What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-06 · 107 added, 92 removed, 330 unchanged (38% of the section changed)

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The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this report.

In addition, we discussed a number of material risks in our Annual Report on Form 10-K for the year ended December 31, 2023, and in Part II, Item 1A below.

In addition, we discussed a number of material risks in our Annual Report on Form 10-K for the year ended December 31, 2023, and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2024.

Those risks continue to be relevant to our performance and financial condition.

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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.

As of June 30, 2024, we had 22 full-time employees.

As of June 30, 2024, we owned 108 properties comprising 9.0 million square feet (including 722,000 rentable square feet under development/redevelopment) in 19 states.

As of June 30, 2024, we had invested $2.4 billion in the aggregate (consisting of purchase price and funding of draws for construction funding and improvements submitted by tenants, if any, but excluding transaction costs) and had committed an additional $61.9 million to fund draws to certain tenants and vendors for improvements at our properties.

Of the $61.9 million committed to fund draws to certain tenants and vendors for improvements at our properties, $7.2 million was incurred but not funded as of June 30, 2024.

Of these 108 properties, we include 104 properties in our operating portfolio, which were 95.6% leased as of June 30, 2024, with a weighted-average remaining lease term of 14.4 years.

We do not include in our operating portfolio the following properties (all of which were under development/redevelopment as of June 30, 2024, and together are expected to comprise 692,000 rentable square feet upon completion of development/redevelopment):

● Davis Highway in Windsor, Michigan (pre-leased);

As of September 30, 2024, we had 22 full-time employees.

As of September 30, 2024, we owned 108 properties comprising 9.0 million square feet (including 618,000 rentable square feet under development/redevelopment) in 19 states.

As of September 30, 2024, we had invested $2.4 billion in the aggregate (consisting of purchase price and funding of draws for construction funding and improvements submitted by tenants, if any, but excluding transaction costs) and had committed an additional $54.5 million to fund draws to certain tenants and vendors for improvements at our properties.

Of the $54.5 million committed to fund draws to certain tenants and vendors for improvements at our properties, $9.2 million was incurred but not funded as of September 30, 2024.

Of these 108 properties, we include 105 properties in our operating portfolio, which were 95.7% leased as of September 30, 2024, with a weighted-average remaining lease term of 14.0 years.

We do not include in our operating portfolio the following properties (all of which were under development/redevelopment as of September 30, 2024, and together are expected to comprise 491,000 rentable square feet upon completion of development/redevelopment):

● 63795 19th Avenue in Palm Springs, California (pre-leased);

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The potential impact of current economic challenges on the Company’s financial condition, results of operations, and cash flows is subject to change and continues to depend on the extent and duration of these risks and uncertainties.

See “—Results of Operations—Comparison of the Three and Nine Months Ended September 30, 2024 and 2023—Rental Revenues” for more information.

If these conditions persist or worsen, additional tenants may default on their obligations under our leases with them, and we may be unable to re-lease those properties on favorable terms or at all.

Market Dynamics in Regulated Cannabis State Programs

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Reduced Capital Availability for Tenants and the Company

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

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

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

In recent years, financial markets have been volatile, reflecting heightened geopolitical risks and material tightening of financial conditions, which have contributed to significant declines in capital availability for regulated cannabis operators.

As regulated cannabis operators also face significant debt maturities in the next few years, certain operators are expected to face challenges in refinancing or extending those debt maturities.

Capital raising activities by U.S.

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Significant Tenants and Concentrations of Risk

As of June 30, 2024, we owned 108 properties located in 19 states leased to 30 tenants (not including three non-cannabis tenants in two properties).

As of September 30, 2024, we owned 108 properties located in 19 states leased to 30 tenants (not including three non-cannabis tenants in two properties).

Many of our tenants are tenants at multiple properties.

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

At June 30, 2024, our largest property was located in New York and accounted for 5.5% of our net real estate held for investment.

