Innovative Industrial Properties (IIPR 1.03%) is a pot stock, but it doesn't sell any legal cannabis itself. Instead, this real estate investment trust (REIT) provides the medical marijuana industry with operating facilities and scarce capital.

The business model here revolves centers on buying production facilities and then leasing them to the growers, providing capital where traditional lenders won't typically venture. It's worked well. For example, $2,500 invested in IIPR on Nov. 1, 2019, would be worth about $8,500 now, and that's not too shabby. But it's also easy to argue there's much more to come. Here are three great reasons to buy IIPR.

Person examining marijuana bud with a loupe.

Image source: Getty Images.

1. The legal marijuana business remains very much on the grow

The National Conference of State Legislatures says that as of June, medical marijuana was legal in 36 states and four territories. Recreational marijuana, meanwhile, was legal in 18 states, two territories, and the District of Columbia. Adding sales from 10 newly legalized states this year and next will push sales to $43 billion by 2025, up from $17.5 billion in 2020.

Meanwhile, the amount of capital raised for marijuana businesses has more than tripled, reaching $6 billion. IIPR is on the leading edge of that growth, which is drawing competition.

For example, NewLake Capital Partners recently went public with a similar lineup of tenants already using it for sale-leaseback arrangements. Still, with such a head start and long-term leases, IIPR should be able to maintain its revenue and payouts and stand its ground among marijuana stocks.

The San Diego-based company now owns 76 properties comprising about 7.5 million rentable square feet in 19 states. It closed its initial public offering at $20 a share on Dec. 5, 2016, and was at $265.52 in early trading on Nov. 26, while yielding 2.23% on an annual dividend of $6.00 per share.

2. IIPR is aggressively capitalizing on the opportunity

The reason the capital is scarce is because marijuana is not legal on the federal level, and that makes most financial institutions and other lenders reluctant to finance its providers. IIPR does just that by buying the facility and leasing it back to the grower on the net lease basis widely used by all kinds of REITs.

Just since July 1, IIPR bought four new properties and more land at an existing property, while executing four lease amendments for additional improvement allowances at even more sites. That represented a total investment of $276 million and added 970,000 rentable square feet to the portfolio.

The company's client list just keeps growing, too, adding to a who's who in this business that includes Cresco LabsTrulieve CannabisCuraleaf Holdings, and Green Thumb Industries. .

The leadership is there, too, to help ensure that happens. That includes an executive chairman, Alan Gold, who co-founded two NYSE-listed REITs. One, BioMed Realty Trust, was sold to Blackstone for $8 billion in 2016. The other, Alexandria Real Estate Equities, was a pioneer and still a dominant player in collaborative science and technology campuses.

3. A good dividend that could keep getting better

IIPR grew revenue in the third quarter to $53.9 million, a 57% jump year over year. The relatively young company also is profitable, recording net income attributable to common stockholders of $29.8 million, or $1.20 per diluted share, for the quarter, and adjusted funds from operations (FFO) of approximately $45 million, or $1.71 per diluted share.

FFO is a critical metric for evaluating REITs, since it speaks to a company's ability to pay out that 90% or more of its taxable income to shareholders in the form of dividends. IIPR paid a quarterly dividend of $1.50 per share on Oct. 15, about 28% more than it did in the year-ago quarter.

In its 3Q21 earnings report, the company says it expects to evaluate adjusting that payout every six months and declaring changes in the first and third quarters each year. With fully leased out properties to medical marijuana growers who can pay the rising rent, it's reasonable to expect the dividends to increase, too.

Growing stock appreciation and dividends combine for a buy

Innovative Industrial Properties is a strong performer in a niche that just keeps growing. This stock already has paid off well in both capital growth and dividends, but it may just be getting started.

The medical marijuana industry just keeps growing, and IIPR has a big head start on competitors lining up to provide capital to its growers, even if the feds move to make the plant legal, easing the reluctance traditional financers -- like heavily regulated banks and credit unions -- of getting involved in the business.

Plus, if the company decides to get into providing the same kind of leasing arrangements to recreational marijuana growers as it does to medical marijuana growers -- although I've not seen that reported -- that could open up a whole new business for this business.

IIPR is already my largest REIT second-largest holding and I have confidence in it going forward.