Investors have looked closely at marijuana stocks as an opportunity to profit from the budding cannabis industry. Although most investors have gravitated toward companies that actually grow marijuana, there are other opportunities in cannabis that have also shown promise. Innovative Industrial Properties (NYSE:IIPR) has aimed to help growers find the specialized real estate properties required to meet their growing needs, and that's proven to be a lucrative niche in the fast-growing market.

Coming into Wednesday's fourth-quarter financial report, Innovative Industrial investors had high hopes that the cannabis REIT would continue to deliver strong performance. Innovative Industrial's numbers were quite encouraging, and the real estate company has a favorable outlook for the foreseeable future.

Greenhouse with high-arch ceiling, fans, and rows of cannabis plants.

Image source: Getty Images.

How Innovative Industrial finished 2018

Innovative Industrial's fourth-quarter results showed just how hot the marijuana market is right now. Revenue from the company's rental properties jumped 111% to $4.70 million, coming in $100,000 higher than most investors had expected. Net income soared to $2.33 million. Although earnings of $0.24 per share were a bit lower than the consensus forecast among those following the stock, the more relevant funds from operations metric came in at $3.24 million, or $0.34 per share. That topped what investors were projecting.

Those who aren't familiar with real estate investment trusts need to understand some of the differences in the way that investors typically evaluate REITs. Because of the extensive depreciation charges that those who manage real estate properties incur regularly, net income according to accounting rules can be misleading. The funds from operations metric adds back in those depreciation charges to reflect more accurately the actual economic gains from a REIT's business. Adjusted funds from operations also include stock-based compensation, and that number came in at $3.63 million for the quarter. That was more than four times what Innovative Industrial brought in during the fourth quarter of 2017, and it worked out to $0.38 in adjusted FFO per share.

Innovative Industrial enjoyed substantial growth in its real estate portfolio during the quarter. In October, the company spent $11.3 million to acquire a Colorado-based cannabis cultivation facility, renting the 58,000 square foot property to The Green Solution. The REIT followed that up in December with the $25 million purchase of a 75,000-square-foot medical marijuana cultivation and processing facility in Illinois, entering into a long-term lease with Ascend Wellness. It also amended leases with tenant Vireo to provide for added improvements to facilities in Minnesota, New York, and Pennsylvania.

Check out the latest earnings call transcript for Innovative Industrial Properties.

What's ahead for Innovative Industrial?

Yet Innovative Industrial is really just getting started. Already during the current quarter, the cannabis REIT has already made substantial headway toward further portfolio growth. February marked Innovative Industrial's first acquisition in its home state of California, paying $6.7 million to buy a 43,000-square-foot industrial property. The real estate company followed up just yesterday with a $20 million investment in an Ohio-based industrial and greenhouse facility to be built and operated by privately held PharmaCann, which will lease the property from Innovative Industrial after construction.  

All told, Innovative Industrial has invested almost $200 million to date in purchases and reimbursements for improvements at its 13 properties. They're generating a roughly 15.1% yield on invested capital, reflecting the huge profit opportunity the REIT has found. Its portfolio is currently at 1.13 million square feet, and lease terms of just over 14 years give investors confidence that Innovative Industrial will keep reaping the rewards of its cannabis real estate investments well into the future.

Moreover, Innovative Industrial paved the way to ramp up its investment activity dramatically by raising financing during the quarter. As of Dec. 31, Innovative Industrial had $133 million in cash and short-term investments on its balance sheet, up from less than $12 million at the end of 2017. After the quarter ended, a further capital raise of just over $138 million in net proceeds in February should give the REIT even more firepower to make investments.

Perhaps most importantly for shareholders, Innovative Industrial's success led the company to boost its dividend. The cannabis REIT will now pay $0.45 per share every quarter, up from $0.35 previously, marking the third time in less than two years that the company gave investors a $0.10-per-share increase to the quarterly payout.

Innovative Industrial investors were quite pleased with the report, and the stock climbed 5% in pre-market trading Thursday morning following the late-Wednesday announcement. With high hopes for further growth, Innovative Industrial has thus far made all the right moves and appears poised to keep taking advantage of the fertile environment for cannabis-related real estate deals.