What changed in this filing

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Item 1. Financial Statements

2021-11-04 compared with 2021-08-05 · 173 added, 125 removed, 407 unchanged (42% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

September 30,

Real estate, at cost:

21 unchanged sentences

Preferred stock, par value $ 0.001 per share, 50,000,000 shares authorized:

9.00 % Series A cumulative redeemable preferred stock, $ 15,000 liquidation preference ($ 25.00 per share), 600,000 shares issued and outstanding at June 30, 2021 and December 31, 2020

9.00 % Series A cumulative redeemable preferred stock, $ 15,000 liquidation preference ($ 25.00 per share), 600,000 shares issued and outstanding at September 30, 2021 and December 31, 2020

Common stock, par value $ 0.001 per share, 50,000,000 shares authorized:

23,928,304 and 23,936,928 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

23,928,304 and 23,936,928 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

Additional paid-in capital

7 unchanged sentences

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Rental (including tenant reimbursements)

15 unchanged sentences

(In thousands, except share amounts)

Three Months Ended June 30, 2021

Three Months Ended June 30, 2020

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

Stockholders’

1 unchanged sentence

Balances at beginning of period

Issuance of unvested restricted stock, net of forfeitures

Net proceeds from sale of common stock

3 unchanged sentences

Balances at end of period

Six Months Ended June 30, 2021

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2021

Nine Months Ended September 30, 2020

Stockholders’

12 unchanged sentences

(In thousands)

For the Six Months Ended

For the Nine Months Ended

September 30,

Cash flows from operating activities

12 unchanged sentences

Reimbursements of tenant improvements and construction funding

Draws on construction loan

Funding of construction loan and other investments

Deposits in escrow for acquisitions

10 unchanged sentences

Net cash provided by financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash, beginning of period

Cash, cash equivalents and restricted cash, end of period

Net increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

Supplemental disclosure of cash flow information:

4 unchanged sentences

Accrual for common and preferred stock dividends declared

Accrual for deferred financing costs

Accrual for stock issuance costs

3 unchanged sentences

Notes to the Condensed Consolidated Financial Statements

June 30, 2021

September 30, 2021

As used herein, the terms “we”, “us”, “our” or the “Company” refer to Innovative Industrial Properties, Inc., a Maryland corporation, and any of our subsidiaries, including IIP Operating Partnership, LP, a Delaware limited partnership (our “Operating Partnership”).

11 unchanged sentences

Any references to square footage or occupancy percentage, and any amounts derived from these values in these notes to the condensed consolidated financial statements, are outside the scope of our independent registered public accounting firm’s review.

The Company considered the impact of COVID-19 on its assumptions and estimates used and determined that there were no material adverse impacts on the Company’s results of operations and financial position at June 30, 2021.

A prolonged outbreak or resurgence of COVID-19 could have a material adverse impact on the financial results and business operations of the Company.

18 unchanged sentences

Our investment in real estate is recorded at historical cost, less accumulated depreciation.

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

Upon acquisition of a property, the acquired tangible and intangible assets and assumed liabilities 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.

1 unchanged sentence

All of our acquisitions to date were recorded as asset acquisitions.

Depreciation.

We consider the period of future benefit of the assets to determine the appropriate estimated useful lives.

Depreciation of our assets is charged to expense on a straight-line basis over the estimated useful lives.

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

Cost Capitalization and Depreciation.

We capitalize costs associated with development and redevelopment activities and tenant improvements when we are considered to be the accounting owner of the resulting assets.

The development and redevelopment activities may be funded by us pursuant to the lease.

We are generally considered the accounting owner for such improvements that are attached to or built into the premises, which are required under the lease to be surrendered to us upon the expiration or earlier termination of the lease.

Typically, such improvements include, but are not limited to, ground up development, and enhanced HVAC, plumbing, electrical and other building systems.

Amounts capitalized are depreciated over estimated useful lives determined by management.

We depreciate buildings and improvements and tenant improvements based on our evaluation of the estimated useful life of each specific asset, not to exceed 40 years .

We depreciate office equipment and furniture and fixtures over estimated useful lives ranging from three to six years .

We depreciate the leasehold improvements at our corporate office over the shorter of the estimated useful lives or the initial lease term.

Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment.

Project costs that are clearly associated with the acquisition and development or redevelopment of a real estate project, for which we are the accounting owner, are capitalized as a cost of that project.

Expenditures that meet one or more of the following criteria generally qualify for capitalization:

● the expenditure provides benefit in future periods;

● the expenditure extends the useful life of the asset beyond our original estimates

Provision for Impairment.

7 unchanged sentences

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

No impairment losses were recognized during the six months ended June 30, 2021 and 2020.

No impairment losses were recognized during the nine months ended September 30, 2021 and 2020.

