Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) and 15d-15(b) promulgated under the Exchange Act, our management has evaluated, under supervision of the audit committee of the board of directors and with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2023. Based on that evaluation, our principal executive and financial officers concluded that our disclosure controls and procedures were effective as of December 31, 2023 (the end of the period covered by this Annual Report).
Management’s Report on Internal Control over Financial Reporting
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Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f), designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our principal executive officer and principal financial officer concluded that our internal controls, as of December 31, 2023, were effective. BDO USA, P.C. has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, which appears in this Annual Report on Form 10-K.
Remediation of Material Weakness
We previously determined that we did not design and maintain effective internal control over financial reporting related to management’s review and approval of requests for funding disbursements for improvements at the Company’s properties.
In response, we immediately commenced measures to remediate the identified material weakness. We have provided additional training to personnel regarding policies and procedures around construction projects and the necessary approvals of requests for funding disbursements in connection with qualifying property improvements at our properties. Our remediation efforts also included (1) enhancing the design of existing procedures and controls over the review and approval of funding requests for improvements; (2) providing additional training and developing tools to implement and monitor our policies and procedures; and (3) supplementing existing resources with the engagement of third-party construction consultants.
Management believes that significant progress has been made in enhancing internal controls as of December 31, 2023 and has concluded that the enhanced controls are operating effectively. The material weakness described in Part II, Item 9A, “Controls and Procedures” in our Annual Report on Form 10-K for the year ended December 31, 2022 has been fully remediated.
Changes in Internal Control Over Financial Reporting
Other than remediation of the material weakness as discussed above, there have been no changes in our system of internal control over financial reporting during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our system of internal control over financial reporting was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Innovative Industrial Properties, Inc.
Park City, Utah
Opinion on Internal Control over Financial Reporting
We have audited Innovative Industrial Properties, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria .
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedule, and our report dated February 27, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, P.C.
San Diego, California
February 27, 2024
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ITEM 9B. OTHER INFORMATION
(b) Rule 10b5-1 Trading Plans
During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement,” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSEPCTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning our directors, executive officers and corporate governance required by Item 10 will be included in the Proxy Statement to be filed relating to our 2024 Annual Meeting of Stockholders and is incorporated herein by reference. Pursuant to instruction G(3) to Form 10-K, information concerning audit committee financial expert disclosure set forth under the heading “Information Regarding the Board — Committees of the Board — Audit Committee” will be included in the Proxy Statement to be filed relating to Innovative Industrial Properties, Inc.’s 2024 Annual Meeting of Stockholders and is incorporated herein by reference.
Pursuant to instruction G(3) to Form 10-K, information concerning compliance with Section 16(a) of the Exchange Act concerning our directors and executive officers set forth under the heading entitled “General Section 16(a) Beneficial Ownership Reporting Compliance” will be included in the Proxy Statement to be filed relating to Innovative Industrial Properties, Inc.’s 2024 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning our executive compensation required by Item 11 will be included in the Proxy Statement to be filed relating to our 2024 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information concerning the security ownership of certain beneficial owners and management, our equity compensation plans and related stockholder matters required by Item 12 will be included in the Proxy Statement to be filed relating to our 2024 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information concerning certain relationships and related transactions and director independence required by Item 13 will be included in the Proxy Statement to be filed relating to our 2024 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information concerning our principal accountant fees and services required by Item 14 will be included in the Proxy Statement to be filed relating to our 2024 Annual Meeting of Stockholders and is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULE
(a)(1) and (2) Financial Statements and Schedule:
Please refer to the Index to Consolidated Financial Statements included under Part II, Item 8, Financial Statements and Supplementary Data.
(3) Exhibits
Exhibit
Number
Description of Exhibit
1.1
Form of Equity Distribution Agreement, dated as of January 20, 2023, between Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and each sales agent.(1)
3.1
Second Articles of Amendment and Restatement of Innovative Industrial Properties, Inc. (including Articles Supplementary Classifying Innovative Industrial Properties, Inc.’s 9.00% Series A Cumulative Redeemable Preferred Stock).(2)
3.2
Third Amended and Restated Bylaws of Innovative Industrial Properties, Inc.(3)
4.1
Form of Certificate for Common Stock.(4)
4.2
Indenture, dated as of February 21, 2019, among IIP Operating Partnership, LP, as issuer, Innovative Industrial Properties, Inc. and the subsidiaries of IIP Operating Partnership, LP, 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), including the Form of Note representing IIP Operating Partnership, LP’s 3.75% Exchangeable Senior Notes due 2024.(5)
4.3
Indenture, dated as of May 25, 2021, among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP, the Subsidiary Guarantors set forth on the signature page thereto, 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), including the form of 5.50% Senior Note due 2026.(6)
4.4
Innovative Industrial Properties, Inc. Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.(7)
10.1
Agreement of Limited Partnership of IIP Operating Partnership, LP.(8)
10.2+
2016 Omnibus Incentive Plan.(8)
10.3+
Form of Restricted Stock Award Agreement for Officers.(9)
10.4+
Form of Restricted Stock Award Agreement for Directors.(9)
10.5+
Form of Restricted Stock Unit Award Agreement.(10)
10.6+
Form of 2021 Performance Share Unit Award Agreement.(11)
10.6+
Form of 2022 Performance Share Unit Award Agreement.(12)
10.7+
Form of Indemnification Agreement between Innovative Industrial Properties, Inc. and each of its Directors and Officers.(4)
10.8+
Severance and Change of Control Agreement dated as of January 18, 2017 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and Alan Gold.(13)
10.9+
Severance and Change of Control Agreement dated as of January 18, 2017 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and Paul Smithers.(13)
10.10+
Severance and Change of Control Agreement dated as of January 18, 2017 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and Brian Wolfe.(13)
10.11+
Severance and Change of Control Agreement dated as of June 7, 2017 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and Catherine Hastings.(14)
10.12+
Severance and Change of Control Agreement dated as of March 29, 2023 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and David Smith.(15)
10.13+
Director Compensation Policy.(11)
10.14+
Innovative Industrial Properties, Inc. Nonqualified Deferred Compensation Plan.(16)
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10.15
Registration Rights Agreement, dated as of May 25, 2021, among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP, the Subsidiary Guarantors set forth on the signature page thereto and BTIG, LLC, as representative of the initial purchasers.(6)
21.1*
List of Subsidiaries of Innovative Industrial Properties, Inc.
22.1
List of Subsidiary Guarantors.(17)
23.1*
Consent of Independent Registered Public Accounting Firm.
31.1*
Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
97.1*
Innovative Industrial Properties, Inc. Compensation Recovery Policy.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
104*
Cover Page Interactive Date File (formatted as Inline XBRL and contained in Exhibit 101).
*
Filed herewith.
+ Indicates management contract or compensatory plan.
(1) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 23, 2023.
(2) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2020.
(3) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on December 8, 2022.
(4) Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-11, as amended (File No. 333-214148), filed with the SEC on November 17, 2016.
(5) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on February 21, 2019.
(6) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on May 25, 2021.
(7) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Annual Report on Form 10-K filed with the SEC on February 26, 2021.
(8) Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-11, as amended (File No. 333-214148), filed with the SEC on October 17, 2016.
(9) Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-8 (File No. 333-214919), filed with the SEC on December 6, 2016.
(10) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 6, 2020.
(11) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 15, 2021.
(12) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 12, 2022.
(13) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 24, 2017.
(14) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on June 8, 2017.
(15) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on March 30, 2023.
(16) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on November 18, 2019.
(17) Incorporated by reference to Innovative Industrial Properties, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on August 3, 2023.
ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
INNOVATIVE INDUSTRIAL PROPERTIES, INC.
By:
/s/ Paul Smithers
Paul Smithers
President, Chief Executive Officer and Director
(Principal Executive Officer)
By:
/s/ David Smith
David Smith
Chief Financial Officer and Treasurer
(Principal Financial Officer)
By:
/s/ Andy Bui
Andy Bui
Vice President, Chief Accounting Officer
(Principal Accounting Officer)
Dated February 27, 2024
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
Name
Capacity
Date
/s/ Alan Gold
Executive Chairman
February 27, 2024
Alan Gold
/s/ Gary Kreitzer
Vice Chairman
February 27, 2024
Gary Kreitzer
/s/ Mary Curran
Director
February 27, 2024
Mary Curran
/s/ Paul Smithers
President, Chief Executive Officer and
February 27, 2024
Paul Smithers
Director
/s/ Scott Shoemaker
Director
February 27, 2024
Scott Shoemaker
/s/ David Stecher
Director
February 27, 2024
David Stecher
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INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Innovative Industrial Properties, Inc.
(a) Financial Statements:
Report of Independent Registered Public Accounting Firm ( BDO USA, P.C. ; San Diego, California ; PCAOB ID # 243 )
F-2
Consolidated Balance Sheets as of December 31, 2023 and 2022
F-4
Consolidated Statements of Income for the years ended December 31, 2023, 2022 and 2021
F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2023, 2022 and 2021
F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021
F-7
Notes to Consolidated Financial Statements
F-8
(b) Financial Statement Schedule:
Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2023
F-30
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Innovative Industrial Properties, Inc.
