What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-05 · 135 added, 144 removed, 199 unchanged (58% of the section changed)

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The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

the potential adverse effect of the ongoing public health crisis of the COVID-19 pandemic, or any future pandemic, epidemic or outbreak of infectious disease, on our and our tenants’ financial condition, results of operations, cash flows and performance, the real estate market and the global economy and financial markets, including our access to capital markets;

economic trends and economic recoveries;

the impact of the COVID-19 pandemic, or future pandemics, on us, our business, our tenants, or the economy generally;

our business and investment strategy;

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rates of default on leases for our assets;

availability of suitable investment opportunities in the medical-use cannabis industry;

concentration of our portfolio of assets and limited number of tenants;

availability of suitable investment opportunities in the regulated cannabis industry;

our understanding of our competition and our potential tenants’ alternative financing sources;

the estimated growth in and evolving market dynamics of the medical-use cannabis market;

the demand for medical-use cannabis cultivation and processing facilities;

the demand for regulated cannabis cultivation and processing facilities;

concentration of our portfolio of assets and limited number of tenants;

the estimated growth in and evolving market dynamics of the regulated cannabis market;

the expected medical-use or adult-use cannabis legalization in certain states;

shifts in public opinion regarding medical-use cannabis;

the additional risks that may be associated with certain of our tenants cultivating and processing adult-use cannabis in our facilities;

shifts in public opinion regarding regulated cannabis;

the additional risks that may be associated with certain of our tenants cultivating, processing and/or dispensing adult-use cannabis in our facilities;

the state of the U.S.

economy generally or in specific geographic areas;

economic trends and economic recoveries;

our ability to access equity or debt capital;

financing rates for our assets;

financing rates for our target assets;

our expected leverage;

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the degree to which any interest rate or other hedging strategies may or may not protect us from interest rate volatility;

impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;

our ability to maintain our qualification as a REIT for U.S.

federal income tax purposes;

the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;

our ability to maintain our qualification as a REIT;

our ability to maintain our exemption from registration under the Investment Company Act of 1940;

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The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this report.

In addition, we discussed a number of material risks in our Annual Report on Form 10 K for the year ended December 31, 2019, in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

In addition, we discussed a number of material risks in our Annual Report on Form 10-K for the year ended December 31, 2020, and in Part II, Item 1A below.

Those risks continue to be relevant to our performance and financial condition.

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We are an internally-managed REIT focused on the acquisition, ownership and management of specialized properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities.

We have leased and expect to continue to lease our properties on a triple-net lease basis, where the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term, including structural repairs, maintenance, taxes and insurance.

We have leased and expect to continue to

lease our properties on a triple-net lease basis, where the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term, including structural repairs, maintenance, taxes and insurance.

We were incorporated in Maryland on June 15, 2016.

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We are the sole general partner of our Operating Partnership and own, directly or through subsidiaries, 100% of the limited partnership interests in our Operating Partnership.

As of September 30, 2020, we had 14 full-time employees.

As of September 30, 2020, we owned 63 properties that were 99.3% (based on square footage) leased to state-licensed cannabis operators and comprising an aggregate of approximately 5.0 million rentable square feet (including approximately 1.9 million rentable square feet under development/redevelopment) in 16 states, with a weighted-average remaining lease term of approximately 16.2 years.

As of September 30, 2020, we had invested approximately $884.5 million in the aggregate (excluding transaction costs) and had committed an additional approximately $267.0 million (including tenant improvements and construction costs accrued but not yet funded as of September 30, 2020) to reimburse certain tenants and sellers for completion of construction and tenant improvements at our properties.

These statistics do not include approximately $10.0 million that may be funded in the future pursuant to our lease with a tenant at one of our Massachusetts properties, as the tenant at the property may not elect to have us disburse those funds to them and pay us the corresponding base rent on those funds.

These statistics also treat our Los Angeles, California property as not leased, due to the tenant being in receivership and its ongoing default in its obligation to pay rent at that location.

As of March 31, 2021, we had 16 full-time employees.

As of March 31, 2021, we owned 68 properties that were 100% leased to state-licensed cannabis operators and comprising an aggregate of approximately 5.9 million rentable square feet (including approximately 2.1 million rentable square feet under development/redevelopment) in 18 states, with a weighted-average remaining lease term of approximately 16.7 years.

As of March 31, 2021, we had invested approximately $1.1 billion in the aggregate (excluding transaction costs) and had committed an additional approximately $330.0 million (including tenant improvements and construction costs accrued but not yet funded as of March 31, 2021) to reimburse certain tenants and sellers for completion of construction and tenant improvements at our properties.