Revenue Recognition.

1 unchanged sentence

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, insurance and operating expenses are included in rental revenues in the period when such costs are reimbursed by the tenants.

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 and 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.

4 unchanged sentences

Interest on the construction loan is payable at maturity, which is December 25, 2022.

As of June 30, 2021, we had funded $ 6.0 million of the construction loan.

As of September 30, 2021, we had funded approximately $ 8.9 million of the construction loan.

Cash and Cash Equivalents .

We consider all highly-liquid investments with original maturities of three months or less to be cash equivalents.

As of June 30, 2021 and December 31, 2020, $ 146.0 million and $ 98.3 million, respectively, were invested in short-term money market funds, obligations of the U.S.

As of September 30, 2021 and December 31, 2020, $ 115.1 million and $ 98.3 million, respectively, were invested in short-term money market funds, obligations of the U.S.

government and certificates of deposit with an original maturity at the time of purchase of less than or equal to three months.

23 unchanged sentences

This group of ASUs is collectively referred to as Topic 842 and was effective for the Company and 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.

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 had a remaining lease term of approximately 3.8 years and 4.3 years as of June 30, 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.

As lessee, we recognized a liability to account for our future obligations related to our corporate office lease, which had a remaining lease term of approximately 3.5 years and 4.3 years as of September 30, 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.

3 unchanged sentences

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

For the six months ended June 30, 2021 and 2020, we recognized office lease expense of approximately $ 114,000 and $ 115,000 , respectively, which are included in general and administrative expense in our consolidated statements of income.

For the six months ended June 30, 2021 and 2020, amounts paid and classified as operating activities in our consolidated statements of cash flows for the office lease were approximately $ 117,000 and $ 38,000 , respectively.

For the nine months ended September 30, 2021 and 2020, we recognized office lease expense of approximately $ 171,000 and $ 172,000 , respectively, which are included in general and administrative expense in our condensed consolidated statements of income.

For the nine months ended September 30, 2021 and 2020, amounts paid and classified as operating activities in our condensed consolidated statements of cash flows for the office lease were approximately $ 176,000 and $ 95,000 , respectively.

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.

6 unchanged sentences

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.

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 condensed consolidated statements of income.

Property taxes paid directly by the lessee to a third party continue to be excluded from our condensed 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 drawdowns of part of the security deposits and temporary base rent and property management fee deferrals through June 30, 2020.

2 unchanged sentences

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.

As of June 30, 2021, approximately $ 1.3 million of the deferred rents, property management fees and security deposits have been repaid.

The remaining total balance of approximately $ 1.2 million is scheduled for pro rata monthly payments and to be repaid in full by December 2021.

As of September 30, 2021, approximately $ 2.1 million of the deferred rents, property management fees and security deposits have been repaid, with approximately $ 411,000 remaining to be paid.

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.

4 unchanged sentences

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 June 30, 2021, our gross investment in the property with the purchase option was approximately $ 30.5 million.

At June 30, 2021, the purchase option was not exercisable.

At September 30, 2021, our gross investment in the property with the purchase option was approximately $ 30.5 million.

At September 30, 2021, the purchase option was not exercisable.

Our leases generally contain options to extend the lease terms at the prevailing market rate or at the expiring rental rate at the time of expiration.

5 unchanged sentences

ASU 2020-06 also updates the earnings per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or shares.

ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, and is to be adopted through a cumulative-effect adjustment to the opening balance of retained earnings either at the date of adoption or in the first

comparative period presented.

Early adoption is permitted but only as of the beginning of the fiscal year.

Upon adoption of ASU 2020-06, convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature, will no longer be allocated between debt and equity components.

Upon our adoption, it will reduce the issue discount of our Exchangeable Senior Notes and will result in less non-cash interest expense in our consolidated financial statements.

Additionally, ASU 2020-06 will result in the reporting of diluted earnings per share, if the effect is dilutive, in our consolidated financial statements, regardless of our settlement intent for the Exchangeable Senior Notes.

Upon our adoption, it will reduce the issue discount of our Exchangeable Senior Notes and will result in less non-cash interest expense in our condensed consolidated financial statements.

Additionally, ASU 2020-06 will result in the reporting of diluted earnings per share, if the effect is dilutive, in our condensed consolidated financial statements, regardless of our settlement intent for the Exchangeable Senior Notes.

We will be required to adopt ASU 2020-06 on January 1, 2022.

Concentration of Credit Risk .

As of June 30, 2021, we owned 72 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Texas, Virginia and Washington.

As of September 30, 2021, we owned 75 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Texas, Virginia and Washington.

The ability of any of our tenants to honor the terms of their leases is dependent upon the economic, regulatory, competition, natural and social factors affecting the community in which that tenant operates.

