What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 102 added, 79 removed, 291 unchanged (38% of the section changed)

10 unchanged sentences

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

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

our business and investment strategy;

32 unchanged sentences

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, 2020, in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, and in Part II, Item 1A below.

In addition, we discussed a number of material risks in our Annual Report on Form 10-K for the year ended December 31, 2020, in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2021 and June 30, 2021, and in Part II, Item 1A below.

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

7 unchanged sentences

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 (the “Operating Partnership”).

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.

2 unchanged sentences

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 June 30, 2021, we had 19 full-time employees.

As of June 30, 2021, we owned 72 properties that were 100% leased to state-licensed cannabis operators and comprising an aggregate of approximately 6.6 million rentable square feet (including approximately 2.2 million rentable square feet under development/redevelopment) in 18 states, with a weighted-average remaining lease term of approximately 16.7 years.

As of June 30, 2021, we had invested approximately $1.3 billion in the aggregate (excluding transaction costs) and had committed an additional approximately $347.8 million (including tenant improvements and construction costs accrued but not yet funded as of June 30, 2021) to reimburse certain tenants and sellers for completion of construction and tenant improvements at our properties, excluding the $18.5 million construction loan to a developer for construction of a regulated cannabis cultivation and processing facility in California.

As of September 30, 2021, we had 19 full-time employees.

As of September 30, 2021, we owned 75 properties that were 100% leased to state-licensed cannabis operators and comprising an aggregate of approximately 7.3 million rentable square feet (including approximately 2.7 million rentable square feet under development/redevelopment) in 19 states, with a weighted-average remaining lease term of approximately 16.7 years.

As of September 30, 2021, we had invested approximately $1.4 billion in the aggregate (excluding transaction costs) and had committed an additional approximately $417.5 million (including improvements and construction costs accrued but not yet funded as of September 30, 2021) to reimburse certain tenants and sellers for completion of construction and improvements at our properties, excluding an $18.5 million construction loan to a developer for construction of a regulated cannabis cultivation and processing facility in California.

Factors Impacting Our Operating Results

9 unchanged sentences

Positive or negative changes in regulatory, economic or other conditions, drought, and natural disasters in the markets where we acquire properties may affect our overall financial performance.

The current outbreak of the novel coronavirus, or COVID-19, or the future outbreak of any other highly infectious or contagious diseases, could materially and adversely impact or cause disruption to our tenants and their operations, and in turn our performance, financial condition, results of operations and cash flows.

The current outbreak of COVID-19, or the future outbreak of any other highly infectious or contagious diseases, could materially and adversely impact or cause disruption to our tenants and their operations, and in turn our performance, financial condition, results of operations and cash flows.

The extent to which COVID-19 impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the outbreak, the actions taken to contain the outbreak or mitigate its impact, and the direct and indirect economic effects of the outbreak and containment measures, among others.

9 unchanged sentences

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

As of June 30, 2021, we have not executed deferrals for any other tenants, other than the deferrals for the three tenants discussed above.

As of September 30, 2021, we have not executed deferrals for any other tenants, other than the deferrals for the three tenants discussed above.

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.

Significant Tenants and Concentrations of Risk

As of June 30, 2021, we owned 72 properties located in 18 states.

As of September 30, 2021, we owned 75 properties located in 19 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 June 30, 2021, none of our properties accounted for 5% or more 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 revenues for the three and six months ended June 30, 2021.

At September 30, 2021, none of our properties accounted for 5% or more of our net real estate held for investment.

Competitive Environment

14 unchanged sentences

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 six months ended June 30, 2021.

Comparison of the Three and Six Months Ended June 30, 2021 and 2020

Comparison of the Three and Nine Months Ended September 30, 2021 and 2020

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

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Rental (including tenant reimbursements)

9 unchanged sentences

Net income attributable to common stockholders

Rental revenues for the three months ended June 30, 2021 increased by approximately $24.6 million, or 101%, to approximately $48.9 million, compared to approximately $24.3 million for the three months ended June 30, 2020.

Approximately $1.8 million of the increase in rental revenues was generated by the properties acquired during the three months ended June 30, 2021.

The remaining approximately $22.8 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.

Total revenues for the three months ended June 30, 2020 included the drawdown of part of the security deposits totaling approximately $743,000 at certain properties occupied by three tenants as part of the temporary rent deferral programs put in place last year at the onset of the COVID-19 pandemic.

