What changed in this filing

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Item 1. Financial Statements

2023-05-09 compared with 2022-11-09 · 213 added, 249 removed, 422 unchanged (52% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

September 30,

Real estate, at cost:

Buildings and improvements

Tenant improvements

Construction in progress

11 unchanged sentences

Notes due 2026, net

Tenant improvements and construction funding payable

Building improvements and construction funding payable

Accounts payable and accrued expenses

6 unchanged sentences

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

9.00 % Series A cumulative redeemable preferred stock, $ 15,000 liquidation preference ($ 25.00 per share), 600,000 shares issued and outstanding at September 30, 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 March 31, 2023 and December 31, 2022

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

27,973,694 and 25,612,541 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

28,034,999 and 27,972,830 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively

Additional paid-in capital

7 unchanged sentences

For the Three Months Ended

For the Nine Months Ended

September 30,

Rental (including tenant reimbursements)

7 unchanged sentences

Interest expense

Loss on exchange of Exchangeable Senior Notes

Gain (loss) on exchange of Exchangeable Senior Notes

Preferred stock dividends

6 unchanged sentences

(In thousands, except share amounts)

Three Months Ended September 30, 2022

Three Months Ended September 30, 2021

Stockholders’

Balances at beginning of period

Exchange of Exchangeable Senior Notes

Payment of common stock offering costs

Preferred stock dividend

Common stock dividend

Stock-based compensation

Balances at end of period

Nine Months Ended September 30, 2022

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2023

Three Months Ended March 31, 2022

Stockholders’

13 unchanged sentences

(In thousands)

For the Nine Months Ended

September 30,

For the Three Months Ended

Cash flows from operating activities

1 unchanged sentence

Depreciation and amortization

Loss on exchange of Exchangeable Senior Notes

(Gain) loss on exchange of Exchangeable Senior Notes

Other non-cash adjustments

9 unchanged sentences

Purchases of investments in real estate

Funding of draws for tenant improvements and construction

Funding of draws for 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 provided by financing activities

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

Net cash used in financing activities

Net decrease 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 draws for tenant improvements and construction funding

Accrual for current-period additions to real estate

Deposits applied for acquisitions

Accrual for common and preferred stock dividends declared

Accrual for stock issuance costs

Exchange of Exchangeable Senior Notes for common stock

3 unchanged sentences

Notes to the Condensed Consolidated Financial Statements

September 30, 2022

March 31, 2023

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, 2023.

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 nine months ended September 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 September 30, 2022.

Reclassification .

We have combined $ 705.3 million of “Tenant improvements” as of December 31, 2022, which represent building improvements in which we are considered to be the accounting owner, with “Building and improvements” in our consolidated balance sheets to conform to the current period presentation as of March 31, 2023.

There was no change to “Total real estate, at cost”.

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.

Use of Estimates.

1 unchanged sentence

Actual results may differ materially from these estimates and assumptions.

The most significant estimates and assumptions made include determination of lease accounting, fair value of acquisition of real estate properties and valuation of stock-based compensation.

Reportable Segment.

8 unchanged sentences

We estimate the fair value of land by reviewing comparable sales within the same submarket and/or region.

We estimate the fair value of buildings and improvements and tenant improvements as if the property was vacant, taking into consideration current replacement costs and other relevant market rate information and may engage third-party valuation specialists.

We estimate the fair value of buildings and improvements as if the property was vacant, taking into consideration current replacement costs and other relevant market rate information and may engage third-party valuation specialists.

Acquisition costs are capitalized as incurred.

4 unchanged sentences

The amount recorded for one above-market operating lease is included in other assets, net on our condensed consolidated balance sheets and is amortized on a straight-line basis as a reduction of rental revenues over the remaining term of the applicable lease.

Sale of Real Estate.

When a real estate asset is sold, we evaluate the provisions of ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”) to determine whether the asset is within the scope of ASC 610-20, including an evaluation of whether the asset being sold is a nonfinancial asset and whether the buyer has gained control of an asset within the scope of ASC 610-20.

In assessing whether the buyer has gained control of the asset, we must determine whether the contract criteria in ASC 606, Revenue from Contracts with Customers (Topic 606) have been met, including 1) the parties to the contract have approved the contract and the contract has commercial substance, 2) we can identify each party’s rights regarding the asset to be transferred, 3) we can identify the payment terms for the asset to be transferred, and 4) it is probable that we will collect substantially all of the consideration to which we will be entitled in exchange for the asset to be transferred.

If all of the contract criteria have been met, the carrying amount of the applicable asset is derecognized with a corresponding gain or loss from the sale recognized in our consolidated statements of income.

If the contract criteria are not all met, the asset transferred is not derecognized and we continue to report the asset in our condensed consolidated balance sheet.

See Note 6 “Investments in Real Estate - Property Disposition” for further information.

Cost Capitalization and Depreciation.

We capitalize costs associated with development and redevelopment activities and tenant improvements when we are considered to be the accounting owner of the resulting assets.

We capitalize costs associated with development and redevelopment activities and improvements when we are considered to be the accounting owner of the resulting assets.

The development and redevelopment activities may be funded by us pursuant to the lease.

2 unchanged sentences

Amounts capitalized are depreciated over estimated useful lives determined by management.

We depreciate buildings and improvements and tenant improvements based on our evaluation of the estimated useful life of each specific asset, not to exceed 40 years .

For the three months ended September 30, 2022 and 2021, we recognized depreciation expense of approximately $ 15.7 million and $ 10.9 million, respectively, which is included in depreciation and amortization expense in our condensed consolidated statements of income.

For the nine months ended September 30, 2022 and 2021, we recognized depreciation expense of approximately $ 44.4 million and $ 29.6 million, respectively, which is included in depreciation and amortization expense in our condensed consolidated statements of income.

We depreciate buildings and 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, 2023 and 2022, we recognized depreciation expense of approximately $ 16.5 million and $ 13.7 million, respectively, which is 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 .

6 unchanged sentences

We define redevelopment properties as existing properties for which we expect to spend significant development and construction costs that are not reimbursements to tenants for improvements at the properties.

When existing properties are determined to be redevelopment properties, the net carrying value of the buildings and improvements and tenant improvements are transferred to construction in progress while the redevelopment activities are in process.

Costs capitalized to construction in progress related to redevelopment properties are transferred to buildings and improvements and tenant improvements at historical cost of the properties as the redevelopment project or phases of projects are placed in service.

During the nine months ended September 30, 2022, we reclassified the net carrying value of buildings and improvements and tenant improvements totaling approximately $ 59.0 million to construction in progress in connection with the default by Kings Garden Inc.

(“Kings Garden”) and the related litigation (see Note 11 “Commitments and Contingencies — Litigation — Kings Garden Lawsuit”).

When existing properties are determined to be redevelopment properties, the net carrying value of the buildings and improvements are transferred to construction in progress while the redevelopment activities are in process.

Costs capitalized to construction in progress related to redevelopment properties are transferred to buildings and improvements at historical cost of the properties as the redevelopment project or phases of projects are placed in service.

During the three months ended March 31, 2023, we reclassified the net carrying value of buildings and improvements totaling approximately $ 51.2 million to construction in progress in connection with the default by Green Peak Industries, Inc.

(“Green Peak”) and the related litigation (see Note 11 “Commitments and Contingencies — Litigation — Green Peak Michigan Litigation”).

Provision for Impairment.

On a quarterly basis, we review current activities and changes in the business conditions of all of our properties prior to and subsequent to the end of each quarter to determine the existence of any triggering events or impairment indicators requiring an impairment analysis.

If triggering events or impairment indicators are identified, we review an estimate of the future undiscounted cash flows for the properties, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration.

If triggering events or impairment indicators are identified, we review an estimate of the future undiscounted cash flows for the properties.

Long-lived assets are individually evaluated for impairment when conditions exist that may indicate that the carrying amount of a long-lived asset may not be recoverable.

4 unchanged sentences

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

No impairment losses were recognized during the nine months ended September 30, 2022 and 2021.

No impairment losses were recognized during the three months ended March 31, 2023 and 2022.

Revenue Recognition.

3 unchanged sentences

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

For the three months ended March 31, 2023, rental revenue recognized included the application of approximately $ 3.1 million of security deposits applied for rent with two tenants who were in default under their respective lease agreements and approximately $ 1.1 million of security deposits for rent with one tenant in connection with lease amendments.

Construction Loan.

1 unchanged sentence

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 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 September 30, 2022, we had funded approximately $ 17.7 million of the construction loan.

In February 2023, we amended the construction loan to provide for, among other things:

(1) the additional capital commitment of the borrower into the project of $ 1.0 million;

(2) our agreement to fund an additional $ 4.5 million into the project;

(3) an increase in the interest rate commencing effective April 1, 2023;

(4) an extension of the loan term to December 31, 2023;

and (5) the provision of additional collateral from the borrower for the loan.

Interest on the loan continues to accrue through March 31, 2023 with monthly payment of interest commencing April 1, 2023.

As of March 31, 2023, we had funded approximately $ 18.4 million of the construction loan.

Cash and Cash Equivalents .

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

As of September 30, 2022 and December 31, 2021, approximately $ 66.5 million and $ 72.0 million, respectively, were invested in short-term money market funds, obligations of the U.S.

As of March 31, 2023 and December 31, 2022, approximately $ 27.9 million and $ 78.0 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.

5 unchanged sentences

Exchangeable Notes.

The liability and equity components of exchangeable debt instruments that may be settled in cash upon exchange, including partial cash settlement, are required to be separately accounted for in a manner that reflects the issuer’s nonexchangeable debt borrowing rate.

The initial proceeds from the sale of our Exchangeable Senior Notes (as defined below) were

allocated between a liability component and an equity component in a manner that reflects interest expense at the rate of similar nonexchangeable debt that could have been issued at such time.

The liability and equity components of exchangeable debt instruments that may be settled in cash upon exchange, including partial cash settlement, were previously required to be separately accounted for in a manner that reflects the issuer’s nonexchangeable debt borrowing rate.

The initial proceeds from the sale of our Exchangeable Senior Notes (as defined below) were allocated between a liability component and an equity component in a manner that reflects interest expense at the rate of similar nonexchangeable debt that could have been issued at such time.

The equity component represents the excess initial proceeds received over the fair value of the liability component of the Exchangeable Senior Notes as of the date of issuance.

We measured the estimated fair value of the debt component of our Exchangeable Senior Notes as of the 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.

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 was 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 were 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):

13 unchanged sentences

Lease Accounting.

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

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

We elected the practical expedient not to separate certain non-lease components from the lease component if the timing and pattern of transfer are the same for the non-lease component and associated lease component, and the lease component would be classified as an operating lease if accounted for separately.

We also elected the short-term lease exception for lessees for leases that are less than 12 months.

As lessee, we recognized a liability to account for our future obligations and a corresponding right-of-use asset related to our corporate office lease.

1 unchanged sentence

In November 2021, we amended the lease to extend the term from April 2025 to January 2027 in connection with an expansion of the leased space which did not commence until February 2022.

As a result of the lease amendment, we re-measured the lease liability relating to the existing leased space and measured the lease liability relating to the expansion space based on the present value of the respective future lease payments (excluding the extension option that we are not reasonably certain to exercise), discounted using the estimated incremental borrowing rate of 5.5 %, which was the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments.

As a result of the lease amendment, we re-measured the lease liability relating to the existing lease space and measured the lease liability to the expansion space based on the present value of the respective future lease payments (excluding the extension option that we are not reasonably certain to exercise), discounted using the estimated incremental borrowing rate of 5.5 %, which was the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments.

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

2 unchanged sentences

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

For the three months ended September 30, 2022 and 2021, we recognized

office lease expense of approximately $ 121,000 and $ 57,000 , respectively, which are included in general and administrative expense in our condensed consolidated statements of income.

For the nine months ended September 30, 2022 and 2021, we recognized office lease expense of approximately $ 344,000 and $ 171,000 , respectively, which are included in general and administrative expense in our condensed consolidated statements of income.

For the nine months ended September 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 $ 282,000 and $ 176,000 , respectively.

For the three months ended March 31, 2023 and 2022, we recognized office lease expense of approximately $ 121,000 and $ 101,000 , respectively, which are included in general and administrative expense in our condensed consolidated statements of income.

For the three months ended March 31, 2023 and 2022, amounts paid and classified as operating activities in our condensed consolidated statements of cash flows for the office lease were approximately $ 123,000 and $ 60,000 , respectively.

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

5 unchanged sentences

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

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.

Substantially all of our leases continue 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 revenues and as property expenses, respectively, on our condensed consolidated statements of income.

5 unchanged sentences

Concentration of Credit Risk .

As of September 30, 2022, we owned 111 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Texas, Virginia and Washington.

As of March 31, 2023, we owned 108 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 and nine months ended September 30, 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 months ended March 31, 2023 and 2022, including tenant reimbursements:

For the Three Months Ended

September 30, 2022

March 31, 2023

Percentage of

1 unchanged sentence

("PharmaCann")

SH Parent, Inc.

("Parallel")

Ascend Wellness Holdings, Inc.

("Ascend")

SH Parent, Inc.

("Parallel") (1)

Green Thumb Industries, Inc.

("Green Thumb")

Trulieve Cannabis Corp.

("Trulieve")

For the Nine Months Ended

September 30, 2022

Percentage of

Kings Garden (1)

Curaleaf Holdings, Inc.

For the Three Months Ended

September 30, 2021

Percentage of

Kings Garden (1)

For the Nine Months Ended

September 30, 2021

March 31, 2022

Percentage of

Cresco Labs Inc.

Kings Garden (1)

(1) On July 13, 2022, Kings Garden defaulted on its obligations to pay rent at all of the properties it leases with us, and pursuant to a confidential, conditional settlement agreement executed on September 11, 2022 between us and Kings Garden, we terminated the leases for two properties that were in development or redevelopment as of September 30, 2022 and regained possession of those properties.

We have recovered $ 10.0 million of funds paid to Kings Garden.

See Note 11 “Commitments and Contingencies — Litigation — Kings Garden Lawsuit” to our condensed consolidated financial statements for more information.

Kings Garden Inc.

("Kings Garden") (2)

Columbia Care, Inc.

(1) Commencing in November 2022, Parallel defaulted on its obligations to pay rent at one of our Pennsylvania properties .

In February 2023, Parallel defaulted on its obligations to pay rent at one of our Texas properties, and we regained possession of that property in March 2023.

See Note 11 “Commitments and Contingencies — Litigation” to our condensed consolidated financial statements for more information.

Excluding security deposits applied for payment of rent for Parallel at one property in Pennsylvania and one property in Texas of approximately $ 1.8 million and $ 395,000 , respectively, Parallel would have represented 6 % of our total rental revenues for the three months ended March 31, 2023.

(2) In July 2022, Kings Garden defaulted on its obligations to pay rent at all of the properties it leases with us, and pursuant to a confidential, conditional settlement agreement executed on September 11, 2022 between us and Kings Garden, we terminated the leases for two properties that were in development or redevelopment as of March 31, 2023 and regained possession of those properties.

See Note 11 “Commitments and Contingencies — Litigation” to our condensed consolidated financial statements for more information.

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

As of September 30, 2022 and December 31, 2021, none of our properties individually represented more than 5 % of our net real estate held for investment.

As of March 31, 2023 and December 31, 2022, none of our properties individually represented more than 5 % of our net real estate held for investment.

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

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

As of March 31, 2023, we had cash accounts in excess of FDIC insured limits.

We have not experienced any losses in such accounts.

As of September 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 27,973,694 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 nine months ended September 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 nine months ended September 30, 2022, we issued 265 and 413,166 shares, respectively, of our common stock upon exchange by holders of approximately $ 17,000 and $ 26.9 million, respectively, of outstanding principal amount of our Exchangeable Senior Notes.

As of March 31, 2023, the Company was authorized to issue up to 50,000,000 shares of common stock, par value $ 0.001 per share, and there were 28,034,999 shares of common stock issued and outstanding.

In January 2023, we terminated the previously existing “at-the-market” offering program and entered into new equity distribution agreements with four 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.

As of March 31, 2023, we had no t sold any shares of common stock under the ATM Program.

During the three months ended March 31, 2023, we issued 32,200 shares of our common stock upon exchange by holders of $ 2.0 million of outstanding principal amount of our Exchangeable Senior Notes.

Preferred Stock

As of September 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).

On or after October 19, 2022, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $ 25.00 per share, plus all accrued and unpaid dividends on such Series A Preferred Stock up to, but excluding the redemption date.

As of March 31, 2023, 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”).

The Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $ 25.00 per share, plus all accrued and unpaid dividends on such Series A Preferred Stock up to, but excluding the redemption date.

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

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

The following table describes the dividends declared by the Company during the three months ended March 31, 2023:

Declaration Date

9 unchanged sentences

April 14, 2023

June 15, 2022

April 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

September 15, 2022

July 1, 2022 to September 30, 2022

October 14, 2022

September 15, 2022

Series A preferred stock

July 15, 2022 to October 14, 2022

October 14, 2022

Investments in Real Estate

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

Massachusetts

January 28, 2022

The Company acquired the following properties during the three months ended March 31, 2023 (dollars in thousands):

Susquehanna Street

February 15, 2023

March 23, 2022

Kings Garden CA

Boltonfield Street

March 3, 2023

April 13, 2022

April 27, 2022

Massachusetts

Texas Original TX

June 14, 2022

Massachusetts

September 1, 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.

(2) The tenant is expected to complete improvements at the property, for which we agreed to provide funding of up to $ 21.9 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 September 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) The purchase price includes approximately $ 1.0 million held in an escrow account, which is subject to distribution to the seller upon seller’s completion of certain improvements at the property and is included in restricted cash on our condensed consolidated balance sheet.

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

$ 2.8 million was included in restricted cash;

(3) Approximately $ 2.6 million was allocated to land;

approximately $ 131.5 million was allocated to building and improvements;

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

The properties acquired during the nine months ended September 30, 2022 generated approximately $ 6.6 million of rental revenues (including tenant reimbursements) and approximately $ 4.8 million of net operating income after deducting property and depreciation expenses.

The properties acquired during the nine months ended September 30, 2021 generated approximately $ 11.9 million of rental revenue (including tenant reimbursements) and approximately $ 10.0 million of net operating income after deducting property and depreciation expenses.

During the three and nine months ended September 30, 2022, the acquisition of the properties which did not satisfy the requirements for sale-leaseback accounting generated approximately $ 538,000 and $ 1.4 million 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.

In connection with the acquisition, we amended the lease for the existing property to incorporate this land into the leased area and reduced the existing improvement allowance under the lease by an amount equal to the purchase price for the land, which was approximately $ 3.3 million.

and approximately $ 32.6 million was allocated to building and improvements.

Acquired In-Place Lease Intangible Assets

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

September 30, 2022

In-place lease intangible assets and related accumulated amortization as of March 31, 2023 and December 31, 2022 is as follows (in thousands):

March 31, 2023

December 31, 2022

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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 $ 215,000 and $ 626,000 for the three and nine months ended September 30, 2022, respectively.

No amortization expense was recognized for three and nine months ended September 30, 2021.

The remaining weighted-average amortization period of the value of acquired in-place leases was approximately 10.9 years, and the estimated annual amortization of the value of the acquired in-place leases as of September 30, 2022 is as follows (in thousands):

2022 (three months ending December 31)

Amortization of in-place lease intangible assets classified in depreciation and amortization expense in our condensed consolidated statements of income was approximately $ 215,000 and $ 198,000 for the three months ended March 31, 2023 and 2022, respectively.

The remaining weighted-average amortization period of the value of acquired in-place leases was approximately 10.2 years, and the estimated annual amortization of the value of the acquired in-place leases as of March 31, 2023 is as follows (in thousands):

2023 (nine months ending December 31)

Above-Market Lease

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

September 30, 2022

The above-market lease and related accumulated amortization included in other assets, net on our condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022 is as follows (in thousands):

March 31, 2023

December 31, 2022

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The above-market lease is amortized on a straight-line basis as a reduction to rental revenues over the remaining lease term of approximately 10.0 years.

For the three and nine months ended September 30, 2022, the amortization of the above-market lease was approximately $ 23,000 and $ 69,000 , respectively.

For the three months ended March 31, 2023 and 2022, the amortization of the above-market lease was approximately $ 23,000 and $ 23,000 , respectively.

Additional Improvement Allowances

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

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

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

(“Holistic”) 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 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.

(“Sozo”) 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 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 nine months ended September 30, 2022, we capitalized costs of approximately $ 303.9 million and funded approximately $ 316.5 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 September 30, 2022 for future periods is summarized as follows (in thousands):

In February 2023, we amended our lease with a subsidiary of Ascend at one of our New Jersey properties, increasing the improvement allowance under the lease by $ 15.0 million to a total of approximately $ 19.6 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

We also amended each of our leases with Ascend to include cross-default provisions applicable to each lease.

In February 2023, we amended our lease and development agreement with PharmaCann at one of our New York properties, increasing the construction fund by $ 15.0 million to a total of approximately $ 93.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

We also amended each of our leases with PharmaCann to include cross-default provisions applicable to each lease.

In February 2023, we amended our lease with a subsidiary of Goodness Growth Holdings Inc.

at one of our New York properties, increasing the improvement allowance under the lease by $ 4.0 million to a total of approximately $ 53.4 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

We also amended each of our leases with Goodness Growth Holdings Inc.

to include cross-default provisions applicable to each lease.

Lease Amendments

In January 2023 , we entered into lease amendments with Holistic Industries Inc.

(“Holistic”) at our properties located in California, Maryland, Massachusetts, Michigan and Pennsylvania, which (1) included cross-default provisions applicable to each lease;

(2) extended the term of each lease;

and (3) provided that 100 % of the base rent shall be applied from the security deposits held by us for (a) the nine months ending September 30, 2023 with respect to the Michigan property and (b) the eight months ending September 30, 2023 with respect to the California property, with pro rata monthly payback of the security deposits over the twelve-month period starting January 2024.

In January 2023, we executed a lease amendment with Calyx Peak, Inc.

at our Missouri property, which (1) extended the term of the lease;

and (2) provided for 100 % base rent deferral through March 31, 2023, with pro rata monthly payback of the deferred rent over the twelve-month period starting April 2023.

In March 2023, we executed a lease amendment with Temescal Wellness of Massachusetts, LLC at our Massachusetts property, which (1) extended the term of the lease;

(2) provided for temporary reduced base rent from April 2023 through January 2024;

and (3) increased base rent for the remainder of the term of the lease.

Capitalized Costs

During the three months ended March 31, 2023, we capitalized costs of approximately $ 66.0 million and funded approximately $ 66.0 million relating to improvements and construction activities at our properties.

Property Disposition

In March 2023, we sold the portfolio of four properties in California previously leased to affiliates of Medical Investor Holdings, LLC (“Vertical”) for $ 16.2 million (excluding transaction costs) with a secured loan for $ 16.1 million with the buyer of the properties.

The loan matures on February 29, 2028 with two options to extend the maturity for twelve months , conditional in each instance on the payment of an extension fee and at least $ 500,000 of the principal balance.

The loan is interest only and payments are payable monthly in advance.

The transaction did not qualify for recognition as a completed sale since not all of the criteria were met.

Accordingly, we have not derecognized the assets transferred.

All consideration received, as well as any future payments, from the buyer will be recognized as a deposit liability and will be included in other liabilities on our condensed consolidated balance sheet

until such time the criteria for recognition as a sale have been met.

In addition, as we have not met all of the held-for-sale criteria, land and building and improvements with a gross carrying value of approximately $ 3.4 million and approximately $ 13.9 million, respectively, and accumulated depreciation of approximately $ 1.4 million as of March 31, 2023, remain on the condensed consolidated balance sheet, and the buildings and improvements continue to be depreciated.

Future Contractual Minimum Rent

Future contractual minimum rent (including base rent and property management fees) under the operating leases as of March 31, 2023 for future periods is summarized as follows (in thousands):

Contractual Minimum Rent

2022 (three months ending December 31)

2023 (nine months ending December 31)

Exchangeable Senior Notes

As of September 30, 2022, our Operating Partnership had outstanding approximately $ 6.4 million principal amount of 3.75 % Exchangeable Senior Notes due 2024 (the “Exchangeable Senior Notes”).

As of March 31, 2023, our Operating Partnership had outstanding approximately $ 4.4 million principal amount of 3.75 % Exchangeable Senior Notes due 2024 (the “Exchangeable Senior Notes”).

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

The exchange rate for the Exchangeable Senior Notes at September 30, 2022 was 15.86813 shares of our common stock per $ 1,000 principal amount of Notes and the exchange price at September 30, 2022 was approximately $ 63.02 per share of our common stock.

The exchange rate for the Exchangeable Senior Notes at March 31, 2023 was 16.41363 shares of our common stock per $ 1,000 principal amount of Notes and the exchange price at March 31, 2023 was approximately $ 60.93 per share of our common stock.

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

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

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

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

At September 30, 2022, the if-exchanged value of the Exchangeable Senior Notes exceeded the principal amount by approximately $ 2.6 million.

During the three and nine months ended September 30, 2022, we issued 265 and 413,166 shares, respectively, of our common stock upon exchanges by holders of approximately $ 17,000 and $ 26.9 million, respectively, of outstanding principal amount of our Exchangeable Senior Notes.

For the nine months ended September 30, 2022, we recognized a loss on the exchange totaling approximately $ 125,000 , 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 $ 17,000 and $ 26.7 million for the three and nine months ended September 30, 2022, respectively.

At March 31, 2023, the if-exchanged value of the Exchangeable Senior Notes exceeded the principal amount by approximately $ 1.1 million.

During the three months ended March 31, 2023, we issued 32,200 shares of our common stock upon exchanges by holders of $ 2.0 million of outstanding principal amount of our Exchangeable Senior Notes.

For the three months ended March 31, 2023, we recognized a gain on the exchange totaling approximately $ 22,000 , 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 net non-cash increase to our additional paid-in capital account of approximately $ 2.0 million for the three months ended March 31, 2023.

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 for the three months ended March 31, 2022.

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

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Amortization of debt discount

For the Three Months Ended March 31,

Amortization of issuance cost

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

September 30, 2022

March 31, 2023

December 31, 2022

Principal amount

Unamortized discount

Unamortized issuance cost

Carrying value

Accrued interest payable for the Exchangeable Senior Notes as of September 30, 2022 and December 31, 2021 was approximately $ 10,000 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 March 31, 2023 and December 31, 2022 was approximately $ 7,000 and $ 70,000 , respectively, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.

Notes due 2026

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However, the Notes due 2026 are effectively subordinated to any of the Company’s, the Operating Partnership’s and the Operating Partnership’s subsidiaries’ future secured indebtedness to the extent of the value of the assets securing such indebtedness.

Interest at a rate of 5.50 % per year is payable on May 15 and November 15 of each year, beginning on November 15, 2021, until the stated maturity date of May 25, 2026.

The Notes due 2026 will pay interest semiannually at a rate of 5.50 % per year and will mature on May 25, 2026.

The terms of the Notes due 2026 are governed by an indenture, dated May 25, 2021, among the Operating Partnership, as issuer, the Company and the Operating Partnership’s subsidiaries, as guarantors, TMI Trust Company, as trustee (as successor-in-interest to GLAS Trust Company LLC), and Securities Transfer Corporation, as registrar (as successor-in-interest to GLAS Trust Company LLC).

2 unchanged sentences

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

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Amortization of issuance cost

1 unchanged sentence

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

September 30, 2022

March 31, 2023

December 31, 2022

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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 September 30, 2022.

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

2022 (three months ended December 31)

Management believes that it was in compliance with those covenants as of March 31, 2023.

Accrued interest payable for the Notes due 2026 as of March 31, 2023 and December 31, 2022 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, 2023 (in thousands):

2023 (nine months ending 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 September 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 nine months ended September 30, 2022 and 2021 have been included in net income attributable to common stockholders to calculate net income per basic and diluted share.