Park City, Utah
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Innovative Industrial Properties, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 27, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Real Estate Acquisitions - Fair Value of Assets Acquired
As described in Notes 2 and 6 to the consolidated financial statements, the Company’s consolidated real estate property acquisitions totaled approximately $35.2 million for the year ended December 31, 2023. The two 2023 property acquisitions involved significant judgments in estimating the fair values used in the allocation between the land and buildings and improvements acquired.
F-2
Table of Contents
We identified the estimation of the fair values used in the allocation of the land and buildings and improvements acquired for the two 2023 property acquisitions as a critical audit matter. The principal considerations for our determination included significant judgments used to evaluate certain assumptions used in the fair values of land and buildings and improvements acquired, including the comparable sales of land, current replacement cost of the buildings and improvements, and certain other assumptions for the two real estate asset acquisitions. Auditing these elements involved a high degree of auditor judgment and subjectivity due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
● Utilizing personnel with specialized knowledge and skills in valuation to assist in the evaluation of the reasonableness of the comparable sales of land, the current replacement cost of the buildings and improvements, and certain other assumptions used in the estimation of the allocation of fair values of land and buildings and improvements acquired, including the comparison of these assumptions to market data.
/s/ BDO USA, P.C.
We have served as the Company’s auditor since 2016.
San Diego, California
February 27, 2024
F-3
Table of Contents
Innovative Industrial Properties, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
December 31,
December 31,
Assets
2023
2022
Real estate, at cost:
Land
$
142,524
$
139,953
Buildings and improvements
2,108,218
2,010,628
Construction in progress
117,773
54,106
Total real estate, at cost
2,368,515
2,204,687
Less accumulated depreciation
( 202,692 )
( 138,405 )
Net real estate held for investment
2,165,823
2,066,282
Construction loan receivable
22,000
18,021
Cash and cash equivalents
140,249
87,122
Restricted cash
1,450
1,450
Investments
21,948
200,935
Right of use office lease asset
1,355
1,739
In-place lease intangible assets, net
8,245
9,105
Other assets, net
30,020
30,182
Total assets
$
2,391,090
$
2,414,836
Liabilities and stockholders’ equity
Liabilities:
Exchangeable Senior Notes, net
$
4,431
$
6,380
Notes due 2026, net
296,449
295,115
Building improvements and construction funding payable
9,591
29,376
Accounts payable and accrued expenses
11,406
10,615
Dividends payable
51,827
50,840
Rent received in advance and tenant security deposits
59,358
58,716
Other liabilities
5,056
1,901
Total liabilities
438,118
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 December 31, 2023 and December 31, 2022
14,009
14,009
Common stock, par value $ 0.001 per share, 50,000,000 shares authorized: 28,140,891 and 27,972,830 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively
28
28
Additional paid-in capital
2,095,789
2,065,248
Dividends in excess of earnings
( 156,854 )
( 117,392 )
Total stockholders’ equity
1,952,972
1,961,893
Total liabilities and stockholders’ equity
$
2,391,090
$
2,414,836
See the accompanying notes to the consolidated financial statements.
F-4
Table of Contents
Innovative Industrial Properties, Inc.
Consolidated Statements of Income
(In thousands, except share and per share amounts)
Years Ended December 31,
2023
2022
2021
Revenues:
Rental (including tenant reimbursements)
$
307,349
$
274,377
$
204,551
Other
2,157
1,982
—
Total revenues
309,506
276,359
204,551
Expenses:
Property expenses
24,893
10,520
4,443
General and administrative expense
42,832
38,520
22,961
Depreciation and amortization expense
67,194
61,303
41,776
Total expenses
134,919
110,343
69,180
Gain on sale of real estate
—
3,601
—
Income from operations
174,587
169,617
135,371
Interest and other income
8,446
3,195
397
Interest expense
( 17,467 )
( 18,301 )
( 18,086 )
Gain (loss) on exchange of Exchangeable Senior Notes
22
( 125 )
( 3,692 )
Net income
165,588
154,386
113,990
Preferred stock dividends
( 1,352 )
( 1,352 )
( 1,352 )
Net income attributable to common stockholders
$
164,236
$
153,034
$
112,638
Net income attributable to common stockholders per share (Note 8):
Basic
$
5.82
$
5.57
$
4.69
Diluted
$
5.77
$
5.52
$
4.55
Weighted-average shares outstanding:
Basic
27,977,807
27,345,047
23,903,017
Diluted
28,255,797
27,663,169
26,261,155
See accompanying notes to the consolidated financial statements.
F-5
Table of Contents
Innovative Industrial Properties, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
Additional
Dividends in
Total
Series A
Shares of
Common
Paid-In-
Excess of
Stockholders'
Preferred Stock
Common Stock
Stock
Capital
Earnings
Equity
Balance, December 31, 2020
$
14,009
23,936,928
$
24
$
1,559,059
$
( 48,120 )
$
1,524,972
Net income
—
—
—
—
113,990
113,990
Issuance of common stock in conjunction with inducement of Exchangeable Senior Notes, net
—
1,684,237
2
108,591
—
108,593
Preferred stock dividend
—
—
—
—
( 1,352 )
( 1,352 )
Common stock dividend
—
—
—
—
( 139,736 )
( 139,736 )
Issuance of unvested restricted stock, net of forfeitures
—
( 8,624 )
—
( 3,384 )
—
( 3,384 )
Stock-based compensation
—
—
—
8,616
—
8,616
Balance, December 31, 2021
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
—
—
—
—
154,386
154,386
Exchange of Exchangeable Senior Notes
—
413,166
—
26,682
—
26,682
Net proceeds from sale of common stock
—
1,932,813
2
351,958
—
351,960
Preferred stock dividend
—
—
—
—
( 1,352 )
( 1,352 )
Common stock dividend
—
—
—
—
( 195,936 )
( 195,936 )
Issuance of unvested restricted stock, net of forfeitures
—
14,310
—
( 2,441 )
—
( 2,441 )
Stock-based compensation
—
—
—
17,507
—
17,507
Balance, December 31, 2022
14,009
27,972,830
28
2,065,248
( 117,392 )
1,961,893
Net income
—
—
—
—
165,588
165,588
Exchange of Exchangeable Senior Notes
—
32,200
—
1,964
—
1,964
Net proceeds from sale of common stock
—
101,061
—
9,564
—
9,564
Preferred stock dividend
—
—
—
—
( 1,352 )
( 1,352 )
Common stock dividend
—
—
—
—
( 203,698 )
( 203,698 )
Issuance of unvested restricted stock, net of forfeitures
—
34,800
—
( 568 )
—
( 568 )
Stock-based compensation
—
—
—
19,581
—
19,581
Balance, December 31, 2023
$
14,009
28,140,891
$
28
$
2,095,789
$
( 156,854 )
$
1,952,972
See accompanying notes to the consolidated financial statements.
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Innovative Industrial Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
2023
2022
2021
Cash flows from operating activities
Net income
$
165,588
$
154,386
$
113,990
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization
67,194
61,303
41,776
Loss (gain) on exchange of Exchangeable Senior Notes
( 22 )
125
3,692
Gain on sale of real estate
—
( 3,601 )
—
Other non-cash adjustments
111
185
95
Stock-based compensation
19,581
17,507
8,616
Amortization of discounts on investments
( 3,198 )
( 2,246 )
( 340 )
Amortization of debt discount and issuance costs
1,371
1,349
2,851
Changes in assets and liabilities
Other assets, net
352
( 3,506 )
( 3,687 )
Accounts payable, accrued expenses and other liabilities
3,924
2,717
3,102
Rent received in advance and tenant security deposits
642
5,911
18,652
Net cash provided by (used in) operating activities
255,543
234,130
188,747
Cash flows from investing activities
Purchases of investments in real estate
( 34,906 )
( 150,090 )
( 287,585 )
Proceeds from sale of real estate asset
—
23,500
—
Funding of draws for improvements and construction
( 150,088 )
( 373,878 )
( 374,541 )
Funding of construction loan and other investments
( 3,979 )
( 21,683 )
( 16,068 )
Deposits in escrow for acquisitions
—
( 250 )
( 625 )
Purchases of short-term investments
( 111,872 )
( 388,800 )
( 569,772 )
Maturities of short-term investments
294,057
515,000
864,498
Net cash provided by (used in) investing activities
( 6,788 )
( 396,201 )
( 384,093 )
Cash flows from financing activities
Issuance of common stock, net of offering costs
9,564
351,960
—
Gross proceeds from issuance of Notes due 2026
—
—
300,000
Payment of deferred financing costs
( 561 )
—
( 6,855 )
Payment of inducement and transaction costs relating to inducement of the Exchangeable Senior Notes
—
—
( 1,696 )
Dividends paid to common stockholders
( 202,711 )
( 183,943 )
( 130,954 )
Dividends paid to preferred stockholders
( 1,352 )
( 1,352 )
( 1,352 )
Taxes paid related to net share settlement of equity awards
( 568 )
( 2,441 )
( 3,384 )
Net cash provided by (used in) financing activities
( 195,628 )
164,224
155,759
Net increase (decrease) in cash, cash equivalents and restricted cash
53,127
2,153
( 39,587 )
Cash, cash equivalents and restricted cash, beginning of year
88,572
86,419
126,006
Cash, cash equivalents and restricted cash, end of year
$
141,699
$
88,572
$
86,419
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of interest capitalized
$
16,125
$
17,247
$
14,381
Supplemental disclosure of non-cash investing and financing activities:
Accrual for current-year additions to real estate
$
8,385
$
29,376
$
46,274
Deposits applied for acquisitions
250
25
200
Accrual for common and preferred stock dividends declared
51,827
50,840
38,847
Exchange of Exchangeable Senior Notes for common stock
2,000
26,682
109,040
Operating lease liability for obtaining right of use asset
—
1,017
192
See accompanying notes to the consolidated financial statements.
