Regret is a terrible thing, but it is often more about what we don't do than what we actually did do. That's a major factor for me with investing because I tend to err on the side of caution with my hard-earned cash. That frequently means missing out on more speculative investments and those that appear to be priced dearly by the market. This is why I wish I had bought Innovative Industrial Properties (NYSE: IIPR) and held on to Realty Income (NYSE: O) five years ago. I'm getting a second chance with one of these names, but here's why they have been, and are likely to remain, such attractive REITs (real estate investment trusts).
The pot landlord
Innovative Industrial Properties was one of the first REITs to own marijuana-related properties. My list of reasons for not buying it early on was pretty simple: It was a new REIT with no history and it was working in a new industry with unresolved regulatory and legal issues. I'm just too conservative to jump into something like that. However, that has proven to be a big mistake, given that the REIT's shares are up more than 1,000% since its IPO in 2016.
The big change has been the slow and steady legalization of marijuana over the past few years. While there are still uncertainties in the space, Innovative Industrial has clearly navigated this emerging niche quite well. For example, it has increased its portfolio from one grow house when it was created to 73 today.
However, what's really impressive is the dividend growth that has accompanied the REIT's portfolio expansion. The first dividend was paid in mid-2017 at $0.15 per share per quarter. The quarterly rate today is $1.50, a massive increase in less than five years. So not only did I miss out on the capital appreciation here, but I also missed the giant dividend growth.
The pot industry, meanwhile, continues to see robust growth, with Innovative Industrial expecting industry sales to more than double by 2025. That suggests that it isn't too late for dividend growth investors to get aboard here. That said, the 2.5% dividend yield probably won't entice more income-oriented folks like me.
A second chance
Realty Income is a REIT I once owned but sold because the yield had compressed thanks to material price appreciation. That was a mistake, and I wish I had kept it in my portfolio over the past five years. It is, simply put, one of the best-run net lease REITs around. What's notable is that net lease REITs own properties, but their tenants pay most of the operating costs for the assets they occupy. It's a very low-risk way of being a landlord. The upshot is that Realty Income, which essentially just collects rent in this arrangement, makes the difference between its financing costs and the rents it charges.
And that is where I made my big mistake: I viewed the REIT as trading at too dear a price when I sold, which was probably true. However, I didn't at the time see that a low yield also meant that Realty Income could sell relatively cheap stock, giving it a cost of capital advantage.
In something of a virtuous cycle, having a highly valued stock allowed it to make accretive acquisitions that grew its business. I missed out on years of dividend growth because I was so focused on protecting capital gains that I didn't see the big picture. In fact, over the past five years, Realty Income finally managed to achieve Dividend Aristocrat status, putting in an elite group of regular dividend growers.
However, I'm getting lucky with Realty Income. I bought VEREIT a few years ago, and Realty Income is set to acquire it as 2021 draws to a close. That will make me a Realty Income shareholder again at a time when I probably wouldn't pull the trigger to buy it on my own because its 4% yield is still historically low. But once it is in my portfolio again, I'm not going to sell it. I'll happily collect the dividend as the REIT uses its premium-priced stock to keep expanding its already industry-leading portfolio.
Learning your lessons
When you look back and think, "coulda, shoulda, woulda," don't chastise yourself too much. We all make mistakes; it's a part of investing (and being human). What you should do is try to learn from the errors and omissions you've made.
For me, I probably wouldn't have bought Innovative Industrial no matter what, even knowing what I know today. I'm just too conservative to buy a new REIT in a new industry. However, Realty Income was a real eye-opener for me because I didn't pay nearly enough attention to the actual business I owned. Now that I'm about to own the REIT again, I'm not planning on duplicating that mistake.