What changed in this filing

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Item 1. Financial Statements

2023-11-02 compared with 2023-08-03 · 180 added, 152 removed, 522 unchanged (39% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

September 30,

Real estate, at cost:

22 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 June 30, 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 September 30, 2023 and December 31, 2022

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

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

28,039,830 and 27,972,830 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively

Additional paid-in capital

7 unchanged sentences

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Rental (including tenant reimbursements)

7 unchanged sentences

Interest expense

(Loss) gain on exchange of Exchangeable Senior Notes

Gain (loss) on exchange of Exchangeable Senior Notes

Preferred stock dividends

6 unchanged sentences

(In thousands, except share amounts)

Three Months Ended June 30, 2023

Three Months Ended June 30, 2022

Three Months Ended September 30, 2023

Three Months Ended September 30, 2022

Stockholders’

1 unchanged sentence

Balances at beginning of period

Issuance of unvested restricted stock, net of forfeitures

Forfeitures of unvested restricted stock, net of issuance

Exchange of Exchangeable Senior Notes

Net proceeds from sale of common stock

Preferred stock dividend

Common stock dividend

Payment of common stock offering costs

Preferred stock dividends

Common stock dividends

Stock-based compensation

Balances at end of period

Six Months Ended June 30, 2023

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2023

Nine Months Ended September 30, 2022

Stockholders’

5 unchanged sentences

Net proceeds from sale of common stock

Preferred stock dividend

Common stock dividend

Preferred stock dividends

Common stock dividends

Stock-based compensation

4 unchanged sentences

(In thousands)

For the Six Months Ended

For the Nine Months Ended

September 30,

Cash flows from operating activities

1 unchanged sentence

Depreciation and amortization

(Gain) loss on exchange of Exchangeable Senior Notes

Loss (gain) on exchange of Exchangeable Senior Notes

Other non-cash adjustments

Stock-based compensation

Amortization of discounts on short-term investments

Amortization of discounts on investments

Amortization of debt discount and issuance costs

3 unchanged sentences

Rent received in advance and tenant security deposits

Net cash provided by operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities

5 unchanged sentences

Maturities of short-term investments

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities

3 unchanged sentences

Taxes paid related to net share settlement of equity awards

Net cash (used in) provided by financing activities

Net cash provided by (used in) financing activities

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

12 unchanged sentences

Notes to the Condensed Consolidated Financial Statements

June 30, 2023

September 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”).

5 unchanged sentences

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.

Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements

Summary of Significant Accounting Policies and Procedures

Basis of Presentation.

6 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 June 30, 2023.

We have combined $ 705.3 million of “Tenant improvements” as of December 31, 2022, which represented 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 September 30, 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 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.

For the three months ended September 30, 2023 and 2022, we recognized depreciation expense of approximately $ 16.5 million and $ 15.7 million, respectively, and for the nine months ended September 30, 2023 and 2022, we recognized depreciation expense of approximately $ 49.5 million and $ 44.4 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.

9 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.

During the nine months ended September 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.

8 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 six months ended June 30, 2023 and 2022.

No impairment losses were recognized during the nine months ended September 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 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.

For the three months ended September 30, 2023, rental revenue recognized included the application of approximately $ 2.2 million of security deposits for rent with three tenants in connection with lease amendments.

For the nine months ended September 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 $ 4.9 million of security deposits for rent with three tenants in connection with lease amendments.

Construction Loan.

8 unchanged sentences

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.

As of September 30, 2023, we had funded approximately $ 21.6 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 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.

We consider all highly-liquid investments with original maturities of three months or less to be cash equivalents, which is comprised of short-term money market funds, obligations of the U.S.

government and certificates of deposit with an original maturity at the time of purchase of less than or equal to three months.

5 unchanged sentences

Exchangeable Notes.

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

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

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

We measured the estimated fair value of the debt component of our Exchangeable Senior Notes as of the date of issuance based on our estimated nonexchangeable debt borrowing rate with the assistance of a third-party valuation specialist as we do not have a history of borrowing arrangements and there was limited empirical data available related to the Company’s industry due to the regulatory uncertainty of the cannabis market in which the Company’s tenants operate.

