Earlier this year, Blue Orca Capital released a scathing short-seller report about Innovative Industrial Properties (IIPR 1.22%), referring to the cannabis company as a "marijuana bank" as opposed to the retail estate investment trust (REIT) that it supposedly is. Although many of the items were difficult to prove, as they focused on tenants that are privately held, there's been a recent development that suggests perhaps the report was right about one thing.

One of Innovative Industrial Properties' tenants has defaulted

Innovative Industrial Properties (IIP) reported that one of its tenants, Kings Garden, had defaulted on both its rent and property management fees for the month on July 13. IIP has leases with Kings Garden for six properties, and the total default is worth $2.2 million. IIP has stated that it is in discussions with the tenant, but also that it is looking to potentially re-lease the properties to other marijuana companies.

Blue Orca Capital's report warned investors about Kings Garden

Among the things Blue Orca Capital pointed to in its report was that Kings Gardens has been involved in multiple lawsuits, one involving falsifying records. The report ultimately suggested that Kings Garden was a high-risk tenant. It also warned about another key tenant, Parallel. However, there hasn't been any news thus far to suggest that IIP is having difficulty with collecting Parallel's rent payments. 

The company's latest earnings report puts things in an even worse light

On IIP's most recent earnings call back in May, the company didn't outright address the short-seller report. Instead, it decided to tell investors about the two companies in question -- Parallel and Kings Garden. While it talked up their growth stories, it didn't say that the short-seller report was wrong and that these tenants were in fine financial shape.

The furthest it went was to say that Kings Garden was a high-quality producer and that IIP believed the business would "continue to effectively adapt to the changing landscape in California." Fast forward just a few months later, and now IIP is telling investors it's considering re-leasing the properties and that Kings Garden has defaulted.

The earnings call was a bit concerning back then because of how coy it was, and now given the news about the default, it looks like management was effectively skirting around the issues. If I were an investor of IIP, I wouldn't have a whole lot of trust in the company's management at this point.

Does this prove the short-seller report is correct?

Although it looks like the concerns about Kings Garden have been warranted, that doesn't mean that all of the allegations the short-seller report made were correct. IIP could lease out the locations to other cannabis producers and potentially replace all that revenue, and the financial impact may be negligible for its business. Plus, there's no proof that Parallel is in the same boat as Kings Garden.

The challenge with short-seller reports, especially ones that target private companies, is that the information can be impossible to verify. If the report went after Curaleaf Holdings or Green Thumb Industries, it would be easy for investors to just look up the state of those companies and their respective earnings reports to see how strong their financials are and their ability to pay rent. But with Kings Garden and Parallel, that simply isn't the case. All investors can do is rely on the information that IIP provides them with.

Has Innovative Industrial Properties become too risky of a buy?

I'm confident that IIP's business will continue to grow, especially as the cannabis industry expands and more states legalize the use of marijuana. This latest development may set the REIT back, but that doesn't mean that it's in trouble just yet.

However, IIP isn't the slam-dunk buy that it once was given this risk. At the very least, I would wait until the company has its next earnings call to see how it answers questions about this default and why it didn't raise the risk on the previous call. Unless it can adequately address those concerns, I wouldn't buy the stock today. Although IIP may be tempting to buy now that it's near its 52-week low, it could easily fall lower as it may have lost the trust of many investors.