Innovative Industrial Properties (IIPR -0.17%) has been on investors' radar since its initial public offering (IPO) in late 2016. This is partly because for a time, it was unique: a real estate investment trust (REIT) that specializes only in properties of interest to marijuana companies. 

A larger part of its appeal today, though, is its high-yield dividend. It approaches double-digit territory with a yield at a shade over 9%, which is very far above the 1.5% average yield in the S&P 500 index. So Innovative is quite the generous company when it comes to renumerating shareholders. Let's find out how the REIT manages this impressive feat.

High yield, in more ways than one

Success begets imitators, and Innovative is no longer the sole marijuana-focused REIT on the stock exchange. It remains the largest and the most significant one, however. For proof, look no further than its tenant list, which contains a clutch of names known to anyone even glancingly familiar with publicly traded pot businesses. Prominent multi-state operators (MSOs) Green Thumb Industries and Curaleaf Holdings are in that lineup, as is Trulieve Cannabis. 

Innovative's portfolio, made up entirely of properties in the U.S., has an admirable geographic range. The REIT has a presence in most of the 23 states that have fully legalized marijuana sale and consumption, from California to Massachusetts.

In terms of properties, though, it's far less diverse, with the portfolio heavily weighted (91% as of March 31) toward pure industrial facilities. Pure retail was only 3%, and industrial/retail hybrid tallied 6%. 

As of the end of June, Innovative held a total of 103 operational properties. Another five were either in development or redevelopment. Occupancy for the operational facilities was sky-high, at 99.9%, and the weighted-average remaining lease term stood at a nicely distant 14.9 years.

The REIT has a business model that's particularly compelling for the frequently cash-strapped marijuana industry. It does sale-leaseback deals, in which an owner hungry for cash sells its property to Innovative, and the REIT then retains the seller as a tenant.

This is a win-win when done right: Innovative gets another income-producing property with a loyal tenant, and the seller receives a pile of cash that is often very urgently needed to fund its operations.

Innovative has certainly had its hiccups (more on that in a moment), but considering its tenants operate in the very challenging marijuana industry, it does very well for itself. Both revenue and profitability have climbed steadily on an annual basis, and at encouraging rates.

The former rose every year from 2018 to 2022, starting at less than $15 million and ending at more than $276 million. It's the same for the latter, with a 2018 net income of $6.8 million snowballing to over $153 million last year.

That profitability is Innovative's not-so-secret sauce that makes the dividend so fluffy. In order to maintain their status as REITs, Innovative and its ilk are required to pay out at least 90% of their net income in the form of shareholder dividends.

Those lofty margins and climbing fundamentals combine to make for not only a high-yield dividend, but also one that often rises. Innovative currently doles out a quarterly $1.80 per share, exactly triple the dividend it paid out in mid-2019.

The struggle before the success

But those hot growth numbers obscure the current reality somewhat: The U.S. pot industry isn't growing much, and as a result, few of Innovative's numbers have lately seen big leaps. Last year, no fewer than three tenants defaulted on at least one Innovative property, while another (Kings Garden) defaulted this spring.

The REIT also felt compelled to throw lifelines, in the form of deferrals or security deposit drawdowns, to two other tenants.

These disquieting pieces of news drove down Innovative's stock, and the market still seems a bit scared of the REIT's all-in commitment to the continually struggling marijuana industry.

But, as Warren Buffett would say, it's wise to invest when others are fearful. Yes, the pot business is a tough one, but most of Innovative's tenants are more solvent than the aforementioned small companies that defaulted. Meanwhile, defaults happen to all REITs sooner or later, whether they be focused on marijuana or more traditional segments such as general retail, office space, hospitals, and others.

Also, from a top-down view, there is widespread support in this country for decriminalization at the federal level (which, practically speaking, would mean legalization). Before long, weed could be legal in America, and the fortunes of the greenest of industries will see a vastly dramatic improvement.

And which REIT will be best positioned to capitalize on this win? That's right: Innovative Industrial Properties.