Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section above entitled “Cautionary Statement Regarding Forward-Looking Statements.” Certain risk factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see Item 1A, “Risk Factors.”
Overview
We are an internally-managed REIT focused on the acquisition, ownership and management of specialized industrial properties in the United States. Our properties are leased to experienced, state-licensed operators for their regulated cannabis facilities. We have leased and expect to continue to lease our properties on a triple-net lease basis, where the tenant is generally responsible for all aspects of and costs related to the property and its operation during the lease term, including structural repairs, maintenance, real estate taxes and insurance.
We were incorporated in Maryland on June 15, 2016. We conduct our business through a traditional umbrella partnership real estate investment trust, or UPREIT structure, in which our properties are owned by our Operating Partnership, directly or through subsidiaries. We are the sole general partner of our Operating Partnership and own, directly or through subsidiaries, 100% of the limited partnership interests in our Operating Partnership. As of December 31, 2024, we had 22 full-time employees.
As of December 31, 2024, we owned 109 properties comprising 9.0 million square feet (including 666,000 rentable square feet under development/redevelopment) in 19 states. As of December 31, 2024, we had invested $2.4 billion in the aggregate (consisting of purchase price and funding of draws for improvements submitted by tenants, if any, but excluding transaction costs) and had committed an additional $38.3 million to fund draws to certain tenants and vendors for improvements at our properties. Of the $38.3 million committed to fund draws to certain tenants and vendors for improvements at our properties, $11.4 million was incurred but not funded as of December 31, 2024.
Of these properties, we include 106 properties in our operating portfolio, which were 98.3% leased as of December 31, 2024, with a weighted-average remaining lease term of 13.7 years.
We do not include in our operating portfolio the following properties (all of which were under development/redevelopment as of December 31, 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);
● Inland Center Drive in San Bernardino, California; and
● Leah Avenue in San Marcos, Texas.
Factors Impacting Our Operating Results
Our results of operations are affected by a number of factors and depend on the rental revenue we receive from the properties that we acquire, the timing of lease expirations, general market conditions, the regulatory environment in the cannabis industry, and the competitive environment for real estate assets that support the regulated cannabis industry.
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Rental Revenues
We receive income primarily from rental revenue generated by the properties that we acquire. The amount of rental revenue depends upon a number of factors, including:
● our ability to enter into leases with increasing or market value rents for the properties that we acquire; and
● rent collection, which primarily relates to each of our current and future tenant’s financial condition and ability to make rent payments to us on time.
The properties that we acquire consist of primarily real estate assets that support the regulated cannabis industry. Most states where we own properties issue licenses for cannabis operations for a limited period. If one or more of our tenants are unable to renew or otherwise maintain their licenses or other state and local authorizations necessary to continue its cannabis operations, such tenants may default on their lease payments to us. Current unfavorable market dynamics in the regulated cannabis industry have adversely affected our ability to re-lease properties upon tenant defaults at the rental rates we currently receive and, in some cases, for prolonged periods. See the section entitled “Business – Tenant Concentration” for a discussion of our recent tenant defaults. Furthermore, changes in federal law and current favorable state or local laws in the cannabis industry may impair our ability to renew or re-lease properties and the ability of our tenants to fulfill their lease obligations and could materially and adversely affect our ability to maintain or increase rental rates for our properties.
Conditions in Our Markets
Positive or negative changes in regulatory, economic or other conditions, drought, and natural disasters in the markets where we acquire properties may affect our overall financial performance.
Our tenants primarily operate in the regulated cannabis industry. Market dynamics and the regulatory regime in the states where they operate create challenges that impact our tenants’ businesses and may decrease future demand for regulated cannabis cultivation and production facilities. These challenges include federal, state and local taxation burdens; ineffective enforcement policies with respect to the illicit cannabis market; declines in unit pricing for regulated cannabis products; limited access to capital; and inflation and supply chain constraints. The resulting adverse impact on the Company’s and our tenants’ financial condition, results of operations, and cash flows depends on the extent and duration of these challenges in the regulated cannabis markets where we own properties, which are further described below.
Market Dynamics in Regulated Cannabis State Programs
States vary significantly in their market dynamics, driven by many factors, including, but not limited to, regulatory frameworks, enforcement policies with respect to illicit, unlicensed cannabis operations, taxation and licensing structures. I neffective enforcement policies with respect to illicit cannabis sales in a particular state may significantly limit the growth and profitability of operators in that state’s regulated cannabis market.
Unit Pricing for Regulated Cannabis Products
Many states have experienced declines in unit pricing for regulated cannabis products, with that decline more pronounced in certain states than in others, which compresses operating margins for operators. As a result, certain regulated cannabis operators have consolidated operations or shuttered certain operations to reduce costs, which could have a negative impact on operators’ demand for regulated cannabis facilities, including our existing tenants.