The following table sets forth the five tenants in our portfolio that represented the largest percentage of our total rental revenues for the three months ended June 30, 2021, including tenant reimbursements:

The following table sets forth the five tenants in our portfolio that represented the largest percentage of our total rental revenues for the three months ended September 30, 2021, including tenant reimbursements;

For the Three Months Ended

June 30, 2021

September 30, 2021

Percentage of

SH Parent, Inc.

("Parallel")

PharmaCann Inc.

Ascend Wellness Holdings, Inc.

Cresco Labs Inc.

Kings Garden Inc.

The following table sets forth the five tenants in our portfolio that represented the largest percentage of our total rental revenues for the six months ended June 30, 2021, including tenant reimbursements:

For the Six Months Ended

June 30, 2021

Ascend Wellness Holdings, Inc.

Green Thumb Industries, Inc.

The following table sets forth the five tenants in our portfolio that represented the largest percentage of our total rental revenues for the nine months ended September 30, 2021, including tenant reimbursements:

For the Nine Months Ended

September 30, 2021

Percentage of

2 unchanged sentences

Cresco Labs Inc.

Curaleaf Holdings, Inc.

The following table sets forth the five tenants in our portfolio that represented the largest percentage of our total rental revenues for the three and six months ended June 30, 2020, including tenant reimbursements:

Kings Garden Inc.

The following table sets forth the five tenants in our portfolio that represented the largest percentage of our total rental revenues for the three and nine months ended September 30, 2020, including tenant reimbursements:

For the Three Months Ended

For the Six Months Ended

June 30, 2020

For the Nine Months Ended

September 30, 2020

Percentage of

1 unchanged sentence

PharmaCann Inc.

Ascend Wellness Holdings, Inc.

Cresco Labs Inc.

Vireo Health, Inc.

(1) Includes leases with affiliates of the entity, for which the entity has provided a corporate guaranty.

As of June 30, 2021 and December 31, 2020, none of our properties individually represented more than 5 % of our net real estate held for investment.

Ascend Wellness Holdings, Inc.

Holistic Industries, Inc.

Curaleaf Holdings, Inc.

In each of the tables above, these leases include leases with affiliates of each entity, for which the entity has provided a corporate guaranty.

As of September 30, 2021 and December 31, 2020, none of our properties individually represented more than 5 % of our net real estate held for investment.

We have deposited cash with a financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $ 250,000 .

As of June 30, 2021, we had cash accounts in excess of FDIC insured limits.

As of September 30, 2021, we had cash accounts in excess of FDIC insured limits.

We have not experienced any losses in such accounts.

As of June 30, 2021, the Company was authorized to issue up to 50,000,000 shares of common stock, par value $ 0.001 per share, and there were 23,928,304 shares of common stock issued and outstanding.

As of September 30, 2021, the Company was authorized to issue up to 50,000,000 shares of common stock, par value $ 0.001 per share, and there were 23,928,304 shares of common stock issued and outstanding.

Preferred Stock

As of June 30, 2021, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value $ 0.001 per share, and there were issued and outstanding 600,000 shares of 9.00 % Series A Cumulative Redeemable Preferred Stock, $ 0.001 par value per share (the “Series A Preferred Stock”).

As of September 30, 2021, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value $ 0.001 per share, and there were issued and outstanding 600,000 shares of 9.00 % Series A Cumulative Redeemable Preferred Stock, $ 0.001 par value per share (the “Series A Preferred Stock”).

Generally, the Company is not permitted to redeem the Series A Preferred Stock prior to October 19, 2022, except in limited circumstances relating to the Company’s ability to qualify as a REIT and in certain other circumstances related to a change of control/delisting (as defined in the articles supplementary for the Series A Preferred Stock).

1 unchanged sentence

Holders of the Series A Preferred Stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in certain other circumstances.

The following table describes the dividends declared by the Company during the six months ended June 30, 2021:

The following table describes the dividends declared by the Company during the nine months ended September 30, 2021:

Declaration Date

16 unchanged sentences

July 15, 2021

September 15, 2021

July 1, 2021 to September 30, 2021

October 15, 2021

September 15, 2021

Series A preferred stock

July 15, 2021 to October 14, 2021

October 15, 2021

Investments in Real Estate

The Company acquired the following properties during the six months ended June 30, 2021 (dollars in thousands):

The Company acquired the following properties during the nine months ended September 30, 2021 (dollars in thousands):

January 22, 2021

5 unchanged sentences

Massachusetts

August 3, 2021

August 13, 2021

Calyx Peak MO

September 17, 2021

September 24, 2021

(1) Includes expected rentable square feet at completion of construction of certain properties.

(2) The tenant is expected to complete tenant improvements at the property, for which we agreed to provide reimbursement of up to approximately $ 10.8 million.

