Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such information is accumulated and communicated to our company’s management, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and principal financial officers have concluded that such disclosure controls and procedures were effective as of December 31, 2021 (the end of the period covered by this Annual Report).
Changes in Internal Control Over Financial Reporting
There were no changes during the quarter ended December 31, 2021 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our system of internal control over financial reporting was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)). Our management, including our principal executive officer and principal financial officer, evaluated, as of December 31, 2021, the effectiveness of our internal control over financial reporting using the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our principal executive officer and financial officer concluded that our internal controls, as of December 31, 2021, were effective. BDO USA, LLP has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, which appears in this Annual Report on Form 10-K.
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Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Innovative Industrial Properties, Inc.
Park City, Utah
Opinion on Internal Control over Financial Reporting
We have audited Innovative Industrial Properties, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria .
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule, and our report dated February 24, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
San Diego, California
February 24, 2022
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ITEM 9B. OTHER INFORMATION
On February 23, 2022, JMP Securities LLC delivered notice to the Company terminating the equity distribution agreement with JMP Securities, dated November 6, 2020 (the “JMP Equity Distribution Agreement”), effective as of February 23, 2022. The JMP Equity Distribution Agreement permitted the Company to offer and sell, from time to time, up to $500,000,000 in aggregate offering price of shares of the Company’s Common Stock through JMP Securities. As a result of the termination of the JMP Equity Distribution Agreement, no further offers or sales of the Company’s Common Stock will be made through JMP Securities pursuant to the Company’s ATM Program. The Company’s separate equity distribution agreements with each of BTIG, LLC, Roth Capital Partners, LLC, Compass Point Research & Trading, LLC, Ladenburg Thalmann & Co. Inc. and Piper Sandler & Co., dated as of November 6, 2020, remain in full force and effect.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSEPCTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning our directors, executive officers and corporate governance required by Item 10 will be included in the Proxy Statement to be filed relating to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. Pursuant to instruction G(3) to Form 10-K, information concerning audit committee financial expert disclosure set forth under the heading “Information Regarding the Board — Committees of the Board — Audit Committee” will be included in the Proxy Statement to be filed relating to Innovative Industrial Properties, Inc.’s 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Pursuant to instruction G(3) to Form 10-K, information concerning compliance with Section 16(a) of the Exchange Act concerning our directors and executive officers set forth under the heading entitled “General — Section 16(a) Beneficial Ownership Reporting Compliance” will be included in the Proxy Statement to be filed relating to Innovative Industrial Properties, Inc.’s 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning our executive compensation required by Item 11 will be included in the Proxy Statement to be filed relating to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information concerning the security ownership of certain beneficial owners and management, our equity compensation plans and related stockholder matters required by Item 12 will be included in the Proxy Statement to be filed relating to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information concerning certain relationships and related transactions and director independence required by Item 13 will be included in the Proxy Statement to be filed relating to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information concerning our principal accountant fees and services required by Item 14 will be included in the Proxy Statement to be filed relating to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a)(1) and (2) Financial Statements and Schedule:
Please refer to the Index to Consolidated Financial Statements included under Part II, Item 8, Financial Statements and Supplementary Data.
(3) Exhibits
Exhibit
Number
Description of Exhibit
1.1
Form of Equity Distribution Agreement, dated as of November 6, 2020, between Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and each sales agent.(1)
3.1
Second Articles of Amendment and Restatement of Innovative Industrial Properties, Inc. (including Articles Supplementary Classifying Innovative Industrial Properties, Inc.’s 9.00% Series A Cumulative Redeemable Preferred Stock).(2)
3.2
Second Amended and Restated Bylaws of Innovative Industrial Properties, Inc.(3)
4.1
Form of Certificate for Common Stock.(4)
4.2
Indenture, dated as of February 21, 2019, among IIP Operating Partnership, LP, as issuer, Innovative Industrial Properties, Inc. and the subsidiaries of IIP Operating Partnership, LP, as guarantors, TMI Trust Company, as trustee (as successor-in-interest to GLAS Trust Company LLC), and Securities Transfer Corporation, as registrar (as successor-in-interest to GLAS Trust Company LLC), including the Form of Note representing IIP Operating Partnership, LP’s 3.75% Exchangeable Senior Notes due 2024.(5)
4.3
Indenture, dated as of May 25, 2021, among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP, the Subsidiary Guarantors set forth on the signature page thereto, TMI Trust Company, as trustee (as successor-in-interest to GLAS Trust Company LLC), and Securities Transfer Corporation, as registrar (as successor-in-interest to GLAS Trust Company LLC), including the form of 5.50% Senior Note due 2026.(6)
4.4
Innovative Industrial Properties, Inc. Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.(7)
10.1
Agreement of Limited Partnership of IIP Operating Partnership, LP.(8)
10.2+
2016 Omnibus Incentive Plan.(8)
10.3+
Form of Restricted Stock Award Agreement for Officers.(9)
10.4+
Form of Restricted Stock Award Agreement for Directors.(9)
10.5+
Form of Restricted Stock Unit Award Agreement.(10)
10.6+
Form of 2021 Performance Share Unit Award Agreement.(11)
10.6+
Form of 2022 Performance Share Unit Award Agreement.(12)
10.7+
Form of Indemnification Agreement between Innovative Industrial Properties, Inc. and each of its Directors and Officers.(4)
10.8+
Severance and Change of Control Agreement dated as of January 18, 2017 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and Alan Gold.(13)
10.9+
Severance and Change of Control Agreement dated as of January 18, 2017 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and Paul Smithers.(13)
10.10+
Severance and Change of Control Agreement dated as of January 18, 2017 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and Brian Wolfe.(13)
10.11+
Severance and Change of Control Agreement dated as of June 7, 2017 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and Catherine Hastings.(14)
10.12+
Director Compensation Policy.(11)
10.13+
Innovative Industrial Properties, Inc. Nonqualified Deferred Compensation Plan.(15)
10.14
Registration Rights Agreement, dated as of May 25, 2021, among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP, the Subsidiary Guarantors set forth on the signature page thereto and BTIG, LLC, as representative of the initial purchasers.(6)
21.1*
List of Subsidiaries of Innovative Industrial Properties, Inc.
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22.1
List of Subsidiary Guarantors.(16)
23.1*
Consent of BDO USA, LLP.
31.1*
Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
104*
Cover Page Interactive Date File (formatted as Inline XBRL and contained in Exhibit 101).
*
Filed herewith.
+ Indicates management contract or compensatory plan.
(1) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on November 6, 2020.
(2) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2020.
(3) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on June 4, 2020.
(4) Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-11, as amended (File No. 333-214148), filed with the SEC on November 17, 2016.
(5) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on February 21, 2019.
(6) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on May 25, 2021.
(7) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Annual Report on Form 10-K filed with the SEC on February 26, 2021.
