If you’re thinking about the most optimal ways to invest your money in today’s market, a real estate investment trust (REIT) should definitely be on your radar. REITs invest in a broad array of real estate assets, such as residential and commercial properties and real estate loans. This means they can offer optionality and diversification in all market environments.
Real estate can be an ideal investment choice for the long haul, even in a bear market. While real estate values may fluctuate in the short term, property values tend to appreciate over the long term.
REITs can give you an opportunity to invest in the property market without the hassle of buying and managing properties yourself, and they offer a level of diversification that can help mitigate risk. REITs are worth considering if you want to add real estate to your portfolio.
Why Investing in REITs Makes Sense Right Now
If you’re on the fence about putting your hard-earned investing dollars into real estate investment trusts (REITs), there are plenty of compelling reasons to make that choice right now.
Diversification: REITs allow you to diversify your portfolio by investing in a range of real estate assets, such as residential and commercial properties, mortgage-backed securities, and infrastructure projects. This can help mitigate risk and smooth out returns over time, especially if you trade otherly highly volatile vehicles like crypto.
REITs are in and of themselves highly diversified. Some REIT companies offer an à la carte menu of real estate investments, while others focus on a narrow market or even a single niche. For instance, if you wish to invest in a drugstore, you can take advantage of an excellent purchase on Walgreens for Sale by Pharma Property Group.
Potential for high income: REITs must distribute at least 90% of taxable income to shareholders dividends per year. Many REITs pay dividends quarterly, which can provide a steady stream of cash flow, especially for retiree investors, according to Forbes Magazine.
Inflation protection: Real estate tends to be a hedge against inflation, as property values tend to increase over time along with the cost of living. This can make REITs a good choice for investors looking to protect their purchasing power.
With REITs, you can tailor your investment plans to protect against inflation and other market uncertainties. For example, although publicly-traded REITs have slacked a little in the past month or two, non-traded REITs offer more bang for your investing dollars, per WSJ.
Professional management: REITs are managed by experienced professionals who handle the day-to-day operations of the properties they own. You won’t have these responsibilities, which is appealing for people who don’t have time and/or expertise in managing properties themselves.
Potential for long-term capital appreciation: Real estate has the potential for long-term capital appreciation, as property values tend to increase over time. REITs can provide exposure to this potential appreciation, which can be a good way to build wealth over time.
The Biggest Buy of the Last Five Years
As an income investor, you may seek a REIT that can consistently increase its quarterly dividend over time, thereby raising your annual yield.
In 2017, you may have heard about a REIT that promised a 38% yield on the purchase price within five years. While this may seem too good to be true, it’s important to remember that not all high-yield stocks are yield traps that eventually collapse. It’s essential to thoroughly research any potential investment before making a buying decision.
While a 3% – 5% annual increase in a dividend is often considered good, you may be surprised to learn that some REITs can offer much higher returns. One such company is Innovative Industrial Properties, Inc. (NYSE: IIPR), a San Diego-based REIT that focuses on purchasing, leasing, and leasing back commercial properties to cannabis companies.
IIPR bills itself as the leader in real estate capital investment for the regulated cannabis industry. As of September 30th, it boasted a vast portfolio featuring 8.7 million square feet of rentable space in 19 states across more than 100 properties, with two more under construction.
The company’s properties are triple-net leased, meaning tenants are responsible for paying taxes, insurance, and maintenance. The average lease length is 15 1/2 years.
IIPR has implemented measures to ensure a diverse and stable portfolio so that no single tenant, or state, represents a significant proportion of its holdings. Specifically, no tenant accounts for more than 14% of the total portfolio, and no state accounts for more than 17%.
IIPR saw a significant increase in its stock price and dividend over the past several years. In December 2017, the company’s stock was valued at $18.90, and it paid a quarterly dividend of 25 cents per share, which translated to an annual dividend yield of 5.2%.
Fast forward to today. The company’s stock is trading at over $114 with a quarterly dividend of $1.80 per share, or $7.20 per year. This represents a 38% yield on the original $18.90 stock purchase.
The company’s success can be attributed to its robust revenue growth and earnings, with quarterly revenue increasing from $2.28 million in 2017 to much higher levels in subsequent years. As a result, the company’s share price has also increased, generating a total return of 642% and 622% with and without dividend reinvestment, respectively.
However, it’s worth noting that the peak in the dividend may have already been hit, because the dividend/Funds from operations (FFO) payout ratio currently stands at 93 %. Additionally, despite continued increases in revenue and FFO, the share price has declined about 58% from its peak in November 2021, which may show a more evident trend if you use automated trading bots.
This could indicate that IIPR may see a different level of dividend growth in the future, though they could still generate strong total returns. Ultimately, it’s essential to carefully consider the potential risks and rewards before investing in any REIT, including Innovative Industrial Properties, Inc. (IIPR).
