INNOVATIVE INDUSTRIAL PROPERTIES INC 10-Q

ITEM 1. FINANCIAL STATEMENTS Innovative Industrial Properties, Inc. Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except share and per share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, Assets ​ 2021 ​ 2020 Real estate, at cost: ​ ​ ​ ​ ​ ​ Land ​ $ 98,930 ​ $ 75,660 Buildings and improvements ​ 816,099 ​ 644,932 Tenant improvements ​ 551,038 ​ 339,647 Construction in progress ​ 4,581 ​ — Total real estate, at cost ​ 1,470,648 ​ 1,060,239 Less accumulated depreciation ​ ( 69,766 ) ​ ( 40,195 ) Net real estate held for investment ​ 1,400,882 ​ 1,020,044 Construction loan ​ ​ 8,925 ​ ​ — Cash and cash equivalents ​ 127,298 ​ 126,006 Investments ​ 554,420 ​ 619,275 Right of use office lease asset ​ ​ 811 ​ ​ 980 Other assets, net ​ 9,749 ​ 1,776 Total assets ​ $ 2,102,085 ​ $ 1,768,081 Liabilities and stockholders’ equity ​ ​ ​ ​ ​ ​ Exchangeable senior notes, net ​ $ 138,287 ​ $ 136,693 Unsecured senior notes, net ​ ​ 293,593 ​ ​ — Tenant improvements and construction funding payable ​ ​ 61,674 ​ ​ 36,500 Accounts payable and accrued expenses ​ 8,449 ​ 4,641 Dividends payable ​ 36,321 ​ 30,065 Other liabilities ​ 1,408 ​ 1,057 Rent received in advance and tenant security deposits ​ 51,222 ​ 34,153 Total liabilities ​ 590,954 ​ 243,109 Commitments and contingencies (Notes 6 and 11) ​ ​ Stockholders’ equity: ​ ​ 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 September 30, 2021 and December 31, 2020 ​ 14,009 ​ 14,009 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 September 30, 2021 and December 31, 2020, respectively ​ 24 ​ 24 Additional paid-in capital ​ 1,562,099 ​ 1,559,059 Dividends in excess of earnings ​ ( 65,001 ) ​ ( 48,120 ) Total stockholders’ equity ​ 1,511,131 ​ 1,524,972 Total liabilities and stockholders’ equity ​ $ 2,102,085 ​ $ 1,768,081 ​ See the accompanying notes to the condensed consolidated financial statements. ​ ​ 3 Table of Contents Innovative Industrial Properties, Inc. Condensed Consolidated Statements of Income (Unaudited) (In thousands, except share and per share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended For the Nine Months Ended ​ ​ September 30, ​ September 30, ​ ​ 2021 2020 2021 2020 Revenues: ​ ​ ​ ​ ​ ​ ​ ​ Rental (including tenant reimbursements) ​ $ 53,856 ​ $ 34,327 ​ $ 145,608 ​ $ 79,803 ​ Total revenues ​ 53,856 ​ 34,327 ​ 145,608 ​ 79,803 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Property expenses ​ 1,365 ​ 2,919 ​ 2,617 ​ 3,933 ​ General and administrative expense ​ 5,307 ​ 3,339 ​ 16,511 ​ 9,695 ​ Depreciation expense ​ 10,891 ​ 7,646 ​ 29,571 ​ 19,299 ​ Total expenses ​ 17,563 ​ 13,904 ​ 48,699 ​ 32,927 ​ Income from operations ​ 36,293 ​ 20,423 ​ 96,909 ​ 46,876 ​ Interest and other income ​ 110 ​ 653 ​ 325 ​ 3,086 ​ Interest expense ​ ( 6,309 ) ​ ( 1,861 ) ​ ( 11,874 ) ​ ( 5,565 ) ​ Net income ​ 30,094 ​ 19,215 ​ 85,360 ​ 44,397 ​ Preferred stock dividends ​ ( 338 ) ​ ( 338 ) ​ ( 1,014 ) ​ ( 1,014 ) ​ Net income attributable to common stockholders ​ $ 29,756 ​ $ 18,877 ​ $ 84,346 ​ $ 43,383 ​ Net income attributable to common stockholders per share (Note 8): ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 1.24 ​ $ 0.87 ​ $ 3.51 ​ $ 2.35 ​ Diluted ​ $ 1.20 ​ $ 0.86 ​ $ 3.41 ​ $ 2.33 ​ Weighted-average shares outstanding: ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ 23,890,537 ​ 21,594,637 ​ 23,889,903 ​ 18,315,231 ​ Diluted ​ 26,260,704 ​ 21,708,725 ​ 26,257,504 ​ 18,429,228 ​ ​ See accompanying notes to the condensed consolidated financial statements. ​ ​ 4 Table of Contents Innovative Industrial Properties, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands, except share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, 2021 ​ ​ Three Months Ended September 30, 2020 ​ ​ Series A ​ Shares of ​ ​ ​ ​ Additional ​ Dividends in ​ Total ​ ​ Series A ​ Shares of ​ ​ ​ ​ Additional ​ Dividends in ​ Total ​ ​ Preferred ​ Common ​ Common ​ Paid-In- ​ Excess of ​ Stockholders’ ​ ​ Preferred ​ Common ​ Common ​ Paid-In ​ Excess of ​ Stockholders’ ​ Stock Stock Stock Capital Earnings Equity ​ Stock Stock Stock Capital Earnings Equity Balances at beginning of period ​ $ 14,009 ​ 23,928,304 ​ $ 24 ​ $ 1,559,908 ​ $ ( 58,774 ) ​ $ 1,515,167 ​ ​ $ 14,009 ​ 18,614,561 ​ $ 19 ​ $ 988,220 ​ $ ( 32,277 ) ​ $ 969,971 Net income ​ ​ — — ​ — ​ — ​ 30,094 ​ 30,094 ​ ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ 19,215 ​ ​ 19,215 Net proceeds from sale of common stock ​ ​ — — ​ — ​ — ​ — ​ — ​ ​ ​ — ​ 3,559,867 ​ ​ 3 ​ ​ 306,291 ​ ​ — ​ ​ 306,294 Preferred stock dividend ​ ​ — — ​ — ​ — ​ ( 338 ) ​ ( 338 ) ​ ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 338 ) ​ ​ ( 338 ) Common stock dividend ​ ​ — — ​ — ​ — ​ ( 35,983 ) ​ ( 35,983 ) ​ ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 25,987 ) ​ ​ ( 25,987 ) Stock-based compensation ​ ​ — — ​ — ​ 2,191 ​ — ​ 2,191 ​ ​ ​ — ​ — ​ ​ — ​ ​ 841 ​ ​ — ​ ​ 841 Balances at end of period ​ $ 14,009 23,928,304 ​ $ 24 ​ $ 1,562,099 ​ $ ( 65,001 ) ​ $ 1,511,131 ​ ​ $ 14,009 ​ 22,174,428 ​ $ 22 ​ $ 1,295,352 ​ $ ( 39,387 ) ​ $ 1,269,996 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, 2021 ​ ​ Nine Months Ended September 30, 2020 ​ ​ Series A ​ Shares of ​ ​ ​ ​ Additional ​ Dividends in ​ Total ​ ​ Series A ​ Shares of ​ ​ ​ ​ Additional ​ Dividends in ​ Total ​ ​ Preferred ​ Common ​ Common ​ Paid-In ​ Excess of ​ Stockholders’ ​ ​ Preferred ​ Common ​ Common ​ Paid-In ​ Excess of ​ Stockholders’ ​ Stock Stock Stock Capital Earnings Equity ​ Stock Stock Stock Capital Earnings Equity Balances at beginning of period ​ $ 14,009 ​ 23,936,928 ​ $ 24 ​ $ 1,559,059 ​ $ ( 48,120 ) ​ $ 1,524,972 ​ ​ $ 14,009 ​ 12,637,043 ​ $ 13 ​ $ 553,932 ​ $ ( 19,944 ) ​ $ 548,010 Net income ​ ​ — — ​ ​ — ​ — ​ 85,360 ​ 85,360 ​ ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ 44,397 ​ ​ 44,397 Exchange of exchangeable senior notes ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ​ — ​ 14 ​ ​ — ​ ​ 1 ​ ​ — ​ ​ 1 Net proceeds from sale of common stock ​ ​ — — ​ ​ — ​ — ​ — ​ — ​ ​ ​ — ​ 9,548,866 ​ ​ 9 ​ ​ 741,097 ​ ​ — ​ ​ 741,106 Issuance of unvested restricted stock, net of forfeitures ​ ​ — ( 8,624 ) ​ ​ — ​ ( 3,384 ) ​ — ​ ( 3,384 ) ​ ​ ​ — ​ ( 11,495 ) ​ ​ — ​ ​ ( 2,166 ) ​ ​ — ​ ​ ( 2,166 ) Preferred stock dividend ​ ​ — — ​ ​ — ​ — ​ ( 1,014 ) ​ ( 1,014 ) ​ ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 1,014 ) ​ ​ ( 1,014 ) Common stock dividend ​ ​ — — ​ ​ — ​ — ​ ( 101,227 ) ​ ( 101,227 ) ​ ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 62,826 ) ​ ​ ( 62,826 ) Stock-based compensation ​ ​ — — ​ ​ — ​ 6,424 ​ — ​ 6,424 ​ ​ ​ — ​ — ​ ​ — ​ ​ 2,488 ​ ​ — ​ ​ 2,488 Balances at end of period ​ $ 14,009 23,928,304 ​ $ 24 ​ $ 1,562,099 ​ $ ( 65,001 ) ​ $ 1,511,131 ​ ​ $ 14,009 ​ 22,174,428 ​ $ 22 ​ $ 1,295,352 ​ $ ( 39,387 ) ​ $ 1,269,996 ​ See accompanying notes to the condensed consolidated financial statements. ​ ​ 5 Table of Contents Innovative Industrial Properties, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months Ended ​ ​ ​ September 30, ​ ​ 2021 2020 Cash flows from operating activities ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 85,360 ​ $ 44,397 ​ Adjustments to reconcile net income to net cash provided by operating activities ​ ​ ​ ​ ​ ​ ​ Depreciation ​ 29,571 ​ 19,299 ​ Other non-cash adjustments ​ ​ 97 ​ ​ 139 ​ Stock-based compensation ​ 6,424 ​ 2,488 ​ Amortization of discounts on short-term investments ​ ( 283 ) ​ ( 2,499 ) ​ Amortization of debt discount and issuance costs ​ 2,011 ​ 1,521 ​ Changes in assets and liabilities ​ ​ ​ ​ ​ ​ ​ Other assets, net ​ ( 3,598 ) ​ ( 364 ) ​ Accounts payable, accrued expenses and other liabilities ​ 4,308 ​ ( 2,095 ) ​ Rent received in advance and tenant security deposits ​ 17,069 ​ 13,692 ​ Net cash provided by operating activities ​ 140,959 ​ 76,578 ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities ​ ​ ​ ​ ​ ​ ​ Purchases of investments in real estate ​ ( 130,853 ) ​ ( 182,086 ) ​ Reimbursements of tenant improvements and construction funding ​ ( 254,182 ) ​ ( 210,114 ) ​ Funding of construction loan and other investments ​ ​ ( 12,077 ) ​ ​ — ​ Deposits in escrow for acquisitions ​ ( 1,500 ) ​ — ​ Purchases of short-term investments ​ ( 499,862 ) ​ ( 668,576 ) ​ Maturities of short-term investments ​ 565,000 ​ 339,492 ​ Net cash used in investing activities ​ ( 333,474 ) ​ ( 721,284 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flows from financing activities ​ ​ ​ ​ ​ ​ ​ Issuance of common stock, net of offering costs ​ — ​ 741,120 ​ Gross proceeds from issuance of unsecured senior notes ​ 300,000 ​ — ​ Payment of deferred financing costs from issuance of unsecured senior notes ​ ​ ( 6,824 ) ​ ​ — ​ Dividends paid to common stockholders ​ ( 94,971 ) ​ ( 49,476 ) ​ Dividends paid to preferred stockholders ​ ( 1,014 ) ​ ( 1,014 ) ​ Taxes paid related to net share settlement of equity awards ​ ( 3,384 ) ​ ( 2,166 ) ​ Net cash provided by financing activities ​ 193,807 ​ 688,464 ​ Net increase in cash and cash equivalents ​ 1,292 ​ 43,758 ​ Cash and cash equivalents, beginning of period ​ 126,006 ​ 117,316 ​ Cash and cash equivalents, end of period ​ $ 127,298 ​ $ 161,074 ​ ​ ​ ​ ​ ​ ​ ​ ​ Supplemental disclosure of cash flow information: ​ ​ ​ ​ ​ ​ ​ Cash paid during the period for interest ​ $ 5,391 ​ $ 5,391 ​ Supplemental disclosure of non-cash investing and financing activities: ​ ​ ​ ​ ​ ​ ​ Accrual for reimbursements of tenant improvements and construction funding ​ $ 61,674 ​ $ 30,583 ​ Deposits applied for acquisitions ​ ​ 200 ​ ​ 650 ​ Accrual for common and preferred stock dividends declared ​ 36,321 ​ 26,325 ​ Accrual for stock issuance costs ​ ​ — ​ ​ 14 ​ Exchange of exchangeable senior notes ​ ​ — ​ ​ 1 ​ ​ See accompanying notes to the condensed consolidated financial statements. ​ 6 Table of Contents Innovative Industrial Properties, Inc. Notes to the Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 1. Organization 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”). We are an internally-managed real estate investment trust (“REIT”) focused on the acquisition, ownership and management of specialized properties leased to experienced, state-licensed operators for their regulated state-licensed cannabis facilities. We have acquired and intend to continue to acquire our properties through sale-leaseback transactions and third-party purchases. We have leased and expect to continue to lease our properties on a triple-net lease basis, where the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term, including structural repairs, maintenance, taxes and insurance. We were incorporated in Maryland on June 15, 2016. We conduct our business through a traditional umbrella partnership real estate investment trust, or UPREIT structure, in which our properties are owned by our Operating Partnership, directly or through subsidiaries. 