Factors Impacting Our Operating Results

Our results of operations are affected by a number of factors and depend on the rental revenue we receive from the properties that we acquire, the timing of lease expirations, general market conditions, the regulatory environment in the medical-use cannabis industry, and the competitive environment for real estate assets that support the regulated medical-use cannabis industry.

Our results of operations are affected by a number of factors and depend on the rental revenues we receive from the properties that we acquire, the timing of lease expirations, general market conditions, the regulatory environment in the regulated cannabis industry, and the competitive environment for real estate assets that support the regulated cannabis industry.

Rental Revenues

We receive income primarily from rental revenue generated by the properties that we acquire.

The amount of rental revenue depends upon a number of factors, including:

We receive income primarily from rental revenues generated by the properties that we acquire.

The amount of rental revenues depends upon a number of factors, including:

● our ability to enter into leases with increasing or market value rents for the properties that we acquire;

● rent collection, which primarily relates to each of our tenant’s financial condition and ability to make rent payments to us on time.

The properties that we acquire consist of real estate assets that support the regulated medical-use cannabis industry.

The properties that we acquire consist of real estate assets that support the regulated cannabis industry.

Changes in federal law and current favorable state or local laws in the cannabis industry may impair our ability to renew or re-lease properties and the ability of our tenants to fulfill their lease obligations and could materially and adversely affect our ability to maintain or increase rental rates for our properties.

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Despite these measures, cannabis dispensaries may experience declines in customer traffic or may be required to close in response to new government regulatory orders, which could have a significant adverse financial impact on certain of our tenants.

We have undertaken in-depth discussions with each of our tenants as they navigate the COVID-19 pandemic and associated severe economic disruption.

In light of those discussions, as of September 30, 2020, we had granted temporary base rent and property management fee deferrals to three affected tenants.

In 2020, we undertook in-depth discussions with each of our tenants as they navigated the COVID-19 pandemic and associated severe economic disruption.

In light of those discussions, in 2020, we granted temporary base rent and property management fee deferrals to three affected tenants.

In connection with these deferrals, we entered into lease amendments with the three affected tenants to apply a portion of the security deposits that we hold under the leases to pay a portion of the March 2020 rent (for one tenant), pay April 2020 rent in full, defer rent for May and June 2020 in full, and provide for the pro rata repayment of the security deposit and deferred rent over an 18 month time period starting July 1, 2020.

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and a total of approximately $1.5 million in rent was deferred for May and June 2020.

See Note 6 in the notes to the condensed consolidated financial statements for further information regarding these base rent and property management deferrals.

As of March 31, 2021, we have not executed deferrals for any other tenants, other than the deferrals for the three tenants discussed above.

Significant Tenants and Concentrations of Risk

As of September 30, 2020, we owned 63 properties located in 16 states.

As of March 31, 2021, we owned 68 properties located in 18 states.

Many of our tenants are tenants at multiple properties.

We seek to manage our portfolio-level risk through geographic diversification and by minimizing dependence on any single property or tenant.

At September 30, 2020, one of our properties in Michigan accounted for approximately 5% of our net real estate held for investment.

See Note 2 in the notes to the condensed consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest percentage of our total rental revenue for the three and nine months ended September 30, 2020.

At March 31, 2021, none of our properties accounted for 5% or more of our net real estate held for investment.

Competitive Environment

We face competition from a diverse mix of market participants, including but not limited to, other companies with similar business models, independent investors, hedge funds, hard money lenders and other real estate investors, as well as potential tenants (cannabis operators themselves), all of whom may compete with us in our efforts to acquire real estate zoned for cannabis operations.

We face competition from a diverse mix of market participants, including but not limited to, other companies with similar business models, independent investors, hedge funds, lenders and other real estate investors, as well as potential tenants (cannabis operators themselves), all of whom may compete with us in our efforts to acquire real estate zoned for regulated cannabis operations.

Competition from others may diminish our opportunities to acquire a desired property on favorable terms or at all.

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Investments in Real Estate

See Note 6 in the notes to the condensed consolidated financial statements for information regarding our investments in real estate activity and property portfolio activity during the nine months ended September 30, 2020.

Comparison of the Three and Nine Months Ended September 30, 2020 and 2019

Comparison of the Three Months Ended March 31, 2021 and 2020

The following table sets forth the results of our operations (in thousands):

For the Three Months

For the Nine Months

September 30,

Rental (excluding tenant reimbursements)

Tenant reimbursements

For the Three Months Ended

Rental (including tenant reimbursements)

Total revenues

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Interest expense

Preferred stock dividend

Preferred stock dividends

Net income attributable to common stockholders

Rental revenues for the three months ended September 30, 2020 increased by approximately $20.3 million, or 182%, to approximately $31.5 million, compared to approximately $11.2 million for the three months ended September 30, 2019.

