Innovative Industrial Properties, Inc., (NYSE: IIPR), informed investors this past week that some of their tenants were not paying rent. After the announcement, the price of the stock dropped to just $49 and has been trading at around $55. The news caused the stock price to plummet from roughly $68 to $49. It was recently selling around $55.
Green Market Report In the press release Innovative Industrial stated, “The Company believes it would be better served if it actively sought to replace a significant portion of its tenants with financially stable long-term residents,” without giving specifics as to what it intended to do. This is probably because each option would result in less money for the company.
Aaron Grey is the equity analyst for Alliance Global Partners. He released a report titled “Analysis of Alliance Global Partners: The Company’s Tenant Management Scenarios” on 1 April.
Tenant disputes
IIP already informed investors of its largest customer PharmaCann’s failure to pay rent on multiple properties. PharmaCann, after the company had assured investors of a resolution and a plan for payment was agreed upon by the two parties, quickly abandoned the contract and stopped making payments. TILT Holdings, 4Front and other rent-dodging companies were then added to this list. TILT has been trying to find buyers for its Massachusetts property in a very small market, while 4Front tries to fix its enormous debt. The final blow to investors was when Gold Flora filed receivership and gave up.
You can find out more about the options by clicking here.
IIP is faced with two general options. The company can start eviction proceedings in the hope that a tenant will pay 100%. Renegotiate rent to get money.
Evictions
Grey wrote, “The alternative of evictions is a route that could be taken, but would take time & eventually come with rents closer to market rate, which would be lower than prior ABR (annualized base rent), particularly in less desirable markets such as MA.” The tenant takes its plants if any. What happens to the equipment left behind by IIP? It may take some time for these facilities to be retrofitted to accommodate a tenant who does not grow cannabis. In this day and age of fluctuating tariffs, evictions are not an attractive option.
Lower rents
According to the analyst, a renegotiation of rent is likely. This is much easier to say than do. IIP is clear that it does not like partial payment and encourages tenants to keep their original agreements and pay any unpaid rent. But you can’t make blood with a turnip. IIP called out tenants who were having financial problems publicly but it didn’t help.
Gold Flora, which is in receivership, could have a different owner who has different ideas for the business. The AGP report stated that Gold Flora was waiting on the receipt of regulatory approval for its 180k sq ft facility in Palm Springs, which its management has previously said it expected to happen in 2025 and would trigger IIPR rental revenue – but that is now increasingly uncertain.
Grey wrote, “If IIPR holds its stance of not accepting partial payments, this could either deter operators from viewing partial payments as a lever or accelerate additional defaults as other operators struggle with CF & look to refinance.” Grey wrote, “If IIPR holds its stance of not accepting partial payments, this could either deter operators from viewing partial payments as a lever or accelerate additional defaults as other operators struggle with CF & look to refinance.”
The analyst stated also that the current situation makes it more likely for a dividend to be cut, and any buyback of shares will most likely not happen until tenants are stabilized.
The future
Analysts believe that a concern over incremental tenants defaulting or moving towards partial payment will continue to linger. Grey anticipates hearing more about this on the first-quarter earnings call. However, Grey believes that investors won’t be able to feel comfortable with the ABR until the refinancing of an increasing number tenants.
Analyst maintained neutral rating but lowered price target to $50 from $70.00.