What changed in this filing

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Item 1. Financial Statements

2024-05-09 compared with 2023-11-02 · 185 added, 293 removed, 409 unchanged (54% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

September 30,

Real estate, at cost:

22 unchanged sentences

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

9.00 % Series A cumulative redeemable preferred stock, $ 15,000 liquidation preference ($ 25.00 per share), 600,000 shares issued and outstanding at September 30, 2023 and December 31, 2022

9.00 % Series A cumulative redeemable preferred stock, $ 15,000 liquidation preference ($ 25.00 per share), 600,000 shares issued and outstanding at March 31, 2024 and December 31, 2023

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

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

28,328,647 and 28,140,891 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

Additional paid-in capital

7 unchanged sentences

For the Three Months Ended

For the Nine Months Ended

September 30,

Rental (including tenant reimbursements)

5 unchanged sentences

Income from operations

Interest and other income

Interest income

Interest expense

8 unchanged sentences

(In thousands, except share amounts)

Three Months Ended September 30, 2023

Three Months Ended September 30, 2022

Stockholders’

Three Months Ended March 31, 2024

Stockholders’

Balances at beginning of period

Forfeitures of unvested restricted stock, net of issuance

Issuance of unvested restricted stock, net of forfeitures

Exchange of Exchangeable Senior Notes

Payment of common stock offering costs

Net proceeds from sale of common stock

Preferred stock dividends

2 unchanged sentences

Balances at end of period

Nine Months Ended September 30, 2023

Nine Months Ended September 30, 2022

Stockholders’

Three Months Ended March 31, 2023

Stockholders’

Balances at beginning of period

Adjustment to opening balance upon adoption of ASU 2020-06 (Note 2)

Issuance of unvested restricted stock, net of forfeitures

Exchange of Exchangeable Senior Notes

Net proceeds from sale of common stock

Preferred stock dividends

6 unchanged sentences

(In thousands)

For the Nine Months Ended

September 30,

For the Three Months Ended

Cash flows from operating activities

Adjustments to reconcile net income to net cash provided by operating activities

Adjustments to reconcile net income to net cash provided by (used in) operating activities

Depreciation and amortization

13 unchanged sentences

Funding of construction loan and other investments

Deposits in escrow for acquisitions

Purchases of short-term investments

3 unchanged sentences

Issuance of common stock, net of offering costs

Principal payment on Exchangeable Senior Notes

Payment of deferred financing costs

Dividends paid to common stockholders

12 unchanged sentences

Exchange of Exchangeable Senior Notes for common stock

Operating lease liability for obtaining right of use asset

See accompanying notes to the condensed consolidated financial statements.

1 unchanged sentence

Notes to the Condensed Consolidated Financial Statements

September 30, 2023

March 31, 2024

As used herein, the terms “we”, “us”, “our” or the “Company” refer to Innovative Industrial Properties, Inc., a Maryland corporation, and any of our subsidiaries, including IIP Operating Partnership, LP, a Delaware limited partnership (our “Operating Partnership”).

5 unchanged sentences

We are the sole general partner of our Operating Partnership and own, directly or through subsidiaries, 100 % of the limited partnership interests in our Operating Partnership.

Summary of Significant Accounting Policies and Procedures

Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements

Basis of Presentation.

5 unchanged sentences

This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2024.

Reclassification .

We have combined $ 705.3 million of “Tenant improvements” as of December 31, 2022, which represented building improvements in which we are considered to be the accounting owner, with “Building and improvements” in our consolidated balance sheets to conform to the current period presentation as of September 30, 2023.

There was no change to “Total real estate, at cost”.

Federal Income Taxes.

7 unchanged sentences

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.

The most significant estimates and assumptions made include determination of lease accounting and fair value of acquisition of real estate properties.

Reportable Segment.

15 unchanged sentences

The amount recorded for one above-market operating lease is included in other assets, net on our condensed consolidated balance sheets and is amortized on a straight-line basis as a reduction of rental revenues over the remaining term of the applicable lease.

Certain acquisitions of real estate did not satisfy the requirements for sale-leaseback accounting and therefore as of both March 31, 2024 and December 31, 2023, acquisitions of $ 20.0 million have been recognized as notes receivable and are included in other assets, net on our condensed consolidated balance sheets.

Sale of Real Estate.

When a real estate asset is sold, we evaluate the provisions of ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”) to determine whether the asset is within the scope of ASC 610-20, including an evaluation of whether the asset being sold is a nonfinancial asset and whether the buyer has gained control of an asset within the scope of ASC 610-20.

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.

3 unchanged sentences

Cost Capitalization and Depreciation.

We capitalize costs associated with development and redevelopment activities and improvements when we are considered to be the accounting owner of the resulting assets.

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.

1 unchanged sentence

Typically, such improvements include, but are not limited to, ground up development, and enhanced HVAC, plumbing, electrical and other building systems.

Amounts capitalized are depreciated over estimated useful lives determined by management.

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

For the three months ended March 31, 2024 and 2023, we recognized depreciation expense of $ 16.9 million and $ 16.5 million, respectively.

Depreciation expense relating to our real estate held for investment is included in depreciation and amortization expense in our condensed consolidated statements of income.