No other properties accounted for more than 5% of our net real estate held for investment at June 30, 2024.

See Note 2 “Concentration of Credit Risk” in the notes to our condensed consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest percentage of our total rental revenues for the three and six months ended June 30, 2024.

At September 30, 2024, our largest property was located in New York and accounted for 5.5% of our net real estate held for investment.

No other properties accounted for more than 5% of our net real estate held for investment at September 30, 2024.

Competitive Environment

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Competition from others may diminish our opportunities to acquire a desired property on favorable terms or at all.

In addition, this

competition may put pressure on us to reduce the rental rates below those that we expect to charge for the properties that we acquire, which would adversely affect our financial results.

In addition, this competition may put pressure on us to reduce the rental rates below those that we expect to charge for the properties that we acquire, which would adversely affect our financial results.

Operating Expenses

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Investments in Real Estate

See Note 6 “Investment in Real Estate” in the notes to the condensed consolidated financial statements for information regarding our investments in real estate activity and property portfolio activity during the six months ended June 30, 2024.

Comparison of the Three and Six Months Ended June 30, 2024 and 2023

Comparison of the Three and Nine Months Ended September 30, 2024 and 2023

The following table sets forth the results of our operations (in thousands):

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Rental (including tenant reimbursements)

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Rental Revenues.

Rental revenues for the three months ended June 30, 2024 increased by $3.4 million, or 4%, to $79.3 million, compared to $75.9 million for the three months ended June 30, 2023.

The increase was primarily driven by the $3.9 million disposition-contingent lease termination fee that was received in connection with the sale of our property in Los Angeles, California (see Note 6 “Investments in Real Estate” to our condensed consolidated financial statements included in this report for more information), a $3.6 million increase to contractual rent and property management fees, which was primarily driven by contractual rent escalations, amendments to leases for additional improvement allowances at existing properties that resulted in adjustments to rent and new leases entered into since March 31, 2023.

The increase was partially offset by a $2.9 million decline in contractual rent and property management fees received during the three months ended June 30, 2024 related to properties that we took back possession of since March 2023 and a decline of $1.3 million in rent received but not recognized in rental revenues due to a re-classification of two sales-type leases starting January 1, 2024 (see Note 2 “Lease Accounting” to our condensed consolidated financial statements included in this report for more information).

Rental revenue received for the three months ended June 30, 2024 included the application of $0.6 million of security deposits for payment of rent, of which $0.5 million was replenished by a tenant in July 2024.

Rental revenue received for the three months ended June 30, 2023 included the application of $1.5 million of security deposits for payment of rent.

Rental revenues for the six months ended June 30, 2024 increased by $2.8 million, or 2%, to $154.2 million, compared to $151.4 million for the six months ended June 30, 2024.

The increase was primarily driven by the $3.9 million disposition-contingent lease termination fee that was received in connection with the sale of our property in Los Angeles, California, a $9.5 million increase to contractual rent and property management fees, which was primarily driven by contractual rent escalations, amendments to leases for additional improvement allowances at existing properties that resulted in adjustments to rent, new leases entered into since March 31, 2023 and a $0.6 million increase to tenant reimbursements, which was primarily due to higher property tax reimbursements collected during the period.

The increase was partially offset by a $8.6 million decline in contractual rent and property management fees received during the six months ended June 30, 2024 related to properties that we took back possession of since March 2023, and a

decline as a result of $2.6 million in rent received but not recognized in rental revenues due to the re-classification of two sales-type leases starting January 1, 2024 described above.

Rental revenue received for the six months ended June 30, 2024 included the application of $0.6 million of security deposits for payment of rent, of which $0.5 million was replenished by a tenant in July 2024.

Rental revenue received for the six months ended June 30, 2023 included the application of $5.7 million of security deposits for payment of rent.

While we have re-leased several properties taken back since March 2023, rent commencement on certain of those properties is contingent on the tenants obtaining the requisite approvals to operate, and temporary rent abatements in certain instances as tenants transition into the properties and commence operations.

As a result, we do not expect to recognize rental revenue from those properties until that has occurred.

Rental revenues for the three months ended September 30, 2024 declined by $1.2 million, or 2% to $76.1 million, compared to $77.3 million for the three months ended September 30, 2023.

The decline was primarily driven by a $3.0 million decline in contractual rent and property management fees received during the three months ended September 30, 2024 related to properties that we regained possession of or sold since June 2023;

a decline of $1.3 million due to rent received but not recognized in rental revenues resulting from the re-classifications of two sales-type leases starting January 1, 2024 (see Note 2 “Lease Accounting” to our condensed consolidated financial statements included in this report for more information);

and $1.3 million of contractually due rent and property management fees that were not collected during the three months ended September 30, 2024.

This decline was partially offset by a $4.6 million increase to contractual rent and property management fees, which was primarily driven by contractual rent escalations, amendments to leases for additional improvement allowances at existing properties that resulted in adjustments to rent, and new leases entered into since June 2023.

For the three months ended September 30, 2024, we applied $1.4 million of security deposits for payment of rent on properties leased to 4Front Ventures Corp.

(“4Front”) (four properties), TILT Holdings Inc.

(“TILT”) (one property), and Emerald Growth Holdings LLC (“Emerald Growth”) (one property).

We terminated our lease with Temescal Wellness of Massachusetts, LLC at our Massachusetts property and regained possession of the property on September 30, 2024.

For the three months ended September 30, 2023, we applied $2.2 million of security deposits for payment of rent.

Subsequent to September 30, 2024, we applied $0.9 million in security deposits for the properties leased to 4Front, TILT and Emerald Growth for the payment of rent owing in October 2024, and, including those security deposits applied, we collected $1.4 million of the contractually due rent and interest of $2.2 million for the month of October 2024 for 4Front, Emerald Growth, TILT and a secured loan for which we are the lender for a California property portfolio.

Rental revenues for the nine months ended September 30, 2024 increased by $1.5 million, or 1%, to $230.2 million, compared to $228.7 million for the nine months ended September 30, 2023.

The increase was primarily driven by a $15.8 million increase to contractual rent and property management fees due to contractual rent escalations, amendments to leases for additional improvement

allowances at existing properties that resulted in adjustments to rent, and new leases entered into since December 2022;

and a $3.9 million disposition-contingent lease termination fee that was received in connection with the sale of our property in Los Angeles, California.

The increase was partially offset by a $12.8 million decline in contractual rent and property management fees received during the nine months ended September 30, 2024 primarily related to properties that we regained possession of since December 2022;

a decline of $3.9 million due to rent received but not recognized in rental revenues resulting from the re-classifications of two sales-type leases starting January 1, 2024 (see Note 2 “Lease Accounting” to our condensed consolidated financial statements included in this report for more information);

and $1.6 million of contractually due rent and property management fees that were not collected.

For the nine months ended September 30, 2024 and 2023, we applied $2.0 million and $8.0 million of security deposits for payment of rent, respectively.

While we have re-leased several properties that we regained possession of since March 2023, rent commencement on certain of these properties is contingent on the tenants obtaining the requisite approvals to operate.

We have also granted temporary rent abatements in certain instances as tenants transition into the properties and commence operations.

As a result, we do not expect to recognize rental revenue from those properties until such events have occurred.

Other Revenues.

Other revenues for the three and six months ended June 30, 2024 and 2023 consisted of interest revenue related to leases for property acquisitions that did not satisfy the requirements for sale-leaseback accounting.

Other revenues for the three and nine months ended September 30, 2024 and 2023 consisted of interest revenue related to leases for property acquisitions that did not satisfy the requirements for sale-leaseback accounting.

Property Expenses.

Property expenses for the three months ended June 30, 2024 increased by $1.1 million to $6.9 million, compared to $5.8 million for the three months ended June 30, 2023.

Property expenses for the six months ended June 30, 2024 increased by $2.2 million to $13.6 million, compared to $11.4 million for the six months ended June 30, 2023.

The increase in both periods was due to additional investment in existing properties, which resulted in higher property tax that we paid for our properties, as well as higher property expenses related to properties that we have taken possession of but not yet leased.

Property expenses for the three months ended September 30, 2024 increased by $1.0 million to $7.3 million, compared to $6.3 million for the three months ended September 30, 2023.

Property expenses for the nine months ended September 30, 2024 increased by $3.2 million to $20.9 million, compared to $17.7 million for the nine months ended September 30, 2023.

The increase in both periods was primarily due to additional investment in existing properties, which resulted in higher property tax that we paid for our properties, as well as higher property expenses related to properties that we have regained possession of but not yet leased.

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

General and Administrative Expense .

General and administrative expense for the three months ended June 30, 2024 decreased by $0.9 million to $9.7 million, compared to $10.6 million for the three months ended June 30, 2023.

General and administrative expense for the six months ended June 30, 2024 decreased by $1.7 million to $19.2 million, compared to $20.9 million for the six months ended June 30, 2023.

The decrease in general and administrative expense for both periods was primarily due to lower litigation-related expense incurred during the period and lower compensation to employees.

The lower compensation was primarily due to the expiration of the PSUs granted in 2021 on December 31, 2023 (which were forfeited in their entirety as they failed to meet the threshold for any payout as of that date), which was partially offset by increases to payroll salary, bonus expense and non-PSU related stock-based compensation for employee and directors.

Compensation expense for the three and six months ended June 30, 2024 included $4.4 million and $8.7 million, respectively, of non-cash stock-based compensation.

Compensation expense for the three and six months ended June 30, 2023 included $4.9 million and $9.7 million, respectively, of non-cash stock-based compensation.

General and administrative expense for the three months ended September 30, 2024 decreased by $1.7 million to $9.3 million, compared to $11.0 million for the three months ended September 30, 2023.

General and administrative expense for the nine months ended September 30, 2024 decreased by $3.3 million to $28.6 million, compared to $31.9 million for the nine months ended September 30, 2023.

The decrease in general and administrative expense for each period was primarily due to lower litigation-related expense incurred and lower compensation to employees compared to the prior year periods.

Compensation expense for the three and nine months ended September 30, 2024 included $4.3 million and $13.0 million, respectively, of non-cash stock-based compensation.

Compensation expense for the three and nine months ended September 30, 2023 included $4.9 million and $14.6 million, respectively, of non-cash stock-based compensation.

Depreciation and Amortization Expense.

Depreciation and amortization expense for the three months ended June 30, 2024 increased $0.8 million to $17.5 million, compared to $16.7 million for the three months ended June 30, 2023.

Depreciation and amortization expense for the six months ended June 30, 2024 increased by $1.2 million to $34.6 million, compared to $33.4 million for the six months ended June 30, 2023.

The increase in depreciation and amortization expense was primarily related to depreciation on properties that we acquired in 2023 and the placement into service of construction and improvements at certain of our properties.

Depreciation and amortization expense for the three months ended September 30, 2024 increased $1.2 million to $17.9 million, compared to $16.7 million for the three months ended September 30, 2023.

Depreciation and amortization expense for the nine months ended September 30, 2024 increased by $2.5 million to $52.6 million, compared to $50.1 million for the nine months ended September 30, 2023.

The increase in depreciation and amortization expense was primarily related to depreciation for properties that we acquired in 2023, one property we acquired in June 2024 and the placement into service of construction and improvements at certain of our properties.

Loss on Sale of Real Estate.

Amount relates to the sale of property in Los Angeles, California (see Note 6 “Investments in Real Estate” to our condensed consolidated financial statements included in this report for more information).