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. ​ ​ 2. Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements Basis of Presentation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. This interim financial information should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. 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 September 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. Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2021. Federal Income Taxes. We believe that we have operated our business so as to qualify to be taxed as a REIT for U.S. federal income tax purposes. Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income. Assuming our dividends equal or exceed our taxable net income, we generally will not be required to pay federal corporate income taxes on such income. The income taxes recorded on our condensed consolidated statements of income represent amounts paid for city and state income and franchise taxes and are included in general and administrative expenses in the accompanying condensed consolidated statements of income. Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates and assumptions. 7 Table of Contents Reportable Segment. We are engaged in the business of providing real estate for the regulated cannabis industry. Our properties are similar in that they are leased to the state-licensed operators on a long-term triple-net basis, consist of improvements that are reusable and have similar economic characteristics. Our chief operating decision maker reviews financial information for our entire consolidated operations when making decisions related to assessing our operating performance. We have aggregated the properties into one reportable segment as the properties share similar long-term economic characteristics and have other similarities, including the fact that they are operated using consistent business strategies. The financial information disclosed herein represents all of the financial information related to our one reportable segment. Acquisition of Real Estate Properties. Our investment in real estate is recorded at historical cost, less accumulated depreciation. 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. Acquisition costs are capitalized as incurred. All of our acquisitions to date were recorded as asset acquisitions. 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; and ● the expenditure extends the useful life of the asset beyond our original estimates Provision for Impairment. On a quarterly basis, we review current activities and changes in the business conditions of all of our properties prior to and subsequent to the end of each quarter to determine the existence of any triggering events or impairment indicators requiring an impairment analysis. If triggering events or impairment indicators are identified, we review an estimate of the future undiscounted cash flows for the properties, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration. Long-lived assets are individually evaluated for impairment when conditions exist that may indicate that the carrying amount of a long-lived asset may not be recoverable. The carrying amount of a long-lived asset to be held and used is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. 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. 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 nine months ended September 30, 2021 and 2020. Revenue Recognition. Our leases are triple-net leases, an arrangement under which the tenant maintains the property while paying us rent. We account for our current leases as operating leases and record revenue for each of our properties on a cash basis due to the uncertain regulatory environment in the United States relating to the regulated cannabis industry and the uncertainty of collectability of lease payments from each tenant due to its limited operating history. Contractually obligated reimbursements from 8 Table of Contents 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. Construction Loan. In June 2021, we executed a construction loan agreement with a developer, pursuant to which we agreed to lend up to $ 18.5 million for the development of a regulated cannabis cultivation and processing facility in California. We have an option to purchase the property, and may execute a negotiated lease with an affiliate of the developer or with another third party, if we determine to exercise our purchase option. The developer is required to complete construction by June 2022, subject to extension in certain circumstances. Interest on the construction loan is payable at maturity, which is December 25, 2022. 