The folks at The Wealth Advisory have had some very long-running teaser pitches about “secret income” over the years, particularly the pitch about “Netflix Royalties” that we covered many times (that was really just teasing data center REITs) and the “Prime Profits” pitch about making income from Amazon packages (which teased the warehouse REITs, including ProLogis).
And those investments were generally pretty successful dividend-paying ideas, with some decent growth thrown in in some cases… but now it’s been a few years, and those stories perhaps are getting a little stale, so we’ve got a new one called “Pot Profits” — shall we dig in?
The pitch this time is from Jason Williams, not Briton Ryle (who I guess is still with The Wealth Advisory, but not involved in this particular ad), but it’s more or less the same general idea… here’s a little taste from the ad:
“If you’re the type of investor who’s looking to chase risky, high-flying pot stocks…
“Then you can stop reading this letter right now because that’s a sucker’s game.
“See, while most folks lost their shirts gambling in the pot stock bubble…
“I’ve been raking in cash hand over fist thanks to a little-known secret of the legal cannabis markets that I call “Pot Paydays.”
“And I continue to collect these reliable and juicy paydays long after the bursting of the pot stock bubble.
“These paydays keep getting bigger too — A LOT bigger….
“I’m talking about an extra annual income as big as $56,725 (or more) every single year for as long as the legal cannabis industry exists!”
Hmmm… I’ll bet that a few eagle-eyed Gumshoe readers have already guessed at an answer, but let’s make sure first.
As is frequent with these kinds of investments, we get some tantalizing hints about the massive income that some “normal” folks are making from these investments…
“Cathy used to work as an accountant, but now the only account she has to balance is her checking account because she’s getting paid $78,244.96 a year thanks to “Pot Paydays!”
“Then there’s Scott C.
“Scott is a surgeon by trade, but he’s also an investor. And he jumped on this opportunity when he heard about it a few years ago. Now he’s looking at “Pot Paydays” worth $23,574.40 a year….
“Take Barry K. He works in real estate and currently lives in San Francisco. In 2019, he received $103,900.62 in ‘Pot Paydays,’ and he recently got a ‘payday’ worth $38,366.
“Then there’s David S. He’s an auditor from Des Moines, Iowa. He banked $27,717.58 in ‘Pot Paydays’ last year.
“Or how about Brian W.? He collected $53,387.95 last year!”
We can dig into a couple of those examples in a moment… but first, what other hints do we get about the company?
They make it sound easy, as is the case with all “income” teaser pitches these days:
“You don’t need to invest in any flash-in-the-pan cannabis company to collect your share of the payments.Are you getting our free Daily Update
"reveal" emails? If not,
just click here...
“You don’t need to send any money to Mexico or Canada.
“You don’t even need to live in a state or country where marijuana is legal.
“All you need is a computer or smartphone, an internet connection, and a few spare minutes.
“As a taxpaying American, you deserve to profit from this incredible wave of wealth just as much as anyone else.”
And it seems like all you have to do is just ask for the money, right? Here’s more on how easy it is…
“The government knows that this industry is a cash cow.
“And it now requires the legal marijuana industry to share its profits with regular Americans like you and me…
“That’s how these “Pot Paydays” were created (more on that in a moment).
“Unlike government programs like Social Security or Medicare, there are no age restrictions on these ‘Pot Paydays.’
“And there’s no limit on how much money you can collect.”
These “paydays” are apparently growing, too, so that sounds exciting…
“Whatever you do with an extra $56,725 this year, I’m urging you to get on the ‘Pot Payday’ distribution list today…
“Because there have already been over 13 legally mandated “Pot Paydays” so far.
“That’s 13 times you could’ve cashed in a five-figure check and seen the face of your bank teller light up in surprise.
“And trust me, you don’t want to miss any more of them because these “Pot Paydays” will be getting even bigger.
“In fact, they’ve already increased EIGHT TIMES since I started following this opportunity.”
Do you notice the consistency of the teased amounts, though? They’re all in the $20,000-$100,000 range, with the constantly repeated pitch that you can get a “payday” of up to $57,000. And the implication over and over is that you don’t really have to do anything…
“You won’t even need to do anything to claim your new larger paydays. As soon as you’re on the distribution list, your checks will be upgraded automatically.”
So how does this magical “payday” money come into being? The magic of marketing is that these copywriters know a good portion of their readers have a sneaking suspicion that folks are getting free money somehow, and that it’s just their lack of connections that has kept them from having a mailbox bursting with checks… so they’re primed to believe.