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Innovative Industrial Properties, Inc.
Notes to Consolidated Financial Statements
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.
Information with respect to rentable square footage is unaudited.
2. Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements
Basis of Presentation. The consolidated financial statements include all of the accounts of the Company, the Operating Partnership and all of our wholly owned subsidiaries, are presented in accordance with U.S. generally accepted accounting principles.
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 December 31, 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 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 consolidated statements of income.
Use of Estimates. The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 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.
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
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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 utilizing a direct capitalization approach and take 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 the 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 the consolidated balance sheets and is amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable lease.
Certain acquisitions of real estate did not satisfy the requirements for sale-leaseback accounting and therefore as of December 31, 2023 and 2022, acquisitions of approximately $ 20.0 million and approximately $ 20.1 million, respectively, have been recognized as notes receivable and are included in other assets, net on our consolidated balance sheets.
Sale of Real Estate. When a real estate asset is sold, we evaluate the provisions of Accounting Standards Codification (“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 consolidated balance sheet. See Note 6 “Investments in Real Estate - Property Dispositions” for further information.
Cost Capitalization and Depreciation. We capitalize costs (including interest) 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 on a straight-line basis over the 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 years ended December 31, 2023, 2022 and 2021, we recognized depreciation expense of approximately $ 66.3 million, $ 60.5 million and $ 41.7 million, respectively, which are included in depreciation and amortization expense in our consolidated statements of income. We depreciate office equipment and
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furniture and fixtures on a straight-line basis over the estimated useful lives ranging from three to seven years . We depreciate the leasehold improvements at our corporate office on a straight-line basis 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 consolidated statements of income.
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. Costs capitalized to construction in progress related to redevelopment properties are transferred to buildings and improvements at historical cost of the properties as the redevelopment project or phases of projects are placed in service. During the year ended December 31, 2023, we reclassified the net carrying value of the buildings and improvements totaling approximately $ 56.8 million to construction in progress relating to two existing properties that were 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 years ended December 31, 2023, 2022 and 2021.
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 consolidated financial statements.
For the year ended December 31, 2023, rental revenue recognized included the application of approximately $ 3.1 million of security deposits for rent with two tenants who were in default under their respective lease agreements and approximately $ 5.7 million of security deposits for rent with three tenants in connection with lease amendments.
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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 payments of interest contractually required commencing April 1, 2023. In December 2023, we further amended to construction loan to extend the loan term to June 30, 2024, with an option for the borrower to extend the loan term to December 31, 2024 upon satisfaction of certain conditions and payment of an extension fee. As of December 31, 2023 and 2022, we had funded approximately $ 22.0 million and $ 18.0 million, respectively, of the construction loan. Interest income on the construction loan is recognized on a cash basis.
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 short-term 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 at the date of adoption.
Deferred Financing Costs. The deferred financing costs relating to our Exchangeable Senior Notes and Notes due 2026 are included as a reduction in the net book value of the related liability on our consolidated balance sheets reflect. These costs are amortized as non-cash interest expense using the effective interest method over the life of the related obligations. Deferred financing costs relating to our Revolving Credit Facility are included in other assets, net on our consolidated balance sheets. These costs are being amortized on a straight-line basis and recognized as non-cash interest expense over the term of the Revolving Credit Facility.
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.
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Lease Accounting. We account for our leases under ASC 842, Leases , and have 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, which contains annual escalations. 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 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. Subsequently, the lease liability is accreted by applying a discount rate established at the lease commencement date to the lease liability balance as of the beginning of the period and is reduced by the payments made during the period.
The right-of-use asset is measured based on the corresponding lease liability. We did not incur any initial direct leasing costs and any other consideration exchanged with the landlord prior to the commencement of the lease. Subsequently, the right-of-use asset is amortized on a straight-line basis during the lease term. For the years ended December 31, 2023, 2022 and 2021, we recognized office lease expense of approximately $ 486,000 , $ 466,000 and $ 231,000 , respectively, which are included in general and administrative expense in our consolidated statements of income. For the years ended December 31, 2023, 2022 and 2021, amounts paid and classified as operating activities in our consolidated statements of cash flows for the office lease were approximately $ 496,000 , $ 402,000 and $ 234,000 , respectively.
As lessor, for each of our real estate transactions involving the leaseback of the related property to the seller or affiliates of the seller, we determine whether these transactions qualify as sale and leaseback transactions under the accounting guidance. 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 continued 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 consolidated statements of income. Property taxes paid directly by the lessee to a third party continue to be excluded from our 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.
Recent Accounting Pronouncements . In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . The amendments in ASU 2023-07 improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, measures
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of segment profit and loss, and disclosures of how the chief operating decision maker uses the reported measure(s) of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The amendments are effective for all public entities that are required to report segment information for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024. The ASU also requires a public entity that has a single reportable segment to provide all the disclosures required by the amendments in this ASU and all existing segment disclosures in Topic 280. Early adoption is permitted. The amendments should be applied retrospectively to all prior periods presented. The Company is currently evaluating the potential impact that this standard will have on its consolidated financial statements and related disclosures .
Concentration of Credit Risk . As of December 31, 2023, we owned 108 properties located in 19 states. 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 tables set forth the five tenants in our portfolio that represented the largest percentage of our total rental revenues for the years ended December 31, 2023, 2022 and 2021, including tenant reimbursements:
For the Year Ended
December 31, 2023
Percentage of
Number of
Rental
Leases
Revenue
PharmaCann Inc. ("PharmaCann")
11
15
%
Ascend Wellness Holdings, Inc. ("Ascend")
4
10
%
Green Thumb Industries, Inc. ("Green Thumb")
3
8
%
SH Parent, Inc. ("Parallel") (1)
4
7
%
Curaleaf Holdings, Inc. ("Curaleaf")
8
7
%
For the Year Ended
December 31, 2022
Percentage of
Number of
Rental
Leases
Revenue
PharmaCann
11
14
%
Parallel (1)
4
10
%
Ascend
4
9
%
Green Thumb
3
7
%
Trulieve Cannabis Corp.
6
7
%
For the Year Ended
December 31, 2021
Percentage of
Number of
Rental
Leases
Revenue
PharmaCann
5
12
%
Parallel (1)
4
10
%
Ascend
3
9
%
Cresco Labs Inc. ("Cresco")
5
8
%
Kings Garden (2)
5
8
%
(1) Commencing in November 2022, Parallel defaulted on its obligations to pay rent at one of our Pennsylvania properties, and we regained possession of that property in October 2023. 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” for more information.
(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
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terminated the leases for two properties and regained possession of those properties, which continued to be in development or redevelopment as of December 31, 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” 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 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 as of December 31, 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 a financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $ 250,000 . As of December 31, 2023, we had cash accounts in excess of FDIC insured limits. We have not experienced any losses in such accounts.
3. Common Stock
As of December 31, 2023, the Company was authorized to issue up to 50,000,000 shares of common stock, par value $ 0.001 per share, and there were 28,140,891 shares of common stock issued and outstanding.
In April 2022, we issued 1,815,790 shares of common stock in an underwritten public offering, including 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 sold 117,023 shares of our common stock pursuant to an “at-the-market” offering program (the “Prior ATM Program”) for net proceeds of approximately $ 21.1 million.
In January 2023, we terminated the Prior ATM 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. 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.
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, 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.
4. Preferred Stock
As of December 31, 2023, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value $ 0.001 per share, and there were issued and outstanding 600,000 shares of 9.00 % Series A Cumulative Redeemable Preferred Stock (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.
