The one event that strikes true fear into the heart of real estate investment trust (REIT) investors is the tenant default.

Cannabis REIT Innovative Industrial Properties(NYSE: IIPR) announced more than one default earlier this week, and the market reacted by energetically selling out of the company's stock. According to data compiled by S&P Global Market Intelligence, it was down by almost 18% week to date on Friday before market open.

An announcement that really dampened the buzz

Following market close last Friday -- typically considered to be an optimum time to release discouraging news -- Innovative made its announcement. Three tenants were in default, specifically the privately held companies 4Front Ventures, Gold Flora, and Tilt Holdings. Collectively, the three companies comprised just under 11% of Innovative's contractual rent as of the end of 2024.

This isn't the first recent notice of default. Last December, tenant PharmaCann defaulted on 6 of the 11 properties it leased from Innovative. This technically meant a default on all 11 due to cross-default provisions in its contract. To the great relief of investors, this situation was resolved at the end of January when PharmaCann agreed to essentially pay the owed rent, and revise the contract somewhat.

Coming so close as they have, the two default announcements are clearly making investors nervous. They are also highlighting the uncomfortable reality of the cannabis industry, which for years has been plagued by a hunger for cash, and frequent losses on the bottom line for even the most prominent sector companies.

Maybe that high-yield dividend isn't enough to stay invested

Innovative had been an attractive stock for several reasons, chiefly that it's one of the few marijuana REITs on the stock market, and it pays a high-yield dividend. Yet that tenant base is looking increasingly wobbly, raising serious concerns about its viability as a business. I've been bullish on Innovative in the past, but I'm becoming significantly more concerned about its business going forward.

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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.

Why Shares of Innovative Industrial Properties Sank This Week was originally published by The Motley Fool

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