We depreciate office equipment and furniture and fixtures over estimated useful lives ranging from three to seven years .

We depreciate the leasehold improvements at our corporate office over the shorter of the estimated useful lives or the remaining lease term.

We depreciate office equipment and 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 condensed consolidated statements of income.

6 unchanged sentences

When existing properties are determined to be redevelopment properties, the net carrying value of the buildings and improvements are transferred to construction in progress while the redevelopment activities are in process.

During the nine months ended September 30, 2023, we reclassified the net carrying value of the buildings and improvements totaling approximately $ 51.2 million to construction in progress relating to an existing property that was placed into redevelopment.

Costs capitalized to construction in progress related to redevelopment properties are transferred to buildings and improvements at historical cost of the properties as the redevelopment project or phases of projects are placed in service.

8 unchanged sentences

We may adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives.

No impairment losses were recognized during the nine months ended September 30, 2023 and 2022.

No impairment losses were recognized during the three months ended March 31, 2024 and 2023.

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.

We recognize revenue for each of the leases at our properties that are classified as operating leases 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.

Additionally, for operating leases, 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 incurred and reimbursed by the tenants.

Contractually obligated real estate taxes that are paid directly by the tenant to the tax authorities are not reflected in our condensed consolidated financial statements.

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

For the nine months ended September 30, 2023, rental revenue recognized included the application of approximately $ 3.1 million of security deposits applied for rent with two tenants who were in default under their respective lease agreements and approximately $ 4.9 million of security deposits for rent with three tenants in connection with lease amendments.

Construction Loan.

7 unchanged sentences

and (5) the provision of additional collateral from the borrower for the loan.

Interest on the loan continued to accrue through March 31, 2023, with monthly payment of interest having commenced April 1, 2023.

As of September 30, 2023, we had funded approximately $ 21.6 million of the $ 23.0 million total commitment.

Interest on the loan continued to accrue through March 31, 2023, with monthly payment of interest contractual required commencing April 1, 2023.

In December 2023, we further amended the 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 both March 31, 2024 and December 31, 2023, we had funded $ 22.0 million of the $ 23.0 million total commitment.

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.

We consider all highly-liquid investments with original maturities of 90 days 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 90 days.

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 consist of obligations of the U.S.

government and certificates of deposit with an original maturity at the time of purchase of greater than three months.

Investments are classified as held-to-maturity and stated at amortized cost.

Exchangeable Notes.

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

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models, and convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature, will no longer be allocated between debt and equity components.

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

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

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 90 days.

Investments in obligations of the U.S.

government are classified as held-to-maturity and stated at amortized cost.

Investments in certificates of deposit are classified as held-to-maturity and stated at cost.

Deferred Financing Costs.

The deferred financing costs that are included as a reduction in the net book value of the related liability on our condensed consolidated balance sheets reflect issuance and other costs related to our debt obligations.

The deferred financing costs relating to our Notes due 2026 are included as a reduction in the net book value of the related liability on our condensed consolidated balance sheet.

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 in our condensed 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.

5 unchanged sentences

Lease Accounting.

We elected the practical expedient not to separate certain non-lease components from the lease component if the timing and pattern of transfer are the same for the non-lease component and associated lease component, and the lease component would be classified as an operating lease if accounted for separately.

We 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.

The lease liability was initially measured based on the present value of the future lease payments discounted using the estimated incremental borrowing rate of 7.25 %, which was the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments.

In November 2021, we amended the lease to extend the term from April 2025 to January 2027 in connection with an expansion of the leased space which did not commence until February 2022.

As a result of the lease amendment, we re-measured the lease liability relating to the existing lease space and measured the lease liability to the expansion space based on the present value of the respective future lease payments (excluding the extension option that we are not reasonably certain to exercise), discounted using the estimated incremental borrowing rate of 5.5 %, which was the interest rate at that time that we estimate we would have had to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments.

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 ends in January 2027 and contains annual escalations.

We measured the lease liability based on the present value of the future lease payments (excluding the extension option that we are not reasonable certain to exercise), discounted using the estimated incremental borrowing rates of 7.25 % and 5.5 %, which were the interest rates that we estimated we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments at initial commencement in December 2019 and upon an amendment in November 2021, respectively.

Subsequently, the lease liability is accreted by applying a discount rate established at the lease commencement date to the lease liability balance as of the beginning of the period and is reduced by the payments made during the period.

2 unchanged sentences

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

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

For the nine months ended September 30, 2023 and 2022, amounts paid and classified as operating activities in our condensed consolidated statements of cash flows for the office lease were approximately $ 372,000 and $ 282,000 , respectively.

In each of the three months ended March 31, 2024 and 2023, we recognized office lease expense of $ 0.1 million, which is included in general and administrative expenses in our condensed consolidated statements of income.

In each of the three months ended March 31, 2024 and 2023, amounts paid and classified as operating activities in our condensed consolidated statements of cash flows for the office lease were $ 0.1 million.

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.

5 unchanged sentences

The lease accounting guidance requires accounting for a transaction as a financing in a sale leaseback when the seller-lessee is provided an option to purchase the property from the landlord at the tenant’s option.

