This Marijuana Stock Just Shocked Its Investors With a Huge Piece of Good News

One of the worst events that can befall a real estate investment trust (REIT) is the default of a major tenant. That happened at the end of last year to Innovative Industrial Properties (NYSE:IIPR), the most significant specialty marijuana industry REIT on the market. That unpleasant situation saw a major turn for the better as January came to a close, though.

At long last, an agreement

The tenant in question was PharmaCann, a privately held cannabis company that (as of Sept. 30) held the No. 1 spot on Innovative's list of numbers of properties rented, at 11. On top of that, it occupied pole position in terms of contribution to the REIT's total revenue, comprising 17% of the tally.

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PharmaCann's default occurred on Dec. 19, upon its failure to pay $4.2 million in rent for six of those properties. Technically this is a default on all 11, since the company had cross-default provisions baked into its contract with Innovative. Following this the two companies began talks on how to resolve the situation.

These dragged on for some time, so I can sympathize with Innovative shareholders who lost hope for any kind of agreement. Finally, on Jan. 30, a deal was announced.

Innovative used PharmaCann's security deposits for all of the rents still owed not only for December plus penalties, but for January 2025, too. The two sides also agreed to amendments covering nine of the properties that stipulate higher security deposits (which are to be paid over three years starting in 2027), and a slight reduction in rent for the nine from $2.8 million per month to $2.6 million.

Innovative and PharmaCann will collaborate on the transition of the remaining two properties to new tenants. If this does not occur by this coming Aug., 1 the duo, which are cultivation facilities in Michigan and Massachusetts, will revert to Innovative's full control. The monthly base rent of $1.3 million is to be abated, effective this past Feb. 1.

Finally, PharmaCann issued a promissory note to Innovative that matures at the latest on Feb. 1, 2035; the REIT did not specify much more about the note, including the amount or the interest rate it bears.

PharmaCann has agreed not to take on additional debt without Innovative's consent until the note is paid in full or it is canceled. Meanwhile, it will seek to raise more equity capital from some of its current investors.

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So what we have here is basically a substantive agreement on PharmaCann taking care of trailing rent obligations, at least through those security deposits. Better, it's also on the hook for most of them going forward.

This will hopefully be a smoother experience with fresh equity capital coming in, though it's not clear how much PharmaCann aims to raise, and investors can only speculate on how successful it will be in the effort.

What's also heartening for Innovative's investors is that management has shown patience and persistence in working out a deal with its troubled tenant -- a deal that, in the end, has numerous safeguards that are quite advantageous for the REIT.

For a little perspective, though, I'd say this was never a red-alert emergency for the REIT. Yes, PharmaCann is tenant No. 1 but the company is also landlord to several stars in the small universe that comprises Big Marijuana (such as it is). Publicly traded multi-state operators (MSOs) Trulieve Cannabis and Curaleaf Holdings, among others, grace its tenant list.

It seems they continue to pay rent on the regular. What's more, at least one could have stepped in to replace PharmaCann as a tenant in case that company ceased to be an Innovative lessee. Perhaps this realization helped drive Innovative and PharmaCann to a deal that clearly favors the former company.

Innovative's investors should not only be relieved at this development, but encouraged by it. They would also probably be wise to stay invested in the company, which is one of the few pot-related stocks that consistently books a net profit. It's also nearly unique in that it pays not only a dividend, but a high-yield dividend, dispensing at a rate topping 10% these days.

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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.