Innovative Industrial Properties: Leverage (for a REIT) Is Everything

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Julian Lin runs Best of Breed Growth Stocks. He discusses his high conviction pick: IIPR (0:35). Reasons to be bullish (3:00). IIPR’s dividend safety (7:20) 280E taxes and cannabis rescheduling (12:15). Is legalization good for multi-state cannabis operators? (16:30) Risks to REITs (21:00). Red and green flags for management (29:00) How investors should think about valuation (37:05).

Transcript

Rena Sherbill: Julian Lin of Best of Breed Growth Stocks, the investing group he runs on Seeking Alpha, a friend of the podcast for many years. Julian, welcome back to the show. Great to have you.

Julian Lin: Great to be here, Rena.

Rena Sherbill: It’s great to talk to you. So here we are at the beginning of 2026, a whole new year. What are you thinking about when you’re looking at the markets these days?

Julian Lin: So for much of the last few years, I’ve been focused a lot on tech stocks, largely because after 2022, there was a big crash in tech stocks, creating a big buying opportunity.

But of course, with the big AI bubble that reduced a lot of those opportunities, although I do still think software is quite interesting, but the focus of today’s podcast is actually in a totally different sector: cannabis. We’ve done a lot of podcasts about cannabis stocks in the past.

There’s finally the big regulatory development that a lot of cannabis investors have been waiting for a long time. That is, namely rescheduling.

You did a previous podcast with Jerry and the Bengal team regarding rescheduling. Today, I hope to focus instead on a different perspective on rescheduling from the landlord perspective, which I think a lot of cannabis investors and also especially REIT investors have been ignoring.

Rena Sherbill: So talk to us specifically why you think the REIT space is worth looking at these days. And would you say especially given the rescheduling conversation, or that just helps?

Julian Lin: Yes, definitely. I’d first point out this very interesting phenomenon, especially if the listeners are coming from like a cannabis investing background. I know a lot of cannabis investors, they view the MSO stocks as being under followed largely because institutional capital has not been able to easily purchase into the names prior because of regulatory restrictions.

But I view a name like the name that I’m mainly focused on today is (IIPR). That’s Innovative Industrial Properties as suffering even more kind of ironically, even more of an issue here. Technically IIPR, it’s listed on the major exchanges. So there’s no necessarily big issues that institutional capital can’t buy in.

However, it falls itself in the worst of both worlds where cannabis investors, they just kind of want to focus on the operators directly selling cannabis so they don’t want to focus on the cannabis rates.

Whereas the REIT investors, they see this big 16% or 15% double-digit dividend yield, they see it’s cannabis and the REIT investors try to avoid it. So you get this situation where it’s like who’s going to be focusing and looking at this cannabis rate except people who are willing to look a little deeper.

Rena Sherbill: So when you’re looking a little deeper, what are the first things that strike you as positive?

Julian Lin: Today I’ll be looking at both the common and the preferred stock (IIPR.PR.A), but focusing first on that common stock. I would first note that the valuation of IIPR relative to the MSOs, which are its tenants, it’s quite intriguing because as long time cannabis investors know, the whole sector has been suffering a lot of headwinds, largely due to pricing headwinds as price compression prices keep coming down due to competition from legal operators and especially the illicit market.

But besides this, the whole sector, of course, has been suffering from having to pay larger income taxes. So as I mentioned earlier, President Trump gave an executive order to expedite the rescheduling of cannabis, but this executive order is significant, largely because it increases confidence that rescheduling will finally happen.

And technically rescheduling occurred back in 2024 under the Biden administration. But over the past year, after the changing administration, I think a lot of cannabis investors had felt that perhaps President Trump’s administration may not be as friendly to this rescheduling. So they probably just forgot about it and wrote it off as no longer a done deal, but this executive order completely changes that.

And greatly increases the confidence that this will occur. So yes, the rescheduling would mean that the MSOs, which are the multi-state operators, again, these are the tenants of IIPR, the landlord, which we’re focusing on today. It means that they will no longer have to pay so-called 280e taxes. And 280e taxes mean that these operators pay taxes based on gross profits.