Substantially all of our leases continue to be classified as operating leases and we continue to record revenue for each of our properties on a cash basis.

Our tenant reimbursable revenue and property expenses continue to be presented on a gross basis as rental revenues and as property expenses, respectively, on our condensed consolidated statements of income.

Property taxes paid directly by the lessee to a third party continue to be excluded from our condensed consolidated financial statements.

Substantially all of our leases are classified as operating leases.

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.

In January 2024, the lease modifications for two of our leases to extend the initial term of each lease changed the lease classification from operating lease to sales-type lease that did not satisfy all the criteria for recognition as a completed sale.

Accordingly, we have not derecognized the underlying assets and all lease payments received, as well as any future lease payments, will be recognized as a deposit liability and will be included in other liabilities on our condensed consolidated balance sheet until certain criteria are met.

As of March 31, 2024, we have received lease payments of $ 1.5 million that have been included in other liabilities on our condensed consolidated balance sheet.

The underlying assets’ land and building and improvements had a gross carrying value of $ 4.1 million and $ 28.9 million, respectively, and accumulated depreciation of $ 2.8 million as of March 31, 2024.

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 Financial Accounting Standards Board issued Accounting Standards Update 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures (“ASU 2023-07”).

The amendments in ASU 2023-07 improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, measures 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.

ASU 2023-07 also requires a public entity that has a single reportable segment to provide all the disclosures required by the amendments in ASU 2023-07 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 condensed consolidated financial statements and related disclosures .

Concentration of Credit Risk .

As of September 30, 2023, we owned 108 properties located in 19 states and leased to 29 tenants.

As of March 31, 2024, we owned 108 properties located in 19 states and leased to 30 tenants (excluding three non-cannabis tenants at two of our properties).

The ability of any of our tenants to honor the terms of their leases is dependent upon the economic, regulatory, competition, natural and social factors affecting the community in which that tenant operates.

The following table sets forth the five tenants in our portfolio that represented the largest percentage of our total rental revenues for the three and nine months ended September 30, 2023 and 2022, including tenant reimbursements:

The following table sets forth the five tenants in our portfolio that represented the largest percentage of our total rental revenues for the three months ended March 31, 2024 and 2023, including tenant reimbursements:

For the Three Months Ended

September 30, 2023

March 31, 2024

Percentage of

PharmaCann Inc.

("PharmaCann")

Ascend Wellness Holdings, Inc.

("Ascend")

Green Thumb Industries, Inc.

("GTI")

("Green Thumb")

Curaleaf Holdings, Inc.

("Curaleaf")

Trulieve Cannabis Corp.

("Trulieve")

For the Nine Months Ended

September 30, 2023

Percentage of

SH Parent, Inc.

("Parallel") (1)

For the Three Months Ended

September 30, 2022

Percentage of

For the Nine Months Ended

September 30, 2022

March 31, 2023

Percentage of

Kings Garden Inc.

("Kings Garden") (2)

(1) Commencing in November 2022, Parallel defaulted on its obligations to pay rent at one of our Pennsylvania properties .

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

See Note 11 “Commitments and Contingencies — Litigation” to our condensed consolidated financial statements for more information.

Excluding security deposits applied for payment of rent for Parallel at one property in Pennsylvania and one property in Texas of approximately $ 1.8 million and $ 395,000 , respectively, Parallel would have represented 6 % of our total rental revenues for the nine months ended September 30, 2023.

(2) In July 2022, Kings Garden defaulted on its obligations to pay rent at all of the properties it leases with us, and pursuant to a confidential, conditional settlement agreement executed on September 11, 2022 between us and Kings Garden, we terminated the leases for two properties and regained possession of those properties, which continued to be in development or redevelopment as of September 30, 2023.

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

See Note 11 “Commitments and Contingencies — Litigation” to our condensed consolidated financial statements for more information.

SH Parent, Inc.

("Parallel") (1)

(1) We regained possession of two properties previously leased to Parallel in Texas and Pennsylvania in March and November 2023, respectively.

In each of the tables above, these leases include leases with affiliates of each entity, for which the entity has provided a corporate guaranty.

As of September 30, 2023, our largest property was located in New York and accounted for approximately 5.4 % of our net real estate held for investment.

No other properties accounted for more than 5 % of our net real estate held for investment as of September 30, 2023.

As of December 31, 2022, none of our properties individually represented more than 5 % of our net real estate held for investment.

As of March 31, 2024 and December 31, 2023, our largest property was located in New York and accounted for 5.5 % and 5.4 %, respectively, 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 March 31, 2024 and December 31, 2023.

We have deposited cash with financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $ 250,000 .

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

As of March 31, 2024, we had cash accounts in excess of FDIC insured limits.

We have not experienced any losses in such accounts.

In January 2023, we terminated the previously existing “at-the-market” offering program and entered into new equity distribution agreements with four sales agents, pursuant to which we may offer and sell from time to time through an “at-the-market” offering program (the “ATM Program”) up to $ 500.0 million in shares of our common stock.

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

During the nine months ended September 30, 2023, we issued 32,200 shares of our common stock upon exchange by holders of $ 2.0 million of outstanding principal amount of our Exchangeable Senior Notes.