Approximately $670,000 of the increase in rental revenue was generated by the properties acquired during the three months ended September 30, 2020.

The remaining approximately $19.6 million increase in rental revenue was generated by properties we acquired in prior periods, including annual escalations and related rents on amendments which increased the tenant improvement allowances on certain of the leases, and partial repayments of deferrals of rent from three of our tenants in accordance with the rent deferral programs described in Note 6 in the notes to the condensed consolidated financial statements.

Rental revenues for the nine months ended September 30, 2020 increased by approximately $50.1 million, or 192%, to approximately $76.1 million, compared to approximately $26.1 million for the nine months ended September 30, 2019.

Approximately $14.4 million of the increase in rental revenue was generated by the properties acquired during the nine months ended September 30, 2020.

The remaining approximately $35.7 million increase in rental revenue was generated by properties we acquired in prior periods, including annual escalations and related rents on amendments which increased the tenant improvement allowances on certain of the leases, partially offset by the deferrals of rent from three of our tenants in accordance with the rent deferral programs described in Note 6 in the notes to the condensed consolidated financial statements.

Rental revenues for the nine months ended September 30, 2020 included approximately $379,000 of rent and associated lease penalties received through the drawdown of the security deposit at our Los Angeles, California property where the tenant is in receivership and defaulted on its lease obligations, in addition to the drawdown of part of the security deposits totaling approximately $940,000 at certain properties leased to three tenants to pay part of the rent and associated lease penalties in accordance with the rent deferral programs described in Note 6 in the notes to the condensed consolidated financial statements.

Tenant Reimbursements.

Tenant reimbursements related to reimbursements by tenants for property insurance premiums and property tax paid at certain properties.

Tenant reimbursements for the nine months ended September 30, 2020 included approximately $43,000 of reimbursements received through the drawdown of the remaining security deposit at our Los Angeles, California property.

The increase in tenant reimbursements for both the three and nine months ended September 30, 2020 primarily related to insurance premiums reimbursed to us by tenants relating to our placement of a portfolio-wide insurance policy in July 2020.

Property Expense.

Property expense related to property insurance premiums and property taxes paid at certain of our properties, which were reimbursed by the tenants.

The increase in property expenses for both the three and nine months ended September 30, 2020 primarily related to insurance costs related to our placement of a portfolio-wide insurance policy in July 2020.

Rental revenues for the three months ended March 31, 2021 increased by approximately $21.8 million, or 103%, to approximately $42.9 million, compared to approximately $21.1 million for the three months ended March 31, 2020.

Approximately $911,000 of the increase in rental revenues was generated by the properties acquired during the three months ended March 31, 2021.

The remaining approximately $20.8 million increase in rental revenues was generated by properties we acquired in prior periods, including annual escalations and related rents on amendments which increased the tenant improvement allowances on certain of the leases.

Rental revenues also include tenant reimbursements related to reimbursements by tenants for property insurance premiums and property tax paid at certain properties.

Property Expenses.

Property expenses related to property insurance premiums and property taxes paid at certain of our properties.

General and Administrative Expense .

General and administrative expense for the three months ended September 30, 2020 increased by approximately $1.2 million to approximately $3.3 million, compared to approximately $2.1 million for the three months ended September 30, 2019.

General and administrative expense for the nine months ended September 30, 2020 increased by approximately $3.0 million to approximately $9.7 million, compared to $6.7 million for the nine months ended September 30, 2019.

The increase in general and administrative expense for both periods was primarily due to higher compensation to employees, the hiring of additional employees and higher public company costs, travel and occupancy costs.

Compensation expense for the three and nine months ended September 30, 2020 included approximately $841,000 and $2.5 million, respectively, of non-cash stock-based compensation.

Compensation expense for the three and nine months ended September 30, 2019 included approximately $655,000 and $1.8 million, respectively, of non-cash stock-based compensation.

General and administrative expense for the three months ended March 31, 2021 increased by approximately $2.3 million to approximately $5.6 million, compared to approximately $3.3 million for the three months ended March 31, 2020.

The increase in general and administrative expense was primarily due to higher compensation to employees, the hiring of additional employees and higher public company costs, travel and occupancy costs.

Compensation expense for the three months ended March 31, 2021 included approximately $2.1 million of non-cash stock-based compensation.

Compensation expense for the three months ended March 31, 2020 included approximately $825,000 of non-cash stock-based compensation.

Depreciation Expense.