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5. Dividends
The following table describes the dividends declared by the Company during the years ended December 31, 2023, 2022 and 2021:
Amount
Dividend
Dividend
Declaration Date
Security Class
Per Share
Period Covered
Paid Date
Amount
(In thousands)
March 15, 2021
Common stock
$
1.32
January 1, 2021 to March 31, 2021
April 15, 2021
$
31,660
March 15, 2021
Series A preferred stock
$
0.5625
January 15, 2021 to April 14, 2021
April 15, 2021
$
338
June 15, 2021
Common stock
$
1.40
April 1, 2021 to June 30, 2021
July 15, 2021
$
33,584
June 15, 2021
Series A preferred stock
$
0.5625
April 15, 2021 to July 14, 2021
July 15, 2021
$
338
September 15, 2021
Common stock
$
1.50
July 1, 2021 to September 30, 2021
October 15, 2021
$
35,983
September 15, 2021
Series A preferred stock
$
0.5625
July 15, 2021 to October 14, 2021
October 15, 2021
$
338
December 15, 2021
Common stock
$
1.50
October 1, 2021 to December 31, 2021
January 14, 2022
$
38,509
December 15, 2021
Series A preferred stock
$
0.5625
October 15, 2021 to January 14, 2022
January 14, 2022
$
338
March 14, 2022
Common stock
$
1.75
January 1, 2022 to March 31, 2022
April 14, 2022
$
45,830
March 14, 2022
Series A preferred stock
$
0.5625
January 15, 2022 to April 14, 2022
April 14, 2022
$
338
June 15, 2022
Common stock
$
1.75
April 1, 2022 to June 30, 2022
July 15, 2022
$
49,101
June 15, 2022
Series A preferred stock
$
0.5625
April 15, 2022 to July 14, 2022
July 15, 2022
$
338
September 15, 2022
Common stock
$
1.80
July 1, 2022 to September 30, 2022
October 14, 2022
$
50,503
September 15, 2022
Series A preferred stock
$
0.5625
July 15, 2022 to October 14, 2022
October 14, 2022
$
338
December 15, 2022
Common stock
$
1.80
October 1, 2022 to December 31, 2022
January 13, 2023
$
50,502
December 15, 2022
Series A preferred stock
$
0.5625
October 15, 2022 to January 14, 2023
January 13, 2023
$
338
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
December 15, 2023
Common stock
$
1.82
October 1, 2023 to December 31, 2023
January 12, 2024
$
51,489
December 15, 2023
Series A preferred stock
$
0.5625
October 15, 2023 to January 14, 2024
January 12, 2024
$
338
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6. Investments in Real Estate
Acquisitions
The Company made the following acquisitions during the year ended December 31, 2023 (dollars in thousands):
Rentable
Initial
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 December 31, 2023 and 2022 is as follows (in thousands):
December 31, 2023
December 31, 2022
In-place lease intangible assets
$
9,979
$
9,979
Accumulated amortization
( 1,734 )
( 874 )
In-place lease intangible assets, net
$
8,245
$
9,105
Amortization of in-place lease intangible assets classified in depreciation and amortization expense in our consolidated statements of income was approximately $ 860,000 , $ 841,000 and $ 33,000 for the years ended December 31, 2023, 2022 and 2021, respectively. The remaining weighted-average amortization period of the value of acquired in-place leases was approximately 9.6 years, and the estimated annual amortization of the value of the acquired in-place leases as of December 31, 2023 is as follows (in thousands):
Year
Amount
2024
$
860
2025
860
2026
860
2027
860
2028
860
Thereafter
3,945
Total
$
8,245
Above-Market Lease
The above-market lease and related accumulated amortization included in other assets, net on our consolidated balance sheets as of December 31, 2023 and 2022 is as follows (in thousands):
December 31, 2023
December 31, 2022
Above-market lease
$
1,054
$
1,054
Accumulated amortization
( 187 )
( 95 )
Above-market lease, net
$
867
$
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 9.3 years. For the years ended December 31, 2023, 2022 and 2021, the amortization of the above-market lease was approximately $ 92,000 , $ 91,000 and $ 4,000 , respectively. As of December 31, 2023, the amortization for each of the next five years is approximately $ 92,000 and approximately $ 407,000 thereafter.
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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.
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.
Lease Amendments
In January 2023 , we entered into lease amendments with Holistic Industries Inc. 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 at our Massachusetts property, which (1) provided for temporary reduced base rent from April 2023 through January 2024 to be partially paid through application of security deposits, with pro rata payback of those security deposits over twelve months starting in February 2024; (2) extended the lease term; and (3) increased base rent for the remainder of the term of the lease.
In 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 Leases
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 December 31, 2023.
In December 2023, we executed a new lease with a tenant at our property located at 9410 Davis Highway in Dimondale, Michigan that was previously leased to Green Peak, which is under construction as of December 31, 2023.
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Capitalized Costs
Including all of our properties, during the year ended December 31, 2023, we capitalized costs of approximately $ 130.7 million and funded approximately $ 150.1 million relating to improvements and construction activities at our properties.
Property Dispositions
In November 2022, we sold one of our Pennsylvania properties that was leased to a subsidiary of Maitri Holdings, LLC for $ 23.5 million, excluding transaction costs, and recognized a gain on sale of the property of approximately $ 3.6 million.
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 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 consolidated balance sheet until such time the criteria for recognition as a sale have been met. As of December 31, 2023, we received interest payments of approximately $ 1.3 million. 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.
Future Contractual Minimum Rent
Future contractual minimum rent (including base rent and property management fees) under the operating leases as of December 31, 2023 for future periods is summarized as follows (in thousands):
Year
Contractual Minimum Rent
2024
$
291,260
2025
303,164
2026
312,135
2027
319,665
2028
326,618
Thereafter
3,727,850
Total
$
5,280,692
7. Debt
Exchangeable Senior Notes
As of December 31, 2023 and 2022, our Operating Partnership had outstanding approximately $ 4.4 million and $ 6.4 million, respectively, 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 December 31, 2023 was 17.30699 shares of our common stock per $ 1,000 principal amount of the Exchangeable Senior Notes and the exchange price at December 31, 2023 was approximately $ 57.78 per share of our common stock. At December 31, 2023, there were 76,774 shares potentially issuable upon conversion of the Exchangeable Senior Notes. 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
F-18
Table of Contents
terms. The effective interest rate including amortization of issuance costs is 4.53 %. 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 December 31, 2023, the if-exchanged value of the Exchangeable Senior Notes exceeded the principal amount by approximately $ 3.3 million. See Note 12 “Subsequent Events” for more information.
During the year ended December 31, 2023, we issued 32,200 shares of our common stock upon exchanges by holders of $ 2.0 million of outstanding principal amount of our Exchangeable Senior Notes. For the year ended December 31, 2023, we recognized a gain on the exchange totaling approximately $ 22,000 , resulting from the difference between the fair value and carrying value of the debt as of the date of the exchange. The issuance of the shares pursuant to the exchanges resulted in a net non-cash increase to our additional paid-in capital account of approximately $ 2.0 million for the year ended December 31, 2023.
During the year ended December 31, 2022, we issued 413,166 shares of our common stock upon exchanges by holders of approximately $ 26.9 million of outstanding principal amount of our Exchangeable Senior Notes. For the year ended December 31, 2022, we recognized a loss on the exchange 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 $ 26.7 million for the year ended December 31, 2022.
In December 2021, our Operating Partnership entered into separate privately-negotiated exchange agreements with certain holders of the Exchangeable Senior Notes, pursuant to which the Operating Partnership delivered and paid an aggregate of (a) 1,684,237 shares of the Company’s common stock and (b) approximately $ 2.3 million in cash (consisting of approximately $ 1.2 million in accrued interest and approximately $ 1.1 million in inducement), collectively, in exchange for approximately $ 110.4 million principal amount of the Exchangeable Senior Notes (the “Exchange Transactions”). The issuance of the shares pursuant to the Exchange Transactions resulted in a non-cash increase to our additional paid-in capital account of approximately $ 109.0 million, primarily driven by the fair value of the shares issued, partially offset by the amount allocated to the repurchase of the exchange option. In connection with the Exchange Transactions, we recognized a loss on induced exchange of Exchangeable Senior Notes of approximately $ 3.7 million.
The following table details our interest expense related to the Exchangeable Senior Notes (in thousands):
For the Year Ended December 31,
2023
2022
2021
Cash coupon
$
182
$
452
$
5,380
Amortization of debt discount
—
—
1,146
Amortization of issuance cost
37
94
991
Capitalized interest
( 7 )
—
—
Total interest expense
$
212
$
546
$
7,517
The following table details the carrying value of our Exchangeable Senior Notes (in thousands):
December 31, 2023
December 31, 2022
Principal amount
$
4,436
$
6,436
Unamortized issuance cost
( 5 )
( 56 )
Carrying value
$
4,431
$
6,380
Accrued interest payable for the Exchangeable Senior Notes was approximately $ 49,000 and $ 70,000 as of December 31, 2023 and 2022, respectively, and is included in accounts payable and accrued expenses on our consolidated balance sheets.
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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 effective interest rate including amortization of issuance costs is 6.03 %.