(8) Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-11, as amended (File No. 333-214148), filed with the SEC on October 17, 2016.
(9) Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-8 (File No. 333-214919), filed with the SEC on December 6, 2016.
(10) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 6, 2020.
(11) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 15, 2021.
(12) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 12, 2022.
(13) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 24, 2017.
(14) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on June 8, 2017.
(15) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on November 18, 2019.
(16) Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-3 (File No. 333-262320) filed with the SEC on January 24, 2022.
ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
INNOVATIVE INDUSTRIAL PROPERTIES, INC.
By:
/s/ Paul Smithers
Paul Smithers
President, Chief Executive Officer and Director
(Principal Executive Officer)
By:
/s/ Catherine Hastings
Catherine Hastings
Chief Financial Officer and Treasurer
(Principal Financial Officer)
By:
/s/ Andy Bui
Andy Bui
Vice President, Chief Accounting Officer
(Principal Accounting Officer)
Dated February 24, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
Name
Capacity
Date
/s/ Alan Gold
Executive Chairman
February 24, 2022
Alan Gold
/s/ Gary Kreitzer
Vice Chairman
February 24, 2022
Gary Kreitzer
/s/ Mary Curran
Director
February 24, 2022
Mary Curran
/s/ Paul Smithers
President, Chief Executive Officer and
February 24, 2022
Paul Smithers
Director
/s/ Scott Shoemaker
Director
February 24, 2022
Scott Shoemaker
/s/ David Stecher
Director
February 24, 2022
David Stecher
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INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Innovative Industrial Properties, Inc.
(a) Financial Statements:
Report of Independent Registered Public Accounting Firm ( BDO USA, LLP ; San Diego, California ; PCAOB ID # 243 )
F-2
Consolidated Balance Sheets as of December 31, 2021 and 2020
F-4
Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019
F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019
F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019
F-7
Notes to Consolidated Financial Statements
F-8
(b) Financial Statement Schedule:
Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2021
F-25
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Innovative Industrial Properties, Inc.
Park City, Utah
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Innovative Industrial Properties, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 , in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 24, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Real Estate Acquisitions - Fair Value of Assets Acquired
As described in Note 6 to the consolidated financial statements, the Company’s consolidated real estate property acquisitions totaled approximately $288.0 million for the year ended December 31, 2021. Certain of the 2021 property acquisitions involved significant judgments in estimating the allocation of the fair values between the land and buildings acquired for which management obtained assistance from third-party valuation specialists.
F-2
Table of Contents
We identified the estimation of the allocation of the fair values of the land and buildings acquired for certain of the 2021 property acquisitions as a critical audit matter due to the limited number of recent comparable transactions. Auditing these acquisitions involved a high degree of auditor judgment and subjectivity in performing procedures and evaluating the reasonableness of the key valuation inputs and assumptions relating to the fair value estimates for land and buildings acquired, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
● Testing the design and operating effectiveness of controls to address key valuation inputs and assumptions within the estimate of fair values of land and buildings acquired.
● Evaluating the reasonableness of the key valuation inputs and assumptions used by the Company in the estimation of the allocation of fair values of land and buildings acquired as compared to relevant market data.
● Utilizing personnel with specialized knowledge and skills in valuation to assist in the evaluation of the inputs and assumptions used in the estimation of the allocation of fair values of land and buildings acquired including the comparison to available market data.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2016.
San Diego, California
February 24, 2022
F-3
Table of Contents
Innovative Industrial Properties, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
December 31,
December 31,
Assets
2021
2020
Real estate, at cost:
Land
$
122,386
$
75,660
Buildings and improvements
979,417
644,932
Tenant improvements
620,301
339,647
Total real estate, at cost
1,722,104
1,060,239
Less accumulated depreciation
( 81,938 )
( 40,195 )
Net real estate held for investment
1,640,166
1,020,044
Construction loan receivable
12,916
—
Cash and cash equivalents
81,096
126,006
Restricted cash
5,323
—
Investments
324,889
619,275
Right of use office lease asset
1,068
980
In-place lease intangible assets, net
9,148
—
Other assets, net
9,996
1,776
Total assets
$
2,084,602
$
1,768,081
Liabilities and stockholders’ equity
Exchangeable Senior Notes, net
$
32,232
$
136,693
Notes due 2026, net
293,860
—
Tenant improvements and construction funding payable
46,274
36,500
Accounts payable and accrued expenses
7,718
4,641
Dividends payable
38,847
30,065
Other liabilities
1,167
1,057
Rent received in advance and tenant security deposits
52,805
34,153
Total liabilities
472,903
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 December 31, 2021 and December 31, 2020
14,009
14,009
Common stock, par value $ 0.001 per share, 50,000,000 shares authorized: 25,612,541 and 23,936,928 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively
26
24
Additional paid-in capital
1,672,882
1,559,059
Dividends in excess of earnings
( 75,218 )
( 48,120 )
Total stockholders’ equity
1,611,699
1,524,972
Total liabilities and stockholders’ equity
$
2,084,602
$
1,768,081
See the accompanying notes to the consolidated financial statements.
F-4
Table of Contents
Innovative Industrial Properties, Inc.
Consolidated Statements of Income
(In thousands, except share and per share amounts)
Years Ended December 31,
2021
2020
2019
Revenues:
Rental (including tenant reimbursements)
$
204,551
$
116,896
$
44,667
Total revenues
204,551
116,896
44,667
Expenses:
Property expenses
4,443
4,952
1,315
General and administrative expense
22,961
14,182
9,818
Depreciation and amortization expense
41,776
28,025
8,599
Total expenses
69,180
47,159
19,732
Income from operations
135,371
69,737
24,935
Interest and other income
397
3,424
4,846
Interest expense
( 18,086 )
( 7,431 )
( 6,306 )
Loss on induced exchange of Exchangeable Senior Notes
( 3,692 )
—
—
Net income
113,990
65,730
23,475
Preferred stock dividends
( 1,352 )
( 1,352 )
( 1,352 )
Net income attributable to common stockholders
$
112,638
$
64,378
$
22,123
Net income attributable to common stockholders per share (Note 8):
Basic
$
4.69
$
3.28
$
2.06
Diluted
$
4.55
$
3.27
$
2.03
Weighted-average shares outstanding:
Basic
23,903,017
19,443,602
10,546,016
Diluted
26,261,155
19,557,619
10,684,068
See accompanying notes to the consolidated financial statements.