So they can’t deduct operating expenses or interest expenses from the calculation of taxable income. And that means a lot of these operators are paying income tax rates of like 80% or even when they have negative operating income, they might be paying taxes.

So rescheduling cannabis from schedule one to schedule three, it falls short of legalization, but it would remove 280 taxes. And basically a lot of these names like Trulieve (TCNNF), for example, or Verano (VRNO), they switch from negative GAAP operating income to positive GAAP operating income just once 280e is removed. So it’s a very, very big significant development and we could see a lot of volatility with the (MSOS) ETF.

But surprising to me is that investors are not focusing as much on IIPR, especially because IIPR, it actually trades at, in my opinion, a cheaper valuation than a lot of these MSO operators.

Because even if we assume that 280E taxes are removed, a lot of these operators, they’re still trading at like 15, 25 times earnings. And this is like heavily adjusted earnings. Whereas IIPR is trading at a 15 % dividend yield and around like 12 times earnings or 11 times earnings.

But an eight times FFO, which is more critical for REITs. And I view this valuation description thing as being kind of curious because IPR as the landlord, they don’t face the same price compression headwinds that the operators are facing.

And that is a very important distinction because when you have price compression headwinds, you would think that a lot of these stocks, the MSOs, they might be limited to the upside just due to having a more cyclical kind of business model where unfortunately they’re kind of only exposed to the downward cycles where prices go down not necessarily prices going up. It’s hard to imagine prices going up at this point.

So you would think that their valuations should be held back lower whereas the landlord they have a very consistent more reliable income stream because they just collecting rents. So regardless of how prices are ongoing as long as their tenants are not bankrupt and are still operating, they get the same rent payment.

That cash flow stream should be a higher quality business than that of their tenants. Yet somehow the stock is trading cheaper than their tenants. And that’s why I think it’s quite interesting.

Rena Sherbill: What would you say about the safety of the dividend?

Julian Lin: Prior to all of this rescheduling executive order, IIPR has seen a lot of volatility in its tenants’ tenant base. For example, PharmaCann, 4front, and over the last several years, a lot of the California operators have been in default with some of their properties.

And so in the most recent quarter, they generated $1.70 or so in adjusted funds from operations per share whereas they pay a $1.90 dividend. So their dividend is not currently covered by AFSO per share. But at the same time, so we got to look at this more critically, approximately 20% of their tenants are not paying rent, which means that, which means to think, yes, so it means the dividend is not covered, but at the same time, it also indicates a potential upside as they release those properties, which I do think they will, especially given where scheduling looks set to occur.

I would think that demand for these properties increases because just the financial profile of selling cannabis improves dramatically. You don’t have 280 taxes anymore. You could be more profitable. IIPR might need to reduce the market rents on those vacant properties. But at this point, from that $1.70 AFL per share, it’s all upside.

But besides this, I’ve got to note that IIPR has very, very low debt. They have around 300 million or $330 million of debts. That equates to around like a 1.3 times debt to EBITDA ratio.

For reference, its own tenants, a lot of them have much higher leverage ratios. But the better comparable would be other net lease real estate investment trusts like Realty Income (O) or National Realty or those kind of net lease rates. Those tend to have leverage ratios around five times to six times. But IIPR is at 1.3 times.

It’s significantly under-leveraged. I would say you can make the argument that IIPR has been a little more aggressive in terms of expanding aggressively in California.

But in terms of balance sheet, the management has arguably done a good job of remaining quite conservative in terms of making sure their leverage ratios are very low. So what that means is, sure, the current dividend, especially in the near term, there is a risk of a cut because it’s, again, the dividend rate is $1.90 and the AFFO is $1.70 per share.

But at the same time, remember, these are net-lease rates. So that AFFO flows directly to the bottom line. The tenant is responsible for real estate insurance, taxes and maintenance capital expenditures. So they don’t have extra recurring, this kind of recurring capital expenditure that is like a hidden cost to it.