The equity component of our Exchangeable Senior Notes was reflected within additional paid-in capital on our condensed consolidated balance sheets, and the resulting debt discount was amortized over the period during which the Exchangeable Senior Notes were expected to be outstanding (through the maturity date) as additional non-cash interest expense.

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40):

2 unchanged sentences

ASU 2020-06 also updates the earnings per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or shares.

We adopted ASU 2020-06 on January 1, 2022 and recognized a cumulative-effect adjustment of approximately $ 728,000 to the opening balance of retained earnings and derecognized approximately $ 1.3 million of the remaining equity component relating to the outstanding principal balance of our Exchangeable Senior Notes at the date of adoption.

Deferred Financing Costs.

13 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 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.

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.

2 unchanged sentences

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

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.

For both the three months ended September 30, 2023 and 2022, we recognized office lease expense of approximately $ 121,000 , and for the nine months ended September 30, 2023 and 2022, we recognized office lease expense of approximately $ 364,000 and $ 344,000 , respectively, which are included in general and administrative expenses in our condensed consolidated statements of income.

For the nine months ended September 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 $ 372,000 and $ 282,000 , 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 June 30, 2023, we owned 108 properties located in 19 states and leased to 30 tenants.

As of September 30, 2023, we owned 108 properties located in 19 states and leased to 29 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 and six months ended June 30, 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 nine months ended September 30, 2023 and 2022, including tenant reimbursements:

For the Three Months Ended

June 30, 2023

September 30, 2023

Percentage of

9 unchanged sentences

("Trulieve")

For the Six Months Ended

June 30, 2023

For the Nine Months Ended

September 30, 2023

Percentage of

2 unchanged sentences

For the Three Months Ended

For the Six Months Ended

June 30, 2022

September 30, 2022

Percentage of

For the Nine Months Ended

September 30, 2022

Percentage of

4 unchanged sentences

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 six months ended June 30, 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 June 30, 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 and regained possession of those properties, which continued to be in development or redevelopment as of September 30, 2023.

Kings Garden paid the stipulated rent during its period of occupancy for the remaining four properties through September 20, 2023, and we regained possession of those properties in September 2023.

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 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 September 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 September 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.

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

We have not experienced any losses in such accounts.

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 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.

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

During the nine months ended September 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 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”).

As of September 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 six months ended June 30, 2023:

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

Declaration Date

16 unchanged sentences

July 14, 2023

September 15, 2023

July 1, 2023 to September 30, 2023

October 13, 2023

September 15, 2023

Series A preferred stock

July 15, 2023 to October 14, 2023

October 13, 2023

Investments in Real Estate

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

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

Susquehanna Street

6 unchanged sentences

Acquired In-Place Lease Intangible Assets

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

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

September 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 $ 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)

Amortization of in-place lease intangible assets classified in depreciation and amortization expense in our condensed consolidated statements of income was approximately $ 215,000 for both the three months ended September 30, 2023 and 2022, respectively, and was approximately $ 645,000 and $ 626,000 for the nine months ended September 30, 2023 and 2022, respectively.

The weighted-average remaining amortization period of the acquired in-place leases was approximately 9.8 years, and the estimated annual amortization of the value of the acquired in-place leases as of September 30, 2023 is as follows (in thousands):

2023 (three 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 June 30, 2023 and December 31, 2022 is as follows (in thousands):

June 30, 2023

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

September 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 9.5 years.

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.

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

For the nine months ended September 30, 2023 and 2022, the amortization of the above-market lease was approximately $ 69,000 in each period.

Additional Improvement Allowances

1 unchanged sentence

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

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

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

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

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

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

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

to include cross-default provisions applicable to each lease.

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

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

Lease Amendments

6 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 (“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;

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.

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

(“4Front”) 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.

Capitalized Costs

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.

During the nine months ended September 30, 2023, we capitalized costs of approximately $ 111.1 million and funded approximately $ 129.5 million relating to improvements and construction activities at our properties.

Property Disposition

5 unchanged sentences

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.

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.

As of September 30, 2023, we received interest payments of approximately $ 939,000 .

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 September 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 June 30, 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 September 30, 2023 for future periods is summarized as follows (in thousands):

Contractual Minimum Rent

2023 (six months ending December 31)

2023 (three months ending December 31)

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”).

As of September 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 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 for the Exchangeable Senior Notes at September 30, 2023 was 17.06090 shares of our common stock per $ 1,000 principal amount of Notes and the exchange price at September 30, 2023 was approximately $ 58.61 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 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.

At September 30, 2023, the if-exchanged value of the Exchangeable Senior Notes exceeded the principal amount by approximately $ 1.3 million.

During the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2023.

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

For the nine months ended September 30, 2022, we recognized a loss on the exchanges totaling approximately $ 125,000 , resulting from the difference between the fair value and carrying value of the debt as of the date of the exchange.

The issuance of the shares pursuant to the exchanges resulted in a non-cash increase to our additional paid-in capital account of approximately $ 17,000 and $ 26.7 million for the three and nine months ended September 30, 2022, respectively.

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

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Amortization of issuance cost

Capitalized interest

Total interest expense

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

June 30, 2023

September 30, 2023

December 31, 2022

2 unchanged sentences

Carrying value

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.

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

Notes due 2026

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

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

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

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.

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

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Amortization of issuance cost

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

June 30, 2023

September 30, 2023

December 31, 2022

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

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

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

Accrued interest payable for the Notes due 2026 as of September 30, 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 September 30, 2023 (in thousands):

2023 (three months ending December 31)

Net Income Per Share

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

Through 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).

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

The 75,682 and 83,007 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the three and nine months ended September 30, 2023, respectively, and were included in the computation of diluted earnings per share.

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

For the three and nine months ended September 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

For the Nine Months Ended

September 30,

Preferred stock dividends

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

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

At June 30, 2023

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

At September 30, 2023

At December 31, 2022

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Investments (1)

Investments as cash equivalents (2)

Exchangeable Senior Notes (3)

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Construction Loan (4)

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

(1) Investments consisting of obligations of the U.S.

government with an original maturity at the time of purchase of greater than three months are classified as held-to-maturity and valued using Level 1 inputs.

(2) Investments as cash equivalents consisting of obligations of the U.S.

government with an original maturity at the time of purchase of less than or equal to three months are classified as held-to-maturity and valued using Level 1 inputs.

(3) 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.

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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.

At September 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.

Treasury and government securities.

Short-term investments consisting of certificate of deposits and obligations of the U.S.

government are stated at amortized cost, which approximates their relative fair values due to the short-term maturities and market rates of interest of these instruments.

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, 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.

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.

The carrying amounts of cash equivalents, accounts payable, accrued expenses and other liabilities approximate their fair values.

Common Stock Incentive Plan

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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 six months ended June 30, 2023 is included in the table below:

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

Grant Date Fair

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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 $ 6.1 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.

Forfeited (1)

Balance at September 30, 2023

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

The remaining unrecognized compensation cost of approximately $ 5.2 million for restricted stock awards is expected to be recognized over a weighted-average amortization period of approximately 1.8 years as of September 30, 2023.

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

The following table summarizes our RSU activity for the nine months ended September 30, 2023.

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

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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.

Balance at September 30, 2023

The remaining unrecognized compensation cost of approximately $ 7.3 million for RSU awards is expected to be recognized over an amortization period of approximately 1.9 years as of September 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 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.

For both the three and nine months ended September 30, 2023 and 2022, we recognized stock-based compensation expense of approximately $ 2.7 million and $ 8.0 million, respectively, relating to PSU awards.

As of September 30, 2023, the remaining unrecognized compensation cost of approximately $ 9.3 million relating to PSU awards is expected to be recognized over the remaining Performance Period of approximately 1.2 years.

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

2023 (six 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 September 30, 2023 is presented in the table below (in thousands):

2023 (three months ending December 31)

Total future contractual lease payments

2 unchanged sentences

Improvement Allowances .

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.

As of September 30, 2023, we had approximately $ 17.2 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 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.

As of September 30, 2023, we had approximately $ 1.4 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.

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

The court has not issued a ruling.

On September 19, 2023, the court granted defendants’ motion to dismiss the Amended Class Action Complaint without prejudice.

On October 19, 2023, a Second Amended Class Action complaint was filed under the same Case Number, and asserted causes of action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

According to the Second Amended Class Action Complaint, the plaintiff is seeking an undetermined amount of damages, interest, attorneys’ fees and costs and other relief on behalf of the putative classes of all persons who acquired shares of the Company’s common stock between August 7, 2020 and August 4, 2022.

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

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

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

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.

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On August 2, 2022, the case was amended to be named IIP-CA 2 LP, a Delaware limited partnership v.

Kings Garden Inc., a Nevada corporation, CK Endeavors, Inc., a California corporation, JM Endeavors, Inc., a California corporation, Michael King, an individual, Gary LaSalle, an individual, Charles Kieley, an individual, and Laurie Kibby, an individual , and to include claims relating to construction at the expansion project and the property that was under redevelopment as of June 30, 2022 for breach of implied covenant of good faith and fair dealing, fraud, negligent misrepresentation, conversion, theft by false pretenses, money had and received, and violations of the Racketeer Influenced and Corrupt Organization Act (18 U.S.C.

Kings Garden Inc., a Nevada corporation, CK Endeavors, Inc., a California corporation, JM Endeavors, Inc., a California corporation, Michael King, an individual, Gary LaSalle, an individual, Charles Kieley, an individual, and Laurie Kibby, an individual , and to include claims relating to construction at two projects as of June 30, 2022 for breach of implied covenant of good faith and fair dealing, fraud, negligent misrepresentation, conversion, theft by false pretenses, money had and received, and violations of the Racketeer Influenced and Corrupt Organization Act (18 U.S.C.

Section 1962(c)).

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.

The amount related to these project costs reported in construction in progress as of September 30, 2023 and December 31, 2022 was approximately $ 28.9 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 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.

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 June 30, 2023.

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 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.

Pursuant to the conditional settlement agreement, as of September 30, 2023, the Company has received a total of approximately $ 19.8 million in partial settlement payments from Kings Garden, which has been accounted for as a reduction to net real estate held for investment on our condensed consolidated balance sheets.

During the three months ended September 30, 2023, we received approximately $ 4.2 million in additional payments from Kings Garden (reflected in the total amount above) and are investigating the remaining additional costs paid of approximately $ 750,000 related to one construction project to determine whether these are 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 project related to these potential overpayments, as of September 30, 2023, we are unable to make such an estimate.

Additionally, on August 16, 2023, we filed suit against Orr Construction, the general contractor for certain amounts on one construction project undertaken by Kings Garden, named IIP-CA 2 LP v.

Orr Builders , asserting claims for fraud, negligent misrepresentation, intentional interference with economic relationship, intentional interference with contract, conspiracy, violation of California unfair competition law, money had and received, and unjust enrichment.

The Company contends that the lawsuit arose out of representations made to the Company by Orr Construction while investigating payments made for one construction project, relating to the lawsuit named IIP-CA 2 LP, a Delaware limited partnership v.

Kings Garden Inc., a Nevada corporation, CK Endeavors, Inc., a California corporation, and JM Endeavors, Inc., a California corporation , filed in the Superior Court of the State of California, which was ultimately settled.

Although there is at least a reasonable possibility that a loss may have been incurred in connection with amounts paid by us and work performed by Orr Construction for that construction project, as of September 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.

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

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

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.

On August 4, 2023, the Company accepted an offer of judgment extended by Kings Garden under California Code of Civil Procedure Section 998, pursuant to which Kings Garden (i) vacated the remaining four properties it previously occupied in September 2023, paying the stipulated rent during its period of occupancy through September 20, 2023, and (ii) agreed to pay the Company damages and attorneys’ fees totaling approximately $ 6.0

million, including interest on the then-outstanding amount, on a fully amortizing schedule of approximately $ 193,000 per month over a three-year period.