F-5
Table of Contents
Innovative Industrial Properties, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share and per share amounts)
Additional
Dividends in
Total
Series A
Shares of
Common
Paid-In-
Excess of
Stockholders'
Preferred Stock
Common Stock
Stock
Capital
Earnings
Equity
Balance, December 31, 2018
$
14,009
9,775,800
10
260,540
( 10,267 )
$
264,292
Net income
—
—
—
—
23,475
23,475
Equity component of Exchangeable Senior Notes
—
—
—
5,569
—
5,569
Net proceeds from sale of common stock
—
2,825,500
3
286,267
—
286,270
Preferred stock dividend
—
—
—
—
( 1,352 )
( 1,352 )
Common stock dividend
—
—
—
—
( 31,800 )
( 31,800 )
Issuance of unvested restricted stock, net of forfeitures
—
35,743
—
( 939 )
—
( 939 )
Stock based compensation
—
—
—
2,495
—
2,495
Balance, December 31, 2019
14,009
12,637,043
13
553,932
( 19,944 )
548,010
Net income
—
—
—
—
65,730
65,730
Exchange of Exchangeable Senior Notes
—
14
—
1
—
1
Net proceeds from sale of common stock
—
11,311,366
11
1,003,962
—
1,003,973
Preferred stock dividend
—
—
—
—
( 1,352 )
( 1,352 )
Common stock dividend
—
—
—
—
( 92,554 )
( 92,554 )
Issuance of unvested restricted stock, net of forfeitures
—
( 11,495 )
—
( 2,166 )
—
( 2,166 )
Stock based compensation
—
—
—
3,330
—
3,330
Balance, December 31, 2020
14,009
23,936,928
24
1,559,059
( 48,120 )
1,524,972
Net income
—
—
—
—
113,990
113,990
Issuance of common stock in conjunction with inducement of Exchangeable Senior Notes, net
—
1,684,237
2
108,591
—
108,593
Preferred stock dividend
—
—
—
—
( 1,352 )
( 1,352 )
Common stock dividend
—
—
—
—
( 139,736 )
( 139,736 )
Issuance of unvested restricted stock, net of forfeitures
—
( 8,624 )
—
( 3,384 )
—
( 3,384 )
Stock-based compensation
—
—
—
8,616
—
8,616
Balance, December 31, 2021
$
14,009
25,612,541
$
26
$
1,672,882
$
( 75,218 )
$
1,611,699
See accompanying notes to the consolidated financial statements.
F-6
Table of Contents
Innovative Industrial Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
2021
2020
2019
Cash flows from operating activities
Net income
$
113,990
$
65,730
$
23,475
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization
41,776
28,025
8,599
Loss on induced exchange of Exchangeable Senior Notes
3,692
—
—
Other non-cash adjustments
95
162
—
Stock-based compensation
8,616
3,330
2,495
Amortization of discounts on short-term investments
( 340 )
( 2,791 )
( 3,738 )
Amortization of debt discount and issuance costs
2,851
2,040
1,678
Changes in assets and liabilities
Other assets, net
( 3,687 )
( 428 )
( 619 )
Accounts payable, accrued expenses and other liabilities
3,102
1,224
1,427
Rent received in advance and tenant security deposits
18,652
13,522
11,617
Net cash provided by operating activities
188,747
110,814
44,934
Cash flows from investing activities
Purchases of investments in real estate
( 287,585 )
( 240,509 )
( 259,889 )
Reimbursements of tenant improvements and construction funding
( 374,541 )
( 289,517 )
( 84,677 )
Funding of construction loan and other investments
( 16,068 )
—
—
Deposits in escrow for acquisitions
( 625 )
( 200 )
( 650 )
Purchases of short-term investments
( 569,772 )
( 1,077,867 )
( 255,664 )
Maturities of short-term investments
864,498
580,978
260,250
Net cash used in investing activities
( 384,093 )
( 1,027,115 )
( 340,630 )
Cash flows from financing activities
Issuance of common stock, net of offering costs
—
1,003,973
286,292
Net proceeds from issuance of Exchangeable Senior Notes
—
—
138,545
Gross proceeds from issuance of Notes due 2026
300,000
—
—
Payment of deferred financing costs from issuance of Notes due 2026
( 6,855 )
—
—
Payment of inducement and transaction costs relating to inducement of the Exchangeable Senior Notes
( 1,696 )
—
—
Dividends paid to common stockholders
( 130,954 )
( 75,464 )
( 22,584 )
Dividends paid to preferred stockholders
( 1,352 )
( 1,352 )
( 1,352 )
Taxes paid related to net share settlement of equity awards
( 3,384 )
( 2,166 )
( 939 )
Net cash provided by financing activities
155,759
924,991
399,962
Net (decrease) increase in cash and cash equivalents
( 39,587 )
8,690
104,266
Cash, cash equivalents and restricted cash, beginning of year
126,006
117,316
13,050
Cash, cash equivalents and restricted cash, end of year
$
86,419
$
126,006
$
117,316
Supplemental disclosure of cash flow information:
Cash paid during the year for interest
$
14,381
$
5,391
$
3,055
Supplemental disclosure of non-cash investing and financing activities:
Accrual for reimbursements of improvements and construction funding
$
46,274
$
36,500
$
24,968
Deposits applied for acquisitions
200
650
—
Accrual for common and preferred stock dividends declared
38,847
30,065
12,975
Accrual for stock issuance costs
—
—
22
Exchange of Exchangeable Senior Notes for common stock
109,040
—
1
Operating lease liability for obtaining right of use asset
192
—
1,211
See accompanying notes to the consolidated financial statements.
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Innovative Industrial Properties, Inc.
Notes to Consolidated Financial Statements
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 industrial properties leased to experienced, state-licensed operators for their regulated 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, real estate 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.
Information with respect to rentable square footage is unaudited.
2. Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements
Basis of Presentation. The consolidated financial statements include all of the accounts of the Company, the Operating Partnership and all of our wholly owned subsidiaries, presented in accordance with U.S. generally accepted accounting principles.
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 for the years ended December 31, 2021 and 2020 and financial position at December 31, 2021 and 2020. A prolonged outbreak or resurgence of COVID-19 could have a material adverse impact on the financial results and business operations of the Company.
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 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 consolidated statements of income.
Use of Estimates. The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results may differ materially from these estimates and assumptions.
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 makers review 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.
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Acquisition of Real Estate Properties. Our investment in real estate is recorded at historical cost, less accumulated depreciation. Upon acquisition of a property, the tangible and intangible assets acquired and liabilities assumed are initially measured based upon their relative fair values. We estimate the fair value of land by reviewing comparable sales within the same submarket and/or region. We estimate the fair value of buildings and improvements and tenant improvements as if the property was vacant, taking into consideration current replacement costs and other relevant market rate information and may engage third-party valuation specialists. Acquisition costs are capitalized as incurred. All of our acquisitions to date were recorded as asset acquisitions.
In December 2021, we acquired a portfolio of properties that included in-place leases. The fair value of acquired in-place leases is derived based on our assessment of estimated lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amounts recorded for acquired in-place leases are reflected as in-place lease intangible assets, net on the balance sheet and are amortized on a straight-line basis as a component of depreciation and amortization expense over the remaining term of the applicable leases.
The fair value of the above-market component of an acquired in-place operating lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) our estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease. The amount recorded for one above-market operating lease is included in other assets, net on the balance sheet and is amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable lease.