So that that AFL per share is all available for shareholders. So even even if we assume like a dividend cut from, you know, $1.90 down to maybe like, let’s say $6 per share, $6 per share would be comfortably below that. And I’m talking about annually. So it will be going down from $7.90 per share annually to $6 per share, which would be $1.50 quarterly.

It would represent 85% AFFO payout ratio. Even after assuming this big cut, the stock is still trading at an 11% dividend yield.

And again, I would note that this seems very unlikely just because 20% of their properties are not reflected currently in the financials. When they release these as the extra income and following rescheduling, the tenant credit quality should improve dramatically.

So it would make me wonder why would the stock still be trading at, we’re currently at 15% yield, assuming dividend cut, might get to an 11 % yield. Why would it still trade at a double digit dividend yield if one, the tenant credit quality has improved where a lot of the operators suddenly have GAAP, profitable operations, very high four wall coverage, and the landlord also itself, its leverage is very low. So there will be a huge gap between the current 11% dividend yield.

Again, this is assuming a big cut, which I think is quite unlikely. Management has signaled they don’t really want to cut. They do think waiting a couple quarters, they will be able to release the properties. Even assuming a big cut, the stock trades at 11 % yield.

Realty Income trades at around a 6 % yield. That gap is way too big in light of the stronger balance sheet and the big positive catalyst in terms of tenant credit quality. I would expect IIPR to be rates at least to an 8%, 9 % yield, which would suggest huge, huge upside from current levels, especially as management and the company releases those vacant properties to boost up AFFO again.

Rena Sherbill: In terms of the 280e component that you’ve been discussing as it pertains to the rescheduling conversation, you mentioned that conversation I had with Jerry and Josh from Bengal Capital. And one of the things that Jerry was talking about was that 280e, even if it does go away, is going to take some time, like perhaps a couple of years. In that interim period, let’s say everything does go according to plan, except it takes much longer.

What would you say to those interim years or months or however long it takes for 280E to fall by the wayside? What would you say happens if it doesn’t go away so quickly?

Julian Lin: 280, I should first of course point out 280 is not the only thing that would improve. You would also have benefits like, especially if rescheduling is officially confirmed, we would have this situation where institutional capital, especially the debt markets, they would be seeing that, oh 280 is going away. So the credit quality of the tenants are improving, which means a lot of these tenants.

As they have debt maturing, I would expect them to be able to refinance their debt at much better interest rates. A lot of their debt is at like 10, 11, 12 % interest rates. They might be able to refinance significantly lower. Even in this higher interest rate environment, they would have, they will be able to maybe, it’s perhaps save costs, a lot of operational costs that they are much higher just because being in a schedule one, they need to hire higher costs of, know, insurance, for example, it’s a very huge one.

But in terms of 280 specifically, yeah, there might be some delay. And I do know one thing in the podcast, which perhaps I would like to clarify or kind of disagree with, they mentioned a lot of the operators that are currently already not paying 280E.

I think on the podcast, they might’ve implied it doesn’t really matter if 280E is removed. I disagree heavily there because one thing is, yeah, sure, a lot of these operators are not paying 280E, like talk about Trulieve, for example, but that just affects the cashflow component on the income statement, they still record the 280 taxes.

So you will still see a big jump from GAAP losses to GAAP positive income once 280 is removed. And more importantly, they will no longer need to be increasing their uncertain tax liabilities once 280 is removed. So even though they are saving cashflow already, there is definitely a big boost once 280 is removed.

As far as the delay, I think that you just, the best way to put it is again, with the MSO has already trading and training on quite healthy valuations. You got, you got to wonder, yeah, if there is a situation where a 280, the removal 280 is delayed, this would add into a point where it hurts somehow the landlord that that would of course imply that it hurts the tenants a lot more, right? Just because the landlord has less leverage.