(2) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to approximately $ 10.8 million.

(3) The purchase price related to the acquisition of additional land adjacent to one of our existing properties.

In connection with the acquisition, we entered into a lease amendment for the existing property, which provided a tenant improvement allowance that resulted in a corresponding adjustment to the base rent for the lease at the property.

In connection with the acquisition, we entered into a lease amendment for the existing property, which provided an improvement allowance that resulted in a corresponding adjustment to the base rent for the lease at the property.

The tenant is expected to complete construction of two new buildings at the property comprising approximately 180,000 square feet in the aggregate, for which we agreed to provide reimbursement of up to approximately $ 51.4 million.

(4) The tenant is expected to construct three buildings at the property, for which we agreed to provide reimbursement of up to $ 24.0 million.

(5) The tenant is expected to complete tenant improvements at the property, for which we agreed to provide reimbursement of up to approximately $ 14.4 million.

(6) The tenant is expected to complete tenant improvements at the property, for which we agreed to provide reimbursement of up to $ 26.0 million.

(7) The tenant is expected to complete tenant improvements at the property, for which we agreed to provide reimbursement of up to approximately $ 5.7 million.

(8) The tenant is expected to complete tenant improvements at the property, for which we agreed to provide reimbursement of up to $ 15.0 million.

(5) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to approximately $ 14.4 million.

(6) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ 26.0 million.

(7) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to approximately $ 5.7 million.

(8) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ 15.0 million.

(9) The tenant is expected to construct a 250,000 square foot industrial facility, for which we agreed to provide reimbursement of up to approximately $ 43.8 million.

The purchase price excludes approximately $ 3.2 million attributable to a portion of the property that is not part of any of the planned construction and which did not satisfy the requirements for sale-leaseback accounting;

therefore, this portion of the property is recognized as a notes receivable and is included in other assets, net on our condensed consolidated balance sheet.

(10) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ 12.9 million.

(11) The tenant is expected to construct an 83,000 square foot industrial facility, for which we agreed to provide reimbursement of up to approximately $ 26.7 million.

(12) The amounts related to the acquisition of additional land adjacent to an existing property and a lease amendment which provided an allowance to fund construction of a new building and resulted in a corresponding adjustment to the base rent for the lease at the property.

The tenant is expected to construct approximately 324,000 square feet of industrial space, for which we agreed to provide reimbursement of up to approximately $ 46.1 million.

(13) Approximately $ 23.3 million was allocated to land and approximately $ 107.8 million was allocated to building and construction in progress.

The properties acquired during the three and six months ended June 30, 2021 generated approximately $ 1.8 million and $ 4.8 million of rental revenues (including tenant reimbursements), respectively, and approximately $ 1.5 million and $ 4.0 million of net operating income, respectively, after deducting property and depreciation expenses, during that period.

The properties acquired during the three and six months ended June 30, 2020 generated approximately $ 1.9 million and $ 5.5 million of rental revenue (including tenant reimbursements), respectively, and approximately $ 1.6 million and $ 4.1 million of net operating income, respectively, after deducting property and depreciation expenses, during that period.

The properties acquired during the three and nine months ended September 30, 2021 generated approximately $ 639,000 and $ 11.9 million of rental revenues (including tenant reimbursements), respectively, and approximately $ 559,000 and $ 10.0 million of net operating income, respectively, after deducting property and depreciation expenses, during that period.

The properties acquired during the three and nine months ended September 30, 2020 generated approximately $ 778,000 and $ 15.2 million of rental revenue (including tenant reimbursements), respectively, and approximately $ 303,000 and $ 11.0 million of net operating income, respectively, after deducting property and depreciation expenses, during that period.

New Lease and Lease Amendments

In January 2021, we executed a new lease at our Los Angeles, California property with a subsidiary of Holistic Industries Inc., pursuant to which we agreed to make available up to $ 11.0 million in funding for future tenant improvements at the property.

In January 2021, we executed a new lease at our Los Angeles, California property with a subsidiary of Holistic Industries Inc.

(“Holistic”), pursuant to which we agreed to make available up to $ 11.0 million in funding for future improvements at the property.

In February 2021, we amended our lease with a subsidiary of LivWell Holdings, Inc.

at one of our Michigan properties, increasing the tenant improvement allowance under the lease by approximately $ 6.9 million to a total of approximately $ 29.9 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

at one of our Michigan properties, increasing the improvement allowance under the lease by approximately $ 6.9 million to a total of approximately $ 29.9 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In February 2021, we amended our lease with PharmaCann Inc.

at one of our New York properties, increasing the tenant improvement allowance under the lease by $ 2.5 million to a total of approximately $ 33.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

at one of our New York properties, increasing the improvement allowance under the lease by $ 2.5 million to a total of approximately $ 33.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In April 2021, we amended our lease with a subsidiary of Jushi Holdings, Inc.

at one of our Pennsylvania properties, increasing the tenant improvement allowance under the lease by $ 30.0 million to a total of approximately $ 40.0 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

With this additional tenant improvement allowance, the tenant is expected to expand the facility by approximately 40,000 square feet and complete the buildout of the existing 89,000 square foot building.