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Interest and Other Income.

Interest and other income for the three months ended September 30, 2020 decreased by approximately $884,000 compared to the three months ended September 30, 2019.

Interest and other income for the nine months ended September 30, 2020 decreased by approximately $616,000 compared to the nine months ended September 30, 2019.

The decreases in both periods were due to lower interest rates on our interest-bearing investments, partially offset by higher balances of interest bearing investments, resulting from proceeds from our common stock offerings.

Interest and other income for the three months ended March 31, 2021 decreased by approximately $1.3 million compared to the three months ended March 31, 2020.

The decrease was due to lower interest rates on our interest-bearing investments, partially offset by higher balances of interest bearing investments, resulting from proceeds from our common stock offerings.

Interest Expense.

Interest expense related to our Exchangeable Senior Notes issued in February 2019.

Interest expense for the three months ended September 30, 2020 and 2019 included approximately $513,000 and $489,000, respectively, of non-cash interest expense;

and interest expense for the nine months ended September 30, 2020 and 2019 included approximately $1.5 million and $1.2 million, respectively, of non-cash interest expense.

Comparison of the Nine Months Ended September 30, 2020 and 2019

Nine Months Ended

September 30,

Interest expense related to our Exchangeable Senior Notes.

Interest expense for the three months ended March 31, 2021 and 2020 included approximately $525,000 and $501,000, respectively, of non-cash interest expense.

Comparison of the Three Months Ended March 31, 2021 and 2020

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

Ending cash, cash equivalents and restricted cash balance

Net cash (used in) provided by financing activities

Ending cash, cash equivalents and restricted cash

Operating Activities

Cash flows provided by operating activities for the nine months ended September 30, 2020 and 2019 were approximately $76.6 million and $25.1 million, respectively.

Cash flows provided by operating activities for the three months ended March 31, 2021 and 2020 were approximately $42.6 million and $19.6 million, respectively.

Cash flows provided by operating activities were generally from contractual rent and security deposits from our properties, partially offset by our general and administrative expense.

Investing Activities

Cash flows used in investing activities for the nine months ended September 30, 2020 were approximately $721.3 million, of which approximately $392.2 million related to the purchases of investments in real estate and funding of a portion of the tenant improvement allowances and construction funding at our properties, and approximately $329.1 million related to net purchases and maturities of short-term investments.

Cash flows used in investing activities for the nine months ended September 30, 2019 were approximately $237.4 million, of which approximately $151.4 million primarily related to the purchase of investment in real estate and funding of a portion of the tenant improvement allowances and construction funding at our properties, approximately $500,000 related to deposits to escrow for acquisitions, and the remaining approximately $85.5 million related to the net purchases and maturities of short-term investments.

Cash flows used in investing activities for the three months ended March 31, 2021 were approximately $13.0 million, of which approximately $93.1 million related to the purchases of investments in real estate and funding of a portion of the tenant improvement allowances and construction funding at our properties, partially offset by cash provided by investing activities of approximately $80.1 million related to net purchases and maturities of short-term investments.

Cash flows used in investing activities for the three months ended March 31, 2020 were approximately $308.3 million, of which approximately $155.2 million primarily related to the purchase of investment in real estate and funding of a portion of the tenant improvement allowances and construction funding at our properties, approximately $838,000 related to deposits to escrow for acquisitions, and the remaining approximately $152.3 million related to the net purchases and maturities of short-term investments.

Financing Activities

Net cash provided by financing activities of approximately $688.5 million during the nine months ended September 30, 2020 was the result of approximately $741.1 million in net proceeds from the follow-on issuances of shares of our common stock, partially offset by dividend payments of approximately $50.5 million to common and preferred stockholders and approximately $2.2 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.

Net cash provided by financing activities of approximately $308.6 million during the nine months ended September 30, 2019 was the result of approximately $138.5 million in net proceeds from the issuance of our Exchangeable Senior Notes, and $185.7 million in net proceeds from the follow-on issuance of shares of our common stock, partially offset by dividend payments of approximately $14.7 million to common and preferred stockholders and approximately $939,000 related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.

Net cash used in financing activities of approximately $33.4 million during the three months ended March 31, 2021 was the result of dividend payments of approximately $30.1 million to common and preferred stockholders and approximately $3.3 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.

Net cash provided by financing activities of approximately $302.7 million during the three months ended March 31, 2020 was the result of approximately $317.8 million in net proceeds from the issuance of our common stock, partially offset by dividend payments of approximately $13.0 million to common and preferred stockholders and approximately $2.2 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements.

