What changed in this filing

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Item 1. Financial Statements

2022-05-05 compared with 2021-11-04 · 215 added, 251 removed, 329 unchanged (59% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

September 30,

Real estate, at cost:

1 unchanged sentence

Tenant improvements

Construction in progress

Total real estate, at cost

1 unchanged sentence

Net real estate held for investment

Construction loan

Construction loan receivable

Cash and cash equivalents

Restricted cash

Right of use office lease asset

In-place lease intangible assets, net

Other assets, net

1 unchanged sentence

Exchangeable Senior Notes, net

Unsecured senior notes, net

Notes due 2026, net

Tenant improvements and construction funding payable

7 unchanged sentences

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

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

9.00 % Series A cumulative redeemable preferred stock, $ 15,000 liquidation preference ($ 25.00 per share), 600,000 shares issued and outstanding at March 31, 2022 and December 31, 2021

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

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

26,107,769 and 25,612,541 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

Additional paid-in capital

7 unchanged sentences

For the Three Months Ended

For the Nine Months Ended

September 30,

Rental (including tenant reimbursements)

Other revenue

Total revenues

1 unchanged sentence

General and administrative expense

Depreciation expense

Depreciation and amortization expense

Total expenses

2 unchanged sentences

Interest expense

Loss on exchange of Exchangeable Senior Notes

Preferred stock dividends

6 unchanged sentences

(In thousands, except share amounts)

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

Stockholders’

Three Months Ended March 31, 2022

Stockholders’

Balances at beginning of period

Balance, December 31, 2021

Adjustment to opening balance upon adoption of ASU 2020-06 (Note 2)

Issuance of unvested restricted stock, net of forfeitures

Exchange of Exchangeable Senior Notes

Net proceeds from sale of common stock

2 unchanged sentences

Stock-based compensation

Balances at end of period

Nine Months Ended September 30, 2021

Nine Months Ended September 30, 2020

Stockholders’

Balance, March 31, 2022

Three Months Ended March 31, 2021

Stockholders’

Balances at beginning of period

Exchange of exchangeable senior notes

Net proceeds from sale of common stock

Balance, December 31, 2020

Issuance of unvested restricted stock, net of forfeitures

2 unchanged sentences

Stock-based compensation

Balances at end of period

Balance, March 31, 2021

See accompanying notes to the condensed consolidated financial statements.

2 unchanged sentences

(In thousands)

For the Nine Months Ended

September 30,

For the Three Months Ended

Cash flows from operating activities

Adjustments to reconcile net income to net cash provided by operating activities

Depreciation and amortization

Loss on exchange of Exchangeable Senior Notes

Other non-cash adjustments

17 unchanged sentences

Issuance of common stock, net of offering costs

Gross proceeds from issuance of unsecured senior notes

Payment of deferred financing costs from issuance of unsecured senior notes

Dividends paid to common stockholders

1 unchanged sentence

Taxes paid related to net share settlement of equity awards

Net cash provided by financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

Net cash used by financing activities

Net decrease in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash, beginning of period

Cash, cash equivalents and restricted cash, end of period

Supplemental disclosure of cash flow information:

1 unchanged sentence

Supplemental disclosure of non-cash investing and financing activities:

Accrual for reimbursements of tenant improvements and construction funding

Accrual for reimbursements of improvements and construction funding

Deposits applied for acquisitions

1 unchanged sentence

Accrual for stock issuance costs

Exchange of exchangeable senior notes

Exchange of Exchangeable Senior Notes for common stock

Operating lease liability for obtaining right of use asset

See accompanying notes to the condensed consolidated financial statements.

1 unchanged sentence

Notes to the Condensed Consolidated Financial Statements

September 30, 2021

March 31, 2022

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

We are an internally-managed real estate investment trust (“REIT”) focused on the acquisition, ownership and management of specialized properties leased to experienced, state-licensed operators for their regulated state-licensed cannabis facilities.

We 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, taxes and insurance.

We were incorporated in Maryland on June 15, 2016.

7 unchanged sentences

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

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

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

Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included.

5 unchanged sentences

Assuming our dividends equal or exceed our taxable net income, we generally will not be required to pay federal corporate income taxes on such income.

