I included some of this in a comment on yesterday’s early-published Friday File, but it got quite long and I had some additional thoughts this morning, so I decided to share a more thorough update here as well, for those who are interested. No Quick Take here, sorry, though I guess my summary is, “I haven’t done anything with my IIPR position this week, and I’m not especially worried about the allegations in the short report… but it’s worth taking a moment, like we did last time there was a short attack on IIPR, to make sure you understand the risk inherent in this stock, and how much risk you’re comfortable taking.”

For those who follow or own Innovative Industrial Properties (IIPR), there was a new short report on them from Blue Orca this week — you can read it on their website if you like.

It’s extremely similar to the short attack from a couple years ago by Grizzly, which also focused on both the nature of their sale/leaseback business and the financial weakness of a private company that was IIPR’s largest tenant… though now that largest tenant is Parallel, while in 2020 PharmaCann was their biggest tenant (PharmaCann is still a very close second).

The “private” part is important, because it’s a lot harder to judge the financial strength of private companies like Parallel and PharmaCann than it is with publicly traded companies, we don’t get to see their balance sheet or their quarterly earnings, often the first notice of trouble at the company comes from sometimes unclear financial media reports or from disclosures by their financial partners, like IIPR, of delinquencies or material problems at those facilities… so you have to have some faith in the landlord’s (IIPR’s) risk management and due diligence on their tenants. So far, I believe IIPR has had only one delinquency among its tenants during its history as a public company, and it was one that looked really bad but had a very minor financial impact (it looked bad because the company, DionyMed in LA, collapsed just months after starting its lease with IIPR, but it was also a relatively small deal, for a genuinely valuable urban property, and it turned out fine for IIPR).

And short sellers are primed to look for weaknesses when financial information does leak out about big tenants, particularly when there is ...