In June 2021, we amended our lease with a subsidiary of Parallel at one of our Florida properties, increasing the tenant improvement allowance under the lease by $ 8.0 million to a total of $ 16.2 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

at one of our Pennsylvania properties, increasing the improvement allowance under the lease by $ 30.0 million to a total of approximately $ 40.0 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

With this additional improvement allowance, the tenant is expected to expand the facility by approximately 40,000 square feet and complete the buildout of the existing 89,000 square foot building.

In June 2021, we amended our lease with a subsidiary of Parallel at one of our Florida properties, increasing the improvement allowance under the lease by $ 8.0 million to a total of $ 16.2 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In June 2021, we amended our lease with a subsidiary of Harvest Health & Recreation Inc.

at one of our Florida properties, increasing the tenant improvement allowance under the lease by $ 7.1 million to a total of approximately $ 17.9 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

Including all of our properties, during the six months ended June 30, 2021, we capitalized costs of approximately $ 176.2 million and funded approximately $ 152.1 million relating to tenant improvements and construction activities at our properties.

Future contractual minimum rent (including base rent, supplemental base rent (for one of our properties in New York) and property management fees) under the operating leases as of June 30, 2021 for future periods is summarized as follows (in thousands):

at one of our Florida properties, increasing the improvement allowance under the lease by $ 7.1 million to a total of approximately $ 17.9 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In August 2021, we amended our lease with Holistic at one of our Maryland properties, increasing the improvement allowance under the lease by $ 8.0 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In September 2021, we amended our lease with Green Peak Industries, Inc.

at one of our Michigan properties, increasing the improvement allowance under the lease by $ 15.0 million to a total of approximately $ 29.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In September 2021, we amended our lease with a subsidiary of Ascend Wellness Holdings, Inc.

at one of our Illinois properties, increasing the improvement allowance under the lease by $ 20.0 million to a total of $ 52.0 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

Including all of our properties, during the nine months ended September 30, 2021, we capitalized costs of approximately $ 279.4 million and funded approximately $ 254.2 million relating to improvements and construction activities at our properties.

Future contractual minimum rent (including base rent, supplemental base rent (for one of our properties in New York) and property management fees) under the operating leases as of September 30, 2021 for future periods is summarized as follows (in thousands):

Contractual Minimum Rent

2021 (six months ending December 31)

2021 (three months ending December 31)

Exchangeable Senior Notes

As of June 30, 2021, our Operating Partnership had outstanding approximately $ 143.75 million principal amount of 3.75 % Exchangeable Senior Notes due 2024 (the “Exchangeable Senior Notes”).

As of September 30, 2021, our Operating Partnership had outstanding approximately $ 143.75 million principal amount of 3.75 % Exchangeable Senior Notes due 2024 (the “Exchangeable Senior Notes”).

The Exchangeable Senior Notes are senior unsecured obligations of our Operating Partnership, are fully and unconditionally guaranteed by us and our Operating Partnership’s subsidiaries and are exchangeable for cash, shares of our common stock, or a combination of cash and shares of our common stock, at our Operating Partnership’s option, at any time prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date.

The exchange rate for the Exchangeable Senior Notes at June 30, 2021 was 15.18404 shares of our common stock per $ 1,000 principal amount of Notes and the exchange price at June 30, 2021 was approximately $ 65.859 per share of our common stock.

The exchange rate for the Exchangeable Senior Notes at September 30, 2021 was 15.25918 shares of our common stock per $ 1,000 principal amount of Notes and the exchange price at September 30, 2021 was approximately $ 65.534 per share of our common stock.

The exchange rate and exchange price are subject to adjustment in certain circumstances.

1 unchanged sentence

Our Operating Partnership will not have the right to redeem the Exchangeable Senior Notes prior to maturity, but may be required to repurchase the Exchangeable Senior Notes from holders under certain circumstances.

Upon issuance of the Exchangeable Senior Notes in February 2019, we recorded an approximately $ 5.8 million discount based on the implied value of the exchange option and an assumed effective interest rate of 4.65 %, as well as approximately $ 5.2 million of initial issuance costs, of which approximately $ 5.0 million and $ 200,000 were allocated to the liability and equity components, respectively, based on their relative fair values.

