Innovative Industrial Properties Archives - Green Market Report

Debra BorchardtJune 16, 2022
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4min110

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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2min140

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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6min150

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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9min171

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.

 


Debra BorchardtFebruary 23, 2022
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3min50

Innovative Industrial Properties, Inc.  (NYSE: IIPR) announced results for the fourth quarter and year ended December 31, 2021. IIP generated total revenues of approximately $58.9 million for the three months ended December 31, 2021, versus approximately $37.1 million for the same period in 2020, an increase of 59%. This beat the Yahoo Finance average analyst estimate of $57 million. Recorded net income attributable to common stockholders of approximately $28.3 million for the quarter, or $1.14 per diluted share, and AFFO of approximately $48.6 million, or $1.85 per diluted share (including the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes). The earnings estimate was for $1.24.

IIP generated total revenues of approximately $204.6 million for the year ended December 31, 2021, compared to approximately $116.9 million for 2020, an increase of 75%. The increase in both periods 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.  The company recorded $4.55 of net income attributable to common stockholders per diluted share and $6.66 of AFFO per diluted share (Note: AFFO per diluted share for 2021 includes the dilutive impact of the assumed full exchange of IIP’s exchangeable senior notes (the Exchangeable Senior Notes) for shares of common stock).

IIP said it had approximately $406.0 million in cash and cash equivalents and short-term investments. The company also has 15% debt to total gross assets, with approximately $2.2 billion in total gross assets, representing a total annual fixed cash interest obligation of approximately $17.8 million, with no debt maturing in 2022 or 2023.

The company said in a statement that as of February 23, 2022, it owned 105 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 7.9 million rentable square feet (including approximately 2.4 million rentable square feet under development/redevelopment), with a weighted-average remaining lease term of approximately 16.6 years.

As of February 23, 2022, IIP had invested approximately $1.8 billion across its portfolio (consisting of the purchase price and construction funding and improvements reimbursed to tenants, but excluding transaction costs) and had committed an additional approximately $268.6 million to reimburse certain tenants and sellers for completion of construction and improvements at IIP’s properties. These statistics do 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.


Debra BorchardtFebruary 7, 2022
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3min50

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.

IIP Portfolio

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.


StaffNovember 4, 2021
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3min50

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.


StaffOctober 18, 2021
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4min30

Innovative Industrial Properties, Inc. (IIP)(NYSE: IIPR) has purchased a 201,000 square foot industrial property in Desert Hot Springs, California from Gold Flora, LLC for $51 million. Gold Flora will then lease the building and is expected to complete additional improvements for the property, for which Innovative Industrial has agreed to provide reimbursement of up to $9.0 million. Assuming full reimbursement for the improvements, IIP said its total investment in the property is expected to be $60.0 million.

“We are excited to welcome Laurie and the Gold Flora team as our newest tenant partner,” said Paul Smithers, President and Chief Executive Officer of IIP. “Gold Flora has established a strong reputation and presence in the largest regulated cannabis market in the world, California, and we look forward to supporting them as a long-term real estate capital partner for many years to come, as they continue to expand the breadth of their operations and reach throughout the state.”

Gold Flora was founded in 2017 and is a vertically integrated operator in California, including cultivation, manufacturing, distribution and retail. The company’s team includes Chief Executive Officer Laurie Holcomb, Chief Operations Officer Greg Gamet, Chief Financial Officer Chris Martin and Chief Cultivation Officer Phillip Hague. Earlier this year, Gold Flora announced a strategic partnership with Stately Brands, including the establishment of an advisory board to Gold Flora and financing to further expand Gold Flora’s retail operations, brands, and distribution network.

“Teaming with IIP on this transaction strategically unlocks capital for us as we focus on our continued growth in California, and we look forward to working with the IIP team for many years to come as our go-to real estate capital provider,” said Laurie Holcomb, Chief Executive Officer of Gold Flora. “In a few short years, I am proud of what our team at Gold Flora has accomplished, with our best-in-class line of products and strategic relationships that I believe will continue to distinguish us in the California marketplace, as we look to expand our footprint and distribution throughout the state.”

As of October 18, IIP now owns 76 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 7.5 million rentable square feet (including approximately 2.8 million rentable square feet under development/redevelopment), which were 100% leased with a weighted-average remaining lease term of approximately 16.7 years. In addition to that, IIP said it has committed approximately $1.9 billion across its portfolio, including capital invested to date (excluding transaction costs) and additional capital commitments to fund future construction and tenant improvements at IIP’s properties.


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