The landlord is GAAP profitable right now, or I said that a lot of tenants may not be, so again, that’s the question. Why is a lot of cannabis investors focusing on MSOs, those stocks versus the landlord, in my eyes, every situation, IIPR should perform a lot stronger, especially in the bearish situation scenarios.

That said, I don’t expect the removal of 280E to take too long, especially given that a lot of the reports surrounding the rescheduling of executive order indicated that cannabis executives, like Kim Rivers of Trulieve who has clearly put a lot of work into making this work. They were instrumental in convincing President Trump to change his mind on this executive order and to schedule three.

I would imagine a big component of that is 280 taxes, that would be the driving force behind pushing or scheduling to occur again. I wouldn’t expect it to take an egregious amount of time for 280 to be removed, I would actually be looking more optimistically that there’s even a chance that, a significant chance, or rather not so insignificant chance that companies like Trulieve might be able to write off those uncertain tax liabilities given how much of an influence they’ve had in delivering this.

Of course, no guarantee, but this is sort of like icing on the cake. Like in addition to remove 280E, they might be able to remove a lot of those component liabilities from their balance sheets.

Rena Sherbill: Does legalization or a furthering of the regulatory conversation and advancement in the regulatory conversation, would that change your thesis on MSOs? Would that make you more positive?

Julian Lin: Outright legalization is quite complicated. And again, I don’t mean to sound so bearish on MSOs. I do know that a lot of them actually do look cheap, especially when rescheduling occurs.

A lot of these names are trading at like four times EBITDA, five times EBITDA. I would just note to investors to be careful because not all of the stocks are trading at that kind of valuation. There’s definitely a lot trading at big valuations. But in terms of legalization, legalization probably would only benefit one of the operators, which is the SSO GlassHouse (GLASF).

In my opinion, that would be the only one that would see potentially some benefit. Of course, there are some caveats there. I don’t want to repeat them. I would recommend listeners to listen again to your previous conversation with Jerry and the team there about GlassHouse.

But in terms of the others, the actual MSO, the actual multi-state operators, legalization would probably be bearish actually because it would formally allow interstate commerce and it would it would probably lead to some, it might be bearish because it would probably lead to a lot of price compression across the industry.

But at the same time, it would probably lead to a lot more growth. So a lot of these operators probably saw a lot more products. For example, so I live in California.

And this is one of the states of which are very, very positive on cannabis. But I will say even here, the mood with like an average person, it’s still, people still view cannabis as like 10 times more dangerous than alcohol, which is just astounding to anyone who like actually knows cannabis.

And I would imagine legalization to be that kind of tipping point that makes the average person, which is most people who don’t, you know, regularly use cannabis, they would probably shift a lot of their alcohol usage to cannabis just because it’s legalized, there’s going to be more media surrounding cannabis. going to be a huge event over one, two year period.

Not as immediate as more of the two-way rescheduling, but I would imagine it to lead to the secular tailwinds that a lot of the industry has been hoping for. But the initial impact might be price compression. So it’ll be near term bearish, for long term bullish for MSOs is how I would view legalization.

Rena Sherbill: I appreciate that. Out of curiosity, when you say that people are still more in favor of alcohol than cannabis, I would agree with that. But I do find that it’s kind of demarcated across generational lines. Younger people do tend to understand that cannabis is better for you than alcohol. Would you say the same thing?

Julian Lin: I would agree, but also note that even with the younger people, a lot of younger people actually still are very, very pro-alcohol and very negative cannabis. So there’s a lot of, a lot of games to be made there. But at same time, do think legalization is probably well, very far away, given how, how clearly our politicians cannot agree on anything. And legalization would need very, very universal cooperation to occur.

But, even now surprisingly with the young people, still think alcohol is safer. And I don’t blame them, mean, cannabis right now, you got your parents telling you, it’s very risky, whereas alcohol you could buy at a safe way, right? So there’s a huge difference. And with alcohol, it’s like a cultural, it’s like, you’re sophisticated if you know what kind of liquor you’re drinking, right? You’re like, you’re a better, you’re more, you’re better in society if you know how, if you have a liquor you like.

