When most people think about investing in real estate, traditional assets like apartments, offices, and strip malls probably come to mind. But there are a host of other sectors that need specialized real estate to function, and in many cases there's a real estate investment trust (REIT) there to help. Here's why you might want to consider investing in cannabis, renewable power, and casino real estate via the REIT option.
1. A good source of cash
Innovative Industrial Properties (IIPR -0.37%) fills an important niche in the cannabis sector. Although pot is increasingly being legalized across the U.S., it still isn't fully legal. And that makes it hard for traditional lenders, like banks, to enter the space. So Innovative Industrial uses its REIT structure to buy assets directly from growers and then lease them right back under long-term contracts. It's a win/win, with Innovative Industrial getting a reliable tenant for a niche asset and the seller getting cash it needs to keep growing its business.
It's been good for investors, too, with Innovative Industrial raising its quarterly dividend from $0.15 per share in mid-2017 to a recent $1.75 per share. That's massive dividend growth and it's not likely to continue forever, but with cannabis still gaining acceptance, there's also no reason to think that growth will suddenly stop. For example, the REIT bought 37 properties in 2021, increasing its portfolio count to 103. It has added some more assets since the end of the year, as well. If you don't mind collecting a generous 4.6% dividend yield from a still-growing REIT, then you might want to take a look at this pot landlord.
There is one caveat here. Innovative Industrial Properties was the subject of a short seller report that questioned the quality of the REIT's tenants. Innovative Industrial's management has strongly denied any problems exist and as new properties are added tenant specific issues become less of a concern. While truly risk averse investors might want to stay on the sidelines, most should be fine trusting the company that everything is OK given its solid track record.
2. Cleaning the world and income, too
Hannon Armstrong (HASI -3.20%) is a mortgage REIT, which means it lends money to others backed by collateral. Normally the collateral for a mortgage REIT is residential real estate. But Hannon Armstrong has applied this model to the renewable power sector, and it is a uniquely good fit.
The cost to build a clean energy facility, like a wind or solar farm, is pretty massive. And the benefit, other than the obvious ESG (environmental, social and governance) side of things, is that clean energy assets are normally backed by long-term power contracts. That makes the cash flow from these assets pretty stable over time. Hannon Armstrong provides loans to the builders, often after construction is complete and cash flows have started. There's a clear line of sight to the strength of future interest payments because of the power contracts involved.
If you are looking at clean energy, but don't want to own a company that takes on the risk of building and running physical assets, Hannon Armstrong is worth a deep dive. And you can collect a fairly generous 3.75% dividend yield along the way.
3. You own the house
Gambling is less about skill than it is about odds, and casino operators go to great lengths to stack the odds in their favor. Sure, an individual person may walk away a winner, but overall more people are destined to lose than win.
But you can make money in the casino business if you own the house in which casinos operate, which is exactly what VICI Properties (VICI 1.18%) is all about. Only it doesn't take on any gambling risk, with leases that have to be paid no matter what is happening on the casino floor.
VICI is one of the biggest names in the casino industry. It swallowed up competitor MGM Growth Properties in April. It now owns 43 destination and regional properties. It's worth noting that the REIT, which only started its stand-alone life in 2017, got through the pandemic downturn, when most of its tenants were forced to shut down, without a dividend cut. If you want to win right along with the house in the gaming space, you'll want to look into this 4.7% yielding REIT.
A lot of options
Investors shouldn't overlook the importance of diversification. But sometimes adding a highly focused and specialized dividend payer to your portfolio is still a good call. Investors looking for a dividend-focused way to play the cannabis, clean energy, and casino sectors should find this trio of REITs particularly alluring.