The following table details our interest expense related to the Notes due 2026 (in thousands):
For the Year Ended December 31,
2023
2022
2021
Cash coupon
$
16,500
$
16,500
$
9,854
Amortization of issuance cost
1,334
1,255
715
Capitalized interest
( 620 )
—
—
Total interest expense
$
17,214
$
17,755
$
10,569
The following table details the carrying value of our Notes due 2026 (in thousands):
December 31, 2023
December 31, 2022
Principal amount
$
300,000
$
300,000
Unamortized issuance cost
( 3,551 )
( 4,885 )
Carrying value
$
296,449
$
295,115
The Operating Partnership may redeem some or all of the notes at its option at any time at the applicable redemption price. If the notes are redeemed prior to February 25, 2026, the redemption price will be equal to 100 % of the principal amount of the notes being redeemed, plus a make-whole premium and accrued and unpaid interest thereon to, but excluding, the applicable redemption date. If the notes are redeemed on or after February 25, 2026, the redemption price will be equal to 100 % of the principal amount of the notes 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 December 31, 2023.
Accrued interest payable for the Notes due 2026 as of December 31, 2023 and 2022 was approximately $ 2.1 million and is included in accounts payable and accrued expenses on our consolidated balance sheets.
Revolving Credit Facility
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 “Revolving Credit Facility”), the availability of which is based on a borrowing base
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Table of Contents
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 Revolving Credit Facility 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 Revolving Credit Facility is subject to an unused line of credit fee, calculated in accordance with the Loan Agreement. 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 loan commitments up to a specified amount. There were no amounts outstanding under the Revolving Credit Facility as of December 31, 2023.
In connection with the Revolving Credit Facility, we recorded approximately $ 561,000 of issuance costs, which are being amortized on a straight-line basis and recognized as non-cash interest expense over the term of the Revolving Credit Facility. For the year ended December 31, 2023, we recognized approximately $ 41,000 of non-cash interest expense related to the Revolving Credit Facility.
The following table summarizes the principal payments on our outstanding indebtedness as of December 31, 2023 (in thousands):
Payments Due
by Year
Amount
2024
4,436
2025
—
2026
300,000
2027
—
2028
—
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 and dividend equivalents 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 December 31, 2023, all of the Company’s participating securities received dividends or dividend equivalents at an equal dividend rate per share. As a result, distributions to participating securities have been included in net income attributable to common stockholders to calculate net income per basic and diluted share.
The 81,169 shares, 202,076 shares and 2,180,550 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the years ended December 31, 2023, 2022 and 2021, respectively, and were included in the computation of diluted earnings per share.
For the years ended December 31, 2023 and 2022, the performance share units (“PSUs”) granted to certain employees were not included in dilutive securities as the performance thresholds for the vesting of the PSUs were not
F-21
Table of Contents
met as measured as of the respective dates. For the year ended December 31, 2021, 81,414 shares issuable upon vesting of PSUs granted to certain employees in January 2021 were included in dilutive securities, as the performance thresholds for vesting of these PSUs were met as measured as of December 31, 2021 (see Note 10 for further discussion of the PSUs).
Computations of net income per basic and diluted share were as follows (in thousands, except share and per share data):
Years Ended December 31,
2023
2022
2021
Net income
$
165,588
$
154,386
$
113,990
Preferred stock dividends
( 1,352 )
( 1,352 )
( 1,352 )
Distribution to participating securities
( 1,482 )
( 834 )
( 557 )
Net income attributable to common stockholders used to compute net income per share – basic
162,754
152,200
112,081
Dilutive effect of Exchangeable Senior Notes
212
546
7,517
Net income attributable to common stockholders used to compute net income per share – diluted
$
162,966
$
152,746
$
119,598
Weighted-average common shares outstanding:
Basic
27,977,807
27,345,047
23,903,017
Restricted stock and RSUs
196,821
116,046
96,174
PSUs
—
—
81,414
Dilutive effect of Exchangeable Senior Notes
81,169
202,076
2,180,550
Diluted
28,255,797
27,663,169
26,261,155
Net income attributable to common stockholders per share:
Basic
$
5.82
$
5.57
$
4.69
Diluted
$
5.77
$
5.52
$
4.55
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 December 31, 2023 and 2022 (in thousands):
At December 31, 2023
At December 31, 2022
Carrying Value
Fair Value
Carrying Value
Fair Value
Investments (1)
$
21,948
$
21,951
$
200,935
$
200,715
Investments as cash equivalents (2)
$
15,187
$
15,029
$
—
$
—
Exchangeable Senior Notes (3)
$
4,431
$
7,576
$
6,380
$
10,282
Notes due 2026 (3)
$
296,449
$
278,325
$
295,115
$
264,234
Construction Loan (4)
$
22,000
$
27,543
$
18,021
$
20,167
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Table of Contents
(1) Investments consisting of short-term obligations of the U.S. government with an original maturity at the time of purchase of greater than three months and less than one year are classified as held-to-maturity and valued using Level 1 inputs. At December 31, 2023, the unrecognized gain was approximately $ 78,000 .
(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 December 31, 2023 and 2022, the expected market yields used to determine fair value were 16.25 % and 25 % , respectively. Changes in market yields may change the fair value of the construction loan. Generally, an increase in market yields may result in a decrease in the fair value of the construction loan. Due to the inherent uncertainty of determining the fair value of a loan that does not have a readily available market value, the fair value of the construction loan may fluctuate from period to period. Additionally, the fair value of the construction loan may differ significantly from the value that would have been used had a readily available market existed for such loan and may differ materially from the value that the Company may ultimately realize.
The carrying amounts of cash equivalents, accounts payable, accrued expenses and other liabilities approximate 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 withholding 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 years ended December 31, 2023, 2022 and 2021 is included in the table below:
Weighted-
Restricted
Average Grant Date
Shares
Fair Value
Nonvested balance at December 31, 2020
76,346
$
50.14
Granted
9,679
$
187.74
Vested
( 29,955 )
$
52.31
Forfeited (1)
( 18,303 )
$
31.99
Nonvested balance at December 31, 2021
37,767
$
92.49
Granted
24,456
$
205.62
Vested
( 18,051 )
$
91.57
Forfeited (1)
( 10,146 )
$
69.74
Nonvested balance at December 31, 2022
34,026
$
181.08
Granted
40,770
$
105.85
Vested
( 12,115 )
$
173.37
Forfeited (1)
( 5,970 )
$
116.31
Nonvested balance at December 31, 2023
56,711
$
135.46
(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 $ 4.3 million for restricted stock awards is expected to be recognized over a weighted-average amortization period of approximately 1.6 years as of December 31, 2023. The fair value of restricted stock that vested in 2023, 2022 and 2021 was approximately $ 1.7 million, $ 6.9 million and $ 8.8 million, respectively.
The following table summarizes our RSU activity for the years ended December 31, 2023, 2022 and 2021. RSUs are issued as part of the Innovative Industrial Properties, Inc. Nonqualified Deferred Compensation Plan (the “Deferred
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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-
Unvested
Average Grant Date
RSUs
Fair Value
Balance at December 31, 2020
36,687
$
76.06
Granted
23,639
$
188.80
Balance at December 31, 2021
60,326
$
120.24
Granted
23,351
$
206.45
Balance at December 31, 2022
83,677
$
144.30
Granted
66,279
$
101.40
Balance at December 31, 2023
149,956
$
125.34
The remaining unrecognized compensation cost of approximately $ 5.9 million for RSU awards is expected to be recognized over an amortization period of approximately 1.7 years as of December 31, 2023.
In January 2021, we initiated the PSU program and issued 70,795 “target” PSUs to a select group of officers, which vest and are settled in shares of common stock (“Award Shares”) based on the Company’s total stockholder return over a period commencing on January 11, 2021 and ending on December 31, 2023 (the “Performance Period”) relative to two different comparator groups of companies. In January 2022, we issued 102,641 “target” PSUs to a select group of officers, which vest and are settled in shares of common stock (referred to herein together with the 2021 PSU Award Shares as the “Award Shares”) based on the Company’s total stockholder return over a period commencing on January 11, 2022 and ending on December 31, 2024 (referred to herein together with the 2021 PSU Performance Period as the “Performance Periods”) relative to two different comparator groups of companies.
At the end of the applicable Performance Periods, a recipient of PSUs may receive as few as zero Award Shares or as many as 150 % of the number of target PSUs in Award Shares, plus deemed dividends. PSUs will also be reduced as necessary so the total value at the vesting date does not exceed 800 % of the grant date PSU price, and if the Company’s absolute total stockholder return during the applicable Performance Period is negative, the payout of Award Shares is capped at the target number of PSUs, notwithstanding the Company’s outperformance of comparator groups. No dividends are paid to the recipient during the applicable Performance Periods. At the end of the applicable Performance Periods, if the Company’s total stockholder return is such that the recipient earns Award Shares, the recipient will receive additional shares of common stock relating to dividends deemed to have been paid and reinvested on the Award Shares. The recipient of the Award Shares may not sell, transfer or otherwise dispose of the Award Shares for a one-year period following the vesting date of the Award Shares.