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 through December 2021.

Rental revenues for the three months ended June 30, 2021 also included $625,000 in stipulated rent paid by the receivership in place previously at the Company’s Los Angeles, California property related to rent owed to the

Company by the receivership in 2020.

The receivership concluded and the Company re-leased the property in January 2021 to a subsidiary of Holistic Industries Inc.

Rental revenues for the six months ended June 30, 2021 increased by approximately $46.3 million, or 102%, to approximately $91.8 million, compared to approximately $45.5 million for the six months ended June 30, 2020.

Approximately $4.8 million of the increase in rental revenue was generated by the properties acquired during the six months ended June 30, 2021.

The remaining approximately $41.5 million increase in rental revenue was generated by properties acquired in prior periods, including annual escalations and related rents on amendments which increased the tenant improvements allowances on certain of our leases.

Total revenues for the six months ended June 30, 2020 also included approximately $422,000 of tenant reimbursements, rent collected and associated lease penalties through the drawdown of the security deposit at the Company’s Los Angeles, California property, where the tenant was in receivership and defaulted on its lease obligations, and the drawdown of part of the security deposits totaling approximately $940,000 at certain properties as part of the temporary rent deferral programs with the three tenants described above.

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

Rental revenues for the three months ended September 30, 2021 increased by approximately $19.6 million, or 57%, to approximately $53.9 million, compared to approximately $34.3 million for the three months ended September 30, 2020.

Approximately $639,000 of the increase in rental revenues was generated by the properties acquired during the three months ended September 30, 2021.

The remaining approximately $19.0 million increase in rental revenues was generated by properties we acquired in prior periods, including contractual rent escalations and amendments to leases for additional improvement allowances and construction funding at existing properties that resulted in adjustments to rent.

Rental revenues for the three months ended September 30, 2021 and 2020 included approximately $1.4 million and $2.8 million, respectively, of tenant reimbursements for property insurance premiums and property taxes.

Rental revenues for the nine months ended September 30, 2021 increased by approximately $65.8 million, or 82%, to approximately $145.6 million, compared to approximately $79.8 million for the nine months ended September 30, 2020.

Approximately $11.9 million of the increase in rental revenue was generated by the properties acquired during the nine months ended September 30, 2021.

The remaining approximately $53.9 million increase in rental revenue was generated by properties acquired in prior periods, including contractual rent escalations and amendments to leases for additional improvements allowances and construction funding at existing properties that resulted in adjustments to rent.

Rental revenues for the nine months ended September

30, 2021 and 2020 included approximately $2.6 million and $3.7 million, respectively, of tenant reimbursements for property insurance premiums and property taxes.

Rental revenues for the nine months ended September 30, 2021 also included $625,000 in stipulated rent paid by the receivership in place previously at our Los Angeles, California property related to rent owed to us by the receivership in 2020.

The receivership concluded and we re-leased the property in January 2021 to a subsidiary of Holistic.

Total revenues for the nine months ended September 30, 2020 included the drawdown of part of the security deposits totaling approximately $940,000 at certain properties as part of temporary rent deferral programs offered to three tenants in April 2020 at the onset of the COVID-19 pandemic, that were applied to the payment of base rent, property management fees and associated lease penalties.

In addition to the drawdown of part of the security deposits, approximately $1.5 million in base rent and management fees due from these three tenants for May and June 2020 were deferred.

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

Total revenues for the nine months ended September 30, 2020 also included approximately $422,000 of tenant reimbursements, rent collected and associated lease penalties through the drawdown of the security deposit at our Los Angeles, California property, where the prior tenant was in receivership and defaulted on its lease obligations.

Property Expenses.

1 unchanged sentence

General and Administrative Expense .

General and administrative expense for the three months ended June 30, 2021 increased by approximately $2.6 million to approximately $5.6 million, compared to approximately $3.0 million for the three months ended June 30, 2020.

General and administrative expense for the six months ended June 30, 2021 increased by approximately $4.8 million to approximately $11.2 million.

General and administrative expense for the three months ended September 30, 2021 increased by approximately $2.0 million to approximately $5.3 million, compared to approximately $3.3 million for the three months ended September 30, 2020.

General and administrative expense for the nine months ended September 30, 2021 increased by approximately $6.8 million to approximately $16.5 million, compared to approximately $9.7 million for the nine months ended September 30, 2020.

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 six months ended June 30, 2021 included approximately $2.1 million and $4.2 million, respectively, of non-cash stock-based compensation.

