INNOVATIVE INDUSTRIAL PROPERTIES INC 10-Q

ITEM 1. FINANCIAL STATEMENTS Innovative Industrial Properties, Inc. Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except share and per share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, Assets ​ 2023 ​ 2022 Real estate, at cost: ​ ​ ​ ​ ​ ​ Land ​ $ 142,524 ​ $ 139,953 Buildings and improvements ​ 2,100,662 ​ 2,010,628 Construction in progress ​ 107,772 ​ 54,106 Total real estate, at cost ​ 2,350,958 ​ 2,204,687 Less accumulated depreciation ​ ( 186,121 ) ​ ( 138,405 ) Net real estate held for investment ​ 2,164,837 ​ 2,066,282 Construction loan receivable ​ ​ 21,556 ​ ​ 18,021 Cash and cash equivalents ​ 117,034 ​ 87,122 Restricted cash ​ ​ 1,450 ​ ​ 1,450 Investments ​ 41,885 ​ 200,935 Right of use office lease asset ​ ​ 1,453 ​ ​ 1,739 In-place lease intangible assets, net ​ ​ 8,460 ​ ​ 9,105 Other assets, net ​ 32,748 ​ 30,182 Total assets ​ $ 2,389,423 ​ $ 2,414,836 Liabilities and stockholders’ equity ​ ​ ​ ​ ​ ​ Liabilities: ​ ​ ​ ​ ​ ​ Exchangeable Senior Notes, net ​ $ 4,423 ​ $ 6,380 Notes due 2026, net ​ ​ 296,107 ​ ​ 295,115 Building improvements and construction funding payable ​ ​ 12,724 ​ ​ 29,376 Accounts payable and accrued expenses ​ 13,631 ​ 10,615 Dividends payable ​ 51,079 ​ 50,840 Rent received in advance and tenant security deposits ​ 59,120 ​ 58,716 Other liabilities ​ 3,670 ​ 1,901 Total liabilities ​ 440,754 ​ 452,943 Commitments and contingencies (Notes 6 and 11) ​ ​ Stockholders’ equity: ​ ​ Preferred stock, par value $ 0.001 per share, 50,000,000 shares authorized: 9.00 % Series A cumulative redeemable preferred stock, $ 15,000 liquidation preference ($ 25.00 per share), 600,000 shares issued and outstanding at September 30, 2023 and December 31, 2022 ​ 14,009 ​ 14,009 Common stock, par value $ 0.001 per share, 50,000,000 shares authorized: 28,039,830 and 27,972,830 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively ​ 28 ​ 28 Additional paid-in capital ​ 2,081,291 ​ 2,065,248 Dividends in excess of earnings ​ ( 146,659 ) ​ ( 117,392 ) Total stockholders’ equity ​ 1,948,669 ​ 1,961,893 Total liabilities and stockholders’ equity ​ $ 2,389,423 ​ $ 2,414,836 ​ See the accompanying notes to the condensed consolidated financial statements. ​ ​ 3 Table of Contents Innovative Industrial Properties, Inc. Condensed Consolidated Statements of Income (Unaudited) (In thousands, except share and per share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended For the Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2023 2022 2023 2022 Revenues: ​ ​ ​ ​ ​ ​ ​ Rental (including tenant reimbursements) ​ $ 77,286 ​ $ 70,345 ​ $ 228,734 ​ $ 204,454 Other ​ 540 ​ 538 ​ 1,616 ​ 1,444 Total revenues ​ 77,826 ​ 70,883 ​ 230,350 ​ 205,898 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Property expenses ​ 6,318 ​ ​ 2,823 ​ ​ 17,700 ​ ​ 7,232 General and administrative expense ​ 10,981 ​ ​ 10,804 ​ ​ 31,924 ​ ​ 28,288 Depreciation and amortization expense ​ 16,678 ​ ​ 15,900 ​ ​ 50,096 ​ ​ 45,001 Total expenses ​ 33,977 ​ 29,527 ​ 99,720 ​ 80,521 Income from operations ​ 43,849 ​ 41,356 ​ 130,630 ​ 125,377 Interest and other income ​ 2,075 ​ ​ 773 ​ ​ 6,625 ​ ​ 1,411 Interest expense ​ ​ ( 4,330 ) ​ ​ ( 4,513 ) ​ ​ ( 13,322 ) ​ ​ ( 13,783 ) Gain (loss) on exchange of Exchangeable Senior Notes ​ — ​ ​ — ​ ​ 22 ​ ​ ( 125 ) Net income ​ 41,594 ​ 37,616 ​ 123,955 ​ 112,880 Preferred stock dividends ​ ( 338 ) ​ ​ ( 338 ) ​ ​ ( 1,014 ) ​ ​ ( 1,014 ) Net income attributable to common stockholders ​ $ 41,256 ​ $ 37,278 ​ $ 122,941 ​ $ 111,866 Net income attributable to common stockholders per share (Note 8): ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 1.46 ​ $ 1.33 ​ $ 4.36 ​ $ 4.10 Diluted ​ $ 1.45 ​ $ 1.32 ​ $ 4.32 ​ $ 4.06 Weighted-average shares outstanding: ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ 27,983,004 ​ 27,938,568 ​ 27,971,544 ​ 27,144,953 Diluted ​ 28,265,605 ​ 28,157,934 ​ 28,248,054 ​ 27,496,151 ​ See accompanying notes to the condensed consolidated financial statements. ​ ​ 4 Table of Contents Innovative Industrial Properties, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands, except share amounts) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, 2023 ​ ​ Three Months Ended September 30, 2022 ​ ​ Series A ​ Shares of ​ ​ ​ ​ Additional ​ Dividends in ​ Total ​ ​ Series A ​ Shares of ​ ​ ​ ​ Additional ​ Dividends in ​ Total ​ ​ Preferred ​ Common ​ Common ​ Paid-In- ​ Excess of ​ Stockholders’ ​ ​ Preferred ​ Common ​ Common ​ Paid-In ​ Excess of ​ Stockholders’ ​ Stock Stock Stock Capital Earnings Equity ​ Stock Stock Stock Capital Earnings Equity Balances at beginning of period ​ $ 14,009 28,040,054 ​ $ 28 ​ $ 2,076,357 ​ $ ( 137,174 ) ​ $ 1,953,220 ​ ​ $ 14,009 ​ 27,973,429 ​ $ 28 ​ $ 2,056,568 ​ $ ( 94,833 ) ​ $ 1,975,772 Net income ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ 41,594 ​ ​ 41,594 ​ ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ 37,616 ​ ​ 37,616 Forfeitures of unvested restricted stock, net of issuance ​ ​ — ​ ( 224 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Exchange of Exchangeable Senior Notes ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ​ — ​ 265 ​ ​ — ​ ​ 17 ​ ​ — ​ ​ 17 Payment of common stock offering costs ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ​ — ​ — ​ ​ — ​ ​ ( 28 ) ​ ​ — ​ ​ ( 28 ) Preferred stock dividends ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 338 ) ​ ​ ( 338 ) ​ ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 338 ) ​ ​ ( 338 ) Common stock dividends ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 50,741 ) ​ ​ ( 50,741 ) ​ ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 50,503 ) ​ ​ ( 50,503 ) Stock-based compensation ​ ​ — ​ — ​ ​ — ​ ​ 4,934 ​ ​ — ​ ​ 4,934 ​ ​ ​ — ​ — ​ ​ — ​ ​ 4,379 ​ ​ — ​ ​ 4,379 Balances at end of period ​ $ 14,009 28,039,830 ​ $ 28 ​ $ 2,081,291 ​ $ ( 146,659 ) ​ $ 1,948,669 ​ ​ $ 14,009 ​ 27,973,694 ​ $ 28 ​ $ 2,060,936 ​ $ ( 108,058 ) ​ $ 1,966,915 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, 2023 ​ ​ Nine Months Ended September 30, 2022 ​ ​ Series A ​ Shares of ​ ​ ​ ​ Additional ​ Dividends in ​ Total ​ ​ Series A ​ Shares of ​ ​ ​ ​ Additional ​ Dividends in ​ Total ​ ​ Preferred ​ Common ​ Common ​ Paid-In ​ Excess of ​ Stockholders’ ​ ​ Preferred ​ Common ​ Common ​ Paid-In ​ Excess of ​ Stockholders’ ​ Stock Stock Stock Capital Earnings Equity ​ Stock Stock Stock Capital Earnings Equity Balances at beginning of period ​ $ 14,009 27,972,830 ​ $ 28 ​ $ 2,065,248 ​ $ ( 117,392 ) ​ $ 1,961,893 ​ ​ $ 14,009 ​ 25,612,541 ​ $ 26 ​ $ 1,672,882 ​ $ ( 75,218 ) ​ $ 1,611,699 Adjustment to opening balance upon adoption of ASU 2020-06 (Note 2) ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ​ — ​ — ​ ​ — ​ ​ ( 1,340 ) ​ ​ 728 ​ ​ ( 612 ) Net income ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ 123,955 ​ ​ 123,955 ​ ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ 112,880 ​ ​ 112,880 Issuance of unvested restricted stock, net of forfeitures ​ ​ — ​ 34,800 ​ ​ — ​ ​ ( 568 ) ​ ​ — ​ ​ ( 568 ) ​ ​ ​ — ​ 15,174 ​ ​ — ​ ​ ( 2,441 ) ​ ​ — ​ ​ ( 2,441 ) Exchange of Exchangeable Senior Notes ​ ​ — ​ 32,200 ​ ​ — ​ ​ 1,964 ​ ​ — ​ ​ 1,964 ​ ​ ​ — ​ 413,166 ​ ​ — ​ ​ 26,682 ​ ​ — ​ ​ 26,682 Net proceeds from sale of common stock ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ​ — ​ 1,932,813 ​ ​ 2 ​ ​ 351,958 ​ ​ — ​ ​ 351,960 Preferred stock dividends ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 1,014 ) ​ ​ ( 1,014 ) ​ ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 1,014 ) ​ ​ ( 1,014 ) Common stock dividends ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 152,208 ) ​ ​ ( 152,208 ) ​ ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 145,434 ) ​ ​ ( 145,434 ) Stock-based compensation ​ ​ — ​ — ​ ​ — ​ ​ 14,647 ​ ​ — ​ ​ 14,647 ​ ​ ​ — ​ — ​ ​ — ​ ​ 13,195 ​ ​ — ​ ​ 13,195 Balances at end of period ​ $ 14,009 28,039,830 ​ $ 28 ​ $ 2,081,291 ​ $ ( 146,659 ) ​ $ 1,948,669 ​ ​ $ 14,009 ​ 27,973,694 ​ $ 28 ​ $ 2,060,936 ​ $ ( 108,058 ) ​ $ 1,966,915 ​ See accompanying notes to the condensed consolidated financial statements. ​ ​ 5 Table of Contents Innovative Industrial Properties, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months Ended ​ ​ September 30, ​ 2023 2022 Cash flows from operating activities ​ ​ ​ ​ ​ ​ Net income ​ $ 123,955 ​ $ 112,880 Adjustments to reconcile net income to net cash provided by operating activities ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ 50,096 ​ 45,001 Loss (gain) on exchange of Exchangeable Senior Notes ​ ​ ( 22 ) ​ ​ 125 Other non-cash adjustments ​ ​ 83 ​ ​ 158 Stock-based compensation ​ 14,647 ​ 13,195 Amortization of discounts on investments ​ ( 2,894 ) ​ ( 1,068 ) Amortization of debt discount and issuance costs ​ 1,021 ​ 1,017 Changes in assets and liabilities ​ ​ ​ ​ ​ ​ Other assets, net ​ ( 2,905 ) ​ ( 6,555 ) Accounts payable, accrued expenses and other liabilities ​ 5,077 ​ 5,339 Rent received in advance and tenant security deposits ​ 404 ​ 8,683 Net cash provided by (used in) operating activities ​ 189,462 ​ 178,775 ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities ​ ​ ​ ​ ​ ​ Purchases of investments in real estate ​ ( 34,906 ) ​ ( 150,090 ) Funding of draws for improvements and construction ​ ( 129,502 ) ​ ( 316,469 ) Funding of construction loan and other investments ​ ​ ( 3,535 ) ​ ​ ( 21,360 ) Deposits in escrow for acquisitions ​ — ​ ( 100 ) Purchases of short-term investments ​ ( 91,772 ) ​ ( 278,717 ) Maturities of short-term investments ​ 253,716 ​ 365,000 Net cash provided by (used in) investing activities ​ ( 5,999 ) ​ ( 401,736 ) ​ ​ ​ ​ ​ ​ ​ Cash flows from financing activities ​ ​ ​ ​ ​ ​ Issuance of common stock, net of offering costs ​ — ​ 351,960 Dividends paid to common stockholders ​ ( 151,969 ) ​ ( 133,440 ) Dividends paid to preferred stockholders ​ ( 1,014 ) ​ ( 1,014 ) Taxes paid related to net share settlement of equity awards ​ ( 568 ) ​ ( 2,441 ) Net cash provided by (used in) financing activities ​ ( 153,551 ) ​ 215,065 Net increase (decrease) in cash, cash equivalents and restricted cash ​ 29,912 ​ ( 7,896 ) Cash, cash equivalents and restricted cash, beginning of period ​ 88,572 ​ 86,419 Cash, cash equivalents and restricted cash, end of period ​ $ 118,484 ​ $ 78,523 ​ ​ ​ ​ ​ ​ ​ Supplemental disclosure of cash flow information: ​ ​ ​ ​ ​ ​ Cash paid during the period for interest, net of interest capitalized ​ $ 8,253 ​ $ 8,997 Supplemental disclosure of non-cash investing and financing activities: ​ ​ ​ ​ ​ ​ Accrual for current-period additions to real estate ​ $ 10,520 ​ $ 35,195 Deposits applied for acquisitions ​ ​ 250 ​ ​ 25 Accrual for common and preferred stock dividends declared ​ 51,079 ​ 50,841 Exchange of Exchangeable Senior Notes for common stock ​ ​ 1,964 ​ ​ 26,682 Operating lease liability for obtaining right of use asset ​ ​ — ​ ​ 1,017 ​ See accompanying notes to the condensed consolidated financial statements. ​ 6 Table of Contents Innovative Industrial Properties, Inc. Notes to the Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 1. Organization 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”). We are an internally-managed real estate investment trust (“REIT”) focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated cannabis facilities. We have acquired and intend to continue to acquire our properties through sale-leaseback transactions and third-party purchases. We have leased and expect to continue to lease our properties on a triple-net lease basis, where the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term, including structural repairs, maintenance, real estate taxes and insurance. We were incorporated in Maryland on June 15, 2016. We conduct our business through a traditional umbrella partnership real estate investment trust, or UPREIT structure, in which our properties are owned by our Operating Partnership, directly or through subsidiaries. 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. ​ ​ 2. Summary of Significant Accounting Policies and Procedures Basis of Presentation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. This interim financial information should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Any references to square footage or occupancy percentage, and any amounts derived from these values in these notes to the condensed consolidated financial statements, are outside the scope of our independent registered public accounting firm’s review. Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2023. Reclassification . 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”. Federal Income Taxes. We believe that we have operated our business so as to qualify to be taxed as a REIT for U.S. federal income tax purposes. Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income. Assuming our dividends equal or exceed our taxable net income, we generally will not be required to pay federal corporate income taxes on such income. The income taxes recorded on our condensed consolidated statements of income represent amounts paid for city and state income and franchise taxes and are included in general and administrative expenses in the accompanying condensed consolidated statements of income. Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates and assumptions. The most significant estimates and assumptions made include determination of lease accounting, fair value of acquisition of real estate properties and valuation of stock-based compensation. 7 Table of Contents Reportable Segment. We are engaged in the business of providing real estate for the regulated cannabis industry. Our properties are similar in that they are leased to the state-licensed operators on a long-term triple-net basis, consist of improvements that are reusable and have similar economic characteristics. Our chief operating decision maker reviews financial information for our entire consolidated operations when making decisions related to assessing our operating performance. We have aggregated the properties into one reportable segment as the properties share similar long-term economic characteristics and have other similarities, including the fact that they are operated using consistent business strategies. The financial information disclosed herein represents all of the financial information related to our one reportable segment. Acquisition of Real Estate Properties. Our investment in real estate is recorded at historical cost, less accumulated depreciation. Upon acquisition of a property, the tangible and intangible assets acquired and liabilities assumed are initially measured based upon their relative fair values. We estimate the fair value of land by reviewing comparable sales within the same submarket and/or region. We estimate the fair value of buildings and improvements as if the property was vacant, taking into consideration current replacement costs and other relevant market rate information and may engage third-party valuation specialists. Acquisition costs are capitalized as incurred. All of our acquisitions to date were recorded as asset acquisitions. The fair value of