As of March 31, 2024, the Company was authorized to issue up to 50,000,000 shares of common stock, par value $ 0.001 per share, and there were 28,328,647 shares of common stock issued and outstanding.

In January 2023, we entered into separate 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 three months ended March 31, 2024, we sold 123,224 shares of our common stock pursuant to the ATM Program for net proceeds of $ 11.8 million.

No shares of common stock were issued pursuant to the ATM Program during the three months ended March 31, 2023.

During the three months ended March 31, 2024, we issued 28,408 shares of our common stock related to the exchange premium upon exchange by holders of $ 4.3 million of outstanding principal amount of our 3.75 % Exchangeable Senior Notes due 2024 (the “Exchangeable Senior Notes”).

During the three months ended March 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.

Preferred Stock

As of September 30, 2023, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value $ 0.001 per share, and there were 600,000 shares issued and outstanding of 9.00 % Series A Cumulative Redeemable Preferred Stock, $ 0.001 par value per share (the “Series A Preferred Stock”).

As of March 31, 2024, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value $ 0.001 per share, and there were 600,000 shares issued and outstanding of 9.00 % Series A Cumulative Redeemable Preferred Stock, $ 0.001 par value per share (the “Series A Preferred Stock”).

The Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $ 25.00 per share, plus all accrued and unpaid dividends on such Series A Preferred Stock up to, but excluding the redemption date.

Holders of the Series A Preferred Stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in certain other circumstances.

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

The following table describes the dividends declared by the Company during the three months ended March 31, 2024:

Declaration Date

9 unchanged sentences

April 15, 2024

June 15, 2023

April 1, 2023 to June 30, 2023

July 14, 2023

June 15, 2023

Series A preferred stock

April 15, 2023 to July 14, 2023

July 14, 2023

September 15, 2023

July 1, 2023 to September 30, 2023

October 13, 2023

September 15, 2023

Series A preferred stock

July 15, 2023 to October 14, 2023

October 13, 2023

Investments in Real Estate

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

Susquehanna Street

February 15, 2023

Boltonfield Street

March 3, 2023

(1) Includes expected rentable square feet at completion of construction of certain properties.

(2) The tenant is expected to complete improvements at the property, for which we agreed to provide funding of up to $ 21.9 million.

(3) Approximately $ 2.6 million was allocated to land and approximately $ 32.6 million was allocated to building and improvements.

Acquired In-Place Lease Intangible Assets

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

September 30, 2023

In-place lease intangible assets and related accumulated amortization as of March 31, 2024 and December 31, 2023 is as follows (in thousands):

March 31, 2024

December 31, 2023

2 unchanged sentences

In-place lease intangible assets, net

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

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

2023 (three months ending December 31)

Amortization of in-place lease intangible assets classified in depreciation and amortization expense in our condensed consolidated statements of income was $ 0.2 million in each of the three months ended March 31, 2024 and 2023.

The weighted-average remaining amortization period of the acquired in-place leases was 9.5 years, and the estimated annual amortization of the value of the acquired in-place leases as of March 31, 2024 is as follows (in thousands):

2024 (nine months ending December 31)

Above-Market Lease

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

September 30, 2023

The above-market lease and related accumulated amortization included in other assets, net on our condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023 is as follows (in thousands):

March 31, 2024

December 31, 2023

2 unchanged sentences

Above-market lease, net

The above-market lease is amortized on a straight-line basis as a reduction to rental revenues over the remaining lease term of approximately 9.5 years.

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

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

Additional Improvement Allowances

In February 2023, we amended our lease with a subsidiary of Ascend at one of our New Jersey properties, increasing the improvement allowance under the lease by $ 15.0 million to a total of approximately $ 19.6 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

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

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

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

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

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

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

The above-market lease is amortized on a straight-line basis as a reduction to rental revenues over the remaining lease term of 9.0 years.

In each of the three months ended March 31, 2024 and 2023, the amortization of the above-market lease was $ 23,000 .

Lease Amendments

In January 2023 , we entered into lease amendments with Holistic Industries Inc.

(“Holistic”) at our properties located in California, Maryland, Massachusetts, Michigan and Pennsylvania, which (1) included cross-default provisions applicable to each lease;

(2) extended the term of each lease;

and (3) provided that 100 % of the base rent shall be applied from the security deposits held by us for (a) the nine months ending September 30, 2023 with respect to the Michigan property and (b) the eight months ending September 30, 2023 with respect to the California property, with pro rata monthly payback of the security deposits over the twelve-month period starting January 2024.

In January 2023, we executed a lease amendment with Calyx Peak, Inc.

at our Missouri property, which (1) extended the term of the lease;

and (2) provided for 100 % base rent deferral through March 31, 2023, with pro rata monthly payback of the deferred rent over the twelve-month period starting April 2023.

In March 2023, we executed a lease amendment with Temescal Wellness of Massachusetts, LLC (“Temescal”) at our Massachusetts property, which (1) provided for temporary reduced base rent from April 2023 through January 2024 to be partially

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.

In June 2023, we executed a new long-term lease with a tenant at our property located at 68860 Perez Road in Cathedral City, California that was previously leased to Kings Garden, which is under construction as of September 30, 2023.

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 being 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 commitment 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.

In January 2024, we executed a new lease with a tenant at one of our retail properties in Michigan.

In March 2024, we executed a new lease for the entire property located at 63795 19th Avenue in Palm Springs, California, with the commencement date under the lease conditioned upon, among other things, the tenant’s receipt of approvals to conduct cannabis operations by the requisite state and local authorities .

Capitalized Costs

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

During the three months ended March 31, 2024, we capitalized costs of $ 17.5 million and funded $ 16.5 million relating to improvements and construction activities at our properties.

Property Disposition

In March 2023, we sold the portfolio of four properties in California previously leased to affiliates of Medical Investor Holdings, LLC (“Vertical”) for $ 16.2 million (excluding transaction costs) and provided a secured loan for $ 16.1 million to the buyer of the properties.

The loan matures on February 29, 2028 with two options to extend the maturity for twelve months , conditional in each instance on the payment of an extension fee and at least $ 500,000 of the principal balance.

The loan 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 $ 0.5 million of the principal balance.

The loan is interest only and payments are payable monthly in advance.

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

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

In addition, as we have not met all of the held-for-sale criteria, land and building and improvements with a gross carrying value of approximately $ 3.4 million and approximately $ 13.9 million, respectively, and accumulated depreciation of approximately $ 1.5 million as of September 30, 2023, remain on the condensed consolidated balance sheet, and the buildings and improvements continue to be depreciated.

As of March 31, 2024, we have received interest payments of $ 1.9 million.

In addition, as we have not met all of the held-for-sale criteria, land and building and improvements with a gross carrying value of $ 3.4 million and $ 13.9 million, respectively, and accumulated depreciation of $ 1.7 million as of March 31, 2024, remain on the condensed consolidated balance sheet, and the buildings and improvements continue to be depreciated.

Future Contractual Minimum Rent

Future contractual minimum rent (including base rent and property management fees) under the operating leases as of September 30, 2023 for future periods is summarized as follows (in thousands):

Future contractual minimum rent (including base rent and property management fees) to be received on our leases as of March 31, 2024 for future periods is summarized as follows (in thousands):

Contractual Minimum Rent

2023 (three months ending December 31)

2024 (nine months ending December 31)

Future contractual minimum rent includes payments to be received on two sales-type leases, which will be recognized as a deposit liability and will be included in other liabilities on our condensed consolidated balance sheet until certain criteria are met (see Note 2 “Lease Accounting” for further details).

Exchangeable Senior Notes

As of September 30, 2023, our Operating Partnership had outstanding approximately $ 4.4 million principal amount of 3.75 % Exchangeable Senior Notes due 2024 (the “Exchangeable Senior Notes”).

The Exchangeable Senior Notes are senior unsecured obligations of our Operating Partnership, are fully and unconditionally guaranteed by us and our Operating Partnership’s subsidiaries and are exchangeable for cash, shares of our common stock, or a combination of cash and shares of our common stock, at our Operating Partnership’s option, at any time prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date.

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

share of our common stock.

The exchange rate and exchange price are subject to adjustment in certain circumstances.

The Exchangeable Senior Notes will pay interest semiannually at a rate of 3.75 % per annum and will mature on February 21, 2024, unless earlier exchanged or repurchased in accordance with their terms.

Our Operating Partnership will not have the right to redeem the Exchangeable Senior Notes prior to maturity, but may be required to repurchase the Exchangeable Senior Notes from holders under certain circumstances.

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

During the nine months ended September 30, 2023, we issued 32,200 shares of our common stock upon exchanges by holders of $ 2.0 million of outstanding principal amount of our Exchangeable Senior Notes.

For the nine months ended September 30, 2023, we recognized a gain on the exchange totaling approximately $ 22,000 , resulting from the difference between the fair value and carrying value of the debt as of the date of the exchange.

The issuance of the shares pursuant to the exchanges resulted in a net non-cash increase to our additional paid-in capital account of approximately $ 2.0 million for the nine months ended September 30, 2023.

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

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

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

During the three months ended March 31, 2024, we issued 28,408 shares of our common stock and paid $ 4.3 million in cash upon exchange by holders of $ 4.3 million principal amount of Exchangeable Senior Notes and paid off the remaining $ 0.1 million principal amount at maturity in February 2024, in accordance with terms of the indenture for the Exchangeable Senior Notes.

During the three months ended March 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 three months ended March 31, 2023, we recognized a gain on the exchange totaling $ 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 $ 2.0 million for the three months ended March 31, 2023.

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

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Amortization of issuance cost

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

September 30, 2023

March 31, 2024

December 31, 2023

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Carrying value

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

Accrued interest payable for the Exchangeable Senior Notes as of December 31, 2023 was $ 49,000 and was included in accounts payable and accrued expenses on our condensed consolidated balance sheets.

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.

In May 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 rank equally in right of payment with all of the Operating Partnership’s future senior unsecured indebtedness.

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 terms of the Notes due 2026 are governed by an indenture dated May 25, 2021, and 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 $ 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 Three Months Ended September 30,

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Amortization of issuance cost

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

September 30, 2023

March 31, 2024

December 31, 2023

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

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

Accrued interest payable for the Notes due 2026 as of September 30, 2023 and December 31, 2022 was approximately $ 6.2 million and $ 2.1 million, respectively, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.