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 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. Investments. Investments consist of obligations of the U.S. government and certificates of deposit with an original maturity at the time of purchase of greater than three months. Investments are classified as held-to-maturity and stated at amortized cost. Exchangeable Notes. The “Debt with Conversion and Other Options” Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification requires the liability and equity components of exchangeable debt instruments that may be settled in cash upon exchange, including partial cash settlement, to be separately accounted for in a manner that reflects the issuer’s nonexchangeable debt borrowing rate. The initial proceeds from the sale of our Exchangeable Senior Notes (as defined below) were allocated between a liability component and an equity component in a manner that reflects interest expense at the rate of similar nonexchangeable debt that could have been issued at such time. The equity component represents the excess initial proceeds received over the fair value of the liability component of the Exchangeable Senior Notes as of the date of issuance. We measured the estimated fair value of the debt component of our Exchangeable Senior Notes as of the date of issuance based on our estimated nonexchangeable debt borrowing rate with the assistance of a third-party valuation specialist as we do not have a history of borrowing arrangements and there is limited empirical data available related to the Company’s industry due to the regulatory uncertainty of the cannabis market in which the Company’s tenants operate. The equity component of our Exchangeable Senior Notes is reflected within additional paid-in capital on our condensed consolidated balance sheets, and the resulting debt discount is amortized over the period during which the Exchangeable Senior Notes are expected to be outstanding (through the maturity date) as additional non-cash interest expense. The additional non-cash interest expense attributable to our Exchangeable Senior Notes will increase in subsequent periods through the maturity date as the Exchangeable Senior Notes accrete to the par value over the same period. Deferred Financing Costs. The deferred financing costs that are included as a reduction in the net book value of the related liability on our condensed consolidated balance sheets reflect issuance and other costs related to our debt obligations. These costs are amortized as non-cash interest expense using the effective interest method over the life of the related obligations. Stock-Based Compensation. Stock-based compensation for equity awards is based on the grant date fair value of the equity awards and is recognized over the requisite service or performance period. If awards are forfeited prior to vesting, we reverse any previously recognized expense related to such awards in the period during which the forfeiture occurs and reclassify any non-forfeitable dividends and dividend equivalents previously paid on these awards from retained earnings to compensation expense. Forfeitures are recognized as incurred. Certain equity awards are subject to vesting based upon the satisfaction of various market conditions. Forfeiture of share awards with market-based restrictions does not result in a reversal of previously recognized share-based compensation expense. Lease Accounting. In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases; in July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Lease – Targeted Improvements; and in December 2018, the FASB issued ASU 2018-20, Narrow-Scope Improvements for Lessors. This group of ASUs is collectively referred to as Topic 842 and was effective for the Company 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 9 Table of Contents 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 3.5 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. The right-of-use asset is measured based on the corresponding lease liability. We did not incur any initial direct leasing costs and any other consideration exchanged with the landlord prior to the commencement of the lease. Subsequently, the right-of-use asset is amortized on a straight-line basis during the lease term. 