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Friday File: Marijuana Burning

Checking in on some of our ugly marijuana-related positions this week... plus thoughts on PW, 5G and more...

By Travis Johnson, Stock Gumshoe, October 11, 2019

Innovative Industrial Properties (IIPR) hit a stop loss yesterday thanks to a sector-wide collapse of marijuana stocks. The big news that hits IIPR directly this week was that MedMen dropped its plan to buy PharmaCann, which is IIPR’s biggest tenant, so I did take the somewhat cautious step of buying a few protective puts just in case the whole sector unravels completely — though I don’t think that’s the most likely outcome, and I still trust management to be making rational decisions about their tenants, so I’m continuing to hold my (pretty large) position in IIPR stock.

As of this week, when they committed to their latest sale/leaseback transaction with LivWell in Michigan (that’s an established Colorado marijuana company that got a MI license), IIPR has a total portfolio investment of $441 million ($123 million committed, $318 already spent), with another $44 million “pending”, mostly to Trulieve, so that’s a total of about $485 million.

Of that, Pharmacann likely represents about $106 million — IIPR has invested $26.5 million into their Massachusetts facility, $30 million in Pennsylvania, and $30 million in New York (that was IIPR’s first big deal, in late 2016). The Ohio facility’s price was not specifically disclosed, but it looks like it was probably about $20 million. So that means PharmaCann operates roughly 22% of IIPR’s portfolio, and presumably generates more than 25% of their cash flow (since properties don’t pay rent or generate cash flow until renovations are complete and/or an initial rent-free period expires, often about six months after closing).

Their latest two deals are their largest two deals, by the way, so they do not appear to be shying away from continuing to grow through big new sale/leaseback transactions even though there has been some real pessimism for marijuana stocks in the past six months — though they are also arguably working with higher quality tenants now. The big one that was announced about two weeks ago was with Cresco Labs (CRLBF) for two properties in Kankakee, Illinois — buying approximately 100,000 square feet of industrial space for $46.3 million and leasing it back to Cresco, presumably on similar terms to other large deals they’ve made. The deal announced this week with LivWell for a suburban Detroit property was for $19 million for the property plus up to $23 million in renovation and improvement costs.

The downside risk has grown ...

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