With an economic downturn and rising interest rates threatening commercial real estate, the marijuana industry facing a barrage of headwinds over the last year, and questions about the ability of its tenants to pay their rent, it's no wonder Innovative Industrial Properties' (IIPR 0.33%) shares are down 50% in the past 12 months. But the marijuana greenhouse landlord just gave investors an upbeat earnings report on May 8.

Could it be that things are looking up for IIP? And if they are, is now a good time to buy a few shares of this real estate investment trust (REIT)? Let's check it out. 

What's going right

The most important metric from Innovative Industrial's Q1 update was its rent collection rate, which was 98%. As its tenants in the cannabis industry struggle with low marijuana selling prices, limited and costly access to capital, and a few other issues, the expectation is that they might struggle to pay up on time. Nonetheless, its rents yielded $76.1 million in quarterly revenue, versus only $1.6 million in contractually obligated rent that wasn't paid. 

That's great news, considering that for the month of February it only collected 92% of its rent due. The unpaid rent stems from a pair of defaulting tenants, Parallel and Green Peak, but it wasn't enough to put a crimp on the company's top-line growth of 18% year-over-year. That's impressive considering Parallel is its largest tenant by the number of square feet rented. What's more, its diluted adjusted funds from operations (AFFO) per share rose by 10.3% year-over-year, reaching $2.25. AFFO is a key benchmark of performance in the REIT industry.

Such bottom-line growth means that the company is only paying out about 80% of its AFFO when it returns capital to shareholders via its dividend. In turn, IIP can probably continue to hike the dividend. And that's exactly what management is doing, with a 16% increase in the first quarter from a year earlier.

So on the surface, IIP's portfolio appears to be stabilizing, which is a point in favor of buying it. 

What could still go wrong

There are a couple issues that might deter investors from buying IIP right now, starting with its reliance on debt to finance buying more real estate.

Its debt load of about $300 million isn't the concern, as it only amounts to roughly 12% of its $2.6 billion in gross assets. That debt is due in 2026, and it has an interest rate of 5.5%. Keep that rate in mind for a moment, we'll circle back to it. 

At the moment, IIP only has about $37.6 million in cash. And, as an example, for one of its most recently acquired marijuana cultivation properties in Ohio, between the cost of the sale-leaseback transaction and further improvements to the facility, it expects to invest $42 million in total. So the company will definitely need to tap more debt if it wants to do similar transactions to expand its top line in the future -- and it will, because that's how its business model works.

The trouble is, it probably can't borrow at the same interest rate as it did before. During the past year or so, the Federal Reserve's mission to control inflation led to hikes of interest rates, which determines the cost of borrowing for all businesses in the U.S. Innovative Industrial's future borrowing will be more expensive for the foreseeable future, which will leave less for shareholders, in addition to leaving less to reinvest for growth. In a nutshell, it's reasonable to expect its expansion rate to slow. And that's bearish for the stock, even if it can still keep growing and paying a rising dividend year-over-year.

What's the smart move?

If you're seeking dividend income, Innovative Industrial Properties may still be worth purchasing. Although it's true that its growth rate will be slower than before, its operating environment seems to be stable for the moment despite a few recent defaults. 

It's entirely possible that more of its tenants will default on their rent if the economic and marijuana market headwinds continue unbated, and that would definitely dent the stock price. But for now, defaults haven't actually harmed the company's growth engine. And even if they do, the company can still probably afford to pay the dividend at its current rate.

So if you're willing to accept that this isn't an investment for the loss-averse, and that the conditions aren't ideal for it to flourish at the moment, buy it.