The 100,799 and 235,753 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the three and nine months ended September 30, 2022, respectively, and were included in the computation of diluted earnings per share.

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

For the three and nine months ended September 30, 2022, the performance share units (“PSUs”) granted to certain employees were no t included in dilutive securities as the performance thresholds for vesting of the PSUs were not met as measured as of September 30, 2022.

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

Through March 31, 2023, 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, 2023 and 2022 have been included in net income attributable to common stockholders to calculate net income per basic and diluted share.

The 102,210 and 507,181 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the three months ended March 31, 2023 and 2022, respectively, and were included in the computation of diluted earnings per share.

For the three months ended March 31, 2023, the performance share units (“PSUs”) granted to certain employees were no t included in dilutive securities as the performance thresholds for vesting of the PSUs were not met as measured as of March 31, 2023.

For the three months ended March 31, 2022, 102,333 shares issuable upon vesting of PSUs granted to certain employees were included in dilutive securities, as the performance thresholds for the vesting of these PSUs were met as measured as of March 31, 2022 (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 Nine Months Ended

September 30,

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 September 30, 2022 and December 31, 2021 (in thousands):

At September 30, 2022

The following table presents the carrying value and approximate fair value of financial instruments at March 31, 2023 and December 31, 2022 (in thousands):

At March 31, 2023

At December 31, 2022

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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 September 30, 2022 and December 31, 2021, cash equivalent instruments consisted of $ 66.5 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 March 31, 2023 and December 31, 2022, cash equivalent instruments consisted of $ 27.9 million and $ 78.0 million, respectively, in short-term money market funds that were measured using the net asset value per share that have not been classified using the fair value hierarchy.

The fund invests primarily in short-term U.S.

3 unchanged sentences

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

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

government with an original maturity at the time of purchase of less than or equal to three months, construction loan receivable,

accounts payable, accrued expenses and other liabilities approximate their fair values due to the short-term maturities and market rates of interest of these instruments.

Common Stock Incentive Plan

4 unchanged sentences

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

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

A summary of the restricted stock activity under the 2016 Plan and related information for the three months ended March 31, 2023 is included in the table below:

Grant Date Fair

2 unchanged sentences

Balance at March 31, 2023

Balance at June 30, 2022 and September 30, 2022

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

The remaining unrecognized compensation cost of approximately $ 4.4 million for restricted stock awards is expected to be recognized over a weighted-average amortization period of approximately 2.0 years as of September 30, 2022.

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

The following table summarizes our RSU activity for the nine months ended September 30, 2022.

The remaining unrecognized compensation cost of approximately $ 6.6 million for restricted stock awards is expected to be recognized over a weighted-average amortization period of approximately 2.3 years as of March 31, 2023.

The fair value of restricted stock that vested during the three months ended March 31, 2023 was approximately $ 1.5 million.

The following table summarizes our RSU activity for the three months ended March 31, 2023.

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

5 unchanged sentences

Balance at March 31, 2023

Balance at June 30, 2022 and September 30, 2022

The remaining unrecognized compensation cost of approximately $ 5.5 million for RSU awards is expected to be recognized over an amortization period of approximately 1.8 years as of September 30, 2022.

The remaining unrecognized compensation cost of approximately $ 9.6 million for RSU awards is expected to be recognized over an amortization period of approximately 2.3 years as of March 31, 2023.

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

In January 2022, we issued 102,641 “target” PSUs to a select group of officers, which vest and are settled in shares of common stock

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

In January 2022, we issued 102,641 “target” PSUs to a select group of officers, which vest and are settled in shares of common stock (referred to herein together with the 2021 PSU Award Shares as the “Award Shares”) based on the Company’s total stockholder return over a period commencing on January 11, 2022 and ending on December 31, 2024 (referred to herein together with the 2021 PSU Performance Period as the “Performance Periods”) relative to two different comparator groups of companies.

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

PSUs will also be reduced as necessary so the total value at the vesting date does not exceed 800 % of the grant date PSU price, and if the Company’s absolute total stockholder return during the applicable Performance Periods is negative, the payout of Award Shares is capped at the target number of PSUs, notwithstanding the Company’s outperformance of comparator groups.

PSUs will also be reduced as necessary so the total value at the vesting date does not exceed 800 % of the grant date PSU price, and if the Company’s absolute total stockholder return

during the applicable Performance Periods is negative, the payout of Award Shares is capped at the target number of PSUs, notwithstanding the Company’s outperformance of comparator groups.

No dividends are paid to the recipient during the applicable Performance Periods.

19 unchanged sentences

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 and nine months ended September 30, 2022, we recognized stock-based compensation expense of approximately $ 2.7 million and $ 8.0 million, respectively, relating to PSU awards.

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

As of September 30, 2022, the remaining unrecognized compensation cost of approximately $ 20.0 million relating to PSU awards is expected to be recognized over the remaining Performance Period of approximately 2.0 years.

As measured as of September 30, 2022, the performance thresholds for the vesting of the PSUs were not met for any of the applicable awards.

For both the three months ended March 31, 2023 and 2022, we recognized stock-based compensation expense of approximately $ 2.7 million relating to PSU awards.

As of March 31, 2023, the remaining unrecognized compensation cost of approximately $ 14.7 million relating to PSU awards is expected to be recognized over the remaining Performance Period of approximately 1.6 years.

As measured as of March 31, 2023, the performance thresholds for the vesting of the PSUs were not met for any of the applicable awards.

Commitments and Contingencies

Office Lease .

The future contractual lease payments for our office lease and the reconciliation to the office lease liability reflected in other liabilities in our condensed consolidated balance sheets as of September 30, 2022 is presented in the table below (in thousands):

2022 (three months ending December 31)

The future contractual lease payments for our office lease and the reconciliation to the office lease liability reflected in other liabilities in our condensed consolidated balance sheet as of March 31, 2023 is presented in the table below (in thousands):

2023 (nine months ending December 31)

Total future contractual lease payments

2 unchanged sentences

Improvement Allowances .

As of September 30, 2022, we had approximately $ 127.6 million of commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease.

As of March 31, 2023, we had approximately $ 57.9 million of commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease.

Construction Loan.

As of September 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.

As of March 31, 2023, we had approximately $ 4.6 million of commitments related to our construction loan for the development of a regulated cannabis cultivation and processing facility in California.

The developer is required to complete construction by December 31, 2023, subject to extension in certain circumstances.

1 unchanged sentence

We follow the policy of monitoring our properties, both targeted acquisition and existing properties, for the presence of hazardous or toxic substances.

While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liabilities that would have a material adverse effect on our financial condition, results of operations and cash flow, or that we believe would require disclosure or the recording of a loss contingency.

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.

Class Action Lawsuit

7 unchanged sentences

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.

On September 29, 2022, an Amended Class Action complaint was filed under the same Case Number, adding as defendants Alan D.

Gold, Tracie J.

Hager, and Benjamin C.

Gold and Benjamin C.

Regin, and asserting causes of action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

According to the Amended Class Action Complaint, the plaintiff 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 August 7, 2020 and August 4, 2022.

On December 1, 2022, defendants moved to dismiss the Amended Class Action Complaint;

on January 25, 2023, plaintiff responded to defendants’ motion to dismiss the Amended Class Action Complaint;

and on March 6, 2023 defendants responded to plaintiff’s answer.

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

9 unchanged sentences

On September 28, 2022, a second derivative action lawsuit was filed against the Company and certain of its officers and directors.

The case was styled Karen Drover, derivatively on behalf of Innovative Industrial Properties, Inc.

The case was named Karen Drover, derivatively on behalf of Innovative Industrial Properties, Inc.

Paul Smithers, Catherine Hastings, Andy Bui, Alan Gold, Gary Kreitzer, Mary Curran, Scott Shoemaker, David Stecher, Defendants, and Innovative Industrial Properties Inc., Nominal Defendant , Case Number 24-C-22-004243, and filed in the Circuit Court for Baltimore City, Maryland.

The lawsuit asserts putative derivative claims for breach of fiduciary duty, and seeks actions to reform and improve the Company, and an undetermined amount of damages, restitution, interest, and attorneys’ fees and costs.

On October 19, 2022, the parties to both cases filed a Joint Motion to Consolidate Related Shareholder Derivative Actions and to Appoint Lead and Liaison Counsel for plaintiffs.

The Company intends to vigorously defend these consolidated lawsuits.

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.

On October 19, 2022, the parties to both cases filed a Joint Motion to Consolidate Related Shareholder Derivative Actions and to Appoint Lead and Liaison Counsel for plaintiffs, which was granted on December 16, 2022, along with a stay in the lawsuit pending a ruling on the defendants’ motion to dismiss the federal class action lawsuit described above.

On April 17, 2023, a third derivative action lawsuit was filed against the Company and certain of its officers and directors.

The case was named Ross Weintraub, derivatively on behalf of Innovative Industrial Properties, Inc.

Alan Gold, Paul Smithers, Catherine Hastings, Ben Regin, Andy Bui, Tracie Hager, Gary Kreitzer, David Stecher, Scott Shoemaker, Mary Curran, and Innovative Industrial Properties, Inc., Case Number 1:23-cv-00737-GLR, and filed in the United States District Court for the District of Maryland.

The lawsuit asserts putative derivative claims for breach of fiduciary duty and violations of Section 14(a) of the Exchange Act, and seeks an undetermined amount of damages, equitable relief, and attorneys’ fees and costs.

Defendants in this action filed a Consent Motion to Stay the Proceeding, which was granted on April 17, 2023.

The Company intends to vigorously defend each of these lawsuits.

However, at this time, the Company cannot predict the probable outcome of these actions, 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., defaulted on its obligations to pay base rent and property management fees 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.

For the three months ended September 30, 2022, Kings Garden’s monetary default under its lease with us was approximately $ 5.2 million in the aggregate, consisting of approximately $ 4.8 million of contractual base rents and property management fees and approximately $ 369,000 of insurance premiums and property taxes, but excluding applicable late charges and default interest.

We applied a portion of the security deposits under the leases, totaling approximately $ 2.6 million, as payments for these amounts.

In July 2022, one of our tenants, Kings Garden Inc., defaulted on its obligations to pay base rent and property management fees 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.

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

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Section 1962(c)).

The amount related to these project costs reported in construction in progress as of September 30, 2022 was approximately $ 38.5 million.

The amount related to these project costs reported in buildings and improvements and tenant improvements was approximately $ 11.5 million in the aggregate as of December 31, 2021.

The amount related to these project costs reported in construction in progress as of March 31, 2023 and December 31, 2022 was approximately $ 33.2 million.

On September 11, 2022, the parties to the lawsuit entered into a confidential, conditional settlement agreement pertaining to matters related to the lawsuit.

Pursuant to the conditional settlement agreement, the Company received a $ 10.0 million partial settlement payment from Kings Garden, which was accounted for as a reduction to construction in progress on our condensed consolidated balance sheets.

Of the six properties previously 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 September 30, 2022.

In connection with the conditional settlement agreement, the Company terminated leases and regained possession of the two properties that were in development or redevelopment as of September 30, 2022.

Out of the amounts included in construction in progress at September 30, 2022, we expect to recover an additional approximately $ 6.0 million from Kings Garden, and we are in the process of investigating additional costs paid of approximately $ 9.8 million to determine whether these are potential overpayments.

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 September 30, 2022, we are unable to make such an estimate.

Pursuant to the conditional settlement agreement, as of December 31, 2022, the Company received a total of $ 15.4 million in partial settlement payments from Kings Garden, which was accounted for as a reduction to construction in progress on our condensed consolidated balance sheets.

In connection with the conditional settlement agreement, the Company terminated leases and regained possession of the two properties that were in development or redevelopment as of December 31, 2022.

Out of the amounts included in construction in progress at March 31, 2023, we are in the process of investigating additional costs paid of approximately $ 9.8 million to determine whether these are potential overpayments.

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 March 31, 2023, we are unable to make such an estimate.

On February 14, 2023, Kings Garden filed an Arbitration Demand related to the interpretation of the confidential, conditional settlement agreement between the parties that concerns certain terms governing (along with the relevant lease) the assignment of one of the Kings Garden leases.

The Company filed a Response to Kings Garden’s Arbitration Demand, Affirmative Defenses and Counter-Claim on March 1, 2023 (the “Counter-Claim”).

Kings Garden filed an answer to the Counter-Claim on March 15, 2023.

An emergency hearing was conducted on April 13, 2023, pursuant to which the arbitrator denied Kings Garden’s Motion for Interim Relief, and established timeframes and procedures for the arbitration.

Parallel Pennsylvania Litigation

On February 6, 2023, IIP-PA 8 LLC, as landlord and an indirect subsidiary of the Company, filed a lawsuit against Goodblend Pennsylvania LLC, as tenant, and Parallel, as guarantor, in the Court of Common Pleas of Allegheny County, Pennsylvania, regarding the lease and related guaranty for one of the Company’s properties located in Pennsylvania.

The lawsuit asserts claims for breach of contract by the tenant and guarantor and ejectment.

Goodblend Pennsylvania LLC and Parallel filed preliminary objections to the lawsuit on March 3, 2023.

IIP-PA 8 LLC filed its response to Goodblend Pennsylvania LLC’s and Parallel’s preliminary objections on March 23, 2023.

On April 25, 2023, IIP-PA 8 LLC filed a motion to compel Goodblend Pennsylvania LLC to pay rent owing under the lease to IIP-PA 8 LLC.

A hearing regarding Parallel’s preliminary objections and IIP-PA 8 LLC’s motion to compel payment of rent is scheduled for June 8, 2023.

Parallel Texas Litigation

On February 11, 2023, a subsidiary of Parallel defaulted on its obligations to pay rent under the lease at one of our properties in Texas that is under development.

On February 23, 2023, IIP-TX 1 LLC, as landlord and an indirect subsidiary of the Company, filed a lawsuit against Surterra San Marcos, LLC, as tenant, in the Justice Court of Hays County, Texas, regarding the lease, asserting claim for possession.

On March 9, 2023 a judgment for possession was entered in favor of IIP-TX 1 LLC, as well as monthly rental amounts due.

On March 13, 2023, IIP-TX 1 LLC filed a subsequent lawsuit against Surterra San Marcos, LLC, Parallel and Sunstream

Opportunities LP (“SAF Entity 1”) in the District Court of Hays County, Texas, regarding the same lease, asserting claims against Surterra San Marcos, LLC, Parallel and SAF Entity 1 for breach of contract, tortious interference with contract, unjust enrichment, fraud and fraudulent inducement, intentional failure to disclose and misrepresentations and conversion, and also requested the granting of a temporary injunction and the appointment of a receiver over the license(s) pertaining to the property’s operations as a regulated cannabis facility.

Green Peak Michigan Litigation

On February 2, 2023, IIP-MI 1 LLC, as landlord and an indirect subsidiary of the Company, filed a lawsuit against Green Peak, as tenant, in 56-A District Court of the State of Michigan, regarding the lease for one of the Company’s properties located in Michigan, asserting claim for possession.

On February 22, 2023, IIP-MI 1 LLC filed a subsequent lawsuit against Green Peak and Tropics LP (“SAF Entity 2”) in the 56 th Circuit Court of the State of Michigan, regarding the same lease, asserting claims against Green Peak for breach of contract, unjust enrichment, and innocent misrepresentation, against SAF Entity 2 for tortious interference with contract, and against both Green Peak and SAF Entity 2 for civil conspiracy.

On March 3, 2023, a stipulated order appointing a receiver over substantially all of Green Peak’s assets was entered in the Circuit Court of Ingham County, Michigan.

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

On October 11, 2022, we amended our lease with Sozo at one of our Michigan properties, pursuant to which we agreed to apply a part of the security deposit we hold for rental amounts due for the period from October 1, 2022 through December 31, 2022, which, absent the satisfaction of certain conditions, is subject to full repayment to us on January 1, 2023.

On October 25, 2022, we amended our lease with Holistic at one of our Massachusetts properties, increasing the improvement allowance under the lease by $ 2.0 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

On October 27, 2022, we amended our lease with a subsidiary of 4Front Ventures Corp.

(“4Front”) at one of our Illinois properties, providing 4Front an option, exercisable until November 11, 2022, to increase the improvement allowance under the lease by an amount between $ 15.0 million and up to $ 19.9 million.

If 4Front exercises this option, the base rent under the lease will be adjusted accordingly and the term of the lease will be extended.

On November 1, 2022, we sold a Pennsylvania industrial property that was leased to a subsidiary of Maitri Holdings, LLC for $ 23.5 million (approximately $ 461 per square foot), excluding transaction costs.

The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q and determined that there have been no events that have occurred that would require adjustments to our disclosures in the condensed consolidated financial statements.

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