The grant date fair value of the PSUs granted in January 2021 and January 2022 was $ 12.0 million and $ 20.0 million, respectively. The fair value was calculated using a Monte Carlo simulation pricing model based on the following assumptions:
2021 PSU Award
2022 PSU Award
Fair Value Assumptions
Fair Value Assumptions
Valuation date
January 6, 2021
January 7, 2022
Fair value per share on valuation date
$ 169.51
$ 194.86
Expected term
3 years
3 years
Expected price volatility
57.64 %
55.99 %
Risk-free interest rate
0.20 %
1.17 %
Discount for post vesting restriction
12.44 %
12.22 %
The expected share price volatility was based on the historical volatility of our shares of common stock over a period of approximately the applicable Performance Periods. The risk-free interest rate was based on the zero-coupon risk-free interest rate derived from the Treasury Constant Maturities yield curve on the valuation date. The discount for the post vesting restriction was estimated using the Finnerty model.
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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 Periods. For the years ended December 31, 2023, 2022 and 2021, we recognized stock-based compensation expense of approximately $ 10.7 million, $ 10.7 million and $ 4.0 million respectively, relating to the PSU awards. As of December 31, 2023, the remaining unrecognized compensation cost of approximately $ 6.7 million relating to the PSUs granted in January 2022 is expected to be recognized over the remaining Performance Period of 1.0 year.
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.
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 consolidated balance sheet as of December 31, 2023 is presented in the table below (in thousands):
Year
Amount
2024
$
511
2025
526
2026
543
2027
45
2028
—
Total future contractual lease payments
1,625
Effect of discounting
( 143 )
Office lease liability
$
1,482
Improvement Allowances. As of December 31, 2023, we had approximately $ 18.7 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 Commitments. As of December 31, 2023, we had approximately $ 11.8 million of commitments related to contracts with vendors for improvements at our properties.
Construction Loan. As of December 31, 2023, we had $ 1.0 million of commitments related to our construction loan for the development of a regulated cannabis cultivation and processing facility in California.
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.
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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 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. On December 18, 2023, defendants moved to dismiss the Second Amended Class Action Complaint. On February 1, 2024, plaintiff responded with their opposition to defendants’ motion to dismiss the Second Amended Class Action Complaint. Defendants’ reply in support of the motion to dismiss is due March 1, 2024. 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 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 Draper, 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 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. 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. The Company intends to vigorously defend each of these lawsuits. However,
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at this time, the Company cannot predict the probable outcome of these actions, and, accordingly, no amounts have been accrued in the Company’s consolidated financial statements.
Kings Garden Lawsuit
On July 25, 2022, IIP-CA 2 LP filed a lawsuit against Kings Garden, a former tenant at six properties. 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. 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)) (“RICO Act”).
On September 11, 2022, the parties to the lawsuit entered into a confidential, conditional settlement agreement pertaining to matters related to the lawsuit. Pursuant to the conditional settlement agreement, as of December 31, 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 consolidated balance sheets. During the year ended December 31, 2023, we received approximately $ 4.4 million in additional payments from Kings Garden (reflected in the total amount above).
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 the assignment of one of the Kings Garden leases. On August 4, 2023, the Company accepted an offer of judgment extended by Kings Garden under California Code of Civil Procedure Section 998, pursuant to which Kings Garden (i) vacated the remaining four properties it previously occupied in September 2023, paying the stipulated rent during its period of occupancy through September 20, 2023, and (ii) agreed to pay the Company damages and attorneys’ fees totaling approximately $ 6.0 million, including interest on the then-outstanding amount, on a fully amortizing schedule of approximately $ 193,000 per month over a three-year period. The offer of judgment included a mutual release. During November and December 2023, we received an aggregate of approximately $ 386,000 from Kings Garden pursuant to the terms of the offer of judgement, which is primarily reported as rental revenues for the year ended December 31, 2023.
Orr Lawsuit
On August 16, 2023, we filed suit against Orr Builders, the general contractor for certain amounts on one construction project undertaken by Kings Garden, and filed a first amended complaint on January 24, 2024, named IIP-CA 2 LP v. Orr Builders and Does 1-20 , asserting claims for fraud, negligent misrepresentation, negligence, breach of contract, breach of covenant of good faith and fair dealing, violation of California unfair competition law, money had and received, and unjust enrichment.
Enviro Air Lawsuit
On January 29, 2024, we filed suit against Enviro Air Systems Inc., Haik Akiopyan and Desert Construction Services, LLC, regarding certain amounts for one construction project undertaken by Kings Garden, named IIP-CA 2 LP vs. Enviro Air Systems Inc., Haik Akopyan and Desert Construction Services, LLC , asserting claims for fraud, negligent misrepresentation, conspiracy, violation of California unfair competition law, money had and received, unjust enrichment, conversion, theft by false pretenses and violations of the RICO Act.
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. 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. In December
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2023, IIP-PA 8 LLC received approximately $ 1.7 million from Goodblend Pennsylvania LLC as a partial payment of the judgment, which is reported as rental revenues for the year ended December 31, 2023.
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 22, 2023, IIP-MI 1 LLC filed a lawsuit against Green Peak and Tropics LP (“SAF Entity 2”) in the Circuit Court of Eaton County, Michigan, regarding a lease for one of the Company’s properties located in Michigan, 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 receiver was appointed over substantially all of Green Peak’s assets in the Circuit Court of Ingham County, Michigan (the “Receivership Case”), pursuant to which the Company subsequently re-gained possession of one of the Company’s cultivation and processing properties, which is under redevelopment as December 31, 2023, and three 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 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. The receiver informed the Company that it intends to vacate the remaining operational cannabis cultivation and processing facility occupied by the receiver by February 29, 2024. The leases for the remaining three retail 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.
Deferred Compensation Plan. In November 2019, we adopted the Innovative Industrial Properties, Inc. Nonqualified Deferred Compensation Plan (the “Plan”), which allows a select group of management and non-employee directors to defer receipt of their compensation, including up to 80 % of base salary, 100 % of bonus, 100 % of director fees and 100 % of restricted equity awards. The Plan assets are held in a rabbi trust which is consolidated and included in the consolidated financial statements.
12. Subsequent Events
Exchange of Remaining Outstanding Principal Amount Exchangeable Senior Notes
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 terms of the indenture for the Exchangeable Senior Notes.
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Lease Amendments
In January 2024, we entered into lease amendments with subsidiaries of 4Front Ventures Corp. (“4Front”) at the four properties we lease to them in Illinois, Massachusetts and Washington, extending the term of each lease. The Illinois property, which is under development, has experienced significant delays in construction, primarily relating to completion of required utilities enhancements, which has resulted in an extended delay of the estimated completion of the project. As a result, we amended the Illinois lease to reduce base rent owing for the nine months ending September 30, 2024, defer the payback of the security deposit applicable to the lease (with the security deposit subject to future pro-rata monthly payback), and increase the base rent for the remainder of the term commencing November 1, 2024.
In February 2024, we amended our lease and development agreement with PharmaCann at one of our New York properties, increasing the construction funding by $ 16.0 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property. We also amended the lease to extend the term.
New Lease
In January 2024, we executed a new lease with a tenant at one of our retail properties in Michigan that was previously leased to Green Peak.
Amendment to Loan Agreement to Increase Commitments Under Revolving Credit Facility
In February 2024, our Operating Partnership entered into an amendment to the Loan Agreement, pursuant to which the aggregate commitments under the Revolving Credit Facility were increased from $ 30.0 million to $ 45.0 million.
