IIPR - Innovative Industrial Properties

[lemsinge]

IIPR is a speculative REIT trading in a very speculative industry. It IPOed in December of 2016 and began deploying the capital raised to purchase real estate used for growing marijuana through sale and leaseback transactions with the growers themselves. It has already closed on two successful transactions and continue to focus on these sale & leasebacks with a target cap rate ranging from 14 to 16 percent (Typical cap rates across all industries are sub 8%). The contracts it is pushing for are triple net leases, which can result in extremely high bottom line growth. Once debt gets thrown into the picture, you could see some pretty nice returns. 

 

It recently raised 15mm through a preferred stock offering due to the company entering 5 non-binding letters of intent to acquire properties worth $43mm. It has already spent ~38mm on its two properties. This recent offering will leave them short $3mm, which will likely result in only 4 new properties within the next 3 to 6 months. I believe that with this, the company could quickly scale up within a year. Furthermore, the stock is trading near book value (1.08x). 

 

With that said, the management team is mediocre. They do have a lawyer as the CEO which could be seen as a potential positive. I also don't support the dividend as it does not make much sense (its earnings are negative, so they are not legally required).

 

I took a swing at this one as I figured the risk-reward tradeoff is skewed, at least for now.

 

If any legal experts could provide their opinion on the industry, that would be much appreciated!

[rb]

I'm not a legal expert, but let me offer this.

 

The whole weed industry is still pretty shady. A lot of the characters in it were formerly involved with the illegal trade. I'd call them the smart/entrepreneurial/innovative drug dealers. Keep this in mind: Nearly all purveyors of alcohol today were bootleggers during the prohibition. But nearly none of the bootleggers are purveyors today. These are not the kind of people that I, as an investor. would like as a partner nor as stewards of my capital.

 

I think the weed industry has to go in the too hard pile, or as always, buyer beware.

[DooDiligence]

I'm not a legal expert, but let me offer this.

 

The whole weed industry is still pretty shady. A lot of the characters in it were formerly involved with the illegal trade. I'd call them the smart/entrepreneurial/innovative drug dealers. Keep this in mind: Nearly all purveyors of alcohol today were bootleggers during the prohibition. But nearly none of the bootleggers are purveyors today. These are not the kind of people that I, as an investor. would like as a partner nor as stewards of my capital.

 

I think the weed industry has to go in the too hard pile, or as always, buyer beware.

 

Agreed, many of the worst legal operators resort to bootlegging & will be shut down in due course.

Might present opportunities if willing to search for management teams with integrity  ???

[lemsinge]

Interesting enough, the stock is now at a level where it can partake in a form of private to public arbitrage by raising equity to purchase real estate. Any sort of raise around these levels will create value if they can lock in similar deals from the last year. The numbers I'm running suggest that a $40mm equity raise will be able to add at least $5 a share after dilution, assuming it's deployed at a 14% cap rate.

 

 

[CorpRaider]

I'm not a legal expert, but let me offer this.

 

The whole weed industry is still pretty shady. A lot of the characters in it were formerly involved with the illegal trade. I'd call them the smart/entrepreneurial/innovative drug dealers. Keep this in mind: Nearly all purveyors of alcohol today were bootleggers during the prohibition. But nearly none of the bootleggers are purveyors today. These are not the kind of people that I, as an investor. would like as a partner nor as stewards of my capital.

 

I think the weed industry has to go in the too hard pile, or as always, buyer beware.

 

Yeah I'm concerned about forfeitures and even laundering issues with this one.  Have you looked at all at the Canadian enterprises?  Seems like it might play out like Seagrams, et. al. during prohibition, or at least it could.

[lemsinge]

I'm not a legal expert, but let me offer this.

 

The whole weed industry is still pretty shady. A lot of the characters in it were formerly involved with the illegal trade. I'd call them the smart/entrepreneurial/innovative drug dealers. Keep this in mind: Nearly all purveyors of alcohol today were bootleggers during the prohibition. But nearly none of the bootleggers are purveyors today. These are not the kind of people that I, as an investor. would like as a partner nor as stewards of my capital.

 

I think the weed industry has to go in the too hard pile, or as always, buyer beware.

 

Yeah I'm concerned about forfeitures and even laundering issues with this one.  Have you looked at all at the Canadian enterprises?  Seems like it might play out like Seagrams, et. al. during prohibition, or at least it could.

 

I haven't spent much time looking at Canadian enterprises as IIPR only owns property in America at this point. And while yes, I agree that the industry is sketchy - IIPR's current tenant profile mitigates some of this risk. In its current state, most of its tenants are licensed for vertical integration (cultivating, processing, & distributing). Most states with medicinal marijuana only have three or four companies with vertical integration. Its one thing for a small medicinal grower to also bootleg on the side whereas I would believe it is much harder/not desirable for companies who are viewed as the industry leaders.

 

IIPR has done a good job so far not getting trigger happy with the cash that they have. I believe the management spends serious time getting to know their tenants to avoid this type of issue.

[lemsinge]

Wanted to write out a brief post-investment analysis since I recently exited my position. I figured it would be good to start doing these as I try to improve my investment process.

 

While there are probably many "public to private" arbitrage opportunities that exist in this space, the valuation, even based on a few years out seems quite high. When I originally looked at the company, it felt quite clear (in my eyes) that management would have to make major errors to erode the value of what I was buying. However, at the current price, and my lack of long-term trust in management, removes my feeling around this. I think the market is pricing this quite accurately based upon very positive future prospects.

 

I did believe the risks mentioned above were legitimate. However, I believe that the demographic I am apart of had an effect on my bias (positively) in regards to pot culture, effectively allowing me to overcome some of those hurdles.

 

I will keep this company on my radar as I think it is an interesting way to play this idea. I think it will be quite a turning point for the industry when IIPR can easily access bank loans to finance its investments.