We expect to use significant cash to acquire our target properties, fund tenant improvement allowances and construction funding at our properties, pay dividends to our stockholders, make interest payments on our Exchangeable Senior Notes, fund our operations, and meet other general business needs.

We expect to use significant cash to acquire additional properties, develop and redevelop existing properties, pay dividends to our stockholders, fund our operations, service our Exchangeable Senior Notes, and meet other general business needs.

Sources and Uses of Cash

We derive all of our revenues from the leasing of our properties, collecting rental income, which includes operating expense reimbursements, based on contractual arrangements with our tenants.

This source of revenue represents our primary source of liquidity to fund our dividends, general and administrative expenses, property development and redevelopment activities, property operating expenses and other expenses incurred related to managing our existing portfolio and investing in additional properties.

We derive all of our revenues from the leasing of our properties and collecting rental income, which includes operating expense reimbursements, based on contractual arrangements with our tenants.

This source of revenue represents our primary source of liquidity to fund our dividends, Exchangeable Senior Notes interest payments, general and administrative expenses, property development and redevelopment activities, property operating expenses and other expenses incurred related to managing our existing portfolio and investing in additional properties.

To the extent additional resources are needed, we expect to fund our investment activity generally through equity or debt issuances either in the public or private markets.

Where possible, we also may issue limited partnership interests in our Operating Partnership to acquire properties from existing owners seeking a tax-deferred transaction.

In January 2020, we issued 3,412,969 shares of common stock, including the exercise in full of the underwriters’ option to purchase an additional 445,170 shares, resulting in net proceeds of approximately $239.6 million.

In May 2020, we issued 1,550,648 shares of common stock, including the exercise in full of the underwriter’s option to purchase an additional 202,259 shares, resulting in net proceeds of approximately $114.9 million.

In July 2020, we issued 3,085,867 shares of common stock, including the exercise in full of the underwriters’ option to purchase an additional 402,504 shares, resulting in net proceeds of approximately $248.2 million.

In September 2019, we entered into equity distribution agreements with three sales agents, pursuant to which we may offer and sell from time to time through an “at-the-market” offering program, or ATM Program, up to $250.0 million in shares of our common stock.

During the three months ended September 30, 2020, we sold 474,000 shares of our common stock for net proceeds of approximately $58.1 million under the ATM Program, which includes the payment of approximately $1.2 million to one sales agent as commission for such sales.

During the nine months ended September 30, 2020, we sold 1,499,382 shares of our common stock at a weighted average sales price of $94.23 per share for net proceeds of approximately $138.4 million under the ATM Program, which includes the payment of approximately $2.8 million to one sales agent as commission for such sales.

As of September 30, 2020, we had approximately $15,000 of our common stock available for future issuance under the ATM Program.

We are party to equity distribution agreements with six sales agents, pursuant to which we may offer and sell from time to time through an “at-the-market” offering program, or ATM Program, up to $500.0 million in shares of our common stock.

As of March 31, 2021, we had approximately $231.7 million in shares of common stock available for issuance under the ATM Program and did not issue any shares of common stock under the ATM Program during the three months ended March 31, 2021.

We have filed an automatic shelf registration statement, which may permit us, from time to time, to offer and sell common stock, preferred stock, warrants and other securities to the extent necessary or advisable to meet our liquidity needs.

We expect to meet our liquidity needs, including for our commitments related to tenant improvement allowances and construction funding described below, through cash on hand, cash flows from operations after payment of dividends and proceeds from sale of equity of the issuance of new debt.

We expect to meet our liquidity needs through cash and short-term investments on hand, cash flows from operations and cash flow from sources discussed above.

We believe that our liquidity and sources of capital are adequate to satisfy our cash requirements.

We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.

We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet our liquidity needs.

Our investment guidelines also provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at the time of any new borrowing, subject to our board of directors’ discretion.

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Our ability to continue to pay dividends is dependent upon our ability to continue to generate cash flows, service any debt obligations we have, including our Exchangeable Senior Notes, and make accretive new investments.

The following table describes the dividends declared by the Company during the nine months ended September, 2020:

The following table describes the dividends declared by the Company during the three months ended March 31, 2021:

Security Class

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April 15, 2021

June 15, 2020

April 1, 2020 to June 30, 2020

July 15, 2020

June 15, 2020

Series A preferred stock

April 15, 2020 to July 14, 2020

July 15, 2020

September 15, 2020

July 1, 2020 to September 30, 2020

October 15, 2020

September 15, 2020

Series A preferred stock

July 15, 2020 to October 14, 2020

October 15, 2020

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2020 (in thousands):

Payments Due by Year

Exchangeable Senior Notes

2020 (three months ending December 31)

Additionally, as of September 30, 2020, we had approximately $232.6 million outstanding in commitments related to tenant improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease and approximately $6.9 million of commitments relating to construction funding for the development of a property in Pennsylvania, which the tenant has agreed to use commercially reasonable efforts to complete by February 9, 2021.

