I shared a brief Trade Note yesterday about the sale of part of my position in Innovative Industrial Properties (IIPR), and I promised to go much more in depth in my thinking today… so strap yourself in. (And if you don’t care about IIPR at all or aren’t interested in “bear attacks”, you can skip way down, this is most of what I’m writing about today.)

Grizzly Research is a research shop that produces and publicizes “bear attack” reports, analyzing stocks that they think will fall in value and which they have already traded short. They are obviously not presenting balanced arguments, they are presenting marketing material to convince people to sell the stock, which will help them to profit from their short position (and to be fair, those who present analysis of stocks to convince you to buy are often not being balanced, either). They posted a “this company is a fraud” piece about Trulieve in December, which I paid attention to because Trulieve is a large tenant of Innovative Industrial Properties, and I didn’t find that particularly compelling as a IIPR shareholder… but then this week they went after IIPR itself, so I thought it was important, as a pretty substantial IIPR shareholder, to look at their report carefully. You can see the report here, and their appendix with individual property investigations here if you’d like to do your own research before you form an opinion.

Here’s the crux of the financial argument from the Grizzly folks:

“On the surface IIPR has been performing well, seeing its stock skyrocket. Even after the recent decline in stock price the company still sports a market cap and Enterprise Value in excess of $1.1B and $1.24B. The rising stock price has caused something of an arbitrage opportunity for IIPR as the company’s current dividend implies a cost of equity capital of about 5%. At the same time IIPR is targeting average yields of around 14% for its real estate investments. However, we believe this arbitrage is firstly unsustainable and secondly about to fall apart, because our findings imply that IIPR will in fact have to finance the 2020 dividend from capital raises or reduce the dividend substantially.”

That is indeed the beauty of IIPR — they levered their relatively easy access to capital, thanks to their NYSE listing and their reputable/experienced management team, into very quickly and aggressively scaling ...