Compensation expense for the three and six months ended June 30, 2020 included approximately $822,000 and $1.6 million, respectively, of non-cash stock-based compensation.

Compensation expense for the three and nine months ended September 30, 2021 included approximately $2.2 million and $6.4 million, respectively, of non-cash stock-based compensation.

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.

Depreciation Expense.

The increase in depreciation expense was related to depreciation on properties that we acquired and the placement into service of construction and tenant improvements at certain of our properties.

The increase in depreciation expense was related to depreciation on properties that we acquired and the placement into service of construction and improvements at certain of our properties.

Interest and Other Income.

Interest and other income for the three months ended June 30, 2021 decreased by approximately $898,000 compared to the three months ended June 30, 2020.

Interest and other income for the three months ended September 30, 2021 decreased by approximately $543,000 compared to the three months ended September 30, 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 issuance of the Unsecured Senior Notes.

Interest and other income for the six months ended June 30, 2021 decreased by approximately $2.2 million compared to the six months ended June 30, 2020.

Interest and other income for the nine months ended September 30, 2021 decreased by approximately $2.8 million compared to the nine months ended September 30, 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 and issuance of the Unsecured Senior Notes.

Interest Expense.

Interest expense consists of interest on our Exchangeable Senior Notes issued in February 2019 and our Unsecured Senior Notes issued on May 25, 2021.

Interest expense for the three months ended June 30, 2021 and 2020 included approximately $649,000 and $507,000, respectively, of non-cash interest expense;

and interest expense for the six months ended June 30, 2021 and 2020 included approximately $1.2 million and $1.0 million, respectively, of non-cash interest expense.

Comparison of the Six Months Ended June 30, 2021 and 2020

Interest expense consists of interest on our Exchangeable Senior Notes issued in February 2019 and our Unsecured Senior Notes issued in May 2021.

Interest expense for the three months ended September 30, 2021 and 2020 included approximately $836,000 and $513,000, respectively, of non-cash interest expense;

and interest expense for the nine months ended September 30, 2021 and 2020 included approximately $2.0 million and $1.5 million, respectively, of non-cash interest expense.

Comparison of the Nine Months Ended September 30, 2021 and 2020

September 30,

Net cash provided by operating activities

1 unchanged sentence

Net cash provided by financing activities

Ending cash, cash equivalents and restricted cash

Ending cash and cash equivalents

Operating Activities

Cash flows provided by operating activities for the six months ended June 30, 2021 and 2020 were approximately $89.4 million and $43.1 million, respectively.

Cash flows provided by operating activities for the nine months ended September 30, 2021 and 2020 were approximately $141.0 million and $76.6 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 six months ended June 30, 2021 were approximately $287.2 million, of which approximately $257.3 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.

The remaining approximately $29.9 million related to net purchases and maturities of short-term investments.

Cash flows used in investing activities for the six months ended June 30, 2020 were approximately $501.0 million, of which approximately $298.9 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 $400,000 related to deposits to escrow for acquisitions, and the remaining approximately $201.8 million related to the net purchases and maturities of short-term investments.

Cash flows used in investing activities for the nine months ended September 30, 2021 were approximately $333.5 million, of which approximately $398.6 million related to investments in real estate and funding of a portion of the improvement allowances, construction funding at our properties and other investments, partially offset by approximately $65.1 million related to net purchases and maturities of short-term investments.

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

Financing Activities

Net cash provided by financing activities of approximately $228.1 million during the six months ended June 30, 2021 was the result of approximately $293.5 million in net proceeds from the issuance of our Unsecured Senior Notes, partially offset by dividend payments of approximately $62.0 million to common and preferred stockholders and approximately $3.4 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 $402.3 million during the six months ended June 30, 2020 was the result of approximately $434.8 million in net proceeds from the follow-on issuance of shares of our common stock, partially offset by dividend payments of approximately $30.3 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 $193.8 million during the nine months ended September 30, 2021 was the result of approximately $293.2 million in net proceeds from the issuance of our Unsecured Senior Notes, partially offset by dividend payments of approximately $96.0 million to common and preferred stockholders and approximately $3.4 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 $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 issuance 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.

Liquidity and Capital Resources

11 unchanged sentences

The terms of the Unsecured Senior Notes are governed by an indenture, which requires compliance with various financial covenants including limits on the amount of total leverage and secured debt maintained by the Operating Partnership and which require the Operating Partnership to maintain minimum levels of debt service coverage.