These amounts do not include up to approximately $10.0 million that a tenant at one of our Massachusetts properties may elect to be reimbursed in the future and pay the corresponding base rent.

As of September 30, 2020, these amounts had not been requested by the tenants.

The commitments discussed in this paragraph are excluded from the table of contractual obligations above, as tenant improvement allowances generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease, and tenants also can exercise discretion regarding the timing for requesting reimbursement for construction funding.

The following table summarizes our contractual obligations as of March 31, 2021 (in thousands):

2021 (nine months ending December 31)

Additionally, as of March 31, 2021, we had approximately $263.9 million outstanding in commitments related to tenant improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease.

As of March 31, 2021, these amounts had not been requested by the tenants.

The commitments

discussed in this paragraph are excluded from the table of contractual obligations above, as tenant improvement allowances generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease.

Non-GAAP Financial Information

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Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc.

NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization and impairment related to real estate properties, and after adjustments for unconsolidated partnerships and joint ventures.”

NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, depreciation and amortization and impairment related to real estate properties, and after adjustments for unconsolidated partnerships and joint ventures.

Management believes that net income, as defined by GAAP, is the most appropriate earnings measurement.

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We believe that by excluding the effect of depreciation, FFO and FFO per share can facilitate comparisons of operating performance between periods.

FFO and FFO per share are used by management to evaluate the REIT’s operating performance and these measures are the measures used by the REIT industry and industry analysts to evaluate REITs.

We report FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs.

For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share.

Management believes that adjusted funds from operations (“AFFO”) and AFFO per share are also appropriate supplemental measures of a REIT’s operating performance.

We calculate AFFO by adding to FFO certain non-cash or infrequent or unpredictable expenses which may impact comparability, consisting of non-cash stock-based compensation expense and non-cash interest expense.

For the three months ended March 31, 2021, FFO (diluted), AFFO and FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock.

As a result, for purposes of calculating FFO (diluted), cash and non-cash interest expense of the Exchangeable Senior Notes was added back to FFO, and the total diluted weighted-average common shares outstanding increased by 2,170,959 shares for the period, which were the potentially issuable shares as if the Exchangeable Senior Notes were exchanged at the beginning of the period.

These adjustments applied only for the three months ended March 31, 2021.

The Exchangeable Senior Notes were anti-dilutive for purposes of calculating earnings per diluted share for the three months ended March 31, 2020, and as such, were treated as anti-dilutive for purposes of calculating FFO, AFFO and FFO and AFFO per diluted share for the three months ended March 31, 2020.

Our computation of FFO and AFFO may differ from the methodology for calculating FFO and AFFO utilized by other equity REITs and, accordingly, may not be comparable to such REITs.

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FFO and AFFO should be considered only as supplements to net income computed in accordance with GAAP as measures of operations.

The table below is a reconciliation of net income attributable to common stockholders to FFO and AFFO for the three and nine months ended September 30, 2020 and 2019 (in thousands, except share and per share amounts):

For the Three Months

For the Nine Months

September 30,

The table below is a reconciliation of net income attributable to common stockholders to FFO and AFFO for the three months ended March 31, 2021 and 2020 (in thousands, except share and per share amounts):

For the Three Months Ended

Net income attributable to common stockholders

Real estate depreciation

FFO attributable to common stockholders

FFO attributable to common stockholders (basic)

Cash and non-cash interest expense

FFO attributable to common stockholders (diluted)

Stock-based compensation

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AFFO attributable to common stockholders

FFO per share – basic

FFO per share – diluted

AFFO per share – basic

AFFO per share – diluted

Weighted average shares outstanding – basic

Weighted average shares outstanding – diluted

FFO per common share – basic

FFO per common share – diluted

AFFO per common share – basic

AFFO per common share – diluted

Weighted average common shares outstanding – basic

Restricted stock and RSUs

Dilutive effect of Exchangeable Senior Notes

Weighted average common shares outstanding – diluted

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with GAAP, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

Our consolidated financial statements have been prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

Actual results could differ materially from those estimates and assumptions.

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Acquisition of Rental Property, Depreciation and Impairment

Upon acquisition of property, the tangible and intangible assets acquired and liabilities assumed are initially measured based upon their relative fair values.

We estimate the fair value of land by reviewing comparable sales within the same submarket and/or region, the fair value of buildings on an as-if vacant basis and may engage third-party valuation specialists.

