Is the Safety of This Company's Substantial 11% Dividend Yield Questionable?
When it comes to chasing high dividend yields, Investment in dividend stocks like Innovative Industrial Properties (IIPR) might seem alluring. However, a high yield can be deceiving if a company can't sustain it, eventually forcing cuts to its payouts. So, the real focus should be on a company's core business.
Our spotlight today falls on IIPR, a Real Estate Investment Trust (REIT) centered around the medical cannabis sector. With a whopping forward yield of approximately 11%, it's hard to ignore. But is this yield sustainable?
The Problem with a Key Tenant
IIP rents properties to cannabis growers and then leases them back, helping these companies free up their capital. This business model works, thanks to the federal-level prohibition and Schedule I classification of marijuana in the U.S. - it's tough for cannabis companies to access conventional banking services.
Unfortunately, the cannabis sector itself has faced some challenges in recent years, and IIP hasn't been immune. Take its third-quarter results for example. Revenue dropped by approximately 2% year-over-year to $76.5 million, and earnings per share dropped to $1.37 from $1.45 in the previous year. Don't expect things to improve soon, either.
Last month, IIP announced that a major tenant, PharmaCann, failed to pay rent for six out of its eleven leased properties. While PharmaCann did pay for the remaining five, due to a default clause in each lease, it effectively defaulted on 100% of its obligations. The non-paid amount, excluding late penalties and interest, is a hefty $4.2 million.
Notably, PharmaCann accounted for about 17% of IIP's rental revenue through September 2024. While IIP is working to resolve this matter, it's an undeniable concern that investors should keep an eye on.
Looking Beyond the Yield
IIP's stock performance over the past three years has taken a nose dive, resulting in a significantly higher yield. Although its dividend has increased during this period, not by a large margin.
The existing issues facing IIP, such as the legal and regulatory environment holding back marijuana companies, were already challenging. Adding to this, the PharmaCann-related issue only makes things more complicated. But this isn't the first time IIP has faced this issue. A tenant defaulted on rent back in 2023.
Some might argue that IIP still has plenty of growth potential in the U.S. cannabis market, operating in only 19 out of 38 states where medical cannabis is legal. However, expanding to new regions might introduce similar problems.
At the end of the day, IIP's fate is closely tied to the success and health of the cannabis industry. As long as marijuana companies continue to struggle, IIP faces risks and the real possibility of reducing its payouts.
Legalization, or at least a more favorable regulatory environment, could help, but it might also make IIP's business model obsolete. Conversely, a more lenient regulatory landscape could attract even more players into the market.
In my opinion, investors should be hopeful for a less stringent legal landscape for cannabis, but it's uncertain when or if this will happen. In the meantime, IIP's challenges could persist for a while. The company can't halt its dividend distribution, as REITs must distribute at least 90% of their taxable income as dividends. However, IIP's "juicy" yield doesn't feel so secure anymore.
Dividend-focused investors should consider other options with more stable offerings.
Enrichment Insights:1. IIPR's financial struggles and tenant issues in the cannabis industry raise concerns about the sustainability of its high dividend yield.2. The company's large tenant, PharmaCann, defaulted on rent, affecting 17% of IIPR's lease revenue until 2024.3. IIPR has a high dividend payout ratio, which could make it difficult for the company to sustain its current dividend level over the long term.4. The legal and regulatory risks in the cannabis industry put additional pressure on IIPR's financial performance and growth prospects.5. IIPR is facing a securities law violation lawsuit, which could negatively impact the company's market position and investor sentiments. The outcome of this lawsuit could result in financial penalties that could affect earnings and profitability.
In light of these factors, while IIPR's high dividend yield might be enticing to income-focused investors, it is wise to weigh the potential risks against the current valuation metrics and financial performance. The company's robust operating margin and low debt-to-equity ratio provide some reassurance, but the overall investment scenario remains complex and requires careful consideration.
Despite IIPR's high dividend yield of approximately 11%, investment in this Real Estate Investment Trust (REIT) might require a closer look due to its reliance on the cannabis sector. The recent default of rent payment by a major tenant, PharmaCann, has raised concerns, particularly as PharmaCann accounts for about 17% of IIPR's rental revenue until 2024.
In the realm of finance, sustainable income is crucial, and with PharmaCann's default, the sustainability of IIPR's high dividend yield becomes a point of discussion. As PharmaCann accounts for a significant part of IIPR's rental income, resolving this matter becomes imperative for maintaining the dividend yield and investor trust.
