Stocks of REIT Innovative Industrial Properties (NYSE:IIPR), the first and only cannabis-focused real estate company on the NY Stock Exchange, fell 7% on Thursday and closed at $169.68 near its 52-week lows after Blue Orca Capital issued a short-seller report on the fund, reported Deborah Borchardt for Green Market Report. Blue Orca has been called an “activist investment firm.”
“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,” noted the report, adding that “unlike 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.”
According to the report, “IIPR’s second-largest tenant is Kings Garden, a private California cannabis company, which was sued by its co-founder in 2021, alleging unlawful and fraudulent conduct. “Notably, the lawsuit accused Kings Garden of falsifying books and records and of selling substantial quantities of illegal cannabis on the black market (...) 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.”
Innovative Industrial Properties Responds To Short-Seller Report
On Thursday, IIP announced that it was “aware of a short-seller report (...) that contains numerous false and misleading statements about IIP.”
“This short-seller report is flawed and demonstrates a basic lack of understanding of commercial real estate generally, the regulated cannabis industry, and IIP’s straightforward, simple business model,” stated the firm in a press release.
“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,” added IIP.
“Given the flawed nature and disinformation contained in this short-seller report, other than the clarification set forth above, the short-seller report’s content does not warrant a response from IIP,” concluded the firm.
Photo by Tierra Mallorca on Unsplash.
