This article originally ran on October 25, the ad is again circulating in slightly different form and sending a lot of questions our way, so we’re re-publishing it here for you today… the basic spiel and the stock are still the same, though they’re being used to pitch a different newsletter. The stock has bumped up by 20% or so in the ensuing six weeks, and been quite volatile. What follows has mostly not been updated since the article originally appeared, but I did make a few edits and updates to reflect some changes in the ad… and since I do own the shares, I have added an updated note on my thoughts at the bottom.

When you’re not sure what to do with a wildly whipsawing market, and know that probably you shouldn’t be doing much of anything, why not again look at… marijuana stocks?

There’s an ad rolling through from the Investing Daily folks for their Personal Finance newsletter ($40/year… though the same ad was previously used to pitch their Income Millionaire service at $1,495/year, nonrefundable, so I guess they’re going downmarket now), and it promises the same thing a lot of other newsletters have touted lately: checks in the mail. Who doesn’t love checks?

As with so many similar ads, we get teased with impressive-sounding income checks from this program — $4,416, $6,480, $13,890, it all sounds like a lot of money — but we’re never told how much you have to INVEST to make those kinds of returns, of course, that would pop our “oh gosh I hope it’s true” bubble… so we’ll look into that as we go along, too.

But what eager Gumshoe readers want to know, of course, is “what’s the secret?” This is pitched as “one company’s unique marijuana profit-sharing program,” this is how the ad starts:

“Marijuana Payouts

“100% Legally-Backed by the Full Authority of the U.S. Federal Gov’t

“A small group of everyday Americans are earning up to $55,563 a year from one company’s unique marijuana profit-sharing program.

“Here’s the one step you must take by

“October 25 December 5 to qualify for the next check run.”

Oh crap, that’s TODAY! How do we qualify for the “check run?”

Cool your jets… that’s probably just a made-up date that’s designed to get you to subscribe quickly, before you’ve had a chance to think it over. I’ll check when we confirm the company here, but most of the time those dates seem to mean “you have to subscribe to my newsletter by this deadline, or I’ll miss my next boat payment.”

The ad is signed by Jim Pearce, who runs most of the Investing Daily newsletters these days… and who has signed a bunch of similar letters promising “income checks” of various kinds in various industries before, though this is the first marijuana-related spiel I’ve seen from him.

Here are some more tantalizing clues from Pearce:

“I’ve found a tiny Maryland company with a revolutionary new marijuana profit-sharing program.

“And it’s consistently sending out checks like the $4,416 one Paul Goodling just received.

“According to a government-mandated report this 51-year-old South Carolina native isn’t the only one collecting massive payouts from this program.

“Steve Miller from Ogden, Utah collected $6,480.

“And Geoff Simon, a 57-year-old Arizona architect raked in $13,890.”

And, of course, they use the photos of folks holding up those “Marijuana Profit-Sharing Checks” to get you daydreaming…

“Imagine how much better you’d sleep with an extra $4,416… $6,480… or $9,974 showing up in your mailbox like clockwork.

“You could finally stop stressing out about how you’re going to make ends meet.

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“Put a real dent in your mortgage.

“And still have enough left over to take your family on an all-inclusive Caribbean vacation.”

Which is ridiculous, of course — these are going to be returns on an investment, not “free income” from some miraculous place. If you’re going to invest enough to get a $9,974 check every quarter in any relatively mainstream investment with any level of safety, that means you’re putting up a tremendous amount of cash — if the cash yield of the investment was 4%, for example, which is fairly middle-of-the-road for listed income investments, that would mean you’re investing (and putting at risk) about a million dollars… this isn’t a lottery ticket, it’s an investment in some kind of cash-generating business.

OK, I got a little humpfy there, stomping up and down on top of my soapbox… but still, keep that in mind: There is no free money, if you’re getting checks they will have some very direct connection to the size of the investment you make up front and the amount of money you are risking.

Back on track now… what is the actual investment they’re teasing?

“Even though the payouts from this company are 100% backed by the full force and authority of the U.S. Federal Government…

“The plan itself is private.

“So you won’t have to deal with all the hassles, rules, and red tape that comes with a government program like Social Security.”