And, better yet, in the service of “get rich” ideas and with a few photos of sailboats and examples of wealth generation from these ideas, investors can be shepherded into a bit of daydreaming about early retirement, and when we daydream it’s easy to to skip a few steps of logic and believe not just that there are “secret” ideas lurking out there that generate $50,000 paydays… but that the way to get in on the secret is by spending $99 for a newsletter subscription.
Which isn’t to say that these income ideas can’t be useful, of course, just that we have to battle our greed tendencies to get a little bit of perspective before we pull out our credit card or make an investment.
So let’s do that, shall we? The best way to get a little perspective is to move away from the promotional pitch and start looking at the facts. Let me just get a couple more clues to make sure we’ve got the right answer…
“The demand from America’s legal cannabis industry for these types of industrial properties is skyrocketing.
“And this ONE firm has a stranglehold on the entire market.
“It already owns over 4.5 million square feet of rentable space for producing medical marijuana. That’s about the size of three Pentagons!
“And get this: 99.2% of this space is already leased out to cannabis companies. And most of these leases have terms of 16 years or more.
“It’s cash that keeps pouring in year after year NO MATTER WHAT!
“This firm doesn’t even have to pay any expenses related to its properties.
“Energy bills, insurance, repairs, and maintenance are all covered by the tenants!
“No wonder this firm is so insanely profitable.
“On top of that, this firm pays ZERO corporate taxes which is unheard of anywhere else in the industry.
“But it can ONLY do this by sending everyday folks like you and me 90% of its profits… in the form of ‘Pot Paydays.'”
And, of course, the reference to those checks in your mailbox…
“As long as you’re on the company’s distribution list, it MUST send you these checks every 90 days.”
That’s the language used by these kinds of ads, most of the time — “distribution list” or “claim your slice” or “lock in your spot” or “tap into the income stream.” What they don’t emphasize is that you have to make an investment and put your money at risk to get this kind of income, of course… and what they don’t get into at all is the scale, how much you would have to invest to generate the level of income they refer to in the ads (the $23,574.40, $78,244.96 or $57,000 a year). Mostly, I presume, because once you talk about the up-front investment required, well, the daydreams tend to peter out a bit.
So what’s the income secret being teased here? This is yet another REIT, the only large publicly-traded REIT in the marijuana space — Innovative Industrial Properties (IIPR).
If you want the basic backdrop on REITs, references to payouts that are “legally required” and chatter about a “deal with the government” or about distributing cash flow are typical ways that copywriters refer to Real Estate Investment Trusts (REITs), which were set up by the government over 50 years ago (under President Eisenhower, in 1960) to “democratize” real estate investing. They make it easier for investors to buy shares of real estate owning or operating businesses, and companies that choose REIT status don’t pay corporate taxes as long as they pass along at least 90% of their taxable income to shareholders in the form of dividends (and then, of course, you pay the taxes on those dividends, so the government gets its cut that way — unless you hold them in a Roth IRA or something like that). REIT shareholders also got a bit of a break on the tax bite from those dividends in the latest tax cuts, in the form of a 20% deduction on this kind of “pass through” income.
So when you see these comments about a stock that’s “legally required” to pay you checks, it’s very often a reference to something like a REIT, a company that is indeed required to pay out most of their profit in dividends if they make a profit. In practice, many REITs actually pay out much more in dividends than they would have had in “taxable income,” mostly because depreciation can be very high and that depreciation, though real, is not a cash cost — and many REITs have been quite successful at selling new shares and borrowing money to acquire new assets or fund capital projects, rather than setting aside their depreciation expenses to maintain or replace the properties, which helps to keep dividend payments rising. Management teams know that rising dividends drive rising share prices, and they are compensated in stock and also collect dividends so maximizing share price and dividends is in their DNA… incentives matter, and they’re not dummies, they know that REIT investors care more about the dividend than anything else (within reason, of course, most of them do focus on keeping the payout ratio in a safe range to make sure the company can keep operating).
Just note that we shouldn’t exaggerate that “legally required” bit — yes, if they make a profit they have to pay out 90% of it to shareholders as a dividend, but most REITs pay out much more than 100% of their “income,” often dramatically more than is required, and REITs that fall on hard times or have tenants default on leases or see risk on the horizon do cut their dividends. At least a few dozen REITs have cut their dividends this year in the wake of the pandemic, and while the pain is concentrated in things like hospitality, tourism, urban offices and retail, that doesn’t mean the next crisis is foreseeable.