Inflation and Supply Chain Constraints
The U.S. economy has experienced a sustained increase in inflation rates in recent years, which we believe is negatively impacting our tenants. This inflation has impacted costs for labor and production inputs for regulated cannabis operators, in addition to increasing costs of construction for development and redevelopment projects. Labor
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shortages and global supply chain issues also continue to adversely impact costs and timing for completion of these development and redevelopment projects, which are resulting in cost overruns and delays in commencing operations on certain of our tenants’ projects.
Capital Availability for Tenants
Recently, 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, since 2021 capital availability has declined for regulated cannabis operators. According to Viridian Capital Advisors (“Viridian”), worldwide cannabis capital raises in 2024 increased slightly over 2023, with less than $2.3 billion in total capital raises, versus over $1.9 billion in 2023, $4.3 billion in 2022 and over $12.0 billion in 2021. Also, according to Viridian, mergers and acquisitions activity in the North American regulated cannabis industry declined in 2024 to $1.2 billion, down from $1.8 billion in 2023.
Capital raising activities by U.S. REITs continued to increase in 2024 with $85 billion of capital raised compared to $62 billion in 2023. According to the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”), U.S. REIT 2024 capital raising was higher than 2022 and 2023, but remained lower than 2019-2021 levels.
Significant Tenants and Concentrations of Risk
As of December 31, 2024, we owned 109 properties located in 19 states. 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 December 31, 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 December 31, 2024. See Note 2 “Summary of Significant Accounting Policies and Procedures” in the notes to the consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest percentage of our total rental revenues for the year ended December 31, 2024.
Competitive Environment
We face competition from a diverse mix of market participants, including but not limited to, other companies with similar business models, independent investors, hedge funds, lenders and other real estate investors, as well as potential tenants (cannabis operators themselves), all of whom may compete with us in our efforts to acquire real estate zoned for regulated cannabis operations. 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.
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Operating Expenses
Our operating expenses include general and administrative expenses, including personnel costs, stock-based compensation, and legal, accounting and other expenses related to corporate governance, public reporting and compliance with the various provisions of U.S. securities laws. Our operating expenses also include costs that we incur for properties, including taxes, insurance, maintenance, security, utilities and other property-specific costs. We generally expect to structure our leases so that the tenant is responsible for real estate taxes, maintenance, insurance, and structural repairs with respect to the premises throughout the lease term. Increases or decreases in such operating expenses will impact our overall financial performance.
Our Qualification as a REIT
We have been organized and operate our business so as to qualify, to be taxed as a REIT for U.S. federal income tax purposes. Shares of our common stock and Series A Preferred Stock are subject to restrictions on ownership and transfer that are intended, among other purposes, to assist us in qualifying and maintaining our qualification as a REIT. In order for us to qualify as a REIT under the Code, the relevant sections of our charter provide that, subject to certain exceptions, no person or entity may own, or be deemed to own, by virtue of the applicable constructive ownership provisions of the Code, more than 9.8% (in value or number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of stock or Series A Preferred Stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of our outstanding common stock or any class or series of our outstanding preferred stock.
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Results of Operations
Investments
See Note 6 “Investments in Real Estate” in the notes to the consolidated financial statements for information regarding our investments in real estate and property portfolio activity during the year ended December 31, 2024. In March 2023, we sold the portfolio of four properties in California previously leased to affiliates of Vertical for $16.2 million (excluding transaction costs) with a secured loan for $16.1 million with the buyer of the properties. The transaction did not qualify for recognition as a completed sale since not all of the criteria were met. Accordingly, we have not derecognized the assets transferred. All consideration received, as well as any future payments, from the buyer is recognized as a deposit liability and is included in other liabilities on our consolidated balance sheet until such time the criteria for recognition as a sale have been met. In addition, as we have not met all of the held-for-sale criteria, land and building and improvements with gross carrying values of $3.4 million and $13.9 million, respectively, and accumulated depreciation of $2.0 million as of December 31, 2024, remain on the consolidated balance sheets, and the buildings and improvements continue to be depreciated. During the year ended December 31, 2024, we received cash interest payments of $1.1 million, which has been recorded as a liability as of December 31, 2024.
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on February 27, 2024, for a comparison of the years ended December 31, 2023 and December 31, 2022.