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. For these transactions, we consider various inputs and assumptions including, but not necessarily limited to, lease terms, renewal options, discount rates, and other rights and provisions in the purchase and sale agreement, lease and other documentation to determine whether control has been transferred to the Company or remains with the lessee. A transaction involving a sale leaseback will be treated as a purchase of a real estate property if it is considered to transfer control of the underlying asset from the lessee. A lease will be classified as direct-financing if risks and rewards are conveyed without the transfer of control and will be classified as a sales-type lease if control of the underlying asset is transferred to the lessee. Otherwise, the lease is treated as an operating lease. These criteria also include estimates and assumptions regarding the fair value of the leased facilities, minimum lease payments, the economic useful life of the facilities, the existence of a purchase option, and certain other terms in the lease agreements. The lease accounting guidance requires accounting for a transaction as a financing in a sale leaseback when the seller-lessee is provided an option to purchase the property from the landlord at the tenant’s option. 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 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. 10 Table of Contents 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. The FASB has issued additional guidance for companies to account for any coronavirus related rent concessions in the form of FASB staff and board members’ remarks at the April 8, 2020 public meeting and the FASB staff question-and-answer document issued on April 10, 2020. We have elected the practical expedient which allows us to not have to evaluate whether concessions provided in response to coronavirus pandemic are lease modifications. This relief is subject to certain conditions being met, including ensuring the total remaining lease payments are substantially the same or less as compared to the original lease payments prior to the concession being granted. 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. If both conditions are present, the lease amendment is accounted for as a new lease that is separate from the original lease. One of our leases that was entered into prior to 2019 provides the lessee with a purchase option to purchase the leased property at the end of the initial lease term in September 2034, subject to the satisfaction of certain conditions. The purchase option provision allows the lessee to purchase the leased property at the greatest of (a) the fair value; (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 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. Certain of our leases provide the lessee with a right of first refusal or right of first offer in the event we market the leased property for sale. Recent Accounting Pronouncements. In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models. 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 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 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. 11 Table of Contents 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 ​ ​ ​ September 30, 2021 ​ ​ ​ ​ ​ Percentage of ​ ​ Number of Rental ​ Leases Revenue SH Parent, Inc. ("Parallel") 4 ​ 12 % PharmaCann Inc. ​ 5 ​ 12 % Kings Garden Inc. 6 ​ 8 % Ascend Wellness Holdings, Inc. ​ 3 ​ 8 % Green Thumb Industries, Inc. 3 ​ 7 % ​ 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 ​ ​ Number of Rental ​ Leases Revenue ​ PharmaCann Inc. 5 ​ 13 % Parallel ​ 4 ​ 10 % Ascend Wellness Holdings, Inc. 3 ​ 9 % Cresco Labs Inc. ​ 5 ​ 8 % Kings Garden Inc. 6 ​ 7 % ​ 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 Nine Months Ended ​ ​ September 30, 2020 ​ September 30, 2020 ​ ​ Percentage of ​ Percentage of ​ Number of Rental Number of Rental ​ ​ Leases Revenue Leases Revenue ​ PharmaCann Inc. 5 16 % 5 19 % Cresco Labs Inc. 5 12 % 5 10 % Ascend Wellness Holdings, Inc. ​ 3 ​ 10 % 3 ​ 10 % Holistic Industries, Inc. ​ 4 ​ 6 % 4 ​ 6 % Curaleaf Holdings, Inc. 4 6 % 4 6 % ​ 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 September 30, 2021, we had cash accounts in excess of FDIC insured limits. We have not experienced any losses in such accounts. ​ 3. Common Stock 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. ​ 12 Table of Contents 4. 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). On or after October 19, 2022, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $ 25.00 per share, plus all accrued and unpaid dividends on such Series A Preferred Stock up to, but excluding the redemption date. 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. ​ 5. Dividends The following table describes the dividends declared by the Company during the nine months ended September 30, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amount ​ Dividend Dividend Declaration Date ​ Security Class ​ Per Share ​ Period Covered ​ Paid Date ​ Amount ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) March 15, 2021 ​ Common stock ​ $ 1.32 ​ January 1, 2021 to March 31, 2021 ​ April 15, 2021 ​ $ 31,660 March 15, 2021 ​ Series A preferred stock ​ $ 0.5625 ​ January 15, 2021 to April 14, 2021 ​ April 15, 2021 ​ $ 338 June 15, 2021 ​ Common stock ​ $ 1.40 ​ April 1, 2021 to June 30, 2021 ​ July 15, 2021 ​ $ 33,584 June 15, 2021 ​ Series A preferred stock ​ $ 0.5625 ​ April 