Whereas with cannabis, you’re just a drug user if you use it at all. that stigma is huge. It’s very, very different. And I would imagine to have a big impact. And I would imagine legalization to be the only thing at this point. mean, at this point, you see even media influencers trying to even you see LeBron James or some NBA players saying they like cannabis for recovery. That hasn’t made the impact you would have expected.

So I think legalization is going to be that that is the turning point that is necessary to drive more of the volumes and price stability that these MSOs are hoping for.

Rena Sherbill: Yeah, it’s definitely a slow roll. Speaking of legalization, we don’t even know when this executive order or if this executive order will come to pass. I mean, there’s a lot of promises in the headlines that are not quite at that promise level yet. So a lot to parse between fact and fiction in this sector and across sectors, but in this one for sure.

Julian, when it comes to REITs, what would you say are the one to two to three biggest risks that you see for REITs in general, for cannabis REITs, and then for IIPR specifically?

Julian Lin: Yes, good question. And as I mentioned, I spent a lot of my recent years looking at software starts, but mostly that was just mostly because of valuations.

But prior to that, I had been looking a lot into REITs largely because Amazon (AMZN) had been becoming bigger like six years ago, and that made me more interested in a lot of the shopping center and mall REITs at that point.

So with REITs, I would say the single most important and very highly underestimated financial metric that investors should be looking at is leverage. And again, I’m not trying to talk about my own horn so much with IIPR, but having a ton of leverage versus having low leverage is everything for a REIT.

For example, typically when you think about these REITs that go down and go bankrupt, have to eliminate the dividend, they never come back, I would say most of the time, 90 % of those times, it’s all because of the leverage.

You could have underperforming operations. You could be in decline. And a lot of the investors might be familiar with some names that they might trade you like three times FFO, four times FFO, really, really low valuations. But somehow that margin of safety, quote unquote, doesn’t apply because all of a sudden they go bankrupt. There’s no dividend. You’re like, how did this happen when I was buying it at like 30 % FFO yield?

It all comes down to leverage. Because when you have a high amount of debt, what that means is that as earnings decline, what matters most is no longer that FFO multiple because a lot of that earnings is no longer available for shareholders.

A lot of those earnings have to put down to paying down debt. The reason why is that tend to have things like covenants, first of all, which means that if you breach certain things like debt to equity or debt to assets, like in terms of how much leverage you have, if the amount of debt goes too high, the debt holders are allowed to declare the equity in default and basically take over the entire company.

And besides this, these companies, they also have to refinance the debt. So when the debt matures, they want to be able to issue new debt to replace that debt.

But if they don’t want to issue the new debt a high 15 % yield, they have to again maintain a lower leverage ratio. So when earnings go down, that would mean the leverage ratio, which again, it would be debt to EBITDA, it will go up.

So if your leverage ratio to begin with is too high and then your earnings start to go down, you get into this negative feedback loop where you have to spend more and more of your cashflow away from dividends and towards paying down debt, which may or may not be enough to stop the cycle.

Let’s look at IIPR. In this case, the leverage again, it’s at 1.3 times that of the EBITDA. That’s ridiculously lower compared to around six times that of the EBITDA typically that these trades operate What that means is that even right now, like the most recent quarter, AFFO dropped 25%. It dropped a lot. It doesn’t matter. They’re not worried at all because their leverage ratio is so low that it doesn’t impact the financial stability whatsoever.

So when you look at the stock trading so cheaply on an ethical basis, that’s real. You’re not worried about some of that cash flow being needed to go down to pay down debt. There’s no need to pay down debt. They could if they wanted to, but there’s absolutely no need. So, that brings me, I think I should mention the preferred stock actually. So while I do think there’s a lot of upside in the common stock, especially because it yields 15%.

And I think it will reweight to the 9% level, which would be a stock price around $84 or so. I think the preferred stock, and that’s the ticker, IPR.PR.A, it depends on the brokerage, but it’s the A class preferred stock.