Comparison of the Years Ended December 31, 2024 and 2023 (in thousands)
Years Ended December 31,
2024
2023
Change
Revenues:
Rental (including tenant reimbursements)
$
306,936
$
307,349
$
(413)
Other
1,581
2,157
(576)
Total revenues
308,517
309,506
(989)
Expenses:
Property expenses
28,472
24,893
3,579
General and administrative expense
37,444
42,832
(5,388)
Depreciation and amortization expense
70,807
67,194
3,613
Total expenses
136,723
134,919
1,804
Gain (loss) on sale of real estate
(3,449)
—
(3,449)
Income from operations
168,345
174,587
(6,242)
Interest income
10,988
8,446
2,542
Interest expense
(17,672)
(17,467)
(205)
Gain (loss) on exchange of Exchangeable Senior Notes
—
22
(22)
Net income
161,661
165,588
(3,927)
Preferred stock dividends
(1,804)
(1,352)
(452)
Net income attributable to common stockholders
$
159,857
$
164,236
$
(4,379)
Revenues
Rental Revenues. Rental revenues for the year ended December 31, 2024 were $306.9 million, compared to $307.4 million for the year ended December 31, 2023, reflecting a decrease of $0.4 million or less than 1%. This decrease in rental revenues was primarily related to certain properties we took back possession of or sold since 2023, lease amendments that adjusted and deferred rent for certain properties, partial payment of rent by certain tenants and two leases that were classified as sale-type leases starting in January 2024 where rental revenue collected is recognized as a deposit liability and is included in other liabilities in our consolidated balance sheet as of December 31, 2024. The decrease was partially offset by the $3.9 million disposition-contingent lease termination fee that was received in
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connection with the sale of our property in Los Angeles, California, amendments to leases for additional improvement allowances at existing properties that resulted in adjustments to rent, revenue from the two properties we acquired in 2024 and contractual rent escalations on our other existing properties.
For the year ended December 31, 2024, we applied $7.7 million of security deposits for payment of contractual rent on properties leased to six tenants. For the year ended December 31, 2023, we applied $8.7 million of security deposits for payment of contractual rent on properties leased to five tenants.
Rental revenues for the year ended December 31, 2024 were negatively impacted by non-collection of rent from properties in our operating portfolio totaling $5.5 million.
While we have re-leased several properties that we regained possession of, the 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 years ended December 31, 2024 and 2023 consist of interest revenue related to leases for property acquisitions that did not satisfy the requirements for sale-leaseback accounting. The decrease in other revenues for the year ended December 31, 2024 was primarily due to non-collection of $0.6 million in rent from one property, partially offset by the application of $0.2 million of security deposits.
Expenses
Property Expenses . Property expenses for the year ended December 31, 2024 increased by $3.6 million, or 14%, to $28.5 million, compared to $24.9 million for the year ended December 31, 2023. The increase 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 year ended December 31, 2024 decreased by $5.4 million, or 13%, to $37.4 million, compared to $42.8 million for the year ended December 31, 2023. The decrease in general and administrative expense was primarily due to lower tenant litigation-related expense incurred, which decreased by $1.8 million compared to 2023, and lower compensation to employees compared to the prior year. The lower compensation was primarily due to the expiration of the performance share units (“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) resulting in a decrease of $4.0 million in PSU related stock-based compensation, which was partially offset by an increase to non-PSU related stock-based compensation for employees and directors.
Compensation expense for the year ended December 31, 2024 and 2023 included $17.3 million and $19.6 million, respectively, of non-cash stock-based compensation.
Depreciation and Amortization Expense. Depreciation and amortization expense for the year ended December 31, 2024 increased by $3.6 million, or 5%, to $70.8 million, compared to $67.2 million for the year ended December 31, 2023. The increase in depreciation and amortization expense was primarily related to depreciation on the two properties we acquired in 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 one property in Los Angeles, California (see Note 6 “Investments in Real Estate” to our consolidated financial statements included in this report for more information).
Interest Income . Interest income for the year ended December 31, 2024 increased by $2.6 million, or 30%, to $11.0 million, compared to $8.4 million for the year ended December 31, 2023. The increase in interest income was primarily due to an additional $3.3 million of interest received on our construction loan, which was partially offset by a $0.7 million decrease to interest earned on our interest-bearing cash and cash equivalents and short-term investments.
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Interest Expense . Interest expense primarily consists of interest on our Notes due 2026. The increase to interest expense was due to a $0.3 million increase of non-cash interest expense related to the Revolving Credit Facility, which was partially offset by a decrease in interest expense on our Exchangeable Senior Notes as a result of their maturity in February 2024.
Cash Flows
The following summary discussion of our cash flows is based on the consolidated statements of cash flows in Item 8, “Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (in thousands):
Year Ended December 31,
2024
2023
Change
Net cash provided by (used in) operating activities
$
258,446
$
255,543
$
2,903
Net cash provided by (used in) investing activities
(55,996)
(6,788)
(49,208)
Net cash provided by (used in) financing activities
(197,904)
(195,628)
(2,276)
Ending cash, cash equivalents and restricted cash
146,245
141,699
4,546
Operating Activities
Cash flows provided by operating activities for the years ended December 31, 2024 and 2023 were $258.4 million and $255.5 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 from 2023 to 2024 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.
Investing Activities
Cash flows used in investing activities for the year ended December 31, 2024 included $82.6 million of purchases of investments in real estate, funding of draws for improvements and construction, and funding of construction loan and other investments in the aggregate, partially offset by $9.1 million in proceeds related to the sale of our Los Angeles, California property and $17.5 million of net maturities of short-term investments.