And, of course…

“There are zero restrictions on how much money you can collect.”

I assume they meant to say “zero restrictions… other than the amount you invest, and the profitability of the operation you invest in.” Must have run out of space there.

Other clues? They say that we can…

“… get the ball rolling for less than $50…

“And once you do…

“The company is legally obligated by the U.S. Federal Government to send you profit-sharing checks for as long as you stay a member.”

And of course it’s URGENT URGENT URGENT!

“The next check run is right around the corner.

“And if you don’t get your name on the list in time someone else will get your share of the payouts.”

OK, enough silliness… let’s see what they actually say about the investment they’re teasing (and yes, to reiterate, it’s an investment — not a free “membership” that sends you checks if you just “enroll”).

More from Pearce:

“… I went looking for a safer way to make money from legal marijuana.

“One that truly makes sense for regular investors.

“It took me months of intensive research. And over $20,000 of my company’s money.

“But I finally found it.

“The perfect legal marijuana business.”

Other clues? Not a lot, but we get a few:

“… it hasn’t just sent out checks like clockwork.

“It’s increased the size of the payouts too.

“Twice in past year.

“To the tune of 133%….”

And…

“This company shot up 140% in the last year alone.”

And one final chunk of clues:

“‘The Perfect Pot Company’

“The first thing you need to know about this Maryland company is that while it derives its profits from the medical marijuana industry…

“It’s not a dispensary. A botanical laboratory. Or a grower.

“Instead, it provides the one thing each of these businesses need.

“Something there’s a limited supply of.

“Something marijuana companies pay a 400% premium to get access to.

“And something that retains its value no matter what happens with marijuana laws.”

And more about those “profit sharing” checks…

“The business who provides it to marijuana companies does not pay corporate taxes.

“As long as it satisfies the U.S. Federal Law which requires it to pay plan members 90% of the money it collects.”

I think you know where we’re going here… that rule that 90% of income must be paid to shareholders (no, not “plan members”) is a tax rule about Real Estate Investment Trusts (REITs), so this is very likely a REIT being teased.

And there’s only one reasonable publicly traded REIT in the marijuana space, so our options are limited… but let’s check off a few more clues just to be sure.

Pearce also says the executive chairman has “30 years of experience” in this industry (real estate, presumably), and his last company had a $405 million IPO but went on to be bought out by Blackstone for $8 billion.

And that it has “a presence” in seven of the 30 states who have legalized medical marijuana, and has no debt.

So what’s the stock? This must be Innovative Industrial Properties (IIPR), which is a stock that has been teased by pretty much every marijuana-focused newsletter over the past year… and it’s also the only marijuana-related stock that’s in my Real Money Portfolio. They are a Real Estate Investment Trust that focuses on sale/leaseback or development transactions with medical marijuana growers, basically giving growers a way to turn the value of their grow facility into financing in exchange for a relatively high rent and landlord-friendly policies.

The company’s goal is to make triple-net lease deals with growers at cap rates of about 15%, meaning that IIPR would write a $10 million check and the first year cash return for IIPR (not counting non-cash costs like depreciation and amortization) would be $1.5 million, with IIPR having no responsibility for maintenance, insurance, or taxes… and they also write in escalators of 3-4% for rent increases each year, a longish 15-year lease term, and an additional “management fee” of about 1% or so.

All of those terms are ones that just about any conventional real estate business would drool over — cap rates these days are much more commonly in the mid-single digits for industrial/warehouse type buildings like these, particularly since IIPR is not necessarily buying prime locations that folks like Amazon would compete for. And they can make these deals because marijuana growers in the US can’t easily go to Wall Street or even a big interstate bank for an expansion loan or even a mortgage — heck, most of them even have trouble accepting credit cards, largely because financial firms, especially big ones, are very risk-averse when it comes to businesses that are illegal (as most marijuana operations still are under federal law).

