There's an old saying that there's no free lunches on Wall Street. It's a fancy way of explaining that for big rewards you often have to take on big risks. Which is why you should always step back and make an assessment of the downside possibilities of every investment you are considering. Innovative Industrial Properties (IIPR 2.21%), Simon Property Group (SPG 0.96%), and Omega Healthcare Investors (OHI 1.42%) are excellent examples of why the nuances matter.
Growing like a weed
Innovative Industrial Properties is an industrial real estate investment trust (REIT) that focuses on marijuana grow houses. This is a fairly new business, given that pot isn't actually legal in all 50 states just yet. However, the industry and the REIT have both been growing at a rapid clip. That shows up best in Innovative Industrial Properties' dividend, which has increased from $0.15 per share per quarter in 2017, when it was first initiated, to the recent figure of $1.75. That's not a typo, the REIT's dividend has increased a massive 900%! The stock is up about the same amount, by the way.
Image source: Getty Images.
Here's the nuance to this story: Innovative Industrial Properties is providing capital to an industry that has limited options for accessing cash. Indeed, the murky legal situation in the pot sector has more traditional funding sources, like banks, sitting on the sidelines. This is creating an opportunity for Innovative Industrial Properties that it has clearly jumped on. But, as marijuana use is normalized, providing funding is getting more competitive. If more traditional funding sources start jumping aboard, Innovative Industrial Properties' edge might not be as strong as it is now. Its yield is 3.4%.
2. The pandemic isn't the only issue
Simon Property Group is one of the largest owners of enclosed malls and factory outlet centers in the world. When the pandemic hit in 2020, countries around the globe shut their economies down to help slow the spread of the illness. That was a devastating blow to Simon, which was forced to cut its dividend after a long string of annual increases. The REIT worked with tenants, invested in its business during the downturn (with partners it bought troubled retailers), and mall operations picked up materially in 2021. The dividend, meanwhile, is back in growth mode and the stock has rallied a huge 180% since April 2020.
That said, Simon is projecting roughly flat results in 2022. The big story is that the pandemic recovery has largely played out and now it's back to "normal" business. Only business in the mall space hasn't been normal for years thanks to the so-called retail apocalypse. That's the hyperbolic name that was given to the shift toward online shopping, but is really a mixture of issues including financially weak retailers struggling to change with the times. The pandemic actually sped up the retail apocalypse, which is a good thing in some ways. But it doesn't change the need for Simon to find new tenants and get them into its malls. That takes time and 2022 will be another year of adjustment on that front. Simon's yield is just under 5%.
3. A necessity business gets slammed
Omega Healthcare is one of the largest owners of nursing homes. Although this is a necessity business that cares for those unable to help themselves, the coronavirus was most deadly for older adults and spread most easily in group settings. That combination took a huge toll on nursing home occupancy. Omega has been very open that it needs to see occupancy climb into the 80% range for it to be back on solid footing. But occupancy ended 2021 at around 74% or so.
That's the bad news, and it is pretty bad. However, based on recent trends, the REIT believes that it could see occupancy get back into the 80% space in 2023. Yes, that means that 2022 is just another recovery year. But with a yield of around 8.6%, more aggressive investors might think that's a good risk/reward trade-off. The risk, of course, is that Omega can't sustain that payout until its occupancy recovers, but management is fairly confident in the strength of its balance sheet and so far has been reluctant to cut the quarterly payment. The wild card is the path of the coronavirus, which is just as uncertain now as it was in 2020. In fact, the REIT just announced that another tenant is having trouble paying rent.
No easy answers
Each of these REITs is attractive in their own way and, notably, facing unique risks. Innovative Industrial Properties has been growing quickly but, at some point, it won't be able to keep that pace up. Simon has rebounded strongly from the pandemic, but it still has notable problems to deal with as it looks to keep its malls filled. And Omega has been in the dog house because of its nursing home focus, but it looks like occupancy trends at this high-yield name are slowly starting to improve. Before you jump aboard any of them, make sure you understand both the rewards and the risks.