Cash flows used in investing activities for the year ended December 31, 2023 included $189.0 million of purchases of investments in real estate, funding of draws for improvements and construction, and funding of construction loan and other investments in the aggregate, partially offset by $182.2 million of net maturities of short-term investments.
The year-over-year decrease in purchases of investments in real estate, funding of draws for improvements and construction, and funding of construction loan and other investments was due to smaller acquisitions and lower development activities as certain projects were completed during 2024.
Financing Activities
Cash flows used in financing activities for the year ended December 31, 2024 were $197.9 million, primarily related to dividend payments of $213.5 million to common and preferred stockholders, principal payment on the Exchangeable Senior Notes of $4.4 million, and $1.4 million related to the 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.
Cash flows used in financing activities for the year ended December 31, 2023 were $195.6 million, primarily related to dividend payments of $204.1 million to common and preferred stockholders and $1.1 million related to the net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees
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and payment of deferred financing costs, partially offset by $9.6 million in net proceeds from the issuance of our common stock.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements. We expect to use significant cash to acquire additional properties, develop and redevelop existing properties, pay dividends to our stockholders, fund our operations, service our Notes due 2026 and meet other general business needs.
Sources and Uses of Cash
We derive substantially all of our revenues from the leasing of our properties and collecting rental income, which includes operating expense reimbursements, based on contractual arrangements with our tenants. This source of revenue represents our primary source of liquidity to fund our dividends, Notes due 2026 interest payments, repayments of borrowings and interest payments under our Revolving Credit Facility, general and administrative expenses, property development and redevelopment activities, property operating expenses and other expenses incurred related to managing our existing portfolio and investing in additional properties. Because substantially all of our leases are triple net, our tenants are generally responsible for the maintenance, insurance and property taxes associated with the properties they lease from us. If a tenant defaults on one of our leases or the lease term expires with no tenant renewal, we would incur property costs not paid by the tenant during the time it takes to re-lease or sell the property.
In July 2022, Kings Garden defaulted on its obligations to pay rent at all of the properties that Kings Garden leases from us. In September 2023, we regained possession of the four remaining properties that Kings Garden had occupied, where Kings Garden paid stipulated rent during its period of occupancy until September 20, 2023. In November 2022, Parallel defaulted on its obligations to pay rent at one of our properties in Pennsylvania, and we regained possession of that property in October 2023. Also in November 2022, Green Peak defaulted on its obligations to pay rent at one of our properties in Michigan. During 2023, a receiver was appointed over substantially all of Green Peak’s assets, and we regained possession of one property that was under redevelopment as a regulated cannabis cultivation and processing facility and three retail properties in Michigan. In February 2024, we regained possession of the remaining regulated cannabis cultivation and processing facility that was leased to Green Peak. In February 2023, Parallel also defaulted on its obligations to pay rent at one of our properties in Texas, and we regained possession of that property in March 2023.
In May 2024, Temescal Wellness defaulted on its obligations to pay rent at one of our properties in Massachusetts and we regained possession of that property in September 2024.
In December 2024, PharmaCann defaulted on its obligations to pay rent for the month of December under six of its eleven leases for properties located in Illinois, Massachusetts, Michigan, New York, Ohio and Pennsylvania. December rent, including base rent, property management fees and estimated tax and insurance payments, totaled $4.3 million for these six properties. In January 2025, we entered into lease amendments with PharmaCann with respect to nine of its leases for properties located in New York, Illinois, Pennsylvania, Ohio, and Colorado. Those amendments reduced cumulative total base rent from $2.8 million per month to $2.6 million per month, with cash rent payments commencing February 1, 2025, and provided for pro-rata replenishment of security deposits over thirty-six months commencing February 1, 2027. We also entered into amendments with PharmaCann with respect to two of its leases for cultivation properties in Michigan and Massachusetts. Those amendments provide that monthly base rent of $1.3 million for these two properties will be abated in full effective February 1, 2025 and, if the properties have not been transitioned to new tenant(s) by August 1, 2025, we will regain full control over the properties. We applied security deposits held by us pursuant to all of the PharmaCann leases for the payment in full of all defaulted rent for December 2024 and January 2025 and certain penalties. If PharmaCann is not able to refinance its existing senior secured credit facility maturing June 30, 2025, all modifications to our leases with PharmaCann described above will immediately be null and void and the leases will revert to the terms in effect as of January 1, 2025.
We directly pay for all property insurance and most property taxes, which are typically reimbursed to us by our tenants. Some tenants have elected to pay property taxes directly. From time to time, we incur non-reimbursed property-level operating costs when properties become vacant and are being re-marketed or re-positioned. These costs vary
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quarterly based on vacancy levels and underperforming properties. Additionally, for properties that are not leased and are under development or redevelopment, we may invest significant capital to prepare them for their intended use and re-leasing. For the year ended December 31, 2024, property expenses included $4.1 million in non-reimbursed costs related to vacant properties or non-payment.
