What changed in this filing

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Item 1. Financial Statements

2022-08-04 compared with 2022-05-05 · 219 added, 126 removed, 418 unchanged (45% of the section changed)

6 unchanged sentences

Tenant improvements

Construction in progress

Total real estate, at cost

13 unchanged sentences

Dividends payable

Other liabilities

Rent received in advance and tenant security deposits

Other liabilities

Total liabilities

2 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 March 31, 2022 and December 31, 2021

9.00 % Series A cumulative redeemable preferred stock, $ 15,000 liquidation preference ($ 25.00 per share), 600,000 shares issued and outstanding at June 30, 2022 and December 31, 2021

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

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

27,973,429 and 25,612,541 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

7 unchanged sentences

For the Three Months Ended

For the Six Months Ended

Rental (including tenant reimbursements)

Other revenue

Total revenues

15 unchanged sentences

(In thousands, except share amounts)

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

Three Months Ended June 30, 2021

Stockholders’

Balance, December 31, 2021

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

Stockholders’

Balances at beginning of period

Issuance of unvested restricted stock, net of forfeitures

4 unchanged sentences

Stock-based compensation

Balance, March 31, 2022

Three Months Ended March 31, 2021

Balances at end of period

Six Months Ended June 30, 2022

Six Months Ended June 30, 2021

Stockholders’

Balance, December 31, 2020

Stockholders’

Balances at beginning of period

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

Preferred stock dividend

1 unchanged sentence

Stock-based compensation

Balance, March 31, 2021

Balances at end of period

See accompanying notes to the condensed consolidated financial statements.

2 unchanged sentences

(In thousands)

For the Three Months Ended

For the Six Months Ended

Cash flows from operating activities

13 unchanged sentences

Purchases of investments in real estate

Reimbursements of tenant improvements and construction funding

Funding of draws for tenant improvements and construction

Funding of construction loan and other investments

5 unchanged sentences

Issuance of common stock, net of offering costs

Gross proceeds from issuance of Notes due 2026

Payment of deferred financing costs from issuance of Notes due 2026

Dividends paid to common stockholders

1 unchanged sentence

Taxes paid related to net share settlement of equity awards

Net cash used by financing activities

Net decrease in cash, cash equivalents and restricted cash

Net cash provided by financing activities

Net (decrease) increase in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash, beginning of period

3 unchanged sentences

Supplemental disclosure of non-cash investing and financing activities:

Accrual for reimbursements of improvements and construction funding

Accrual for draws for tenant improvements and construction funding

Deposits applied for acquisitions

Accrual for common and preferred stock dividends declared

Accrual for stock issuance costs

Accrual for deferred financing costs

Exchange of Exchangeable Senior Notes for common stock

3 unchanged sentences

Notes to the Condensed Consolidated Financial Statements

March 31, 2022

June 30, 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”).

13 unchanged sentences

This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2022.

Variable Interest Entities.

From time to time, the Company may acquire properties utilizing a reverse like-kind exchange under Section 1031 of the Internal Revenue Code (“Reverse 1031 Exchange”) in order to defer taxable gains on the subsequent sale of real estate properties.

During the six months ended June 30, 2022, the Company acquired four properties for a total purchase price of approximately $ 82.3 million, excluding transaction costs, as part of Reverse 1031 Exchanges.

The acquired properties are in the possession of limited liability companies whose legal equity interests are owned by a qualified intermediary engaged to execute the Reverse 1031 Exchanges until the Reverse 1031 Exchanges are completed or terminated.

The limited liability companies were deemed to be variable interest entities (“VIEs”) for which the Company is deemed to be the primary beneficiary as the Company has the ability to direct the activities of the entity that most significantly impact its economic performance and the Company has all of the risks and rewards of ownership.

As such, the VIEs, including the acquired properties, are included in the Company’s condensed consolidated financial statements as a consolidated VIE until legal title is transferred to the Company upon the completion of the Reverse 1031 Exchanges.

There were four consolidated VIEs on the Company’s condensed consolidated financial statements as of June 30, 2022.