I think this one will also, this will appeal to a lot of investors and perhaps appeal to more investors is because it’s far less risky. Even though it’s the same company, the preferred stock tends to have a far lower risk profile largely because one, the preferred stock dividend has to be paid before the common stock dividend.

So IIPR, they could cut the common dividend, but the preferred stock dividend will still be paid in full. And two, there’s it’s cumulative these dividends, which mean that if they, if they pause a preferred dividend, it accumulates.

It means that prior to ever resuming the common dividend, they would have to pay all the missed preferred dividends in full. but the key thing here is again, I already know that I’m with a view that the common stock is not at, not nearly as risky as implied by the current valuation.

But perhaps an investor will think, okay, but the dividend cut is still coming. And whenever a cut is still coming, you never feel like the cut is always priced in. You never know how much the cut will happen. And they might feel like the common stock still has some risk, but the preferred stock, it’s very different.

And I recently wrote a public report on Seeking Alpha, which also in depth covered that preferred stock. So the preferred stock is covered by by earnings like AFFO by 48 times.

And just for reference, when you compare this preferred stock, which is currently yielding around 9.5%, when you compare it to other high yielding preferreds, like in the 7 % to the 9 % range, so like even lower yielding than this one, the coverage from AFFO tends to be more in the, it tends to be more in like the four times to eight times range.

At the highest, it will be eight times. But remember with this IPR preferred stock, is at 48, 48 times. It’s exponentially higher in terms of coverage. And what that means in this case is like, so I ran a risk analysis, even if IPR was forced to cut all of their rents by 50%. So that means remember they already are not getting paid 20 % of their rents. If we assume zero recovery there.

And on the remaining tenants which are currently paying rent, they cut rent by 50%. In that situation, the preferred stock dividend will still be covered by 16 times, which would again, this will be a huge, it still be the safest preferred stock by far compared to any of other high yielding preferred stocks.

The leverage would rise to 3.7 times that of EBITDA, which will still be safer than realty income in terms of leverage.

So even in this worst case situation, which has become very, very unlikely due to rescheduling, the preferred stock, it’s still very, very safe. And this is, it’s still yielding 9.5%. The potential upside is of course capped by, you know, the possibility of being called at $25 for share.

But even then I was still expect the stock, I still expect the preferred stock to trade up to around $26, $27 per share, a bit higher than the call, the call value just because it’s unlikely that the company will call the preferred stock as long as a common stock is yielding so much. So in my eyes, it looks like it’s yielding 9.5 % with around 6 to 7 % Calc-Core appreciation upside to $25 and more like 10 % to 15 % potential upside to around $27 for sure an additional capital appreciation.

To me, it’s the safest preferred stock I’ve ever seen, yet it’s yielding almost double digits. Just given the incredible safety in terms of leverage and the coverage of that preferred dividend, I don’t expect it to trade at such a high yield for so long, especially once rescheduling occurs. Because once rescheduling occurs, that 50% scenario, it’s off the table.

And again, the preferred stock still will be the safest one in the universe, even assuming 50% cuts across the board.

Rena Sherbill: What are your thoughts of management? How do you feel like they’ve handled things?

Julian Lin: I think management deserves some acknowledgement or some positive commentary regarding their use of low leverage. And that’s a huge reason why I can still be highly, highly positive here. I named the Common and Preferred Stock Conviction bias even as the stocks look like they’re high risk.

I would imagine a lot of investors, they see this 15 % yield on the stock and they just go, okay, this is going bankrupt. This is done. I’m not even going to look.

But again, leverage for a REIT is everything. If the leverage here was already at five, even just five times EBITDA, which would be normal for the industry. But if it was at five times EBITDA, I would not even be considering it at all.

Even at this valuation, it’s because there would be risks, heavier risks to the dividend, heavier risks to potential bankruptcy at play. But with the leverage at 1.3 times EBITDA, I see the risk of bankruptcy virtually none.

