Grizzly Research has released its latest short report this morning, this time targeting the cannabis-focused REIT Innovative Industrial Properties (NYSE: IIPR) and referring to it as the “WeWork of Cannabis”. Chief among the accusations levied against IIPR is that its portfolio is chalk-full of toxic low quality assets, and that it has conducted a series of sham transactions to help prop up its largest tenant.
Perhaps even more concerning for investors, is the claim that Grizzly suspects 38 – 49% of IIPR’s 2020 rental income is in jeopardy or has been already lost by the firm, with the cash flow analysis pointing to the potential of the firm being a pyramid scheme, with the dividend either having to be slashed or funded via future capital raises. Grizzly closes out its summary with a valuation target of $22.00 based on the firms assets, which is in stark comparison to the closing price of $69.06 yesterday.
The core of the research report conducted by Grizzly is centered around the firms largest tenant, PharmaCann, who currently accounts for 17% of IIPR’s estimated 2020 rental income. The private cannabis multi state operator currently has five properties under lease with the REIT across five states. The MSO represents a total investment of $89.1 million for the REIT, and approximately $18.7 million in annual rent.
Grizzly notes that based on publicly available financials thanks to a terminated merger with Medmen Enterprises (CSE: MMEN), PharmaCann appears to be nearly insolvent with a high monthly burn rate, and the recent departure of the founder and CEO in August 2019. Recent deals conducted with IIPR are alleged to be a means of propping up the tenant, with one recent August 2019 transaction valued at $942,000 seeing a monthly rental fee of $260,000. When Grizzly’s team visited the site, the property was found to be empty land.
Another recent transaction with PharmaCann saw IIPR purchase a property in October 2019 for $18.0 million in Dwight, Illinois that contained a 48,000 square foot building. PharmaCann had purchased the property a year earlier for only $1.75 million, with images showing a lack of any significant improvements.
Outside of PharmaCann, Grizzly points to numerous other tenants that are facing funding issues due to the collapse in the cannabis public markets, such as Vireo Health (CSE: VREO), and DionyMed Brands (CSE: DYME). In the case of DionyMed, IIPR conducted a transaction just weeks before the firm filed for insolvency, leaving the REIT with an overpriced building and no tenants.
The researcher also points to a number of transactions overall that result in expensive leases for the cannabis operator, which often has no basis on the actual cash flow from the property, making the lease unsustainable. Grizzly also indicates that as a result of this, it makes the business model of IIPR itself flawed.
The result, is the claim that the firms dividend will have to be reduced substantially as it threatens the business itself. Grizzly points to the lack of revenues to support the current dividend that is indicated to be $86 million per year, while total lease income in Grizzly’s best case scenario is pegged at $82 million for 2020. This, combined with with the discount applied by Grizzly to the firms net asset value per share due to the low quality of tenants, has resulted in Grizzly ascribing a price per share estimate of $22.00
The full report published by Grizzly Research can be found here.
IIPR last traded at $67.50 on the NYSE.
Information for this briefing was found via Grizzly Research and Innovative Industrial Properties. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
As the founder of The Deep Dive, Jay is focused on all aspects of the firm. This includes operations, as well as acting as the primary writer for The Deep Dive’s stock analysis. In addition to The Deep Dive, Jay performs freelance writing for a number of firms and has been published on Stockhouse.com and CannaInvestor Magazine among others.