The offer of judgment included a mutual release.

Parallel Pennsylvania Litigation

4 unchanged sentences

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.

On October 25, 2023, a consent order was executed by the Court which awarded possession of the property to IIP-PA 8 LLC on October 31, 2023 and damages in favor of IIP-PA 8 LLC in the amount of approximately $ 15.5 million.

Parallel Texas Litigation

1 unchanged sentence

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

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

In March 2023, a judgment for possession was entered in favor of IIP-TX 1 LLC, as well as monthly rental amounts due, and we regained possession of the property.

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.

The parties exchanged initial disclosures in September 2023, and are in the discovery phase.

Green Peak Michigan Litigation

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(“Green Peak”), as tenant, in 56-A District Court of the State of Michigan, regarding the lease for one of the Company’s properties located in Michigan, asserting claim for possession.

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

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

On February 22, 2023, IIP-MI 1 LLC filed a subsequent lawsuit against Green Peak and Tropics LP (“SAF Entity 2”) in the Circuit Court of Eaton County, 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 (the “Circuit Court Action”).

On March 3, 2023, a stipulated order appointing a receiver over substantially all of Green Peak’s assets was entered in the Circuit Court of Ingham County, Michigan (the “Receivership Case”), pursuant to which the Company re-gained possession of one of the Company’s cultivation and processing properties, which is under redevelopment as of September 30, 2023, and two retail properties.

As a result of the Receivership Case the claims asserted against Green Peak in the Circuit Court Action were stayed by order of the court and the claims against SAF Entity 2 were suspended by agreement of the parties pending the outcome of the Receivership Case.

On September 28, 2023, a stipulation and order was entered in the Receivership Case, pursuant to which the Company is expected to re-gain possession of another retail property in Michigan on November 30, 2023, with the receiver paying contractually due rent through the last date of occupancy.

On October 3, 2023, the court approved the sale of substantially all of Green Peak’s remaining assets in receivership to an affiliate of Green Peak’s senior secured lender, with the order approving the sale entered October 12, 2023.

The leases for the remaining properties are expected to be assumed by the purchaser in connection with the closing of the sale.

We may, from time to time, be a party to other legal proceedings, which arise in the ordinary course of our business.

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Subsequent Events

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.

On October 23, 2023, our Operating Partnership entered into a loan and security agreement (the “Loan Agreement”) with a federally regulated commercial bank, as lender and as agent for lenders that become party thereto from time to time.

The Loan Agreement matures on October 23, 2026, and provides $ 30.0 million in aggregate commitments for secured revolving loans, the availability of which is based on a borrowing base consisting of real properties owned by subsidiaries (the “Subsidiary Guarantors”) of the Operating Partnership that satisfy eligibility criteria set forth in the Loan Agreement.

The obligations of the Operating Partnership under the Loan Agreement are guaranteed by the Company and the Subsidiary Guarantors, and are secured by (i) operating accounts of the Operating Partnership into which lease payments under the real property included in the borrowing base are paid, (ii) the equity interest of the Subsidiary Guarantors, (iii) the real estate included in the borrowing base and the leases and rents thereunder, and (iv) all personal property of the Subsidiary Guarantors.

Borrowings under the Loan Agreement bear interest at a variable rate based on the greater of the prime rate and an applicable margin based on deposits with the participating bank(s) and a stipulated interest rate.

The Loan Agreement is subject to certain liquidity and operating covenants and includes customary representations and warranties, affirmative and negative covenants and events of default.

The Loan Agreement also allows the Operating Partnership, subject to the satisfaction of certain conditions, to request additional revolving incremental loan commitments up to a specified amount.

There were no amounts outstanding under the Loan Agreement as of November 2, 2023.

In October 2023, we amended our lease with a subsidiary of Goodness Growth at one of our New York properties, increasing the improvement allowance under the lease by $ 14.0 million to a total of approximately $ 67.4 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In connection with the lease amendment, the tenant prepaid rent for the three month period commencing on November 1, 2023 and ending January 31, 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