The only chance of bankruptcy is if the entire legal cannabis sector is just unsustainable and possible. But in terms of management, they definitely deserve recognition for keeping leverage low. at the same time, there are reasons why (NLCP), New Lake Capital, trade at a premium, one would be IIPR.

They had invested considerably in California, which while it’s great for a consumer, cannabis is very cheap here. On the other hand, it’s an unlimited license state. So profit margins are very low here in California. And if there was like illicit market, it all comes from California too.

It’ll be a very hard place to operate as an operator. Besides this, one can also raise eyebrows on the recent foray into life sciences. They recently have been investing, trying to diversify prior to rescheduling, I guess it makes sense. They were trying to, in an attempt to improve their stock valuation, they are trying to diversify away from the cannabis sector. They made a meaningful push to invest in the also troubled sector in life sciences.

Anyone familiar with the life sciences, real estate sector, you could just look at something like (ARE) and you can see how troubling the life science real estate market has been. But they were hoping some diversification would help.

The unfortunate thing here was that the way they diversified, they chose one tenant in IQHQ. And this tenant happened just prior to their investment. Their executive chairman, Alan Gold, is also the executive chairman of IIPR. So there are potential issues there.

Of course, a positive note, positive spin, could be like with Alan Gold’s participation there, maybe he feels more confident that IIPR could make investments there and do well. But to the skeptical one, I could understand through the skeptical and definitely right now it’s a period of skepticism with the stock trading at 15%.

You might be looking at it, this might be a red flag that they’re investing into something where management was also previously involved in, closely involved in. So with management, it’s kind of a mixed bag there.

But again, with the REITs, again, two things with REITs. I already mentioned leverage, but in terms of management, the most important thing with management for a REIT is definitely whether or not it’s internally managed or externally managed. And this might be a term that you may not really know about or care about unless you were ever investing in a REIT.

External management is often used for like mortgage rates, sometimes you see these external managements in like normal like residential shopping. Sometimes you see this also. The big risk with external management is that they’re compensated based on like assets, for example, just assets, not assets for share, but just assets.

So what that means is even when there’s stock trades, like in this case, let’s say a 15 % yield or a very low valuation, they might still do the weird thing of issuing stock, like let’s say at a 12 % yield to buy assets at like a 4 % or 5 % yield. they would, you know, that would obviously create, I’m sorry, destroy shareholder value very efficiently. It’ll be a very efficient way to destroy shareholder value, but it will be a very efficient way to continue growing assets and grow their compensation.

That’s external management. IIPR and (NLCP) as well, they’re both internally managed and so they don’t have this issue. So in the past, yes, you can say, IIPR, they shouldn’t have invested so much in California. But I wouldn’t have said that this was because of some kind of misalignment.

I think they just might have dropped the ball a little bit and so far, and they haven’t continued to reinvest in California. I wouldn’t say there’s clear red flags in terms of management here. That would have been present if, for example, there was high leverage or external management structure.

Rena Sherbill: Just plain old fallibility. Human fallibility. Julian, what else would you add to this conversation, either as it pertains to the cannabis sector or IIPR specifically? What else would you think is of value for investors to know?

Julian Lin: I think when one is trying to trade on rescheduling or potential regulatory hype, of course, to each their own, I personally don’t like to invest so much in hype. I’ve lost a lot of money. Maybe I’m just not a good hype investor. But I think at the end of the day, it is important to at least have some run some of the numbers to understand exactly what you’re investing in. Because if you don’t understand the valuation, won’t know when to sell.

And if like, if the stocks go up, you won’t know when you’re supposed to sell. You would just kind of be hoping. And if the stock prices go down, you wouldn’t know if you should buy. so like if you are buying some of the stocks at the MSOS, you know, would recommend knowing those valuations, knowing the potential actual impact of moving to 280E. So if the stock goes up 50%, is this a chance to buy more because 280 is finally being removed?