The following table summarizes the principal payments on our outstanding indebtedness as of September 30, 2023 (in thousands):

2023 (three months ending December 31)

Management believes that it was in compliance with those covenants as of March 31, 2024.

Accrued interest payable for the Notes due 2026 as of March 31, 2024 and December 31, 2023 was $ 6.2 million and $ 2.1 million, respectively, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.

Revolving Credit Facility

In October 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, which matures on October 23, 2026.

The Loan Agreement was amended in February 2024 to provide $ 45.0 million in aggregate commitments for secured revolving loans (the “Revolving Credit Facility”), the availability of which is based on a borrowing base consisting of real properties owned by subsidiaries (the “Subsidiary Guarantors”) of the Operating Partnership that satisfy eligibility criteria set forth in the Loan Agreement.

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

Borrowings under the 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 March 31, 2024.

In connection with the Revolving Credit Facility, we recorded $ 0.7 million 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 three months ended March 31, 2024, we recognized $ 55,000 of non-cash interest expense related to the Revolving Credit Facility.

The following table summarizes the principal payments on our outstanding indebtedness as of March 31, 2024 (in thousands):

2024 (nine months ending December 31)

Net Income Per Share

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

Through September 30, 2023, all of the Company’s participating securities received dividends or dividend equivalents at an equal dividend rate per share or unit.

As a result, distributions to participating securities for the three and nine months ended September 30, 2023 and 2022 have been included in net income attributable to common stockholders to calculate net income per basic and diluted share.

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

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

For the three and nine months ended September 30, 2023 and 2022, the performance share units (“PSUs”) granted to certain employees were no t included in dilutive securities as the performance thresholds for vesting of the PSUs were not met as measured as of the respective dates (see Note 10 for further discussion of PSUs).

Through March 31, 2024, all of the Company’s participating securities received dividends or dividend equivalents at an equal dividend rate per share or unit.

As a result, distributions to participating securities for the three months ended March 31, 2024 and 2023 have been included in net income attributable to common stockholders to calculate net income per basic and diluted share.

The 38,079 and 102,210 shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis were dilutive for the three months ended March 31, 2024 and 2023, respectively, and were included in the computation of diluted earnings per share.

For the three months ended March 31, 2024 and 2023, the performance share units (“PSUs”) granted to certain employees were no t included in dilutive securities as the performance thresholds for vesting of the PSUs were not met as measured as of the respective dates (see Note 10 for further discussion of PSUs).

Computations of net income per basic and diluted share (in thousands, except share and per share data) were as follows:

For the Three Months Ended

For the Nine Months Ended

September 30,

Preferred stock dividends

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

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

At September 30, 2023

The following table presents the carrying value and approximate fair value of financial instruments at March 31, 2024 and December 31, 2023 (in thousands):

At March 31, 2024

At December 31, 2023

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Construction Loan (4)

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

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

(1) At March 31, 2024, investments consisting of short-term certificates of deposit with an original maturity at the time of purchase of greater than 90 days and less than one year are classified as held-to-maturity and stated at cost, which approximates fair value.

At December 31, 2023, investments consisting of short-term obligations of the U.S.

government with an original maturity at the time of purchase of greater than 90 days and less than one year are classified as held-to-maturity, stated at amortized cost and valued using Level 1 inputs.

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

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

government with an original maturity at the time of purchase of 90 days or less are classified as held-to-maturity, stated at amortized cost and valued using Level 1 inputs.

(3) The fair value is determined based upon Level 2 inputs as the Exchangeable Senior Notes and Notes due 2026 were trading in the private market.

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In the yield analysis, the Company considers the current contractual interest rate, the maturity and other terms of the loan relative to risk of the company and the specific loan.

At September 30, 2023 and December 31, 2022, the expected market yield used to determine fair value was 25 % .

Changes in market yields may change the

fair value of the construction loan.

At each of March 31, 2024 and December 31, 2023, the expected market yield used to determine fair value was 16.25 % .

Changes in market yields may change the fair value of the construction loan.

Generally, an increase in market yields may result in a decrease in the fair value of the construction loan.

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The 2016 Plan automatically terminates on the date which is ten years following the effective date of the 2016 Plan.

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

A summary of the restricted stock activity under the 2016 Plan and related information for the three months ended March 31, 2024 is included in the table below:

Grant Date Fair

2 unchanged sentences

Balance at March 31, 2024

Balance at June 30, 2023

Forfeited (1)

Balance at September 30, 2023

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

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

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

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

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

The remaining unrecognized compensation cost of $ 7.1 million for restricted stock awards is expected to be recognized over a weighted-average amortization period of 2.1 years as of March 31, 2024.

The fair value of restricted stock that vested during the three months ended March 31, 2024 was $ 2.1 million.

The following table summarizes our RSU activity for the three months ended March 31, 2024.

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

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Balance at March 31, 2024

Balance at June 30, 2023

Balance at September 30, 2023

The remaining unrecognized compensation cost of approximately $ 7.3 million for RSU awards is expected to be recognized over an amortization period of approximately 1.9 years as of September 30, 2023.

