The marijuana sector that real estate investment trust (REIT) Innovative Industrial Properties (IIPR -0.17%) serves is in a state of flux. That has left Wall Street worried about the company's business. The stock hasn't been a strong performer of late, but investors shouldn't read too deeply into the sentiment. Here's a look at how the stock has performed -- and how the business is doing.
Getting down
Innovative Industrial mainly owns facilities that it leases to marijuana growers, usually under sale-lease back agreements. If you bought the shares one year ago, a $10,000 investment would be worth roughly $8,500 today. That's about a 15% decline as of July 19. That is much better than the performance of the Global X Cannabis ETF (POTX), which would have turned $10,000 into just $3,700 over the past year. That's a decline of more than 60%. Clearly things are not going well in the marijuana sector.
Data source: YCharts
That said, Innovative Industrial Properties is an REIT, so dividends are an important component of your return. Right now the landlord pays a huge 8.9% dividend yield. If you include the dividend in the return equation, which is total return and assumes dividend reinvestment, a $10,000 investment one year ago would be worth roughly $9,300. That represents a decline of about 7% -- which, given the drop in the broader marijuana sector, is actually not so bad. In fairness, the S&P 500 is up about 20% over that span based on total return (around 19% on a price-only basis), so Innovative Industrial is a major market laggard. But it isn't uncommon for an individual sector to zig while the market zags.
Data source: YCharts
In fact, if you are value-biased or contrarian and interested in the marijuana industry because of its downturn, Innovative Industrial could be a relatively safe way to get exposure to it.
Still on solid ground
There's no question that Innovative Industrial is dealing with a few headwinds. Rental collection rates are below 100% because some troubled tenants have stopped paying rent. But it is managing the problem fairly well, taking action where needed. That includes swapping out tenants and selling properties. The rapid expansion of companies in the immature but expanding pot market almost guaranteed that a shakeout would happen eventually.
That said, Innovative Industrial's dividend looks like it is well covered. The REIT pays a quarterly dividend of $1.80 per share. In the first quarter, adjusted funds from operations (FFO) came in at $2.25 per share, up 10% year over year. That equates to an adjusted FFO payout ratio of 80%, which is completely reasonable for a REIT, which by law must pay out 90% or more of its taxable income in dividends. And it provides some wiggle room should the problems with tenants continue.
Data source: YCharts
On top of that, the REIT's balance sheet remains incredibly strong as the chart above shows. It has a debt-to-equity ratio of 0.15 times. Compare that to Realty Income (O -0.17%), which many investors consider an ultra-safe REIT, which has a debt-to-equity ratio of 0.65 times (lower numbers indication less leverage). Basically, Innovative Industrial looks like it has a strong foundation to muddle through the marijuana shakeout. Highlighting that fact is the REIT's purchase of two properties in the first quarter and investment in an upgrade at a third. Far from hunkering down, it is still in expansion mode.
An opportunity?
Risk-averse investors should probably avoid Innovative Industrial, if only because it has a relatively small portfolio focused on a niche property type. But for those willing to take on some uncertainty, the huge yield on offer and still-strong business-level performance suggest this marijuana landlord remains well positioned. Of course, things could get worse before they get better with regard to the marijuana shake out -- however, while Wall Street is throwing the baby out with the bathwater, you could be collecting a 8.9% dividend yield.