Innovative Industrial Properties is a peculiar specialty REIT, and it’s the only listed REIT that specializes in marijuana grow facilities, but it’s not completely unique — there are other REITs and real estate companies that focus on the marijuana industry, it’s just that none of them have gotten a major listing like IIPR and none of them are as large. The most likely emerging competitor seemed like it would be Kalyx REIT, which had a deal in place to merge into a SPAC last year (Atlantic Alliance Partnership, ticker was AAPC), but that deal fell through because of listing rules. Kalyx is still private and likely quite a bit smaller than IIPR, though they had similar square footage as of a year ago when the SPAC merger was contemplated (AAPC has liquidated, I assume, it’s no longer listed), maybe it would even be a reasonable acquisition target for IIPR. There are also a bunch of penny stocks that say they’re marijuana “land” or “real estate” companies but don’t seem to have any assets or revenue, so the sector has no doubt attracted the same charlatans and misguided hopefuls who populate the penny stock realm in every sector.

So there is nothing magical in what IIPR does, but it is a high-return real estate business, particularly if you consider that they’re able to generate very high returns even without using leverage (most REITs have a substantial amount of debt), and I own shares, mostly because I see the potential for very dramatic dividend increases over the next few years and that tends to cause the share price to become similarly lofty.

And yes, the government requires that REITs pay out 90% of their income if they’re to avoid corporate taxes… but that’s not the same thing as saying the dividends are “backed by the full authority of the government” — IIPR is motivated to pay dividends because that’s what investors want and expect, and dividends are a huge part of the appeal for most REIT investors, but they already pay far more than is legally required (as many REITs do, since their cash flow is much higher than the taxable income the government cares about)… and if their earnings go down in the future, they would not be the first REIT to halt or reduce its dividend. REITs hate to cut dividends, of course, but sometimes business gets bad — and no, the government will not “back” that dividend if income falls.

Big picture risk? We’ve got some of that with IIPR, to be sure. Beyond the possibility, however remote, that marijuana is wholly re-criminalized and the FBI starts bringing battering rams to every grow facility and dispensary, it mostly comes down to competition. They need to keep doing deals with 10-15% cap rates if they’re going to grow as much as I expect, and that means that medical marijuana growers have to be willing and able to pay that — which means they need to not have any other great options for financing.

The biggest risk to IIPR’s growth prospects is probably if Washington really lets marijuana companies off the hook, ironically enough — if the government officially changes the law to respect state’s rights in marijuana legalization, and takes marijuana off the DEA schedule 1 list, then that’s likely to open the door for marijuana companies to list on the stock exchange or borrow from big banks and get conventional commercial mortgages… and that would probably bring lots of the more risk-averse landlords to the table as well, driving down rents. I expect that to happen over time, but I think it will probably be gradual… and hope that IIPR will have a strong tenant base with long-term leases before the juiciest part of this profit window closes because the semi-legal status of marijuana improves.

And, of course, interest rates are a risk as well — not a double risk for IIPR like they are for many REITs, because IIPR doesn’t have to pay interest on borrowed money (no one would lend to them on good terms, due, again, to that good ‘ol legality issue), but still a risk… if the 10-year note goes to 4% or 5%, then the dividend for IIPR looks less appealing in comparison. If REITs generally drop in price to provide higher yields for investors, then IIPR would probably drop with them.

We also have the company-specific risks — the primary one I worry about here is the health of the tenants, which, of course, impacts their ability to pay rent.

Their tenants are for the most part still pretty small and not very transparent (though some of them are publicly traded in Canada), but their ability to pay the high rents IIPR charges will depend on their ability to make money as medical marijuana providers, and so far the first tenants seem to be doing fine but we don’t know what the future finances of that market will look like… will these be high margin businesses? Will further legalization or over-licensing cut into demand and drive prices lower or drive some operators out of business? I have no idea, but there is a lot of speculative capital rushing into the industry right now, so none of these tenants should be in desperate straits just yet.

And IIPR also has some “concentration risk” with a few of their properties operated by the same company — a risk that’s likely to remain, since I’m sure multi-state businesses they’ve already dealt with also make up some of their pipeline of future possible deals.

