What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-27 compared with 2023-02-28 · 146 added, 127 removed, 275 unchanged (50% of the section changed)

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As of December 31, 2023, we owned 108 properties comprising approximately 8.9 million square feet (including approximately 1.4 million rentable square feet under development/redevelopment) in 19 states.

As of December 31, 2022, we had invested approximately $2.2 billion in the aggregate (consisting of purchase price and funding of draws for construction funding and improvements submitted by tenants, if any, but excluding transaction costs) and had committed an additional approximately $125.5 million to fund draws to certain tenants and sellers for construction and improvements at our properties.

Of the approximately $125.5 million committed to fund draws to certain tenants and sellers for construction and improvements at our properties, approximately $28.9 million was incurred but not funded as of December 31, 2022.

These statistics do not include an $18.5 million loan commitment from us to a developer for construction of a regulated cannabis cultivation and processing facility in California, of which we have funded approximately $18.0 million as of December 31, 2022.

Of these properties, we include 108 properties in our operating portfolio, which were 100% leased to state-licensed cannabis operators as of December 31, 2022, with a weighted-average remaining lease term of approximately 15.3 years.

Rent collection for our operating portfolio (calculated as base rent and property management fees collected as a percentage of contractually due base rent and property management fees, including an aggregate of approximately $2.7 million of security deposits applied for payment of rent for our leases with Kings Garden and Sozo Health, Inc.

(“Sozo”)) was approximately 97% for the year ended December 31, 2022.

Rent collection for our operating portfolio (including approximately $541,000 of security deposits applied for payment of rent from our lease with Sozo) was approximately 94% for the three months ended December 31, 2022.

We do not include in our operating portfolio two of our properties, which were previously leased to Kings Garden, and an expansion project at a property where Kings Garden continues to occupy the property pursuant to a confidential, contingent settlement agreement, all of which were under development as of December 31, 2022, and together are expected to comprise approximately 395,000 rentable square feet upon completion of development.

As of December 31, 2023, we had invested approximately $2.4 billion in the aggregate (consisting of purchase price and funding of draws for improvements submitted by tenants, if any, but excluding transaction costs) and had committed an additional approximately $40.1 million to fund draws to certain tenants and vendors for improvements at our properties.

Of the approximately $40.1 million committed to fund draws to certain tenants and vendors for improvements at our properties, approximately $9.6 million was incurred but not funded as of December 31, 2023.

These statistics do not include a $23.0 million loan commitment from us to a developer for construction of a regulated cannabis cultivation and processing facility in California, of which we have funded $22.0 million as of December 31, 2023.

Of these properties, we include 103 properties in our operating portfolio, which were 95.8% leased as of December 31, 2023, with a weighted-average remaining lease term of approximately 14.6 years.

Rent collection for our operating portfolio (calculated as base rent and property management fees collected as a percentage of contractually due base rent and property management fees, including an aggregate of approximately $8.7 million of security deposits applied for payment of rent for our leases with five tenants) was approximately 98% for the year ended December 31, 2023.

Rent collection for our operating portfolio (including approximately $767,000 of security deposits applied for payment of rent from our lease with one tenant) was 100% for the three months ended December 31, 2023.

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

● Inland Center Drive in San Bernardino, California;

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

● 63795 19th Avenue in Palm Springs, California;

● Leah Avenue in San Marcos, Texas;

● Davis Highway in Dimondale, Michigan (pre-leased).

Factors Impacting Our Operating Results

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The properties that we acquire consist of real estate assets that support the regulated cannabis industry.

Changes in current favorable state or local laws in the cannabis industry may impair our ability to renew or re-lease properties and the ability of our tenants to fulfill their lease obligations and could materially and adversely affect our ability to maintain or increase rental rates for our properties.

Most states where we own properties issue licenses for cannabis operations for a limited period.

If one or more of our tenants are unable to renew or otherwise maintain their licenses or other state and local authorizations necessary to continue its cannabis operations, such tenants may default on their lease payments to us.

Furthermore, changes in federal law and current favorable state or local laws in the cannabis industry may impair our ability to renew or re-lease properties and the ability of our tenants to fulfill their lease obligations and could materially and adversely affect our ability to maintain or increase rental rates for our properties.

Conditions in Our Markets

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Inflation and Supply Chain Constraints

economy is experiencing a sustained increase in inflation rates, which we believe is negatively impacting our tenants.

economy has experienced a sustained increase in inflation rates in recent years, which we believe is negatively impacting our tenants.

This inflation has impacted costs for labor and production inputs for regulated cannabis operators, in addition to increasing costs of construction for development and redevelopment projects.

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Reduced Capital Availability for Tenants and the Company

Recently, financial markets have been volatile, reflecting heightened geopolitical risks and material tightening of financial conditions since the U.S.

In recent years, financial markets have been volatile, reflecting heightened geopolitical risks and material tightening of financial conditions since the U.S.

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

Driven in part by overall macroeconomic conditions, capital availability has significantly declined for regulated cannabis operators.

According to Viridian, total equity and debt capital raising for public and private cannabis companies in North America decreased by more than 65% in 2022 versus 2021.

