The marijuana sector has always fascinated investors, but fear still lingers when it comes to investing in pot stocks. Both medical and recreational marijuana is legal in Canada. But in the U.S., the market is still limited because cannabis is illegal at the federal level. Currently, 33 states and the District of Columbia allow medical marijuana, while (as of just last week) 15 states and D.C. have legalized recreational marijuana.

U.S. cannabis companies have fared well during the pandemic thanks to a surge in consumer demand. In Illinois, a relatively new recreational market, its monthly sales broke records all year. From January, its first month of legalization, until October, total sales in Illinois come to a striking $500 million, with $300 million just from medical cannabis. In October alone, recreational and medical sales topped $100 million.

But there is one stock not directly linked to the marijuana sector that is doing exceptionally well this year. It's a real estate investment trust (REIT) that allows investors an indirect entry into the cannabis industry. Innovative Industrial Properties (NYSE:IIPR) was already soaring this year. But its third-quarter results that came out on Nov. 4 sent the stock even higher. It is up about 102% so far this year, compared to the Horizons Marijuana Life Sciences ETF's decline of 14%. So what's all the hype about?

Commercial hemp faming in a green house

Image source: Getty Images.

A non-conventional entry into the marijuana industry

Due to the legal status of cannabis in the U.S., many marijuana companies have found it difficult to acquire land for their production facilities. As a REIT, Innovative acquires and then leases out properties to these pot companies while collecting rental income -- its main source of revenue. Not being directly associated with an evolving and slightly risky industry has its perks, which is evident from Innovative's growth this year.

In its third-quarter results for the period ended Sept. 30, revenue grew 197% year over year to $34.3 million. Acquisitions and the leasing of new properties drove the revenue jump, which brought in profits as well. Innovative's net income rose a whopping 210% to $19.2 million from the year-ago period.

Its tenants include popular U.S. cannabis companies Curaleaf Holdings (OTC:CURLF) and Cresco Labs (OTC:CRLBF), both of which have put on outstanding performances this year. Cresco Labs saw a 216% year-over-year increase in revenue to $94.2 million in its second quarter ended June 30. Curaleaf also recorded a 142% increase in total revenue in its second quarter ended June 30, to $117 million. These companies' expansion plans will present only more leasing opportunities for Innovative. 

Acquisitions are the key to revenue growth 

Acquisitions are the main revenue-driving factor for Innovative. The company stated in its earnings release that it acquired five properties totaling 448,000 rentable square feet in Florida, Michigan, and New Jersey between July 1 and Nov. 4.

There is no stopping medical marijuana growth as more and more people understand its benefits. The medical market alone could be worth more than $59 billion by 2025, according to estimates by Global Market Insights. As the medical pot market expands, the need for more production facilities will arise for cannabis companies -- thus driving revenue growth for Innovative. And Innovative has a strong balance sheet to fuel its growth strategies. It ended the third quarter with $161.1 million in cash and cash equivalents, and zero debt.

Graph on hand of a businessman

Image source: Getty Images.

Another benefit? It's a dividend stock

Not only does Innovative Industrial give you indirect access to the growth of the marijuana sector, but it is also a dividend stock. As a REIT, Innovative is legally required to return at least 90% of its taxable income to investors in the form of dividends. 

Innovative has a dividend yield of 3.2%, much higher than the S&P 500's average dividend yield of 2%. But a dividend yield isn't the only metric to evaluate when considering a dividend stock. Consistency in dividend payments is what matters.

In the case of a REIT, adjusted funds from operations (AFFO) are often studied to understand how much cash is available to be paid out as dividends. Thanks to its growing revenue and net income, Innovative's AFFO jumped a striking 192% year over year to $28 million in Q3. This allowed the company to offer more to investors by hiking its dividend by 10% in the third quarter.

IIPR Chart

IIPR data by YCharts

Growing revenues, steady profits, wise growth strategies, consistent dividends, and an ever-evolving medical marijuana business makes Innovative Industrial an exciting non-conventional marijuana pick. Its exceptional third-quarter results are proof that the company has established itself as a good bet, allowing investors indirect access to the sector without many of the risks associated with pure-play companies.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.