To the extent additional resources are needed, we expect to fund our investment activity generally through equity or debt issuances either in the public or private markets along with draws on our Revolving Credit Facility. Where possible, we also may issue limited partnership interests in our Operating Partnership to acquire properties from existing owners seeking a tax-deferred transaction.
In May 2021, we received an investment grade rating from a ratings agency. We sought to obtain an investment grade rating to facilitate access to the investment grade unsecured debt market as part of our overall strategy to maximize our financial flexibility and manage our overall cost of capital. On May 25, 2021, our Operating Partnership issued $300.0 million aggregate principal amount of Notes due 2026. The Notes due 2026 are the Operating Partnership’s general unsecured obligations, 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 which matured in February 2024. 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 December 31, 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. We, or our affiliates, may at any time and from time to time, purchase our Notes due 2026 for cash through open market purchases, privately negotiated transactions, a tender offer or otherwise. Such purchases, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
In February 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, in accordance with terms of the indenture for the Exchangeable Senior Notes.
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 . During the year ended December 31, 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 year ended December 31, 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 intend to file an automatic shelf registration statement, which may permit us, from time to time, to offer and sell common stock, preferred stock, warrants, debt securities of our Operating Partnership and other securities to the extent necessary or advisable to meet our liquidity needs.
On October 23, 2023, our Operating Partnership entered into a loan and security agreement (the “Loan Agreement”) with a federally regulated commercial bank, as lender and as agent for lenders that become party thereto from time to time. The Loan Agreement matures on October 23, 2026, and 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 December 31, 2024. See Note 7 “Debt” to our consolidated financial statements included in this report for more information.
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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.
We expect to meet our short-term and long-term liquidity needs through cash and short-term investments on hand, cash flows from operations and cash flows from sources discussed above. We believe that our liquidity and sources of capital are adequate to satisfy our cash requirements. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet our liquidity needs. Our investment guidelines also provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at the time of any new borrowing, subject to our board of directors’ discretion.
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.
Dividends
The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to qualify and maintain its qualification as a REIT. As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. During 2024, we declared cash dividends on our common stock totaling $7.52 per share, and cash dividends on our Series A Preferred Stock totaling $2.25 per share. 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.
Year Ended December 31,
2024
2023
2022
Ordinary income distributions
$
7.440000
$
7.700000
$
6.929636
Long-term capital gain distributions (1)
—
—
0.100364
Total
$
7.440000
$
7.700000
$
7.030000
(1) Unrecaptured Section 1250 Gain of $0.058864 represents additional characterization of and is part of long-term capital gain distributions for the year ended December 31, 2022.
The common stock distribution with a record date of December 31, 2024 was a split-year distribution, with $0.83 allocable to 2024 for federal income tax purposes and $1.07 allocable to 2025 for federal income tax purposes. The common stock distribution with a record date of December 29, 2023 was a split-year distribution, with $0.83 allocable to 2023 for federal income tax purposes and $0.99 allocable to 2024 for federal income tax purposes. The common stock distribution with a record date of December 30, 2022 was a split-year distribution, with $0.33 allocable to 2022 for federal income tax purposes and $1.47 allocable to 2023 for federal income tax purposes.
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Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2024 (in thousands):
Payments Due
by Year
Notes due 2026
Interest
Office Rent
Total
2025
$
—
$
16,500
$
526
$
17,026
2026
300,000
6,646
543
307,189
2027
—
—
45
45
2028
—
—
—
—
2029
—
—
—
—
Thereafter
—
—
—
—
Total
$
300,000
$
23,146
$
1,114
$
324,260
As of December 31, 2024, we had (1) $37.1 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) $1.2 million outstanding in commitments related to contract with vendors for improvements at our properties; and (3) $0.2 million outstanding in commitments to fund a construction loan. The commitments discussed in this paragraph are excluded from the table of contractual obligations above, as improvement allowances generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease, there is no explicit time frame for incurring the obligations related to our contracts with vendors, and construction loan funding generally may be requested by the borrower from time to time, subject to satisfaction of certain conditions.
There were no amounts outstanding under the Revolving Credit Facility as of December 31, 2024. See Note 7 “Debt” to our consolidated financial statements included in this report for more information.
Non-GAAP Financial Information and Other Metrics
In addition to the required GAAP presentations, we use certain non-GAAP performance measures as we believe these measures improve the understanding of our operational results. We continually evaluate the usefulness, relevance, limitations, and calculation of our reported non-GAAP performance measures to determine how best to provide relevant information to the public and thus such reported measures could change.
Funds from Operations, Normalized Funds from Operations and Adjusted Funds from Operations
Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by NAREIT. NAREIT defines FFO as the most commonly accepted and reported non-GAAP 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 and 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.
Management believes that net income, as defined by GAAP, is the most appropriate earnings measurement. However, management believes FFO and FFO per share to be supplemental measures of a REIT’s performance because they provide an understanding of the operating performance of our properties without giving effect to certain significant non-cash items, primarily depreciation expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. We believe that by excluding the effect of depreciation, FFO and FFO per share can facilitate comparisons of operating performance between periods. We report FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share.
