What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-09 · 125 added, 133 removed, 277 unchanged (48% of the section changed)

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The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

rates of default on leases for our assets, concentration of our portfolio of assets and limited number of tenants;

the estimated growth in and evolving market dynamics of the regulated cannabis market inflation dynamics;

rates of default on leases for our assets;

concentration of our portfolio of assets and limited number of tenants;

the estimated growth in and evolving market dynamics of the regulated cannabis market;

the demand for regulated cannabis facilities;

inflation dynamics;

our ability to improve our internal control over financial reporting, including our inability to remediate the identified material weakness, and the costs and the time associated with such efforts;

the impact of the ongoing COVID-19 pandemic, or future pandemics, on us, our business, our tenants, or the economy generally;

the impact of pandemics on us, our business, our tenants, or the economy generally;

war and other hostilities, including the conflict in Ukraine;

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financing rates for our target assets;

our expected leverage;

our level of indebtedness, which could reduce funds available for other business purposes and reduce our operational flexibility;

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The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this report.

In addition, we discussed a number of material risks in our Annual Report on Form 10-K for the year ended December 31, 2021, and in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, and in Part II, Item 1A below.

In addition, we discussed a number of material risks in our Annual Report on Form 10-K for the year ended December 31, 2022, and in Part II, Item 1A below.

Those risks continue to be relevant to our performance and financial condition.

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We are the sole general partner of our Operating Partnership and own, directly or through subsidiaries, 100% of the limited partnership interests in our Operating Partnership.

As of September 30, 2022, we had 22 full-time employees.

As of September 30, 2022, we owned 111 properties comprising approximately 8.7 million square feet (including approximately 2.0 million rentable square feet under development/redevelopment) in 19 states.

As of September 30, 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 $162.3 million to fund draws to certain tenants and sellers for construction and improvements at our properties.

Of the approximately $162.3 million committed to fund draws to certain tenants and sellers for construction and improvements at our properties, approximately $34.7 million was incurred but not funded as of September 30, 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 $17.7 million as of September 30, 2022.

Of these properties, the 109 properties in our operating portfolio were 100% leased to state-licensed cannabis operators, with a weighted-average remaining lease term of approximately 15.5 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, but excluding the security deposits applied as a result of the Kings Garden lease defaults commencing in July 2022) was approximately 97% for the nine months ended September 30, 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 September 30, 2022, and together are expected to comprise approximately 395,000 rentable square feet upon completion of development.

As of March 31, 2023, we had 21 full-time employees.

As of March 31, 2023, we owned 108 properties comprising approximately 8.9 million square feet (including approximately 1.6 million rentable square feet under development/redevelopment) in 19 states.

As of March 31, 2023, we had invested approximately $2.3 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 $84.5 million to fund draws to certain tenants and sellers for construction and improvements at our properties.

Of the approximately $84.5 million committed to fund draws to certain tenants and sellers for construction and improvements at our properties, approximately $26.6 million was incurred but not funded as of March 31, 2023.

These statistics do not include a $23.0 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 $18.4 million as of March 31, 2023.

Of these properties, we include 103 properties in our operating portfolio, which were 100% leased to state-licensed cannabis operators as of March 31, 2023, with a weighted-average remaining lease term of approximately 15.1 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 $4.2 million of security deposits applied for payment of rent for our leases with Green Peak, Parallel and Holistic) was approximately 98% for the three months ended March 31, 2023.

As of March 31, 2023, we have fully applied approximately $909,000 of security deposit for payment of rent for one of our leases with Green Peak and fully applied approximately $2.2 million of security deposits for payment of rent for two of our leases with Parallel.

We do not include in our operating portfolio the following properties (all of which were under development/redevelopment as of March 31, 2023, and together are expected to comprise approximately 715,000 rentable square feet upon completion of development/redevelopment):

● Inland Center Drive in San Bernardino, California;

● Perez Road in Cathedral City, California;

● 63795 19th Avenue in Palm Springs, California;

● Leah Avenue in San Marcos, Texas;

● Davis Highway in Windsor, Michigan.

Factors Impacting Our Operating Results

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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 ongoing COVID-19 Pandemic.

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.

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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, driven in part by the COVID-19 pandemic, geopolitical issues and the war in Ukraine, 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.

This inflation has increased 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.

For the past several months, 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 and for the Company.

According to Viridian Capital Advisors (“Viridian”), total equity and debt capital raising for public and private cannabis companies in North America decreased by approximately 64% year-to-date through September 30, 2022 versus the prior year’s period.

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

regulated cannabis cultivation and retail sector was down 67% year-to-date through September 30, 2022 versus the same period in the prior year, with equity capital raised in the sector down 96% year-to-date through September 30, 2022 and no equity deal in 2022 raising more than $25 million, according to Viridian.

Driven in part by overall macroeconomic conditions, both capital availability and mergers and acquisitions activity have significantly declined for regulated cannabis operators.

Capital raising activities by U.S.

REITs also experienced a steep decline in the three months ended September 30, 2022.

According to the National Association of Real Estate Investment Trusts, Inc.

(“NAREIT”), U.S.

REITs raised $6.3 billion in debt and equity during the three months ended September 30, 2022, compared to $29.4 billion raised during the three months ended September 30, 2021, representing the lowest level since the fourth quarter of 2009.

REITs have also experienced steep declines, including significantly reduced capital availability for our company.

Significant Tenants and Concentrations of Risk

As of September 30, 2022, we owned 111 properties located in 19 states.

As of March 31, 2023, we owned 108 properties located in 19 states.

Many of our tenants are tenants at multiple properties.

We seek to manage our portfolio-level risk through geographic diversification and by minimizing dependence on any single property or tenant.

At September 30, 2022, none of our properties accounted for 5% or more of our net real estate held for investment.

See Note 2 in the notes to the condensed consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest percentage of our total rental revenues for the three and nine months ended September 30, 2022.

See Note 11 “Commitments and Contingencies — Litigation — Kings Garden Lawsuit” to our condensed consolidated financial statements included in this report for more information regarding Kings Garden leases.

At March 31, 2023, none of our properties accounted for 5% or more of our net real estate held for investment.

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.

In February 2023, Parallel also defaulted on its obligations to pay rent at one of our properties in Texas.

In March 2023, Green Peak was placed into receivership.

See Note 11 “Commitments and Contingencies — Litigation” to our condensed consolidated financial statements included in this report for more information regarding Kings Garden, Parallel and Green Peak.

Competitive Environment

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Investments in Real Estate

See Note 6 in the notes to the condensed consolidated financial statements for information regarding our investments in real estate activity and property portfolio activity during the nine months ended September 30, 2022.

Comparison of the Three and Nine Months Ended September 30, 2022 and 2021

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

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 is recognized as a deposit liability and is 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.

During the three months ended March 31, 2023, we received cash interest payment of approximately $134,000, which has been recorded as a liability as of March 31, 2023.

Comparison of the Three Months Ended March 31, 2023 and 2022

The following table sets forth the results of our operations (in thousands):

For the Three Months Ended

For the Nine Months Ended

September 30,

Rental (including tenant reimbursements)

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Interest expense

Loss on exchange of Exchangeable Senior Notes

Gain (loss) on exchange of Exchangeable Senior Notes

Preferred stock dividends

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Rental Revenues.

Rental revenues for the three months ended September 30, 2022 increased by approximately $16.4 million, or 31%, to approximately $70.3 million, compared to approximately $53.9 million for the three months ended September 30, 2021.

Approximately $143,000 of the increase in rental revenues was generated by the property acquired during the three months ended September 30, 2022.

The remaining approximately $16.3 million increase in rental revenues was generated by properties we acquired in prior periods, including contractual rent escalations and amendments to leases for additional improvement allowances and construction funding at existing properties that resulted in adjustments to rent.

Rental revenues for the three months ended September 30, 2022 included approximately $2.6 million in security deposits drawn by us for defaults by Kings Garden in its obligations to pay rent commencing in July 2022.

Rental revenues for the three months ended September 30, 2022 and 2021 included approximately $2.7 million and $1.4 million, respectively, of tenant reimbursements for property insurance premiums and property taxes.

Rental revenues during the three months ended September 30, 2022 were negatively impacted by non-collection of rent during the quarter totaling approximately $5.7 million (including approximately $5.3 million of contractual base rents and property management fees and approximately $369,000 for tenant reimbursements for property insurance premiums and property taxes) from two tenants, Kings Garden and affiliates of Medical Investor Holdings, LLC (“Vertical”).

Rental revenues for the nine months ended September 30, 2022 increased by $58.9 million, or 40%, to approximately $204.5 million, compared to approximately $145.6 million for the nine months ended September 30, 2021.

Approximately $6.6 million of the increase in rental revenues was generated by the properties acquired during the nine months ended September 30, 2022.

Rental revenues for the three months ended March 31, 2023 increased by approximately $11.4 million, or 18%, to approximately $75.5 million, compared to approximately $64.1 million for the three months ended March 31, 2022.

Approximately $516,000 of the increase in rental revenues was generated by the properties acquired during the three months ended March 31, 2023.

The remaining approximately $10.9 million increase in rental revenues was generated by properties we acquired in prior periods, including contractual rent escalations and amendments to leases for additional improvement allowances and construction funding at existing properties that resulted in adjustments to rent.

Rental revenues for the nine months ended September 30, 2022 and 2021 included approximately $7.1 million and $2.6 million, respectively, of tenant reimbursements for property insurance premiums and property taxes.

Rental revenues during the nine months ended September 30, 2022 were negatively impacted by non-collection of rent during the period totaling approximately $6.5 million (including approximately $6.1 million of contractual base rents and property management fees and approximately $369,000 for tenant reimbursements for property insurance premiums and property taxes) from the two tenants, Kings Garden and Vertical.

Rental revenues for the three months ended March 31, 2023 included the full application of approximately $909,000 of security deposit for payment of rent for one of our leases with Green Peak, the full application of approximately $2.2 million of security deposits for payment of rent for two of our leases with Parallel and the partial application of approximately $1.1 million of security deposits for payment of rent for two of our leases with Holistic in accordance with lease amendments executed with Holistic in January 2023 (see Note 6 in the notes to the condensed consolidated financial statements for information).

Rental revenues for the three months ended March 31, 2023 and 2022 included approximately $5.2 million and $1.9 million, respectively, of tenant reimbursements for property insurance premiums and property taxes.

Rental revenues during the three months ended March 31, 2023 were negatively impacted by non-collection of rent during the quarter from properties in our operating portfolio totaling approximately $1.8 million (including approximately $1.6 million of contractual base rents and property management fees and approximately $152,000 of tenant reimbursements for property insurance premiums and property taxes) from three tenants, Green Peak, affiliates of Vertical and Parallel.

Other Revenues.

Other revenues for the three and nine months ended September 30, 2022 consists of interest revenue related to leases for property acquisitions that did not satisfy the requirements for sale-leaseback accounting.

Other revenues for the three months ended March 31, 2023 and 2022 consisted of interest revenue related to leases for property acquisitions that did not satisfy the requirements for sale-leaseback accounting.

Property Expenses.

Property expenses for the three and nine months ended September 30, 2022 increased by approximately $1.5 million and $4.6 million respectively, compared to the three and nine months ended September 30, 2021.

Property expenses for the three months ended March 31, 2023 increased by approximately $3.6 million compared to the three months ended March 31, 2022.

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.

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General and Administrative Expense .

General and administrative expense for the three months ended September 30, 2022 increased by approximately $5.5 million to approximately $10.8 million, compared to approximately $5.3 million for the three months ended September 30, 2021.

General and administrative expense for the nine months ended September 30, 2022 increased by approximately $11.8 million to approximately $28.3 million, compared to approximately $16.5 million for the nine months ended September 30, 2021.

The increase in general and administrative expense was primarily due to approximately $2.1 million in litigation-related expense incurred during the three months ended September 30, 2022 related to matters described in Note 11 “Commitments and Contingencies — Litigation” to our condensed consolidated financial statements included in this report, higher compensation to employees, the hiring of additional employees and higher public company costs, travel and occupancy costs.

Compensation expense for the three and nine months ended September 30, 2022 included approximately $4.4 million and $13.2 million, respectively, of non-cash stock-based compensation.

Compensation expense for the three and nine months ended September 30, 2021 included approximately $2.2 million and $6.4 million, respectively of non-cash stock-based compensation.

General and administrative expense for the three months ended March 31, 2023 increased by approximately $1.6 million to approximately $10.4 million, compared to approximately $8.8 million for the three months ended March 31, 2022.

The increase in general and administrative expense was primarily due to approximately $624,000 in litigation-related expense incurred during the three months ended March 31, 2023 related to matters described in Note 11 “Commitments and Contingencies — Litigation” to our condensed consolidated financial statements included in this report, higher compensation to employees, the hiring of additional employees and higher public company costs, travel and occupancy costs.

Compensation expense for the three months ended March 31, 2023 and 2022 included approximately $4.8 million and $4.4 million, respectively, of non-cash stock-based compensation.

Depreciation and Amortization Expense.

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Interest and Other Income.

Interest and other income for the three months ended September 30, 2022 increased by approximately $663,000 compared to the three months ended September 30, 2021.

Interest and other income for the nine months ended September 30, 2022 increased by approximately $1.1 million compared to the nine months ended September 30, 2021.

The increase in both periods was due to higher balances of interest-bearing investments resulting from proceeds from our common stock offerings and higher interest rates on our interest-bearing investments.

Interest and other income for the three months ended March 31, 2023 increased by approximately $2.2 million compared to the three months ended March 31, 2022.

The increase was due to higher interest rates on our interest-bearing investments.

Interest Expense.

Interest expense consists of interest on our Exchangeable Senior Notes issued in February 2019 and our Notes due 2026 issued in May 2021.

Interest expense for the three months ended September 30, 2022 and 2021 included approximately $328,000 and $836,000, respectively, of non-cash interest expense;

and interest expense for the nine months ended September 30, 2022 and 2021 included approximately $1.0 million and $2.0 million, respectively, of non-cash interest expense.

Interest expense for the three months ended September 30, 2022 decreased by approximately $1.8 million compared to the three months ended September 30, 2021 due to exchanges of approximately $110.4 million outstanding principal amount of our Exchangeable Senior Notes in December 2021 and exchanges of approximately $26.9 million outstanding principal amount of our Exchangeable Senior Notes during the nine months ended September 30, 2022.

Interest expense for the nine months ended September 30, 2022 increased by approximately $1.9 million compared to the nine months ended September 30, 2021 due to our Notes due 2026 issued in May 2021, partially offset by exchanges of our Exchangeable Senior Notes during the comparative periods.

Comparison of the Nine Months Ended September 30, 2022 and 2021 (in thousands)

Nine Months Ended September 30,

Interest expense consists of interest on our Exchangeable Senior Notes and our Notes due 2026.

Interest expense for the three months ended March 31, 2023 and 2022 included approximately $338,000 and $365,000, respectively, of non-cash interest expense.

Interest expense for the three months ended March 31, 2023 decreased by approximately $246,000 compared to the three months ended March 31, 2022 due to exchanges of approximately $26.9 million outstanding principal amount of our Exchangeable Senior Notes during the year ended December 31, 2022 and exchanges of $2.0 million outstanding principal amount of our Exchangeable Senior Notes during the three months ended March 31, 2023.

Comparison of the Three Months Ended March 31, 2023 and 2022 (in thousands)

Three Months Ended March 31,

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net cash used in financing activities

Ending cash, cash equivalents and restricted cash

Operating Activities

Cash flows provided by operating activities for the nine months ended September 30, 2022 and 2021 were approximately $178.8 million and $141.0 million, respectively.

Cash flows provided by operating activities were generally from contractual rent and security deposits from our properties, partially offset by our general and administrative expense.

Cash flows provided by operating activities for the three months ended March 31, 2023 and 2022 were approximately $64.6 million and $59.9 million, respectively.

Cash flows provided by operating activities were generally from contractual rent from our properties, partially offset by our general and administrative expense, property expenses in excess of tenant reimbursements and property expenses at properties that were not leased.

Investing Activities

Cash flows used in investing activities for the nine months ended September 30, 2022 were approximately $401.7 million, of which approximately $488.0 million related to investments in real estate and funding of draws for a portion of the improvement allowances, construction funding at our properties and other investments, partially offset by approximately $86.3 million related to net purchases and maturities of short-term investments.

Cash flows used in investing activities for the nine months ended September 30, 2021 were approximately $333.5 million, of which approximately $398.6 million primarily related to the purchase of investment in real estate and funding of draws for a portion of the improvement allowances and construction funding at our properties, partially offset by approximately $65.1 million related to net purchases and maturities of short-term investments.

Cash flows used in investing activities for the three months ended March 31, 2023 were approximately $62.7 million, of which approximately $101.3 million related to investments in real estate and funding of draws for a portion of the improvement allowances, construction funding at our properties and other investments, partially offset by approximately $38.6 million related to net purchases and maturities of short-term investments.

Cash flows used in investing activities for the three months ended March 31, 2022 were approximately $81.1 million, of which approximately $196.1 million related to investments in real estate and funding of a portion of the improvement allowances, construction funding at our properties and other investments, partially offset by $115.0 million related to maturities of short-term investments.

Financing Activities

Net cash provided by financing activities of approximately $215.1 million during the nine months ended September 30, 2022 was the result of approximately $352.0 million in net proceeds from the issuance of our common stock, partially offset by dividend payments of approximately $134.5 million to common and preferred stockholders and approximately $2.4 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.

Net cash provided by financing activities of approximately $193.8 million during the nine months ended September 30, 2021 was the result of approximately $293.2 million in net proceeds from the issuance of our Notes due 2026, partially offset by dividend payments of approximately $96.0 million to common and preferred stockholders and 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.

Net cash used in financing activities of approximately $51.4 million during the three months ended March 31, 2023 was the result of dividend payments of approximately $50.8 million to common and preferred stockholders and approximately $568,000 related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.

Net cash used in financing activities of approximately $20.2 million during the three months ended March 31, 2022 was the result of approximately $21.1 million in net proceeds from the issuance of our common stock, offset by dividend payments of approximately

$38.9 million to common and preferred stockholders and approximately $2.4 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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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 September 30, 2022, we owned 111 properties.

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

As of March 31, 2023, we owned 108 properties.

Of these properties, the 103 properties in our operating portfolio were 100% leased to state-licensed cannabis operators, with a weighted-average remaining lease term of approximately 15.1 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, but excluding the security deposits applied as a result of the Kings Garden lease defaults commencing in July 2022) was approximately 97% for the nine months ended September 30, 2022.

On July 13, 2022, Kings Garden defaulted on its obligations to pay rent at all of the properties that Kings Garden leases from us (See Note 11 “Commitments and Contingencies — Litigation” to our condensed consolidated financial statements included in this report for more information).

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 September 30, 2022, and together are expected to comprise approximately 395,000 rentable square feet upon completion of development.

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, and including an aggregate of approximately $4.2 million of security deposits applied for payment of rent for our leases with Green Peak, Parallel and Holistic) was approximately 98% for the three months ended March 31, 2023.

As of March 31, 2023, we have fully applied approximately $909,000 of security deposits for payment of rent for one of our leases with Green Peak and fully applied approximately $2.2 million of security deposits for payment of rent for two of our leases with Parallel.

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

In February 2023, Parallel also defaulted on its obligations to pay rent at one of our properties in Texas.

In March 2023, a receiver was appointed over substantially all of Green Peak’s assets.

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

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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.

In addition, for properties that are not leased and are under development or redevelopment, we may make significant additional investments in these properties in order to get them ready for their intended use and to re-lease them.

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 September 30, 2022.

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 March 31, 2023.

Subject to the terms of the indenture, any new subsidiary of the Operating Partnership will also guarantee the Notes due 2026 .

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.

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 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.

We are party to equity distribution agreements with six 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.

In March 2022, we sold 117,023 shares of our common stock for net proceeds of approximately $21.1 million under the ATM Program.

As of September 30, 2022, the remaining amount available to be sold under the ATM Program was approximately $209.9 million.

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

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 not sold any shares of common stock under the 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 and other securities to the extent necessary or advisable to meet our liquidity needs.

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In recent months, 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.

If this environment continues for a prolonged period of time or worsens, 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.

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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 Notes due 2026, and make accretive new investments.

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:

Security Class

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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

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2022 (in thousands):

The following table summarizes our contractual obligations as of March 31, 2023 (in thousands):

Notes due 2026

2022 (three months ending December 31)

Additionally, as of September 30, 2022, we had approximately $127.6 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.

As of September 30, 2022, we also had approximately $802,000 outstanding in commitments to fund a construction loan, which the developer is required to complete by December 1, 2022, subject to extension in certain circumstances.

2023 (nine months ending December 31)

Additionally, as of March 31, 2023, we had approximately $57.9 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.

As of March 31, 2023, we also had approximately $4.6 million outstanding in commitments to fund a construction loan, which the developer is required to complete by December 31, 2023, subject to extension in certain circumstances.

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.

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See Note 7 “Debt” to our condensed consolidated financial statements included in this report 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.

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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Management believes that adjusted funds from operations (“AFFO”) and AFFO per share are also appropriate supplemental measures of a REIT’s operating performance.

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

For the three and nine months ended September 30, 2022 and 2021, FFO (diluted), Normalized FFO and 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.

As a result, for purposes of calculating FFO (diluted), cash and non-cash interest expense of the

Exchangeable Senior Notes was added back to FFO, and the total diluted weighted-average common shares outstanding increased by 100,799 shares and 235,753 shares for the three and nine months ended September 30, 2022, respectively, which were the potentially issuable shares as if the Exchangeable Senior Notes were exchanged at the beginning of the period.

For the three and nine months ended September 30, 2021, for purposes of calculating FFO (diluted), cash and non-cash interest expense of the Exchangeable Senior Notes was added back to FFO, and the total diluted weighted-average common shares outstanding increased by 2,193,492 shares for both periods, which were the potentially issuable shares as if the Exchangeable Senior Notes were exchanged at the beginning of the period.

For the three and nine months ended September 30, 2022, the performance share units (“PSUs”) granted to certain employees were not 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.

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

For the three months ended March 31, 2023, FFO (diluted), Normalized FFO and 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.

As a result, for purposes of calculating FFO (diluted), cash and non-cash interest expense of the Exchangeable Senior Notes was added back to FFO, and the total diluted weighted-average common shares outstanding increased by 102,210 shares for the three months ended March 31, 2023, which were the potentially issuable shares as if the Exchangeable Senior Notes were exchanged at the beginning of the period.

For the three months ended March 31, 2022, FFO (diluted), Normalized FFO and 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.

As a result, for purposes of calculating FFO (diluted), cash and non-cash interest expense of the Exchangeable Senior Notes was added back to FFO, and the total diluted weighted-average common shares outstanding increased by 507,181 shares, which were the potentially issuable shares as if the Exchangeable Senior Notes were exchanged at the beginning of the period.

For the three months ended March 31, 2023, the performance share units (“PSUs”) granted to certain employees were not 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 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.

Our computation of FFO, Normalized FFO, and AFFO may differ from the methodology for calculating FFO, Normalized FFO and AFFO utilized by other equity REITs and, accordingly, may not be comparable to such REITs.

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FFO, Normalized FFO and AFFO should be considered only as supplements to net income computed in accordance with GAAP as measures of operations.

The table below is a reconciliation of net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the three and nine months ended September 30, 2022 and 2021 (in thousands, except share and per share amounts):

The table below is a reconciliation of net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the three months ended March 31, 2023 and 2022 (in thousands, except share and per share amounts):

For the Three Months Ended

For the Nine Months Ended

September 30,

Net income attributable to common stockholders

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FFO attributable to common stockholders (diluted)

Acquisition-related expense

Financing expense

Litigation-related expense

Loss on exchange of Exchangeable Senior Notes

(Gain) loss on exchange of Exchangeable Senior Notes

Normalized FFO attributable to common stockholders (diluted)

Interest income on seller-financed note (1)

Stock-based compensation

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Weighted average common shares outstanding – diluted

(1) Amount reflects the non-refundable interest paid on the seller-financed note issued to us by the buyer in connection with our disposition of a portfolio of four properties in southern California previously leased to affiliates of Vertical, which is recognized as a deposit liability and is included in other liabilities in our condensed consolidated balance sheet as of March 31, 2023, as the transaction did not qualify for recognition as a completed sale.

Critical Accounting Estimates

the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

Our condensed consolidated financial statements have been prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

Actual results could differ materially from those estimates and assumptions.

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The following critical accounting estimates discussion reflects what we believe are the most significant estimates and assumptions used in the preparation of our consolidated financial statements.

This discussion of our critical accounting estimates is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates and assumptions.

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

This discussion of our critical accounting estimates is intended to supplement should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 “Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements” to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022.

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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The use of different assumptions can affect the amount of consideration allocated to the acquired depreciable/amortizable asset, which in turn can impact our net income due to the recognition of the related depreciation/amortization expense in our condensed consolidated statements of income.

We depreciate buildings and improvements and tenant improvements where we are considered the owner for accounting purposes based on our evaluation of the estimated useful life of each specific asset, not to exceed 40 years.

We depreciate buildings and improvements where we are considered the owner for accounting purposes based on our evaluation of the estimated useful life of each specific asset, not to exceed 40 years.

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

The determination of whether we are or the tenant is the owner of tenant improvements for accounting purposes is subject to significant judgment.

The determination of whether we are or the tenant is the owner of improvements for accounting purposes is subject to significant judgment.

In making that determination, we consider numerous factors and perform a detailed evaluation of each individual lease.

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The factors we evaluate include but are not limited to the following:

● whether the lease agreement requires landlord approval of how the tenant improvement allowance is spent prior to installation of the tenant improvements;

● whether the lease agreement requires the tenant to provide evidence to the landlord supporting the cost and what the tenant improvement allowance was spent on prior to payment by the landlord for such tenant improvements;

● whether the tenant improvements are unique to the tenant or reusable by other tenants;

● whether the tenant is permitted to alter or remove the tenant improvements without the consent of the landlord or without compensating the landlord for any lost utility or diminution in fair value;

● whether the ownership of the tenant improvements remains with the landlord or remains with the tenant at the end of the lease term.

When we conclude that we are the owner of tenant improvements for accounting purposes using the factors discussed above, we record the cost to construct the tenant improvements as our capital asset.

● whether the lease agreement requires landlord approval of how the improvement allowance is spent prior to installation of the improvements;

● whether the lease agreement requires the tenant to provide evidence to the landlord supporting the cost and what the improvement allowance was spent on prior to payment by the landlord for such improvements;

● whether the improvements are unique to the tenant or reusable by other tenants;

● whether the tenant is permitted to alter or remove the improvements without the consent of the landlord or without compensating the landlord for any lost utility or diminution in fair value;

● whether the ownership of the improvements remains with the landlord or remains with the tenant at the end of the lease term.

When we conclude that we are the owner of improvements for accounting purposes using the factors discussed above, we record the cost to construct the improvements as our capital asset.

We evaluate our real estate assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a given asset may not be recoverable.

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If any impairment indicators are present for a specific real estate asset, we then perform an undiscounted cash flow analysis and compare the net carrying amount of the real estate asset to the real estate asset’s estimated undiscounted future cash flow over the anticipated holding period.

If the estimated undiscounted future cash flow is less than the net carrying amount of the real estate asset, we perform an impairment loss calculation to determine if the fair value of the real estate asset is less than the net carrying value of the real estate asset.

carrying value of the real estate asset.

Our impairment loss calculation compares the net carrying amount of the real estate asset to the real estate asset’s estimated fair value, which may be based on estimated discounted future cash flow calculations or third-party valuations or appraisals.

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For each property where such an indicator occurred, we completed an impairment evaluation.

After completing this process, we determined that for each of the operating properties evaluated, undiscounted cash flows over the holding period were in excess of carrying value and, therefore, we did not record any impairment losses for these properties for the three and nine months ended September 30, 2022 and 2021.

Stock-Based Compensation

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Interest Rate Risk

As of September 30, 2022, we had $300.0 million principal amount of Notes due 2026 and approximately $6.4 million principal amount of Exchangeable Senior Notes outstanding at fixed interest rates, and therefore, if interest rates decline, our required payments may exceed those based on current market rates.

As of March 31, 2023, we had $300.0 million principal amount of Notes due 2026 and approximately $4.4 million principal amount of Exchangeable Senior Notes outstanding at fixed interest rates, and therefore, if interest rates decline, our required payments may exceed those based on current market rates.

It is possible that a property we acquire in the future would be subject to a mortgage, which we may assume.

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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 2. Management’s Discussion and Analysis