The big reason investors should be looking at Innovative Industrial Properties (NYSE: IIPR) and AGNC Investment (NASDAQ: AGNC) today are their dividend yields. Innovative Industrial's yield is a huge 10%, while AGNC Investment's yield is an even loftier 13%!
However, high yields like this usually come with added risk. Dividend investors need to go in with their eyes wide open when considering these ultra-high-yield real estate investment trusts (REITs).
Innovative Industrial owns industrial properties and largely uses a net lease approach, which means that its tenants are responsible for most property-level expenses. However, this overlooks what's perhaps the most important fact, since Innovative Industrial is focused on owning marijuana-related properties. That largely means grow houses, which are a highly specialized property type.
Given the still somewhat murky legal status of pot, Innovative Industrial has been a key source of capital for legal marijuana growers. There was something of a land grab early on in the industry, and now there appears to be a shakeout taking place.
This has left Innovative Industrial dealing with tenants that are having trouble paying the rent. Clearly, that's not a good thing, but the REIT has thus far managed to deal with the headwinds in relative stride.
One of the key positives here is the company's strong balance sheet. For example, net lease REIT giant Realty Income and industrial REIT giant Prologis both have debt-to-equity ratios over 0.5, while Innovative Industrial's ratio is just 0.15. Low leverage provides Innovative Industrial a material opportunity to continue growing the portfolio and a lot of breathing room when it comes to supporting the dividend.
Given the tenant issues, the safety of the dividend is an important consideration. In the fourth quarter of 2024, the adjusted funds from operations (FFO) payout ratio was roughly 86%. That's a bit high, even for a net lease REIT. However, the recent reworking of a lease with a large tenant is expected to be a $0.16-per-share headwind to FFO going forward.
Taking that into consideration, it looks like the adjusted FFO payout ratio could rise to a touch over 90% in 2025. Innovative Industrial may need the extra breathing room that its strong balance sheet affords, which helps explain the 10%-plus dividend yield.
AGNC Investment, while a REIT, doesn't own physical properties -- it owns mortgages that have been pooled into bond-like securities. This is a complicated niche of the REIT sector with pricing dynamics that are impacted by things such as interest rates, the housing market, and mortgage repayment rates, among many other things. To make matters even more complex, leverage is a key tool used by mortgage REITs like AGNC Investment, and the securities they own trade daily, which isn't the case for most physical properties.