Innovative Industrial Properties Archives - Green Market Report

StaffJanuary 19, 2023
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The Daily Hit is a recap of the top financial news stories for January 19, 2023.

On the Site

Columbia Care Closes Unprofitable Dispensaries, Cuts Jobs

In an effort to cut costs and try to become profitable, Columbia Care Inc. (CSE: CCHW) (OTCQX: CCHWF) closed four unprofitable dispensaries and cut its headcount by 25%. Col-Care said it closed one dispensary in California and three in Colorado. In addition, the company consolidated cultivation operations in California, Colorado, and Pennsylvania to improve its adjusted EBITDA contribution. Read more here.

IIP Says Cannabis Tenants Not Paying Rent

Innovative Industrial Properties Inc. (NYSE: IIPR) said rent collections dropped to just 92% for the month ending Jan. 31. The company said it had collected 97% of its rent at the end of December. The cannabis real estate investment trust outed various cannabis companies that have slipped in their rent payments. Read more here.

Minnesota Legalization Bill a Good Start But Could be Improved

A new bill in the Minnesota Legislature to legalize adult-use cannabis features a few provisions that indicate state lawmakers are learning which policies work and which don’t when it comes to replacing underground marijuana markets with regulated ones. Read more here.

In Other News

TerrAscend Corp./Wana Brands

TerrAscend Corp. (CSE: TER) (OTCQX: TRSSF), a North American cannabis operator, signed a multiyear agreement with edibles manufacturer Wana Brands to introduce Wana’s products at The Apothecarium retail stores and additional third-party retailers in New Jersey. The agreement will also transfer the manufacturing and sales of Wana’s existing portfolio of products in Maryland to TerrAscend. Read more here.

Relativity Acquisition Corp.

Relativity Acquisition Corp. (Nasdaq: RACY), a blank check company focused on targets in the legalized cannabis industry, received a determination letter from the Nasdaq Listing Qualifications staff that the company was not in compliance with the requirements of the Nasdaq Listing Rules or either of the alternative requirements for continued listing on The Nasdaq Global Market. Read more here.

Tier One Consulting

In a complaint filed Wednesday, Tier One Consulting, which is owned by DJCBP Corp., and David Ju said former city officials of both Baldwin Park and Compton in California conspired to illegally sell a cannabis license to Ju, and mishandled mitigation fees that he paid as part of the license deal. Read more here.


Debra BorchardtJanuary 19, 2023
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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).

Lease Adjustments

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.

Portfolio

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.

Debra BorchardtJune 16, 2022
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Texas Original Holdings, LLC (Texas Original) is the latest cannabis company to sell its property to Innovative Industrial Properties, Inc. (IIP) (NYSE: IIPR) and then enter into a long-term lease. The purchase price for the property was approximately $12.0 million (excluding transaction costs), which was derived from costs Texas Original incurred to acquire the 25 acres of land and develop the property through the date of closing. IIP said that at the time of closing, the majority of project site work had been completed and two of the four buildings have been dried in with interior finish out under construction.

Texas Original is one of three vertically integrated cannabis license holders in Texas, is the only provider headquartered in the state, and is estimated to hold a large majority of the current market share within Texas’ medical cannabis program. However, the program is extremely restrictive and very small. In addition to that, the state is currently dominated by very conservative politicians, that have little interest in further legalization.

Texas Original is expected to complete construction of the approximately 85,000 square foot industrial and hybrid greenhouse facility, for which IIP has agreed to provide reimbursement of up to approximately $10.0 million, consisting of completion of building shell, interior buildout of cultivation and production rooms, and mechanical, electrical and plumbing systems. Assuming full reimbursement for the construction, IIP’s total investment in the property is expected to be $22.0 million (excluding transaction costs), or approximately $259 per square foot. Upon completion, the property is expected to include approximately 49,000 square feet of cultivation space, with the balance of the space utilized for manufacturing, processing, testing, and administrative activities.

IIP Lawsuit

Some investors are apparently becoming concerned about the valuations that IIP is giving these properties leading to a shareholder lawsuit. The class action complaint alleges that  Innovative Industrial Properties‘ focus is to be a cannabis company lender rather than a REIT and that the true values of the company’s properties are significantly lower than Innovative Industrial Properties represents. Green Market Report has pointed out the company’s exposure to Parallel Cannabis and it seems this case is following that line of concern. it alleges that “there are existential issues in its top customers” and as a result, “its top customers may not be able to continue making payments to Innovative Industrial Properties and the company would face significant issues replacing these customers; and as a result, defendants’ statements about its business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis at all relevant times.”


StaffMay 5, 2022
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After the market closed on Wednesday, Innovative Industrial Properties, Inc. (IIP) (NYSE: IIPR) announced results for the first quarter ending March 31, 2022. The cannabis REIT delivered total revenues of approximately $64.5 million in the quarter, representing a 50% increase from the prior year’s quarter. However, it missed the Yahoo Finance Average analyst estimate for revenues of $67 million.

IIP said that the increase was driven primarily by the acquisition and leasing of new properties, additional improvement allowances, and construction funding at existing properties resulting in adjustments to base rent, and contractual rental escalations at certain properties.

IIP recorded net income attributable to common stockholders and net income attributable to common stockholders per diluted share of approximately $34.7 million and $1.32, respectively. This also missed the average analyst estimate for earnings of $1.41.

The funds from operations (FFO) (diluted) and FFO per diluted share of approximately $48.9 million and $1.86, respectively; normalized FFO, which adds back to FFO acquisition-related expense and the loss on exchange of a portion of the Exchangeable Senior Notes during the three months ended March 31, 2022 (Normalized FFO).

Plus a Normalized FFO per diluted share of approximately $49.1 million and $1.87, respectively; and AFFO and AFFO per diluted share of approximately $53.8 million and $2.04, respectively. For the three months ended March 31, 2022, FFO (diluted), Normalized FFO, AFFO and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock.

 


Debra BorchardtApril 15, 2022
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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.

Parallel Exposure

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”


Debra BorchardtMarch 30, 2022
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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.”

ETF Exposure

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.

YOLO AdvisorShares Pure Cannabis ETF 16.94%
MJUS ETFMG U.S. Alternative Harvest ETF 10.33%
BUDX Cannabis Growth ETF 9.81%
PSY Defiance Next Gen Altered Experience ETF 7.55%
MSOS AdvisorShares Pure US Cannabis ETF 6.80%

 

Bankruptcy?

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.”

In Closing

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.

 


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