultivation from approximately 20,000 sq. ft. to approximately 45,000 sq. ft. (~33,000 sq. ft. of canopy) and supplementing the current CO2 extraction with new Class I, Division 1 ethanol extraction technology. The facility produces high-quality, indoor-grown flower and extracts and is strategically located within minutes of Interstate 81, Interstate 84 and the Pennsylvania Turnpike, enabling efficient wholesale distribution to the 98 dispensaries currently operating across the commonwealth, including the Company’s eight operational BEYOND / HELLO™ dispensaries. The facility is expected to supply the company’s subsidiaries and other licensed retail facilities.
Columbia Care will continue to operate the retail property as a regulated medical-use cannabis dispensary and the industrial property as a regulated medical-use cannabis cultivation and processing facility. Columbia Care is expected to complete improvements to the industrial property and IIP has agreed to provide reimbursement of up to $1.6 million. This brings IIP’s total investment in the two properties to approximately $14.0 million if all the improvement money is reimbursed.
“Columbia Care is one of the preeminent cannabis operators in the United States, and we are thrilled to introduce them as a new tenant partner,” said Paul Smithers, President and Chief Executive Officer of Innovative Industrial Properties, Inc. “As one of the largest cannabis operators, Columbia Care is dedicated to providing the highest quality products and services to patients and customers, and we look forward to supporting them as a long-term real estate capital partner in New Jersey, including providing the additional real estate capital for further enhancements to their cultivation and processing facility.”
Columbia Care in New Jersey
Columbia Care is one of only three operators licensed to dispense medical cannabis in the southern region of New Jersey. In June, the company announced the opening of a dispensary location and produced its first harvest this month at its cultivation and processing facility. New Jersey classified medical cannabis dispensaries as “essential,” allowing them to remain open during the coronavirus pandemic, while implementing additional safety and social distancing protocols to protect the health of patient customers and employees. Last month, the New Jersey Department of Health also enacted a waiver that allows licensed operators to provide home delivery of medical cannabis products to patients.
Nicholas Vita, CEO of Columbia Care said, “Partnering with IIP provides Columbia Care with access to nondilutive capital that offers flexibility and provides us with the ability to continue to build and expand our cultivation, manufacturing, and retail capabilities in the markets that matter most.”
The dispensary in Vineland NJ will be supported by the company’s 50,000 sq. ft. cultivation and manufacturing facility, which will supply both the dispensary as well as Columbia Care’s wholesale operations in the state. Adhering to both local and state guidelines for social distancing, patients have access to curbside and express pickup options as well as Columbia Care’s innovative Virtual.Care portal, providing the industry’s most complete virtual shopping experience.
As of July 20, 2020, IIP owned 61 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, Nevada, North Dakota, Ohio, Pennsylvania and Virginia, totaling approximately 4.5 million rentable square feet (including approximately 1.5 million rentable square feet under development/redevelopment), which were 99.2% leased (based on square footage) with a weighted-average remaining lease term of approximately 16.1 years. As of July 20, 2020, IIP had invested approximately $820.4 million in the aggregate (excluding transaction costs) and had committed an additional approximately $213.3 million to reimburse certain tenants and sellers for completion of construction and tenant improvements at IIP’s properties. .
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