The most recent update from an industry darling may indicate significant financial hurdles for marijuana companies.

The stock market has underperformed over the last year, and marijuana stocks have been targeted by bearish investors. The misery has rippled throughout the marijuana business, with the ETFMG Alternative Harvest ETF (MJ) losing more than half its value since January 2022 alone, and nearly 90% since its peak in 2018.

Marijuana stock investors had hoped that government legalization initiatives in the United States will open up a massive new market and provide relief to suppliers who are battling with cannabis product gluts.

However, the rapidly changing financial market conditions have had their own implications for those in the cannabis industry, and the latest news from marijuana-focused real estate investment trust Innovative Industrial Properties, raises new concerns that weak business conditions may begin to have a domino effect on financing as well.

The Shares of Innovative Industrial Have Taken a Knock.

Innovative Industrial Properties shares plunged 15% Thursday morning, shortly after the start of the regular trading day.

The cannabis-focused REIT announced its fourth-quarter and full-year 2022 operations, investment, and capital markets activity, raising concerns among shareholders about the company’s performance.

Innovative Industrial had 110 properties in 19 states as of the end of 2022. The company’s property totaled 8.7 million square feet, with 1.9 million square feet now under construction or renovation. 100% of its 108 operating properties are leased, with an average lease term of more than 15 years.

In order to diversify its exposure, Innovative Industrial has done its best to prevent substantial concentrations in its client base.

The great majority of its tenants are multistate firms, and the marijuana REIT primarily serves businesses that want to cultivate or process cannabis at their facilities.

Tenant Defaults

However, as economic conditions have deteriorated, one concern has arisen over Innovative Industrial’s clients’ ability to make rent payments.

According to this marijuana-focused REIT, it has collected 92% of the predicted rent for the month of January and 94% for the three months from October to December 2022. The overall figure for 2022 from Innovative Industrial was 97%.

Despite the generally positive news, Innovative Industrial announced a number of defaults in its release. As of January 18, three tenants were in arrears on their rent obligations at residences in Pennsylvania, Michigan, and California.

The REIT has also renegotiated agreements to allow tenants to temporarily defer base rent payments in exchange for longer lease periods or additional default provisions.

Furthermore, Innovative Industrial’s disputes with operator Kings Garden have persisted. Kings Garden is still paying rent on its four California properties, and Innovative Industrial recovered significant sums over and beyond typical rent in the fourth quarter.

Are Producers Having Difficulty?

One significant advantage of Innovative Industrial’s business strategy is that it saves cannabis producers the funds required to own their own sites.

Given the regulatory challenges of working in the cannabis sector, the REIT’s property access and skill in adapting real estate to tenants’ needs are significant selling factors for potential partners.

Cannabis firms, on the other hand, have been under fire for years. Margins have been impacted by a bad pricing environment, and growing financing costs will provide fresh hurdles.

This increases the likelihood of additional defaults among Innovative Industrial’s tenants.

Innovative Industrial was able to stand out as a picks-and-shovels play in cannabis for a long time, performing well even as marijuana growers suffered.

However, Innovative Industrial’s stock has dropped dramatically as well, implying that the entire industry may be under such much financial pressure that other companies may struggle to survive.

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