Acquisition costs are capitalized as incurred since all of our acquisitions to date were recorded as asset acquisitions.

We depreciate each of our buildings and improvements over its estimated remaining useful life, not to exceed 40 years.

We depreciate tenant improvements at our buildings where we are considered the owner over the estimated useful lives of the improvements, which may not be limited by the terms of the related leases.

Upon acquisition of property, we allocate the purchase price based upon the relative fair values of all assets acquired and liabilities assumed.

For transactions that are an asset acquisition, acquisition costs are capitalized as incurred.

All of our acquisitions to date have been recorded as asset acquisitions.

We depreciate tenant improvements at our buildings where we are considered the owner over the estimated useful lives of the improvements, not to exceed 40 years.

We review current activities and changes in the business conditions of all of our properties to determine the existence of any triggering events or impairment indicators requiring an impairment analysis.

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We assess the expected undiscounted cash flows based upon numerous factors, including, but not limited to, construction costs, available market information, current and historical operating results, known trends, current market/economic conditions that may affect the property, and our assumptions about the use of the asset, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration.

Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value.

determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value.

We may adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives.

Revenue Recognition and Accounts Receivable

Our leases are triple-net leases, an arrangement under which the tenant maintains the property while paying us rent.

We account for our current leases as operating leases and record revenue for each of our properties on a cash basis due to the uncertain regulatory environment in the United States relating to the regulated cannabis industry and the uncertainty of collectability of lease payments from each tenant due to its limited operating history.

Contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses are included in rental revenue in the period when such costs are reimbursed by the tenants.

Contractually obligated real estate taxes that are paid directly by the tenant to the tax authorities are not reflected in our condensed consolidated financial statements.

Our existing tenant leases and future tenant leases are generally expected to be triple-net leases, an arrangement under which the tenant maintains the property while paying us rent and property management fees.

We account for our leases as operating leases.

Operating leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term, unless the collectability of lease payments is not probable.

Rental increases based upon changes in the U.S.

Consumer Price Index are recognized only after the changes in the indexes have occurred and are then applied according to the lease agreements.

Contractually obligated reimbursements from tenants for recoverable real estate taxes, insurance and operating expenses are included in rental revenues in the period when such costs are incurred.

Contractually obligated real estate taxes that are paid directly by the tenant to the tax authorities are not reflected in our consolidated financial statements.

We record revenue for each of our properties on a cash basis due to the uncertain regulatory environment in the United States relating to the regulated cannabis industry and the uncertainty of collectability of lease payments from each tenant due to its limited operating history.

Exchangeable Notes

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Lease Accounting

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases;

in July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases — Targeted Improvements;

and in December 2018, the FASB issued ASU 2018-20, Narrow-Scope Improvements for Lessors.

This group of ASUs is collectively referred to as Topic 842 and was effective for the Company for its consolidated financial statements for the year ended December 31, 2019.

We adopted Topic 842 effective as of January 1, 2019 using the effective date method and elected the package of practical expedients that allows an entity not to reassess upon adoption (i) whether an expired or existing contract contains a lease, (ii) whether a lease classification related to expired or existing lease arrangements, and (iii) whether costs incurred on expired or existing leases qualify as initial direct costs, and as a lessor, the practical expedient not to separate certain non-lease components, such as common area maintenance, from the lease component if the timing and pattern of transfer are the same for the non-lease component and associated lease component, and the lease component would be classified as an operating lease if accounted for separately.

We also elected the lessor practical expedient, allowing us to continue to amortize previously capitalized initial direct leasing costs incurred prior to the adoption of Topic 842.

As lessee, we recognized a liability to account for our future obligations related to our corporate office lease, which has a remaining lease term of approximately 4.0 years and 4.3 years as of March 31, 2021 and December 31, 2020, respectively, excluding the extension option that we are not reasonably certain to exercise, and a corresponding right-of-use asset.

The lease liability is measured based on the present value of the future lease payments discounted using the estimated incremental borrowing rate of 7.25%, which is the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an

amount equal to the lease payments.

Subsequently, the lease liability is accreted by applying a discount rate established at the lease commencement date to the lease liability balance as of the beginning of the period and is reduced by the payments made during the period.

The right-of-use asset is measured based on the corresponding lease liability.

We did not incur any initial direct leasing costs and any other consideration exchanged with the landlord prior to the commencement of the lease.

Subsequently, the right-of-use asset is amortized on a straight-line basis during the lease term.

As lessor, for each of our real estate transactions involving the leaseback of the related property to the seller or affiliates of the seller, we determine whether these transactions qualify as sale and leaseback transactions under the accounting guidance.

