Why Innovative Industrial Properties Stock Withered by Almost 40% in December

For any person or company that makes coin by renting property, a tenant default is the situation nightmares are made of. That's only compounded if the landlord in question manages multiple properties and a tenant defaults on more than one of them.

Such was the situation with marijuana real estate investment trust (REIT) Innovative Industrial Properties (NYSE: IIPR) in the final month of 2024. And not only did it suffer a damaging default event, but an analyst tracking its stock also downgraded his recommendation.

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An unwanted holiday gift

Just a few days before Christmas, Innovative's tenant PharmaCann defaulted on its latest rent payments for six of the 11 properties it leases from the REIT. All told, the unpaid monies totaled $4.2 million for December. Although it did pay for the other five facilities, it has cross-default provisions baked into its contracts. So, technically, it defaulted on those too.

By the standards of the relatively small and splintered marijuana sector, PharmaCann is a major player. It's one of the largest privately owned multistate operators and is active in eight U.S. states. Rather uncomfortably, it is also, as of this past Sept. 30, Innovative's No. 1 tenant. That's both in terms of total properties leased (again, 11), and percentage of total rental revenue (17%).

At the time, Innovative wrote in a press release that it aimed to "enforce its rights ... aggressively" in the situation, adding that such enforcement could result in eviction proceedings. On a more hopeful note, it said it was continuing to hold talks with PharmaCann, so perhaps there's a better solution to their mutual problem. As of early January, there has been no further news about the default from either company.

Understandably, investors bailed from Innovative after the news was announced. And it wasn't only the investing public that was becoming more bearish on the REIT. BTIG prognosticator Thomas Catherwood downgraded his recommendation on the stock, sliding it down one peg to "neutral" from his previous "buy."

Time to get contrarian

It's easy to be down on the marijuana industry these days, as many companies in it are unprofitable and struggle to simply remain afloat. I wouldn't give up on it entirely, as public sentiment is strongly in favor of a legal rescheduling of marijuana on the federal level, which would in effect legalize it throughout the country.

I think Innovative will be able to cope with the PharmaCann situation, even in the worst-case scenario of the tenant's full default. I believe the well-capitalized Innovative will still do well with its remaining clients, and with 11 vacant properties it will stand a good chance of finding replacement tenants.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.