Considering a 76% drop, Is High-Yield, Pioneering Industrial Properties Worth Investing in During a Price Slide?
Seeking income growth investments, you might have stumbled upon a promising stock with intriguing features - Innovative Industrial Properties (IIPR -0.64%). Its dividend, initially introduced in 2017, went up by a whopping 1,170% over time. Despite the remarkable track record and numerous increases, without any cuts, the market seems apprehensive of another reduction on the horizon. As a result, the stock has experienced a steep drop of over 75%, offering a lucrative 11.158% yield at present prices.
If you're eagerly searching for high-yield dividend stocks, you're probably aware that not everything that glitters is gold. So let's delve deeper into why IIPR's yield appears to be too good to be true.
Reasons behind the stock's decline
In essence, the decline of IIPR's stock can be linked to one of its primary tenants, PharmaCann. On December 19, 2024, PharmaCann defaulted on rent obligations for six out of its 11 leases. While PharmaCann paid $90,000 in rent for five of its leases, the $4.2 million in unpaid rent significantly impacted investors.
Fortunately, Innovative Industrial was able to cover the financial gap with security deposits. However, PharmaCann accounts for approximately 16.5% of IIPR's total rental revenue, making it crucial to maintain its financial stability and dividend commitment.
In the third quarter of 2024, IIPR reported an adjusted funds from operations (FFO) of $2.25 per share, which is sufficient to meet its then-existing dividend rate of $1.90 per quarter. But this doesn't leave much room for unforeseen challenges, especially if PharmaCann faces further difficulties.
Don't hope for an immediate comeback
It's important to note that IIPR primarily invests in retail properties and has established itself as a noteworthy player in the cannabis industry by owning 98% of properties used for cultivation, processing, or distribution of cannabis products. In response to PharmaCann's default, the REIT announced its intent to aggressively enforce its rights, which might involve evicting the tenant.
While the potential eviction could pave the way for a new tenant, the real challenge lies in PharmaCann's financial situation. High-margin cannabis profits mainly benefit early market entrants with limited competition, but as the competition intensifies, these profits can be eroded.
With 24 states now allowing recreational cannabis use and the potential for federal legalization, it's unlikely that PharmaCann will be the last tenant to struggle with rent payments. Waning cannabis profit margins and the threat of increased competition present additional challenges for IIPR's already unprofitable tenants.
Explore alternative options
As the first-mover in the cannabis real estate market, IIPR boasted impressive financial performance in its early years. However, current financial pressures, including tenant defaults and intensifying competition, raise concerns about its ability to maintain its generous dividend payout.
Given the challenges facing IIPR's largest tenants, including PharmaCann, Ascend Wellness, Green Thumb Industries, Curaleaf Holdings, and Trulieve Cannabis, it may be wise to seek alternative, more viable high-yield stocks to consider.
After considering the financial struggles of IIPR's main tenants and the potential impact on its dividend payout, you might want to reconsider your investing strategy in finance. Diversifying your portfolio by exploring alternative high-yield stocks could be a wise decision in this situation.
In the light of PharmaCann's rental issues and the broader challenges in the cannabis industry, investing money in other high-dividend stocks might offer more stability and potential growth.
