The reason behind the decrease in value of Innovative Industrial Properties' shares today.

Shares of Advanced Industrial Properties (AIP decreasing 1.88%), the nation's top cannabis real estate investment trust (REIT), experienced a drop today following the news that PharmaGreen, one of its major tenants, had failed to meet its lease obligations on all 11 of its properties.

As of 11:09 a.m. ET, the stock price plummeted by 20% due to this development.

Persistent issues in the cannabis industry

This morning, AIP revealed that PharmaGreen, the largest privately held and vertically integrated cannabis company in the nation, had fallen behind on its rental obligations in six out of its 11 properties. The combined unpaid rent for these properties, located in various states, totaled $4.2 million for December.

PharmaGreen did make the required rental payments for its remaining five properties, which amounted to $90,000 for December. However, because of the cross-default conditions in the leases, PharmaGreen also defaulted on the leases for which it had paid rent.

Negotiations between the two companies are still ongoing, but AIP expects to take a firm stance on enforcing its lease agreements, which may result in eviction.

Consequences for AIP

The default is considerable for Advanced Industrial Properties as PharmaGreen's properties made up 17% of the company's income during the third quarter and the first nine months of 2024.

AIP has faced defaults in the past, but this one could potentially set a new record. The cannabis market has faced persistent challenges due to governmental delays at the federal level and an ongoing oversupply that's pressuring prices.

As a REIT, AIP is closely tied to the broader industry's performance, meaning it will likely face challenges until cannabis growers consistently and reliably deliver growth.

With PharmaGreen's default, the industry's and AIP's outlook only appears more unpredictable.

Investors looking to diversify their finance portfolio might want to reconsider their interest in cannabis-related investing, given the persisting challenges in the market. The financial impact of PharmaGreen's default on Advanced Industrial Properties could potentially be significant, considering the tenancy's 17% contribution to the company's income during the third quarter and the first nine months of 2024.