After opening a job update on 1/18/23, New Industry (NYSE:IIPR) fell about 16% on the 19th. I think it will fall even more as time goes on. Most of their reports can be described as kicking the can down the road and throwing good money at bad. This article will dig into the fundamentals and explain why I think this is only the tip of the iceberg of the missing list.
Here’s what they have to say about collecting lists.
The collection of rent for the operation of the IIP (calculated as base rent and property management fees collected on contractual amounts payable) as follows:
- 92% collected to date for the month ending January 31, 2023 (including approximately $324,000 of a security deposit requested for lease payment for IIP’s lease to Holistic Industries Inc .(Holistic) to the IIP property in Michigan and receiving full lease payment from .Sozo Health, Inc. (Sozo))
- 94% collected for the three months ended December 31, 2022 (including approximately $541,000 of escrow funds used for IIP and Sozo lease payments); and
- 97% was collected for the year ended December 31, 2022 (including an amount of approximately $2.7 million of reserve funds used to pay rent for leases of IIP and Kings Garden Inc. (Kings Garden) and Sozo).
Eating safe deposits is not as important as collecting wages. The amount of collection should be very low.
Sometimes tenants face an operational crisis. It happens in all businesses and most REITs at some point in their operations have times when tenants are unable to pay rent. These defects in themselves are not the problem. The IIPR’s acquisition process creates serious vulnerabilities.
Not all disabilities are the same
At the beginning of this month I write about the perception of the value of a tenant to the owner of the building. In that article I explained that if the property can be satisfied and the rent paid is according to the market rent, the owner of the house may not suffer because of the failure of the tenants. The REIT can re-let the space at similar rates and may incur a few rental expenses in doing so, but overall it’s not a big deal. Then I suggest that for IIPR in particular, the loss of the tenant is a bad thing. There are 3 specific areas in IIPR that disturb residents.
- The rents are significantly higher than market rates
- Property prices are part of the prices paid
- The property cannot be used at that price
All of this is related to IIPR’s plan to sell the lease that operates to bake loans into leases.
More than 90% of IIPR’s properties are industrial buildings. They are in the following categories.
In the first place, industrial warehouses cost about $100 per foot. In these areas you can buy warehouses for $50-$70 per square foot. This is the line from the IIPR announcement that I found most disturbing:
Total investment/deposit per square foot: $274.
So the warehouse itself is about $70 a foot. What was the additional $200 per foot that IIPR paid for the lease sale?
It is officially recognized as a home owner to return the money on the property because these warehouses have been converted into farms.
I think it would be more accurate to describe it as a loan that IIPR pays to the tenant with the intention of paying it back through rent over time. length of lease. Another troubling line is the IIPR report:
Weight list duration: 15.3 years.
The IIPR provides somewhere in the region of $200 per square meter of TI or the equivalent (occupant allowance) on a $70 per square meter building. . In exchange, IIPR receives rent that is many times higher than what would normally be paid on an industrial property.
If the tenant pays the rent for the full 15 years, the IIPR is paid with a good profit on it. It’s a good business model if you have a lot of tenants, but like any other type of loan, you need to make sure it’s good value for money.
This is what makes IIPR different from other REITs. Most REITs invest in real estate. The property itself is very important so that the REIT does not depend on its tenants because the property is so valuable that the REIT can find new tenants and receive rent payments.
IIPR chose a business model that invests in its residents. Remember the numbers from above: $70 per square foot for the house. $200 per square foot per tenant for TI.
That’s why IIPR relies heavily on its residents. If the tenants are unsuccessful, the $200 is out the window.
Well, unfortunately, the marijuana business is a sensitive and developed business with inexperienced players and financial resources. It was only a matter of time before some of the tenants ran out of money.
However, as time went on the market seemed to forget about the risk of IIPR and the stock continued to trade at a price comparable to the value of its assets.
However, with the recent announcement, it seems the floodgates have opened. Housing problems are no longer an isolated problem. There are many businesses and many tenants who are unable to pay the rent. Again from the IIPR update:
On January 18, 2023:
SH Parent, Inc. (Parallel) defaulted on its obligations to pay rent on one of IIP Pennsylvania’s properties (about 2.9% of the investment/deposit).
Green Peak Industries, Inc. (Skymint) defaulted on its obligations to pay rent on one of IIP Michigan’s properties under construction (approximately 2.7% of the investment/deposit).
The partners of Medical Investor Holdings, LLC (Vertical) failed to pay their obligations to pay the rent on the property of IIP California (about 0.7% of the investment / retention).
As of January 18, 2023, IIP has entered into lease amendments that include countervailing provisions and/or additional lease terms in exchange for restrictions. Here is the basic list for the following three properties:
One California property and one Michigan property listed by Holistic (about 1.8% of investment/retention capital combined):
100% of the base rent to be used from safe deposits held by IIP for the nine months ending September 30, 2023 with respect to the Michigan property and the eight months ending September 30, 2023 with respect to the California property, with reimbursement. safe deposits over 12 months starting January 2024.
One property in Missouri was leased by Calyx Peak, Inc. (about 1.2% of investment/operation):
100% double base payment until March 31, 2023, with prorated repayment over the next 12 months.
The report explains in detail how IIPR provides more money to these tenants.
Construction is underway: two properties (previously leased to Kings Garden), and an expansion project on a property where Kings Garden continues to occupy the property and pay rent , approximately 395,000 rentable square feet in total.
San Bernardino property (approximately 192,000 rentable square feet): IIP is actively evaluating other non-cannabis uses for the property due to market conditions in California and changes in the zoning of the property.
Cathedral City Property (approximately 23,000 rentable square feet): IIP has issued a letter of intent to lease the property and is negotiating lease terms with the tenant. There is no guarantee that IIP will list the property on the expected terms, or not.
I know that the San Bernadino property is particularly dangerous to the IIPR because they are currently trying to list the property as a traditional warehouse. Conventional warehouses rent per foot for about $7 and as I have pointed out IIPR pays $274 per foot. $7 is income before any expenses.
At that rate it will take a long time to break even.
Where is the bottom?
IIPR is always active in financing many of their joint ventures. So, I don’t see bankruptcy as a real concern here. However, when enough tenants stop paying rent the value of their rent goes away leaving only the value of their property.
They have 110 properties with a total of 8.7 million rentable square feet. If they lose their marijuana-related tenants they are just warehouses and will go back to a warehouse for about $70 a foot. The property is worth just over $600 million. That’s a huge drop from their current market cap of $2.6B
I don’t think all tenants will default so they can keep some of their rent, but I think a large percentage will not.
Therefore, the fair value of IIPR is between $600 million and $2.6B depending on the strength of the wave failure tenant.
There is still time to leave
Even with a 16% or more drop since the job update, the IIPR is still very expensive. There is still plenty of time to sell and move on to better things.
It would probably be better to invest in a different REIT that invests in its properties rather than its tenants. There is only one business REIT that invests in real estate rather than real estate and that is LXP Industrial Trust (LXP). Otherwise, take a bite, the options are pretty solid. Stocks are performing well and REITs generally have low valuations.