Innovative Industrial Properties (IIPR -0.17%) offers investors a high yield, and the real estate investment trust (REIT) has increased its dividend payments several times over the past few years. However, there's been a noticeable shift in that pattern. The cannabis company recently announced its dividend for next month, and it's yet another quarter without a raise. Given the company's recent challenges, it's not something investors should overlook.
The aggressive rate hikes have slowed to a crawl
Innovative Industrial Properties (IIP) has made for an attractive stock for cannabis investors because it provides an extremely high yield and has been increasing the dividend at a rapid rate in recent years. At 10.2%, its dividend yield is now at astronomical levels as a significant decline in IIP's share price has pushed its yield up, and it's now up to more than six times the S&P 500 average of 1.6%.
And as you can see from the chart below, the company's rate of dividend increases has slowed down drastically in the past year:
Data source: YCharts.
The last increase was in September 2022, when it hiked the dividend by a bit less than 3% to $1.80. In the previous increase, IIP raised its dividend by $0.25, which represented a 17% boost to the payout. It was also common for the company to declare multiple rate increases in a year.
But now, IIP has gone four straight quarters without an increase, keeping the dividend at $1.80 per share.
Why have the dividend hikes stopped?
The problem for IIP, which owns facilities it leases to marijuana growers, is that the cannabis industry is struggling amid oversupply. Marijuana producers have been slashing expenses and closing facilities in an effort to keep spending down. Revenue growth rates for many top marijuana companies also have slowed:
Data source: YCharts.
IIP has had trouble collecting rent from some of its tenants, and several have defaulted. Currently, the company's funds from operations (FFO) -- a crucial measure of REIT performance -- per share is strong enough to support the dividend, but there's not much room for increases. For the first three months of 2023, IIP's per-share FFO was $2.04, which puts its payout ratio based on that metric at 88%.
Could a dividend cut be coming?
The REIT hasn't announced any rate cuts, but the writing could be on the wall for investors. Between a high yield, worsening economic conditions, and a struggling industry, IIP's business might not be able to sustain the dividend for long. A lot will depend on whether the company's financials deteriorate this year, potentially making the dividend unsustainable.
By not raising its dividend for four straight quarters, however, there are signs that the company is being much more conservative than it has been in the past. A dividend cut may not look imminent, but I would be surprised if it didn't happen at some point this year, as a potential recession in the months ahead may only exacerbate IIP's challenges.
Is IIP's stock too risky to invest in?
Since the start of 2022, shares of IIP are down an incredible 72%. That's only slightly better than how the AdvisorShares Pure U.S. Cannabis ETF has performed during that stretch, falling by 79%. The safety that IIP's stock once offered investors is long gone. And if a dividend cut does happen, then an even greater sell-off could ensue.
Until the cannabis industry shows signs of recovery, and marijuana producers are growing again and generating positive cash flow, this is a stock I'd avoid.