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

regulated cannabis cultivation and retail sector was down over 70% in 2022 versus 2021, with equity capital raised in the sector down over 96% and no equity deal in 2022 raising more than $25 million, according to Viridian.

Cannabis stock prices (measured by the MSOS ETF) had declined more than 70% by the end of 2022, and were trading at multi-year lows.

According to Viridian, mergers and acquisitions activity in the U.S.

regulated cannabis industry also declined significantly in 2022, with aggregate transaction volume in dollar terms down nearly 70% on nearly 50% fewer transactions versus 2021.

According to Viridian, worldwide cannabis capital raises in 2023 constituted a multi-year low, with less than $2 billion in total capital raises, versus over $4.3 billion in 2022 and over $12 billion in 2021.

Total equity and debt capital raising for public and private cannabis cultivation and retail companies in the United States decreased 74% from 2022 and were lower than any previous year since before 2018, with debt accounting for over 80% of all capital raised for cannabis cultivation operations.

According to Viridian, as of December 31, 2023, cannabis stock prices (as measured by the MSOS ETF) had declined 87% since their February 2021 peak.

Also according to Viridian, mergers and acquisitions activity in the North American regulated cannabis industry declined significantly in 2023 to $1.75 billion, down from $4.95 billion in 2022.

Capital raising activities by U.S.

REITs experienced a steep decline in 2022, with that decline more pronounced in the second half of 2022.

According to NAREIT, U.S.

REITs raised $41.5 billion in debt and equity during 2022, compared to $133.6 billion in 2021, representing the lowest level since 2009.

REITs continued to be subdued in 2023, after experiencing a significant decline in the latter part of 2022.

According to the NAREIT, U.S.

REIT 2023 capital raising was modestly higher than 2022, though 2022 represented the lowest level since 2009.

Significant Tenants and Concentrations of Risk

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

At December 31, 2022, none of our properties accounted for 5% or more of our net real estate held for investment.

See Note 2 in the notes to the consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest percentage of our total rental revenues for the year ended December 31, 2022.

In July 2022, Kings Garden, a tenant of ours at six properties that we own in southern California, defaulted on its obligations to pay rent.

In November 2022, Parallel defaulted on its obligations to pay rent at one of our properties in Pennsylvania, and Green Peak defaulted on its obligations to pay rent at one our properties in Michigan.

See Part I, Item 3.

Legal Proceedings and Note 11 “Commitments and Contingencies — Litigation” to our consolidated financial statements for more information regarding Kings Garden, Parallel and Green Peak.

At December 31, 2023, our largest property was located in New York and accounted for approximately 5.4% of our net real estate held for investment.

No other properties accounted for more than 5% of our net real estate held for investment at December 31, 2023.

See Note 2 “Summary of Significant Accounting Policies and Procedures” in the notes to the consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest percentage of our total rental revenues for the year ended December 31, 2023.

See Note 11 “Commitments and Contingencies — Litigation” to our consolidated financial statements for more information regarding Kings Garden, Parallel and Green Peak, which defaulted on their obligations under certain leases with us.

Competitive Environment

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securities laws.

Our operating expenses also include costs that we incur for properties, including taxes, insurance, maintenance, security, utilities and other property-specific costs.

We generally expect to structure our leases so that the tenant is responsible for real estate taxes, maintenance, insurance, and structural repairs with respect to the premises throughout the lease term.

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Results of Operations

See Note 6 in the notes to the consolidated financial statements for information regarding our investments in real estate and property portfolio activity during the year ended December 31, 2022.

See Note 6 “Investments in Real Estate” in the notes to the consolidated financial statements for information regarding our investments in real estate and property portfolio activity during the year ended December 31, 2023.

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

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

Accordingly, we have not derecognized the assets transferred.

All consideration received, as well as any future payments, from the buyer is recognized as a deposit liability and is included in other liabilities on our consolidated balance sheet until such time the criteria for recognition as a sale have been met.

In addition, as we have not met all of the held-for-sale criteria, land and building and improvements with gross carrying values of approximately $3.4 million and approximately $13.9 million, respectively, and accumulated depreciation of approximately $1.6 million as of December 31, 2023, remain on the consolidated balance sheet, and the buildings and improvements continue to be depreciated.

During the year ended December 31, 2023, we received cash interest payments of approximately $1.3 million, which has been recorded as a liability as of December 31, 2023.

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022 for a comparison of the years ended December 31, 2022 and December 31, 2021.

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Interest expense

Loss on exchange of Exchangeable Senior Notes

Gain (loss) on exchange of Exchangeable Senior Notes

Preferred stock dividends

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Rental revenues for the year ended December 31, 2023 increased by approximately $33.0 million, or 12%, to approximately $307.4 million, compared to approximately $274.4 million for the year ended December 31, 2022.

