What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-08-03 compared with 2023-05-09 · 181 added, 142 removed, 493 unchanged (40% of the section changed)

27 unchanged sentences

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

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

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

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

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

28,040,054 and 27,972,830 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

Additional paid-in capital

7 unchanged sentences

For the Three Months Ended

For the Six Months Ended

Rental (including tenant reimbursements)

7 unchanged sentences

Interest expense

Gain (loss) on exchange of Exchangeable Senior Notes

(Loss) gain on exchange of Exchangeable Senior Notes

Preferred stock dividends

6 unchanged sentences

(In thousands, except share amounts)

Three Months Ended March 31, 2023

Three Months Ended March 31, 2022

Three Months Ended June 30, 2023

Three Months Ended June 30, 2022

Stockholders’

1 unchanged sentence

Balances at beginning of period

Issuance of unvested restricted stock, net of forfeitures

Exchange of Exchangeable Senior Notes

Net proceeds from sale of common stock

Preferred stock dividend

Common stock dividend

Stock-based compensation

Balances at end of period

Six Months Ended June 30, 2023

Six Months Ended June 30, 2022

Stockholders’

Balances at beginning of period

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

10 unchanged sentences

(In thousands)

For the Three Months Ended

For the Six Months Ended

Cash flows from operating activities

24 unchanged sentences

Taxes paid related to net share settlement of equity awards

Net cash used in financing activities

Net decrease in cash, cash equivalents and restricted cash

Net cash (used in) provided by financing activities

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

Cash, cash equivalents and restricted cash, beginning of period

1 unchanged sentence

Supplemental disclosure of cash flow information:

Cash paid during the period for interest

Cash paid during the period for interest, net of interest capitalized

Supplemental disclosure of non-cash investing and financing activities:

2 unchanged sentences

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

March 31, 2023

June 30, 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”).

14 unchanged sentences

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”.

39 unchanged sentences

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.

For the three months ended June 30, 2023 and 2022, we recognized depreciation expense of approximately $ 16.5 million and $ 15.0 million, respectively, and for the six months ended June 30, 2023 and 2022, we recognized depreciation expense of approximately $ 33.0 million and $ 28.7 million, respectively.

Depreciation expense relating to our real estate held for investment 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 .

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

Depreciation expense relating to our corporate assets is included in general and administrative expense in our condensed consolidated statements of income.

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

5 unchanged sentences

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.

During the six months ended June 30, 2023, we reclassified the net carrying value of the buildings and improvements totaling approximately $ 51.2 million to construction in progress relating to an existing property that was placed into redevelopment.

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.

7 unchanged sentences

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

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

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

For the three months ended June 30, 2023, rental revenue recognized included the application of approximately $ 1.5 million of security deposits for rent with two tenants in connection with lease amendments.

For the six months ended June 30, 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 $ 2.7 million of security deposits for rent with two tenants in connection with lease amendments.

Construction Loan.

4 unchanged sentences

(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;

(3) an increase in the interest rate 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.

Interest on the loan continued to accrue through March 31, 2023, with monthly payment of interest having commenced April 1, 2023.

As of June 30, 2023, we had funded approximately $ 20.9 million of the $ 23.0 million total commitment.

Cash and Cash Equivalents .

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

As of March 31, 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.

As of June 30, 2023 and December 31, 2022, approximately $ 79.7 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.

30 unchanged sentences

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 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.

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 at that time that we estimate we would have had 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.

The right-of-use asset is measured based on the corresponding lease liability.

We did not incur any initial direct leasing costs and any other consideration exchanged with the landlord prior to the commencement of the lease.

We did not incur any initial direct leasing costs or exchange any other consideration with the landlord prior to the commencement of the lease.

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

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.

For both the three months ended June 30, 2023 and 2022, we recognized office lease expense of approximately $ 122,000 , and for the six months ended June 30, 2023 and 2022, we recognized office lease expense of approximately $ 243,000 and $ 223,000 , respectively, which are included in general and administrative expenses in our condensed consolidated statements of income.

For the six months ended June 30, 2023 and 2022, amounts paid and classified as operating activities in our condensed consolidated statements of cash flows for the office lease were approximately $ 248,000 and $ 161,000 , 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.

13 unchanged sentences

Concentration of Credit Risk .

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.

As of June 30, 2023, we owned 108 properties located in 19 states and leased to 30 tenants.

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

The following table sets forth the five tenants in our portfolio that represented the largest percentage of our total rental revenues for the three months ended March 31, 2023 and 2022, including tenant reimbursements:

The following table sets forth the five tenants in our portfolio that represented the largest percentage of our total rental revenues for the three and six months ended June 30, 2023 and 2022, including tenant reimbursements:

For the Three Months Ended

March 31, 2023

June 30, 2023

Percentage of

3 unchanged sentences

("Ascend")

SH Parent, Inc.

("Parallel") (1)

Green Thumb Industries, Inc.

("GTI")

Curaleaf Holdings, Inc.

("Curaleaf")

Trulieve Cannabis Corp.

("Trulieve")

For the Six Months Ended

June 30, 2023

Percentage of

SH Parent, Inc.

("Parallel") (1)

For the Three Months Ended

March 31, 2022

For the Six Months Ended

June 30, 2022

Percentage of

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 .

1 unchanged sentence

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.

(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 June 30, 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 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 March 31, 2023, we had cash accounts in excess of FDIC insured limits.

As of June 30, 2023, our largest property was located in New York and accounted for approximately 5.4 % of our net real estate held for investment.

No other properties accounted for more than 5 % of our net real estate held for investment as of June 30, 2023.

As of 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 financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $ 250,000 .

As of June 30, 2023, we had cash accounts in excess of FDIC insured limits.

We have not experienced any losses in such accounts.

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.

As of June 30, 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 28,040,054 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.

As of June 30, 2023, we had no t sold any shares of common stock under the ATM Program.

During the six months ended June 30, 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 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”).

As of June 30, 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 600,000 shares issued and outstanding 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 three months ended March 31, 2023:

The following table describes the dividends declared by the Company during the six months ended June 30, 2023:

Declaration Date

9 unchanged sentences

April 14, 2023

June 15, 2023

April 1, 2023 to June 30, 2023

July 14, 2023

June 15, 2023

Series A preferred stock

April 15, 2023 to July 14, 2023

July 14, 2023

Investments in Real Estate

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

The Company acquired the following properties during the six months ended June 30, 2023 (dollars in thousands):

Susquehanna Street

4 unchanged sentences

(2) The tenant is expected to complete improvements at the property, for which we agreed to provide funding of up to $ 21.9 million.

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

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

(3) Approximately $ 2.6 million was allocated to land 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 March 31, 2023 and December 31, 2022 is as follows (in thousands):

March 31, 2023

In-place lease intangible assets and related accumulated amortization as of June 30, 2023 and December 31, 2022 is as follows (in thousands):

June 30, 2023

December 31, 2022

2 unchanged sentences

In-place lease intangible assets, net

Amortization of in-place lease intangible assets classified in depreciation and amortization expense in our condensed consolidated statements of income was approximately $ 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)

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 $ 213,000 for the three months ended June 30, 2023 and 2022, respectively, and was approximately $ 430,000 and $ 411,000 for the six months ended June 30, 2023 and 2022, respectively.

The weighted-average remaining amortization period of the acquired in-place leases was approximately 10.0 years, and the estimated annual amortization of the value of the acquired in-place leases as of June 30, 2023 is as follows (in thousands):

2023 (six months ending December 31)

Above-Market Lease

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

March 31, 2023

The above-market lease and related accumulated amortization included in other assets, net on our condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022 is as follows (in thousands):

June 30, 2023

December 31, 2022

3 unchanged sentences

The above-market lease is amortized on a straight-line basis as a reduction to rental revenues over the remaining lease term of approximately 9.8 years.

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.

For the three months ended June 30, 2023 and 2022, the amortization of the above-market lease was approximately $ 23,000 in each period.

For the six months ended June 30, 2023 and 2022, the amortization of the above-market lease was approximately $ 46,000 in each period.

Additional Improvement Allowances

15 unchanged sentences

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;

In March 2023, we executed a lease amendment with Temescal Wellness of Massachusetts, LLC (“Temescal”) at our Massachusetts property, which (1) provided for temporary reduced base rent from April 2023 through January 2024 to be partially paid through application of security deposits, with pro rata payback of those security deposits over twelve months starting in February 2024;

(2) extended the lease term;

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

In June 2023, we executed a new long-term lease with a tenant at our property located at 68860 Perez Road in Cathedral City, California that was previously leased to Kings Garden, which is under construction as of June 30, 2023.

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.

During the six months ended June 30, 2023, we capitalized costs of approximately $ 101.8 million and funded approximately $ 111.5 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.

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) and provided a secured loan for $ 16.1 million to 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.

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

Accordingly, we have not derecognized the assets transferred on our condensed consolidated balance sheets.

As of June 30, 2023, we received interest payments of approximately $ 537,000 .

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 $ 1.5 million as of June 30, 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):

Future contractual minimum rent (including base rent and property management fees) under the operating leases as of June 30, 2023 for future periods is summarized as follows (in thousands):

Contractual Minimum Rent

2023 (nine months ending December 31)

2023 (six months ending December 31)

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”).

As of June 30, 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 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 for the Exchangeable Senior Notes at June 30, 2023 was 16.74033 shares of our common stock per $ 1,000 principal amount of Notes and the exchange price at June 30, 2023 was approximately $ 59.74 per share of our common stock.

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

1 unchanged sentence

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

At March 31, 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.

At June 30, 2023, the if-exchanged value of the Exchangeable Senior Notes exceeded the principal amount by approximately $ 986,000 .

During the six months ended June 30, 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 six months ended June 30, 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 six months ended June 30, 2023.

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

We recognized a loss on the exchanges totaling approximately $ 7,000 and $ 125,000 for the three and six months ended June 30, 2022, respectively, resulting from the difference between the fair value and carrying value of the debt as of the date of the exchange.

The issuance of the shares pursuant to the exchanges resulted in a non-cash increase to our additional paid-in capital account of approximately $ 3.0 million and $ 26.7 million for the three and six months ended June 30, 2022, respectively.

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

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Amortization of issuance cost

1 unchanged sentence

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

March 31, 2023

June 30, 2023

December 31, 2022

2 unchanged sentences

Carrying value

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.

Accrued interest payable for the Exchangeable Senior Notes as of June 30, 2023 and December 31, 2022 was approximately $ 49,000 and $ 70,000 , respectively, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.

Notes due 2026

7 unchanged sentences

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

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Amortization of issuance cost

Capitalized interest

Total interest expense

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

March 31, 2023

June 30, 2023

December 31, 2022

6 unchanged sentences

The terms of the indenture for the Notes due 2026 require compliance with various financial covenants, including minimum level of debt service coverage and limits on the amount of total leverage and secured debt maintained by the Operating Partnership.

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

Management believes that it was in compliance with those covenants as of June 30, 2023.

Accrued interest payable for the Notes due 2026 as of June 30, 2023 and December 31, 2022 was approximately $ 2.1 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 June 30, 2023 (in thousands):

2023 (six months ending December 31)

Net Income Per Share

4 unchanged sentences

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

Through 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).

Through June 30, 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 and six months ended June 30, 2023 and 2022 have been included in net income attributable to common stockholders to calculate net income per basic and diluted share.

The 74,260 and 87,437 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the three and six months ended June 30, 2023, respectively, and were included in the computation of diluted earnings per share.

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

For the three and six months ended June 30, 2023 and 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 the respective dates (see Note 10 for further discussion of PSUs).

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

For the Three Months Ended

For the Six Months Ended

Preferred stock dividends

14 unchanged sentences

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

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

At March 31, 2023

The following table presents the carrying value and approximate fair value of financial instruments at June 30, 2023 and December 31, 2022 (in thousands):

At June 30, 2023

At December 31, 2022

4 unchanged sentences

Notes due 2026 (2)

Construction Loan (3)

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

1 unchanged sentence

(2) The fair value is determined based upon Level 2 inputs as the Exchangeable Senior Notes and Notes due 2026 were trading in the private market.

As of March 31, 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.

(3) The construction loan receivable is categorized as Level 3 and was valued using a yield analysis, which is typically performed for non-credit impaired loans.

To determine fair value using a yield analysis, a current price is imputed for the loan based upon an assessment of the expected market yield for a similarly structured loan with a similar level of risk.

In the yield analysis, the Company considers the current contractual interest rate, the maturity and other terms of the loan relative to risk of the company and the specific loan.

At June 30, 2023 and December 31, 2022, the expected market yield used to determine fair value was 25 % .

Changes in market yields may change the fair value of the construction loan.

Generally, an increase in market yields may result in a decrease in the fair value of the construction loan.

Due to the inherent uncertainty of determining the fair value of a loan that does not have a readily available market value, the fair value of the construction loan may fluctuate from period to period.

Additionally, the fair value of the construction loan may differ significantly from the

value that would have been used had a readily available market existed for such loan and may differ materially from the value that the Company may ultimately realize.

As of June 30, 2023 and December 31, 2022, cash equivalent instruments consisted of approximately $ 79.7 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, 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 three months ended March 31, 2023 is included in the table below:

A summary of the restricted stock activity under the 2016 Plan and related information for the six months ended June 30, 2023 is included in the table below:

Grant Date Fair

2 unchanged sentences

Balance at March 31, 2023

Balance at June 30, 2023

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

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.

The remaining unrecognized compensation cost of approximately $ 6.1 million for restricted stock awards is expected to be recognized over a weighted-average amortization period of approximately 2.0 years as of June 30, 2023.

The fair value of restricted stock that vested during the six months ended June 30, 2023 was approximately $ 1.7 million.

The following table summarizes our RSU activity for the six months ended June 30, 2023.

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

5 unchanged sentences

Balance at March 31, 2023

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.

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

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

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

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

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

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

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

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

2021 PSU Award

2022 PSU Award

Fair Value Assumptions

Valuation date

January 6, 2021

January 7, 2022

Fair value per share on valuation date

Expected term

Expected price volatility

Risk-free interest rate

Discount for post vesting restriction

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

The risk-free interest rate was based on the zero-coupon risk-free interest rate derived from the Treasury Constant Maturities yield curve on the applicable valuation date.

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

Balance at June 30, 2023

The remaining unrecognized compensation cost of approximately $ 8.6 million for RSU awards is expected to be recognized over an amortization period of approximately 2.1 years as of June 30, 2023.

In January 2021 and 2022, we issued 70,795 and 102,641 “target” PSUs, respectively, to a select group of officers, which vest and are settled in shares of common stock based on the Company’s total stockholder return over a performance period of approximately three years from the grant date.

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 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.

For both the three and six months ended June 30, 2023 and 2022, we recognized stock-based compensation expense of approximately $ 2.7 million and $ 5.3 million, respectively, relating to PSU awards.

As of June 30, 2023, the remaining unrecognized compensation cost of approximately $ 12.0 million relating to PSU awards is expected to be recognized over the remaining Performance Period of approximately 1.4 years.

As measured as of June 30, 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 sheet as of March 31, 2023 is presented in the table below (in thousands):

2023 (nine months ending December 31)

The future contractual lease payments for our office lease and the reconciliation to the office lease liability reflected in other liabilities in our condensed consolidated balance sheet as of June 30, 2023 is presented in the table below (in thousands):

2023 (six months ending December 31)

Total future contractual lease payments

2 unchanged sentences

Improvement Allowances .

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.

As of June 30, 2023, we had approximately $ 29.6 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.

Construction Loan.

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.

As of June 30, 2023, we had approximately $ 2.1 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

13 unchanged sentences

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.

and on March 6, 2023 defendants replied to plaintiff’s response.

The court has not issued a ruling.

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

18 unchanged sentences

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

On June 5, 2023, a fourth derivative action lawsuit was filed against the Company and certain of its officers and directors.

The case was named Franco DeBlasio, on behalf of Gerich Melenth Nin (GMN) LP, derivatively on behalf of Innovative Industrial Properties, Inc.

Paul Smithers, Catherine Hastings, Alan D.

Gold, Tracie J.

Hager, Benjamin C.

Regin, Andy Bui, Gary A.

Kreitzer, David Stecher, Scott Shoemaker, Mary Curran, and Innovative Industrial Properties, Inc., Case Number 1:23-cv-01513-GLR, and filed in the United States District Court for the District of Maryland.

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.

On July 19, 2023, the United States Court for the District of Maryland consolidated Case Nos.

1:23-cv-00737-GLR and 1:23-cv-01513-GLR with case number 1:23-cv-00737-GLR as the lead case, and kept the stay in place.

Kings Garden Lawsuit

7 unchanged sentences

Section 1962(c)).

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.

The amount related to these project costs reported in construction in progress as of June 30, 2023 and December 31, 2022 was approximately $ 33.1 million and $ 33.2 million, respectively.

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, 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.

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 December 31, 2022 and March 31, 2023.

Pursuant to the conditional settlement agreement, as of June 30, 2023, the Company received a total of $ 15.6 million in partial settlement payments from Kings Garden, which was accounted for as a reduction to net real estate held for investment 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.

Out of the amounts included in construction in progress at June 30, 2023, we are in the process of investigating additional costs paid of approximately $ 9.6 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 June 30, 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.

2 unchanged sentences

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.

In July 2023, the Company filed a motion for leave to amend its Counter-Claims.

A hearing before the arbitrator is scheduled for August 17, 2023.

Parallel Pennsylvania Litigation

3 unchanged sentences

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.

The Court issued an Order on June 13, 2023 denying Goodblend Pennsylvania LLC’s and Parallel’s preliminary objections and directing Goodblend Pennsylvania LLC and Parallel to file an answer to the complaint.

On June 9, 2023, IIP-PA 8 LLC filed a Motion for a Trial Date, which is scheduled to be heard on September 6, 2023.

Goodblend Pennsylvania LLC and Parallel have filed a joint answer to the complaint requesting that the complaint be dismissed.

Parallel Texas Litigation

2 unchanged sentences

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.

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 2, 2023, IIP-MI 1 LLC, as landlord and an indirect subsidiary of the Company, filed a lawsuit against Green Peak Industries, Inc.

(“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.

4 unchanged sentences

Subsequent Events

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.

In July 2023, we amended our lease with a subsidiary of 4Front Ventures Corp.

at one of our Illinois properties, pursuant to which, among other things, we agreed to apply a portion of the security deposit that we hold under the lease to pay one-half of the monthly installments of base rent due from the tenant, commencing on August 1, 2023 and continuing through November 30, 2023, which the tenant is then required to repay over a 12-month period commencing on January 1, 2024.

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