Innovative Industrial Properties (IIPR 1.10%) is a cannabis-focused real estate investment trust (REIT) that has been falling sharply in value. Down an incredible 61% this year, it has underperformed the S&P 500 and its 18% decline over the same period. What was once seen as a stable buy in the cannabis industry doesn't look the same way anymore -- investors have recently learned about problems the company is having with a key tenant, Kings Garden, which has defaulted.
The business is facing some challenges to address those concerns, and there could be a material impact to its bottom line. That's why the company's recent actions caught me by surprise.
The stock raised its dividend payments
Last week, Innovative Industrial Properties (IIP) declared a quarterly dividend of $1.80, which represents a 2.8% increase from the $1.75 dividend that it was previously paying. IIP has been paying a dividend since 2017, and only once has it paid the same dividend for three straight quarters; the REIT has normally hiked its payouts multiple times a year.
I expected that the company would be a bit more cautious given the challenges with Kings Garden, but IIP remains intent on frequently raising its dividend. With the increase, the stock now yields more than 7% per year. That's more than four times the 1.7% yield that the S&P 500 averages.
Is IIP's dividend yield safe?
One inevitable question investors may have is about the safety of the dividend, and whether IIP can really continue paying such a high yield for long. When it comes to REITs, investors need to focus on funds from operations, or FFO, to assess the safety of the yield. This is the equivalent of net income for REITs, as it excludes depreciation and amortization and other expenses that may not be relevant in evaluating the strength of the business.
For the three-month period ending June 30, IIP's diluted FFO was $1.97, which is above the $1.80 quarterly dividend it is paying right now. The caveat here is that these recent financials don't include the impact of the recent default by Kings Garden -- that took place in July, after the close of the period. And so it's likely that the gap between the dividend and the FFO per share will be even narrower. The dividend does look safe for now, but the pot stock is certainly riskier than it was before.
IIP's rate hikes are slowing down significantly
Although IIP continued its pattern of increasing dividend payments, the yield has increased while the dividend change has decreased. The $1.80 dividend payment will be paid in October. Here's how it compares with the same payment in previous years:
Source: Company filings. Chart by author.
The upcoming dividend payment is 20% higher than the $1.50 payment that IIP made in October 2021. And when compared to the $1.75 dividend that IIP was paying earlier this year, the most recent increase reflected a modest 2.8% increase.
IIP appears to be taking a more conservative approach with the dividend, while at the same time still trying to make multiple rate hikes within a year. Unless the company can address the concerns around its troubled tenant and also find a way to significantly boost its bottom line, IIP's days of growing its dividend at a high rate may be over.
Should you buy IIP for its high-yielding dividend?
IIP's 7% dividend yield is safe for now, and it can mean significant recurring cash flow for your portfolio. A $25,000 investment, would bring in $1,750 in annual dividend payments. But the bigger issue for me is the company's management and its reluctance to warn investors ahead of time of the default. That makes the stock risky because it suggests the business is not as safe as its strong FFO number might suggest.
For those reasons, IIP is a dividend stock I'd avoid, even despite its high yield.