The increase in rental revenue was attributable to:

● The nine properties we acquired in 2022 which generated approximately $10.2 million of rental revenue in 2022;

● The 37 properties we acquired in 2021 which generated approximately $47.9 million of rental revenue in 2022, including related rents on amendments which increased the improvement allowances on four of the leases, compared to approximately $18.6 million in 2021, an increase of approximately $29.3 million;

● The amendments to increase improvement allowances for eight properties that we acquired prior to 2021, the additional purchase of land which was included in the corresponding lease for one property, the annual rent escalations on the 64 properties we acquired prior to 2021, which collectively resulted in approximately $24.6 million in additional rental revenue during the year ended December 31, 2022 versus 2021;

● An increase of approximately $5.7 million in tenant reimbursements revenue for property tax and insurance, to approximately $10.1 million for the year ended December 31, 2022, compared to approximately $4.4 million for the year ended December 31, 2021.

The increase in rental revenues was partially offset by a decrease in rental revenues of approximately $716,000, which was the result of the cessation of lease payments after the sale of one of our Pennsylvania properties that was leased to a subsidiary of Maitri in November 2022.

Rental revenues for the year ended December 31, 2022 also included an aggregate of approximately $3.3 million of security deposits applied for payment of rent (including tenant reimbursements) for our leases with Kings Garden and Sozo.

Rental revenues for the year ended December 31, 2022 were negatively impacted by non-collection of rent during the period totaling approximately $8.6 million (consisting of approximately $8.2 million of contractual base rents and property management fees from four tenants, Kings Garden, Medical Investor Holdings, LLC (“Vertical”), Green Peak and Parallel, and approximately $440,000 for tenant reimbursements for property insurance premiums and property taxes from two tenants, Kings Garden and Vertical).

Of that increase, approximately $13.3 million was related to tenant reimbursements for property insurance premiums and property taxes, which increased to approximately $23.4 million for the year ended December 31, 2023, compared to approximately $10.1 million for the year ended December 31, 2022.

The increase in tenant reimbursements was primarily due to a change in our policy, starting in January 2023, from allowing tenants to pay property taxes directly to taxing authorities to us making tax payments directly to taxing authorities and then billing tenants for property

tax reimbursements.

Prior to 2023, real estate taxes required to be paid by the tenant under our leases were paid directly by the tenant to the tax authorities and were therefore not reflected in our consolidated financial statements.

The remaining approximately $19.7 million increase in rental revenue was attributable to:

● The two properties we acquired in 2023 which generated approximately $5.2 million of rental revenue in 2023;

● The nine properties we acquired in 2022 which generated approximately $17.8 million of rental revenue in 2023, including a rent adjustment on a lease amendment for an additional improvement allowance at one of these properties, compared to approximately $10.2 million in 2022, a net increase of approximately $7.6 million;

● A net increase of approximately $6.9 million in rental revenue generated by properties we acquired prior to 2022, including contractual rent escalations, rent adjustments for amendments to leases for additional improvement allowances at existing properties that resulted in adjustments to rent.

Rental revenues for the year ended December 31, 2023 included the application of approximately $8.7 million of security deposits applied for rent for our leases with five tenants and approximately $888,000 of security deposits applied for tenant reimbursements for property insurance premiums and property taxes for our leases with three tenants.

Rental revenues for the year ended December 31, 2023 also included approximately $1.7 million as partial payment of a consent order against Parallel for its failure to pay rent at one of our Pennsylvania properties previously leased to Parallel and approximately $243,000 in payments from Kings Garden pursuant to an offer of judgment relating to certain properties previously leased to Kings Garden (see Note 11 “Commitments and Contingencies — Litigation” to our consolidated financial statements included in this report for more information).

Rental revenues for the year ended December 31, 2023 were negatively impacted by non-collection of rent during the period from properties in our operating portfolio totaling approximately $4.8 million (consisting of approximately $4.5 million of contractual base rents and property management fees from three tenants and approximately $289,000 for tenant reimbursements for property insurance premiums and property taxes from three tenants), and the termination of certain leases with Green Peak, Kings Garden and Parallel.

Other Revenues.

Other revenues for the year ended December 31, 2023 consists of interest revenue related to leases for property acquisitions that did not satisfy the requirements for sale-leaseback accounting.

Other revenues for the year ended December 31, 2023 increased by approximately $175,000, or 9%, to approximately $2.2 million, compared to approximately $2.0 million for the year ended December 31, 2022.

The increase was primarily due to recognizing a full year of interest revenue in 2023 related to the two properties acquired in 2022 that did not satisfy the requirements for sale-leaseback accounting.

Property Expenses .

Property expenses for the year ended December 31, 2023 increased by approximately $14.4 million, compared to 2022.

The increase was primarily due to new property acquisitions and additional investment in existing properties which resulted in higher property insurance premiums and property taxes that we paid for our properties.

The increase was primarily due to the recognition of property taxes incurred and paid or to be paid by us starting in January 2023, as described above.

The increase was also due to new property acquisitions and additional investment in existing properties which resulted in higher property insurance premiums and property taxes that we paid for our properties.

Property expenses are generally reimbursable to us by the tenants under the terms of the leases.

For the year ended December 31, 2022, property expenses included approximately $440,000 of non-reimbursed expenses related to Kings Garden and Vertical lease defaults.

General and Administrative Expense .

General and administrative expense for the year ended December 31, 2023 increased by approximately $4.3 million, or 11%, to approximately $42.8 million, compared to approximately $38.5 million for the year ended December 31, 2022.

The increase in general and administrative expense was primarily due to higher compensation to employees, the hiring of additional employees, higher public company, travel and occupancy costs and approximately $3.0 million in litigation-related expenses incurred during the year ended December 31, 2022 related to matters described in Note 11 “Commitments and Contingencies – Litigation” to our consolidated financial statements included in this report.

The increase in general and administrative expense was primarily due to higher compensation expense to employees, the hiring of additional employees, and higher public company costs.

Compensation expense for the years ended December 31, 2023 and 2022 included approximately $19.6 million and $17.5 million, respectively, of non-cash stock-based compensation.

The increase in non-cash stock-based compensation expense was primarily due to additional grants of stock-based awards to existing and new employees.

Non-cash stock-

based compensation for the years ended December 31, 2023 and 2022 each included approximately $4.0 million relating to performance share units (“PSUs”) granted to certain employees in 2021 and approximately $6.7 million relating to the PSUs granted to certain employees in 2022.

As measured as of December 31, 2023, the performance thresholds for the vesting of the PSUs were not met for any of the applicable awards, and the PSUs granted in January 2021 were forfeited in their entirety pursuant to the terms of the agreements.

Depreciation and Amortization Expense.

The increase in depreciation and amortization expense was related to depreciation on properties that we acquired and the placement into service of construction and improvements at certain of our properties.

Depreciation and amortization expense for the year ended December 31, 2023 increased by approximately $5.9 million, or 10%, to approximately $67.2 million, compared to approximately $61.3 million for the year ended December 31, 2022.

The approximately $5.9 million increase was related to depreciation and amortization on properties that we acquired and the placement into service of construction at certain of our properties, of which approximately $1.0 million was related to the two properties we acquired in 2023, approximately $1.7 million was related to nine properties we acquired in 2022, and the remaining increase related to properties acquired prior to 2022.

Interest and Other Income .

Interest and other income primarily related to interest earned on our short-term investments and cash and cash equivalents.

The increase in interest and other income was primarily due to higher interest bearing investments.

Interest and other income for the year ended December 31, 2023 increased by approximately $5.2 million to approximately $8.4 million, compared to the year ended December 31, 2022.

Approximately $4.2 million of the increase was due to higher interest rates on our interest-bearing cash and cash equivalents along with our short-term investments.

The remaining increase of approximately $1.0 million was related to interest received on our construction loan during the year ended December 31, 2023.

Interest Expense .

Interest expense related to our Exchangeable Senior Notes issued in February 2019 and Notes due 2026 issued in May 2021.

For the year ended December 31, 2022, interest expense increased by approximately $215,000, or 1%, to approximately $18.3 million, compared to $18.1 million for the year ended December 31, 2021.

The increase in interest expense was primarily due to the additional interest expense on our Notes due 2026 issued in May 2021, partially offset by a decrease in interest expense on our Exchangeable Senior Notes due to exchanges by holders of approximately $26.9 million of outstanding principal amount of our Exchangeable Senior Notes during the year ended December 31, 2022 and the induced exchange of approximately $110.4 million principal amount of our Exchangeable Senior Notes in December 2021.

See Note 7 in the notes to the consolidated financial statements included in this report for further information.

Gain on Sale of Real Estate .

Gain on sale of real estate is attributable to the sale in November 2022 of one of our Pennsylvania properties that was leased to a subsidiary of Maitri for $23.5 million, excluding transactions costs.

Loss on Exchange of Exchangeable Senior Notes .

Loss on exchange of Exchangeable Senior Notes is attributable to the exchange agreements we executed with certain holders of our Exchangeable Senior Notes.

See Note 7 in the notes to the consolidated financial statements included in this report for further information.

Interest expense is primarily related to our Exchangeable Senior Notes issued in February 2019 and Notes due 2026 issued in May 2021.

For the year ended December 31, 2023, interest expense decreased by approximately $834,000, or 5%, to approximately $17.5 million, compared to $18.3 million for the year ended December 31, 2022 due to exchanges of approximately $26.9 million outstanding principal amount of our Exchangeable Senior Notes during the year ended December 31, 2022, and also due to the exchanges of $2.0 million outstanding principal amount of our Exchangeable Senior Notes and capitalization of approximately $627,000 of interest during the year ended December 31, 2023.

The following summary discussion of our cash flows is based on the consolidated statements of cash flows in Item 8, “Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (in thousands):

Year Ended December 31,

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net cash provided by (used in) operating activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Ending cash, cash equivalents and restricted cash

Operating Activities

Cash flows provided by operating activities for the years ended December 31, 2023 and 2022 were approximately $255.5 million and $234.1 million, respectively.

Cash flows provided by operating activities primarily related to contractual rent and security deposits from our properties, partially offset by general and administrative expenses.

Cash flows provided by operating activities increased from 2021 to 2022 primarily due to leases for properties we acquired during these time periods, annual escalations of base rent on our leases, and amendments to existing leases to increase improvement allowances at those properties, which resulted in a corresponding increase in base rents, partially offset by rent payment defaults by certain tenants, higher cash compensation to employees, higher public company, travel and occupancy costs and increased litigation expenses.

