Blue Orca Capital, named for the killer fish, issued a short-seller report on hashish REIT Revolutionary Industrial Properties (NYSE: IIPR) on Thursday. The inventory fell over 7% on Thursday to shut at $169.68 close to its 52-week lows. Markets within the U.S. are closed on Friday for the Good Friday vacation.
The report wrote, “Within the final 18 months, we expect IIPR’s mortgage e-book seems to have degraded considerably because the sector has develop into extra aggressive and IIPR stretched for decrease high quality tenants looking for persevering with development. IIPR’s largest tenant is a failed SPAC that seems in extreme monetary misery and was not too long ago sued by buyers accusing it of securities fraud and being in impact a Ponzi scheme.” Inexperienced Market Report wrote about this publicity not too long ago when it uncovered the extent to which IIP relies on hire from Parallel Hashish.
The report went on to say, “Not like with different REITs, IIPR can not anticipate to get better the misplaced revenue from defaulting tenants as a result of it seems that the precise values of its properties are considerably beneath their carrying worth on IIPR’s steadiness sheet. IIPR’s inventory has already priced in sturdy internet revenue development in FY 2022, which means a repricing is probably going given the danger of default at its main tenant and the deteriorating fundamentals of different IIPR portfolio corporations.”
Kings Backyard Danger
Past the problems with Parallel Hashish, Blue Orca additionally factors to Kings Backyard saying, “IIPR’s second largest tenant is a personal California hashish firm, Kings Backyard. In Might 2021, its co-founder sued Kings Backyard and its executives alleging illegal and fraudulent conduct with respect to Kings Backyard’s monetary, regulatory and tax reporting. Notably, the lawsuit accused Kings Backyard of falsifying books and information and of promoting substantial portions of unlawful hashish on the black market.” The report went on to say, “If we take a look at the portfolio of Kings Backyard properties, primarily based on the worth paid by Kings Backyard earlier than flipping them to IIPR, we estimate that the residual worth of the properties is a fraction of the carrying worth of the properties on IIPR’s steadiness sheet and that even assuming a ten% yield, hire from a alternative tenant would doubtless be greater than 80% decrease.”
Blue Orca additionally means that falling hashish inventory valuations are one other danger for IIPR as a result of it makes it tougher for hashish corporations to lift cash. “This creates a cycle of fairness raises and falling inventory costs, elevating their price of capital. Most of those corporations report detrimental internet revenue and detrimental free money flows. This issues as a result of IIPR’s inventory value is
contingent on the monetary well being of its tenant portfolio and the flexibility of its hashish corporations to proceed to pay excessive lease charges over the subsequent 15-20 years. We predict falling share costs and deteriorating financials amongst IIPR’s debtors ought to trigger buyers to reprice IIPR’s shares, given the mounting dangers to its long-term mortgage e-book.”
IIPR Fires Again
IIP stated the report was so flawed it didn’t warrant a response however gave one anyway. The corporate stated, “Particularly, it’s IIP’s opinion that this short-seller fails to have any comprehension of the scope of serious infrastructure enhancements which are wanted for the transformation of a regular industrial constructing to a mission-critical facility with the improved environmental controls and different constructing methods essential for regulated hashish cultivation and processing. As well as, the writers don’t perceive the method that IIP employs for underwriting these enhancements, and that any IIP reimbursements relate solely to verified, certified enhancements to the buildings for these functions, and by no means as funding for any kind of “mortgage” to be utilized for every other objective.”
Blue Orca lastly famous, “We consider Parallel because the canary within the coal mine – demonstrative of broader danger that we imagine exists throughout a lot of IIPR’s portfolio; long-term leases made to low credit score high quality tenants with important draw back within the occasion of default”
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