In connection with the issuance of the Exchangeable Senior Notes in February 2019, we recorded an approximately $ 5.8 million discount based on the implied value of the exchange option and an assumed effective interest rate of 4.65 %, as well as approximately $ 5.2 million of initial issuance costs, of which approximately $ 5.0 million and $ 200,000 were allocated to the liability and equity components, respectively, based on their relative fair values.

Issuance costs allocated to the liability component are being amortized using the effective interest method and recognized as non-cash interest expense over the expected term of the Exchangeable Senior Notes.

The following table details our interest expense related to the Exchangeable Senior Notes (in thousands):

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Amortization of debt discount

1 unchanged sentence

Total interest expense

The following table details the carrying value of our Exchangeable Senior Notes on our condensed consolidated balance sheets (in thousands):

June 30, 2021

The following table details the carrying value of our Exchangeable Senior Notes (in thousands):

September 30, 2021

December 31, 2020

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Carrying value

Accrued interest payable for the Exchangeable Senior Notes as of June 30, 2021 and December 31, 2020 was approximately $ 1.6 million for both periods, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.

Accrued interest payable for the Exchangeable Senior Notes as of September 30, 2021 and December 31, 2020 was approximately $ 225,000 and $ 1.6 million, respectively, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.

Unsecured Senior Notes

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The terms of the Unsecured Senior Notes are governed by an indenture, dated May 25, 2021, among the Operating Partnership, as issuer, the Company and the Operating Partnership’s subsidiaries, as guarantors, and GLAS Trust Company LLC, as trustee.

Upon issuance of the Unsecured Senior Notes, we recorded approximately $ 6.7 million of initial issuance costs, which are being amortized using the effective interest method and recognized as non-cash interest expense over the term of the Unsecured Senior Notes.

In connection with the issuance of the Unsecured Senior Notes, we recorded approximately $ 6.8 million of issuance costs, which are being amortized using the effective interest method and recognized as non-cash interest expense over the term of the Unsecured Senior Notes.

The following table details our interest expense related to the Unsecured Senior Notes (in thousands):

For the Three and Six Months

Ended June 30, 2021

For the Three Months

For the Nine Months

Ended September 30, 2021

Amortization of issuance cost

Total interest expense

The following table details the carrying value of our Unsecured Senior Notes on our condensed consolidated balance sheet (in thousands):

June 30, 2021

The following table details the carrying value of our Unsecured Senior Notes (in thousands):

September 30, 2021

Principal amount

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The terms of the indenture for the Unsecured Senior Notes require compliance with various financial covenants, including minimum level of debt service coverage and limits on the amount of total leverage and secured debt maintained by the Operating Partnership.

Management believes that it was in compliance with those covenants as of June 30, 2021.

On May 25, 2021, the Company, the Operating Partnership and the subsidiaries of the Operating Partnership entered into a registration rights agreement with the representative of the initial purchasers of the Unsecured Senior Notes, pursuant to which the Company, the Operating Partnership and the subsidiaries of the Operating Partnership agreed to use commercially reasonable efforts to file with the Securities and Exchange Commission within 60 days , and cause to become effective within 180 days , a registration statement registering exchange notes with nearly identical terms to the Unsecured Senior Notes, and to cause an exchange offer to be consummated within 60 days after the registration statement is declared effective.

In addition, in some circumstances, the Company, the Operating Partnership and the subsidiaries of the Operating Partnership agreed to file a shelf registration statement providing for the sale of all of the Unsecured Senior Notes by the holders thereof.

Accrued interest payable for the Unsecured Senior Notes as of June 30, 2021 was approximately $ 1.7 million, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.

Management believes that it was in compliance with those covenants as of September 30, 2021.

Company, the Operating Partnership and the subsidiaries of the Operating Partnership agreed to use commercially reasonable efforts to file with the Securities and Exchange Commission within 60 days , and cause to become effective within 180 days , a registration statement registering exchange notes with nearly identical terms to the Unsecured Senior Notes, and to cause an exchange offer to be consummated within 60 days after the registration statement is declared effective.

On July 20, 2021, the Company, the Operating Partnership and the subsidiaries of the Operating Partnership filed such a registration statement on Form S-4 with the Securities and Exchange Commission (as amended), which was declared effective on September 10, 2021.

On September 14, 2021, the Operating Partnership launched the exchange offer to exchange all validly tendered and outstanding Unsecured Senior Notes for an equal principal amount of a new series of notes which will be registered under the Securities Act of 1933, as amended, and substantially identical to the outstanding Unsecured Senior Notes, except for transfer restrictions and registration rights (see Note 12 for further discussion of the exchange).

Accrued interest payable for the Unsecured Senior Notes as of September 30, 2021 was approximately $ 5.8 million, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.

Net Income Per Share

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Earnings per basic share represents the summation of the distributed and undistributed earnings per share class divided by the total number of shares.