Cash flows used in investing activities for the years ended December 31, 2022 and 2021 were approximately $396.2 million and $384.1 million, respectively.

Cash flows used in investing activities increased from 2021 to 2022 primarily due to less net maturities of short-term investments, partially offset by a decrease in purchases of new properties, a decrease in funding of improvement allowances and construction funding, and receipt of the proceeds from sale of one of our Pennsylvania properties previously leased to Maitri.

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

Cash flows provided by operating activities increased from 2022 to 2023 primarily due to leases for properties we acquired during these time periods, annual escalations of base rent on our leases, and amendments to existing leases to increase improvement allowances at those properties, which resulted in a corresponding increase in base rents, partially offset by rent payment defaults by certain tenants, higher cash compensation to employees and higher public company costs.

Investing Activities

Cash flows used in investing activities for the year ended December 31, 2023 included approximately $189.0 million of purchases of investments in real estate, funding of draws for improvements and construction, and funding of construction loan and other investments in the aggregate, partially offset by approximately $182.2 million of net maturities of short-term investments.

Cash flows used in investing activities for the year ended December 31, 2022 included approximately $545.9 million of purchases of investments in real estate, funding of draws for improvements and construction, and funding of construction loan and other investments in the aggregate, partially offset by approximately $126.2 million of net maturities of short-term investments and receipt of $23.5 million of proceeds from sale of one of our Pennsylvania properties previously leased to a subsidiary of Maitri Holdings, LLC.

Financing Activities

Cash flows used in financing activities for the year ended December 31, 2023 were approximately $195.6 million, primarily related to dividend payments of approximately $204.1 million to common and preferred stockholders, approximately $561,000 related to payment of deferred financing costs on the Revolving Credit Facility, and approximately $568,000 related to the net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees, partially offset by approximately $9.6 million in net proceeds from the issuance of our common stock.

Cash flows provided by financing activities for the year ended December 31, 2022 were approximately $164.2 million, primarily related to approximately $351.9 million in net proceeds from the issuance of our common stock, partially offset by dividend payments of approximately $185.3 million to common and preferred stockholders and approximately $2.4 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.

Cash flows provided by financing activities for the year ended December 31, 2021 were approximately $155.8 million, primarily related to approximately $293.2 million in net proceeds from the issuance of our Notes due 2026, partially offset by dividend payments of approximately $132.3 million to common and preferred stockholders, approximately $3.4 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees, and approximately $1.7 million related to the induced exchange of Exchangeable Senior Notes pursuant to the Exchange Transactions.

Liquidity and Capital Resources

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Sources and Uses of Cash

We derive substantially all of our revenues from the leasing of our properties, collecting rental income and operating expense reimbursements based on contractual arrangements with our tenants.

This source of revenue represents our primary source of liquidity to fund our dividends, Exchangeable Senior Notes and Notes due 2026 interest payments, general and administrative expenses, property development and redevelopment activities, property operating expenses and other expenses incurred related to managing our existing portfolio and investing in additional properties.

We derive substantially all of our revenues from the leasing of our properties and collecting rental income, which includes operating expense reimbursements, based on contractual arrangements with our tenants.

This source of revenue represents our primary source of liquidity to fund our dividends, Notes due 2026 interest payments, repayments of borrowings and interest payments under our Revolving Credit Facility, general and administrative expenses, property development and redevelopment activities, property operating expenses and other expenses incurred related to managing our existing portfolio and investing in additional properties.

Because substantially all our leases are triple net, our tenants are generally responsible for the maintenance, insurance and property taxes associated with the properties they lease from us.

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

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

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

Of these properties, we include 108 properties in our operating portfolio, which were 100% leased to state-licensed cannabis operators, with a weighted-average remaining lease term of approximately 15.3 years.

Rent collection for our operating portfolio (including approximately $541,000 of security deposits applied for payment of rent for our lease with Sozo) was approximately 94% for the three months ended December 31, 2022.

Of these properties, we include 103 properties in our operating portfolio, which were 95.8% leased, with a weighted-average remaining lease term of approximately 14.6 years.

Rent collection for our operating portfolio (calculated as base rent and property management fees collected as a percentage of contractually due base rent and property management fees, including an aggregate of approximately $8.7 million of security deposits applied for payment of rent for our leases with five tenants) was approximately 98% for the year ended December 31, 2023.

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

Two of our properties, which were previously leased to Kings Garden, and an expansion project at a property where Kings Garden continues to occupy the property pursuant to a confidential, contingent settlement agreement, were under development as of December 31, 2022, and together are expected to comprise approximately 395,000 rentable square feet upon completion of development.

In September 2023, we regained possession of the four remaining properties that Kings Garden had occupied, where Kings Garden paid stipulated rent during its period of occupancy until September 20, 2023.

In November 2022, Parallel defaulted on its obligations to pay rent at one of our properties in Pennsylvania, and we regained possession of that property in October 2023.