The typical 15-year lease deals they’re doing look fantastic, and bring a return of all of their capital less than halfway through the lease term and nothing but profit after that, even without IIPR using any leverage… but they’re only fantastic if the tenants stay in business and keep paying rent. If the economics of the industry change and their growers fall on hard times, then either IIPR has to evict them or they have to renegotiate for lower rents to support the tenants if they see a viable future.

If, for whatever reason, these properties aren’t viable for growing medical marijuana anymore… then yes, they do still hold value because they’re still buildings and land, but they’re likely to be worth a lot less than the value they’re carried at on IIPR’s books, and will generate a lot less revenue. I somewhat optimistically assume that the properties might be worth as much as half as much as IIPR paid if they have to revert to some other industrial use — that could be wrong, of course, I don’t know how the individual properties would be positioned in terms of location or other qualities… but they would, at least, be worth something.

So my assumption is that IIPR, if catastrophe struck, would be worth about half what they paid to acquire and improve their properties, plus their cash in the bank. Cash is a big factor at the moment, since they just did a big equity raise that will bring their cash balance up to about $200 million (almost half of the $500 million market cap once those new shares are on the books — they’ll have a total of about 10 million shares outstanding), so that, too, reduces risk as long as they don’t do something dumb with the cash — I think the risk of permanent loss on the downside is limited to about 50-60%, given the current financials.

So your job, should you choose to accept it, is to decide what the probability of a major loss is, and weigh that against the current dividend and the growth trajectory of that dividend. I expect dividend growth to be the primary driver for IIPR shares (outside of the occasional spike-and-plummet overreactions that all marijuana-related stocks seem to enjoy), and that depends on deal flow. If they can put another $100 million to work in the next six months, that would bring the expected rental cash flow up to something like $30 million over a year or two (it takes a while, these deals often have a construction/renovation period first, with no rent is paid, and then a 6-month or so no-rent holiday as operations are started up).

That level of income would easily support a dividend of more than $2 a share at this point, quite likely more, so that indicates to me that there’s real potential for the dividend to increase by 50% over the next 12-18 months (it’s expected to be $1.40/share per year at this point, the latest dividend, just raised, was 35 cents). If that happens, I expect the stock to grow similarly — maybe a little less than 50% if interest rate expectations really change over that time, but rapid and sustainable dividend growth always attracts investors. And while that expectation does require them to keep making more deals, it’s also very conservative if you start with the assumption that more deals can be made at 15% cap rates and that their tenants pay their rent.

So it’s in those assumptions that the risk lies, and I always get a little nervous when they go for a few months without announcing a new deal, but I still like IIPR here — and with about $200 million in cash, probably $150 million or so of which is unencumbered (many of their deals take a while to complete, since they’re effectively reimbursing for construction and renovation), they are loaded up to make more deals if they can find them. The current business, the deals they’ve already made and are starting to collect rent on, is a good business if you value it at $20-25/share, I think, so what they do with the $15-20 in cash per share that they have on top of that will tell us whether the stock is reasonably priced here — which means it’s time to get out your tea leaves, your squirrel entrails, or your tarot cards and try to guess what that future holds. For me, it’s all about dividend growth and I think they’re going to have it in spades, so I think it’s a worthwhile speculation below $45.

It’s your money, though, so it’s your tea leaves that count — so what do you think? Interested in a 3.5% 2.8% yield from a medical marijuana landlord? Think it’s too risky, or too expensive? Let us know with a comment below.

P.S. I promised to circle back about those checks and give a little update — yes, the most recent quarterly dividend was 35 cents (having grown from 15 cents last year, to 25 cents a couple quarters ago), and that dividend was paid about 10 days ago so you’ve missed it for this quarter — October 25 December 5 doesn’t mean anything. Their next earnings report won’t come until probably late March, and the next dividend will probably be declared in mid-December for payment in January… so if they follow last year’s pattern there could be a dividend declaration next week, but they just raised it in September so there’s no great expectation that they’ll raise it again quickly (though they could arguably afford to).

And the size of those novelty “Marijuana Profit-Sharing Checks?” If you take your dividends in cash instead of reinvesting them (I reinvest, I like to let dividends compound and make more money for me over time), then you would essentially get a 35-cent check for each share you own. The shares are currently trading at about $49.50, so to get the smallest quarterly check that I noticed being teased in the ad (that was the check for $4,416), you’d have to buy more than 12,000 shares today, investing about $594,000. And, of course, that $594,000 is at risk, invested in a pretty new startup company in a fundamentally risky business, and you could definitely lose some or all of it.