Amount relates to the sale of property in Los Angeles, California in May 2024 (see Note 6 “Investments in Real Estate” to our condensed consolidated financial statements included in this report for more information).

Interest Income.

Interest income for the three months ended June 30, 2024 increased by $1.7 million to $4.0 million, compared to $2.3 million for the three months ended June 30, 2023.

Interest income for the six months ended June 30, 2024 increased by $1.2 million to $5.8 million, compared to $4.6 million for the six months ended June 30, 2023.

The increase in both periods was primarily due to cash interest received on our construction loan agreement with a developer pursuant to which we agreed to lend up to $23.0 million (as amended), for the development of a regulated cannabis cultivation and processing facility in California (the “Construction Loan”).

Cash interest received on our Construction Loan was $2.1 million during each of the three and six months ended June 30, 2024, versus $0.5 million during each of the three and six months ended June 30, 2023.

Cash interest received on our Construction Loan included a loan maturity extension fee paid to us of $0.3 million during the three months ended June 30, 2024.

Interest income for the three months ended September 30, 2024 increased by $0.6 million to $2.7 million, compared to $2.1 million for the three months ended September 30, 2023.

Interest income for the nine months ended September 30, 2024 increased by $1.8 million to $8.4 million, compared to $6.6 million for the nine months ended September 30, 2023.

The increase in both periods was primarily due to cash interest received on our construction loan pursuant to which we agreed to lend up to $23.0 million, for the development of a regulated cannabis cultivation and processing facility in California (the “Construction Loan”).

Cash interest received on our Construction Loan was $1.1 million and $3.2 million during the three and nine months ended September 30, 2024, respectively, versus $0.4 million and $1.0 million during the three and nine months ended September 30, 2023.

Cash interest received on our Construction Loan included a loan maturity extension fee paid to us of $0.3 million during the nine months ended September 30, 2024.

Interest Expense.

Interest expense primarily consists of interest on our Notes due 2026.

Interest expense for the three months ended June 30, 2024 decreased by $0.2 million to $4.3 million, compared to $4.5 million for the three months ended June 30, 2023.

Interest expense for the six months ended June 30, 2024 decreased by $0.3 million to $8.7 million, compared to $9.0 million for the six months ended June 30, 2023.The decrease in both periods was primarily due to the capitalization of $0.2 million and $0.4 million of interest during the three and six months ended June 30, 2024, respectively, and the maturity of the Exchangeable Senior Notes in February 2024.

The decrease was partially offset by $68,000 and $0.1 million non-cash interest expense related to the Revolving Credit Facility for the three and six months ended June 30, 2024, respectively.

Interest expense for the three months ended June 30,

2024 and 2023 included $0.4 million and $0.3 million, respectively, of non-cash interest expense.

Interest expense for the six months ended June 30, 2024 and 2023 included $0.8 million and $0.7 million, respectively, of non-cash interest expense.

Comparison of the Six Months Ended June 30, 2024 and 2023 (in thousands)

Six Months Ended June 30,

Interest expense for the three months ended September 30, 2024 increased by $0.1 million to $4.4 million, compared to $4.3 million for the three months ended September 30, 2023, which was primarily due to non-cash interest expense related to the Revolving Credit Facility.

Interest expense for the nine months ended September 30, 2024 decreased by $0.2 million to $13.1 million, compared to $13.3 million for the nine months ended September 30, 2023, which was primarily due to higher capitalization of interest and the maturity of the Exchangeable Senior Notes in February 2024.

Comparison of the Nine Months Ended September 30, 2024 and 2023 (in thousands)

Nine Months Ended September 30,

Net cash provided by (used in) operating activities

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Operating Activities

Cash flows provided by operating activities for the six months ended June 30, 2024 and 2023 were $135.8 million and $126.4 million, respectively.