Also in November 2022, Green Peak defaulted on its obligations to pay rent at one of our properties in Michigan.

In March 2023, a receiver was appointed over substantially all of Green Peak’s assets, and we subsequently regained possession of one property that was under redevelopment as a regulated cannabis cultivation and processing facility and three retail properties in Michigan.

In February 2023, Parallel also defaulted on its obligations to pay rent at one of our properties in Texas, and we regained possession of that property in March 2023.

See Part I, Item 3.

Legal Proceedings and Note 11 “Commitments and Contingencies — Litigation” to our consolidated financial statements for more information regarding Kings Garden, Parallel and Green Peak.

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

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

In addition, we may recognize an expense for certain property costs, such as insurance premiums and real estate taxes billed in arrears, if we believe the tenant is likely to vacate the property before making payment on those obligations or may be unable to pay such costs in a timely manner.

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We may advance certain property costs on behalf of our tenants but expect that the majority of these costs will be reimbursed by the tenant and do not anticipate that they will be significant to our operations.

For the year ended December 31, 2022, property expenses included approximately $440,000 of non-reimbursed expenses related to Kings Garden and Vertical lease defaults.

To the extent additional resources are needed, we expect to fund our investment activity generally through equity or debt issuances either in the public or private markets.

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

For the year ended December 31, 2023, property expenses included approximately $844,000 of non-reimbursed expenses related to operating properties that were not leased.

To the extent additional resources are needed, we expect to fund our investment activity generally through equity or debt issuances either in the public or private markets along with draws on our Revolving Credit Facility.

Where possible, we also may issue limited partnership interests in our Operating Partnership to acquire properties from existing owners seeking a tax-deferred transaction.

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On May 25, 2021, our Operating Partnership issued $300.0 million aggregate principal amount of Notes due 2026.

The Notes due 2026 are the Operating Partnership’s general unsecured and unsubordinated obligations, are fully and unconditionally guaranteed by us and all of the direct and indirect subsidiaries of the Operating Partnership, and rank equally in right of payment with all of the Operating Partnership’s existing and future senior unsecured indebtedness, including the Exchangeable Senior Notes.

The Notes due 2026 are the Operating Partnership’s general unsecured obligations, are fully and unconditionally guaranteed by us and all of the direct and indirect subsidiaries of the Operating Partnership, and rank equally in right of payment with all of the Operating Partnership’s existing and future senior unsecured indebtedness, including the Exchangeable Senior Notes.

The terms of the Notes due 2026 are governed by an indenture, which requires compliance with various financial covenants including limits on the amount of total leverage and secured debt maintained by the Operating Partnership and which require the Operating Partnership to maintain minimum levels of debt service coverage.

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In addition, the terms of the indenture provide that if the debt rating on the Notes due 2026 is downgraded or withdrawn entirely, interest on the Notes due 2026 will increase to a range of 6.0% to 6.5% based on such debt rating.

In April 2022, we issued 1,815,790 shares of common stock in an underwritten public offering, which includes the exercise in full of the underwriters’ option to purchase an additional 236,842 shares, resulting in net proceeds of approximately $330.9 million.

During the year ended December 31, 2022, we issued 413,166 shares of our common stock upon exchange by holders of approximately $26.9 million of outstanding principal amount of our Exchangeable Senior Notes.

During the year ended December 31, 2022, we sold 117,023 shares of our common stock for net proceeds of approximately $21.1 million under the Prior ATM Program.

In January 2023, we terminated the Prior ATM Program and entered into new equity distribution agreements for the ATM Program, pursuant to which we may offer and sell from time to time up to $500.0 million of shares of our common stock.

As of February 28, 2023, we had not issued any shares of common stock under this ATM Program.

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

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 the ATM Program up to $500.0 million in shares of our common stock.

During the year ended December 31, 2023, we sold 101,061 shares of our common stock under the ATM Program for net proceeds of approximately $9.6 million.

We have filed an automatic shelf registration statement, which may permit us, from time to time, to offer and sell common stock, preferred stock, warrants, debt securities of our Operating Partnership and other securities to the extent necessary or advisable to meet our liquidity needs.

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 the Revolving Credit Facility, which was increased to $45.0 million in aggregate commitments pursuant to an amendment to the Loan Agreement executed subsequent to year-end .

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

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.

There were no amounts outstanding under the Loan Agreement as of December 31, 2023.

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

Subsequent to year-end, we issued 28,408 shares of our common stock and paid approximately $4.3 million in cash upon exchange by holders of approximately $4.3 million principal amount of Exchangeable Senior Notes and paid off the remaining $100,000 principal amount at maturity, in accordance with the terms of the indenture for the Exchangeable Senior Notes.

We expect to meet our short-term and long-term liquidity needs through cash and short-term investments on hand, cash flows from operations and cash flows from sources discussed above.

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Our investment guidelines also provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at the time of any new borrowing, subject to our board of directors’ discretion.

Recently, financial markets have been volatile in general, which has also significantly reduced our access to capital.

If sustained, this would have a material adverse effect on our business, financial condition and results of operations, including our ability to continue to make acquisitions of new properties and fund investments for improvements at existing properties.