15, 2021 to July 14, 2021 ​ July 15, 2021 ​ $ 338 September 15, 2021 ​ Common stock ​ $ 1.50 ​ July 1, 2021 to September 30, 2021 ​ October 15, 2021 ​ $ 35,983 September 15, 2021 ​ Series A preferred stock ​ $ 0.5625 ​ July 15, 2021 to October 14, 2021 ​ October 15, 2021 ​ $ 338 ​ ​ 6. Investments in Real Estate Acquisitions The Company acquired the following properties during the nine months ended September 30, 2021 (dollars in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Rentable ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Square ​ Purchase ​ Transaction ​ ​ ​ ​ Property Market Closing Date Feet (1) Price Costs Total ​ Harvest FL Florida ​ ​ January 22, 2021 ​ 295,000 ​ $ 23,800 ​ $ 16 ​ $ 23,816 (2) Kings Garden CA California ​ ​ February 5, 2021 ​ 180,000 ​ 1,350 ​ 7 ​ 1,357 (3) Parallel TX Texas ​ ​ March 10, 2021 ​ 63,000 ​ 3,400 ​ 17 ​ 3,417 (4) GPI MI Davis Hwy ​ Michigan ​ ​ April 16, 2021 ​ ​ 175,000 ​ ​ 15,550 ​ ​ 4 ​ ​ 15,554 (5) Parallel PA ​ Pennsylvania ​ ​ May 13, 2021 ​ ​ 239,000 ​ ​ 41,750 ​ ​ 11 ​ ​ 41,761 (6) Sozo MI ​ Michigan ​ ​ May 14, 2021 ​ ​ 85,000 ​ ​ 10,250 ​ ​ 9 ​ ​ 10,259 (7) Temescal MA ​ Massachusetts ​ ​ May 26, 2021 ​ ​ 70,000 ​ ​ 3,100 ​ ​ 9 ​ ​ 3,109 (8) 4Front IL ​ Illinois ​ ​ August 3, 2021 ​ ​ 250,000 ​ ​ 3,348 ​ ​ 18 ​ ​ 3,366 (9) Harvest MD ​ Maryland ​ ​ August 13, 2021 ​ ​ 112,000 ​ ​ 16,615 ​ ​ 21 ​ ​ 16,636 (10) Calyx Peak MO ​ Missouri ​ ​ September 17, 2021 ​ ​ 83,000 ​ ​ 1,530 ​ ​ 11 ​ ​ 1,541 (11) Vireo NY ​ New York ​ ​ September 24, 2021 ​ ​ 324,000 ​ ​ 10,225 ​ ​ 12 ​ ​ 10,237 (12) Total ​ ​ ​ ​ ​ ​ 1,876,000 ​ $ 130,918 ​ $ 135 ​ $ 131,053 (13) ​ (1) Includes expected rentable square feet at completion of construction of certain properties. (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 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 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. 13 Table of Contents (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 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. (“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 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 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 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 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. 14 Table of Contents 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): ​ ​ ​ ​ ​ Year Contractual Minimum Rent 2021 (three months ending December 31) ​ $ 55,657 2022 ​ 241,192 2023 ​ 253,851 2024 ​ 261,359 2025 ​ 269,194 Thereafter ​ 4,143,675 Total ​ $ 5,224,928 ​ ​ 7. Debt 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 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. The Exchangeable Senior Notes will pay interest semiannually at a rate of 3.75 % per annum and will mature on February 21, 2024, unless earlier exchanged or repurchased in accordance with their terms. 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. 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 September 30, ​ For the Nine Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2021 2020 2021 2020 Cash coupon ​ $ 1,348 ​ $ 1,348 ​ $ 4,042 ​ $ 4,042 Amortization of debt discount ​ ​ 288 ​ ​ 275 ​ ​ 855 ​ ​ 816 Amortization of issuance cost ​ 249 ​ ​ 238 ​ 739 ​ ​ 707 Total interest expense ​ $ 1,885 ​ $ 1,861 ​ $ 5,636 ​ $ 5,565 ​ 15 Table of Contents The following table details the carrying value of our Exchangeable Senior Notes (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2021 December 31, 2020 Principal amount ​ $ 143,749 ​ $ 143,749 Unamortized discount ( 2,930 ) ​ ( 3,785 ) Unamortized issuance cost ( 2,532 ) ​ ( 3,271 ) Carrying value ​ $ 138,287 ​ $ 136,693 ​ 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 On May 25, 2021, our Operating Partnership issued $ 300.0 million aggregate principal amount of its 5.50 % Unsecured Senior Notes due 2026 (the “Unsecured Senior Notes”). The Unsecured Senior Notes are senior unsecured obligations of our Operating Partnership, are fully and unconditionally guaranteed by us and our Operating Partnership’s subsidiaries and rank equally in right of payment with all of the Operating Partnership’s existing and future senior unsecured indebtedness, including the Exchangeable Senior Notes. However, the Unsecured Senior Notes are effectively subordinated to any of the Company’s, the Operating Partnership’s and the Operating Partnership’s subsidiaries’ future secured indebtedness to the extent of the value of the assets securing such indebtedness. Interest at a rate of 5.50 % per year is payable on May 15 and November 15 of each year, beginning on November 15, 2021, until the stated maturity date of May 25, 2026. 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. 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 Months ​ For the Nine Months ​ Ended September 30, 2021 Ended September 30, 2021 Cash coupon ​ $ 4,125 ​ ​ 5,821 Amortization of issuance cost ​ 299 ​ ​ 417 Total interest expense ​ $ 4,424 ​ $ 6,238 ​ The following table details the carrying value of our Unsecured Senior Notes (in thousands): ​ ​ ​ ​ ​ September 30, 2021 Principal amount ​ $ 300,000 Unamortized issuance cost ( 6,407 ) Carrying value ​ $ 293,593 ​ The Operating Partnership may redeem some or all of the notes at its option at any time at the applicable redemption price. If the notes are redeemed prior to February 25, 2026, the redemption price will be equal to 100 % of the principal amount of the notes being redeemed, plus a make-whole premium and accrued and unpaid interest thereon to, but excluding, the applicable redemption date. If the notes are redeemed on or after February 25, 2026, the redemption price will be equal to 100 % of the principal amount of the notes being redeemed, plus accrued and unpaid interest thereon to, but excluding, the applicable redemption date. 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 September 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 16 Table of Contents 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. ​ 8. Net Income Per Share Grants of restricted stock of the Company and restricted stock units (“RSUs”) in share-based payment transactions are considered participating securities prior to vesting and, therefore, are considered in computing basic earnings per share under the two-class method. The two-class method is an earnings allocation method for calculating earnings per share when a company’s capital structure includes either two or more classes of common stock or common stock and participating securities. Earnings per basic share under the two-class method is calculated based on dividends declared on common shares and other participating securities (“distributed earnings”) and the rights of participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends accruing during the period. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage of each security to the total number of outstanding participating securities. Earnings per basic share represents the summation of the distributed and undistributed earnings per share class divided by the total number of shares. 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). 17 Table of Contents 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 Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2021 2020 2021 2020 Net income ​ $ 30,094 ​ $ 19,215 ​ $ 85,360 ​ $ 44,397 ​ Preferred stock dividends ​ ( 338 ) ​ ( 338 ) ​ ​ ( 1,014 ) ​ ​ ( 1,014 ) ​ Distribution to participating securities ​ ( 147 ) ​ ( 133 ) ​ ​ ( 410 ) ​ ​ ( 369 ) ​ Net income attributable to common stockholders used to compute net income per share - basic ​ ​ 29,609 ​ ​ 18,744 ​ ​ 83,936 ​ ​ 43,014 ​ Dilutive effect of Exchangeable Senior Notes ​ ​ 1,885 ​ ​ — ​ ​ 5,636 ​ ​ — ​ Net income attributable to common stockholders used to compute net income per share - diluted ​ $ 31,494 ​ $ 18,744 ​ $ 89,572 ​ $ 43,014 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average common shares outstanding: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ 23,890,537 ​ 21,594,637 ​ ​ 23,889,903 ​ ​ 18,315,231 ​ Restricted stock, RSUs and PSUs ​ ​ 176,675 ​ ​ 114,088 ​ ​ 174,109 ​ ​ 113,997 ​ Dilutive effect of Exchangeable Senior Notes ​ ​ 2,193,492 ​ ​ — ​ ​ 2,193,492 ​ ​ — ​ Diluted ​ 26,260,704 ​ 21,708,725 ​ ​ 26,257,504 ​ ​ 18,429,228 ​ Net income attributable to common stockholders per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 1.24 ​ $ 0.87 ​ $ 3.51 ​ $ 2.35 ​ Diluted ​ $ 1.20 ​ $ 0.86 ​ $ 3.41 ​ $ 2.33 ​ ​ ​ 9. Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2—Includes other inputs that are directly or indirectly observable in the marketplace. 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 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 ​ ​ ​ ​ ​ ​ Carrying Value Fair Value Carrying Value Fair Value Investments (1) ​ $ 554,420 ​ $ 554,410 ​ $ 619,275 ​ $ 619,270 Exchangeable Senior Notes (2) ​ $ 138,287 ​ $ 506,291 ​ $ 136,693 ​ $ 397,663 Unsecured Senior Notes (2) ​ $ 293,593 ​ $ 315,789 ​ $ — ​ $ — (1) Short-term investments consisting of obligations of the U.S. government with an original maturity at the time of purchase of greater than three months are classified as held-to-maturity and valued using Level 1 inputs. (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 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. Treasury and government securities. Short-term investments consisting of certificate of deposits and obligations of the U.S. government are stated at amortized cost, which approximates their relative fair values due to the short-term maturities and market rates of interest of these instruments. 18 Table of Contents The carrying amounts of financial instruments such as cash equivalents invested in certificates of deposit, obligations of the U.S. government with an original maturity at the time of purchase of less than or equal to three months, accounts payable, accrued expenses and other liabilities approximate their fair values due to the short-term maturities and market rates of interest of these instruments. 10. Common Stock Incentive Plan Our board of directors adopted our 2016 Omnibus Incentive Plan (the “2016 Plan”) to enable us to motivate, attract and retain the services of directors, employees and consultants considered essential to our long-term success. The 2016 Plan offers our directors, employees and consultants an opportunity to own our stock or rights that will reflect our growth, development and financial success. Under the terms of the 2016 Plan, the aggregate number of shares of our common stock subject to options, restricted stock, stock appreciation rights, restricted stock units and other awards, will be no more than 1,000,000 shares. Any equity awards that lapse, expire, terminate, are canceled or are forfeited (including forfeitures in connection with satisfaction of tax withholdings obligations of the recipient) are re-credited to the 2016 Plan’s reserve for future issuance. 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 nine months ended September 30, 2021 is included in the table below: ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ Unvested ​ Average ​ ​ Restricted ​ Grant Date Fair ​ ​ Stock ​ Value Balance at December 31, 2020 76,346 ​ $ 50.14 Granted 7,692 ​ $ 189.41 Vested ( 28,816 ) ​ $ 50.90 Forfeited (1) ( 18,303 ) ​ $ 31.99 Balance at March 31, 2021 36,919 ​ $ 87.57 Granted ​ 1,987 ​ $ 181.27 Vested ​ ( 1,139 ) ​ $ 87.82 Balance at June 30, 2021 and September 30, 2021 ​ 37,767 ​ $ 92.49 (1) Shares that were forfeited to cover the employees’ tax withholding obligation upon vesting . 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. Nonqualified Deferred Compensation Plan (the “Deferred Compensation Plan”), which allows a select group of management and our non-employee directors to defer receiving certain of their cash and equity-based compensation. RSUs are subject to vesting conditions of the Deferred Compensation Plan and have the same economic rights as shares of restricted stock under the 2016 Plan: ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-Average ​ ​ Restricted ​ Grant Date Fair ​ ​ Stock Units ​ Value Balance at December 31, 2020 ​ 36,687 ​ $ 76.06 Granted ​ 21,873 ​ $ 189.41 Balance at March 31, 2021 ​ 58,560 ​ $ 118.40 Granted ​ 1,766 ​ $ 181.27 Balance at June 30, 2021 and September 30, 2021 ​ 60,326 ​ $ 120.24 ​ 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 19 Table of Contents 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. At the end of the Performance Period, if the Company’s total stockholder return is such that the recipient earns Award Shares, the recipient will receive additional shares of common stock relating to dividends deemed to have been paid and reinvested on the Award Shares. The recipient of the Award Shares may not sell, transfer or otherwise dispose of the Award Shares for a one-year period following the vesting date of the Award Shares. The grant date fair value of the PSUs granted in January 2021 was $ 12.0 million. The fair value was calculated using a Monte Carlo simulation pricing model based on the following assumptions: ​ ​ ​ ​ ​ ​ PSU Award ​ Fair Value Assumptions Valuation date January 6, 2021 ​ Fair value per share on valuation date ​ $ 169.51 ​ Expected term ​ 3 years ​ Expected price volatility 57.64 % ​ Risk-free interest rate ​ 0.20 % ​ Discount for post vesting restriction 12.44 % ​ ​ The expected share price volatility was based on the historical volatility of our shares of common stock over a period of approximately the Performance Period. The risk-free interest rate was based on the zero-coupon risk-free interest rate derived from the Treasury Constant Maturities yield curve on the valuation date. The discount for the post vesting restriction was estimated using the Finnerty model. 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 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. 11. Commitments and Contingencies Office Lease . 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): ​ ​ ​ ​ ​ Year Amount 2021 (three months ending December 31) ​ $ 60 2022 ​ 242 2023 ​ 249 2024 ​ 256 2025 ​ 88 Total future contractual lease payments ​ 895 Effect of discounting ​ ( 12 ) Office lease liability ​ $ 883 ​ 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 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. Environmental Matters. We follow the policy of monitoring our properties, both targeted acquisition and existing properties, for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liabilities that would have a material adverse effect on our financial condition, results of operations and cash flow, or that we believe would require disclosure or the recording of a loss contingency. 20 Table of Contents Litigation . We may, from time to time, be a party to legal proceedings, which arise in the ordinary course of our business. We are not aware of any pending or threatened litigation that, if resolved against us, would have a material adverse effect on our consolidated financial position, results of operations or cash flows. 12. Subsequent Events Investments 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. ​ ​ ​ 21 Table of Contents ​