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

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

Subject to the terms of the indenture, any new subsidiary of the Operating Partnership will also guarantee the Unsecured Senior Notes.

1 unchanged sentence

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 June 30, 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 six months ended June 30, 2021.

As of September 30, 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 nine months ended September 30, 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.

6 unchanged sentences

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 Unsecured Senior Notes, and make accretive new investments.

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:

Security Class

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

Contractual Obligations

The following table summarizes our contractual obligations as of June 30, 2021 (in thousands):

2021 (six months ending December 31)

Additionally, as of June 30, 2021, we had approximately $287.2 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 June 30, 2021, we also had $12.5 million outstanding in commitments to fund a construction loan, which the developer is required to complete by June 2022, subject to extension in certain circumstances.

As of June 30, 2021, these amounts had not been requested.

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 construction loan funding generally may be requested by the borrower from time to time, subject to satisfaction of certain conditions.

The following table summarizes our contractual obligations as of September 30, 2021 (in thousands):

2021 (three months ending December 31)

Additionally, as of September 30, 2021, we had approximately $355.9 million outstanding in 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.

As of September 30, 2021, we also had $9.6 million outstanding in commitments to fund a construction loan, which the developer is required to complete by June 2022, subject to extension in certain circumstances.

As of September 30, 2021, these amounts had not been requested.

The commitments discussed in this paragraph are excluded from the table of contractual obligations above, as 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 construction loan funding generally may be requested by the borrower from time to time, subject to satisfaction of certain conditions.

Non-GAAP Financial Information

13 unchanged sentences

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 generally.

For the three and six months ended June 30, 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.

For the three and nine months ended September 30, 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 2,193,492 shares for both periods, which were the potentially issuable shares as if the Exchangeable Senior Notes were exchanged at the beginning of the respective periods.

These adjustments applied only for the three and six months ended June 30, 2021.

The Exchangeable Senior Notes were anti-dilutive for purposes of calculating earnings per diluted share for the three and six months ended June 30, 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 and six months ended June 30, 2020.

These adjustments applied only for the three and nine months ended September 30, 2021.

The Exchangeable Senior Notes were anti-dilutive for purposes of calculating earnings per diluted share for the three and nine months ended September 30, 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 and nine months ended September 30, 2020.

For the three and nine months ended September 30, 2021, 78,582 shares issuable upon vesting PSUs granted to certain employees in January 2021 were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of September 30, 2021.

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.

2 unchanged sentences

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 six months ended June 30, 2021 and 2020 (in thousands, except share and per share amounts):

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, 2021 and 2020 (in thousands, except share and per share amounts):

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Net income attributable to common stockholders

11 unchanged sentences

Weighted average common shares outstanding – basic

Restricted stock and RSUs

Restricted stock, RSUs and PSUs

Dilutive effect of Exchangeable Senior Notes

1 unchanged sentence

Critical Accounting Policies

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.

Our condensed 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 condensed 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.

5 unchanged sentences

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, not to exceed 40 years.

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.

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

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.

3 unchanged sentences

Impairment indicators or triggering events for long-lived assets to be held and used are assessed by project and include significant fluctuations in estimated net operating income, occupancy changes, significant near-term lease expirations, current and historical operating and/or cash flow losses, construction costs, estimated completion dates, rental rates, and other market factors.

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.

6 unchanged sentences

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.

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.

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.

10 unchanged sentences

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.

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 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.

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.

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 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.

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.

10 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 temporary base rent and property management fee deferrals through June 30, 2020.

6 unchanged sentences

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

(b) the value determined by dividing the then-current base rent by 8%;

(b) the value determined by dividing the then-

current base rent by 8%;

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.

Stock-Based Compensation

6 unchanged sentences

federal income tax purposes.

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

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

federal income tax purposes.

11 unchanged sentences

Interest Rate Risk

As of June 30, 2021, we had $300.0 million of Unsecured Senior Notes and approximately $143.75 million of Exchangeable Senior Notes outstanding at fixed interest rates, and therefore, if interest rates decline, our required payments may exceed those based on current market rates.

As of September 30, 2021, we had $300.0 million of Unsecured Senior Notes and approximately $143.75 million of Exchangeable Senior Notes outstanding at fixed interest rates, 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.

6 unchanged sentences

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 2. Management’s Discussion and Analysis