What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-09 · 99 added, 78 removed, 324 unchanged (35% of the section changed)

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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, 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, in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, and in Part II, Item 1A below.

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

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Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company’s filings and reports.

The purpose of this Management’s Discussion and Analysis (“MD&A”) is to provide an understanding of the Company’s consolidated financial condition, results of operations and cash.

The purpose of this Management’s Discussion and Analysis (“MD&A”) is to provide an understanding of the Company’s consolidated financial condition, results of operations and cash flows.

MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s condensed consolidated financial statements and accompanying notes.

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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 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):

As of June 30, 2023, we had 22 full-time employees.

As of June 30, 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 June 30, 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 $50.2 million to fund draws to certain tenants and sellers for construction and improvements at our properties.

Of the approximately $50.2 million committed to fund draws to certain tenants and sellers for construction and improvements at our properties, approximately $20.6 million was incurred but not funded as of June 30, 2023.

Of these properties, we include 103 properties in our operating portfolio, which were 99.9% leased to state-licensed cannabis operators as of June 30, 2023, with a weighted-average remaining lease term of approximately 14.9 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 $1.5 million of security deposits applied for payment of rent for our leases with Holistic and Temescal) was approximately 97% for the three months ended June 30, 2023.

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 $5.8 million of security deposits applied for payment of rent for our leases with Green Peak, Parallel, Holistic and Temescal) was approximately 98% for the six months ended June 30, 2023, respectively.

As of June 30, 2023, we had fully applied approximately $909,000 of security deposit for payment of rent for one of our former leases with Green Peak and fully applied approximately $2.2 million of security deposits for payment of rent for a former lease with Parallel in Texas and a lease with Parallel in Pennsylvania.

We do not include in our operating portfolio the following properties (all of which were under development/redevelopment as of June 30, 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;

● Perez Road in Cathedral City, California (pre-leased);

● 63795 19th Avenue in Palm Springs, California;

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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 U.S.

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

consumer financial health.

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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.

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

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

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Significant Tenants and Concentrations of Risk

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

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

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 March 31, 2023, 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 months ended March 31, 2023.

At 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 at June 30, 2023.

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.

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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 three months ended March 31, 2023.

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.

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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

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.

During the three and six months ended

June 30, 2023, we received cash interest payments of approximately $403,000 and $537,000, respectively, which has been recorded as a liability as of June 30, 2023.

Comparison of the Three and Six Months Ended June 30, 2023 and 2022

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

For the Three Months Ended

For the Six Months Ended

Rental (including tenant reimbursements)

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Interest expense

Gain (loss) on exchange of Exchangeable Senior Notes

(Loss) gain on exchange of Exchangeable Senior Notes

Preferred stock dividends

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Rental Revenues.

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 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.

Rental revenues for the three months ended June 30, 2023 increased by approximately $5.9 million, or 8%, to approximately $75.9 million, compared to approximately $70.0 million for the three months ended June 30, 2022.

The increase in rental revenues was generated by properties we acquired in prior periods, including contractual rent escalations.

Rental revenues for the three months ended June 30, 2023 included the partial application of approximately $1.2 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 and the partial application of $300,000 of security deposits for payment of rent for one lease with Temescal in accordance with a lease amendment we executed with Temescal in March 2023 (see Note 6 in the notes to the condensed consolidated financial statements for information).

Rental revenues for the three months ended June 30, 2023 and 2022 included approximately $5.4 million and $2.5 million, respectively, of tenant reimbursements for property insurance premiums and property taxes.

Rental revenues during the three months ended June 30, 2023 were negatively impacted by non-collection of rent during the quarter from properties in our operating portfolio totaling approximately $2.2 million primarily related to contractual base rents and property management fees from two tenants, Parallel and Green Peak.

Rental revenues for the six months ended June 30, 2023 increased by approximately $17.3 million, or 13%, to approximately $151.4 million, compared to approximately $134.1 million for the six months ended June 30, 2022.

Approximately $15.4 million increase in rental revenues was generated primarily 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.

The remaining $1.9 million of the increase in rental revenues was generated by properties acquired during the six months ended June 30, 2023.

Rental revenues for the six months ended June 30, 2023 included the full application of approximately $909,000 of security deposit for payment of rent for one of our former leases with Green Peak, the full application of approximately $2.2 million of security deposits for payment of rent for a former lease with Parallel in Texas and an existing lease with Parallel in Pennsylvania, partial application of approximately $2.4 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 and the partial application of $300,000 of security deposit for payment of rent for one lease with Temescal in accordance with a lease amendment executed with Temescal in March 2023 (see Note 6 in the notes to the condensed consolidated financial statements for information).

Rental revenues for the six months ended June 30, 2023 and 2022 included approximately $10.6 million and $4.4 million, respectively, of tenant reimbursements for property insurance premiums and property taxes.

Rental revenues during the six months ended June 30, 2023 were negatively impacted by non-collection of rent during the period from properties in our operating portfolio totaling approximately $3.6 million (including approximately $3.5 million of contractual base rents and property management fees and approximately $143,000 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 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.

Other revenues for the three and six months ended June 30, 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 months ended March 31, 2023 increased by approximately $3.6 million compared to the three months ended March 31, 2022.

Property expenses for the three and six months ended June 30, 2023 increased by approximately $3.4 million and approximately $7.0 million compared to the three and six months ended June 30, 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 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.

General and administrative expense for the three months ended June 30, 2023 increased by approximately $1.9 million to approximately $10.6 million, compared to approximately $8.7 million for the three months ended June 30, 2022.

General and administrative expense for the six months ended June 30, 2023 increased by approximately $3.4 million to approximately $20.9 million, compared to approximately $17.5 million for the six months ended June 30, 2022.

The increase in general and administrative expense was primarily due to approximately $749,000 and approximately $1.4 million in litigation-related expense incurred during the three and six months ended June 30, 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, higher public company costs and occupancy costs.

Compensation expense for the three and six months ended June 30, 2023 included approximately $4.9 million and $9.7 million, respectively, of non-cash stock-based compensation.

Compensation expense for the three and six months ended June 30, 2022 included approximately $4.4 million and $8.8 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 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 and other income for the three months ended June 30, 2023 increased by approximately $1.7 million compared to the three months ended June 30, 2022.

Interest and other income for the six months ended June 30, 2023 increased by approximately $3.9 million compared to the six months ended June 30, 2022.

The increase in both periods was due to higher interest rates on our interest-bearing investments and approximately $545,000 of interest received on our construction loan during the three months ended June 30, 2023.

Interest Expense.

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,

Interest expense for the three months ended June 30, 2023 and 2022 included approximately $339,000 and $324,000, respectively, of non-cash interest expense.

Interest expense for the six months ended June 30, 2023 and 2022 included approximately $677,000 and $689,000, respectively, of non-cash interest expense.

Interest expense for the six months ended June 30, 2023 decreased by approximately $278,000 compared to the six months ended June 30, 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 also due to the exchanges of $2.0 million outstanding principal amount of our Exchangeable Senior Notes and capitalization of approximately $34,000 of interest during the six months ended June 30, 2023.

Comparison of the Six Months Ended June 30, 2023 and 2022 (in thousands)

Six Months Ended June 30,

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in financing activities

Net cash (used in) provided by financing activities

Ending cash, cash equivalents and restricted cash

Operating Activities

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.

Cash flows provided by operating activities for the six months ended June 30, 2023 and 2022 were approximately $126.4 million and $122.0 million, respectively.

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

Cash flows used in investing activities for the six months ended June 30, 2023 were approximately $18.4 million, of which approximately $149.3 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 $130.9 million related to net purchases and maturities of short-term investments.

Cash flows used in investing activities for the six months ended June 30, 2022 were approximately $427.0 million, of which approximately $442.9 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 $15.9 million related to net maturities of short-term investments.

Financing Activities

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.

Net cash used in financing activities of approximately $102.5 million during the six months ended June 30, 2023 was the result of dividend payments of approximately $101.9 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 provided by financing activities of approximately $264.5 million during the six months ended June 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 $85.1 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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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.

As of June 30, 2023, we owned 108 properties.

Of these properties, the 103 properties in our operating portfolio were 99.9% leased to state-licensed cannabis operators, with a weighted-average remaining lease term of approximately 14.9 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, 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.

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 $1.5 million of security deposits applied for payment of rent for our leases with Holistic and Temescal) was approximately 97% for the three months ended June 30, 2023.

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 $5.8 million of security deposits applied for payment of rent for our leases with Green Peak, Parallel, Holistic and Temescal) was approximately 98% for the six months ended June 30, 2023.

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

Two of our properties, which were previously leased to Kings Garden, and an expansion project at a property where Kings Garden continues to occupy the property pursuant to a confidential, contingent settlement agreement, were under development as of March 31, 2023.

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 June 30, 2023.

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.

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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 March 31, 2023.

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 June 30, 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.

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.

During the six months ended June 30, 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.

As of June 30, 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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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 three months ended March 31, 2023:

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

Security Class

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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

Contractual Obligations

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

The following table summarizes our contractual obligations as of June 30, 2023 (in thousands):

Notes due 2026

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.

2023 (six months ending December 31)

Additionally, as of June 30, 2023, we had approximately $29.6 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 June 30, 2023, we also had approximately $2.1 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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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.

For the three and six months ended June 30, 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 74,260 and 87,437 shares for the three and six months ended June 30, 2023, 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 six months ended June 30, 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 103,742 shares and 304,348 shares for the three and six months ended June 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 six months ended June 30, 2023 and 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 the respective periods.

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 months ended March 31, 2023 and 2022 (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 and six months ended June 30, 2023 and 2022 (in thousands, except share and per share amounts):

For the Three Months Ended

For the Six Months Ended

Net income attributable to common stockholders

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FFO attributable to common stockholders (diluted)

Financing expense

Litigation-related expense

(Gain) loss on exchange of Exchangeable Senior Notes

Loss (gain) on exchange of Exchangeable Senior Notes

Normalized FFO attributable to common stockholders (diluted)

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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.

(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 June 30, 2023, as the transaction did not qualify for recognition as a completed sale.

Critical Accounting Estimates

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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 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.

This discussion of our critical accounting estimates is intended to supplement and 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

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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.

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 months ended March 31, 2023 and 2022.

Stock-Based Compensation

Compensation cost for all share-based awards requires an estimate of fair value on the grant date and compensation cost is recognized on a straight-line basis over the service vesting period, which represents the requisite service period.

The grant date fair value for compensation programs that contain market conditions, like modifiers based on total stockholder return (a “market condition”), are performed using complex pricing valuation models that require the input of assumptions, including judgments to estimate expected stock price volatility, expected life, and forfeiture rate.

See Note 10 “Common Stock Incentive Plan” to our condensed consolidated financial statements included in this report for further discussion the assumptions and estimates.

The grant date fair value for compensation programs that contain market conditions, like modifiers based on total stockholder return (a “market condition”), are performed using Monte Carlo simulation pricing models that require the input of assumptions, including judgments to estimate expected stock price volatility, risk-free interest rate, and 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.

Impact of Real Estate and Credit Markets

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Interest Rate Risk

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.

As of June 30, 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