Potential Threat to Real Estate Investment Trust's High-Yielding Dividend Following Tenant's Significant Default
If you're eyeing an investment with returns exceeding 10%, you know it comes with some risk. A yield that high and safe would be gone in a flash, grabbed by income investors. When this doesn't happen, it's a red flag. Investors might be second-guessing the stock's safety.
One high-yield stock causing a stir lately is realistic estate investment trust (REIT) Innovative Industrial Properties (IIPR), whose yield surpasses 11%. This is way beyond the 1.3% average for the S&P 500.
However, IIP recently disclosed some unsettling news that might make this already risky investment even more dicey. One major tenant, PharmaCann, defaulted on rent payments. This is a significant concern for IIP, as these PharmaCann properties generate 17% of its total rental revenue.
Uncertain times ahead, as the situation remains unclear. IIP may pursue legal action or seek new tenants for the properties. But this default adds an extra layer of risk to an investment that wasn't exactly a bed of roses to begin with. On the day of the news, IIP shares plummeted by 23%.
But is a dividend cut imminent? The question is murky, as the news is fresh and developments are still unfolding. Just before the default announcement, IIP declared a quarterly dividend of $1.90 per share, payable in January. Whether IIP will trim its payout is anybody's guess.
However, something's for sure – IIP has a narrow margin for error. In the latest quarter, ending September 2024, IIP's normalized fund from operations (FFO) was $2.02 per share. FFO is crucial for REITs to measure safe dividend payments. Based on its recent results, IIP's FFO is only 6% higher than its quarterly dividend rate. If PharmaCann accounts for a similar percentage of revenue, IIP's dividend could become unsustainable if they lose that income.
Yet, the question remains – what happens next? If PharmaCann's situation improves, or IIP finds new tenants for the properties, there may be little cause for concern. But let's not forget that IIP relies heavily on cannabis growers, who often struggle with profitability. Replacing tenants might prove challenging.
While a dividend cut isn't a certainty right now, it's not wholly out of the question. Investors should brace themselves in case IIP trims its payout at some point this year.
Investing in IIP offered enticing returns, but its business consequences are risky, given its dependence on a questionable cannabis industry. Instead of high-yielding cannabis stocks, investors may find safer shelter in lower-yielding stocks from other sectors.
If IIP does cut its dividend, it could send shares spiraling, negating the main reason for investment – the high payout. Prudent investors should approach IIP with caution, awaiting clearer signs before making a move.
If you're considering investing in IIPR due to its high yield, be aware of its reliance on the cannabis industry, which can be unpredictable. A default by a major tenant like PharmaCann can significantly impact IIP's financial stability and dividend payout. The recent 23% nosedive in IIP's shares underscores the risks involved. In such uncertain times, even the safest investments may require careful consideration and a willingness to accept some potential losses.