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

The increase in cash flows provided by operating activities for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily due to the $3.9 million disposition-contingent lease termination fee that was received concurrently with the sale of our property in Los Angeles, California, higher contractual rent collection (including deferred lease payments received on sales-type leases), proceeds from property insurance claims, higher interest income and changes in working capital due to timing of vendor payments.

Cash flows provided by operating activities for the nine months ended September 30, 2024 and 2023 were $200.6 million and $189.5 million, respectively.

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

The increase in cash flows provided by operating activities for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was primarily due to the $3.9 million disposition-contingent lease termination fee that was received concurrently with the sale of our property in Los Angeles, California, higher contractual rent collection (including deferred lease payments received on sales-type leases), proceeds from property insurance claims, higher interest income and changes in working capital due to timing of vendor payments.

Investing Activities

Cash flows used in investing activities for the six months ended June 30, 2024 were $58.8 million, of which $50.0 million was related to investments in real estate and funding of draws for improvement and construction funding at our properties, $17.9 million was related to net purchases and maturities of short-term investments, partially offset by $9.1 million in proceeds related to the sale of our Los Angeles, California property.

Cash flows used in investing activities for the six months ended June 30, 2023 were $18.4 million, of which $149.3 million was related to investments in real estate and funding of draws for improvement and construction funding at our properties and other investments, partially offset by $130.9 million related to net purchases and maturities of short-term investments.

Cash flows used in investing activities for the nine months ended September 30, 2024 were $52.4 million, of which $58.7 million was related to investments in real estate and funding of draws for improvement and construction funding at our properties, $2.8 million was related to net purchases and maturities of short-term investments, partially offset by $9.1 million in proceeds related to the sale of our Los Angeles, California property.

Cash flows used in investing activities for the nine months ended September 30, 2023 were $6.0 million, of which $167.9 million was related to investments in real estate and funding of draws for improvement and construction funding at our properties and other investments, partially offset by $161.9 million related to net purchases and maturities of short-term investments.

Financing Activities

Net cash used in financing activities of $97.8 million during the six months ended June 30, 2024 was the result of $11.8 million in net proceeds from the issuance of our common stock, offset by dividend payments of $104.1 million to common and preferred stockholders, principal payment on the Exchangeable Senior Notes of $4.4 million, and $1.0 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees and payment of deferred financing costs.

Net cash used in financing activities of $102.5 million during the six months ended June 30, 2023 was the result of dividend payments of $101.9 million to common and preferred stockholders and $0.6 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.

Net cash used in financing activities of $142.8 million during the nine months ended September 30, 2024 was the result of dividend payments of $158.7 million to common and preferred stockholders, principal payment on the Exchangeable Senior Notes of $4.4 million, and $1.1 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees and payment of deferred financing costs, partially offset by $11.8 million in net proceeds from the issuance of our common stock and $9.6 million in net proceeds from the issuance of our Series A Preferred Stock pursuant to our ATM Program.

Net cash used in financing activities of $153.6 million during the nine months ended September 30, 2023 was the result of dividend payments of $153.0 million to common and preferred stockholders and $0.6 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.

Liquidity and Capital Resources

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

As of June 30, 2024, we owned 108 properties.

As of September 30, 2024, we owned 108 properties.

Of these properties, the 105 properties in our operating portfolio were 95.7% leased, with a weighted-average remaining lease term of 14.0 years.

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

For the three and six months ended June 30, 2024, property expenses included $1.0 million and $1.7 million, respectively, of non-reimbursed expenses related to operating properties that were not leased.

For the three and nine months ended September 30, 2024, property expenses included $0.9 million and $2.6 million, respectively, of non-reimbursed expenses related to operating properties that were not leased.

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

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

Management believes that it was in compliance with those covenants as of June 30, 2024.

Management believes that it was in compliance with those covenants as of September 30, 2024.

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

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In May 2024, we terminated the previously existing “at-the-market” offering program (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”), including on a forward basis, shares of our common stock and 9.00% Series A Cumulative Redeemable Preferred Stock, $0.001 par value per share (the “Series A Preferred Stock”) , up to an aggregate offering price of $500.0 million.

