If you're looking at an investment that yields more than 10%, you know that there's likely going to be some risk involved with it. A yield that high and that safe would be quickly scooped up by income investors. When that doesn't happen, it's a sign that there is some hesitation around the stock and the safety of its payout.
One high-yielding stock investors might be tempted to take a chance on these days is that of real estate investment trust (REIT) Innovative Industrial Properties (IIPR +0.31%). The REIT's yield is up to more than 11%, which is far higher than the 1.3% the S&P 500 averages.
But Innovative Industrial Properties (IIP) just announced some troubling news, which could make its yield look even riskier: A major tenant defaulted. Is this dividend stock in big trouble, and could a cut to its payout be around the corner?
NYSE: IIPR
Key Data Points
IIP announces PharmaCann default
On Dec. 20, 2024, IIP announced that one of its key tenants, PharmaCann, defaulted as it failed to pay the full rent in December on six of its 11 leases. For IIP, this is a significant tenant as it notes that these PharmaCann properties account for 17% of the REIT's total rental revenue.
It's still early on, so investors won't know how this situation will unfold and whether IIP may end up pursuing eviction proceedings and finding new tenants for the properties, but it does undoubtedly add a significant risk to a dividend stock that already wasn't all that safe of an investment to begin with.
The day the news was released, shares of IIP nosedived and ended up falling by 23%.
Is a dividend cut coming?
A week prior to the news of the default, IIP declared a quarterly dividend of $1.90 per share, payable on Jan. 15. Whether the REIT cuts the dividend is too early to predict at this point, given how recent the developments are. But one thing's for sure -- there isn't a big buffer for the REIT, given its high payout.
In IIP's most recent quarter, which ended on Sept. 30, 2024, its normalized funds from operations (FFO) totaled $2.02 per share. FFO is what REITs use to evaluate the safety of their dividend payments. Based on its recent results, the REIT's normalized FFO is only 6% higher than the rate of its quarterly dividend. If PharmaCann accounts for 17% of revenue and perhaps a similar percentage of the FFO, then that could put the REIT in a situation where its dividend is at an unsustainable rate if it loses that rental income.
However, this again falls back into the question of what happens next. If this proves to be a temporary issue for PharmaCann or IIP finds new tenants for the properties, then everything may be fine. But let's not forget that IIP depends on cannabis growers, who often struggle with profitability; finding a strong and safe tenant in the industry may be easier said than done.
A dividend cut may not be on the horizon just yet, but investors shouldn't be surprised if IIP does decide to trim its payout at some point this year.
Is IIP a stock worth taking a chance on today?
IIP's dividend was risky to begin with since the REIT's business depends heavily on the strength of a wobbly cannabis industry. Cannabis growers don't make for the safest of tenants, and with a default now to worry about as well, investors may be better off looking at lower-yielding stocks in other industries than IIP, which may offer more safety.
If IIP cuts its dividend, that could send the stock into even more of a tailspin as that could remove the main reason investors invest in IIP in the first place -- for that high payout. Take that away, and this becomes more of a speculative buy and risky investment.
At the very least, investors may want to take a wait-and-see approach with IIP's stock as these developments are still fresh, and a lot could happen in the weeks and months ahead, which can dictate how problematic of a situation this proves to be for the REIT.