But as far as Innovative Industrial Properties (IIPR) is concerned, yes, it’s a pretty fantastic REIT and has had extraordinary performance in its short life as a public company. I’ve covered this one many times and have owned it for almost three years now, so I’ll just re-share what I wrote about IIPR when Marc Lichtenfeld was teasing it in Oxford Income ads last month:
Innovative Industrial Properties is indeed a REIT that leases space to marijuana growers — for the most part, that means advanced warehouse properties for indoor growing, leased primarily to “medical” marijuana companies in states where that is legalized. They have grown extraordinarily quickly, and the fact that marijuana companies are otherwise having a hard time finding access to capital without dilution (since most banks won’t lend to them) means that IIPR can charge very high rents for the sale/leaseback deals it does to offer financing to these marijuana growers. So their returns are high, and the risk is also quite high because these properties are essentially “build to suit” growhouses — if marijuana growing collapses as a business, it’s not like IIPR can slot in an Amazon distribution center in those properties and collect the same rent, the value of those properties for any other use would be dramatically lower.
The high returns from high rents plus the rapid growth in the portfolio, fueled by a ton of equity raises, means that IIPR has been able to raise the dividend extremely aggressively. That has fueled the rise in the share price, and the stock still has an above average forward yield of almost 4%, so as long as those tenants continue to be able to pay their rent, IIPR remains a compelling buy… you just have to decide what kind of discount you might insist on given the above-average risk of the sector. For some folks, just the fact that IIPR has effectively no debt, unlike almost any other REIT, is discount enough.
Here’s what I wrote to the Irregulars recently, after IIPR raised its dividend again (I’ve owned this stock since January of 2018, though I did cut my position in half this year to reduce the risk levels in my portfolio):
From the 9/18/20 Friday File: “Speaking of dividend compounders, Innovative Industrial Properties (IIPR) raised its dividend again, a nice solid 10% lift after they raised it 6% last quarter (both sequential increases, the year-over-year growth is dramatically higher). So now the payout is $1.17 a quarter, which if they don’t do any more dividend increases in the coming year would mean we’re looking at a forward dividend yield of about 3.7%. Not the kind of valuation you’d necessarily want to chase, given the risk, but certainly it’s nice to see another dividend increase, which serves as both a nice boost to income and compounding power and a signal of strength and confidence from management.
“I was too cautious about the financial health of IIPR’s tenants earlier in the pandemic, and they’ve come through it very well so far… but tenant health is still the real overriding risk for IIPR — so I’ll repeat what I’ve said many times: if the tenants can keep paying their rent, a near-4% yield with 50% year-over-year dividend growth (down from 100%+ a year ago) is a no-brainer. I reduced my position because I decided the company is riskier than I had originally calculated, and wanted to lessen my exposure as a result, but the numbers say it’s an obvious buy.”
My thoughts on that haven’t changed — high risk REIT because of the nature of their tenants, but those tenants have come through the crisis much better than I anticipated in the past six months… so far, at least.
There remains not very much competition in the REIT space for marijuana, though there are now two small and emerging players… Subversive Real Estate Acquisition (SVX on the NEO exchange in Canada, SBVRF OTC in the US), which is essentially a Canada-listed SPAC, recently announced a deal to take marijuana-focused Inception REIT public through a merger deal, with ambitions of paying a very high 7.5% dividend (this is discussed in a Seeking Alpha article here, if you’re curious — I noted this one to the Irregulars when I speculated on it in June, and will update that story on Friday after I’ve looked over the deal — I also added to that speculative position today), and the even-smaller Power REIT (PW) has been diversifying away from its core railroad and solar farm properties with investments in marijuana greenhouses to try to spur some growth. I have some exposure to both of those (through SVX rights and PW shares, both very small positions), and there are arguments in favor of both, but I would still argue that IIPR is a fundamentally much stronger story right now — a far larger company, with a record of a strong and growing dividend that makes it easy for them to raise money, and much less tenant risk because of diversification and portfolio size.
And when it comes to making that big ol’ income that’s teased in the ads? $57,000? $78,244.96? $23,574.40?
Well, that’s a little more challenging. As is often the case when specific examples are given, we’re not exactly dealing with “ordinary” investors — the Cathy H. who’s getting “pot payouts” of $78,244.96? That’s Catherine Hastings, who’s the Chief Financial Officer (CFO) for Innovative Industrial Properties. She gets a decent salary plus bonus of about $470,000, but she also gets huge chunks of stock grants as part of her compensation. I don’t see any indication that she has ever bought any shares, but she owns 15,907 as of January of this year… which would be worth just over $2 million. And, yes, would bring in $74,444.76 in annual dividend income at this quarter’s dividend rate ($1.17 per share). That’s not exactly $78,244.96, but it’s awfully close… and her income will almost certainly be higher than that, because it’s almost certain that IIPR will continue to raise the dividend, if not every quarter then at least once or twice a year.