As of June 30, 2024, we had not sold any shares of common stock or Series A Preferred Stock under the ATM Program, including on a forward basis.

During the six months ended June 30, 2024, we sold 123,224 shares of our common stock pursuant to the Prior ATM Program for net proceeds of $11.8 million.

During the nine months ended September 30, 2024, we sold 123,224 shares of our common stock pursuant to the Prior ATM Program for net proceeds of $11.8 million.

During the nine months ended September 30, 2024, we sold 402,673 shares of our Series A Preferred Stock pursuant to the ATM Program for net proceeds of $9.6 million.

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

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.

The Loan Agreement matures on October 23, 2026, and provides $50.0 million in aggregate commitments for secured revolving loans (the “Revolving Credit Facility”) .

The Loan Agreement matures on October 23, 2026, and was most recently amended in November 2024 to increase aggregate commitments for secured revolving loans to $87.5 million (the “Revolving Credit Facility”) .

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.

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

There were no amounts outstanding under the Loan Agreement as of June 30, 2024.

There were no amounts outstanding under the Loan Agreement as of September 30, 2024.

In May 2024, we sold a property in Los Angeles, California for $9.1 million (excluding closing costs), received a disposition-contingent lease termination fee from the tenant concurrently with the closing of $3.9 million and received tenant reimbursement of our closing and other costs related to the sale of the property.

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In the long term, we may also voluntarily repurchase our outstanding debt or equity securities (depending on prevailing market conditions, our liquidity, contractual restrictions and other factors) through cash purchases, open-market purchases, privately negotiated transactions, tender offers or otherwise.

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

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

In recent years, financial markets have been volatile in general.

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

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Our ability to continue to pay dividends is dependent upon our ability to continue to generate cash flows, service any debt obligations we have, including our Notes due 2026, and make accretive new investments.

The following table describes the dividends declared by the Company during the six months ended June 30, 2024:

The following table describes the dividends declared by the Company during the nine months ended September 30, 2024:

Security Class

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July 15, 2024

September 13, 2024

July 1, 2024 to September 30, 2024

October 15, 2024

September 13, 2024

Series A preferred stock

July 15, 2024 to October 14, 2024

October 15, 2024

Contractual Obligations

The following table summarizes our contractual obligations as of June 30, 2024 (in thousands):

The following table summarizes our contractual obligations as of September 30, 2024 (in thousands):

Notes due 2026

2024 (six months ended December 31)

Additionally, as of June 30, 2024, we had (1) $52.2 million outstanding in commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease;

2024 (three months ended December 31)

Additionally, as of September 30, 2024, we had (1) $44.2 million outstanding in commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease;

(2) $1.1 million outstanding in commitments related to contracts with vendors for improvements at our properties, which are expected to be incurred by December 31, 2024;

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NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, depreciation, amortization and impairment related to real estate properties, and after adjustments for unconsolidated partnerships and joint ventures.

The Company also excludes the disposition-contingent lease termination fee relating to the sale of our property in Los Angeles, California.

The Company also excludes the disposition-contingent lease termination fee relating to the sale of our property in Los Angeles, California in May 2024.

Management believes that net income, as defined by GAAP, is the most appropriate earnings measurement.

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

For all periods presented other than the three months ended June 30, 2024, FFO (diluted), Normalized FFO and AFFO, and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock as if the Exchangeable Senior Notes were exchanged at the beginning of the respective reporting period.

For all periods presented other than the three months ended September 30, 2024, FFO (diluted), Normalized FFO and AFFO, and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock as if the Exchangeable Senior Notes were exchanged at the beginning of the respective reporting period.

The Exchangeable Senior Notes matured in February 2024.

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FFO, Normalized FFO and AFFO should be considered only as supplements to net income computed in accordance with GAAP as measures of operations.

The table below is a reconciliation of net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the three and six months ended June 30, 2024 and 2023 (in thousands, except share and per share amounts):

The table below is a reconciliation of net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the three and nine months ended September 30, 2024 and 2023 (in thousands, except share and per share amounts):

For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Net income attributable to common stockholders

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(1) Amount reflects the $3.9 million disposition-contingent lease termination fee received concurrently with the sale of our property in Los Angeles, California, net of the loss on sale of real estate of $3.4 million (see Note 6 “Investments in Real Estate” to our condensed consolidated financial statements included in this report for more information).

(2) Amount reflects the non-refundable interest received on the seller-financed note issued to us by the buyer in connection with our disposition of a portfolio of four properties in southern California previously leased to affiliates of Vertical, which is recognized as a deposit liability and is included in other liabilities in our condensed consolidated balance sheet as of June 30, 2024, as the transaction did not qualify for recognition as a completed sale.

(3) Amount reflects the non-refundable lease payments received on two sales-type leases which are recognized as a deposit liability starting on January 1, 2024, and is included in other liabilities in our condensed consolidated balance sheet as of June 30, 2024, as the transaction did not qualify for recognition as a completed sale (see Note 2 “Lease Accounting” to our condensed consolidated financial statements included in this report for more information).

(2) Amount reflects the non-refundable interest received on the seller-financed note issued to us by the buyer in connection with our disposition of a portfolio of four properties in southern California previously leased to affiliates of Vertical, which is recognized as a deposit liability and is included in other liabilities in our condensed consolidated balance sheet as of September 30, 2024, as the transaction did not qualify for recognition as a completed sale.

(3) Amount reflects the non-refundable lease payments received on two sales-type leases which are recognized as a deposit liability starting on January 1, 2024, and is included in other liabilities in our condensed consolidated balance sheet as of September 30, 2024, as the transaction did not qualify for recognition as a completed sale (see Note 2 “Lease Accounting” to our condensed consolidated financial statements included in this report for more information).

Prior to the lease modifications on January 1, 2024, which extended the initial lease terms, the leases were classified as operating leases and the lease payments received were recognized as rental revenue and therefore, included in net income attributable to common stockholders.

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

A decrease of 5% in the estimated unguaranteed residual value of our properties would result in changes to the lease classification of one lease that was modified during the six months ended June 30, 2024.

A decrease of 5% in the estimated unguaranteed residual value of our properties would result in changes to the lease classification of one lease that was modified during the nine months ended September 30, 2024.

Acquisition of Rental Property, Depreciation and Impairment

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

After completing this process, we determined that for each of the operating properties evaluated, undiscounted cash flows over the holding period were in excess of carrying value and, therefore, we did not record any impairment losses for these properties for the three and six months ended June 30, 2024 and 2023.

Significant adverse changes in the critical accounting estimates used in the impairment evaluation are required for the undiscounted cash flows over the holding period to be less than the carrying value as of June 30, 2024.

Impact of Real Estate and Credit Markets

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Interest Rate Risk

As of June 30, 2024, we had $300.0 million principal amount of Notes due 2026 outstanding at fixed interest rates, and therefore, if interest rates decline, our required payments may exceed those based on current market rates.

As of September 30, 2024, we had $300.0 million principal amount of Notes due 2026 outstanding at a fixed interest rate of 5.50%, and therefore, if interest rates decline, our required payments may exceed those based on current market rates.

It is possible that a property we acquire in the future would be subject to a mortgage, which we may assume.

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therefore, if interest rates increase, our required payments on any amounts outstanding on our Revolving Credit Facility may also increase.

As of June 30, 2024, we had no outstanding borrowings on our Revolving Credit Facility.

As of September 30, 2024, we had no outstanding borrowings on our Revolving Credit Facility.

Impact of Inflation

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

economy has experienced a period of increased inflation in recent years.

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

2 unchanged sentences

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 2. Management’s Discussion and Analysis