acquired in-place leases is derived based on our assessment of estimated lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amounts recorded for acquired in-place leases are reflected as in-place lease intangible assets, net on our condensed consolidated balance sheets and are amortized on a straight-line basis as a component of depreciation and amortization expense over the remaining term of the applicable leases. The fair value of the above-market component of an acquired in-place operating lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) our estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease. The amount recorded for one above-market operating lease is included in other assets, net on our condensed consolidated balance sheets and is amortized on a straight-line basis as a reduction of rental revenues over the remaining term of the applicable lease. Sale of Real Estate. When a real estate asset is sold, we evaluate the provisions of ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”) to determine whether the asset is within the scope of ASC 610-20, including an evaluation of whether the asset being sold is a nonfinancial asset and whether the buyer has gained control of an asset within the scope of ASC 610-20. In assessing whether the buyer has gained control of the asset, we must determine whether the contract criteria in ASC 606, Revenue from Contracts with Customers (Topic 606) have been met, including 1) the parties to the contract have approved the contract and the contract has commercial substance, 2) we can identify each party’s rights regarding the asset to be transferred, 3) we can identify the payment terms for the asset to be transferred, and 4) it is probable that we will collect substantially all of the consideration to which we will be entitled in exchange for the asset to be transferred. If all of the contract criteria have been met, the carrying amount of the applicable asset is derecognized with a corresponding gain or loss from the sale recognized in our consolidated statements of income. If the contract criteria are not all met, the asset transferred is not derecognized and we continue to report the asset in our condensed consolidated balance sheet. See Note 6 “Investments in Real Estate - Property Disposition” for further information. ​ Cost Capitalization and Depreciation. We capitalize costs associated with development and redevelopment activities and improvements when we are considered to be the accounting owner of the resulting assets. The development and redevelopment activities may be funded by us pursuant to the lease. We are generally considered the accounting owner for such improvements that are attached to or built into the premises, which are required under the lease to be surrendered to us upon the expiration or earlier termination of the lease. Typically, such improvements include, but are not limited to, ground up development, and enhanced HVAC, plumbing, electrical and other building systems. Amounts capitalized are depreciated over estimated useful lives determined by management. 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 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. We depreciate office equipment and furniture and fixtures over estimated useful lives ranging from three to seven years . We depreciate the leasehold improvements at our corporate office over the shorter of the estimated useful lives or the remaining lease term. Depreciation expense relating to our corporate assets is included in general and administrative expense in our condensed consolidated statements of income. 8 Table of Contents Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment. Project costs that are clearly associated with the acquisition and development or redevelopment of a real estate project, for which we are the accounting owner, are capitalized as a cost of that project. Expenditures that meet one or more of the following criteria generally qualify for capitalization: ● the expenditure provides benefit in future periods; and ● the expenditure extends the useful life of the asset beyond our original estimates. We define redevelopment properties as existing properties for which we expect to spend significant development and construction costs that are not reimbursements to tenants for improvements at the properties. When existing properties are determined to be redevelopment properties, the net carrying value of the buildings and improvements are transferred to construction in progress while the redevelopment activities are in process. 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. Provision for Impairment. On a quarterly basis, we review current activities and changes in the business conditions of all of our properties prior to and subsequent to the end of each quarter to determine the existence of any triggering events or impairment indicators requiring an impairment analysis. If triggering events or impairment indicators are identified, we review an estimate of the future undiscounted cash flows for the properties. Long-lived assets are individually evaluated for impairment when conditions exist that may indicate that the carrying amount of a long-lived asset may not be recoverable. The carrying amount of a long-lived asset to be held and used is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Impairment indicators or triggering events for long-lived assets to be held and used are assessed by project and include significant fluctuations in estimated net operating income, occupancy changes, significant near-term lease expirations, current and historical operating and/or cash flow losses, construction costs, estimated completion dates, rental rates, and other market factors. We assess the expected undiscounted cash flows based upon numerous factors, including, but not limited to, construction costs, available market information, current and historical operating results, known trends, current market/economic conditions that may affect the property, and our assumptions about the use of the asset, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration. Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value. We may adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives. No impairment losses were recognized during the nine months ended September 30, 2023 and 2022. Revenue Recognition. Our leases are triple-net leases, an arrangement under which the tenant maintains the property while paying us rent. We account for our current leases as operating leases and record revenue for each of our properties on a cash basis due to the uncertain regulatory environment in the United States pertaining to the regulated cannabis industry, the limited operating history of certain tenants and the resulting uncertainty of collectability of lease payments from each tenant over the duration of the lease term. Contractually obligated reimbursements from tenants for recoverable real estate taxes, insurance and operating expenses are included in rental revenues in the period when such costs are reimbursed by the tenants. 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 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. In June 2021, we executed a construction loan agreement with a developer, pursuant to which we agreed to lend up to $ 18.5 million for the development of a regulated cannabis cultivation and processing facility in California. We have an option to purchase the property, and may execute a negotiated lease with an affiliate of the developer or with another third party, if we determine to exercise our purchase option. In February 2023, we amended the construction loan to provide for, among other things: (1) the additional capital commitment of the borrower into the project of $ 1.0 million; (2) our agreement to fund an additional $ 4.5 million into the project; (3) an increase in the interest rate effective April 1, 2023; (4) an extension of the loan term to December 31, 2023; and (5) the provision of additional collateral from the borrower for the loan. Interest on the loan continued to accrue through March 31, 2023, with monthly payment of interest having commenced April 1, 2023. As of September 30, 2023, we had funded approximately $ 21.6 million of the $ 23.0 million total commitment. 9 Table of Contents ​ Cash and Cash Equivalents . 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. Restricted Cash . Restricted cash relates to cash held in escrow accounts for future draws for improvements for tenants in accordance with certain lease agreements. Investments. Investments consist of obligations of the U.S. government and certificates of deposit with an original maturity at the time of purchase of greater than three months. Investments are classified as held-to-maturity and stated at amortized cost. Exchangeable Notes. 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models, and convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature, will no longer be allocated between debt and equity components. 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 (as defined below) at the date of adoption. Deferred Financing Costs. The deferred financing costs that are included as a reduction in the net book value of the related liability on our condensed consolidated balance sheets reflect issuance and other costs related to our debt obligations. These costs are amortized as non-cash interest expense using the effective interest method over the life of the related obligations. Stock-Based Compensation. Stock-based compensation for equity awards is based on the grant date fair value of the equity awards and is recognized over the requisite service or performance period. If awards are forfeited prior to vesting, we reverse any previously recognized expense related to such awards in the period during which the forfeiture occurs and reclassify any non-forfeitable dividends and dividend equivalents previously paid on these awards from retained earnings to compensation expense. Forfeitures are recognized as incurred. Certain equity awards are subject to vesting based upon the satisfaction of various market conditions. Forfeiture of share awards with market-based restrictions does not result in a reversal of previously recognized share-based compensation expense. Lease Accounting. We elected the practical expedient not to separate certain non-lease components from the lease component if the timing and pattern of transfer are the same for the non-lease component and associated lease component, and the lease component would be classified as an operating lease if accounted for separately. We also elected the short-term lease exception for lessees for leases that are less than 12 months. As lessee, we recognized a liability to account for our future obligations and a corresponding right-of-use asset related to our corporate office lease. The lease liability was initially measured based on the present value of the future lease payments discounted using the estimated incremental borrowing rate of 7.25 %, which was the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments. 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. Subsequently, the lease liability is accreted by applying a discount rate established at the lease commencement date to the lease liability balance as of the beginning of the period and is reduced by the payments made during the period. The right-of-use asset is measured based on the corresponding lease liability. We did not incur any initial direct leasing costs or exchange any other consideration with the landlord prior to the commencement of the lease. Subsequently, the right-of-use asset is amortized on a straight-line basis during the lease term. For 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. 10 Table of Contents 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. For these transactions, we consider various inputs and assumptions including, but not necessarily limited to, lease terms, renewal options, discount rates, and other rights and provisions in the purchase and sale agreement, lease and other documentation to determine whether control has been transferred to the Company or remains with the lessee. A transaction involving a sale leaseback will be treated as a purchase of a real estate property if it is considered to transfer control of the underlying asset from the lessee. A lease will be classified as direct-financing if risks and rewards are conveyed without the transfer of control and will be classified as a sales-type lease if control of the underlying asset is transferred to the lessee. Otherwise, the lease is treated as an operating lease. These criteria also include estimates and assumptions regarding the fair value of the leased facilities, minimum lease payments, the economic useful life of the facilities, the existence of a purchase option, and certain other terms in the lease agreements. The lease accounting guidance requires accounting for a transaction as a financing in a sale leaseback when the seller-lessee is provided an option to purchase the property from the landlord at the tenant’s option. Substantially all of our leases continue to be classified as operating leases and we continue to record revenue for each of our properties on a cash basis. Our tenant reimbursable revenue and property expenses continue to be presented on a gross basis as rental revenues and as property expenses, respectively, on our condensed consolidated statements of income. Property taxes paid directly by the lessee to a third party continue to be excluded from our condensed consolidated financial statements. Lease amendments are evaluated to determine if the modification grants the lessee an additional right-of-use not included in the original lease and if the lease payments increase commensurate with the standalone price of the additional right-of-use, adjusted for the circumstances of the particular contract. If both conditions are present, the lease amendment is accounted for as a new lease that is separate from the original lease. Our leases generally contain options to extend the lease terms at the prevailing market rate or at the expiring rental rate at the time of expiration. Certain of our leases provide the lessee with a right of first refusal or right of first offer in the event we market the leased property for sale. Concentration of Credit Risk . 