While Innovative Industrial Properties (NYSE: IIPR) had been managing to stay ahead of nonpaying tenants, the cannabis real estate investment trust (REIT) is now suffering along side the rest of the cannabis industry. The reason? One of its largest portfolio holdings has joined the nonpaying cohort.

And now shareholders are throwing in the towel.

In December, IIP told investors that PharmaCann wasn’t paying rent on six of 11 properties, with the base rent, property management fees and estimated tax and insurance payments owed totaling $4.2 million. IIP noted that even though PharmaCann paid rent on the other five properties, it was technically in default on the whole group because of the nonpayment for the six and could be subject to late penalties and interest.

Worst-case scenario, PharmaCann will be evicted – and considering the company is 17% of IIP’s rental income, it would affect the bottom line.

Trouble was brewing

Even before news of the default – which led to 3 million shares being traded and the price falling from $77 down to $73 – shareholders were worried about the tenants. IIPR’s stock was trading around $135 before the third quarter results were published.

Then in November, Green Market Report wrote about IIP feeling the effects of lowered revenue from troubled properties when it reported its earnings. Revenue slid 1.7%, and the company was using deposit money from some of its tenants for rent payments.

During the third quarter, IIP applied $1.4 million of security deposits for payment of rent on four properties leased to 4Front Ventures Corp., one property to TILT Holdings, and one property lease to Emerald Growth. IIP also terminated its lease with Temescal Wellness of Massachusetts Holdings LLC and regained possession of the property previously occupied by that tenant on Sept. 30, 2024.

PharmaCann was not well

PharmaCann is a privately owned multistate operator, which makes it harder to see any cracks in the company. However, during a third quarter earnings call, publicly traded Cronos Group (Nasdaq: CRON) told its investors that it recognized a C$25.7 million impairment loss driven by impairment charges recorded on its PharmaCann option.

Before that, Cronos reported that for the three and six months that ended June 30, 2024, it recognized C$12.9 million and C$25.7 million of impairment loss on its PharmaCann option. Indeed as early as 2022, Cronos was writing down its investment in PharmaCann – clearly a sign of trouble.

In 2022, PharmaCann got a $30 million capital expenditure financing facility from XS Financial to support its growth initiatives. By 2023, PharmaCann was still using this facility, indicating that it was relying on external financing to fund its operations, which meant it wasn’t making enough money on its own.

In addition, PharmaCann’s union workers in New York secured a 20% wage increase in May 2023, which added to the company’s financial pressures. That state’s adult-use program’s rocky rollout also added stress. Still, IIP made a construction investment of $16 million in PharmaCann in February 2024 for a New York property.

By the end of 2024, PharmaCann had closed its LivWell operation in Michigan, citing trouble in that state’s market. However, it seems it was more that just the Michigan market causing the stress for PharmaCann.

A billion wiped out

When IIP told investors it was having trouble with some of its tenants, the stock tumbled from $130 and is lately selling at $67. Share prices have plunged 36% over the past month. With 28.3 million shares outstanding, IIP has lost a whopping $1.7 billion in valuation in a short amount of time. Analysts from BTIG and Compass Point both downgraded the stock in December to Neutral.

While IIP has managed to find new tenants for some of its properties and to continue rent increases for others, PharmaCann could be harder to offset. IIP is already working through challenges with another problem tenant, Parallel Cannabis, in Florida, while Ascend Wellness, its next biggest portfolio exposure, is also seeing its losses mount. Back in August, Ascend slashed its full-year revenue outlook, citing mounting competition in Illinois, Massachusetts and New Jersey. With the lackluster second-quarter results, the company later that month ousted then-CEO John Hartmann and CFO Mark Cassebaum.

IIP is likely to keep close tabs on Ascend’s health as it has now found itself getting dragged down into the cannabis industry’s woes when before it seemed immune.