Innovative Industrial Properties (IIPR -1.61%) is not a pure-play cannabis company. It is an REIT (real estate investment trust) that acquires properties from medical cannabis companies and leases them back.  Investors are sometimes skeptical of putting their money in U.S. cannabis stocks, as the drug remains illegal at the federal level. Here, Innovative offers them a safer choice as it only offers real estate capital for the medical cannabis industry but has no direct involvement with cannabis. Hence, it is safe from the legal scrutiny the marijuana industry faces while still enjoying the benefits of its evolution.

Since its IPO in December 2016, Innovative Industrial Properties' shares have surged a whopping 970%. The industry benchmark, the Horizons Marijuana Life Sciences ETF, is up just 28% over the same period. Even though the cannabis industry has seen some rough times since then, Innovative has safely sailed through -- again, the fact that the company is not directly linked to cannabis has its perks. Innovative Industrial Properties performed outstandingly last year, and its wise growth strategies have it geared up for an even stronger 2021. Let's see whether the stock is worth investing in this month.

a man looking at a cannabis plant.

tImage source: Getty Images.

Safe from the volatility in the cannabis industry

The marijuana industry is volatile. Regulatory hurdles have been affecting legal store openings in Canada, which impacts revenue. And in the U.S., the illegality of the drug prevents pot companies from having access to an influx of capital to set up larger production facilities. Banks and financial institutions shy away from providing financial help to avoid getting penalized. 

However, being a REIT, Innovative does have access to such capital. Thus, it acquires these production facilities from the cannabis companies and leases right back to them. The rental income earned from leasing becomes the only and ongoing source of revenue for Innovative.

But federal legalization in the U.S. is possible in the coming years, and banking legislation may lessen regulatory hurdles even sooner than that. Will Innovative lose out on revenue as it becomes easier for pot companies to get financial help from banks to set up production facilities? Not necessarily -- smaller cannabis companies that won't be in a position to attract loans from banks could then turn to Innovative. While some of its clients are big names, it still earns a significant amount of revenue from smaller cannabis companies like Holistic Industries, PharmaCann, and Ascent Wellness Holdings. Out of 66 properties at the end of Dec. 31, these three contributed about 34% of total rental revenue.

Innovative Industrial's financials are strong

In its fourth quarter (ended Dec. 31), Innovative's revenue saw an exciting jump of 110% year-over-year to $37.1 million. For the full year 2020, total revenue grew 162% from the year-ago period to $117 million. This growth can be attributed to the company's acquiring and leasing out new properties in 2020. Innovative's rapid growth strategies amid the pandemic show how much potential this company has. In 2020 alone, it acquired 20 new properties.

Innovative is also profitable, with net income rising to $21 million from $9.5 million in the year-ago period. It also saw a 191% year-over-year increase in its adjusted funds from operations (AFFO) to $98 million for the full year 2020. AFFO for a REIT is similar to earnings for other companies, helping to determine how much cash is available to be paid out as dividends.

Aside from allowing investors an indirect entry into the cannabis space, this company is also a dividend stock, with a yield of around 2.7%. As a REIT, Innovative is legally bound to pay 90% of its earnings as dividends to shareholders. However, more important than having a higher dividend yield is the company's consistency in paying dividends. It implies the company is able to grow its revenue and earnings. And its rising AFFO, which allows it to pay consistent dividends, is a sign of that. On March 15, the company announced a 32% year-over-year hike to a quarterly dividend of $1.24 per share.

No reasons to ignore this pot stock

 As of April 5, Innovative Industrial Properties was the proud owner of 68 properties in 18 states, totaling 6 million square feet. Though the company hasn't clearly discussed its growth strategies, with the expansion of the medical cannabis industry, its expansion plans continue. The global medical cannabis market could grow at a compound annual growth rate (CAGR) of 23% to be worth $44.4 billion by 2025.

Statewide legalization is also ramping up in the U.S. Innovative's management believes there is a possibility that six more states -- Texas, South Carolina, Alabama, Kentucky, Kansas, and Nebraska -- could move ahead with their medical cannabis legalization programs this year. That could mean more expansion opportunities for its tenants, thus boosting its rental revenue.

Innovative Industrial's tenants include popular U.S. cannabis companies Cresco Labs (CRLBF)Trulieve Cannabis (TCNNF -2.17%)Curaleaf Holdings (CURLF), and Green Thumb Industries (GTBIF -1.96%). With the marijuana industry evolving, these companies have a lot of room to grow. And their recent fourth-quarter performances reveal the bright future that lies ahead of them, which means more growth opportunities for Innovative. Cresco Labs' revenue jumped 292% year-over-year to $162.3 million in Q4, while Trulieve Cannabis's total revenue soared 111% to $168.4 million. Curaleaf saw a 205% increase in total revenue to $230 million, and Green Thumb's revenue increased 134% year over year to $177.2 million.

From a valuation perspective, Innovative is expensive than most of its REIT peers, but investors remain interested in this stock's unconventional entry point into the marijuana industry without exposure to its risks. The icing on the cake is it is a dividend stock that provides a stable income to investors. Its recent dividend hike marked the ninth increase for the company since its IPO in 2016.

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Strong financials, consistent dividends, opportunities for higher revenue from an expanding medical cannabis industry, and wise expansion strategies all make this pot-related stock an excellent investment for the long term.