The income taxes recorded on our condensed consolidated statements of income represent amounts paid for city and state income and franchise taxes and are included in general and administrative expenses in the accompanying condensed consolidated statements of income.

Use of Estimates.

9 unchanged sentences

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

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

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

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.

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 our condensed consolidated balance sheets 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 our condensed consolidated balance sheets and is amortized on a straight-line basis as a reduction of rental revenue over the remaining term of the applicable lease.

Cost Capitalization and Depreciation.

5 unchanged sentences

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 three months ended March 31, 2022 and 2021, we recognized depreciation expense of approximately $ 13.7 million and $ 8.8 million, respectively, which are included in depreciation and amortization expense in our condensed consolidated statements of income.

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

14 unchanged sentences

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

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

No impairment losses were recognized during the three months ended March 31, 2022 and 2021.

Revenue Recognition.

Our leases are triple-net leases, an arrangement under which the tenant maintains the property while paying us rent.

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

Contractually obligated reimbursements from

tenants for recoverable real estate taxes, insurance and operating expenses are included in rental revenues in the period when such costs are incurred and reimbursed by the tenants.

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 condensed consolidated financial statements.

4 unchanged sentences

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

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

As of March 31, 2022, we had funded approximately $ 15.5 million of the construction loan.

Cash and Cash Equivalents .

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

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

As of March 31, 2022 and December 31, 2021, approximately $ 32.5 million and $ 72.0 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 improvements for tenants in accordance with certain lease agreements.

Investments consist of obligations of the U.S.

2 unchanged sentences

Exchangeable Notes.

The “Debt with Conversion and Other Options” Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification requires the liability and equity components of exchangeable debt instruments that may be settled in cash upon exchange, including partial cash settlement, to be separately accounted for in a manner that reflects the issuer’s nonexchangeable debt borrowing rate.

The 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.

1 unchanged sentence

We measured the estimated fair value of the debt component of our Exchangeable Senior Notes as of the date of issuance based on our estimated nonexchangeable debt borrowing rate with the assistance of a third-party valuation specialist as we do not have a history of borrowing arrangements and there is limited empirical data available related to the Company’s industry due to the regulatory uncertainty of the cannabis market in which the Company’s tenants operate.

The equity component of our Exchangeable Senior Notes is reflected within additional paid-in capital on our condensed consolidated balance sheets, and the resulting debt discount is amortized over the period during which the Exchangeable Senior Notes are expected to be outstanding (through the maturity date) as additional non-cash interest expense.

The additional non-cash interest expense attributable to our Exchangeable Senior Notes will increase in subsequent periods through the maturity date as the Exchangeable Senior Notes accrete to the par value over the same period.

The equity component of our Exchangeable Senior Notes was reflected within additional paid-in capital on our condensed consolidated balance sheets, and the resulting debt discount was 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.

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, and convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature, will no longer be allocated between debt and equity components.

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.

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 and derecognized approximately $ 1.3 million of the remaining equity component relating to the outstanding principal balance of our Exchangeable Senior Notes at the date of adoption.

Deferred Financing Costs.

8 unchanged sentences

Lease Accounting.

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases;

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

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

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

We adopted Topic 842 effective as of January 1, 2019 using the effective date method and elected the package of practical expedients that allows an entity not to reassess upon adoption (i) whether an expired or existing contract contains a lease, (ii) whether a lease classification related to expired or existing lease arrangements, and (iii) whether costs incurred on expired or existing leases qualify as initial direct costs, and as a lessor, the practical expedient not to separate certain non-lease components, such as common area maintenance, from the lease component if the timing and pattern of transfer are the same for the non-lease component and

associated lease component, and the lease component would be classified as an operating lease if accounted for separately.

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

As lessee, we recognized a liability to account for our future obligations related to our corporate office lease, which had a remaining lease term of approximately 3.5 years and 4.3 years as of September 30, 2021 and December 31, 2020, respectively, excluding the extension option that we are not reasonably certain to exercise, and a corresponding right-of-use asset.

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

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 amendment, we re-measured the lease liability relating to the existing leased space and measured the lease liability relating to the expansion space based on the present value of the respective 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.

2 unchanged sentences

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

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

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

For the three months ended March 31, 2022 and 2021, we recognized office lease expense of approximately $ 101,000 and $ 57,000 , respectively, which are included in general and administrative expense in our condensed consolidated statements of income.

For the three months ended March 31, 2022 and 2021, amounts paid and classified as operating activities in our condensed consolidated statements of cash flows for the office lease were approximately $ 60,000 and $ 59,000 , 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.

5 unchanged sentences

The lease accounting guidance requires accounting for a transaction as a financing in a sale leaseback when the seller-lessee is provided an option to purchase the property from the landlord at the tenant’s option.

Our leases continued to be classified as operating leases and we continue to record revenue for each of our properties on a cash basis.

Our tenant reimbursable revenue and property expenses continue to be presented on a gross basis as rental revenue and as property expenses, respectively, on our condensed consolidated statements of income.

Property taxes paid directly by the lessee to a third party continue to be excluded from our condensed consolidated financial statements.

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

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

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

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

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

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

Substantially all of our leases continued to be classified as operating leases and we continue to record revenue for each of our properties on a cash basis.

Our tenant reimbursable revenue and property expenses continue to be presented on a gross basis as rental revenue and as property expenses, respectively, on our consolidated statements of income.

Property taxes paid directly by the lessee to a third party continue to be excluded from our consolidated financial statements.

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

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

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

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

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

and (c) an amount equal to our gross investment in the property (including the purchase price at acquisition and any additional investment in the property made by us during the term of the lease), indexed to inflation.

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

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

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

Certain of our leases provide the lessee with a right of first refusal or right of first offer in the event we market the leased property for sale.

Recent Accounting Pronouncements.

In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models.

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

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

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

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

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

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

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

Concentration of Credit Risk .

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

As of March 31, 2022, we owned 107 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Texas, Virginia and Washington.

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

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

The following table sets forth the five tenants in our portfolio that represented the largest percentage of our total rental revenues for the three months ended March 31, 2022 and 2021, including tenant reimbursements:

For the Three Months Ended

September 30, 2021

March 31, 2022

Percentage of

PharmaCann Inc.

SH Parent, Inc.

("Parallel")

PharmaCann Inc.

Kings Garden Inc.

Ascend Wellness Holdings, Inc.

Green Thumb Industries, Inc.

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

For the Nine Months Ended

September 30, 2021

Percentage of

PharmaCann Inc.

Ascend Wellness Holdings, Inc.

Cresco Labs Inc.

Kings Garden Inc.

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

Columbia Care, Inc.

For the Three Months Ended

For the Nine Months Ended

September 30, 2020

Percentage of

March 31, 2021

Percentage of

PharmaCann Inc.

Ascend Wellness Holdings, LLC

Cresco Labs Inc.

Ascend Wellness Holdings, Inc.

Holistic Industries, Inc.

Curaleaf Holdings, Inc.

Green Thumb Industries, Inc.

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

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

As of March 31, 2022 and December 31, 2021, none of our properties individually represented more than 5 % of our net real estate held for investment.

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

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

As of March 31, 2022, we had cash accounts in excess of FDIC insured limits.

We have not experienced any losses in such accounts.

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

As of March 31, 2022, the Company was authorized to issue up to 50,000,000 shares of common stock, par value $ 0.001 per share, and there were 26,107,769 shares of common stock issued and outstanding.

We are party to equity distribution agreements with certain sales agents, pursuant to which we may offer and sell from time to time through an “at-the-market” offering program (the “ATM Program”) up to $ 500.0 million in shares of our common stock.

During the three months ended March 31, 2022, we sold 117,023 shares of our common stock for net proceeds of approximately $ 21.1 million under the ATM Program, which includes the payment of approximately $ 434,000 to one sales agent as commission for such sales.

During the three months ended March 31, 2022, we issued 365,842 shares of our common stock upon exchange by holders of approximately $ 23.9 million of outstanding principal amount of our Exchangeable Senior Notes.

Preferred Stock

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

As of March 31, 2022, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value $ 0.001 per share, and there were issued and outstanding 600,000 shares of 9.00 % Series A Cumulative Redeemable Preferred Stock, $ 0.001 par value per share (the “Series A Preferred Stock”).

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

1 unchanged sentence

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

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

The following table describes the dividends declared by the Company during the three months ended March 31, 2022:

Declaration Date

9 unchanged sentences

April 14, 2022

June 15, 2021

April 1, 2021 to June 30, 2021

July 15, 2021

June 15, 2021

Series A preferred stock

April 15, 2021 to July 14, 2021

July 15, 2021

September 15, 2021

July 1, 2021 to September 30, 2021

October 15, 2021

September 15, 2021

Series A preferred stock

July 15, 2021 to October 14, 2021

October 15, 2021

Investments in Real Estate

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

The Company acquired the following properties during the three months ended March 31, 2022 (dollars in thousands):

Massachusetts

January 28, 2022

Kings Garden CA

February 10, 2022

March 23, 2022

GPI MI Davis Hwy

April 16, 2021

Massachusetts

August 3, 2021

August 13, 2021

Calyx Peak MO

September 17, 2021

September 24, 2021

Kings Garden CA

March 25, 2022

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

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

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

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

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

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

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

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

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

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

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

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

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

(2) The acquisition of the property did not satisfy the requirements for sale-leaseback accounting and therefore, the transaction is recognized as a note receivable and is included in other assets, net on our condensed consolidated balance sheet.

(3) The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ 4.6 million.

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

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

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

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

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

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

New Lease and Lease Amendments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(4) The purchase price includes $ 1.8 million holdback held in an escrow account, which is subject to distribution to the seller upon seller’s completion of certain improvements at the property, which is included in restricted cash on our condensed consolidated balance sheet.

(5) Approximately $ 16.0 million was included in other assets;

$ 1.8 million was included in restricted cash;

approximately $ 6.3 million was allocated to land;

approximately $ 38.0 million was allocated to building and improvements;

and approximately $ 265,000 was allocated to an in-place lease.

The properties acquired during the three months ended March 31, 2022 generated approximately $ 532,000 of rental revenues (including tenant reimbursements) and approximately $ 388,000 of net operating income after deducting property and depreciation expenses, during that period.

The properties acquired during the three months ended March 31, 2021 generated approximately $ 911,000 of rental revenue (including tenant reimbursements) and approximately $ 743,000 of net operating income after deducting property and depreciation expenses, during that period.

During the three months ended March 31, 2022, the acquisition of the property which did not satisfy the requirements for sale-leaseback accounting generated approximately $ 298,000 of interest revenue, which is included in other revenue on our condensed consolidated statements of income.

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.

Acquired In-Place Lease Intangible Assets

In-place lease intangible assets and related accumulated amortization as of March 31, 2022 and December 31, 2021 is as follows (in thousands):

March 31, 2022

December 31, 2021

In-place lease intangible assets

Accumulated amortization

In-place lease intangible assets, net

Amortization of in-place lease intangible assets classified in depreciation and amortization expense in our condensed consolidated statements of income was approximately $ 198,000 for the three months ended March 31, 2022.

The weighted-average amortization period of the value of acquired in-place leases was approximately 11.4 years, and the estimated annual amortization of the value of the acquired in-place leases as of March 31, 2022 is as follows (in thousands):

2022 (nine months ending December 31)

Above-Market Lease

The above-market lease and related accumulated amortization included in other assets, net on our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 is as follows (in thousands):

March 31, 2022

December 31, 2021

Above-market lease

Accumulated amortization

Above-market lease, net

The above-market lease is amortized on a straight-line basis as a reduction to rental revenue over the remaining lease term of approximately 11.2 years.

For the three months ended March 31, 2022, the amortization of the above-market lease was approximately $ 23,000 .

Lease Amendments

In February 2022, we amended our lease with Green Peak Industries, Inc.

at one of our Michigan properties, increasing the improvement allowance under the lease by $ 18.0 million to a total of approximately $ 47.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

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

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

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

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

In March 2022, we amended our lease with Holistic Industries Inc.

at one of our Michigan properties, increasing the improvement allowance under the lease by $ 3.5 million to a total of $ 22.3 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In March 2022, we amended our lease with a subsidiary of Ascend Wellness Holdings, Inc.

at one of our Michigan properties, increasing the improvement allowance under the lease by $ 4.4 million to a total of $ 19.4 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In March 2022, we amended our lease with a subsidiary of Ascend Wellness Holdings, Inc.

at one of our Massachusetts properties, increasing the improvement allowance under the lease by $ 14.9 million to a total of approximately $ 37.2 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 three months ended March 31, 2022, we capitalized costs of approximately $ 126.9 million and funded approximately $ 129.4 million relating to improvements and construction activities at our properties.

Future contractual minimum rent (including base rent and property management fees) under the operating leases as of March 31, 2022 for future periods is summarized as follows (in thousands):

Contractual Minimum Rent

2021 (three months ending December 31)

2022 (nine months ending December 31)

Exchangeable Senior Notes

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

As of March 31, 2022, our Operating Partnership had outstanding approximately $ 9.5 million principal amount of 3.75 % Exchangeable Senior Notes due 2024 (the “Exchangeable Senior Notes”).

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

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

The exchange rate for the Exchangeable Senior Notes at March 31, 2022 was 15.42947 shares of our common stock per $ 1,000 principal amount of Notes and the exchange price at March 31, 2022 was approximately $ 64.81 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.

The Exchangeable Senior Notes will pay interest semiannually on March 15 and September 15 of each year at a rate of 3.75 % per annum and will mature on February 21, 2024, unless earlier exchanged or repurchased in accordance with their terms.

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

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

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

At March 31, 2022, the if-exchanged value of the Exchangeable Senior Notes exceeded the principal amount by approximately $ 20.6 million.

During the three months ended March 31, 2022, we issued 365,842 shares of our common stock upon exchanges by holders of approximately $ 23.9 million of outstanding principal amount of our Exchangeable Senior Notes and recognized a loss on the exchanges totaling approximately $ 118,000 , resulting from the difference between the fair value and carrying value of the debt as of the date of the exchange.

The issuance of the shares pursuant to the exchanges resulted in a non-cash increase to our additional paid-in capital account of approximately $ 23.7 million.

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

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Amortization of debt discount

2 unchanged sentences

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

September 30, 2021

December 31, 2020

At March 31, 2022

At December 31, 2021

Principal amount

2 unchanged sentences

Carrying value

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

Unsecured Senior Notes

On May 25, 2021, our Operating Partnership issued $ 300.0 million aggregate principal amount of its 5.50 % Unsecured Senior Notes due 2026 (the “Unsecured Senior Notes”).

The Unsecured Senior Notes are senior unsecured obligations of our Operating Partnership, are fully and unconditionally guaranteed by us and our Operating Partnership’s subsidiaries and rank equally in right of payment with all of the Operating Partnership’s existing and future senior unsecured indebtedness, including the Exchangeable Senior Notes.

However, the Unsecured Senior Notes are effectively subordinated to any of the Company’s, the Operating Partnership’s and the Operating Partnership’s subsidiaries’ future secured indebtedness to the extent of the value of the assets securing such indebtedness.

Accrued interest payable for the Exchangeable Senior Notes as of March 31, 2022 and December 31, 2021 was approximately $ 15,000 and $ 365,000 , respectively, and is included in accounts payable and accrued expenses on our condensed 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 Unsecured Senior Notes are governed by an indenture, dated May 25, 2021, among the Operating Partnership, as issuer, the Company and the Operating Partnership’s subsidiaries, as guarantors, and GLAS Trust Company LLC, as trustee.

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

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

For the Three Months

For the Nine Months

Ended September 30, 2021

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.

The following table details our interest expense related to the Notes due 2026 (in thousands):

For the Three Months Ended

March 31, 2022

Amortization of issuance cost

Total interest expense

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

September 30, 2021

The following table details the carrying value of our Notes due 2026 (in thousands):

At March 31, 2022

December 31, 2021

Principal amount

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If the notes are redeemed on or after February 25, 2026, the redemption price will be equal to 100 % of the principal amount of the notes being redeemed, plus accrued and unpaid interest thereon to, but excluding, the applicable redemption date.

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

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

On May 25, 2021, the Company, the Operating Partnership and the subsidiaries of the Operating Partnership entered into a registration rights agreement with the representative of the initial purchasers of the Unsecured Senior Notes, pursuant to which the

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

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

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

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

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 March 31, 2022.

Accrued interest payable for the Notes due 2026 as of March 31, 2022 and December 31, 2021 was approximately $ 6.2 million and $ 2.1 million, respectively, 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 March 31, 2022 (in thousands):

2022 (nine months ended December 31)

Net Income Per Share

Grants of restricted stock of the Company and restricted stock units (“RSUs”) in share-based payment transactions are considered participating securities prior to vesting and, therefore, are considered in computing basic earnings per share under the two-class method.

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.

2 unchanged sentences

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

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

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

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

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

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

Through March 31, 2022, all of the Company’s participating securities received dividends or dividend equivalents at an equal dividend rate per share or unit.

As a result, distributions to participating securities for the three months ended March 31, 2022 and 2021 have been included in net income attributable to common stockholders to calculate net income per basic and diluted share.

The 507,181 and 2,170,959 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the three months ended March 31, 2022 and 2021, respectively, and were included in the computation of diluted earnings per share.

For the three months ended March 31, 2022, 102,333 shares issuable upon vesting of performance share units (“PSUs”) granted to certain employees were included in dilutive securities, as the performance thresholds for vesting of these PSUs were met as measured as of March 31, 2022.

For the three months ended March 31, 2021, the PSUs granted to certain employees were not included in dilutive securities as of March 31, 2021 as the performance thresholds for vesting of any performance share units were not met (see Note 10 for further discussion of the PSUs).

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

For the Three Months Ended

For the Nine Months Ended

September 30,

Preferred stock dividends

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Weighted-average common shares outstanding:

Restricted stock, RSUs and PSUs

Restricted stock and RSUs

Dilutive effect of Exchangeable Senior Notes

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

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

At September 30, 2021

The following table presents the carrying value and approximate fair value of financial instruments at March 31, 2022 and December 31, 2021 (in thousands):

At March 31, 2022

At December 31, 2021

3 unchanged sentences

Exchangeable Senior Notes (2)

Unsecured Senior Notes (2)

Notes due 2026 (2)

(1) Short-term investments consisting of obligations of the U.S.

government with an original maturity at the time of purchase of greater than three months are classified as held-to-maturity and valued using Level 1 inputs.

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

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

(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 March 31, 2022 and December 31, 2021, cash equivalent instruments consisted of $ 32.5 million and $ 72.0 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.

3 unchanged sentences

The carrying amounts of financial instruments such as cash equivalents invested in certificates of deposit, obligations of the U.S.

government with an original maturity at the time of purchase of less than or equal to three months, accounts payable, accrued expenses and other liabilities approximate their fair values due to the short-term maturities and market rates of interest of these instruments.

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 fair values due to the short-term maturities and market rates of interest of these instruments.

Common Stock Incentive Plan

4 unchanged sentences

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

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

A summary of the restricted stock activity under the 2016 Plan and related information for the three months ended March 31, 2022 is included in the table below:

Grant Date Fair

2 unchanged sentences

Balance at March 31, 2022

Balance at June 30, 2021 and September 30, 2021

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

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

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

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

The remaining unrecognized compensation cost of approximately $ 5.5 million for restricted stock awards is expected to be recognized over a weighted-average amortization period of approximately 2.5 years as of March 31, 2022.

The fair value of restricted stock that vested during the three months ended March 31, 2022 was approximately $ 6.7 million.

The following table summarizes our RSU activity for the three months ended March 31, 2022.

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

5 unchanged sentences

Balance at March 31, 2022

Balance at June 30, 2021 and September 30, 2021

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

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

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

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

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

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

At the end of the Performance Period, if the Company’s total stockholder return is such that the recipient earns Award Shares, the recipient will receive additional shares of common stock relating to dividends deemed to have been paid and reinvested on the Award Shares.

The remaining unrecognized compensation cost of approximately $ 7.2 million for RSU awards is expected to be recognized over an amortization period of approximately 2.3 years as of March 31, 2022.

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 (“2021 PSU 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 “ 2021 PSU Performance Period”) relative to two different comparator groups of companies.

In January 2022, we issued 102,641 “target” PSUs to a select group of officers, which vest and are settled in shares of common stock (referred to herein together with the 2021 PSU Award Shares as the “Award Shares”) based on the Company’s total stockholder return

over a period commencing on January 11, 2022 and ending on December 31, 2024 (referred to herein together with the 2021 PSU Performance Period as the “Performance Periods”) relative to two different comparator groups of companies.

At the end of the applicable Performance Periods, 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 applicable Performance Periods 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 applicable Performance Periods.

At the end of the applicable Performance Periods, if the Company’s total stockholder return is such that the recipient earns Award Shares, the recipient will receive additional shares of common stock relating to dividends deemed to have been paid and reinvested on the Award Shares.

The recipient of the Award Shares may not sell, transfer or otherwise dispose of the Award Shares for a one-year period following the vesting date of the Award Shares.

The grant date fair value of the PSUs granted in January 2021 was $ 12.0 million.

The fair value was calculated using a Monte Carlo simulation pricing model based on the following assumptions:

The grant date fair values of the PSUs granted in January 2021 and January 2022 were $ 12.0 million and $ 20.0 million, respectively.

The fair values were calculated using a Monte Carlo simulation pricing model based on the following assumptions:

2021 PSU Award

2022 PSU Award

Fair Value Assumptions

Valuation date

January 6, 2021

January 7, 2022

Fair value per share on valuation date

3 unchanged sentences

Discount for post vesting restriction

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 expected share price volatility was based on the historical volatility of our shares of common stock over a period of approximately the applicable Performance Periods.

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 applicable valuation date.

The discount for the post vesting restriction was estimated using the Finnerty model.

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

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

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

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 applicable Performance Period.

For the three months ended March 31, 2022, we recognized stock-based compensation expense of $ 2.7 million relating to PSU awards.

As of March 31, 2022, the remaining unrecognized compensation cost of approximately $ 25.3 million relating to PSU awards is expected to be recognized over the remaining Performance Period of approximately 2.5 years.

Commitments and Contingencies

Office Lease .

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

2021 (three months ending December 31)

The future contractual lease payments for our office lease and the reconciliation to the office lease liability reflected in other liabilities in our condensed consolidated balance sheets as of March 31, 2022 is presented in the table below (in thousands):

2022 (nine months ending December 31)

Total future contractual lease payments

2 unchanged sentences

Improvement Allowances .

As of September 30, 2021, we had approximately $ 355.9 million of commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease.

As of March 31, 2022, we had approximately $ 185.3 million of commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease.

Construction Loan.

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

As of March 31, 2022, we had approximately $ 3.0 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.

2 unchanged sentences

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.

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.

On April 25, 2022, we, and certain of our officers, were named as defendants in a federal securities class action lawsuit filed in the United States District Court District of New Jersey.

The lawsuit was purportedly brought on behalf of purchasers of our common stock.

The lawsuit alleges that we and certain of our officers made false or misleading statements regarding our business.

Defendants seek monetary damages and other relief.

We intend to defend the lawsuit vigorously.

We may, from time to time, be a party to other legal proceedings, which arise in the ordinary course of our business.

Although the results of these proceedings, claims, inquiries, and investigations cannot be predicted with certainty, we do not believe that the final outcome of these matters is reasonably likely to have a material adverse effect on our business, financial condition, or results of operations.

Regardless of final outcomes, however, any such proceedings, claims, inquiries, and investigations may nonetheless impose a significant burden on management and employees and may come with significant defense costs or unfavorable preliminary and interim rulings.

Subsequent Events

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

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

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

Unsecured Senior Notes Exchange

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

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

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

Subsequent to March 31, 2022, we acquired the following properties and made the following additional funds available to a tenant for improvements at one of our existing properties (dollars in thousands):

April 13, 2022

April 27, 2022

PharmaCann NY

April 27, 2022

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

(2) Excludes transaction costs.

(3) The amount relates to amendments to our lease and development agreement which provides for an increase in the construction funding at one of our New York properties of up to $ 45.0 million to a total of $ 78.5 million, and also resulted in a corresponding adjustment to the base rent for the lease at the property.

The tenant is expected to construct approximately 98,000 square feet of additional industrial space at the property.

Capital Activity

Subsequent to March 31, 2022, in April 2022, we issued 1,815,790 shares of common stock, including the exercise in full of the underwriters’ option to purchase an additional 236,842 shares, resulting in gross proceeds of approximately $ 345.0 million.

Subsequent to March 31, 2022, we issued 47,059 shares of our common stock upon exchanges by a holder of approximately $ 3.1 million of outstanding principal amount of our Exchangeable Senior Notes.

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

What changed 10-Q

Item 1. Financial Statements