The other folks cited are very likely matches for specific folks on the management team as well, no surprise — so “Barry K” and his “recent payday” of $38,366 is very likely a reference to board member Gary Kreitzer, who now has about 36,714 shares… surgeon “Scott C.” and his $23,574.40 in income is another board member, Scott Shoemaker. You get the idea, I won’t bore you by going through them all.
And more importantly, if you back into those numbers you can get the sense of what it would take to generate that kind of income — $2 million in the case of “Cathy H.,” but even with the headline number of $57,000 that they repeat over and over, the match is pretty simple — to make that kind of income this year, assuming that the dividend stays at this $1.17 level for four quarters, you’d need to own 12,179 shares. You can cut that level down a little bit if you reinvest your dividends instead of taking the cash (since reinvesting compounds the payouts, and means your future dividend swill be slightly higher), but to get an annual dividend payout in that general neighborhood you’re talking about an up-front investment of roughly $1.5 million.
I don’t say this to discourage you — I like REITs and I like dividend-paying stocks, the power of compounding is real and it is a wonderful way to build wealth over the long term… but remember that while the powerful drivers are dividend growth, current dividend yield and the math of compounding, the key ingredient is patience.
So at the risk of wearing out your patience on this point, I’ll leave you with the update that I posted for the Irregulars about IIPR back in August, since that included some examples of the power of compounding — the numbers would have changed a bit since then, with IIPR raising the dividend again and the share price up another 10% or so, but the basic idea hasn’t changed:
From the 8/14/20 Friday File: Innovative Industrial Properties (IIPR), our REIT that owns marijuana cultivation facilities, shocked me with this announcement:
“As reported in IIP’s first quarter earnings release, during this coronavirus pandemic, IIP worked with three of its 23 tenants to provide temporary rent deferrals, structured to apply a portion of the security deposit IIP holds under each lease to pay April rent in full, defer rent for May and June in full, and provide for the pro rata repayment of the security deposit and deferred rent over an 18 month time period starting July 1. All three tenants paid rent in full for July, including pro rata repayments of the security deposit and deferred rent.
“IIP collected 100% of contractual rent due for each of the months of April, May, June, and July 2020 across IIP’s total portfolio (other than the tenant at IIP’s Los Angeles, California property that is in receivership), and has not executed rent deferrals for any additional tenants, other than the three tenants described above.”
It’s not the three tenants who requested rent deferrals that shocked me, of course, we knew about that months ago… it’s the fact that they’ve all started to catch up already with their July rent, and that nobody else has requested a deferral or missed a rent payment (other than that LA property, which went into bankruptcy a long time ago and was also a known issue). 100% is impressive indeed in this environment — I guess the pot business has been more resilient than I feared it might be, and the stock has reacted accordingly with another strong surge higher.
IIPR is still justifiable here as an investment if their tenants can keep paying rent, with an above-average yield of 3.7% and the likelihood of above-average dividend growth, but it has certainly had a big recent run-up in price. We’ll see continued volatility, I’m sure, particularly if there’s speculation about a Democratic Party sweep in November and national marijuana legalization seems likely to pass, since there have always been concerns that federal legalization will bring in the big-money banks and other REITs and cut into IIPR’s high-yield business (since then big banks would be willing to finance marijuana companies, and they wouldn’t have to pay up for real estate-backed financing from IIPR), but it’s probably equally true that mass legalization would be good for IIPR because it would likely make their tenants stronger and give them better access to credit, which could make rent payments more reliable. They are the most established sale-leaseback company in this segment, and these are long-term leases (10-20 years), so it’s not like the portfolio will disappear… and companies in all industries appreciate sale-leaseback financing, not just semi-legal industries, so there will be demand even if the yields drop with competition… and MPW will still have the “in” as the first big mover in this niche. Even if their returns drop to something similar to other triple-net lease REITs, that’s not a long-term negative — it just means their growth would likely slow, not that their revenues would shrink.