I’ll close it out with the update that I shared with the Irregulars last month, following IIPR’s latest earnings update — the stock has done well, so this has grown to be one of my top ten holdings, roughly 3% of the Real Money Portfolio. Here’s what I wrote to my favorite people on November 9 in the Friday File:

Innovative Industrial Properties (IIPR) reported a fine quarter, though nothing in their business is really particularly likely to “surprise” beyond the timing of lease terms and rent payments. Adjusted Funds From Operations (AFFO) came in at 38 cents, easily covering even the just-raised 35-cent dividend… given their massive cash balance at this point they can pay pretty much whatever dividend they like, but it’s encouraging that the dividend is now effectively covered by cash flow.

IIPR now owns ten properties, including the latest one added in October in Colorado that I didn’t see announced before the earnings report… all of the properties are medical marijuana growing facilities, and about 10% of the portfolio is still under development. They have about 9.8 million shares outstanding now (including the big offering they did after the quarter ended), and after their post-quarter purchase of that property in Colorado ($11.25 million) and their on-the-books commitments for tenant improvements ($15.9 million) they should now have almost exactly $150 million in cash to use in making future deals. The properties they hold should be valued on the books (at cost) at about $140 million after those improvements, so if you just look at an asset valuation the company should be worth at least $290 million (they have no debt, though there is $15 million or so of preferred stock outstanding).

The current market cap is about $420 million, so there’s some downside to that asset valuation… and more downside than that if it turns out that the buildings aren’t worth what IIPR paid for them — which would likely be the case if either company-specific bankruptcy or substantial regulatory change takes their current tenants away. My working theory is that the buildings should be worth half what IIPR paid if medical marijuana growing ceases to be a worthwhile (or legal) business in the US, which would mean a $70 million asset value plus $150 million in cash, so $220 million or slightly better than half of the current market cap as a possible downside risk target. It could be worse than that, of course, if people sell in a panic or if something beyond “this business got lousy” happens to the tenants, but I think $20 a share is a rational downside risk to think about at the moment.

On the positive side, If they can put half of their cash to work over the next six months buying another 3-5 properties with terms similar to their existing portfolio, we could be looking at a company that, a year from now, would be looking forward to revenue of $30-35 million per year and AFFO of $20-25 million, depending on how they ramp their administrative costs (hopefully not a lot), which could give us an AFFO per share of $2.50 and a dividend of probably $2.20 per share, an increase from the current dividend of about 50%. The stock price would depend on what the market demands in terms of yield at that point, which makes things iffy, but if the market is willing to buy that kind of dividend growth at a 3% current yield, the shares would rise roughly 50%, too, to the mid-$60s. If people insist on a 4% yield, the stock would rise about 20% to the low $50s. Given those scenarios, possible 50% loss and possible 50% gain tied to rapid dividend increases, my judgement is that the positive outcomes have a higher probability, the lack of debt makes the downside less scary, and I still think IIPR is worth buying in the low $40s, anywhere below $45… though given the volatility of the sector, it wouldn’t be surprising to get opportunities to purchase at substantially lower prices. Dividend growth remains the key, I think.

IIPR did not host a conference call to talk about the results, so we don’t get much “color” on the quarter otherwise, and they haven’t been very specific about a dividend strategy other than to demonstrate a willingness over the past year to raise the dividend as the business grows — but they’ve only been in business for two years, so it’s a little early to be looking for schedules or patterns. The election and Sessions resignation appeared to have pretty much no impact, which I think makes sense — given the heavy polarization in Congress, I expect we’re a ways from seeing big moves from the feds on marijuana in either direction, so I think the most likely outcome is a continuation of the “technically illegal” nature of the marijuana business that keeps the big banks away, but no particular federal crackdown that scares off investors… which is pretty much the perfect sweet spot for IIPR to keep building its portfolio and demanding high cap rates from its partners.