The High Cost of Green Growth
Cash is king. In the cannabis sector, cash is also a rare commodity. While multi-state operators struggle with the tax burdens of Section 280E, the landlords are quietly collecting rent checks that would make a Manhattan office owner blush. Innovative Industrial Properties (IIPR) has moved past the speculative phase of 2021. It is now a hard-nosed industrial play. On October 23, 2025, the yield on IIPR hit a level that traditional real estate investors find uncomfortable. It hovered near 9.2 percent. This is not just a dividend. It is a risk premium for a sector still waiting for the final word from the DEA on Schedule III implementation.
Follow the Rent Money
The money tells a story of survival. In the last 48 hours, trading volume for cannabis REITs has spiked. This movement follows a leaked memo regarding the finalization of the rescheduling process. According to the latest Reuters market analysis, the spread between cannabis REIT yields and the 10 year Treasury note is at its widest point since the banking crisis of 2023. This is the tilt. While the average industrial REIT trades at a 22x FFO multiple, IIPR is languishing at 11x. The market is pricing in a catastrophe that the balance sheets do not show. Rent collection rates for IIPR remained above 95 percent in the third quarter of 2025. This is despite the high profile restructuring of several smaller tenants in Michigan and California.
Visualizing the Yield Gap
To understand the opportunity, one must look at the divergence between risk and reality. The following chart illustrates the yield spread as of October 25, 2025, compared to the broader REIT market and government bonds.
The Tenant Health Audit
The risk is not the property. The risk is the tenant. Investors often forget that an industrial warehouse is just a shell. If a cannabis operator goes under, the specialized HVAC and power systems installed by IIPR are worth pennies on the dollar to a logistics firm like Amazon. However, to another cannabis operator, they are gold. This is the moat. The capital expenditure required to build a compliant cultivation facility is now exceeding 300 dollars per square foot. IIPR owns the infrastructure that the industry cannot live without. Per SEC filings from the previous quarter, the weighted average lease term for IIPR stands at 14.4 years. This is not a short-term gamble. This is a long-term infrastructure play disguised as a marijuana stock.
| Tenant Profile | Exposure % | Rent Coverage Ratio | Risk Level |
|---|---|---|---|
| Top 5 MSOs | 38% | 3.2x | Low |
| Mid-Tier Private | 42% | 1.8x | Moderate |
| Single State Operators | 20% | 1.1x | High |
Regulatory Arbitrage
The current valuation gap exists because of the SAFER Banking Act’s slow rollout. Institutional money is still handcuffed. Big pension funds cannot touch IIPR because of the federal status of the underlying product. This creates a vacuum. Retail investors and specialized hedge funds are the only ones at the table. Once the DEA’s final rule on rescheduling is published in the Federal Register, the institutional floodgates will open. We are seeing early signs of this in the options market. There is a heavy concentration of call options with January 2026 expiration dates. The smart money is betting on a re-rating of the entire sector.
The Mechanical Advantage
IIPR uses a sale-leaseback model. They buy the property from the operator and lease it back. This provides the operator with much-needed non-dilutive capital. In exchange, IIPR gets triple-net leases. This means the tenant pays the taxes, the insurance, and the maintenance. In an inflationary environment like 2025, this is the ultimate hedge. IIPR’s overhead is minimal. They are essentially a bank that happens to own warehouses. The current dividend payout ratio is 82 percent of Adjusted Funds From Operations (AFFO). This provides a comfortable cushion. Even if a major tenant defaults, the dividend is likely safe.
What Comes Next
The market is fixated on the next FOMC meeting, but the real catalyst for IIPR is the February 2026 judicial review of cannabis interstate commerce bans. If the courts signal that cannabis can be moved across state lines, the value of IIPR’s strategic locations in border states like Pennsylvania and Illinois will skyrocket. Watch the 115 dollar price level on the stock. If it breaks through that resistance before the end of the year, the 9 percent yield will be a memory of the past. The data suggests that the window for double-digit effective yields is closing fast as the regulatory fog lifts.