And the thesis is better. So this is a better thesis, has time to double down or has all the upside been extracted and you should be aggressively selling and just, and again, when we saw the trading action recently where it was rumored that there’ll be an executive order coming MSOS ETF went up so much. Then once the rumor actually hit the ETF drops was a 25 % on that same day.

That is a clear example of exactly what I’m saying. When that happens, you will feel easier to sleep at night if you understand the numbers and know why you are maybe doubling down or why you are selling before it or even after this kind of thing happens.

In the case of IIPR, I realize it could be weird naming this kind of stock a conviction buy when look, I get it, the common stock is yielding 15%. The dividend is not currently covered by AFO. And even the preferred stock is yielding 9.5%, which is huge. And that’s more than even mortgage REITs.

It can feel risky if you don’t look in the numbers that why would I name this a conviction? Why would I have so much of my assets allocated here? But when you look, but when you focus on the numbers on what matters again with the REITs, it all comes down to leverage. It comes down to coverage, especially if that preferred stock.

In this case, for example, when I understand that all this rent coverage, even if there’s more delays on 280, even if there’s more tenants having suffering issues, you can understand what is the exact potential risk to either to the common or preferred stock here.

So definitely the takeaway is don’t just focus on hype. You do want to look under the hood at some of the fundamentals.

Rena Sherbill: Hype has gotten us all into a lot of trouble already, Julian. No more hype. Let me end with this, because you’re a valuation guy, and there’s so much confusion when it comes to valuation these days.

As it pertains to tech, as it pertains to cannabis, a lot of questioning on how to best value stocks, given that there’s a lot of promise, and we’re not exactly sure what numbers to attach to the promise. What else, if anything, would you add to the valuation conversation?

Julian Lin: Sure. And valuation is an art. Everything I say, even though I think I’m correct, there is no correct. There’s objectively no correct way to do it. But I would say an easy way that I like to do it is you want to have some benchmarks.

I do not think the S&P 500 (SP500) average PE is a good benchmark. There’s a lot of problems when you just look in the average PE of the S&P 500 because every individual stock there, they have a different thesis, a different appropriate valuation, picking average and saying, this stock is cheaper than the 22, 28 times multiple S&P. I don’t think that’s a good way to do it.

Instead, you want to pick certain names that you think are cheap or a very high quality, I think will do well. For me, lot of it tends to be, historically might be something like a Google (GOOG) (GOOGL) or Meta Platforms (META).

For Meta right now, it’s trading at around, if I recall, around seven times sales around, you know, 20, 22 times earnings, or in my estimates, you know, around 16 times long-term earnings. When I have something like that, and I know that this is one of the highest quality names you could buy.

If I wanted to buy anything else than that, and of course you do, you don’t want to the own Meta, but if you wanted to buy something else that’s let’s say riskier, the valuation has to be compelling relative to that.

Otherwise, what’s the point, right? If it’s riskier and more expensive, then there wouldn’t be such a point. So I think that’s an easy way to do the valuations. I would want to buy something that’s cheaper, but besides that, you could also help use this for modeling.

For example, I say with the MSOS, not to pick on it, but if you are having a price target for the MSOS of being like 50 times earnings after 280 is removed, what I’ll say is that I don’t know that that might be quite risky because if something like a meta is trading at 22 times earnings, forward earnings right now, and that has net cash balance sheet, long-term secular growth, it may not make sense to make your frame of price target as being so much higher than that.

So I think with valuation, it definitely helps having reference points to keep yourself modest, keep yourself grounded in terms of how optimistic or pessimistic you’re being there.

Rena Sherbill: I appreciate that, Julian. This was a really awesome deep dive into IIPR. I really appreciate you taking the time and laying so much out for us as listeners, as investors.

Again, your investing group on Seeking Alpha is called Best of Breed Growth Stocks. That article that you wrote on IIPR will leave a link to that. We’ll also leave a link to that Cannabis Investing Podcast conversation that we’ve been referencing. Julian, thank you so much for this conversation. I hope to talk to you again soon.

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