I still think IIPR is quite high-risk, which is why I shrunk my holdings this year, but REITs who can grow their dividends aggressively are rare treats. I’m happy to hold what I still own, and let those dividends compound, and it’s quite possible it will soar much higher if they avoid any defaults from their major tenants. It’s also quite possible that Pharmacann (their largest tenant) goes under or defaults on their leases in a surprise move, and IIPR drops by 25% in a day, so keep that in mind, but given their phenomenal ability to grow the dividend quickly the returns could be impressive if they raise the dividend more aggressively next time out and get some more attention as a result. The last dividend increase was a token one, in IIPR terms, but would have been impressive for almost any other company, and they’ve increased the dividend in four of the past five quarters… the next dividend should be declared in mid-September, so that will be an important signal of what they see coming down the pike.
If you ever want an illustration of how quickly dividend reinvestment and compounding can create windfall gains, by the way, IIPR is the poster child of that because of their insanely rapid dividend increases. They had already increased the dividend once when I first bought shares in early 2018, and the 25-cent quarterly dividend at that point meant the yield was about 3%. Those first shares I bought now have a “yield on cost” of 13% a year, with the dividend still growing, and the reinvested shares over the past couple years have increased my share count by more than 10% as well… so the impact is more substantial still. Let me run through that example, just to illustrate the often-underappreciated power of dividend compounding in the wake of a dividend-growth stock.
Using a block of shares probably illustrates it best — if I had bought just 100 shares of IIPR back in January of 2018, at $32.55 each (so, $3,255.00), and done nothing, the first dividend would have been $25 (25 cents X 100 shares) and would have bought almost a full share if reinvested… then another 25 cent dividend, then a 35 cent and 45 cent dividend, then growth ramps up to 60 cents, 78 cents, and a dollar by this past January. In total, those 100 shares would have earned $6.09 each in dividends, adding $609 to the total return (which doesn’t sound impressive, since the shares also went from $35 to above $120 at their peak), but it’s not just those dividends… it’s also the new shares that each of those dividends bought when you reinvested, and each of those new shares also collected dividends.
Here’s how that adds up, using numbers from earlier in the week when I did the math:
If you ignore the dividends, IIPR went from $32.55 to $117. Great. Your investment of $3,255 turned into $11,700.
If you add the dividends, it went from $32.55 to $117 and you also got $609 in total dividends. You’ve got $12,309.
If you reinvest the dividends, then you actually would end up with 109 shares at the end, not just 100… and the total of the dividend payments with that growing share base actually gets up to about $712. Your total value so far is $12,753 and you’ll be collecting the next dividend on a 109 share base as it continues to compound.
The share price capital gains are definitely the sexy part, particularly with an unusually rapid grower like this, but if it all settles down and the share price is stagnant for a while, or goes through ups and downs for a few years, it will be the compounding of those dividends over time that probably really provides the leverage for your total return. We should also remember that to a large degree it is the rising dividend that fuels the rising share price — it’s not a coincidence that IIPR had a yield of about 3% in early 2018 and still has a yield near 3% today, those huge dividend increases along the way drove investors into the stock and pushed the shares higher at roughly the same pace that the dividend was increased.
This all reinforces that oft-cited quote from Charlie Munger: “The first rule of compounding is to never interrupt it unnecessarily” — which offers some solace when you look back and see that you failed to sell out of your position at the highs of last summer, when that position was briefly worth a little over $14,000. Selling at the top is impossible to do reliably, but letting your dividends compound is something anyone can do.
Assuming, of course, that you don’t need the money for something else. Like, say, rent. I’m still working from the mindset of being in the “accumulation phase” of my portfolio, I still add money to it every year and let my dividends compound to boost future growth and build wealth… I know a lot of folks are in a very different stage, one I’ll probably reach before too long, where they’re living off of the income from the portfolio and trying not to reduce that portfolio too quickly as they age.
In that scenario, it’s diversification of dividends that counts — having enough different kinds of assets that pay dividends or interest income to you on a regular basis, giving you better odds that the income you can earn from that portfolio will be steady enough to be a reliable part of your budget, letting you avoid selling stocks at the worst time.
So there you have it — yes, there’s income in them thar hills… and yes, you’ve got to cough up some capital, and take some risk, to earn it… but there is some obvious appeal to buying landlords in this space instead of speculating on operators, as we’ve seen Innovative Industrial Properties provide dramatically better returns than most marijuana growers over the past few years. If you’ve got thoughts on IIPR or this latest pitch by The Wealth Advisory, please do chime in with a comment below.
Disclosure: Of the companies mentioned above, I own shares of Innovative Industrial Properties and Power REIT and rights to Subversive Real Estate Acquisition REIT shares. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.