In January 2021 and 2022, we issued 70,795 and 102,641 “target” PSUs, respectively, to a select group of officers, which vest and are settled in shares of common stock based on the Company’s total stockholder return over a performance period of approximately three years from the grant date.

The remaining unrecognized compensation cost of $ 10.8 million for RSU awards is expected to be recognized over an amortization period of 2.2 years as of March 31, 2024.

Stock-based compensation for market-based PSU awards is based on the grant date fair value of the equity awards and is recognized over the applicable performance period.

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

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

As measured as of September 30, 2023, the performance thresholds for the vesting of the PSUs were not met for any of the applicable awards.

For the three months ended March 31, 2024 and 2023, we recognized stock-based compensation expense of $ 1.7 million and $ 2.7 million, respectively, relating to PSU awards.

As of March 31, 2024, the remaining unrecognized compensation cost of $ 5.0 million relating to PSU awards is expected to be recognized over the remaining performance period of 0.8 years.

The PSUs granted in January 2021 were forfeited in their entirety on December 31, 2023 pursuant to the terms of the agreements, as the PSUs failed to meet the performance threshold for vesting.

As measured as of March 31, 2024, the performance threshold for the vesting of the PSUs granted in January 2022 also was not met.

Commitments and Contingencies

Office Lease .

The future contractual lease payments for our office lease and the reconciliation to the office lease liability reflected in other liabilities in our condensed consolidated balance sheet as of September 30, 2023 is presented in the table below (in thousands):

2023 (three months ending December 31)

The future contractual lease payments for our office lease and the reconciliation to the office lease liability reflected in other liabilities in our condensed consolidated balance sheet as of March 31, 2024 is presented in the table below (in thousands):

2024 (nine months ending December 31)

Total future contractual lease payments

2 unchanged sentences

Improvement Allowances .

As of September 30, 2023, we had approximately $ 17.2 million of commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease.

As of March 31, 2024, we had $ 24.1 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 March 31, 2024, we had $ 6.8 million of commitments related to contracts with vendors for improvements at our properties.

Construction Loan.

As of September 30, 2023, we had approximately $ 1.4 million of commitments related to our construction loan for the development of a regulated cannabis cultivation and processing facility in California.

The developer is required to complete construction by December 31, 2023, subject to extension in certain circumstances.

As of March 31, 2024, 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.

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The case was named Michael V.

Malozzi, individually and on behalf of others similarly situated v.

Mallozzi, individually and on behalf of others similarly situated v.

Innovative Industrial Properties, Inc., Paul Smithers, Catherine Hastings and Andy Bui, Case No.

8 unchanged sentences

On December 1, 2022, defendants moved to dismiss the Amended Class Action Complaint.

on January 25, 2023, plaintiff responded to defendants’ motion to dismiss the Amended Class Action Complaint;

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

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

1 unchanged sentence

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

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

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;

and on March 1, 2024, defendants replied to plaintiff’s response.

It is possible that similar lawsuits may yet

be filed in the same or other courts that name the same or additional defendants.

We intend to defend the lawsuit vigorously.

However, at this time, we cannot predict the probable outcome of this action, and, accordingly, no amounts have been accrued in the Company’s condensed consolidated financial statements.

Derivative Action Lawsuit

Derivative Action Lawsuits

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.

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.

Paul Smithers, Catherine Hastings, Andy Bui, Alan Gold, Gary Kreitzer, Mary Curran, Scott Shoemaker, David Stecher, and Innovative Industrial Properties, Inc., Case Number 24-C-22-003312, 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.

2 unchanged sentences

On September 28, 2022, a second derivative action lawsuit was filed against the Company and certain of its officers and directors.

The case was named Karen Drover, derivatively on behalf of Innovative Industrial Properties, Inc.

The case was named Karen Draper, derivatively on behalf of Innovative Industrial Properties, Inc.

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.

5 unchanged sentences

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

Defendants in this

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

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

On June 5, 2023, a fourth derivative action lawsuit was filed against the Company and certain of its officers and directors.

5 unchanged sentences

Kreitzer, David Stecher, Scott Shoemaker, Mary Curran, and Innovative Industrial Properties, Inc., Case Number 1:23-cv-01513-GLR, and filed in the United States District Court for the District of Maryland.

The Company intends to vigorously defend each of these lawsuits.

However, at this time, the Company cannot predict the probable outcome of these actions, and, accordingly, no amounts have been accrued in the Company’s condensed consolidated financial statements.

On July 19, 2023, the United States Court for the District of Maryland consolidated Case Nos.

1:23-cv-00737-GLR and 1:23-cv-01513-GLR with case number 1:23-cv-00737-GLR as the lead case, and kept the stay in place.

Kings Garden Lawsuit

In July 2022, one of our tenants, Kings Garden Inc., defaulted on its obligations to pay base rent and property management fees under each of its six leases with our indirect, wholly owned subsidiary, IIP-CA 2 LP, and defaulted on its obligations to reimburse us for certain insurance premiums at the properties incurred by us that are payable by Kings Garden as operating expenses under such leases.

On July 25, 2022, IIP-CA 2 LP filed a lawsuit against Kings Garden.

The case was named IIP-CA 2 LP, a Delaware limited partnership v.