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A transaction involving a sale leaseback will be treated as a purchase of a real estate property if it is considered to transfer control of the underlying asset from the lessee.

A lease will be classified as direct-financing if risks and rewards are conveyed without the transfer of control.

A lease will be classified as direct-financing if risks and rewards are conveyed without the transfer of control and will be classified as a sales-type lease if control of the underlying asset is transferred to the lessee.

Otherwise, the lease is treated as an operating lease.

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The lease accounting guidance requires accounting for a transaction as a financing in a sale leaseback when the seller-lessee is provided an option to purchase the property from the landlord at the tenant’s option.

All of our leases are classified as operating leases.

Our tenant reimbursable revenue and property expenses are presented on a gross basis as rental revenue and as property expenses, respectively, on our condensed consolidated statements of income.

One of our leases that was entered into prior to 2019 provides the lessee with a purchase option to purchase the leased property at the end of the initial lease term in September 2034.

Our leases continued to be classified as operating leases and we continue to record revenue for each of our properties on a cash basis.

Our tenant reimbursable revenue and property expenses continue to be presented on a gross basis as rental revenue and as property expenses, respectively, on our consolidated statements of income.

Property taxes paid directly by the lessee to a third party continue to be excluded from our consolidated financial statements.

In April 2020, in response to the coronavirus pandemic and associated severe economic disruption, we amended leases at certain of our properties to provide for temporary base rent and property management fee deferrals through June 30, 2020.

The FASB has issued additional guidance for companies to account for any coronavirus related rent concessions in the form of FASB staff and board members' remarks at the April 8, 2020 public meeting and the FASB staff question-and-answer document issued on April 10, 2020.

We have elected the practical expedient which allows us to not have to evaluate whether concessions provided in response to coronavirus pandemic are lease modifications.

This relief is subject to certain conditions being met, including ensuring the total remaining lease payments are substantially the same or less as compared to the original lease payments prior to the concession being granted.

Lease amendments that are not associated with the coronavirus pandemic are evaluated to determine if the modification grants the lessee an additional right-of-use not included in the original lease and if the lease payments increase commensurate with the standalone price of the additional right-of-use, adjusted for the circumstances of the particular contract.

If both conditions are present, the lease amendment is accounted for as a new lease that is separate from the original lease.

One of our leases that was entered into prior to 2019 provides the lessee with a purchase option to purchase the leased property at the end of the initial lease term in September 2034, subject to the satisfaction of certain conditions.

The purchase option provision allows the lessee to purchase the leased property at the greatest of (a) the fair value;

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and (c) an amount equal to our gross investment in the property (including the purchase price at acquisition and any additional investment in the property made by us during the term of the lease), indexed to inflation.

At September 30, 2020, our gross investment in the property with the purchase option was approximately $30.5 million.

At September 30, 2020, the purchase option was not exercisable.

At March 31, 2021, our gross investment in the property with the purchase option was approximately $30.5 million.

At March 31, 2021, the purchase option was not exercisable.

Stock-Based Compensation

Stock-based compensation for equity awards is based on the grant date fair value of the equity instrument and is recognized over the requisite service period.

If awards are forfeited prior to vesting, we reverse any previously recognized expense related to such awards in the period during which the forfeiture occurs and reclassify any non-forfeitable dividends previously paid on these awards from retained earnings to compensation expense.

Stock-based compensation for equity awards is based on the grant date fair value of the equity awards and is recognized over the requisite service or performance period.

If awards are forfeited prior to vesting, we reverse any previously recognized expense related to such awards in the period during which the forfeiture occurs and reclassify any non-forfeitable dividends and dividend equivalents previously paid on these awards from retained earnings to compensation expense.

Forfeitures are recognized as incurred.

Certain equity awards are subject to vesting based upon the satisfaction of various market conditions.

Forfeiture of share awards with market-based restrictions does not result in a reversal of previously recognized share-based compensation expense.

We have been organized to operate our business so as to qualify to be taxed as a REIT, for U.S.

federal income tax purposes.

Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income for U.S.

Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income

federal income tax purposes.

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Interest Rate Risk

As of September 30, 2020, we had approximately $143.75 million of Exchangeable Senior Notes outstanding at a fixed interest rate, and therefore, if interest rates decline, our required payments may exceed those based on current market rates.

As of March 31, 2021, we had approximately $143.75 million of Exchangeable Senior Notes outstanding at a fixed interest rate, and therefore, if interest rates decline, our required payments may exceed those based on current market rates.

It is possible that a property we acquire in the future would be subject to a mortgage, which we may assume.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis