Over the past year, shares of medical cannabis real estate investment trust (REIT) Innovative Industrial Properties (IIPR -1.33%) have soared by close to 140%. Since its IPO in December 2016, it has returned an even more impressive 930% to investors. 

Such a level of share appreciation is abnormal for REIT companies, as they rely heavily on pre-negotiated rent checks and lease payments for their revenue. Just what could be behind Innovative Industrial's impressive share rally, and is it too late to buy into the hype?

Farmer holding hemp seedling in greenhouse.

Image source: Getty Images.

A superb business model 

Innovative Industrial rents marijuana growing, distribution, and manufacturing facilities to state-licensed medical cannabis operations. It plays a vital role in the medical marijuana industry, as the drug is still illegal on a federal level, meaning start-up dispensaries do not have access to traditional funding methods. 

To make matters worse, some states require vertical integration before prospective growers can get their license. This means they must own their entire supply chain, ranging from cultivation facilities to distribution centers to retail stores. Such a feat isn't really possible without the help of private financiers like Innovative Industrial.

The company acquires established real estate property in the sector. Afterward, it leases the assets back to tenants who grow marijuana. It currently has 66 facilities across 16 states, with a total investment of $1.3 billion. The weighted average length of the lease it offers is 16.6 years.

Back in the third quarter of 2020, it brought in about $34.3 million in revenue and $18.9 million in profits, triple what it earned in Q3 2019. Innovative Industrial also generated $54 million in net income from Q3 2019 to Q3 2020. That's a remarkable achievement and represents a 1,740% increase over its 2018 full-year profits.

A big driver behind the company's spectacular growth is the mass expansion of the marijuana industry in the U.S. With Democrats gaining control of the Senate after run-off elections in 2021, the Biden administration could decriminalize the drug or legalize it on the federal level. By 2025, the medical marijuana industry is set to almost triple from where it was in 2019, reaching a $34 billion valuation. It is also possible that all 50 states could legalize medical marijuana by that year -- a 2019 poll from Quinnipiac University showed 93% support among Americans for such an initiative.  

Innovative Industrial is also unique in that it pays out almost all of its earnings in dividends. The stock has an annual yield of 2.36%. Given that it has a debt-to-asset ratio of just 9.4%, the company can safely maintain its current payout for quite some time without worrying about other financial obligations.

What's the verdict? 

Right now, Innovative Industrial is trading at 61 times earnings. That is quite a premium considering the REIT sector, in general, is valued at 50 times net income. However, one key aspect to account for is the company's 200% year-over-year revenue and earnings growth. Meanwhile, its generic REIT competitors offer investors an average of just 2% annual profit growth in the next five years.

With that in mind, the company's premium seems more than justified. In terms of funds from operations (FFO), the stock is even cheaper. FFO adds non-cash items such as depreciation and amortization back into a REIT's earnings. Innovative Industrial trades for about 40 times FFO. 

Overall, the REIT is poised to be a major player in the green wave that is sweeping across the U.S., without even coming into contact with cannabis plants themselves. Given the current "go big or go home" regulatory environment, new pot-growers will be in dire need of a large amount of capital right from the get-go. 

If you are a marijuana investor who not only wants to see your holdings grow, but also enjoy a safe and consistent dividend, Innovative Industrial might just be your best pick.