We compute normalized funds from operations (“Normalized FFO”) by adjusting FFO, as defined by NAREIT, to exclude certain GAAP income and expense amounts that we believe are infrequent and unusual in nature and/or not
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related to our core real estate operations. Exclusion of these items from similar FFO-type metrics is common within the equity REIT industry, and management believes that presentation of Normalized FFO and Normalized FFO per share provides investors with a metric to assist in their evaluation of our operating performance across multiple periods and in comparison to the operating performance of other companies, because it removes the effect of unusual items that are not expected to impact our operating performance on an ongoing basis. Normalized FFO is used by management in evaluating the performance of our core business operations. Items included in calculating FFO that may be excluded in calculating Normalized FFO include certain transaction-related gains, losses, income or expense or other non-core amounts as they occur.
Management believes that adjusted funds from operations (“AFFO”) and AFFO per share are also appropriate supplemental measures of a REIT’s operating performance. We calculate AFFO by adjusting Normalized FFO for certain cash and non-cash items.
Other than for the three months ended December 31, 2024, September 30, 2024 and June 30, 2024, FFO (diluted), Normalized FFO, AFFO and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock.
For the three months ended September 30 and June 30, 2024, 25,352 shares and 20,713 shares, respectively, issuable upon vesting of the PSUs were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of the respective periods. No shares were issuable upon vesting of the PSUs for all other periods presented, as the performance thresholds for vesting of the PSUs were not met as measured as of the end of those respective periods.
Our computation of FFO, Normalized FFO and AFFO may differ from the methodology for calculating FFO, Normalized FFO and AFFO utilized by other equity REITs and, accordingly, may not be comparable to such REITs. Further, FFO, Normalized FFO and AFFO do not represent cash flow available for management’s discretionary use. FFO, Normalized FFO and AFFO should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. FFO, Normalized FFO and AFFO should be considered only as supplements to net income computed in accordance with GAAP as measures of operations.
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The table below is a reconciliation of net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the years ended December 31, 2024, 2023 and 2022 (in thousands, except share and per share amounts):
Years Ended December 31,
2024
2023
2022
Net income attributable to common stockholders
$
159,857
$
164,236
$
153,034
Real estate depreciation and amortization
70,807
67,194
61,303
Loss (gain) on sale of real estate
—
—
(3,601)
Disposition-contingent lease termination fee, net of loss on sale of real estate (1)
(451)
—
—
FFO attributable to common stockholders (basic)
230,213
231,430
210,736
Cash and non-cash interest expense on Exchangeable Senior Notes
28
219
546
FFO attributable to common stockholders (diluted)
230,241
231,649
211,282
Financing expense
—
—
367
Litigation-related expense
788
2,480
3,010
Loss (gain) on exchange of Exchangeable Senior Notes
—
(22)
125
Normalized FFO attributable to common stockholders (diluted)
231,029
234,107
214,784
Interest income on seller-financed note (2)
1,104
1,342
—
Deferred lease payments received on sales-type leases (3)
4,938
—
—
Stock-based compensation
17,317
19,581
17,507
Non-cash interest expense
1,664
1,375
1,255
Above-market lease amortization
92
92
91
AFFO attributable to common stockholders (diluted)
$
256,144
$
256,497
$
233,637
FFO per common share – diluted
$
8.07
$
8.20
$
7.64
Normalized FFO per common share – diluted
$
8.10
$
8.29
$
7.76
AFFO per common share – diluted
$
8.98
$
9.08
$
8.45
Weighted average common shares outstanding – basic
28,226,402
27,977,807
27,345,047
Restricted stock and RSUs
294,780
196,821
116,046
Dilutive effect of Exchangeable Senior Notes
9,468
81,169
202,076
Weighted average common shares outstanding – diluted
28,530,650
28,255,797
27,663,169
(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 consolidated financial statements included in this report for more information).
(2) Amount reflects the non-refundable interest paid on the seller-financed note issued to us by the buyer in connection with our disposition of a portfolio of four properties in southern California previously leased to affiliates of Vertical, which is recognized as a deposit liability and is included in other liabilities in our consolidated balance sheet as of December 31, 2024 and 2023, 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 consolidated balance sheets as of December 31, 2024, as the transaction did not qualify for recognition as a completed sale (see Note 2 “Lease Accounting” to our 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 stockholder.
