An Investment in This REIT 5 Years Ago Would Pay A 38% Dividend Yield Today


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When income investors purchase a real estate investment trust (REIT), one of the things they hope is that the stock will perform well enough for the company to increase its quarterly dividend as the years go by, raising the investor’s annual yield.

Usually, the dividend hikes are 3 to 5 cents per year, and investors are happy if they can get that on a steady basis. For example, a $1 dividend on a $25 stock that increases its dividend by 5 cents per year can turn a 4% yield into a 5% yield in about five years.

But what if in 2017, you heard you could buy a REIT that in five years would give you a 38% yield on your purchase price? It’s likely you would think that stock will eventually become a gigantic yield trap whose price collapses to penny-stock status. But that’s not so.

Meet Innovative Industrial Properties Inc. IIPR, a specialized San Diego, California-based REIT founded in 2016. Innovative Industrial purchases, leases and leases back commercial properties to cannabis companies. On its website, Innovative Industrial Properties calls itself “The Leading Provider of Real Estate Capital for the Regulated Cannabis Industry.”

As of Sept. 30, Innovative Industrial Properties had a portfolio of 8.7 million rentable square feet across 109 properties in 19 states. Two more properties are under construction.

All of Innovative Industrial’s properties are triple-net leased, meaning tenants pay taxes, insurance and maintenance. Its average lease length is 15.5 years. And even though it specializes in the cannabis industry, it’s still quite diversified in that no tenant represents more than 14% of its total portfolio, and no state represents more than 17% of its total portfolio.

At the beginning of December 2017, Innovative Industrial Properties was priced at $18.90 and paid a quarterly dividend of 25 cents per share, for a 5.2% annual dividend.

Today Innovative Industrial Properties is at more than $114, with a quarterly dividend of $1.80, or $7.20 annually. The yield on that original $18.90 stock purchase is now 38%. No reverse splits have artificially boosted the share price. So how did this phenomenal yield happen?

It’s all about revenue growth and earnings. In 2017, Innovative Industrial Properties had fourth-quarter revenue of only $2.28 million. Funds from operations (FFO) were 18 cents per share. But each year since, Innovative Industrial Properties has multiplied its revenue and FFO, so the share price has risen along with those increases. The following chart shows the outstanding growth of Innovative Industrial Properties in the fourth quarter of each year since 2017, with the exception of 2022, which has only had three quarterly reports so far:

Q4/ YEAR

REVENUE

FFO

2022 (Q3)

$70.88 million

$1.97

2021

$58.94 million

$1.75

2020

$37.09 million

$1.26

2019

$17.67 million

$1.09

2018

$ 4.78 million

$0.34

2017

$ 2.28 million

$0.18

Although even the most well-known cannabis stocks have performed poorly since 2017, as their landlord, Innovative Industrial Properties has a 622% total return over that time without dividends being reinvested and 642% with dividend reinvestment.


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So will this massive dividend growth continue? If the FFO continues to increase, that could continue to generate higher dividends. But the peak in the dividend may have occurred, as the dividend/FFO payout ratio is now at 93%.

The share price, which reached $274 in November 2021, has now declined about 58% — despite revenue and FFO continuing to increase. That makes Innovative Industrial Properties a REIT that could continue to generate strong total returns going forward.

Weekly REIT Report: REITs are one of the most misunderstood investment options, making it difficult for investors to spot incredible opportunities until it’s too late. Benzinga’s in-house real estate research team has been working hard to identify the greatest opportunities in today’s market, which you can gain access to for free by signing up for Benzinga’s Weekly REIT Report.

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