Innovative Industrial Properties (IIPR 2.02%) is one of the most talked-about real estate investment trusts (REITs) in the stock market today -- for good reason. The company, which specializes in leasing and ownership of industrial properties for the use of medical marijuana, has outperformed the S&P 500 annually by 57% over the past three years while providing investors with an annualized return of 78%. If you invested $10,000 in the company in 2018, your money would be worth more than $51,000 today.

IIPR Chart
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With results like that, it's no surprise investors have flocked to IIPR, pushing its share price up 418% in three years. While some investors may worry they missed the boat when it comes to investing in Innovative Industrial Properties, here's why I think there's still time to add this growing REIT to your portfolio.

2021 highlights

Innovative Industrial Properties was the first publicly traded REIT to serve the budding cannabis industry. While other marijuana-focused SPACs have come to the market, IIPR holds the title as the largest operator in this field, with 76 properties in 19 states under management. The company uses a unique sale-leaseback structure to purchase industrial properties from existing operators in the medical marijuana field and then lease the property back to them using a long-term net lease. This business model helps IIPR expand its revenues while generating secure cash flow through high-quality tenants with proven track records.

In the first nine months of the year (ending Sep. 30), revenue grew 82% year over year. Adjusted funds from operations (AFFO), a metric similar to free cash flow, decreased in 2021 because the company issued nearly $144 million in senior notes. However, over the same period in 2020, AFFO grew 79% from 2019 levels.

The company is exceptionally well-positioned in its liquidity and working capital requirements. With debt-to-total gross assets of just 20% and $127.3 million in cash equivalents, IIPR's balance sheet looks sound.

Person tending to medical marijuana plants in factory.

Image source: Getty Images.

Future growth opportunities

Considering only 36 states, including the District of Columbia, have legalized medical marijuana so far, the next few years could provide IIPR with new demand as cannabis is likely legalized in more states and even at the federal level. Given the rising demand for cannabis, that is a fair assumption. BDSA, a data provider for the cannabis industry, found cannabis sales increased 41% year over year from 2020 and predicts marijuana sales to exceed $62 billion by 2026.

In Q3 2021, Innovative Industrial Properties recently expanded its partnership with one of its tenants, Goodness Growth Holdings (GDNS.F 15.91%), which will add 324,000 square feet to its portfolio in New York. Additionally, the company acquired five properties in California, Illinois, Maryland, and Missouri.

I'll be the first to admit today's expensive share prices aren't exactly inviting with IIPR stock trading at 35 times sales and 58 times trailing-12-month earnings, but I do believe there is still an opportunity for investors to get in. I currently own shares of IIPR and don't plan on selling anytime soon. But I'd love to own more. IIPR is constantly on my watch list and is a company I will happily double down on in the event of a market correction.

Innovative Industrial Properties is backed by a solid investment strategy in a super unique and underserved niche that has substantial growth potential. And its financial standing couldn't be stronger. If you have been sitting on the sidelines, I would say it's not too late to add a few shares to your portfolio. I personally think IIPR still has many years of growth ahead.