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The tables below are reconciliations of quarterly net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the years ended December 31, 2024 and 2023 (in thousands, except share and per share amounts):
Three Months Ended (1)
December 31, 2024
September 30, 2024
June 30, 2024
March 31, 2024
Net income attributable to common stockholders
$
39,461
$
39,651
$
41,655
$
39,090
Real estate depreciation and amortization
18,240
17,944
17,473
17,150
Disposition-contingent lease termination fee, net of loss on sale of real estate (2)
—
—
(451)
—
FFO attributable to common stockholders (basic)
57,701
57,595
58,677
56,240
Cash and non-cash interest expense on Exchangeable Senior Notes
—
—
—
28
FFO attributable to common stockholders (diluted)
57,701
57,595
58,677
56,268
Litigation-related expense
268
210
164
146
Normalized FFO attributable to common stockholders (diluted)
57,969
57,805
58,841
56,414
Interest income on seller-financed note (3)
30
268
403
403
Deferred lease payments received on sales-type leases (4)
568
1,452
1,462
1,456
Stock-based compensation
4,315
4,316
4,371
4,315
Non-cash interest expense
456
419
401
388
Above-market lease amortization
23
23
23
23
AFFO attributable to common stockholders (diluted)
$
63,361
$
64,283
$
65,501
$
62,999
FFO per common share – diluted
$
2.02
$
2.02
2.06
1.98
Normalized FFO per common share – diluted
$
2.03
$
2.02
2.06
1.98
AFFO per common share – diluted
$
2.22
$
2.25
2.29
2.21
Weighted-average common shares outstanding – basic
28,254,565
28,254,565
28,250,843
28,145,017
Restricted stock and RSUs
299,770
299,770
300,582
278,890
PSUs
—
25,352
20,713
—
Dilutive effect of Exchangeable Senior Notes
—
—
—
38,079
Weighted-average common shares outstanding – diluted
28,554,335
28,579,687
28,572,138
28,461,986
Three Months Ended (1)
December 31, 2023
September 30, 2023
June 30, 2023
March 31, 2023
Net income attributable to common stockholders
$
41,295
$
41,256
$
40,931
$
40,754
Real estate depreciation and amortization
17,098
16,678
16,704
16,714
FFO attributable to common stockholders (basic)
58,393
57,934
57,635
57,468
Cash and non-cash interest expense on Exchangeable Senior Notes
50
50
50
69
FFO attributable to common stockholders (diluted)
58,443
57,984
57,685
57,537
Litigation-related expense
152
1,112
670
546
Loss (gain) on exchange of Exchangeable Senior Notes
—
—
—
(22)
Normalized FFO attributable to common stockholders (diluted)
58,595
59,096
58,355
58,061
Interest income on seller-financed note (3)
403
402
403
134
Stock-based compensation
4,934
4,934
4,884
4,829
Non-cash interest expense
383
335
331
326
Above-market lease amortization
23
23
23
23
AFFO attributable to common stockholders (diluted)
$
64,338
$
64,790
$
63,996
$
63,373
FFO per common share – diluted
$
2.07
2.05
2.04
2.04
Normalized FFO per common share – diluted
$
2.07
2.09
2.07
2.06
AFFO per common share – diluted
$
2.28
2.29
2.26
2.25
Weighted-average common shares outstanding – basic
27,996,393
27,983,004
27,981,517
27,949,747
Restricted stock and RSUs
206,667
206,919
201,462
171,741
Dilutive effect of Exchangeable Senior Notes
76,774
75,682
74,260
102,210
Weighted-average common shares outstanding – diluted
28,279,834
28,265,605
28,257,239
28,223,698
(1) The sum of quarterly financial data may vary from annual data due to rounding and differences in the dilutive effect of potentially issuable shares of each reporting period.
(2) Amount reflects the $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 consolidated financial statements included in this report for more information)
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(3) Amount reflects the non-refundable interest paid on the seller-financed note issued to us by the buyer in connection with our disposition of a portfolio of four properties in southern California previously leased to affiliates of Vertical, which is recognized as a deposit liability and is included in other liabilities in our consolidated balance sheets as of December 31, 2024 and 2023, as the transaction did not qualify for recognition as a completed sale.
(4) 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 consolidated balance sheets as of December 31, 2024, as the transaction did not qualify for recognition as a completed sale (see Note 2 “Lease Accounting” to our 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.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with GAAP, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates and assumptions.
We continually evaluate the estimates and assumptions we use to prepare our consolidated financial statements. Our critical accounting estimates are defined as accounting estimates or assumptions made in accordance with GAAP, which involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations. The following critical accounting estimates discussion reflects what we believe are the most significant estimates and assumptions used in the preparation of our consolidated financial statements. This discussion of our critical accounting estimates is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates and assumptions. For further discussion of our significant accounting policies, see Note 2 “Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements” to our consolidated financial statements included in this report.
Lease Accounting
We account for our leases under Accounting Standards Codification 842, Leases, which requires significant estimates and judgments by management in its application. Upon lease inception or lease modification, we assess the lease classification of both the land and building components of the property. The determination of lease classification requires the calculation of the rate implicit in the lease, which is driven by significant estimates relating to the unguaranteed residual value of the assets at the end of the non-cancelable lease term. A decrease of 5% in the estimated unguaranteed residual value of our properties would result in a change to the lease classification of one lease that was modified during the year ended December 31, 2024.
Acquisition of Rental Property, Depreciation and Impairment
All of our acquisitions of rental properties to date were accounted for as asset acquisitions and not business combinations because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings, and related intangible assets). The accounting model for asset acquisitions requires that the acquisition consideration (including acquisition costs) be allocated to the individual assets acquired and liabilities assumed on a relative fair value basis.
We exercise judgment to determine key assumptions used in each valuation technique (cost, income, and sales approaches). For example, we are required to use judgment and make a number of assumptions, including those related to projected growth in rental rates and operating expenses, anticipated trends and market/economic conditions. The use of different assumptions can affect the amount of consideration allocated to the acquired depreciable/amortizable asset, which in turn can impact our net income due to the recognition of the related depreciation/amortization expense in our consolidated statements of operations.
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We depreciate buildings and improvements where we are considered the owner for accounting purposes based on our evaluation of the estimated useful life of each specific asset, not to exceed 40 years. Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment.
The determination of whether we are or the tenant is the owner of improvements for accounting purposes is subject to significant judgment. In making that determination, we consider numerous factors and perform a detailed evaluation of each individual lease. No one factor is determinative in reaching a conclusion. The factors we evaluate include but are not limited to the following:
● whether the lease agreement requires landlord approval of how the improvement allowance is spent prior to installation of the improvements;
● whether the lease agreement requires the tenant to provide evidence to the landlord supporting the cost and what the improvement allowance was spent on prior to payment by the landlord for such improvements;
● whether the improvements are unique to the tenant or reusable by other tenants;
● whether the tenant is permitted to alter or remove the improvements without the consent of the landlord or without compensating the landlord for any lost utility or diminution in fair value; and
● whether the ownership of the improvements remains with the landlord or remains with the tenant at the end of the lease term.
When we conclude that we are the owner of improvements for accounting purposes using the factors discussed above, we record the cost to construct the improvements as our capital asset.
We evaluate our real estate assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a given asset may not be recoverable. We evaluate our real estate assets for impairment on a property-by-property basis. Indicators we use to determine whether an impairment evaluation is necessary include:
● deterioration in rental rates for a specific property;
● deterioration of a given rental submarket;
● significant change in strategy or use of a specific property or any other event that could result in a decreased holding period, including classifying a property as held for sale, or significant development delay;
● evidence of material physical damage to the property; and
● default by a significant tenant when any of the other indicators above are present.
When we evaluate for potential impairment our real estate assets to be held and used, we first evaluate whether there are any indicators of impairment. If any impairment indicators are present for a specific real estate asset, we then perform an undiscounted cash flow analysis and compare the net carrying amount of the real estate asset to the real estate asset’s estimated undiscounted future cash flow over the anticipated holding period. If the estimated undiscounted future cash flow is less than the net carrying amount of the real estate asset, we perform an impairment loss calculation to determine if the fair value of the real estate asset is less than the net carrying value of the real estate asset. Our impairment loss calculation compares the net carrying amount of the real estate asset to the real estate asset’s estimated fair value, which may be based on estimated discounted future cash flow calculations or third-party valuations or appraisals. We recognize an impairment loss if the amount of the asset’s net carrying amount exceeds the asset’s estimated fair value. If we recognize an impairment loss, the estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis would be depreciated (amortized) over the remaining useful life of that asset. If a real estate asset is designated as real estate held-for-sale, it is carried at the lower of the net carrying value or estimated fair value less costs to sell, and depreciation ceases.
Our undiscounted cash flow and fair value calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flow and property fair values, including determining our estimated holding period. We are also required to make a number of assumptions relating to future economic and market events and prospective operating trends.
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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 years ended December 31, 2024, 2023 and 2022. Significant adverse changes in the critical accounting estimates and judgements used in the impairment evaluation would need to occur for the undiscounted cash flows over the holding period to be less than the carrying value for each operating property evaluated as of December 31, 2024.
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, the U.S. credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.
Interest Rate Risk
As of December 31, 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. In recent years, the commercial real estate market generally has experienced significant disruptions from, among other things, significant increases in interest rates and changing tenant preferences for space. Our Revolving Credit Facility bears interest at a variable rate based on the greater of the prime rate and an applicable margin and a stipulated interest rate; therefore, if interest rates increase, our required payments on any amounts outstanding on our Revolving Credit Facility may also increase. As of December 31, 2024, we had no outstanding borrowings on our Revolving Credit Facility.
Impact of Inflation
The U.S. economy has experienced a sustained increase in inflation rates in recent years. We enter into leases that generally provide for fixed increases in rent. During times when inflation is greater than the fixed increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation. See also the discussion under Item 1A, “Risk Factors,” under the caption “Inflation may adversely affect our business and our tenants’ financial condition and results of operations.”
Seasonality
Our business has not been, and we do not expect our business in the future to be, subject to material seasonal fluctuations.