Through June 30, 2021, all of the Company’s participating securities received dividends or dividend equivalents at an equal dividend rate per share or unit.

As a result, distributions to participating securities for the three and six months ended June 30, 2021 and 2020 have been included in net income attributable to common stockholders to calculate net income per basic and diluted share.

The 2,182,691 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the three and six months ended June 30, 2021, respectively, and were included in the computation of diluted earnings per share.

The 2,134,451 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were anti-dilutive for the three and six months ended June 30, 2020, respectively, and were excluded from the computation of diluted earnings per share.

Performance share units (“PSUs”) granted to certain employees during the six months ended June 30, 2021 were not included in dilutive securities as of June 30, 2021 as the performance thresholds for vesting of any performance share units were not met (see Note 10 for further discussion of the PSUs).

Through September 30, 2021, all of the Company’s participating securities received dividends or dividend equivalents at an equal dividend rate per share or unit.

As a result, distributions to participating securities for the three and nine months ended September 30, 2021 and 2020 have been included in net income attributable to common stockholders to calculate net income per basic and diluted share.

The 2,193,492 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the three and nine months ended September 30, 2021, and were included in the computation of diluted earnings per share.

The 2,148,218 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were anti-dilutive for the three and nine months ended September 30, 2020, and were excluded from the computation of diluted earnings per share.

For the three and nine months ended September 30, 2021, 78,582 shares issuable upon vesting of performance share units (“PSUs”) granted to certain employees in January 2021 were included in dilutive securities, as the performance thresholds for vesting of these PSUs were met as measured as of September 30, 2021 (see Note 10 for further discussion of the PSUs).

Computations of net income per basic and diluted share (in thousands, except share and per share data) were as follows:

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Preferred stock dividends

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Weighted-average common shares outstanding:

Restricted stock and RSUs

Restricted stock, RSUs and PSUs

Dilutive effect of Exchangeable Senior Notes

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Level 3—Unobservable inputs that are supported by little or no market activities, therefore requiring an entity to develop its own assumptions.

The following table presents the carrying value in the condensed consolidated financial statements and approximate fair value of financial instruments at June 30, 2021 and December 31, 2020 (in thousands):

At June 30, 2021

The following table presents the carrying value and approximate fair value of financial instruments at September 30, 2021 and December 31, 2020 (in thousands):

At September 30, 2021

At December 31, 2020

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(2) The fair value is determined based upon Level 2 inputs as the Exchangeable Senior Notes and Unsecured Senior Notes were trading in the private market.

As of June 30, 2021 and December 31, 2020, cash equivalent instruments consisted of $ 146.0 million and $ 98.3 million, respectively, in short-term money market funds that were measured using the net asset value per share that have not been classified using the fair value hierarchy.

As of September 30, 2021 and December 31, 2020, cash equivalent instruments consisted of $ 115.1 million and $ 98.3 million, respectively, in short-term money market funds that were measured using the net asset value per share that have not been classified using the fair value hierarchy.

The fund invests primarily in short-term U.S.

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The 2016 Plan automatically terminates on the date which is ten years following the effective date of the 2016 Plan.

A summary of the restricted stock activity under the 2016 Plan and related information for the six months ended June 30, 2021 is included in the table below:

A summary of the restricted stock activity under the 2016 Plan and related information for the nine months ended September 30, 2021 is included in the table below:

Grant Date Fair

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Balance at March 31, 2021

Balance at June 30, 2021

Balance at June 30, 2021 and September 30, 2021

(1) Shares that were forfeited to cover the employees’ tax withholding obligation upon vesting .

The remaining unrecognized compensation cost of approximately $ 2.6 million for restricted stock awards is expected to be recognized over a weighted-average amortization period of approximately 1.6 years as of June 30, 2021.

The fair value of restricted stock that vested during the six months ended June 30, 2021 was approximately $ 8.8 million.

The following table summarizes our RSU activity for the six months ended June 30, 2021.

The remaining unrecognized compensation cost of approximately $ 2.1 million for restricted stock awards is expected to be recognized over a weighted-average amortization period of approximately 1.6 years as of September 30, 2021.

The fair value of restricted stock that vested during the nine months ended September 30, 2021 was approximately $ 8.8 million.

The following table summarizes our RSU activity for the nine months ended September 30, 2021.

RSUs are issued as part of the Innovative Industrial Properties, Inc.

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Balance at March 31, 2021

Balance at June 30, 2021

The remaining unrecognized compensation cost of approximately $ 5.0 million for RSU awards is expected to be recognized over an amortization period of approximately 2.1 years as of June 30, 2021.

Balance at June 30, 2021 and September 30, 2021

The remaining unrecognized compensation cost of approximately $ 4.4 million for RSU awards is expected to be recognized over an amortization period of approximately 2.0 years as of September 30, 2021.