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 nine months ended September 30, 2023 and 2022, including tenant reimbursements: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended ​ ​ September 30, 2023 ​ ​ ​ ​ ​ Percentage of ​ ​ Number of Rental ​ Leases Revenue ​ PharmaCann Inc. ("PharmaCann") 11 ​ 15 % Ascend Wellness Holdings, Inc. ("Ascend") ​ 4 ​ 10 % Green Thumb Industries, Inc. ("GTI") 3 ​ 8 % Curaleaf Holdings, Inc. ("Curaleaf") ​ 8 ​ 7 % Trulieve Cannabis Corp. ("Trulieve") 6 ​ 7 % ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months Ended ​ ​ September 30, 2023 ​ ​ ​ ​ ​ Percentage of ​ ​ Number of Rental ​ Leases Revenue ​ PharmaCann 11 ​ 15 % Ascend ​ 4 ​ 10 % GTI 3 ​ 8 % Curaleaf ​ 8 ​ 7 % SH Parent, Inc. ("Parallel") (1) 4 ​ 7 % ​ 11 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended ​ ​ ​ September 30, 2022 ​ ​ ​ Percentage of ​ Number of Rental ​ Leases Revenue PharmaCann ​ 11 ​ 14 % Parallel ​ 4 ​ 10 % Ascend ​ 4 ​ 10 % GTI ​ 3 ​ 8 % Trulieve ​ 6 ​ 7 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months Ended ​ ​ September 30, 2022 ​ ​ ​ ​ ​ Percentage of ​ ​ Number of Rental ​ Leases Revenue ​ PharmaCann 11 ​ 14 % Parallel ​ 4 ​ 10 % Ascend 4 ​ 9 % Kings Garden Inc. ("Kings Garden") (2) ​ 6 ​ 7 % Trulieve 6 ​ 7 % (1) Commencing in November 2022, Parallel defaulted on its obligations to pay rent at one of our Pennsylvania properties . In February 2023, Parallel defaulted on its obligations to pay rent at one of our Texas properties, and we regained possession of that property in March 2023. See Note 11 “Commitments and Contingencies — Litigation” to our condensed consolidated financial statements for more information. Excluding security deposits applied for payment of rent for Parallel at one property in Pennsylvania and one property in Texas of approximately $ 1.8 million and $ 395,000 , respectively, Parallel would have represented 6 % of our total rental revenues for the nine months ended September 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 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 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 September 30, 2023, we had cash accounts in excess of FDIC insured limits. We have not experienced any losses in such accounts. ​ 3. Common Stock 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 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. ​ 12 Table of Contents 4. 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. ​ 5. Dividends The following table describes the dividends declared by the Company during the nine months ended September 30, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amount ​ Dividend Dividend Declaration Date ​ Security Class ​ Per Share ​ Period Covered ​ Paid Date ​ Amount ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) March 15, 2023 ​ Common stock ​ $ 1.80 ​ January 1, 2023 to March 31, 2023 ​ April 14, 2023 ​ $ 50,725 March 15, 2023 ​ Series A preferred stock ​ $ 0.5625 ​ January 15, 2023 to April 14, 2023 ​ April 14, 2023 ​ $ 338 June 15, 2023 ​ Common stock ​ $ 1.80 ​ April 1, 2023 to June 30, 2023 ​ July 14, 2023 ​ $ 50,742 June 15, 2023 ​ Series A preferred stock ​ $ 0.5625 ​ April 15, 2023 to July 14, 2023 ​ July 14, 2023 ​ $ 338 September 15, 2023 ​ Common stock ​ $ 1.80 ​ July 1, 2023 to September 30, 2023 ​ October 13, 2023 ​ $ 50,742 September 15, 2023 ​ Series A preferred stock ​ $ 0.5625 ​ July 15, 2023 to October 14, 2023 ​ October 13, 2023 ​ $ 338 ​ ​ 6. Investments in Real Estate Acquisitions The Company acquired the following properties during the nine months ended September 30, 2023 (dollars in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Rentable ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Square ​ Purchase ​ Transaction ​ ​ ​ ​ Property Market Closing Date Feet (1) Price Costs Total ​ Susquehanna Street Pennsylvania ​ ​ February 15, 2023 ​ 58,000 ​ $ 15,000 ​ $ 26 ​ $ 15,026 ​ Boltonfield Street Ohio ​ ​ March 3, 2023 ​ 157,000 ​ 20,100 ​ 29 ​ 20,129 (2) Total ​ ​ ​ ​ ​ ​ 215,000 ​ $ 35,100 ​ $ 55 ​ $ 35,155 (3) ​ (1) Includes expected rentable square feet at completion of construction of certain properties. (2) The tenant is expected to complete improvements at the property, for which we agreed to provide funding of up to $ 21.9 million. (3) Approximately $ 2.6 million was allocated to land and approximately $ 32.6 million was allocated to building and improvements. ​ Acquired In-Place Lease Intangible Assets 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 In-place lease intangible assets ​ $ 9,979 ​ $ 9,979 Accumulated amortization ( 1,519 ) ​ ( 874 ) In-place lease intangible assets, net ​ $ 8,460 ​ $ 9,105 ​ 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): ​ 13 Table of Contents ​ ​ ​ ​ Year Amount 2023 (three months ending December 31) ​ $ 215 2024 ​ 860 2025 ​ 860 2026 ​ 860 2027 ​ 860 Thereafter ​ 4,805 Total ​ $ 8,460 ​ Above-Market Lease The above-market lease and related accumulated amortization included in other assets, net on our condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022 is as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2023 December 31, 2022 Above-market lease ​ $ 1,054 ​ $ 1,054 Accumulated amortization ( 164 ) ​ ( 95 ) Above-market lease, net ​ $ 890 ​ $ 959 ​ 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 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 In February 2023, we amended our lease with a subsidiary of Ascend at one of our New Jersey properties, increasing the improvement allowance under the lease by $ 15.0 million to a total of approximately $ 19.6 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property. We also amended each of our leases with Ascend to include cross-default provisions applicable to each lease. ​ In February 2023, we amended our lease and development agreement with PharmaCann at one of our New York properties, increasing the construction 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. (“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 In January 2023 , we entered into lease amendments with Holistic Industries Inc. (“Holistic”) at our properties located in California, Maryland, Massachusetts, Michigan and Pennsylvania, which (1) included cross-default provisions applicable to each lease; (2) extended the term of each lease; and (3) provided that 100 % of the base rent shall be applied from the security deposits held by us for (a) the nine months ending September 30, 2023 with respect to the Michigan property and (b) the eight months ending September 30, 2023 with respect to the California property, with pro rata monthly payback of the security deposits over the twelve-month period starting January 2024. ​ In January 2023, we executed a lease amendment with Calyx Peak, Inc. at our Missouri property, which (1) extended the term of the lease; and (2) provided for 100 % base rent deferral through March 31, 2023, with pro rata monthly payback of the deferred rent over the twelve-month period starting April 2023. ​ In March 2023, we executed a lease amendment with Temescal Wellness of Massachusetts, LLC (“Temescal”) at our Massachusetts property, which (1) provided for temporary reduced base rent from April 2023 through January 2024 to be partially 14 Table of Contents 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 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. ​ New 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 September 30, 2023. ​ Capitalized Costs ​ 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 In March 2023, we sold the portfolio of four properties in California previously leased to affiliates of Medical Investor Holdings, LLC (“Vertical”) for $ 16.2 million (excluding transaction costs) and provided a secured loan for $ 16.1 million to the buyer of the properties. The loan matures on February 29, 2028 with two options to extend the maturity for twelve months , conditional in each instance on the payment of an extension fee and at least $ 500,000 of the principal balance. The loan is interest only and payments are payable monthly in advance. The transaction did not qualify for recognition as a completed sale under GAAP since not all of the criteria were met. Accordingly, we have not derecognized the assets transferred on our condensed consolidated balance sheets. 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 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 September 30, 2023 for future periods is summarized as follows (in thousands): ​ ​ ​ ​ ​ Year Contractual Minimum Rent 2023 (three months ending December 31) ​ $ 71,899 2024 ​ ​ 296,878 2025 ​ 305,612 2026 ​ 314,670 2027 ​ 324,001 Thereafter ​ 4,167,626 Total ​ $ 5,480,686 ​ ​ 7. Debt 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 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 15 Table of Contents share of our common stock. The exchange rate and exchange price are subject to adjustment in certain circumstances. The Exchangeable Senior Notes will pay interest semiannually at a rate of 3.75 % per annum and will mature on February 21, 2024, unless earlier exchanged or repurchased in accordance with their terms. Our Operating Partnership will not have the right to redeem the Exchangeable Senior Notes prior to maturity, but may be required to repurchase the Exchangeable Senior Notes from holders under certain circumstances. At September 30, 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 September 30, ​ For the Nine Months Ended September 30, ​ 2023 2022 2023 2022 Cash coupon $ 41 $ 60 $ 140 $ 391 Amortization of issuance cost ​ 9 ​ 12 ​ 29 ​ 83 Capitalized interest ​ ​ ( 2 ) ​ ​ — ​ ​ ( 2 ) ​ ​ — Total interest expense $ 48 $ 72 $ 167 $ 474 ​ The following table details the carrying value of our Exchangeable Senior Notes (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2023 December 31, 2022 Principal amount $ 4,436 $ 6,436 Unamortized issuance cost ( 13 ) ​ ( 56 ) Carrying value $ 4,423 $ 6,380 ​ 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. 16 Table of Contents Notes due 2026 On May 25, 2021, our Operating Partnership issued $ 300.0 million aggregate principal amount of its 5.50 % Senior Notes due 2026 (the “Notes due 2026”). The Notes due 2026 are senior unsecured obligations of our Operating Partnership, are fully and unconditionally guaranteed by us and our Operating Partnership’s subsidiaries 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. However, the Notes due 2026 are effectively subordinated to any of the Company’s, the Operating Partnership’s and the Operating Partnership’s subsidiaries’ future secured indebtedness to the extent of the value of the assets securing such indebtedness. 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, 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. In connection with the issuance of the Notes due 2026, we recorded approximately $ 6.8 million of issuance costs, which are being amortized using the effective interest method and recognized as non-cash interest expense over the term of the Notes due 2026. The following table details our interest expense related to the Notes due 2026 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended September 30, ​ For the Nine Months Ended September 30, ​ 2023 ​ 2022 2023 ​ 2022 Cash coupon ​ $ 4,125 ​ $ 4,125 ​ $ 12,375 ​ $ 12,375 Amortization of issuance cost ​ 335 ​ ​ 316 ​ ​ 992 ​ ​ 934 Capitalized interest ​ ( 178 ) ​ ​ — ​ ​ ( 212 ) ​ ​ — Total interest expense ​ $ 4,282 ​ $ 4,441 ​ $ 13,155 ​ $ 13,309 ​ The following table details the carrying value of our Notes due 2026 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2023 December 31, 2022 Principal amount $ 300,000 $ 300,000 Unamortized issuance cost ( 3,893 ) ​ ( 4,885 ) Carrying value $ 296,107 $ 295,115 ​ The Operating Partnership may redeem some or all of the Notes due 2026 at its option at any time at the applicable redemption price. If the Notes due 2026 are redeemed prior to February 25, 2026, the redemption price will be equal to 100 % of the principal amount of the Notes due 2026 being redeemed, plus a make-whole premium and accrued and unpaid interest thereon to, but excluding, the applicable redemption date. If the Notes due 2026 are redeemed on or after February 25, 2026, the redemption price will be equal to 100 % of the principal amount of the Notes due 2026 being redeemed, plus accrued and unpaid interest thereon to, but excluding, the applicable redemption date. The terms of the indenture for the Notes due 2026 require compliance with various financial covenants, including minimum level of debt service coverage and limits on the amount of total leverage and secured debt maintained by the Operating Partnership. Management believes that it was in compliance with those covenants as of September 30, 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. 17 Table of Contents The following table summarizes the principal payments on our outstanding indebtedness as of September 30, 2023 (in thousands): ​ ​ ​ ​ Payments Due ​ ​ by Year Amount 2023 (three months ending December 31) ​ $ — 2024 ​ ​ 4,436 2025 ​ ​ — 2026 ​ ​ 300,000 2027 ​ ​ — Thereafter ​ ​ — Total ​ $ 304,436 ​ ​ ​ 8. Net Income Per Share Grants of restricted stock and restricted stock units (“RSUs”) of the Company in share-based payment transactions are considered participating securities prior to vesting and, therefore, are considered in computing basic earnings per share under the two-class method. The two-class method is an earnings allocation method for calculating earnings per share when a company’s capital structure includes either two or more classes of common stock or common stock and participating securities. Earnings per basic share under the two-class method is calculated based on dividends declared on common shares and other participating securities (“distributed earnings”) and the rights of participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends accruing during the period. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage of each security to the total number of outstanding participating securities. Earnings per basic share represents the summation of the distributed and undistributed earnings per share class divided by the total number of shares. Through September 30, 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). 18 Table of Contents Computations of net income per basic and diluted share (in thousands, except share and per share data) were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended ​ For the Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2023 2022 2023 2022 Net income ​ $ 41,594 ​ $ 37,616 ​ $ 123,955 ​ $ 112,880 Preferred stock dividends ​ ( 338 ) ​ ( 338 ) ​ ​ ( 1,014 ) ​ ​ ( 1,014 ) Distribution to participating securities ​ ( 372 ) ​ ( 213 ) ​ ​ ( 1,106 ) ​ ​ ( 622 ) Net income attributable to common stockholders used to compute net income per share – basic ​ ​ 40,884 ​ ​ 37,065 ​ ​ 121,835 ​ ​ 111,244 Dilutive effect of Exchangeable Senior Notes ​ ​ 50 ​ ​ 72 ​ ​ 169 ​ ​ 474 Net income attributable to common stockholders used to compute net income per share – diluted ​ $ 40,934 ​ $ 37,137 ​ $ 122,004 ​ $ 111,718 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average common shares outstanding: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ 27,983,004 ​ 27,938,568 ​ ​ 27,971,544 ​ ​ 27,144,953 Restricted stock and RSUs ​ ​ 206,919 ​ ​ 118,567 ​ ​ 193,503 ​ ​ 115,445 Dilutive effect of Exchangeable Senior Notes ​ ​ 75,682 ​ ​ 100,799 ​ ​ 83,007 ​ ​ 235,753 Diluted ​ 28,265,605 ​ 28,157,934 ​ ​ 28,248,054 ​ ​ 27,496,151 Net income attributable to common stockholders per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 1.46 ​ $ 1.33 ​ $ 4.36 ​ $ 4.10 Diluted ​ $ 1.45 ​ $ 1.32 ​ $ 4.32 ​ $ 4.06 ​ ​ 9. Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2—Includes other inputs that are directly or indirectly observable in the marketplace. Level 3—Unobservable inputs that are supported by little or no market activities, therefore requiring an entity to develop its own assumptions. The following table presents the carrying value and approximate fair value of financial instruments at September 30, 2023 and December 31, 2022 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At September 30, 2023 ​ At December 31, 2022 ​ ​ ​ ​ ​ ​ Carrying Value Fair Value Carrying Value Fair Value Investments (1) ​ $ 41,885 ​ $ 41,880 ​ $ 200,935 ​ $ 200,715 Investments as cash equivalents (2) ​ $ 20,100 ​ $ 20,091 ​ $ — ​ $ — Exchangeable Senior Notes (3) ​ $ 4,423 ​ $ 5,577 ​ $ 6,380 ​ $ 10,282 Notes due 2026 (3) ​ $ 296,107 ​ $ 268,611 ​ $ 295,115 ​ $ 264,234 Construction Loan (4) ​ $ 21,556 ​ $ 26,362 ​ $ 18,021 ​ $ 20,167 (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. (4) The construction loan receivable is categorized as Level 3 and was valued using a yield analysis, which is typically performed for non-credit impaired loans. To determine fair value using a yield analysis, a current price is imputed for the loan based upon an assessment of the expected market yield for a similarly structured loan with a similar level of risk. In the yield analysis, the Company considers the current contractual interest rate, the maturity and other terms of the loan relative to risk of the company and the specific loan. At 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 19 Table of Contents 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. ​ The carrying amounts of cash equivalents, accounts payable, accrued expenses and other liabilities approximate their fair values. 10. Common Stock Incentive Plan Our board of directors adopted our 2016 Omnibus Incentive Plan (the “2016 Plan”) to enable us to motivate, attract and retain the services of directors, employees and consultants considered essential to our long-term success. The 2016 Plan offers our directors, employees and consultants an opportunity to own our stock or rights that will reflect our growth, development and financial success. Under the terms of the 2016 Plan, the aggregate number of shares of our common stock subject to options, restricted stock, stock appreciation rights, restricted stock units and other awards, will be no more than 1,000,000 shares. Any equity awards that lapse, expire, terminate, are canceled or are forfeited (including forfeitures in connection with satisfaction of tax withholdings obligations of the recipient) are re-credited to the 2016 Plan’s reserve for future issuance. The 2016 Plan automatically terminates on the date which is ten years following the effective date of the 2016 Plan. A summary of the restricted stock activity under the 2016 Plan and related information for the nine months ended September 30, 2023 is included in the table below: ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ Unvested ​ Average ​ ​ Restricted ​ Grant Date Fair ​ ​ Stock ​ Value Balance at December 31, 2022 34,026 ​ $ 181.08 Granted 35,565 ​ $ 110.88 Vested ( 9,154 ) ​ $ 187.00 Forfeited (1) ( 5,596 ) ​ $ 115.01 Balance at March 31, 2023 54,841 ​ $ 141.31 Granted ​ 5,055 ​ $ 71.23 Vested ​ ( 2,811 ) ​ $ 128.11 Balance at June 30, 2023 ​ 57,085 ​ $ 135.75 Granted ​ 150 ​ $ 80.49 Vested ​ ( 150 ) ​ $ 80.49 Forfeited (1) ​ ( 374 ) ​ $ 135.84 Balance at September 30, 2023 ​ 56,711 ​ $ 135.75 (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. 20 Table of Contents 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. Nonqualified Deferred Compensation Plan (the “Deferred Compensation Plan”), which allows a select group of management and our non-employee directors to defer receiving certain of their cash and equity-based compensation. RSUs are subject to vesting conditions of the Deferred Compensation Plan and have the same economic rights as shares of restricted stock under the 2016 Plan: ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-Average ​ ​ Restricted ​ Grant Date Fair ​ ​ Stock Units ​ Value Balance at December 31, 2022 ​ 83,677 ​ $ 144.30 Granted ​ 61,785 ​ $ 103.60 Balance at March 31, 2023 ​ 145,462 ​ $ 127.01 Granted ​ 4,494 ​ $ 71.23 Balance at June 30, 2023 ​ 149,956 ​ $ 125.34 Granted ​ — ​ $ - Balance at September 30, 2023 ​ 149,956 ​ $ 125.34 ​ 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 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. 11. 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 September 30, 2023 is presented in the table below (in thousands): ​ ​ ​ ​ ​ Year Amount 2023 (three months ending December 31) ​ $ 124 2024 ​ 511 2025 ​ 526 2026 ​ 543 2027 ​ 45 Total future contractual lease payments ​ 1,749 Effect of discounting ​ ( 166 ) Office lease liability ​ $ 1,583 ​ Improvement Allowances . 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 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. 21 Table of Contents Environmental Matters. We follow the policy of monitoring our properties, both targeted acquisition and existing properties, for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liabilities that would have a material adverse effect on our financial condition, results of operations and cash flow, or that we believe would require disclosure or the recording of a loss contingency. Litigation . Class Action Lawsuit On April 25, 2022, a federal securities class action lawsuit was filed against the Company and certain of its officers. The case was named Michael V. Malozzi, individually and on behalf of others similarly situated v. Innovative Industrial Properties, Inc., Paul Smithers, Catherine Hastings and Andy Bui, Case No. 2-22-cv-02359, and was filed in the U.S. District Court for the District of New Jersey. The lawsuit was purportedly brought on behalf of purchasers of our common stock and alleges that we and certain of our officers made false or misleading statements regarding our business in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), SEC Rule 10b-5, and Section 20(a) of the Exchange Act. According to the filed complaint, the p laintiff is seeking an undetermined amount of damages, interest, attorneys’ fees and costs and other relief on behalf of the putative classes of all persons who acquired shares of the Company’s common stock between May 7, 2020 and April 13, 2022. On September 29, 2022, an Amended Class Action Complaint was filed under the same Case Number, adding as defendants Alan D. Gold and Benjamin C. Regin, and asserting causes of action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. According to the Amended Class Action Complaint, the plaintiff is seeking an undetermined amount of damages, interest, attorneys’ fees and costs and other relief on behalf of the putative classes of all persons who acquired shares of the Company’s common stock between August 7, 2020 and August 4, 2022. On December 1, 2022, defendants moved to dismiss the Amended Class Action Complaint; on January 25, 2023, plaintiff responded to defendants’ motion to dismiss the Amended Class Action Complaint; and on March 6, 2023 defendants replied to plaintiff’s response. 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. We intend to defend the lawsuit vigorously. However, at this time, we cannot predict the probable outcome of this action, and, accordingly, no amounts have been accrued in the Company’s condensed consolidated financial statements. ​ Derivative Action Lawsuit On July 26, 2022, a derivative action lawsuit was filed against the Company and certain of its officers and directors. The case was named John Rice, derivatively on behalf of Innovative Industrial Properties, Inc. v. Paul Smithers, Catherine Hastings, Andy Bui, Alan Gold, Gary Kreitzer, Mary Curran, Scott Shoemaker, David Stecher, and Innovative Industrial Properties, Inc., and was filed in the Circuit Court for Baltimore City, Maryland. The lawsuit asserts putative derivative claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets against the directors and certain officers of the Company. The plaintiffs are seeking declaratory relief, direction to reform and improve corporate governance and internal procedures, and an undetermined amount of damages, restitution, interest, and attorneys’ fees and costs. On September 6, 2022, the defendants in this action filed a Consent Motion to Stay the Proceedings, which was granted on October 11, 2022. On September 28, 2022, a second derivative action lawsuit was filed against the Company and certain of its officers and directors. The case was named Karen Drover, derivatively on behalf of Innovative Industrial Properties, Inc. v. Paul Smithers, Catherine Hastings, Andy Bui, Alan Gold, Gary Kreitzer, Mary Curran, Scott Shoemaker, David Stecher, Defendants, and Innovative Industrial Properties Inc., Nominal Defendant , Case Number 24-C-22-004243, and filed in the Circuit Court for Baltimore City, Maryland. The lawsuit asserts putative derivative claims for breach of fiduciary duty, and seeks actions to reform and improve the Company, and an undetermined amount of damages, restitution, interest, and attorneys’ fees and costs. On October 19, 2022, the parties to both cases filed a Joint Motion to Consolidate Related Shareholder Derivative Actions and to Appoint Lead and Liaison Counsel for plaintiffs, which was granted on December 16, 2022, along with a stay in the lawsuit pending a ruling on the defendants’ motion to dismiss the federal class action lawsuit described above. On April 17, 2023, a third derivative action lawsuit was filed against the Company and certain of its officers and directors. The case was named Ross Weintraub, derivatively on behalf of Innovative Industrial Properties, Inc. v. Alan Gold, Paul Smithers, Catherine Hastings, Ben Regin, Andy Bui, Tracie Hager, Gary Kreitzer, David Stecher, Scott Shoemaker, Mary Curran, and Innovative Industrial Properties, Inc., Case Number 1:23-cv-00737-GLR, and filed in the United States District Court for the District of Maryland. The lawsuit asserts putative derivative claims for breach of fiduciary duty and violations of Section 14(a) of the Exchange Act, and seeks an undetermined amount of damages, equitable relief, and attorneys’ fees and costs. Defendants in this 22 Table of Contents action filed a Consent Motion to Stay the Proceeding, which was granted on April 17, 2023. On June 5, 2023, a fourth derivative action lawsuit was filed against the Company and certain of its officers and directors. The case was named Franco DeBlasio, on behalf of Gerich Melenth Nin (GMN) LP, derivatively on behalf of Innovative Industrial Properties, Inc. v. Paul Smithers, Catherine Hastings, Alan D. Gold, Tracie J. Hager, Benjamin C. Regin, Andy Bui, Gary A. Kreitzer, David Stecher, Scott Shoemaker, Mary Curran, and Innovative Industrial Properties, Inc., Case Number 1:23-cv-01513-GLR, and filed in the United States District Court for the District of Maryland. The Company intends to vigorously defend each of these lawsuits. However, at this time, the Company cannot predict the probable outcome of these actions, and, accordingly, no amounts have been accrued in the Company’s condensed consolidated financial statements. On July 19, 2023, the United States Court for the District of Maryland consolidated Case Nos. 1:23-cv-00737-GLR and 1:23-cv-01513-GLR with case number 1:23-cv-00737-GLR as the lead case, and kept the stay in place. ​ Kings Garden Lawsuit In July 2022, one of our tenants, Kings Garden Inc., defaulted on its obligations to pay base rent and property management fees under each of its six leases with our indirect, wholly owned subsidiary, IIP-CA 2 LP, and defaulted on its obligations to reimburse us for certain insurance premiums at the properties incurred by us that are payable by Kings Garden as operating expenses under such leases. On July 25, 2022, IIP-CA 2 LP filed a lawsuit against Kings Garden. The case was 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 , and was filed in the Superior Court of the State of California. The lawsuit asserts claims for breach of contract, declaratory relief, and injunctive relief. 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 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 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 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. The Company filed a Response to Kings Garden’s Arbitration Demand, Affirmative Defenses and Counter-Claim on March 1, 2023 (the “Counter-Claim”). Kings Garden filed an answer to the Counter-Claim on March 15, 2023. In July 2023, the Company filed a motion for leave to amend its Counter-Claims. 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 23 Table of Contents 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 On February 6, 2023, IIP-PA 8 LLC, as landlord and an indirect subsidiary of the Company, filed a lawsuit against Goodblend Pennsylvania LLC, as tenant, and Parallel, as guarantor, in the Court of Common Pleas of Allegheny County, Pennsylvania, regarding the lease and related guaranty for one of the Company’s properties located in Pennsylvania. The lawsuit asserts claims for breach of contract by the tenant and guarantor and ejectment. Goodblend Pennsylvania LLC and Parallel filed preliminary objections to the lawsuit on March 3, 2023. IIP-PA 8 LLC filed its response to Goodblend Pennsylvania LLC’s and Parallel’s preliminary objections on March 23, 2023. 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 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 On February 11, 2023, a subsidiary of Parallel defaulted on its obligations to pay rent under the lease at one of our properties in Texas that is under development. On February 23, 2023, IIP-TX 1 LLC, as landlord and an indirect subsidiary of the Company, filed a lawsuit against Surterra San Marcos, LLC, as tenant, in the Justice Court of Hays County, Texas, regarding the lease, asserting claim for possession. 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 On February 2, 2023, IIP-MI 1 LLC, as landlord and an indirect subsidiary of the Company, filed a lawsuit against Green Peak Industries, Inc. (“Green Peak”), as tenant, in 56-A District Court of the State of Michigan, regarding the lease for one of the Company’s properties located in Michigan, asserting claim for possession. On February 22, 2023, IIP-MI 1 LLC filed a subsequent lawsuit against Green Peak and Tropics LP (“SAF Entity 2”) in the 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. Although the results of these proceedings, claims, inquiries, and investigations cannot be predicted with certainty, we do not believe that the final outcome of these matters is reasonably likely to have a material adverse effect on our business, financial condition, or results of operations. Regardless of final outcomes, however, any such proceedings, claims, inquiries, and investigations may nonetheless impose a significant burden on management and employees and may come with significant defense costs or unfavorable preliminary and interim rulings. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 24 Table of Contents 12. Subsequent Events 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. ​ ​ ​ 25 Table of Contents ​