In recent years, financial markets have been volatile in general, which has also significantly reduced our access to capital.

If sustained, this could have a material adverse effect on our business, financial condition and results of operations, including our ability to continue to make acquisitions of new properties and fund investments for improvements at existing properties.

The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to qualify and maintain its qualification as a REIT.

As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent

companies are not REITs can.

As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can.

During 2023, we declared cash dividends on our common stock totaling $7.22 per share, and cash dividends on our Series A Preferred Stock totaling $2.25 per share.

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The common stock distribution with a record date of December 29, 2023 was a split-year distribution, with $0.83 allocable to 2023 for federal income tax purposes and $0.99 allocable to 2024 for federal income tax purposes.

The common stock distribution with a record date of December 30, 2022 was a split-year distribution, with $0.33 allocable to

2022 for federal income tax purposes and $1.47 allocable to 2023 for federal income tax purposes.

The common stock distribution with a record date of December 31, 2021 was a split-year distribution, with $0.10 allocable to 2021 for federal income tax purposes and $1.40 allocable to 2022 for federal income tax purposes.

The common stock distribution with a record date of December 31, 2020 was a split-year distribution, with $0.22 allocable to 2020 for federal income tax purposes and $1.02 allocable to 2021 for federal income.

Contractual Obligations

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As of December 31, 2023, we had (1) approximately $18.7 million outstanding in commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease;

and (2) approximately $479,000 outstanding in commitments to fund a construction loan.

The commitments discussed in this paragraph are excluded from the table of contractual obligations above, as improvement allowances generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease and construction loan funding generally may be requested by the borrower from time to time, subject to satisfaction of certain conditions.

(2) approximately $11.8 million outstanding in commitments related to contracts with vendors for improvements at our properties, which are expected to be incurred by December 31, 2024;

and (3) $1.0 million outstanding in commitments to fund a construction loan.

The commitments discussed in this paragraph are excluded from the table of contractual obligations above, as improvement allowances generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease, there is no explicit time frame for incurring the obligations related to our contracts with vendors, and construction loan funding generally may be requested by the borrower from time to time, subject to satisfaction of certain conditions.

There were no amounts outstanding under the Loan Agreement as of December 31, 2023.

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

Supplemental Guarantor Information

In March 2020, the SEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities.

The amendments became effective on January 4, 2021.

Our Notes due 2026 and our Exchangeable Senior Notes are the unsecured senior obligations of our Operating Partnership and are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by us and all of our direct and indirect wholly-owned subsidiaries, which are listed on Exhibit 22.1 hereto and which we refer to collectively as “Subsidiary Guarantors.” Only the Notes due 2026 and the related guarantees are registered securities under the Securities Act.

See Note 7 in the notes to our consolidated financial statements for a description of certain terms of our Notes due 2026.

The offer and sale of the Exchangeable Senior Notes and the related guarantees were not and will not be registered under the Securities Act or the securities laws of any other jurisdiction and instead were issued in reliance upon an

exemption from such registration.

Unless they are subsequently registered under the Securities Act, the Exchangeable Senior Notes and the related guarantees may be offered and sold only in transactions that are exempt from the registration requirements under the Securities Act and the applicable securities laws of any other jurisdiction.

See Note 7 “Debt” in the notes to our consolidated financial statements for a description of certain terms of our Notes due 2026.

As a result of the amendments to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that the subsidiary obligor is consolidated into the parent company’s consolidated financial statements, the parent guarantee is “full and unconditional” and, subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 of Regulation S-X is provided, which includes narrative disclosure and summarized financial information.

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

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

For all periods presented (other than the twelve months ended December 31, 2020), FFO (diluted), Normalized FFO, AFFO and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock.

The Exchangeable Senior Notes were anti-dilutive for purposes of calculating earnings per diluted share for all other periods presented, and as such, were treated as anti-dilutive for purposes of calculating FFO, Normalized FFO, AFFO and FFO, Normalized FFO and AFFO per diluted share for such periods.

For the three months ended March 31, 2022, 102,333 shares issuable upon vesting of the performance share units (“PSUs”) were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of March 31, 2022.

No shares were issuable upon vesting of the PSUs for the three months ended December 31, 2022, September 30, 2022 and June 30, 2022 and the twelve months ended December 31, 2022, as the performance thresholds for vesting of the PSUs were not met as measured as of the end of those respective periods.

For the three and twelve months ended December 31, 2021, 81,414 shares issuable upon vesting of PSUs granted to certain employees in January 2021 were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of December 31, 2021.

For the three months ended September 30, 2021, 78,582 shares issuable upon vesting of the PSUs were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of September 30, 2021.

No shares were issuable upon vesting of the PSUs for the three months ended June 30, 2021 and March 31, 2021, as the performance thresholds for vesting of the PSUs were not met as measured as of the end of those respective periods.

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

For all periods presented FFO (diluted), Normalized FFO, AFFO and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock.