In January 2021, we issued 70,795 “target” PSUs to a select group of officers, which vest and are settled in shares of common stock (“Award Shares”) based on the Company’s total stockholder return over a period commencing on January 11, 2021 and ending on December 31, 2023 (the “Performance Period”) relative to two different comparator groups of companies.

At the end of the Performance Period, a recipient of PSUs may receive as few as zero Award Shares or as many as 150 % of the number of target PSUs in Award Shares, plus deemed dividends.

PSUs will also be reduced as necessary so the total value at the vesting date does not exceed 800 % of the grant date PSU price, and if the Company’s absolute total stockholder return during the Performance Period is negative, the payout of Award Shares is capped at the target number of PSUs, notwithstanding the Company’s outperformance of comparator groups.

PSUs will also be reduced as necessary so the total value at the vesting date does not exceed

800 % of the grant date PSU price, and if the Company’s absolute total stockholder return during the Performance Period is negative, the payout of Award Shares is capped at the target number of PSUs, notwithstanding the Company’s outperformance of comparator groups.

No dividends are paid to the recipient during the Performance Period.

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Stock-based compensation for market-based PSU awards is based on the grant date fair value of the equity awards and is recognized over the Performance Period.

For the three and six months ended June 30, 2021, we recognized stock-based compensation expense of $ 1.0 million and $ 2.0 million, respectively, relating to the PSU awards.

As of June 30, 2021, the remaining unrecognized compensation cost of approximately $ 10.0 million relating to PSU awards is expected to be recognized over the remaining Performance Period of approximately 2.5 years.

For the three and nine months ended September 30, 2021, we recognized stock-based compensation expense of $ 1.0 million and $ 3.0 million, respectively, relating to the PSU awards.

As of September 30, 2021, the remaining unrecognized compensation cost of approximately $ 9.0 million relating to PSU awards is expected to be recognized over the remaining Performance Period of approximately 2.3 years.

Commitments and Contingencies

Office Lease .

The future contractual lease payments for our office lease and the reconciliation to the office lease liability reflected in our condensed consolidated balance sheets as of June 30, 2021 is presented in the table below (in thousands):

2021 (six months ending December 31)

The future contractual lease payments for our office lease and the reconciliation to the office lease liability reflected in other liabilities in our condensed consolidated balance sheets as of September 30, 2021 is presented in the table below (in thousands):

2021 (three months ending December 31)

Total future contractual lease payments

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Office lease liability

Tenant Improvement Allowances .

As of June 30, 2021, we had approximately $ 287.2 million of 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.

Improvement Allowances .

As of September 30, 2021, we had approximately $ 355.9 million of commitments related to 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.

Construction Loan.

As of June 30 2021, we had $ 12.5 million of commitments related to our construction loan for the development of a regulated cannabis cultivation and processing facility in California.

As of September 30, 2021, we had $ 9.6 million of commitments related to our construction loan for the development of a regulated cannabis cultivation and processing facility in California.

The developer is required to complete construction by June 2022, subject to extension in certain circumstances.

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Subsequent Events

Subsequent to June 30, 2021, we acquired a property in Illinois for $ 6.5 million and executed a lease with a subsidiary of 4Front Ventures Corp.

(“4Front”) for the entire property.

4Front is expected to construct approximately 250,000 square feet of industrial space at the property, for which we agreed to provide reimbursement of up to approximately $ 43.8 million.

In October 2021, we acquired a property in California for $ 51.0 million and executed a lease with Gold Flora, LLC (“Gold Flora”) for the entire property.

Gold Flora is expected to complete certain improvements at the property, for which we agreed to provide reimbursement of up to approximately $ 9.0 million.

In November 2021, we amended our lease with Temescal Wellness of Massachusetts, LLC at one of our Massachusetts properties, increasing the improvement allowance under the lease by $ 8.7 million to a total of $ 23.7 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

Unsecured Senior Notes Exchange

On October 19, 2021, in accordance with the registration rights agreement entered into among the Company, the Operating Partnership, the subsidiaries of the Operating Partnership and the initial purchasers of the Unsecured Senior Notes, the Operating Partnership completed its exchange offer to exchange all of the outstanding Unsecured Senior Notes for an equal principal amount of a new issuance of 5.50 % Senior Notes due 2026 pursuant to an effective registration statement on Form S-4 filed with the Securities and Exchange Commission.

A total of $ 300.0 million aggregate principal amount of the original Unsecured Senior Notes, representing 100 % of the outstanding principal amount of the original Unsecured Senior Notes, was validly tendered and received prior to the expiration of the exchange offer.

The terms of the new Unsecured Senior Notes are substantially identical to the original Unsecured Senior Notes, except for transfer restrictions and registration rights relating to the original Unsecured Senior Notes.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements