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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-26 · 197 added, 181 removed, 134 unchanged (74% of the section changed)

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For a discussion of such risk factors, see Item 1A, “Risk Factors.”

We are an internally-managed REIT focused on the acquisition, ownership and management of specialized industrial 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, real estate taxes and insurance.

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

We were incorporated in Maryland on June 15, 2016.

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As of December 31, 2021, we had 18 full-time employees.

As of December 31, 2020, we owned 66 properties that were 99.3% leased (based on square footage) to state-licensed cannabis operators and comprising an aggregate of approximately 5.4 million rentable square feet (including approximately 2.0 million rentable square feet under development/redevelopment) in 17 states, with a weighted-average remaining lease term of approximately 16.6 years.

As of December 31, 2020, we had invested an aggregate of approximately $1.0 billion (consisting of purchase price and development and tenant reimbursement commitments funded, if any, but excluding transaction costs) and had committed an additional approximately $287.8 million to reimburse certain tenants and sellers for completion of construction and tenant improvements at our properties.

These statistics treat our Los Angeles, California property as not leased, due to the tenant being in receivership and its ongoing default in its obligation to pay rent at that location as of December 31, 2020.

As of December 31, 2021, we owned 103 properties comprising an aggregate of approximately 7.7 million rentable square feet (including approximately 2.5 million rentable square feet under development/redevelopment) in 19 states, with a weighted-average remaining lease term of approximately 16.6 years.

As of December 31, 2021, we had invested an aggregate of approximately $1.7 billion (consisting of purchase price and development and tenant reimbursement commitments funded, if any, but excluding transaction costs) and had committed an additional approximately $316.1 million to reimburse certain tenants and sellers for completion of construction and improvements at our properties.

Of the approximately $316.1 million committed to reimburse certain tenants and sellers for completion of construction and improvements at our properties, approximately $46.3 million was incurred as of December 31, 2021.

These statistics do not include an $18.5 million loan from us to a developer for construction of a regulated cannabis cultivation and processing facility in California and up to $55.0 million that may be funded between June 15, 2022 and July 31, 2022 pursuant to our lease with a tenant at one of our Pennsylvania properties, as the tenant at that property may not elect to have us disburse those funds and pay us the corresponding base rent on those funds.

Factors Impacting Our Operating Results

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

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

Rental Revenues

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

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

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

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

Changes in current favorable state or local laws in the cannabis industry may impair our ability to renew or re-lease properties and

the ability of our tenants to fulfill their lease obligations and could materially and adversely affect our ability to maintain or increase rental rates for our properties.

Conditions in Our Markets

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

The ongoing COVID-19 pandemic, 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 the ongoing COVID-19 pandemic 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 pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the outbreak and containment measures, among others.

Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, supply chains and consumer spending as well as other unanticipated consequences remain unknown.

Our tenants’ ability to pay their rent obligations to us depends, in part, on whether our tenants can continue their regulated cannabis operations and the ability and willingness of consumers to visit dispensary businesses.

In the large majority of states that have legalized cannabis, state governmental authorities have recognized both medical-use and adult-use cannabis operations, including supply chain activities such as cultivation, processing, distribution and dispensary activities, as “essential businesses”, allowing them to remain open and operational.

While laws and practices vary from state to state, state and local governmental authorities and regulated cannabis businesses have taken additional measures to ensure the safety and well-being of employees, patients and consumers, including but not limited to restrictions associated with social distancing requirements and additional levels of protection for medical cannabis patients with more vulnerability to health complications from COVID-19.

Despite these measures, cannabis dispensaries may experience declines in customer traffic or may be required to close in response to new government regulatory orders, which may result from a prolonged outbreak or resurgence of COVID-19 cases, and could have a significant adverse financial impact on certain of our tenants.

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

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

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

Pursuant to these amendments, a total of approximately $940,000 of security deposits were applied to the payment of base rent, property management fees and associated lease penalties for March and April 2020, including approximately $185,000 related to the partial payment of the March 2020 base rent and property management fees for one of the tenants;

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

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

Significant Tenants and Concentrations of Risk

As of December 31, 2021, we owned 103 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 December 31, 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 consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest percentage of our total rental revenues for the year ended December 31, 2021.

Competitive Environment

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See Note 6 in the notes to the consolidated financial statements for information regarding our investments in real estate and property portfolio activity during the year ended December 31, 2021.

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020 for a comparison of the years ended December 31, 2020 and December 31, 2019.

Comparison of the Years Ended December 31, 2021 and 2020 (in thousands)

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Years Ended December 31,

Rental (excluding tenant reimbursements)

Tenant reimbursements

Rental (including tenant reimbursements)

Total revenues

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General and administrative expense

Depreciation expense

Depreciation and amortization expense

Total expenses

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Interest expense

Loss on induced exchange of Exchangeable Senior Notes

Preferred stock dividends

Net income attributable to common stockholders

Rental (excluding tenant reimbursements) .

Rental revenues for the year ended December 31, 2021 increased by approximately $87.7 million, or 75%, to approximately $204.6 million, compared to approximately $116.9 million for the year ended December 31, 2020.

The increase in rental revenue was attributable to:

● The 20 properties we acquired in 2020 which generated approximately $25.6 million of rental revenue in 2020;

● The 35 properties we acquired in 2019 which generated approximately $54.5 million of rental revenue in 2020, including related rents on the amendments which increased the tenant improvement allowances on eight of the leases, compared to approximately $15.7 million in 2019, an increase of approximately $38.8 million;

● The amendments to increase the tenant improvement allowances of seven properties we acquired prior to 2019 and the annual rent escalations on the eleven properties we acquired prior to 2019, which collectively resulted in approximately $4.5 million in additional rental revenue during the year ended December 31, 2020.

Rental revenues for the year ended December 31, 2020 included approximately $379,000 of rent and associated lease penalties received through the drawdown of the security deposit at our Los Angeles, California property where the tenant was in receivership and defaulted on its lease obligations commencing in January 2020;

and approximately $424,000 of rent received through the drawdown of security deposits at our properties leased to Vertical in southern California, in which Vertical made partial payments of contractual rent due.

Rental revenues for the year ended December 31, 2020 also included drawdown of part of the security deposits totaling approximately $940,000 at certain properties leased to three tenants to pay part of the rent and associated lease penalties in accordance with the rent deferral programs described in Note 6 in the notes to the consolidated financial statements.

Rental revenues for the year ended December 31, 2019 increased by approximately $29.0 million, or 202%, to approximately $43.4 million, compared to approximately $14.3 million for the year ended December 31, 2018.

The increase in rental revenue was attributable to:

● The 35 properties we acquired 2019 which generated approximately $15.7 million of rental revenue in 2019;

● The six properties we acquired in 2018 which generated approximately $14.7 million of rental revenue in 2019, including related rents on the amendments which increased the tenant improvement allowances on five of the leases, compared to approximately $2.8 million in 2018, an increase of approximately $11.9 million;

● The amendments to increase the tenant improvement allowances of two properties we acquired prior to 2018 and the annual rent escalations on the five properties we acquired prior to 2018 which resulted in approximately $1.4 million in additional rental revenue during the year ended December 31, 2019.

Tenant Reimbursements .

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

Tenant reimbursements for the year ended December 31, 2020 included approximately $43,000 of reimbursements received through the drawdown of the remaining security deposit at our Los Angeles, California property.

The increase in tenant reimbursements for each year primarily related to the additional properties that we acquired over the years.

● The 37 properties we acquired in 2021 which generated approximately $18.6 million of rental revenue in 2021, including related rents on amendments which increased the improvement allowances on three of the leases;

● The 20 properties we acquired in 2020 which generated approximately $67.8 million of rental revenue in 2021, including related rent on an amendment to one lease which increased the improvement allowance, compared to approximately $25.6 million in 2020, an increase of approximately $42.2 million;

● The amendments to increase the improvement allowances of six properties we acquired prior to 2020, additional purchases of land which were included in the corresponding leases for two properties, the annual rent escalations on the 46 properties we acquired prior to 2020, and the repayment of deferred rents and property management fees from three tenants which we granted temporary rent deferrals in 2020, which collectively resulted in approximately $27.1 million in additional rental revenue during the year ended December 31, 2021.

The increase in rental revenue was partially offset due to a decrease in tenant reimbursements revenue for property taxes and insurance, which decreased by approximately $209,000 to approximately $4.4 million for the year ended December 31, 2021, compared to approximately $4.6 million for the year ended December 31, 2020.

Rental revenues for the year ended December 31, 2021 also included approximately $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 Industries Inc.

Property Expenses .

Property expenses related to property insurance premiums and real estate taxes paid at certain of our properties, which are reimbursable by the tenants in accordance with the leases.

The increase in property expenses for each year primarily related to the additional properties that we acquired over the three years.

General and Administrative Expense .

General and administrative expense for the year ended December 31, 2020 increased by approximately $4.4 million, or 44%, to approximately $14.2 million, compared to $9.8 million for the year ended December 31, 2019.

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

General and administrative expense for the year ended December 31, 2019 increased by approximately $3.4 million, or 54%, to approximately $9.8 million, compared to $6.4 million for the year ended December 31, 2018.

General and administrative expense for the year ended December 31, 2021 increased by approximately $8.8 million, or 62%, to approximately $23.0 million, compared to approximately $14.2 million for the year ended December 31, 2020.

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

Compensation expense for the years ended December 31, 2020, 2019 and 2018 included approximately $3.3 million, $2.5 million and $1.5 million, respectively, of non-cash stock-based compensation.

Depreciation Expense.

The increase in depreciation expense for each year was related to depreciation on properties that we acquired in the respective current and prior years, and the placement into service of tenant improvements and construction funding at certain of our properties.

Compensation expense for the years ended December 31, 2021 and 2020 included approximately $8.6 million and $3.3 million, respectively, of non-cash stock-based compensation.

Depreciation and Amortization Expense.

The increase in depreciation expense for each year was related to depreciation on properties that we acquired in the respective current and prior years, and the placement into service of improvements and construction funding at certain of our properties.

Interest and Other Income .

Interest and other income primarily related to interest earned on our short-term investments and cash and cash equivalents.

The decrease in interest and other income for the year ended December 31, 2020 compared to 2019 was due to lower rates earned on interest bearing investments and cash balances.

The increase in interest and other income for the year ended December 31, 2019 compared to 2018 was due to amortization of discounts on short-term investments and higher interest bearing investment and cash balances.

The decrease in interest and other income was primarily due to lower interest bearing investments and cash balances.

Interest Expense .

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

Preferred Stock Dividends .

Preferred stock dividends related to dividends for our Series A Preferred Stock, which we issued in October 2017.

Interest expense related to our Exchangeable Senior Notes issued in February 2019 and Notes due 2026 issued in May 2021.

For the year ended December 31, 2021, interest expense increased by approximately $10.7 million, or 143%, to approximately $18.1 million, compared to $7.4 million for the year ended December 31, 2020.

The increase in interest expense was primarily due to the additional interest expense on our Notes due 2026 issued in May 2021.

Loss on Induced Exchange of Exchangeable Senior Notes .

Loss on induced exchange of Exchangeable Senior Notes is attributable to the exchange agreements we executed with certain holders of our Exchangeable Senior Notes in December 2021, pursuant to which we exchanged approximately $110.4 million principal amount of the Exchangeable Senior Notes for shares of common stock and cash (see Note 7 in the notes to the consolidated financial statements for further information).

The following summary discussion of our cash flows is based on the consolidated statements of cash flows in Item 8, “Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (in thousands):

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Ending cash, cash equivalents and restricted cash

Cash flows provided by operating activities for the years ended December 31, 2020, 2019 and 2018 were approximately $110.8 million, $44.9 million and $15.7 million, respectively.

Cash flows provided by operating activities for the years ended December 31, 2021 and 2020 were approximately $188.7 million and $110.8 million, respectively.

Cash flows provided by operating activities primarily related to contractual rent and security deposits from our properties, partially offset by general and administrative expenses.

Cash flows provided by operating activities increased from 2018 to 2019 and from 2019 to 2020 primarily due to leases for properties we acquired during these time periods, annual escalations of base rent on our leases, and amendments to existing leases to increase tenant improvement allowances at those properties, which resulted in a corresponding increase in base rents, partially offset by higher cash compensation to employees and higher public company, travel and occupancy costs.

Cash flows used in investing activities for the years ended December 31, 2020, 2019 and 2018 were approximately $1.0 billion, $340.6 million and $199.3 million, respectively.

Cash flows used in investing activities increased from 2018 to 2019 and from 2019 to 2020 primarily related to the purchases of new properties and additional funding of tenant improvement allowances, construction funding and net purchases and maturities of short-term investments.

Cash flows provided by financing activities for the year ended December 31, 2020 were approximately $925.0 million, primarily related to approximately $1.0 billion in net proceeds from our follow-on public offerings of common stock completed in January, May and July 2020 and sales of common stock during 2020 under our ATM Program, partially offset by approximately $76.8 million in dividend payments to holders of our common stock and Series A Preferred Stock and approximately $2.2 million in withholding taxes paid by us related to net share settlement of restricted stock awards that vested for certain employees.

Cash flows provided by financing activities for the year ended December 31, 2019 were approximately $400.0 million, primarily related to approximately $286.3 million in net proceeds from our follow-on public offering of common stock completed in July 2019 and sales of common stock during 2019 under our ATM Program, and approximately $138.5 million in net proceeds from the issuance of our Exchangeable Senior Notes in February 2019, partially offset by approximately $23.9 million in dividend payments to holders of our common stock and Series A Preferred Stock and approximately $939,000 in withholding taxes paid by us related to net share settlement of restricted stock awards that vested for certain employees.

Cash flows provided by financing activities for the year ended December 31, 2018 were approximately $184.9 million, primarily related to approximately $193.2 million in net proceeds from our follow-on public offerings of common stock completed in January and October 2018, partially offset by approximately $7.9 million in dividend payments to holders of our common stock and Series A Preferred Stock and approximately $390,000 in withholding taxes paid by us related to net share settlement of restricted stock awards that vested for certain employees.

Cash flows provided by operating activities increased from 2020 to 2021 primarily due to leases for properties we acquired during these time periods, annual escalations of base rent on our leases, and amendments to existing leases to increase improvement allowances at those properties, which resulted in a corresponding increase in base rents, partially offset by higher cash compensation to employees and higher public company, travel and occupancy costs.

Cash flows used in investing activities for the years ended December 31, 2021 and 2020 were approximately $384.1 million and $1.0 billion, respectively.

Cash flows used in investing activities decreased from 2020 to 2021 primarily due to less purchases and increases in maturities of short-term investments, partially offset by increases in purchases of new properties, funding of improvement allowances and construction funding.

Cash flows provided by financing activities for the year ended December 31, 2021 were approximately $155.8 million, primarily related to approximately $293.2 million in net proceeds from the issuance of our Notes due 2026, partially offset by dividend payments of approximately $132.3 million to common and preferred stockholders, 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, and approximately $1.7 million related to the induced exchange of Exchangeable Senior Notes pursuant to the Exchange Transactions.

Cash flows provided by financing activities for the year ended December 31, 2020 were approximately $925.0 million, primarily related to approximately $1.0 billion in net proceeds from our follow-on public offerings of common stock completed in January, May and July 2020 and sales of common stock during 2020 under our ATM Program, partially offset by approximately $76.8 million in dividend payments to holders of our common stock and Series A Preferred Stock and approximately $2.2 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.

Liquidity and Capital Resources

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

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

Sources and Uses of Cash

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

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

This source of revenue represents our primary source of liquidity to fund our dividends, Exchangeable Senior Notes and Notes due 2026 interest payments, general and administrative expenses, property development and redevelopment activities, property operating expenses and other expenses incurred related to managing our existing portfolio and investing in additional properties.

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

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

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

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

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

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

During the year ended December 31, 2020, we sold 1,499,382 shares of our common stock at a weighted-average sales price of $94.23 per share for net proceeds of approximately $138.4 million under the Prior ATM Program, which includes the payment of approximately $2.8 million to one sales agent as commission for such sales.

In November 2020, we terminated the Prior ATM Program and entered into new 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 (the “New ATM Program”) up to $500.0 million in shares of our common stock.

During the year ended December 31, 2020, we sold 1,762,500 shares of our common stock at a weighted-average sales price of $152.25 per share for net proceeds of approximately $262.9 million under the New ATM Program, which includes the payment of approximately $5.4 million to one sales agent as commission for such sales.

As of December 31, 2020, we had approximately $231.7 million in shares of common stock available for issuance under the New ATM Program.

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

In May 2021, we received an investment grade rating from a ratings agency.

We sought to obtain an investment grade rating to facilitate access to the investment grade unsecured debt market as part of our overall strategy to maximize our financial flexibility and manage our overall cost of capital.

On May 25, 2021, our Operating Partnership issued $300.0 million aggregate principal amount of Notes due 2026.

The Notes due 2026 are the Operating Partnership’s general unsecured and unsubordinated obligations, are fully and unconditionally guaranteed by us and all of the direct and indirect subsidiaries of the Operating Partnership, 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.

The terms of the Notes due 2026 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 December 31, 2021.

Subject to the terms of the indenture, any new subsidiary of the Operating Partnership will also guarantee the Notes due 2026 .

In addition, the terms of the indenture provide that if the debt rating on the Notes due 2026 is downgraded or withdrawn entirely, interest on the Notes due 2026 will increase to a range of 6.0% to 6.5% based on such debt rating.

We are party to equity distribution agreements with certain 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 December 31, 2021, we had approximately $231.7 million in shares of common stock available for issuance under the ATM Program and did not issue any shares of common stock under the ATM Program during the year ended December 31, 2021.

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

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

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

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

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

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

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

All dividends declared during the years ended December 31, 2021, 2020 and 2019 were characterized as ordinary income for federal income tax purposes, except for $1.40 of the common stock dividend with a record date of December 31, 2021, which is allocable to 2022 and for which the tax treatment has not been finalized.

$1.02 of the common stock dividend with a record date of December 31, 2020 was allocated to 2021, and $0.49 of the common stock dividend with a record date of December 31, 2019 was allocated to 2020.

Contractual Obligations

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

Additionally, as of December 31, 2020, we had approximately $250.7 million outstanding in commitments related to tenant improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease and approximately $624,000 of commitments relating to construction funding for the development of a property in Pennsylvania, which we funded in full in February 2021.

Notes due 2026

As of December 31, 2021, we had (1) approximately $269.8 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;

and (2) $5.6 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.

In addition, we are obligated to fund up to $55.0 million between June 15, 2022 and July 31, 2022 pursuant to our lease with a tenant at one of our Pennsylvania properties, if the tenant at that property elects to have us disburse those funds.

Supplemental Guarantor Information

In March 2020, the SEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities.

The amendments became effective on January 4, 2021.

Our Notes due 2026 and our Exchangeable Senior Notes are the unsecured senior obligations of our Operating Partnership and are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by us and all of our direct and indirect wholly-owned subsidiaries, which are listed on Exhibit 22.1 hereto and which we refer to collectively as “Subsidiary Guarantors.” Only the Notes due 2026 and the related guarantees are registered securities under the Securities Act.

See Note 7 in the notes to our consolidated financial statements for a description of certain terms of our Notes due 2026.

The offer and sale of the Exchangeable Senior Notes and the related guarantees were not and will not be registered under the Securities Act or the securities laws of any other jurisdiction and instead were issued in reliance upon an exemption from such registration.

Unless they are subsequently registered under the Securities Act, the Exchangeable Senior Notes and the related guarantees may be offered and sold only in transactions that are exempt from the registration requirements under the Securities Act and the applicable securities laws of any other jurisdiction.

As a result of the amendments to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that the subsidiary obligor is consolidated into the parent company’s consolidated financial statements, the parent guarantee is “full and unconditional” and, subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 of Regulation S-X is provided, which includes narrative disclosure and summarized financial information.

Accordingly, separate consolidated financial statements of our Operating Partnership and the Subsidiary Guarantors have not been presented.

Furthermore, as permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, we have excluded the summarized financial information for the Operating Partnership and the Subsidiary Guarantors because the combined assets, liabilities, and results of operations of the Operating Partnership and the Subsidiary Guarantors are not materially different than the corresponding amounts in our condensed consolidated financial statements, and management believes such summarized financial information would be repetitive and would not provide incremental value to investors.

Non-GAAP Financial Information and Other Metrics

Funds from Operations and Adjusted Funds from Operations

Funds from Operations, Normalized Funds from Operations and Adjusted Funds from Operations

In addition to the required GAAP presentations, we use certain non-GAAP performance measures as we believe these measures improve the understanding of our operational results.

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

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

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

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

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However, real estate values instead have historically risen or fallen with market conditions.

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

We believe that by excluding the effect of depreciation, FFO and

FFO per share can facilitate comparisons of operating performance between periods.

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

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

We compute normalized funds from operations (“Normalized FFO”) by adjusting FFO, as defined by NAREIT, to exclude certain GAAP income and expense amounts that we believe are infrequent and unusual in nature and/or not related to our core real estate operations.

Exclusion of these items from similar FFO-type metrics is common within the equity REIT industry, and management believes that presentation of Normalized FFO and Normalized FFO per share provides investors with a metric to assist in their evaluation of our operating performance across multiple periods and in comparison to the operating performance of other companies, because it removes the effect of unusual items that are not expected to impact our operating performance on an ongoing basis.

Normalized FFO is used by management in evaluating the performance of our core business operations.

Items included in calculating FFO that may be excluded in calculating Normalized FFO include certain transaction-related gains, losses, income or expense or other non-core amounts as they occur.

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

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

For the three months ended December 31, 2020, 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 2,158,837 shares for the period, which were the potentially issuable shares as if the Exchangeable Senior Notes were exchanged at the beginning of the period.

These adjustments applied only for the three months ended December 31, 2020.

Exchangeable Senior Notes were anti-dilutive for purposes of calculating earnings per diluted share for all other periods presented, and as such, were treated as anti-dilutive for purposes of calculating FFO, AFFO and FFO and AFFO per diluted share for all fiscal years presented and the three months ended December 31, 2019.

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.

Further, FFO and AFFO do not represent cash flow available for management’s discretionary use.

FFO and AFFO should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

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 years ended December 31, 2020, 2019 and 2018 (in thousands, except share and per share amounts):

We calculate AFFO by adjusting Normalized FFO for certain non-cash items.

For the three months ended December 31, 2021, September 30, 2021, June 30, 2021, March 31, 2021 and December 31, 2020 and the twelve months ended December 31, 2021, FFO (diluted), Normalized FFO, AFFO and FFO, Normalized 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.

The Exchangeable Senior Notes were anti-dilutive for purposes of calculating earnings per diluted share for all other periods presented, and as such, were treated as anti-dilutive for purposes of calculating FFO, Normalized FFO, AFFO and FFO, Normalized FFO and AFFO per diluted share for such periods.

For the three and twelve months ended December 31, 2021, 81,414 shares issuable upon vesting of performance share units (“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 December 31, 2021.

For the three months ended September 30, 2021, 78,582 shares issuable upon vesting of the PSUs were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of September 30, 2021.

No shares were issuable upon vesting of the PSUs for the three months ended June 30, 2021 and March 31, 2021, as the performance thresholds for vesting of the PSUs were not met as measured as of the end of those respective periods.

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

Further, FFO, Normalized FFO and AFFO do not represent cash flow available for management’s discretionary use.

FFO, Normalized FFO and AFFO should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

FFO, Normalized 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, Normalized FFO and AFFO for the years ended December 31, 2021, 2020 and 2019 (in thousands, except share and per share amounts):

Years Ended December 31,

Net income attributable to common stockholders

Real estate depreciation

FFO attributable to common stockholders

Real estate depreciation and amortization

FFO attributable to common stockholders (basic)

Cash and non-cash interest expense on Exchangeable Senior Notes

FFO attributable to common stockholders (diluted)

Acquisition-related expense

Financing expense

Loss on induced exchange of Exchangeable Senior Notes

Normalized FFO attributable to common stockholders (diluted)

Stock-based compensation

Non-cash interest expense

AFFO attributable to common stockholders

FFO per share – basic

FFO per share – diluted

AFFO per share – basic

AFFO per share – diluted

Weighted average shares outstanding – basic

Weighted average shares outstanding – diluted

The table below is a reconciliation of quarterly net income attributable to common stockholders to FFO and AFFO for the years ended December 31, 2020 and 2019 (in thousands, except share and per share amounts):

Above-market lease amortization

AFFO attributable to common stockholders (diluted)

FFO per common share – diluted

Normalized FFO per common share – diluted

AFFO per common share – diluted

Weighted average common shares outstanding – basic

Restricted stock and RSUs

Dilutive effect of Exchangeable Senior Notes

Weighted average common shares outstanding – diluted

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

Three Months Ended (1)

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FFO attributable to common stockholders (basic)

Cash and non-cash interest expense

Cash and non-cash interest expense on Exchangeable Senior Notes

FFO attributable to common stockholders (diluted)

Acquisition related expense

Loss on induced exchange of Exchangeable Senior Notes

Normalized FFO attributable to common stockholders (diluted)

Stock-based compensation

Non-cash interest expense

AFFO attributable to common stockholders

FFO per common share – basic

Above-market lease amortization

AFFO attributable to common stockholders (diluted)

FFO per common share – diluted

AFFO per common share – basic

Normalized FFO per common share – diluted

AFFO per common share – diluted

Weighted-average common shares outstanding – basic

Restricted stock and restricted stock units

Restricted stock and RSUs

Dilutive effect of Exchangeable Senior Notes

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Real estate depreciation

FFO available to common stockholders

FFO attributable to common stockholders (basic)

Cash and non-cash interest expense

FFO attributable to common stockholders (diluted)

Acquisition-related expense

Financing expense

Normalized FFO attributable to common stockholders (diluted)

Stock-based compensation

Non-cash interest expense

AFFO available to common stockholders

FFO per common share – basic

AFFO attributable to common stockholders (diluted)

FFO per common share – diluted

AFFO per common share – basic

Normalized FFO per common share – diluted

AFFO per common share – diluted

Weighted-average common shares outstanding – basic

Restricted stock

Restricted stock and restricted stock units

Dilutive effect of Exchangeable Senior Notes

Weighted-average common shares outstanding – diluted

(1) The sum of quarterly financial data may vary from annual data due to rounding and differences in the dilutive effect of potentially issuable shares of each reporting period.

Critical Accounting Policies

Critical Accounting Estimates

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

Actual results could differ materially from those estimates and assumptions.

Set forth below is a summary of our accounting policies that we believe are critical to the preparation of our consolidated financial statements.

Our accounting policies are more fully discussed in Note 2 to the consolidated financial statements.

We continually evaluate the estimates and assumptions we use to prepare our consolidated financial statements.

Our critical accounting estimates are defined as accounting estimates or assumptions made in accordance with GAAP, which involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations.

The following critical accounting estimates discussion reflects what we believe are the most significant estimates and assumptions used in the preparation of our consolidated financial statements.

This discussion of our critical accounting estimates is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates and assumptions.

For further discussion of our significant accounting policies, see Note 2 “Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements” to our consolidated financial statements included in this report.

Acquisition of Rental Property, Depreciation and Impairment

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

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

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

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

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

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

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.

Revenue Recognition

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

We account for our leases as operating leases.

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

Rental increases based upon changes in the U.S.

Consumer Price Index (“CPI”) 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 revenue in the period when such costs are incurred.

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

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

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 exchangeable notes are 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 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 respective issuance dates 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 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.

Lease Accounting

In February 2016, the FASB issued ASU 2016-02, Leases;

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

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

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

We adopted Topic 842 effective as of January 1, 2019 using the effective date method and elected the package of practical expedients that allows an entity not to reassess upon adoption (i) whether an expired or existing contract contains a lease, (ii) whether a lease classification related to expired or existing lease arrangements, and (iii) whether costs incurred on expired or existing leases qualify as initial direct costs, and as a lessor, the practical expedient not to

separate certain non-lease components, such as common area maintenance, from the lease component if the timing and pattern of transfer are the same for the non-lease component and associated lease component, and the lease component would be classified as an operating lease if accounted for separately.

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

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

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

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

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

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

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

As lessor, for each of our real estate transactions involving the leaseback of the related property to the seller or affiliates of the seller, we determine whether these transactions qualify as sale and leaseback transactions under the accounting guidance in Topic 842.

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 under Topic 842 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.

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

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

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

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

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

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

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

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

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 December 31, 2020, our gross investment in the property with the purchase option was approximately $30.5 million.

At December 31, 2020, the purchase option was not exercisable.

All of our acquisitions of rental properties to date were accounted for as asset acquisitions and not business combinations because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings, and related intangible assets).

The accounting model for asset acquisitions requires that the acquisition consideration (including acquisition costs) be allocated to the individual assets acquired and liabilities assumed on a relative fair value basis.

We exercise judgement to determine key assumptions used in each valuation technique.

For example, we are required to use judgment and make a number of assumptions, including those related to projected growth in rental rates and operating expenses, anticipated trends and market/economic conditions.

The use of different assumptions can affect the amount of consideration allocated to the acquired depreciable/amortizable asset, which in turn can impact our net income due to the recognition of the related depreciation/amortization expense in our consolidated statements of operations.

We depreciate buildings and improvements and tenant improvements where we are considered the owner for accounting purposes 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.

The determination of whether we are or the tenant is the owner of tenant improvements for accounting purposes is subject to significant judgment.

In making that determination, we consider numerous factors and perform a detailed evaluation of each individual lease.

No one factor is determinative in reaching a conclusion.

The factors we evaluate include but are not limited to the following:

● whether the lease agreement requires landlord approval of how the tenant improvement allowance is spent prior to installation of the tenant improvements;

● whether the lease agreement requires the tenant to provide evidence to the landlord supporting the cost and what the tenant improvement allowance was spent on prior to payment by the landlord for such tenant improvements;

● whether the tenant improvements are unique to the tenant or reusable by other tenants;

● whether the tenant is permitted to alter or remove the tenant improvements without the consent of the landlord or without compensating the landlord for any lost utility or diminution in fair value;

● whether the ownership of the tenant improvements remains with the landlord or remains with the tenant at the end of the lease term.

When we conclude that we are the owner of tenant improvements for accounting purposes using the factors discussed above, we record the cost to construct the tenant improvements as our capital asset.

We evaluate our real estate assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a given asset may not be recoverable.

We evaluate our real estate assets for impairment on a property-by-property basis.

Indicators we use to determine whether an impairment evaluation is necessary include:

● deterioration in rental rates for a specific property;

● deterioration of a given rental submarket;

● significant change in strategy or use of a specific property or any other event that could result in a decreased holding period, including classifying a property as held for sale, or significant development delay;

● evidence of material physical damage to the property;

● default by a significant tenant when any of the other indicators above are present.

When we evaluate for potential impairment our real estate assets to be held and used, we first evaluate whether there are any indicators of impairment.

If any impairment indicators are present for a specific real estate asset, we then perform an undiscounted cash flow analysis and compare the net carrying amount of the real estate asset to the real estate asset’s estimated undiscounted future cash flow over the anticipated holding period.

If the estimated undiscounted future cash flow is less than the net carrying amount of the real estate asset, we perform an impairment loss calculation to determine if the fair value of the real estate asset is less than the net carrying value of the real estate asset.

Our impairment loss calculation compares the net carrying amount of the real estate asset to the real estate asset’s estimated fair value, which may be based on estimated discounted future cash flow calculations or third-party valuations or appraisals.

We recognize an impairment loss if the amount of the asset’s net carrying amount exceeds the asset’s estimated fair value.

If we recognize an impairment loss, the estimated fair value of the asset becomes its new cost basis.

For a depreciable long-lived asset, the new cost basis would be depreciated (amortized) over the remaining useful life of that asset.

If a real estate asset is designated as real estate held for sale, it is carried at the lower of the net carrying value or estimated fair value less costs to sell, and depreciation ceases.

Our undiscounted cash flow and fair value calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flow and property fair values, including determining our estimated holding period and selecting the discount or capitalization rate that reflects the risk inherent in future cash flow.

Estimating projected cash flow is highly subjective as it requires assumptions related to future rental rates, tenant allowances, operating expenditures, property taxes, capital improvements, and occupancy levels.

We are also required to make a number of assumptions relating to future economic and market events and prospective operating trends.

Determining the appropriate capitalization rate also requires significant judgment and is typically based on many factors including the prevailing rate for the market or submarket, as well as the quality and location of the properties.

Further, capitalization rates can fluctuate resulting from a variety of factors in the overall economy or within regional markets.

If the actual net cash flow or actual market capitalization rates significantly differ from our estimates, the impairment evaluation for an individual asset could be materially affected.

For each property where such an indicator occurred, we completed an impairment evaluation.

After completing this process, we determined that for each of the operating properties evaluated, undiscounted cash flows over the holding period were in excess of carrying value and, therefore, we did not record any impairment losses for these properties for the years ended December 31, 2021 and 2020.

Stock-Based Compensation

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

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

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

federal income tax purposes, commencing with our taxable year ended December 31, 2018.

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.

As long as our dividends equal or exceed our taxable net income, we generally will not be required to pay U.S.

federal income tax on such income.

The Tax Cuts and Jobs Act was enacted in December 2018 and is generally effective for tax years beginning in 2018.

See also Item 1A, “Risk Factors,” under the caption “Legislative, regulatory or administrative changes could adversely affect us or our stockholders.”

Adoption of New or Revised Accounting Standards

Prior to December 31, 2019, as an “emerging growth company” under the JOBS Act, we took advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.

We ceased being emerging growth company on December 31, 2019 and as a result, are no longer eligible to delay adoption of such new or revised accounting pronouncements applicable to public companies.

Compensation cost for all share-based awards requires an estimate of fair value on the grant date and compensation cost is recognized on a straight-line basis over the service vesting period, which represents the requisite service period.

The grant date fair value for compensation programs that contain market conditions, like modifiers based on total stockholder return (a “market condition”), are performed using complex pricing valuation models that require the input of assumptions, including judgments to estimate expected stock price volatility, expected life, and forfeiture rate.

See Note 10 “Common Stock Incentive Plan” to our consolidated financial statements included in this report for further discussion the assumptions and estimates.

Impact of Real Estate and Credit Markets

4 unchanged sentences

credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.

Off-Balance Sheet Arrangements

We have no unconsolidated investments or any other off-balance sheet arrangements.

Interest Rate Risk

In February 2019, our Operating Partnership issued $143.75 million aggregate principal amount of the Exchangeable Senior Notes, which bears interest at a fixed rate of 3.75% per annum until maturity.

The Exchangeable Senior Notes are the only debt we have outstanding.

At this time, we have no plans to issue additional debt instruments.

As of December 31, 2021, we had $300.0 million principal amount of Notes due 2026 and approximately $33.4 million principal amount 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.

Impact of Inflation

We enter into leases that generally provide for annual fixed increases in rent, and in certain cases have entered into leases that provide for annual increases in rent equal to the greater of a fixed increase and the increase in annual CPI.

expect these lease provisions to result in rent increases over time.

We enter into leases that generally provide for fixed increases in rent.

We expect these lease provisions to result in rent increases over time.

During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.

We do not expect our business to be subject to material seasonal fluctuations.

Our business has not been, and we do not expect our business in the future to be, subject to material seasonal fluctuations.

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-K

Item 7. Management’s Discussion and Analysis