The Exchangeable Senior Notes were anti-dilutive for purposes of calculating earnings per diluted share for all periods presented, and as such, were treated as anti-dilutive for purposes of calculating FFO, Normalized FFO, AFFO and FFO, Normalized FFO and AFFO per diluted share for such periods.

For the three months ended March 31, 2022, 102,333 shares issuable upon vesting of the PSUs were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of March 31, 2022.

For the year ended December 31, 2021, 81,414 shares issuable upon vesting of the PSUs were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of December 31, 2021.

No shares were issuable upon vesting of the PSUs for all other periods presented, as the performance thresholds for vesting of the PSUs were not met as measured as of the end of those respective periods.

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

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FFO attributable to common stockholders (diluted)

Acquisition-related expense

Financing expense

Litigation-related expense

Loss on exchange of Exchangeable Senior Notes

Loss (gain) on exchange of Exchangeable Senior Notes

Normalized FFO attributable to common stockholders (diluted)

Interest income on seller-financed note (1)

Stock-based compensation

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Weighted average common shares outstanding – diluted

The table below is a reconciliation of quarterly net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the years ended December 31, 2022 and 2021 (in thousands, except share and per share amounts):

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

The tables below are reconciliations of quarterly net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the years ended December 31, 2023 and 2022 (in thousands, except share and per share amounts):

Three Months Ended (1)

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Real estate depreciation and amortization

Gain on sale of real estate

FFO attributable to common stockholders (basic)

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FFO attributable to common stockholders (diluted)

Acquisition-related expense

Financing expense

Litigation-related expense

Loss on exchange of Exchangeable Senior Notes

Loss (gain) on exchange of Exchangeable Senior Notes

Normalized FFO attributable to common stockholders (diluted)

Interest income on seller-financed note (2)

Stock-based compensation

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Real estate depreciation and amortization

Gain on sale of real estate

FFO attributable to common stockholders (basic)

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FFO attributable to common stockholders (diluted)

Acquisition-related expense

Loss on exchange of Exchangeable Senior Notes

Financing expense

Litigation-related expense

Loss (gain) on exchange of Exchangeable Senior Notes

Normalized FFO attributable to common stockholders (diluted)

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(1) The sum of quarterly financial data may vary from annual data due to rounding and differences in the dilutive effect of potentially issuable shares of each reporting period.

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

Critical Accounting Estimates

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

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

insight into the information used by management when evaluating significant estimates and assumptions.

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

Lease Accounting

We account for our leases under ASC 842 “Leases”, which requires significant estimates and judgments by management in its application.

We account for our leases under Accounting Standards Codification 842, Leases, which requires significant estimates and judgments by management in its application.

Upon lease inception or lease modification, we assess the lease classification of both the land and building components of the property.

The determination of lease classification requires the calculation of the rate implicit in the lease, which is driven by significant estimates relating to the unguaranteed residual value of the assets at the end of the non-cancelable lease term.

A decrease of 5% in the estimated unguaranteed residual value of our properties would result in changes to the lease classifications of two leases that were modified during the year ended December 31, 2023.

Acquisition of Rental Property, Depreciation and Impairment

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The accounting model for asset acquisitions requires that the acquisition consideration (including acquisition costs) be allocated to the individual assets acquired and liabilities assumed on a relative fair value basis.

We exercise judgement to determine key assumptions used in each valuation technique.

We exercise judgment to determine key assumptions used in each valuation technique (cost, income, and sales approaches).

For example, we are required to use judgment and make a number of assumptions, including those related to projected growth in rental rates and operating expenses, anticipated trends and market/economic conditions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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If a real estate asset is designated as real estate held-for-sale, it is carried at the lower of the net carrying value or estimated fair value less costs to sell, and depreciation ceases.

Our undiscounted cash flow and fair value calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flow and property fair values, including determining our estimated holding period and selecting the discount or capitalization rate that reflects the risk inherent in future cash flow.

Estimating projected cash flow is highly subjective as it requires assumptions related to future rental rates, tenant allowances, operating expenditures, property taxes, capital improvements, and occupancy levels.

We are also required to make a number of assumptions relating to future economic and market events and prospective operating trends.

Determining the appropriate capitalization rate also requires significant judgment and is typically based on many factors including the prevailing rate for the market or submarket, as well as the quality and location of the properties.

Further, capitalization rates can fluctuate resulting from a variety of factors in the overall economy or within regional markets.

If the actual net cash flow or actual market capitalization rates significantly differ from our estimates, the impairment evaluation for an individual asset could be materially affected.

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

After completing this process, we determined that for each of the operating properties evaluated, undiscounted cash flows over the holding period were in excess of carrying value and, therefore, we did not record any impairment losses for these properties for the years ended December 31, 2023, 2022 and 2021.

Stock-Based Compensation

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

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

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

Significant adverse changes in the critical accounting estimates used in the impairment evaluation are required for the undiscounted cash flows over the holding period to be less than the carrying value as of December 31, 2023.

Impact of Real Estate and Credit Markets

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Impact of Inflation

economy is experiencing a sustained increase in inflation rates.

economy has experienced a sustained increase in inflation rates in recent years.

We enter into leases that generally provide for fixed increases in rent.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis