What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-02-24 · 141 added, 70 removed, 261 unchanged (45% of the section changed)

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As of December 31, 2022, we had 19 full-time employees.

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

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

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

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

As of December 31, 2022, we owned 110 properties comprising approximately 8.7 million square feet (including approximately 1.6 million rentable square feet under development/redevelopment) in 19 states.

As of December 31, 2022, we had invested approximately $2.2 billion in the aggregate (consisting of purchase price and funding of draws for construction funding and improvements submitted by tenants, if any, but excluding transaction costs) and had committed an additional approximately $125.5 million to fund draws to certain tenants and sellers for construction and improvements at our properties.

Of the approximately $125.5 million committed to fund draws to certain tenants and sellers for construction and improvements at our properties, approximately $28.9 million was incurred but not funded as of December 31, 2022.

These statistics do not include an $18.5 million loan commitment from us to a developer for construction of a regulated cannabis cultivation and processing facility in California, of which we have funded approximately $18.0 million as of December 31, 2022.

Of these properties, we include 108 properties in our operating portfolio, which were 100% leased to state-licensed cannabis operators as of December 31, 2022, with a weighted-average remaining lease term of approximately 15.3 years.

Rent collection for our operating portfolio (calculated as base rent and property management fees collected as a percentage of contractually due base rent and property management fees, including an aggregate of approximately $2.7 million of security deposits applied for payment of rent for our leases with Kings Garden and Sozo Health, Inc.

(“Sozo”)) was approximately 97% for the year ended December 31, 2022.

Rent collection for our operating portfolio (including approximately $541,000 of security deposits applied for payment of rent from our lease with Sozo) was approximately 94% for the three months ended December 31, 2022.

We do not include in our operating portfolio two of our properties, which were previously leased to Kings Garden, and an expansion project at a property where Kings Garden continues to occupy the property pursuant to a confidential, contingent settlement agreement, all of which were under development as of December 31, 2022, and together are expected to comprise approximately 395,000 rentable square feet upon completion of development.

Factors Impacting Our Operating Results

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

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

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

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

Conditions in Our Markets

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

The ongoing COVID-19 pandemic, or the future outbreak of any other highly infectious or contagious diseases, could materially and adversely impact or cause disruption to our tenants and their operations, and in turn our performance, financial condition, results of operations and cash flows.

The extent to which the ongoing COVID-19 pandemic impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the outbreak and containment measures, among others.

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

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

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

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

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

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

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

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

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

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

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

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

The success of our tenants in operating their businesses and their ability to pay rent continue to be significantly influenced by many challenges including the impact of inflation, labor shortages, supply chain constraints on their cost of doing business, and the U.S.

consumer financial health.

Additionally, market dynamics and the regulatory regime in the states where they operate create challenges that may impact our tenants’ businesses and/or decrease future demand for regulated cannabis cultivation and production facilities.

The potential impact of current economic challenges on the Company’s financial condition, results of operations, and cash flows is subject to change and continues to depend on the extent and duration of these risks and uncertainties.

Market Dynamics in Regulated Cannabis State Programs

States vary significantly in their market dynamics, driven by many factors, including, but not limited to, regulatory frameworks, enforcement policies with respect to illicit, unlicensed cannabis operations, taxation and licensing structures.

For example, in California, according to Global Go Analytics, t he illicit market for cannabis remains a much larger portion of overall sales in the state, and state and local authorities have assessed significant taxes on regulated cannabis products, both of which have had the impact of significantly limiting the growth and profitability for operators in the state’s regulated cannabis market.

Many states continue to experience significant declines in unit pricing for regulated cannabis products, with that decline more pronounced in certain states than in others, which compresses operating margins for operators.

As a result, certain regulated cannabis operators have announced that they are consolidating operations or shuttering certain operations to reduce costs, which if prolonged, could have a material negative impact on operators’ demand for regulated cannabis facilities, including our existing tenants.

Inflation and Supply Chain Constraints

economy is experiencing a sustained increase in inflation rates, which we believe is negatively impacting our tenants.

This inflation has impacted costs for labor and production inputs for regulated cannabis operators, in addition to increasing costs of construction for development and redevelopment projects.

Ongoing labor shortages and global supply chain issues also continue to adversely impact costs and timing for completion of these development and redevelopment projects, which are resulting in cost overruns and delays in commencing operations on certain of our tenants’ projects.

Reduced Capital Availability for Tenants and the Company

Recently, financial markets have been volatile, reflecting heightened geopolitical risks and material tightening of financial conditions since the U.S.

Federal Reserve began increasing interest rates in spring of 2022 and continued uncertainty regarding monetary policy.

Driven in part by overall macroeconomic conditions, capital availability has significantly declined for regulated cannabis operators.

According to Viridian, total equity and debt capital raising for public and private cannabis companies in North America decreased by more than 65% in 2022 versus 2021.

Even more pronounced, total capital raised for the U.S.

regulated cannabis cultivation and retail sector was down over 70% in 2022 versus 2021, with equity capital raised in the sector down over 96% and no equity deal in 2022 raising more than $25 million, according to Viridian.

Cannabis stock prices (measured by the MSOS ETF) had declined more than 70% by the end of 2022, and were trading at multi-year lows.

According to Viridian, mergers and acquisitions activity in the U.S.

regulated cannabis industry also declined significantly in 2022, with aggregate transaction volume in dollar terms down nearly 70% on nearly 50% fewer transactions versus 2021.

Capital raising activities by U.S.

REITs experienced a steep decline in 2022, with that decline more pronounced in the second half of 2022.

According to NAREIT, U.S.

REITs raised $41.5 billion in debt and equity during 2022, compared to $133.6 billion in 2021, representing the lowest level since 2009.

Significant Tenants and Concentrations of Risk

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See Note 2 in the notes to the consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest percentage of our total rental revenues for the year ended December 31, 2022.

In July 2022, Kings Garden, a tenant of ours at six properties that we own in southern California, defaulted on its obligations to pay rent.

In November 2022, Parallel defaulted on its obligations to pay rent at one of our properties in Pennsylvania, and Green Peak defaulted on its obligations to pay rent at one our properties in Michigan.

See Part I, Item 3.

Legal Proceedings and Note 11 “Commitments and Contingencies — Litigation” to our consolidated financial statements for more information regarding Kings Garden, Parallel and Green Peak.

Competitive Environment

We face competition from a diverse mix of market participants, including but not limited to, other companies with similar business models, independent investors, hedge funds and other real estate investors, hard money lenders, as well as would-be tenants, cannabis operators themselves, all of whom may compete with us in our efforts to acquire real estate zoned for cannabis cultivation and production operations.

We face competition from a diverse mix of market participants, including but not limited to, other companies with similar business models, independent investors, hedge funds, lenders and other real estate investors, as well as potential tenants (cannabis operators themselves), all of whom may compete with us in our efforts to acquire real estate zoned for regulated cannabis operations.

Competition from others may diminish our opportunities to acquire a desired property on favorable terms or at all.

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Operating Expenses

Our operating expenses include general and administrative expenses, including personnel costs, legal, accounting, and other expenses related to corporate governance, public reporting and compliance with the various provisions of U.S.

Our operating expenses include general and administrative expenses, including personnel costs, stock-based compensation, and legal, accounting and other expenses related to corporate governance, public reporting and compliance with the various provisions of U.S.

securities laws.

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Comparison of the Years Ended December 31, 2022 and 2021 (in thousands)

Increase / (Decrease)

Years Ended December 31,

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Total expenses

Gain on sale of real estate

Income from operations

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Interest expense

Loss on induced exchange of Exchangeable Senior Notes

Loss on exchange of Exchangeable Senior Notes

Preferred stock dividends

Net income attributable to common stockholders

Rental Revenues.

Rental revenues for the year ended December 31, 2022 increased by approximately $69.8 million, or 34%, to approximately $274.4 million, compared to approximately $204.6 million for the year ended December 31, 2021.

The increase in rental revenue was attributable to:

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

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

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

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

Rental revenues for the year ended December 31, 2021 also included approximately $625,000 in stipulated rent paid by the receivership in place previously at our Los Angeles, California property related to rent owed to us by the receivership in 2020.

The receivership concluded and we re-leased the property in January 2021 to a subsidiary of Holistic Industries Inc.

● The nine properties we acquired in 2022 which generated approximately $10.2 million of rental revenue in 2022;

● The 37 properties we acquired in 2021 which generated approximately $47.9 million of rental revenue in 2022, including related rents on amendments which increased the improvement allowances on four of the leases, compared to approximately $18.6 million in 2021, an increase of approximately $29.3 million;

● The amendments to increase improvement allowances for eight properties that we acquired prior to 2021, the additional purchase of land which was included in the corresponding lease for one property, the annual rent escalations on the 64 properties we acquired prior to 2021, which collectively resulted in approximately $24.6 million in additional rental revenue during the year ended December 31, 2022 versus 2021;

● An increase of approximately $5.7 million in tenant reimbursements revenue for property tax and insurance, to approximately $10.1 million for the year ended December 31, 2022, compared to approximately $4.4 million for the year ended December 31, 2021.

The increase in rental revenues was partially offset by a decrease in rental revenues of approximately $716,000, which was the result of the cessation of lease payments after the sale of one of our Pennsylvania properties that was leased to a subsidiary of Maitri in November 2022.

Rental revenues for the year ended December 31, 2022 also included an aggregate of approximately $3.3 million of security deposits applied for payment of rent (including tenant reimbursements) for our leases with Kings Garden and Sozo.

Rental revenues for the year ended December 31, 2022 were negatively impacted by non-collection of rent during the period totaling approximately $8.6 million (consisting of approximately $8.2 million of contractual base rents and property management fees from four tenants, Kings Garden, Medical Investor Holdings, LLC (“Vertical”), Green Peak and Parallel, and approximately $440,000 for tenant reimbursements for property insurance premiums and property taxes from two tenants, Kings Garden and Vertical).

Other Revenues.

Other revenues for the year ended December 31, 2022 consists of interest revenue related to leases for property acquisitions that did not satisfy the requirements for sale-leaseback accounting.

Property Expenses .

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

Property expenses for the year ended December 31, 2022 increased by approximately $6.1 million, compared to 2021.

The increase was primarily due to new property acquisitions and additional investment in existing properties which resulted in higher property insurance premiums and property taxes that we paid for our properties.

Property expenses are generally reimbursable to us by the tenants under the terms of the leases.

For the year ended December 31, 2022, property expenses included approximately $440,000 of non-reimbursed expenses related to Kings Garden and Vertical lease defaults.

General and Administrative Expense .

General and administrative expense for the year ended December 31, 2022 increased by approximately $15.5 million, or 68%, to approximately $38.5 million, compared to approximately $23.0 million for the year ended December 31, 2021.

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

The increase in general and administrative expense was primarily due to higher compensation to employees, the hiring of additional employees, higher public company, travel and occupancy costs and approximately $3.0 million in litigation-related expenses incurred during the year ended December 31, 2022 related to matters described in Note 11 “Commitments and Contingencies – Litigation” to our consolidated financial statements included in this report.

Compensation expense for the years ended December 31, 2022 and 2021 included approximately $17.5 million and $8.6 million, respectively, of non-cash stock-based compensation.

Depreciation and Amortization Expense.

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

The increase in depreciation and amortization expense was related to depreciation on properties that we acquired and the placement into service of construction and improvements at certain of our properties.

Interest and Other Income .

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

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

The increase in interest and other income was primarily due to higher interest bearing investments.

Interest Expense .

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

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

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

Loss on Induced Exchange of Exchangeable Senior Notes .

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

For the year ended December 31, 2022, interest expense increased by approximately $215,000, or 1%, to approximately $18.3 million, compared to $18.1 million for the year ended December 31, 2021.

The increase in interest expense was primarily due to the additional interest expense on our Notes due 2026 issued in May 2021, partially offset by a decrease in interest expense on our Exchangeable Senior Notes due to exchanges by holders of approximately $26.9 million of outstanding principal amount of our Exchangeable Senior Notes during the year ended December 31, 2022 and the induced exchange of approximately $110.4 million principal amount of our Exchangeable Senior Notes in December 2021.

See Note 7 in the notes to the consolidated financial statements included in this report for further information.

Gain on Sale of Real Estate .

Gain on sale of real estate is attributable to the sale in November 2022 of one of our Pennsylvania properties that was leased to a subsidiary of Maitri for $23.5 million, excluding transactions costs.

Loss on Exchange of Exchangeable Senior Notes .

Loss on exchange of Exchangeable Senior Notes is attributable to the exchange agreements we executed with certain holders of our Exchangeable Senior Notes.

See Note 7 in the notes to the consolidated financial statements included in this report for further information.

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

Years Ended December 31,

Year Ended December 31,

Net cash provided by operating activities

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

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

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

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

Cash flows provided by operating activities increased from 2021 to 2022 primarily due to leases for properties we acquired during these time periods, annual escalations of base rent on our leases, and amendments to existing leases to increase improvement allowances at those properties, which resulted in a corresponding increase in base rents, partially offset by rent payment defaults by certain tenants, higher cash compensation to employees, higher public company, travel and occupancy costs and increased litigation expenses.

Cash flows used in investing activities for the years ended December 31, 2022 and 2021 were approximately $396.2 million and $384.1 million, respectively.

Cash flows used in investing activities increased from 2021 to 2022 primarily due to less net maturities of short-term investments, partially offset by a decrease in purchases of new properties, a decrease in funding of improvement allowances and construction funding, and receipt of the proceeds from sale of one of our Pennsylvania properties previously leased to Maitri.

Cash flows provided by financing activities for the year ended December 31, 2022 were approximately $164.2 million, primarily related to approximately $352.0 million in net proceeds from the issuance of our common stock, partially offset by dividend payments of approximately $185.3 million to common and preferred stockholders and approximately $2.5 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.

Cash flows provided by financing activities for the year ended December 31, 2021 were approximately $155.8 million, primarily related to approximately $293.2 million in net proceeds from the issuance of our Notes due 2026, partially offset by dividend payments of approximately $132.3 million to common and preferred stockholders, approximately $3.4 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees, and approximately $1.7 million related to the induced exchange of Exchangeable Senior Notes pursuant to the Exchange Transactions.

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

Liquidity and Capital Resources

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Sources and Uses of Cash

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

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

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

Because substantially all our leases are triple net, our tenants are generally responsible for the maintenance, insurance and property taxes associated with the properties they lease from us.

If a tenant defaults on one of our leases or the lease term expires with no tenant renewal, we would incur the property costs not paid by the tenant during the time it takes to re-lease or sell the property.

As of December 31, 2022, we owned 110 properties.

Of these properties, we include 108 properties in our operating portfolio, which were 100% leased to state-licensed cannabis operators, with a weighted-average remaining lease term of approximately 15.3 years.

Rent collection for our operating portfolio (including approximately $541,000 of security deposits applied for payment of rent for our lease with Sozo) was approximately 94% for the three months ended December 31, 2022.

In July 2022, Kings Garden defaulted on its obligations to pay rent at all of the properties that Kings Garden leases from us.

Two of our properties, which were previously leased to Kings Garden, and an expansion project at a property where Kings Garden continues to occupy the property pursuant to a confidential, contingent settlement agreement, were under development as of December 31, 2022, and together are expected to comprise approximately 395,000 rentable square feet upon completion of development.

See Part I, Item 3.

Legal Proceedings and Note 11 “Commitments and Contingencies — Litigation” to our consolidated financial statements for more information regarding Kings Garden, Parallel and Green Peak.

We expect to incur some property-level operating costs from time to time in periods during which properties that become vacant are being remarketed.

In addition, we may recognize an expense for certain property costs, such as insurance premiums and real estate taxes billed in arrears, if we believe the tenant is likely to vacate the property before making payment on those obligations or may be unable to pay such costs in a timely manner.

Property costs are generally not significant to our operations, but the amount of property costs can vary quarter to quarter based on the number of property vacancies and whether we have any underperforming properties.

We may advance certain property costs on behalf of our tenants but expect that the majority of these costs will be reimbursed by the tenant and do not anticipate that they will be significant to our operations.

For the year ended December 31, 2022, property expenses included approximately $440,000 of non-reimbursed expenses related to Kings Garden and Vertical lease defaults.

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

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The Notes due 2026 are the Operating Partnership’s general unsecured and unsubordinated obligations, are fully and unconditionally guaranteed by us and all of the direct and indirect subsidiaries of the Operating Partnership, and rank equally in right of payment with all of the Operating Partnership’s existing and future senior unsecured indebtedness, including the Exchangeable Senior Notes.

The terms of the Notes due 2026 are governed by an indenture, which requires compliance with various financial covenants including limits on the amount of total leverage and secured debt maintained by the Operating Partnership and which require the

Operating Partnership to maintain minimum levels of debt service coverage.

Management believes that it was in compliance with those covenants as of December 31, 2022.

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

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

As of December 31, 2021, we had approximately $231.7 million in shares of common stock available for issuance under the ATM Program and did not issue any shares of common stock under the ATM Program during the year ended December 31, 2021.

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

During the year ended December 31, 2022, we issued 413,166 shares of our common stock upon exchange by holders of approximately $26.9 million of outstanding principal amount of our Exchangeable Senior Notes.

During the year ended December 31, 2022, we sold 117,023 shares of our common stock for net proceeds of approximately $21.1 million under the Prior ATM Program.

In January 2023, we terminated the Prior ATM Program and entered into new equity distribution agreements for the ATM Program, pursuant to which we may offer and sell from time to time up to $500.0 million of shares of our common stock.

As of February 28, 2023, we had not issued any shares of common stock under this ATM Program.

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

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

Recently, financial markets have been volatile in general, which has also significantly reduced our access to capital.

If sustained, this would have a material adverse effect on our business, financial condition and results of operations, including our ability to continue to make acquisitions of new properties and fund investments for improvements at existing properties.

The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to qualify and maintain its qualification as a REIT.

As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can.

As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent

companies are not REITs can.

During 2022, we declared cash dividends on our common stock totaling $7.10 per share, and cash dividends on our Series A Preferred Stock totaling $2.25 per share.

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

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

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

Year Ended December 31,

Ordinary income distributions

Long-term capital gain distributions (1)

(1) Unrecaptured Section 1250 Gain of $0.058864 represents additional characterization of and is part of long-term capital gain distributions for the year ended December 31, 2022.

The common stock distribution with a record date of December 30, 2022 was a split-year distribution, with $0.33 allocable to 2022 for federal income tax purposes and $1.47 allocable to 2023 for federal income tax purposes.

The common stock distribution with a record date of December 31, 2021 was a split-year distribution, with $0.10 allocable to 2021 for federal income tax purposes and $1.40 allocable to 2022 for federal income tax purposes.

The common stock distribution with a record date of December 31, 2020 was a split-year distribution, with $0.22 allocable to 2020 for federal income tax purposes and $1.02 allocable to 2021 for federal income.

Contractual Obligations

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As of December 31, 2022, we had (1) approximately $96.6 million outstanding in commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease;

and (2) $5.6 million outstanding in commitments to fund a

construction loan, which the developer is required to complete by June 2022, subject to extension in certain circumstances.

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

and (2) approximately $479,000 outstanding in commitments to fund a construction loan.

The commitments discussed in this paragraph are excluded from the table of contractual obligations above, as improvement allowances generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease and construction loan funding generally may be requested by the borrower from time to time, subject to satisfaction of certain conditions.

Supplemental Guarantor Information

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

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

exemption from such registration.

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

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

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

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

Non-GAAP Financial Information and Other Metrics

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

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

We continually evaluate the usefulness, relevance, limitations, and calculation of our reported non-GAAP performance measures to determine how best to provide relevant information to the public and thus such reported measures could change.

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

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

Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by NAREIT.

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

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

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

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

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

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

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

For the three months ended December 31, 2021, September 30, 2021, June 30, 2021, March 31, 2021 and December 31, 2020 and the twelve months ended December 31, 2021, FFO (diluted), Normalized FFO, AFFO and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock.

For all periods presented (other than the twelve months ended December 31, 2020), FFO (diluted), Normalized FFO, AFFO and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock.

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

For the three and twelve months ended December 31, 2021, 81,414 shares issuable upon vesting of performance share units (“PSUs”) granted to certain employees in January 2021 were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of December 31, 2021.

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

No shares were issuable upon vesting of the PSUs for the three months ended December 31, 2022, September 30, 2022 and June 30, 2022 and the twelve months ended December 31, 2022, as the performance thresholds for vesting of the PSUs were not met as measured as of the end of those respective periods.

For the three and twelve months ended December 31, 2021, 81,414 shares issuable upon vesting of PSUs granted to certain employees in January 2021 were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of December 31, 2021.

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

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Real estate depreciation and amortization

Gain on sale of real estate

FFO attributable to common stockholders (basic)

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Financing expense

Loss on induced exchange of Exchangeable Senior Notes

Litigation-related expense

Loss on exchange of Exchangeable Senior Notes

Normalized FFO attributable to common stockholders (diluted)

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Net income attributable to common stockholders

Real estate depreciation

Real estate depreciation and amortization

Gain on sale of real estate

FFO attributable to common stockholders (basic)

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Acquisition-related expense

Loss on induced exchange of Exchangeable Senior Notes

Financing expense

Litigation-related expense

Loss on exchange of Exchangeable Senior Notes

Normalized FFO attributable to common stockholders (diluted)

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Net income attributable to common stockholders

Real estate depreciation

Real estate depreciation and amortization

FFO attributable to common stockholders (basic)

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Acquisition-related expense

Financing expense

Loss on exchange of Exchangeable Senior Notes

Normalized FFO attributable to common stockholders (diluted)

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Non-cash interest expense

Above-market lease amortization

AFFO attributable to common stockholders (diluted)

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Weighted-average common shares outstanding – basic

Restricted stock and restricted stock units

Restricted stock and RSUs

Dilutive effect of Exchangeable Senior Notes

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

Lease Accounting

We account for our leases under ASC 842 “Leases”, which requires significant estimates and judgments by management in its application.

Upon lease inception or lease modification, we assess the lease classification of both the land and building components of the property.

The determination of lease classification requires the calculation of the rate implicit in the lease, which is driven by significant estimates relating to the unguaranteed residual value of the assets at the end of the non-cancelable lease term.

Acquisition of Rental Property, Depreciation and Impairment

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Impact of Inflation

economy is experiencing a sustained increase in inflation rates.

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

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

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

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

See also the discussion under Item 1A, “Risk Factors,” under the caption “Inflation may adversely affect our business and our tenants’ financial condition and results of operations.”

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis