The Most Important Marijuana Stock You're Not Watching

Any marijuana stock investor, even the more casual among that crowd, is at least glancingly familiar with the web of multistate operators (MSOs) that operate in this country, or the relatively large pot conglomerates atop the sector in Canada. They might not necessarily know the top specialty real estate investment trust (REIT) in weed world, Innovative Industrial Properties (NYSE: IIPR).

Innovative matters, not only because it's by far the most prominent cannabis REIT on the market, but also because of a major plank of its business strategy makes it a notable financial player in the American marijuana industry. Let's dive into this outlier of a marijuana company.

Landlord to the weedies

It's no secret that marijuana businesses, beset by a host of challenges, are often unprofitable and frequently cash-strapped. Innovative offers an elegant solution through sale-leaseback deals, in which it purchases a property owned by such a business and then leases it back to the original owner.

Done well, this arrangement is a win for both the REIT and its new tenant -- the former adds another specialty property to its portfolio, while the counterparty gets a pile of much-needed capital for its operations. Nearly all of Innovative's 110 properties, across 19 U.S. states and occupied by 38 tenants, were acquired through sale-leasebacks.

In its first quarter of this year, that set of properties brought in nearly $69 million in rental revenue for the REIT. This translated into attributable net income of $30.2 million ($1.02 per share). Adjusted funds from operations (AFFO, which is considered a more appropriate profitability metric than net income for REITs) came in at $53.4 million, or $1.88 per share.

The catch is, these metrics weren't much changed from the same quarter of 2025. In that period, the three line items were, respectively, $71.7 million, $30.3 million ($1.03 per share), and $55.3 million ($1.94).

The fundamentals were held back by a series of tenant defaults; this is the hardscrabble marijuana industry, after all. Innovative was hit by a spate of these in late 2024 and early 2025, and in March this year.

Although no one likes a default, Innovative has been rather active and effective in recovering some of the missing rents from these tenants, at times through legal proceedings. All told, in the first quarter alone, through settlement payments and court-released funds, the REIT collected nearly $5 million from these businesses. It also drew a combined $1.4 million from the security deposits of two other defaulters.

What's more, Innovative secured new tenants for several properties formerly occupied by defaulting businesses.

High yield or high risk?

For any REIT to maintain its status, it's obligated to pay at least 90% of its net income out in the form of shareholder dividends. Innovative hands out a regular and occasionally rising quarterly dividend, as it's constantly profitable and has shown growth at times when not weighed down by defaults. The latest payout is $1.90 per share, which was last increased in June 2024, from $1.82.

Is it sustainable? This is a concern for more than a few investors, who fret that those defaults (and perhaps future ones) will harm the financials enough to necessitate a cut. Another development they fret about is that the current $1.90 per share dividend is well above recent per-share net income of $1.03, and a bit north of AFFO per share.

Yet Innovative has numerous advantages beyond a solid, classic business model and a management team that's effectively dealing with defaulters. One is its relatively low leverage; its total debt-to-gross assets ratio is 13%, well below the 36% average for REITs, per data from industry trade association Nareit (although its methodology varies slightly from Innovative).

I should note, however, that the company had $291 million in notes (a type of debt security) maturing on May 25, and, as of this writing, had been busy securing the funds to cover them.

The REIT is also diversifying. Last August, it announced a deal with life sciences property company IQHQ under which it would provide a package of debt financing (in the form of a senior secured loan) and investment in its partner's high-yield preferred stock totaling $270 million.

If the IQHQ involvement goes well, Innovative expects to exercise its right -- baked into the deal -- to physically own certain properties currently in IQHQ's portfolio.

Double-digit temptation

So, for all its uniqueness, is Innovative a buy these days?

It sure is tempting. Although the dividend hasn't been lifted in almost two years, it yields a lofty 13.5%, which blows away many figures in the yield-rich REIT industry. But as any savvy investor knows, a high-yield dividend often means high risk. I'm not fully convinced Innovative can maintain the payout, especially if it's hit with a new wave of defaults.

Still, the company has managed to survive, if not always thrive, as a landlord to a challenged industry -- no mean feat in itself. I also think its involvement in the rebounding life sciences industry could be a sleeper win for it. Personally, I'd be an investor in this stock, albeit with the realization that any weed and weed-adjacent asset is inherently risky, and this one's dividend might get a haircut.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.