Cost Capitalization and Depreciation. We capitalize costs associated with development and redevelopment activities and 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 . For the years ended December 31, 2021, 2020 and 2019, we recognized depreciation expense of approximately $ 41.7 million, $ 28.0 million and $ 8.6 million, respectively, which are included in depreciation and amortization expense in our consolidated statements of income. 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. 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
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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 years ended December 31, 2021, 2020 and 2019.
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 pertaining to the regulated cannabis industry, the limited operating history of certain tenants and the resulting uncertainty of collectability of lease payments from each tenant over the duration of the lease term. Contractually obligated reimbursements from tenants for recoverable real estate taxes, insurance and operating expenses are included in rental revenues in the period when such costs are reimbursed by the tenants. Contractually obligated real estate taxes that are paid directly by the tenant to the tax authorities are not reflected in our 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 December 31, 2021, we had funded approximately $ 12.9 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 December 31, 2021 and 2020, $ 72.0 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.
Restricted Cash. Restricted cash relates to cash held in escrow accounts for the reimbursement of tenant improvements for tenants in accordance with certain lease agreements.
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 but less than one year. Investments are classified as held-to-maturity and stated at amortized cost.
Exchangeable Notes. The liability and equity components of exchangeable debt instruments that may be settled in cash upon exchange, including partial cash settlement, are required 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 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.
Deferred Financing Costs. The deferred financing costs that are included as a reduction in the net book value of the related liability on our consolidated balance sheets reflect issuance and other costs related to our debt obligations.
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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. 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 and a corresponding right-of-use asset related to our corporate office lease. The lease liability was initially measured based on the present value of the future lease payments discounted using the estimated incremental borrowing rate of 7.25 %, which was 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. In November 2021, we amended the lease to extend the term from April 2025 to January 2027 in connection with an expansion of the leased space which did not commence until February 2022. As a result of the lease modification on the existing leased space, we re-measured the lease liability based on the present value of the future lease payments (excluding the extension option that we are not reasonably certain to exercise), discounted using the estimated incremental borrowing rate of 5.5 %, which was 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 years ended December 31, 2021, 2020 and 2019, we recognized office lease expense of approximately $ 231,000 , $ 229,000 and $ 82,000 , respectively, which are included in general and administrative expense in our consolidated statements of income. For the years ended December 31, 2021, 2020 and 2019, amounts paid and classified as operating activities in our consolidated statements of cash flows for the office lease were approximately $ 234,000 , $ 172,000 and $ 87,000 , 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
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reimbursable revenue and property expenses continue to be presented on a gross basis as rental revenue and as property expenses, respectively, on our consolidated statements of income. Property taxes paid directly by the lessee to a third party continue to be excluded from our consolidated financial statements.
In 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.
The FASB issued additional guidance for companies to account for any COVID-19 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 COVID-19 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 COVID-19 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.
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 adopted ASU 2020-06 on January 1, 2022 and recognized a cumulative-effect adjustment of approximately $ 728,000 to the opening balance of retained earnings relating to the outstanding principal balance of our Exchangeable Senior Notes at the date of adoption.
Concentration of Credit Risk . As of December 31, 2021, we owned 103 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 its lease is dependent upon the economic, regulatory, competition, natural and social factors affecting the community in which that tenant operates.
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Two of our tenants, PharmaCann Inc. (“PharmaCann”) (at five of our properties) and SH Parent Inc. (“Parallel”) (at four of our properties), represented approximately 12 % and 10 %, respectively, of our rental revenue (including tenant reimbursements) for the year ended December 31, 2021. Three of our tenants, PharmaCann (at five of our properties), Ascend Wellness Holdings, Inc. (“Ascend”) (at three of our properties), and Cresco Labs Inc. (“Cresco”) (at five of our properties), represented approximately 18 %, 10 %, and 10 %, respectively, of our rental revenues (including tenant reimbursements) for the year ended December 31, 2020. Two of our tenants, PharmaCann (at five of our properties) and Ascend (at two of our properties), represented approximately 26 % and 12 %, respectively, of our rental revenues (including tenant reimbursements) for the year ended December 31, 2019.
At December 31, 2021 and 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 December 31, 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 December 31, 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 25,612,541 shares of common stock issued and outstanding.
4. Preferred Stock
As of December 31, 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.
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5. Dividends
The following table describes the dividends declared by the Company during the years ended December 31, 2021, 2020 and 2019:
Amount
Dividend
Dividend
Declaration Date
Security Class
Per Share
Period Covered
Paid Date
Amount
(In thousands)
March 12, 2019
Common stock
$
0.45
January 1, 2019 to March 31, 2019
April 15, 2019
$
4,412
March 12, 2019
Series A preferred stock
$
0.5625
January 15, 2019 to April 14, 2019
April 15, 2019
$
338
June 14, 2019
Common stock
$
0.60
April 1, 2019 to June 30, 2019
July 15, 2019
$
5,885
June 14, 2019
Series A preferred stock
$
0.5625
April 15, 2019 to July 14, 2019
July 15, 2019
$
338
September 13, 2019
Common stock
$
0.78
July 1, 2019 to September 30, 2019
October 15, 2019
$
8,866
September 13, 2019
Series A preferred stock
$
0.5625
July 15, 2019 to October 14, 2019
October 15, 2019
$
338
December 10, 2019
Common stock
$
1.00
October 1, 2019 to December 31, 2019
January 15, 2020
$
12,637
December 10, 2019
Series A preferred stock
$
0.5625
October 15, 2019 to January 14, 2020
January 15, 2020
$
338
March 13, 2020
Common stock
$
1.00
January 1, 2020 to March 31, 2020
April 15, 2020
$
17,070
March 13, 2020
Series A preferred stock
$
0.5625
January 15, 2020 to April 14, 2020
April 15, 2020
$
338
June 15, 2020
Common stock
$
1.06
April 1, 2020 to June 30, 2020
July 15, 2020
$
19,770
June 15, 2020
Series A preferred stock
$
0.5625
April 15, 2020 to July 14, 2020
July 15, 2020
$
338
September 15, 2020
Common stock
$
1.17
July 1, 2020 to September 30, 2020
October 15, 2020
$
25,987
September 15, 2020
Series A preferred stock
$
0.5625
July 15, 2020 to October 14, 2020
October 15, 2020
$
338
December 14, 2020
Common stock
$
1.24
October 1, 2020 to December 31, 2020
January 15, 2021
$
29,727
December 14, 2020
Series A preferred stock
$
0.5625
October 15, 2020 to January 14, 2021
January 15, 2021
$
338
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
December 15, 2021
Common stock
$
1.50
October 1, 2021 to December 31, 2021
January 14, 2022
$
38,509
December 15, 2021
Series A preferred stock
$
0.5625
October 15, 2021 to January 14, 2022
January 14, 2022
$
338
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6. Investments in Real Estate
Acquisitions
The Company made the following acquisitions during the year ended December 31, 2021 (dollars in thousands):
Rentable
Initial
Square
Purchase
Transaction
Property
Market
Closing Date
Feet (1)(17)
Price
Costs
Total
Trulieve FL
Florida
January 22, 2021
295,000
$
23,800
$
16
$
23,816
(2)
King's 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
71,000
3,100
9
3,109
(8)
4Front IL
Illinois
August 3, 2021
250,000
3,348
18
3,366
(9)
Trulieve MD
Maryland
August 13, 2021
112,000
16,615
21
16,636
(10)
Calyx 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)
Gold Flora CA
California
October 15, 2021
201,000
51,000
13
51,013
(13)
LivWell MI
Michigan
December 9, 2021
15,000
34,150
8
34,158
(14)
CO/PA/ND Portfolio
Various
December 14, 2021
179,000
71,585
143
71,728
(15)
Total
2,272,000
$
287,653
$
299
$
287,952
(16)
(1) Includes expected rentable square feet at completion of construction of certain properties.