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INNOVATIVE INDUSTRIAL PROPERTIES, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 2023
(In thousands)
Initial Costs
Total Costs
Costs
Capitalized
Year
Building and
Subsequent to
Building and
Accumulated
Net Cost
Property
Property Type (1)
State
Built/Renovated
Land
Improvements
Acquisition
Land
Improvements (6)
Total
Depreciation
Basis
Year Acquired
East Cherry Street
Industrial
Arizona
1971 / 2016
$
723
$
3,995
$
—
$
723
$
3,995
$
4,718
$
( 171 )
$
4,547
2022
West Greenhouse Drive
Industrial
Arizona
1995 / 2017
398
14,629
5,003
398
19,632
20,030
( 4,221 )
15,809
2017
Perez Road (5)
Industrial
California
1981 / (2)
734
5,634
7,080
734
12,714
13,448
( 329 )
13,119
2022
64125 19th Avenue
Industrial
California
2019 / 2023
5,930
45,081
12,605
5,930
57,686
63,616
( 3,144 )
60,472
2021
McLane Street
Industrial
California
2005 / 2019
1,577
15,935
—
1,577
15,935
17,512
( 1,449 )
16,063
2020
Inland Center Drive (5)
Industrial (4)
California
1969 / (2)
3,485
21,911
10,481
3,485
32,392
35,877
—
35,877
2020
63795 19th Avenue (5)
Industrial
California
2004 / (2)
3,534
12,852
18,234
3,534
31,086
34,620
( 1,869 )
32,751
2019
North Anza Road
Industrial (4)
California
1980 / 2017
916
5,406
—
916
5,406
6,322
( 786 )
5,536
2019
North Anza Road & Del Sol Road
Industrial (4)
California
1980 / 2017
840
4,959
—
840
4,959
5,799
( 721 )
5,078
2019
1804 Needles Highway (3)
Industrial
California
1964 / 2019
174
715
1
174
716
890
( 84 )
806
2019
West Broadway (3)
Industrial
California
1976 / 2019
289
1,185
2
289
1,187
1,476
( 139 )
1,337
2019
3253 Needles Highway (3)
Industrial
California
2018 / 2019
949
3,900
8
949
3,908
4,857
( 458 )
4,399
2019
3241 & 3247 Needles Highway (3)
Industrial
California
2020 / 2020
1,981
8,138
16
1,981
8,154
10,135
( 957 )
9,178
2019
Sacramento
Industrial
California
1990 / 2019
1,376
5,321
6,033
1,376
11,354
12,730
( 1,694 )
11,036
2019
Steele Street
Industrial
Colorado
1967 / 1978 / 2018
2,101
9,176
—
2,101
9,176
11,277
( 1,579 )
9,698
2018
Washington Street
Industrial
Colorado
1975 / 2017
4,309
4,988
—
4,309
4,988
9,297
( 271 )
9,026
2021
West Barberry Place
Industrial
Colorado
1971 / 2012
389
2,478
—
389
2,478
2,867
( 129 )
2,738
2021
Hamilton Road
Industrial
Florida
1982 / 2021
2,186
17,371
36,340
2,186
53,711
55,897
( 3,871 )
52,026
2020
West Lake Drive
Industrial
Florida
2014 / 2021
1,071
34,249
16,007
1,071
50,256
51,327
( 5,808 )
45,519
2020
NW Highway 441
Industrial
Florida
1981 / 2021
752
23,064
17,782
752
40,846
41,598
( 3,237 )
38,361
2021
Ben Bostic Road
Industrial
Florida
2019 / 2020
274
16,729
—
274
16,729
17,003
( 2,214 )
14,789
2019
East Mazon Avenue
Industrial
Illinois
1992 / 2020
201
17,807
10,008
201
27,815
28,016
( 4,107 )
23,909
2019
Revolution Road
Industrial
Illinois
2015 / 2020
563
18,457
51,538
563
69,995
70,558
( 9,631 )
60,927
2018
East 4th Street
Industrial
Illinois
2015 / 2020
739
8,284
40,998
739
49,282
50,021
( 5,887 )
44,134
2020
Industrial Drive
Industrial
Illinois
1984 / 2020
350
10,191
29,446
350
39,637
39,987
( 5,287 )
34,700
2019
S US Highway 45 52
Industrial
Illinois
2015 / 2019
268
11,840
13,279
268
25,119
25,387
( 3,477 )
21,910
2019
Centerpoint Way
Industrial
Illinois
2016 / 2019
2,947
17,761
254
2,947
18,015
20,962
( 2,376 )
18,586
2019
Adams Street
Industrial
Illinois
(2)
3,366
—
62,247
3,366
62,247
65,613
( 2,273 )
63,340
2021
South Street
Industrial
Maryland
1980 / 2021
1,861
14,775
12,858
1,861
27,633
29,494
( 2,134 )
27,360
2021
Alaking Court
Industrial
Maryland
2017 / 2017
2,785
8,410
22,765
2,785
31,175
33,960
( 5,711 )
28,249
2017
Western Maryland Parkway
Industrial
Maryland
1996 / 2021
1,849
23,441
—
1,849
23,441
25,290
( 1,001 )
24,289
2022
Hopping Brook Road
Industrial
Massachusetts
2020 / 2020
3,030
—
27,512
3,030
27,512
30,542
( 3,236 )
27,306
2018
Chestnut Hill Avenue
Industrial
Massachusetts
1938 / 2021
2,202
24,568
36,965
2,202
61,533
63,735
( 6,039 )
57,696
2020
Worcester Road
Industrial
Massachusetts
1973 / 2022
4,063
16,462
—
4,063
16,462
20,525
( 532 )
19,993
2022
Canal Street/7 North Bridge Street
Industrial
Massachusetts
1890 / 2021
694
2,831
40,035
694
42,866
43,560
( 6,594 )
36,966
2019
Palmer Road
Industrial
Massachusetts
1980 / 2018
1,059
11,717
6,977
1,059
18,694
19,753
( 2,550 )
17,203
2018
East Main Street
Industrial
Massachusetts
1991 / 2019
2,316
13,194
—
2,316
13,194
15,510
( 1,135 )
14,375
2020
Curran Highway
Industrial
Massachusetts
1978 / 2021
2,082
1,026
23,685
2,082
24,711
26,793
( 1,568 )
25,225
2021
Hoover Road
Industrial
Michigan
1940 / 2020 / 2021
1,237
17,791
64,484
1,237
82,275
83,512
( 7,934 )
75,578
2019
East Hazel Street
Industrial
Michigan
1929 / 2021
409
4,360
19,297
409
23,657
24,066
( 2,656 )
21,410
2019
Oliver Drive
Industrial
Michigan
1930 / 1972 / 2021
1,385
3,631
26,755
1,385
30,386
31,771
( 3,011 )
28,760
2020
Davis Highway (5)
Industrial
Michigan
1999 / (2)
1,907
13,647
42,105
1,907
55,752
57,659
—
57,659
2021
F-30
Table of Contents
Harvest Park
Industrial
Michigan
2018 / 2021
1,933
3,559
10,301
1,933
13,860
15,793
( 2,574 )
13,219
2018
Executive Drive
Industrial
Michigan
1960 / 2020
389
6,489
3,140
389
9,629
10,018
( 1,451 )
8,567
2019
77th Street Northeast
Industrial
Minnesota
2015 / 2017 / 2019
427
2,644
6,618
427
9,262
9,689
( 1,658 )
8,031
2017
Industrial Drive
Industrial
Missouri
2022
753
787
26,710
753
27,497
28,250
( 1,501 )
26,749
2021
East Cheyenne Avenue
Industrial
Nevada
1984 / 2020
1,088
2,768
5,771
1,088
8,539
9,627
( 1,313 )
8,314
2019
Munsonhurst Road
Industrial
New Jersey
1956 / 2022
4,987
30,421
19,637
4,987
50,058
55,045
( 2,499 )
52,546
2022
South Route 73
Industrial
New Jersey
1995 / 2020
702
4,857
29,511
702
34,368
35,070
( 4,626 )
30,444
2020
North West Blvd
Industrial
New Jersey
1962 / 2020
222
10,046
1,580
222
11,626
11,848
( 1,231 )
10,617
2020
Hudson Crossing Drive
Industrial
New York
2016 / (2)
7,600
22,475
93,670
7,600
116,145
123,745
( 7,467 )
116,278
2016
County Route 117
Industrial
New York
1970 / (2)
1,593
3,157
72,008
1,593
75,165
76,758
( 4,220 )
72,538
2017
98th Ave South
Industrial
North Dakota
2018 / 2020
191
9,743
2,272
191
12,015
12,206
( 1,602 )
10,604
2019
Hunts Landing Road
Industrial
Ohio
2019 / 2019
712
—
19,309
712
19,309
20,021
( 2,149 )
17,872
2019
Jason Street
Industrial
Ohio
1937 / 2020
239
2,688
29,250
239
31,938
32,177
( 3,259 )
28,918
2020
Springs Way
Industrial
Ohio
2018 / 2020
235
10,377
2,335
235
12,712
12,947
( 1,457 )
11,490
2020
East Tallmadge Ave.
Industrial
Ohio
1954 / 1986 / 2020
22
1,014
2,501
22
3,515
3,537
( 612 )
2,925
2019
Boltonfield Street
Industrial
Ohio
2023 / (2)
1,253
18,876
21,990
1,253
40,866
42,119
( 692 )
41,427
2023
Scott Technology Park
Industrial
Pennsylvania
2020 / 2020
954
—
27,070
954
27,070
28,024
( 2,413 )
25,611
2019
New Beaver Avenue
Industrial
Pennsylvania
1976 / 2021
6,979
34,781
25,986
6,979
60,767
67,746
( 4,838 )
62,908
2021
East Market Street
Industrial
Pennsylvania
1927 / 2017
1,435
19,098
74,306
1,435
93,404
94,839
( 10,239 )
84,600
2019
Wayne Avenue
Industrial
Pennsylvania
1980 / (2)
1,228
13,080
47,359
1,228
60,439
61,667
( 6,005 )
55,662
2019
Horton Drive
Industrial
Pennsylvania
1988 / 2020
1,353
11,854
29,745
1,353
41,599
42,952
( 4,353 )
38,599
2019
Industrial Street
Industrial
Pennsylvania
1930 / 2020
941
7,941
16,318
941
24,259
25,200
( 2,478 )
22,722
2020
Rosanna Avenue
Industrial
Pennsylvania
1959 / 2020
3,540
5,603
36,671
3,540
42,274
45,814
( 5,247 )
40,567
2018
Susquehanna Street
Industrial
Pennsylvania
1968 / 2017
1,318
13,708
—
1,318
13,708
15,026
( 327 )
14,699
2023
FM 969
Industrial
Texas
(2)
—
11,157
3,682
—
14,839
14,839
( 604 )
14,235
2022
Decatur Street
Industrial
Virginia
2019 / 2020
231
11,582
7,936
231
19,518
19,749
( 3,233 )
16,516
2020
Lathrop Industrial Drive SW
Industrial
Washington
1997 / 2015
1,826
15,684
—
1,826
15,684
17,510
( 1,504 )
16,006
2020
East Glendale Avenue
Retail
Arizona
2019 / 2019
1,216
811
501
1,216
1,312
2,528
( 230 )
2,298
2019
Dahlia Street
Retail
Colorado
2019 / 2019
179
2,132
—
179
2,132
2,311
( 207 )
2,104
2020
East Colfax Avenue
Retail
Colorado
1998 / 2020
244
307
916
244
1,223
1,467
( 73 )
1,394
2021
North 2nd Street
Retail
Colorado
1973 / 2020
140
258
810
140
1,068
1,208
( 60 )
1,148
2021
West Railroad Avenue
Retail
Colorado
1977 / 2020
149
618
168
149
786
935
( 62 )
873
2021
Southgate Pl
Retail
Colorado
1998 / 2019
367
645
54
367
699
1,066
( 76 )
990
2020
Wewatta Street
Retail
Colorado
2015 / 2018
4,036
2,417
—
4,036
2,417
6,453
( 129 )
6,324
2021
Southgate Place
Retail
Colorado
2018 / 2018
942
3,314
—
942
3,314
4,256
( 194 )
4,062
2021
South Peoria Court
Retail
Colorado
1979 / 2016
938
2,770
—
938
2,770
3,708
( 161 )
3,547
2021
Highway 6 & 24
Retail
Colorado
1960 / 2019
892
1,996
—
892
1,996
2,888
( 116 )
2,772
2021
North College Avenue
Retail
Colorado
1952 / 2017
527
2,952
—
527
2,952
3,479
( 156 )
3,323
2021
East Quincy Avenue
Retail
Colorado
2018 / 2018
659
2,493
—
659
2,493
3,152
( 139 )
3,013
2021
East Montview Boulevard
Retail
Colorado
1952 / 2019
256
1,490
—
256
1,490
1,746
( 80 )
1,666
2021
South Federal Blvd
Retail
Colorado
1980 / 2017
193
1,361
—
193
1,361
1,554
( 71 )
1,483
2021
Santa Fe Trail
Retail
Colorado
1948 / 2000
232
1,110
—
232
1,110
1,342
( 64 )
1,278
2021
Water Street
Retail
Colorado
1930 / 2013
319
945
—
319
945
1,264
( 56 )
1,208
2021
Gregory Street
Retail
Colorado
1875 / 2014
101
1,058
—
101
1,058
1,159
( 54 )
1,105
2021
West 20th Avenue
Retail
Colorado
1970 / 2014
289
666
—
289
666
955
( 38 )
917
2021
South Federal Blvd.
Retail
Colorado
1941 / 2018
461
319
—
461
319
780
( 20 )
760
2021
West 6th Street
Retail
Colorado
2019 / 2019
60
272
—
60
272
332
( 18 )
314
2021
Elm Avenue
Retail
Colorado
1962 / 2020
21
311
—
21
311
332
( 22 )
310
2021
Bent Avenue North
Retail
Colorado
2019 / 2019
49
284
—
49
284
333
( 18 )
315
2021
Coolidge Rd
Retail
Michigan
2019 / 2019
1,635
—
1,727
1,635
1,727
3,362
( 224 )
3,138
2019
South Cedar Street
Retail
Michigan
1957 / 2019
282
1,951
—
282
1,951
2,233
( 308 )
1,925
2019
West Pierson Road
Retail
Michigan
1975 / 2019
122
2,065
—
122
2,065
2,187
( 326 )
1,861
2019
Wilder Road
Retail
Michigan
1988 / 2019
49
1,696
—
49
1,696
1,745
( 267 )
1,478
2019
East Front Street
Retail
Michigan
1992 / 2019
449
827
—
449
827
1,276
( 130 )
1,146
2019
South Mason Drive
Retail
Michigan
1970 / 2019
25
973
—
25
973
998
( 153 )
845
2019
N Delsea Dr
Retail
New Jersey
1974 / 2020
244
1,928
—
244
1,928
2,172
( 167 )
2,005
2020
24th Street East
Retail
North Dakota
2019 / 2019
348
1,368
—
348
1,368
1,716
( 83 )
1,633
2021
Highway 2 East
Retail
North Dakota
1976 / 2019
120
1,225
—
120
1,225
1,345
( 78 )
1,267
2021
F-31
Table of Contents
Main Street
Retail
Pennsylvania
1980 / 2019
57
840
—
57
840
897
( 43 )
854
2021
South 17th Street
Retail
Pennsylvania
2021 / 2021
553
2,000
—
553
2,000
2,553
( 90 )
2,463
2022
Esperanza Street
Industrial/Retail
California
1926 / 1976
1,713
11,307
979
1,713
12,286
13,999
( 1,346 )
12,653
2019
Grape Street
Industrial/Retail
Colorado
1982 / 2018
1,380
5,786
—
1,380
5,786
7,166
( 308 )
6,858
2021
US 50 Business and Baxter Road
Industrial/Retail
Colorado
1929 / 2019
119
1,652
—
119
1,652
1,771
( 106 )
1,665
2021
South Fox Street
Industrial/Retail
Colorado
1965 / 2014
297
829
—
297
829
1,126
( 44 )
1,082
2021
West Street
Industrial/Retail
Massachusetts
1880 / 2021
650
7,119
19,050
650
26,169
26,819
( 2,419 )
24,400
2020
Mozzone Boulevard
Industrial/Retail
Massachusetts
1975 / 2019
1,626
38,406
—
1,626
38,406
40,032
( 1,717 )
38,315
2022
Stephenson Highway
Industrial/Retail
Michigan
2021 / 2021
6,211
—
22,304
6,211
22,304
28,515
( 1,741 )
26,774
2020
Hoover Road
Industrial/Retail
Michigan
1951 / 2021
700
9,557
6,984
700
16,541
17,241
( 1,276 )
15,965
2021
Leah Avenue (5)
Industrial/Retail
Texas
(2)
2,222
1,195
4,471
2,222
5,666
7,888
—
7,888
2021
Total
$
142,524
$
891,551
$
1,334,440
$
142,524
$
2,225,991
$
2,368,515
$
( 202,692 )
$
2,165,823
(1) “Industrial” reflects facilities utilized or expected to be utilized for regulated cannabis cultivation, processing and/or distribution activities, which can consist of industrial and/or greenhouse space.
(2) As of December 31, 2023, all or a portion of the property was under development or redevelopment.
(3) These four properties were sold in March 2023 but the transaction did not qualify for recognition as a completed sale under GAAP. As such, the properties remain on the consolidated balance sheet. Refer to Note 6 “Investments in Real Estate” for more information.
(4) As of December 31, 2023, we were evaluating alternative non-cannabis uses for the property, due in part to changes in the zoning of the property that no longer allow for regulated cannabis cultivation and processing.
(5) As of December 31, 2023, these properties were vacant and excluded from our operating portfolio.
(6) Building and improvements balance includes Construction in progress.
As of December 31, 2023, the aggregate gross cost of the properties included above for federal income tax purposes was approximately $ 2.4 billion, which excludes the four properties that were sold in March 2023 that did not qualify for recognition as a completed sale under GAAP but is recognized as a sale for tax purposes.
A reconciliation of historical cost and related accumulated depreciation is as follows (in thousands):
Years Ended December 31,
2023
2022
2021
Investment in real estate, at cost:
Balance at beginning of year
$
2,204,687
$
1,722,104
$
1,060,239
Purchases of investments in real estate
35,155
149,317
277,717
Additions and improvements, net
128,673
355,633
384,148
Sale of real estate investments
—
( 22,367 )
—
Balance at end of year
$
2,368,515
$
2,204,687
$
1,722,104
Accumulated Depreciation:
Balance at beginning of year
$
( 138,405 )
$
( 81,938 )
$
( 40,195 )
Depreciation expense, net
( 64,287 )
( 58,935 )
( 41,743 )
Sale of real estate investments
—
2,468
—
Balance at end of year
$
( 202,692 )
$
( 138,405 )
$
( 81,938 )
F-32
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.