Federal Income Taxes.

3 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 the condensed consolidated statements of 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 the condensed consolidated statements of income.

Use of Estimates.

25 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 .

We depreciate the leasehold improvements at our corporate office over the shorter of the estimated useful lives or the initial lease term.

For the three months ended June 30, 2022 and 2021, we recognized depreciation expense of approximately $ 15.0 million and $ 9.8 million, respectively, which is included in depreciation and amortization expense in our condensed consolidated statements of income.

For the six months ended June 30, 2022 and 2021, we recognized depreciation expense of approximately $ 28.7 million and $ 18.7 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 seven years .

We depreciate the leasehold improvements at our corporate office over the shorter of the estimated useful lives or the remaining lease term.

Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment.

12 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 three months ended March 31, 2022 and 2021.

No impairment losses were recognized during the six months ended June 30, 2022 and 2021.

Revenue Recognition.

6 unchanged sentences

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.

The developer is required to complete construction by December 1, 2022, subject to extension in certain circumstances.

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

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

As of June 30, 2022, we had funded approximately $ 17.7 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 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.

As of June 30, 2022 and December 31, 2021, approximately $ 32.6 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.

Restricted cash relates to cash held in escrow accounts for future draws for improvements for tenants in accordance with certain lease agreements.

Investments consist of obligations of the U.S.

6 unchanged sentences

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 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.

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):

23 unchanged sentences

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

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.

For the three months ended June 30, 2022 and 2021, we recognized office lease expense of approximately $ 122,000 and $ 57,000 , respectively, which are included in general and administrative expense in our condensed consolidated statements of income.

For the six months ended June 30, 2022 and 2021, we recognized office lease expense of approximately $ 223,000 and $ 114,000 , respectively, which are included in general and administrative expense in our condensed consolidated statements of income.

For the six months ended June 30, 2022 and 2021, amounts paid and classified as operating activities in our condensed consolidated statements of cash flows for the office lease were approximately $ 161,000 and $ 117,000 , 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.

6 unchanged sentences

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.

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.

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.

3 unchanged sentences

Concentration of Credit Risk .

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.

As of June 30, 2022, we owned 110 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 March 31, 2022 and 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 and six months ended June 30, 2022 and 2021, including tenant reimbursements:

For the Three Months Ended

March 31, 2022

For the Six Months Ended

June 30, 2022

Percentage of

PharmaCann Inc.

("PharmaCann")

SH Parent, Inc.

1 unchanged sentence

Ascend Wellness Holdings, Inc.

("Ascend")

Kings Garden Inc.

Columbia Care, Inc.

Trulieve Cannabis Corp.

("Trulieve")

For the Three Months Ended

March 31, 2021

June 30, 2021

Percentage of

PharmaCann Inc.

Ascend Wellness Holdings, LLC

Cresco Labs Inc.

Kings Garden Inc.

For the Six Months Ended

June 30, 2021

Percentage of

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

On July 13, 2022, Kings Garden defaulted on its obligations to pay rent at all of the properties it leases with us.

See Note 12 “Subsequent Events” to our condensed consolidated financial statements included in this report for more information.

As of June 30, 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 March 31, 2022, we had cash accounts in excess of FDIC insured limits.

As of June 30, 2022, we had cash accounts in excess of FDIC insured limits.

We have not experienced any losses in such accounts.

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.

As of June 30, 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 27,973,429 shares of common stock issued and outstanding.

In April 2022, we issued 1,815,790 shares of common stock in an underwritten public offering, including the exercise in full of the underwriters’ option to purchase an additional 236,842 shares, resulting in net proceeds of approximately $ 330.9 million.

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.

During the six months ended June 30, 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 and six months ended June 30, 2022, we issued 47,059 and 412,901 shares, respectively, of our common stock upon exchange by holders of approximately $ 3.1 million and $ 26.9 million, respectively, of outstanding principal amount of our Exchangeable Senior Notes.

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”).

As of June 30, 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 three months ended March 31, 2022:

The following table describes the dividends declared by the Company during the six months ended June 30, 2022:

Declaration Date

9 unchanged sentences

April 14, 2022

June 15, 2022

March 1, 2022 to June 30, 2022

July 15, 2022

June 15, 2022

Series A preferred stock

April 15, 2022 to July 14, 2022

July 15, 2022

Investments in Real Estate

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

The Company acquired the following properties during the six months ended June 30, 2022 (dollars in thousands):

Massachusetts

4 unchanged sentences

March 25, 2022

April 13, 2022

April 27, 2022

Massachusetts

Texas Original TX

June 14, 2022

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

(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.

(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.

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

(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.

As of June 30, 2022, we have distributed approximately $ 1.4 million of the holdback.

The remaining approximately $ 400,000 is included in restricted cash on our condensed consolidated balance sheet.

(5) The acquisitions of the MCP MD, Harvest AZ, TILT MA and Texas Original TX properties were made through consolidated VIEs utilizing Reverse 1031 Exchanges that were entered into at the time each of the properties was acquired.

See Note 2 “Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements – Variable Interest Entities” for more information regarding the Company’s Reverse 1031 Exchanges and consolidation of VIEs.

(6) The tenant is expected to complete improvements at the property, for which we agreed to provide funding of up to approximately $ 10.0 million.

The purchase price includes approximately $ 908,000 attributable to the property which did not satisfy the requirements for sale-leaseback accounting;

therefore, this amount is recognized as a note receivable and is included in other assets, net on our condensed consolidated balance sheet.

(7) Approximately $ 16.9 million was included in other assets;

2 unchanged sentences

approximately $ 115.1 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.

and approximately $ 798,000 was allocated to in-place leases.

The properties acquired during the three and six months ended June 30, 2022 generated approximately $ 1.3 million and $ 3.0 million of rental revenues (including tenant reimbursements), respectively, and approximately $ 954,000 and $ 2.2 million of net operating income after deducting property and depreciation expenses, respectively.

The properties acquired during the three and six months ended June 30, 2021 generated approximately $ 1.8 million and $ 4.8 million of rental revenue (including tenant reimbursements), respectively, and approximately $ 1.5 million and $ 4.0 million of net operating income after deducting property and depreciation expenses, respectively.

During the three and six months ended June 30, 2022, the acquisition of the properties which did not satisfy the requirements for sale-leaseback accounting generated approximately $ 516,000 and $ 906,000 of interest revenue, respectively, 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.

1 unchanged sentence

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

In-place lease intangible assets and related accumulated amortization as of June 30, 2022 and December 31, 2021 is as follows (in thousands):

June 30, 2022

December 31, 2021

2 unchanged sentences

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)

The remaining weighted-average amortization period of the value of acquired in-place leases was approximately 11.2 years, and the estimated annual amortization of the value of the acquired in-place leases as of June 30, 2022 is as follows (in thousands):

2022 (six 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

The above-market lease and related accumulated amortization included in other assets, net on our condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021 is as follows (in thousands):

June 30, 2022

December 31, 2021

3 unchanged sentences

The above-market lease is amortized on a straight-line basis as a reduction to rental revenue over the remaining lease term of approximately 10.9 years.

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

For the three and six months ended June 30, 2022, the amortization of the above-market lease was approximately $ 23,000 and $ 46,000 , respectively.

Lease Amendments

3 unchanged sentences

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):

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

In April 2022, we amended our lease and development agreement with PharmaCann at one of our New York properties, increasing the construction fund by $ 45.0 million to a total of approximately $ 78.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In June 2022, we amended our lease with a subsidiary of Curaleaf Holdings, Inc.

(“Curaleaf”) at one of our Illinois properties, increasing the improvement allowance under the lease by approximately $ 10.9 million to a total of $ 29.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In June 2022, we amended our lease with Sozo Health, Inc.

at one of our Michigan properties, increasing the improvement allowance by approximately $ 1.2 million to a total of approximately $ 7.0 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In June 2022, we amended our lease with a subsidiary of Curaleaf at one of our Pennsylvania properties, increasing the improvement allowance by $ 35.0 million to a total of approximately $ 47.4 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In June 2022, we amended our lease with a subsidiary of Green Thumb Industries Inc.

at one of our Pennsylvania properties, increasing the improvement allowance by $ 55.0 million to a total $ 74.3 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 six months ended June 30, 2022, we capitalized costs of approximately $ 276.3 million and funded approximately $ 291.4 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 June 30, 2022 for future periods is summarized as follows (in thousands):

Contractual Minimum Rent

2022 (nine months ending December 31)

2022 (six months ending December 31)

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”).

As of June 30, 2022, our Operating Partnership had outstanding approximately $ 6.5 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 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 for the Exchangeable Senior Notes at June 30, 2022 was 15.62234 shares of our common stock per $ 1,000 principal amount of Notes and the exchange price at June 30, 2022 was approximately $ 64.01 per share of our common stock.

The exchange rate and exchange price are subject to adjustment in certain circumstances.

1 unchanged sentence

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 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.

At June 30, 2022, the if-exchanged value of the Exchangeable Senior Notes exceeded the principal amount by approximately $ 4.6 million.

During the three and six months ended June 30, 2022, we issued 47,059 and 412,901 shares, respectively, of our common stock upon exchanges by holders of approximately $ 3.1 million and $ 26.9 million, respectively, of outstanding principal amount of our Exchangeable Senior Notes and recognized a loss on the exchanges totaling approximately $ 7,000 and $ 125,000 for the three and six months ended June 30, 2022, respectively, 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 $ 3.0 million and $ 26.7 million for the three and six months ended June 30, 2022, respectively.

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

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Amortization of debt discount

2 unchanged sentences

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

At March 31, 2022

At December 31, 2021

June 30, 2022

December 31, 2021

Principal amount

2 unchanged sentences

Carrying value

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.

Accrued interest payable for the Exchangeable Senior Notes as of June 30, 2022 and December 31, 2021 was approximately $ 71,000 and $ 365,000 , respectively, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.

Notes due 2026

7 unchanged sentences

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

For the Three Months Ended

March 31, 2022

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Amortization of issuance cost

1 unchanged sentence

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

At March 31, 2022

June 30, 2022

December 31, 2021

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Carrying value

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 Operating Partnership may redeem some or all of the Notes due 2026 at its option at any time at the applicable redemption price.

If the Notes due 2026 are redeemed prior to February 25, 2026, the redemption price will be equal to 100 % of the principal amount of the Notes due 2026 being redeemed, plus a make-whole premium and accrued and unpaid interest thereon to, but excluding, the applicable redemption date.

If the Notes due 2026 are redeemed on or after February 25, 2026, the redemption price will be equal to 100 % of the principal amount of the Notes due 2026 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 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)

Management believes that it was in compliance with those covenants as of June 30, 2022.

Accrued interest payable for the Notes due 2026 as of June 30, 2022 and 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 June 30, 2022 (in thousands):

2022 (six months ended December 31)

Net Income Per Share

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

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).

Through June 30, 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 and six months ended June 30, 2022 and 2021 have been included in net income attributable to common stockholders to calculate net income per basic and diluted share.

The 103,742 and 304,348 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the three and six months ended June 30, 2022, respectively, and were included in the computation of diluted earnings per share.

The 2,182,691 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the three and six months ended June 30, 2021, and were included in the computation of diluted earnings per share.

For the three and six months ended June 30, 2022 and 2021, as the performance thresholds for vesting of the performance share units (“PSUs”) were not met as measured as of the respective dates, they were excluded from the calculation of weighted average common shares outstanding – diluted for all periods presented (see Note 10 for further discussion of 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 Six Months Ended

Preferred stock dividends

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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 March 31, 2022 and December 31, 2021 (in thousands):

At March 31, 2022

The following table presents the carrying value and approximate fair value of financial instruments at June 30, 2022 and December 31, 2021 (in thousands):

At June 30, 2022

At December 31, 2021

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(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.

As of June 30, 2022 and December 31, 2021, cash equivalent instruments consisted of $ 32.6 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.

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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 three months ended March 31, 2022 is included in the table below:

A summary of the restricted stock activity under the 2016 Plan and related information for the six months ended June 30, 2022 is included in the table below:

Grant Date Fair

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Balance at March 31, 2022

Balance at June 30, 2022

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

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.

The remaining unrecognized compensation cost of approximately $ 5.1 million for restricted stock awards is expected to be recognized over a weighted-average amortization period of approximately 2.2 years as of June 30, 2022.

The fair value of restricted stock that vested during the six months ended June 30, 2022 was approximately $ 6.9 million.

The following table summarizes our RSU activity for the six months ended June 30, 2022.

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

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Balance at March 31, 2022

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.

Balance at June 30, 2022

The remaining unrecognized compensation cost of approximately $ 6.5 million for RSU awards is expected to be recognized over an amortization period of approximately 2.1 years as of June 30, 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.

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.

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.

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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.

For the three and six months ended June 30, 2022, we recognized stock-based compensation expense of approximately $ 2.7 million and $ 5.3 million, respectively, relating to PSU awards.

For the three and six months ended June 30, 2021, we recognized stock-based compensation expense of approximately $ 1.0 million and $ 2.0 million, respectively, relating to PSU awards.

As of June 30, 2022, the remaining unrecognized compensation cost of approximately $ 22.7 million relating to PSU awards is expected to be recognized over the remaining Performance Period of approximately 2.3 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 March 31, 2022 is presented in the table below (in thousands):

2022 (nine 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 June 30, 2022 is presented in the table below (in thousands):

2022 (six months ending December 31)

Total future contractual lease payments

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Improvement Allowances .

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.

As of June 30, 2022, we had approximately $ 194.4 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 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.

As of June 30, 2022, we had approximately $ 802,000 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 December 1, 2022, subject to extension in certain circumstances.

Environmental Matters.

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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.

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.

Class Action Lawsuit

On April 25, 2022, a federal securities class action lawsuit was filed against the Company and certain of its officers.

The case was named Michael V.

Malozzi, individually and on behalf of others similarly situated v.

Innovative Industrial Properties, Inc., Paul Smithers, Catherine Hastings and Andy Bui, Case No.

2-22-cv-02359, and was filed in the U.S.

District Court for the District of New Jersey.

The lawsuit was purportedly brought on behalf of purchasers of our common stock and alleges that we and certain of our officers made false or misleading statements regarding our business in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), SEC Rule 10b-5, and Section 20(a) of the Exchange Act.

According to the filed complaint, the p laintiff is seeking an undetermined amount of damages, interest, attorneys’ fees and costs and other relief on behalf of the putative classes of all persons who acquired shares of the Company’s common stock between May 7, 2020 and April 13, 2022.

It is possible that similar lawsuits may yet be filed in the same or other courts that name the same or additional defendants.

We intend to defend the lawsuit vigorously.

However, at this time, we cannot predict the probable outcome of this action, and, accordingly, no amounts have been accrued in the Company’s condensed consolidated financial statements.

Derivative Action Lawsuit

On July 26, 2022, a derivative action lawsuit was filed against the Company and certain of its officers and directors.

The case was named John Rice, derivatively on behalf of Innovative Industrial Properties, Inc.

Paul Smithers, Catherine Hastings, Andy Bui, Alan Gold, Gary Kreitzer, Mary Curran, Scott Shoemaker, David Stecher, and Innovative Industrial Properties, Inc., and was filed in the Circuit Court for Baltimore City, Maryland.

The lawsuit asserts putative derivative claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets against the directors and certain officers of the Company.

The plaintiffs are seeking declaratory relief, direction to reform and improve corporate governance and internal procedures, and an undetermined amount of damages, restitution, interest, and attorneys’ fees and costs.

The Company intends to vigorously defend this lawsuit.

However, at this time, the Company cannot predict the probable outcome of this action, and, accordingly, no amounts have been accrued in the Company’s condensed consolidated financial statements.

Kings Garden Lawsuit

On July 13, 2022, one of our tenants, Kings Garden Inc.

(“Kings Garden”), defaulted on its obligations to pay base rent and property management fees for the month of July under each of its six leases with our indirect, wholly owned subsidiary, IIP-CA 2 LP, and defaulted on its obligations to reimburse us for certain insurance premiums at the properties incurred by us that are payable by Kings Garden as operating expenses under such leases.

Kings Garden’s monetary default under its leases with us was approximately $ 2.2 million in the aggregate, consisting of approximately $ 1.8 million of base rent and property management fees for the month of July and approximately $ 382,000 of insurance premiums, but excluding applicable late charges and default interest.

We applied a portion of the security deposits under the leases, totaling approximately $ 2.3 million, as payment for these amounts, as well as applicable late charges and default interest through July 13, 2022.

Of the six properties leased to Kings Garden, four were operational, with an expansion project at one of those properties, and the other two properties were in development or redevelopment as of June 30, 2022.

On July 25, 2022, IIP-CA 2 LP filed a lawsuit against Kings Garden.

The case was named IIP-CA 2 LP, a Delaware limited partnership v.

Kings Garden Inc., a Nevada corporation, CK Endeavors, Inc., a California corporation, and JM Endeavors, Inc., a California corporation , and was filed in the Superior Court of the State of California.

The lawsuit asserts claims for breach of contract, declaratory relief, and injunctive relief.

On August 2, 2022, the case was amended to be named IIP-CA 2 LP, a Delaware limited partnership v.

Kings Garden Inc., a Nevada corporation, CK Endeavors, Inc., a California corporation, JM Endeavors, Inc., a California corporation, Michael King, an individual, Gary LaSalle, an individual, Charles Kieley, an individual, and Laurie Kibby, an individual , and to include claims relating to construction at the expansion project and the property that was under redevelopment as of June 30, 2022 for breach of implied covenant of good faith and fair dealing, fraud, negligent misrepresentation, conversion, theft by false pretenses, money had and received, and violations of the Racketeer Influenced and Corrupt Organization Act (18 U.S.C.

Section 1962(c)).

We are seeking monetary damages, interest, attorneys’ fees, and declaratory and injunctive relief.

Although there is at least a reasonable possibility that a loss may have been incurred in connection with the default by Kings Garden and the related construction projects, as of June 30, 2022, we are unable to make such an estimate.

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

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Subsequent Events

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.

Tenant Default

We previously entered into leases (collectively, the “Kings Garden Leases”) with Kings Garden, as tenant, for six properties located in southern California.

On July 13, 2022, Kings Garden defaulted on its obligations to pay base rent and property management fees for the month of July under each of the Kings Garden Leases, and defaulted on its obligations to reimburse us for certain insurance premiums at the properties incurred by us that are payable by Kings Garden as operating expenses under the Kings Garden Leases.

Kings Garden’s monetary default under all of the Kings Garden Leases was approximately $ 2.2 million in the aggregate, consisting of approximately $ 1.8 million of base rent and property management fees for the month of July and approximately $ 382,000 of insurance premiums, but excluding applicable late charges and default interest.

We applied a portion of the security deposits under the Kings Garden Leases, totaling approximately $ 2.3 million, as payment for these amounts, as well as applicable late charges and default interest through July 13, 2022.

As of August 4, 2022, we had not received any additional payments from Kings Garden under any of the Kings Garden Leases, and have approximately $ 373,000 remaining of security deposits under the Kings Garden Leases.

Tenant Rent Abatement

On July 1, 2022, we amended our lease with Calyx Peak, Inc.

at our Missouri property, abating the base rent for the period from July 1, 2022 through December 31, 2022.

As of August 4, 2022, the property was under construction and not yet operational, and construction has been delayed in part due to delays in procurement of construction materials.

On July 29, 2022, we amended our lease with Green Peak Industries, Inc.

at one of our Michigan properties, abating the base rent and property management fee for the period from August 1, 2022 through October 31, 2022.

As of August 4, 2022, the property was

under construction and not yet operational, and construction has been delayed in part due to delays in procurement of construction materials.

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