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

The lawsuit asserts claims for breach of contract, declaratory relief, and injunctive relief.

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

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

Section 1962(c)).

The amount related to these project costs reported in construction in progress as of September 30, 2023 and December 31, 2022 was approximately $ 28.9 million and $ 33.2 million, respectively.

On September 11, 2022, the parties to the lawsuit entered into a confidential, conditional settlement agreement pertaining to matters related to the lawsuit.

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

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

Although there is at least a reasonable possibility that a loss may have been incurred in connection with the default by Kings Garden and the related construction project related to these potential overpayments, as of September 30, 2023, we are unable to make such an estimate.

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

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

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

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

Although there is at least a reasonable possibility that a loss may have been incurred in connection with amounts paid by us and work performed by Orr Construction for that construction project, as of September 30, 2023, we are unable to make such an estimate.

On February 14, 2023, Kings Garden filed an Arbitration Demand related to the interpretation of the confidential, conditional settlement agreement between the parties that concerns certain terms governing (along with the relevant lease) the assignment of one of the Kings Garden leases.

The Company filed a Response to Kings Garden’s Arbitration Demand, Affirmative Defenses and Counter-Claim on March 1, 2023 (the “Counter-Claim”).

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

In July 2023, the Company filed a motion for leave to amend its Counter-Claims.

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

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

The offer of judgment included a mutual release.

Parallel Pennsylvania Litigation

On February 6, 2023, IIP-PA 8 LLC, as landlord and an indirect subsidiary of the Company, filed a lawsuit against Goodblend Pennsylvania LLC, as tenant, and Parallel, as guarantor, in the Court of Common Pleas of Allegheny County, Pennsylvania, regarding the lease and related guaranty for one of the Company’s properties located in Pennsylvania.

The lawsuit asserts claims for breach of contract by the tenant and guarantor and ejectment.

Goodblend Pennsylvania LLC and Parallel filed preliminary objections to the lawsuit on March 3, 2023.

IIP-PA 8 LLC filed its response to Goodblend Pennsylvania LLC’s and Parallel’s preliminary objections on March 23, 2023.

The Court issued an Order on June 13, 2023 denying Goodblend Pennsylvania LLC’s and Parallel’s preliminary objections and directing Goodblend Pennsylvania LLC and Parallel to file an answer to the complaint.

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

Parallel Texas Litigation

On February 11, 2023, a subsidiary of Parallel defaulted on its obligations to pay rent under the lease at one of our properties in Texas that is under development.

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

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

On March 13, 2023, IIP-TX 1 LLC filed a subsequent lawsuit against Surterra San Marcos, LLC, Parallel and Sunstream Opportunities LP (“SAF Entity 1”) in the District Court of Hays County, Texas, regarding the same lease, asserting claims against Surterra San Marcos, LLC, Parallel and SAF Entity 1 for breach of contract, tortious interference with contract, unjust enrichment, fraud and fraudulent inducement, intentional failure to disclose and misrepresentations and conversion, and also requested the granting of a temporary injunction and the appointment of a receiver over the license(s) pertaining to the property’s operations as a regulated cannabis facility.

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

Green Peak Michigan Litigation

On February 2, 2023, IIP-MI 1 LLC, as landlord and an indirect subsidiary of the Company, filed a lawsuit against Green Peak Industries, Inc.

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

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

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

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

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

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

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

The Company intends to vigorously defend each of these lawsuits.

However, at this time, the Company cannot predict the probable outcome of these actions, and, accordingly, no amounts have been accrued in the Company’s condensed consolidated financial statements.

The consolidated case remains stayed as Case Number 24-C-22-003312.

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

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Subsequent Events

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

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

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

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

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

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

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

In connection with the lease amendment, the tenant prepaid rent for the three month period commencing on November 1, 2023 and ending January 31, 2024.

In April 2024, we executed a new long-term lease with Lume Cannabis Co.

at our property located at 10070 Harvest Park in Dimondale, Michigan.

In May 2024, we executed a new long-term lease at our property located at 19533 McLane Street in Palm Springs, California.

The commencement date under each of these leases is conditioned upon, among other things, the tenant’s receipt of approvals to conduct cannabis operations by the requisite state and local authorities.

Lease Amendments

In April 2024, we amended our lease with a subsidiary of Battle Green Holdings LLC at one of our Ohio properties to provide an additional improvement allowance of $ 4.5 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property.

In April 2024, we amended the lease with a subsidiary of 4Front at one of our Illinois properties to provide an additional improvement allowance of $ 1.6 million, which also resulted in a corresponding adjustment to the base rent for the lease at the property and increased the annual base rent escalations for the remainder of the lease term.

Property Sale and Lease Termination

In May 2024, we sold our leased property in Los Angeles, California for $ 9.1 million (excluding closing costs) to a third-party buyer.

Concurrently with the sale, pursuant to a separate agreement previously executed between us and the tenant, the tenant paid us a lease termination fee of $ 3.9 million, and paid for the closing and other costs incurred by us in connection with the sale of the property.

Excluding our reimbursement for those closing and other costs, we received total consideration of $ 13.0 million in connection with the sale of the property and termination of the existing lease.

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

What changed 10-Q

Item 1. Financial Statements