(2) Trulieve acquired Harvest in 2021. The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to approximately $ 10.8 million. In June 2021, we amended the lease, which increased the improvement allowance by $ 7.1 million to a total of approximately $ 17.9 million, which also resulted in a corresponding adjustment to base rent for the lease at the property.
(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 $ 14.5 million. In September 2021, we amended the lease, which increased the improvement allowance 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.
(6) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ 26.0 million.
(7) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to approximately $ 5.7 million.
(8) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ 15.0 million. In November 2021, we amended the lease, which increased the improvement allowance by $ 8.7 million to total of $ 23.7 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.
(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 consolidated balance sheet.
(10) Trulieve acquired Harvest in 2021. 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) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ 9.0 million.
(14) We acquired the central utility plant facilities from the tenant at the property, which increased the total rentable square feet at the property to 205,000 square feet, provided reimbursements to the tenant for certain other improvements made at the property, and amended the lease to increase the improvement allowance for future improvements by $ 550,000 , all of which resulted in a corresponding adjustment to the base rent for the property.
(15) We acquired a portfolio of 27 properties leased to multiple tenants with 24 properties located in Colorado, two properties located in North Dakota, and one property located in Pennsylvania . The tenants at three of the properties are expected to complete improvements at the properties for which we are obligated to provide reimbursement of up to a total of approximately $ 1.1 million.
(16) Approximately $ 46.7 million was allocated to land, approximately $ 231.0 million was allocated to building and improvements, approximately $ 9.1 million was allocated to in-place leases and approximately $ 1.1 million was allocated to one above-market lease.
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(17) Excludes an additional approximately 110,000 rentable square feet relating to expansions at properties acquired prior to 2021.
Acquired In-Place Lease Intangible Assets
In-place lease intangible assets and related accumulated amortization as of December 31, 2021 is as follows (in thousands):
At December 31, 2021
In-place lease intangible assets
$
9,181
Accumulated amortization
( 33 )
In-place lease intangible assets, net
$
9,148
Amortization of in-place lease intangible assets classified in depreciation and amortization expense in our consolidated statements of income was approximately $ 33,000 for the year ended December 31, 2021. The weighted-average amortization period of the value of acquired in-place leases was approximately 11.7 years, and the estimated annual amortization of the value of the acquired in-place leases as of December 31, 2021 is as follows (in thousands):
Year
Amount
2022
$
786
2023
786
2024
786
2025
786
2026
786
Thereafter
5,218
Total
$
9,148
Above-Market Lease
At December 31, 2021, we had one above-market lease acquired on December 14, 2021 with an initial value of approximately $ 1.1 million and an amortization period of approximately 11.5 years.
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 $ 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.
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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 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 year ended December 31, 2021, we capitalized costs of approximately $ 384.1 million and funded approximately $ 374.5 million relating to improvements and construction activities at our properties.
The properties acquired during the year ended December 31, 2021 generated approximately $ 19.2 million of rental revenue (including tenant reimbursements) and approximately $ 15.5 million of net operating income after deducting property and depreciation expenses, during that period. The properties acquired during the year ended December 31, 2020 generated approximately $ 27.2 million of rental revenue (including tenant reimbursements) and approximately $ 20.7 million net operating income after deducting property and depreciation expenses, during that period.
Future contractual minimum rent (including base rent and property management fees) under the operating leases as of December 31, 2021 for future periods is summarized as follows (in thousands):
Year
Contractual Minimum Rent
2022
$
258,705
2023
272,576
2024
280,595
2025
288,955
2026
297,597
Thereafter
4,237,164
Total
$
5,635,592
7. Debt
Exchangeable Senior Notes
As of December 31, 2021 and 2020, our Operating Partnership had outstanding approximately $ 33.4 million and $ 143.7 million, respectively, 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 December 31, 2021 was 15.32648 shares of our common stock per $1,000 principal amount of the Exchangeable Senior Notes and the exchange price at December 31, 2021 was approximately $ 65.25 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. At December 31, 2021, the if-exchanged value of the Exchangeable Senior Notes exceeded the principal amount by approximately $ 101.1 million.
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 as well as the debt discount, are being amortized using the effective interest method and recognized as non-cash interest expense over the expected term of the Exchangeable Senior Notes.
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In December 2021, our Operating Partnership entered into separate privately-negotiated exchange agreements with certain holders of the Exchangeable Senior Notes, pursuant to which the Operating Partnership delivered and paid an aggregate of (a) 1,684,237 shares of the Company’s common stock and (b) approximately $ 2.3 million in cash (consisting of approximately $ 1.2 million in accrued interest and approximately $ 1.1 million in inducement), collectively, in exchange for approximately $ 110.4 million principal amount of the Exchangeable Senior Notes (the “Exchange Transactions”). The issuance of the shares pursuant to the Exchange Transactions resulted in a non-cash increase to our additional paid-in capital account of approximately $ 109.0 million, primarily driven by the fair value of the shares issued, partially offset by the amount allocated to the repurchase of the exchange option. Following the closing of the Exchange Transactions, approximately $ 33.4 million in aggregate principal amount of the Exchangeable Senior Notes remain outstanding with terms unchanged. In connection with the Exchange Transactions, we recognized a loss on induced exchange of Exchangeable Senior Notes of approximately $ 3.7 million.
The following table details our interest expense related to the Exchangeable Senior Notes (in thousands):
Year Ended December 31,
2021
2020
2019
Cash coupon
$
5,380
$
5,391
$
4,628
Amortization of debt discount
1,146
1,093
898
Amortization of issuance cost
991
947
780
Total interest expense
$
7,517
$
7,431
$
6,306
The following table details the carrying value of our Exchangeable Senior Notes (in thousands):
At December 31, 2021
At December 31, 2020
Principal amount
$
33,373
$
143,749
Unamortized discount
( 612 )
( 3,785 )
Unamortized issuance cost
( 529 )
( 3,271 )
Carrying value
$
32,232
$
136,693
Accrued interest payable for the Exchangeable Senior Notes was approximately $ 365,000 and $ 1.6 million as of December 31, 2021 and 2020, respectively, and is included in accounts payable and accrued expenses on our consolidated balance sheets.
Notes due 2026
On May 25, 2021, our Operating Partnership issued $ 300.0 million aggregate principal amount of its 5.50 % Senior Notes due 2026 (the “Notes due 2026”). The Notes due 2026 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 Notes due 2026 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 Notes due 2026 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, TMI Trust Company, as trustee (as successor-in-interest to GLAS Trust Company LLC), and Securities Transfer Corporation, as registrar (as successor-in-interest to GLAS Trust Company LLC). 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.
In connection with the issuance of the Notes due 2026, 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 Notes due 2026.
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The following table details our interest expense related to the Notes due 2026 (in thousands):
Year Ended
December 31, 2021
Cash coupon
$
9,854
Amortization of issuance cost
715
Total interest expense
$
10,569
The following table details the carrying value of our Notes due 2026 (in thousands):
At December 31, 2021
Principal amount
$
300,000
Unamortized issuance cost
( 6,140 )
Carrying value
$
293,860
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 Notes due 2026 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 December 31, 2021.
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 Notes due 2026, the Operating Partnership completed its exchange offer to exchange all of the outstanding Notes due 2026 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 Notes due 2026, representing 100 % of the outstanding principal amount of the original Notes due 2026, was validly tendered and received prior to the expiration of the exchange offer. The terms of the new Notes due 2026 are substantially identical to the original Notes due 2026, except for transfer restrictions and registration rights relating to the original Notes due 2026.
Accrued interest payable for the Notes due 2026 as of December 31, 2021 was approximately $ 2.1 million, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.
The following table summarizes the principal payments on our outstanding indebtedness as of December 31, 2021 (in thousands):
Payments Due
by Year
Amount
2022
$
—
2023
—
2024
33,373
2025
—
2026
300,000
Thereafter
—
Total
$
333,373
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8. Net Income Per Share
Grants of restricted stock and restricted stock units (“RSUs”) of the Company 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 and dividend equivalents 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 December 31, 2021, all of the Company’s participating securities received dividends or dividend equivalents at an equal dividend rate per share. As a result, distributions to participating securities have been included in net income attributable to common stockholders to calculate net income per basic and diluted share.
The 2,180,550 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the year ended December 31, 2021, and were included in the computation of diluted earnings per share. The 2,158,837 and 2,100,307 potentially issuable shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were anti-dilutive for the years ended December 31, 2020 and 2019, respectively, and were excluded from the computation of diluted earnings per share.
For the year ended December 31, 2021, 81,414 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 December 31, 2021 (see Note 10 for further discussion of the PSUs).
Computations of net income per basic and diluted share were as follows (in thousands, except share and per share data):
Years Ended December 31,
2021
2020
2019
Net income
$
113,990
$
65,730
$
23,475
Preferred stock dividends
( 1,352 )
( 1,352 )
( 1,352 )
Distribution to participating securities
( 557 )
( 509 )
( 396 )
Net income attributable to common stockholders used to compute net income per share - basic
112,081
63,869
21,727
Dilutive effect of Exchangeable Senior Notes
7,517
—
—
Net income attributable to common stockholders used to compute net income per share - diluted
$
119,598
$
63,869
$
21,727
Weighted-average common shares outstanding:
Basic
23,903,017
19,443,602
10,546,016
Restricted stock and RSUs
96,174
114,017
138,052
PSUs
81,414
—
—
Dilutive effect of Exchangeable Senior Notes
2,180,550
—
—
Diluted
26,261,155
19,557,619
10,684,068
Net income attributable to common stockholders per share:
Basic
$
4.69
$
3.28
$
2.06
Diluted
$
4.55
$
3.27
$
2.03
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
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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 December 31, 2021 and 2020 (in thousands):
At December 31, 2021
At December 31, 2020
Carrying Value
Fair Value
Carrying Value
Fair Value
Investments (1)
$
324,889
$
324,772
$
619,275
$
619,270
Exchangeable Senior Notes (2)
$
32,232
$
134,270
$
136,693
$
397,663
Notes due 2026 (2)
$
293,860
$
318,486
$
—
$
—
(1) 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 Notes due 2026 were trading in the private market.
As of December 31, 2021 and 2020, cash equivalent instruments consisted of approximately $ 72.0 million and $ 98.3 million, respectively, in short-term money market funds that were measured using the net asset value per share that have not been classified using the fair value hierarchy. 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 fair values due to the short-term maturities and market rates of interest of these instruments.
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, construction loan receivable, accounts payable, accrued expenses and other liabilities approximate their relative 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 withholding 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.
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A summary of the restricted stock activity under the 2016 Plan and related information for the years ended December 31, 2021, 2020 and 2019 is included in the table below:
Weighted-
Restricted
Average Grant Date
Shares
Fair Value
Nonvested balance at December 31, 2018
147,359
$
23.98
Granted
56,460
$
55.82
Vested
( 43,556 )
$
25.82
Forfeited (1)
( 20,717 )
$
18.98
Nonvested balance at December 31, 2019
139,546
$
37.03
Granted
17,057
$
75.96
Vested
( 51,705 )
$
40.07
Forfeited (1)
( 28,552 )
$
19.72
Nonvested balance at December 31, 2020
76,346
$
50.14
Granted
9,679
$
187.74
Vested
( 29,955 )
$
52.31
Forfeited (1)
( 18,303 )
$
31.99
Nonvested balance at December 31, 2021
37,767
$
92.49
(1) All of these shares were forfeited to cover the employees’ tax withholding obligation upon vesting.
The remaining unrecognized compensation cost of approximately $ 1.5 million for restricted stock awards is expected to be recognized over a weighted-average amortization period of approximately 1.6 years as of December 31, 2021. The fair value of restricted stock that vested in 2021, 2020 and 2019 was approximately $ 8.8 million, $ 6.0 million and $ 3.2 million, respectively.
The following table summarizes our RSU activity for the years ended December 31, 2021 and 2020. There was no RSU activity for the year ended December 31, 2019. 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-
Unvested
Average Grant Date
RSUs
Fair Value
Balance at December 31, 2019
—
$
—
Granted
36,687
$
76.06
Balance at December 31, 2020
36,687
$
76.06
Granted
23,639
$
188.80
Balance at December 31, 2021
60,326
$
120.24
The remaining unrecognized compensation cost of approximately $ 3.7 million for RSU awards is expected to be recognized over an amortization period of approximately 1.7 years as of December 31, 2021.
In January 2021, we issued 70,795 “target” PSUs to a select group of officers, which vest and are settled in shares of common stock (“Award Shares”) based on the Company’s total stockholder return over a period commencing on January 11, 2021 and ending on December 31, 2023 (the “Performance Period”) relative to two different comparator groups of companies. At the end of the Performance Period, a recipient of PSUs may receive as few as zero Award Shares or as many as 150 % of the number of target PSUs in Award Shares, plus deemed dividends. PSUs will also be reduced as necessary so the total value at the vesting date does not exceed 800 % of the grant date PSU price, and if the Company’s absolute total stockholder return during the Performance Period is negative, the payout of Award Shares is capped at the target number of PSUs, notwithstanding the Company’s outperformance of comparator groups. 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
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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 year ended December 31, 2021, we recognized stock-based compensation expense of $ 4.0 million relating to the PSU awards. As of December 31, 2021, the remaining unrecognized compensation cost of approximately $ 8.0 million relating to PSU awards is expected to be recognized over the remaining Performance Period of approximately 2.0 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 consolidated balance sheet as of December 31, 2021 is presented in the table below (in thousands):
Year
Amount
2022
$
241
2023
249
2024
256
2025
264
2026
295
Total future contractual lease payments
1,305
Effect of discounting
( 163 )
Office lease liability
$
1,142
Improvement Allowances. As of December 31, 2021, we had approximately $ 269.8 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 December 31, 2021, we had $ 5.6 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.
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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.
Deferred Compensation Plan. In November 2019, we adopted the Innovative Industrial Properties, Inc. Nonqualified Deferred Compensation Plan (the “Plan”), which allows a select group of management and non-employee directors to defer receipt of their compensation, including up to 80 % of base salary, 100 % of bonus, 100 % of director fees and 100 % of restricted equity awards. The Plan assets are held in a rabbi trust which is consolidated and included in the consolidated financial statements.
12. Subsequent Events
Investments
Subsequent to December 31, 2021, we acquired the following properties, including commitments to fund improvements and construction, and made the following additional funds available to tenants for improvements at our existing properties (dollars in thousands):
Rentable
Square
Purchase
Improvement
Property
Market
Closing Date
Feet (1)
Price
Commitments
Total (2)
4Front MA
Massachusetts
January 28, 2022
57,000
$
16,000
$
—
$
16,000
GPI MI
Michigan
February 4, 2022
—
—
18,000
18,000
(3)
Ascend NJ
New Jersey
February 10, 2022
114,000
35,400
4,600
40,000
(4)
Total
171,000
$
51,400
$
22,600
$
74,000
(1) Includes expected rentable square feet at completion of construction.
(2) Excludes transaction costs.
(3) The amount relates to a lease amendment which increased the improvement allowance under a lease at one of our Michigan properties by $ 18.0 million to a total of approximately $ 47.5 million, and also resulted in a corresponding adjustment to base rent for the lease at the property.
(4) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ 4.6 million.
In addition, we acquired additional land adjacent to one of our existing properties in Pennsylvania on February 2, 2022. In connection with the acquisition, we amended the lease for the existing property to incorporate this land into the leased area and reduced the existing improvement allowance under the lease by an amount equal to the purchase price for the land, which was approximately $ 3.3 million.
F-24
Table of Contents
INNOVATIVE INDUSTRIAL PROPERTIES, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 2021
(In thousands)
Initial Costs
Total Costs
Costs
Capitalized
Year
Building and
Subsequent to
Building and
Accumulated
Net Cost
Property
State
Built/Renovated
Land
Improvements
Acquisition
Land
Improvements
Total
Depreciation
Basis
Year Acquired
Pharm AZ
Arizona
1995/2017
$
398
$
14,629
$
5,003
$
398
$
19,632
$
20,030
$
( 2,862 )
$
17,168
2017
Pharm AZ Retail
Arizona
2019
1,216
811
501
1,216
1,312
2,528
( 122 )
2,406
2019
Sacramento CA
California
1990/2019
1,376
5,321
6,033
1,376
11,354
12,730
( 976 )
11,754
2019
Kings Garden CA Portfolio
California
Various (1)(11)
10,351
61,062
11,475
10,351
72,537
82,888
( 3,336 )
79,552
2019/2020/2021
Holistic CA
California
1926/1976
1,713
11,307
1,077
1,713
12,384
14,097
( 726 )
13,371
2019
Vertical CA Portfolio
California
Various (2)
3,393
13,939
—
3,393
13,939
17,332
( 892 )
16,440
2019
Gold Flora CA
California
2021/2021
5,930
45,081
5,243
5,930
50,324
56,254
( 254 )
56,000
2021
Columbia Care CO
Colorado
1967/1978/2018
2,101
9,176
—
2,101
9,176
11,277
( 1,029 )
10,248
2018
LivWell CO Retail Portfolio
Colorado
Various (3)
546
2,781
72
546
2,853
3,399
( 135 )
3,264
2020
Trulieve FL Portfolio
Florida
Various (4)(11)
1,027
39,793
17,793
1,027
57,586
58,613
( 2,016 )
56,597
2019/2021
Parallel FL Portfolio
Florida
Various (5)
3,258
51,625
52,336
3,258
103,961
107,219
( 3,388 )
103,831
2020
Ascend IL
Illinois
2015/2020
563
18,457
50,267
563
68,724
69,287
( 4,365 )
64,922
2018
Cresco IL Portfolio
Illinois
Various (6)
3,215
29,602
13,635
3,215
43,237
46,452
( 3,265 )
43,187
2019
PharmaCann IL
Illinois
1992/2020
201
17,807
10,008
201
27,815
28,016
( 2,024 )
25,992
2019
Curaleaf IL
Illinois
1984/2020
350
10,191
18,514
350
28,705
29,055
( 2,276 )
26,779
2019
GTI IL
Illinois
2015/2020
739
8,284
40,997
739
49,281
50,020
( 2,392 )
47,628
2020
4Front IL
Illinois
(11)
3,366
—
5,804
3,366
5,804
9,170
( 10 )
9,160
2021
Holistic MD
Maryland
2017
2,785
8,410
19,309
2,785
27,719
30,504
( 3,148 )
27,356
2017
Trulieve MD
Maryland
1980/2021
1,861
14,775
8,206
1,861
22,981
24,842
( 260 )
24,582
2021
PharmaCann MA
Massachusetts
2020
3,030
—
27,512
3,030
27,512
30,542
( 1,824 )
28,718
2018
Holistic MA
Massachusetts
1980/2018
1,059
11,717
4,967
1,059
16,684
17,743
( 1,398 )
16,345
2018
Trulieve MA
Massachusetts
1890/2021
694
2,831
40,035
694
42,866
43,560
( 3,737 )
39,823
2019
Ascend MA
Massachusetts
1938/2021
2,202
24,568
22,059
2,202
46,627
48,829
( 1,989 )
46,840
2020
Cresco MA
Massachusetts
1880/2021
650
7,119
15,840
650
22,959
23,609
( 748 )
22,861
2020
4Front MA
Massachusetts
1987/2019
2,316
13,194
—
2,316
13,194
15,510
( 389 )
15,121
2020
Temescal MA
Massachusetts
1978/2021
2,082
1,026
6,158
2,082
7,184
9,266
( 77 )
9,189
2021
Green Peak MI
Michigan
Various (7)(11)
3,840
17,206
18,228
3,840
35,434
39,274
( 1,855 )
37,419
2018/2021
Emerald Growth MI
Michigan
1960/2020
389
6,489
3,139
389
9,628
10,017
( 811 )
9,206
2019
Ascend MI
Michigan
1929/2021
409
4,360
14,894
409
19,254
19,663
( 1,173 )
18,490
2019
LivWell MI
Michigan
1940/2020/2021
1,237
17,791
64,482
1,237
82,273
83,510
( 3,340 )
80,170
2019
Green Peak MI Retail Portfolio
Michigan
Various (8)
2,562
7,512
1,755
2,562
9,267
11,829
( 762 )
11,067
2019
Cresco MI
Michigan
1930/1972/2021
1,385
3,631
26,754
1,385
30,385
31,770
( 1,021 )
30,749
2020
Holistic MI
Michigan
2021
6,211
—
18,789
6,211
18,789
25,000
( 428 )
24,572
2020
Sozo MI
Michigan
1951/2021
700
9,557
5,599
700
15,156
15,856
( 247 )
15,609
2021
Vireo MN
Minnesota
2015/2017/2019
427
2,644
6,618
427
9,262
9,689
( 1,072 )
8,617
2017
Calyx MO
Missouri
(11)
753
787
8,491
753
9,278
10,031
( 46 )
9,985
2021
Las Vegas NV
Nevada
1984/2020
1,088
2,768
5,771
1,088
8,539
9,627
( 755 )
8,872
2019
Curaleaf NJ
New Jersey
1995/2020
702
4,857
29,511
702
34,368
35,070
( 1,699 )
33,371
2020
Columbia Care NJ Portfolio
New Jersey
Various (8)
466
11,974
1,580
466
13,554
14,020
( 576 )
13,444
2020
PharmaCann NY
New York
2016/2021
7,600
22,475
9,765
7,600
32,240
39,840
( 3,144 )
36,696
2016
Vireo NY
New York
1970/2021
1,593
3,157
27,566
1,593
30,723
32,316
( 1,073 )
31,243
2017
Curaleaf ND
North Dakota
2018/2020
191
9,743
2,271
191
12,014
12,205
( 805 )
11,400
2019
PharmaCann OH
Ohio
2019
712
—
19,310
712
19,310
20,022
( 1,173 )
18,849
2019
AYR OH
Ohio
1954/1986/2020
22
1,014
2,501
22
3,515
3,537
( 401 )
3,136
2019
Cresco OH
Ohio
2018/2020
235
10,377
1,981
235
12,358
12,593
( 601 )
11,992
2020
GTI OH
Ohio
1937/2020
239
2,688
27,741
239
30,429
30,668
( 1,070 )
29,598
2020
Jushi PA
Pennsylvania
1959/2020
275
5,603
34,013
275
39,616
39,891
( 2,009 )
37,882
2018
Maitri PA
Pennsylvania
1970/2019
233
6,249
15,884
233
22,133
22,366
( 1,762 )
20,604
2019
F-25
Table of Contents
Columbia Care PA
Pennsylvania
1988/2020
1,353
11,854
29,745
1,353
41,599
42,952
( 1,391 )
41,561
2019
PharmaCann PA
Pennsylvania
2021
954
—
27,070
954
27,070
28,024
( 1,027 )
26,997
2019
GTI PA
Pennsylvania
1927/2017
1,435
19,098
19,304
1,435
38,402
39,837
( 3,775 )
36,062
2019
Curaleaf PA
Pennsylvania
1980/2019
1,228
13,080
12,423
1,228
25,503
26,731
( 2,243 )
24,488
2019
Holistic PA
Pennsylvania
1930/2020
941
7,941
10,265
941
18,206
19,147
( 840 )
18,307
2020
Parallel PA
Pennsylvania
1976/2021
6,979
34,781
25,890
6,979
60,671
67,650
( 1,050 )
66,600
2021
Parallel TX
Texas
(11)
2,222
1,195
3,861
2,222
5,056
7,278
( 14 )
7,264
2021
CO/PA/ND Portfolio
Various (11)
Various (11)
17,526
44,134
—
17,526
44,134
61,660
( 52 )
61,608
2021
Columbia Care VA
Virginia
2019/2020
231
11,582
7,936
231
19,518
19,749
( 1,570 )
18,179
2020
4Front WA
Washington
1997/2015
1,826
15,684
—
1,826
15,684
17,510
( 515 )
16,995
2020
Total
$
122,386
$
733,737
$
865,981
$
122,386
$
1,599,718
$
1,722,104
$
( 81,938 )
$
1,640,166
(1) Portfolio consists of eight properties constructed and renovated between 1969 and 2019.
(2) Portfolio consists of four properties constructed and renovated between 1964 and 2020.
(3) Portfolio consists of two properties constructed in 1998 and 2019.
(4) Portfolio consists of two properties constructed in 1981 and 2019. One of the properties was renovated in 2020.
(5) Portfolio consists of two properties originally constructed in 1982 and 2014. Both properties were renovated and expanded in 2020 and 2021.
(6) Portfolio consists of two properties constructed in 2015 and 2016. Both properties were renovated in 2019.
(7) Portfolio consists of two properties constructed in 1999 and 2018.
(8) Portfolio consists of six properties constructed and renovated between 1957 and 2019.
(9) Portfolio consists of two properties constructed between 1962 and 1974. Both properties were renovated in 2020.
(10) Portfolio consists of 27 properties with 24 properties located in Colorado, two properties located in North Dakota, and one property located in Pennsylvania, which were constructed and renovated between 1870 and 2020.
(11) As of December 31, 2021, all or a portion of the property was under active development or redevelopment.
A reconciliation of historical cost and related accumulated depreciation is as follows (in thousands):
Years Ended December 31,
2021
2020
2019
Investment in real estate, at cost:
Balance at beginning of year
$
1,060,239
$
518,031
$
150,930
Purchases of investments in real estate
277,717
241,159
259,889
Additions and improvements
384,148
301,049
107,212
Balance at end of year
$
1,722,104
$
1,060,239
$
518,031
Accumulated Depreciation:
Balance at beginning of year
$
( 40,195 )
$
( 12,170 )
$
( 3,571 )
Depreciation expense
( 41,743 )
( 28,025 )
( 8,599 )
Balance at end of year
$
( 81,938 )
$
( 40,195 )
$
( 12,170 )
F-26
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.