What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2025-05-08 compared with 2024-11-07 · 146 added, 153 removed, 284 unchanged (51% of the section changed)

11 unchanged sentences

rates of default on leases for our assets;

our ability to re-lease properties upon tenant defaults or lease terminations for the rent we currently receive, or at all;

concentration of our portfolio of assets and limited number of tenants;

the estimated growth in and evolving market dynamics of the regulated cannabis market;

the demand for regulated cannabis facilities;

the demand for regulated cannabis cultivation and processing facilities;

decreased economic activity due to fluctuations in trade policies, tariffs, and related government actions;

inflation dynamics;

33 unchanged sentences

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 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2024.

In addition, we discussed a number of material risks in our Annual Report on Form 10-K for the year ended December 31, 2024.

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

5 unchanged sentences

The purpose of this Management’s Discussion and Analysis (“MD&A”) is to provide an understanding of the Company’s consolidated financial condition, results of operations and cash flows.

MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s condensed consolidated financial statements and accompanying notes.

MD&A is provided as a supplement to,

and should be read in conjunction with, the Company’s condensed consolidated financial statements and accompanying notes.

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

4 unchanged sentences

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

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):

As of March 31, 2025, we had 21 full-time employees.

As of March 31, 2025, we owned 110 properties comprising 9.0 million square feet (including 666,000 rentable square feet under development/redevelopment) in 19 states.

As of March 31, 2025, we had invested $2.5 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 $27.4 million to fund draws to certain tenants and vendors for improvements at our properties.

Of the $27.4 million committed to fund draws to certain tenants and vendors for improvements at our properties, $9.0 million was incurred but not funded as of March 31, 2025.

Of these 110 properties, we include 107 properties in our operating portfolio, which were 98.4% leased as of March 31, 2025, with a weighted-average remaining lease term of 13.5 years.

We do not include in our operating portfolio the following properties (all of which were under development/redevelopment as of March 31, 2025, 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);

1 unchanged sentence

• Leah Avenue in San Marcos, Texas.

As discussed below under the section entitled “ —Factors Impacting Our Operating Results—Conditions in Our Markets ,” market dynamics in the regulated cannabis industry have been extremely challenging.

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.

As we have discussed in this and previous filings with the SEC, these challenges have negatively impacted the ability of certain of our tenants to make their lease payments on the properties they lease from us.

As a result, the Company recently announced that it intends to proactively seek to refresh a substantial portion of its tenant base with more financially viable long-term tenants to better position the Company for sustainable growth and improved financial performance.

As part of this strategic effort, the Company declared certain of its tenants in default in March 2025, for failure to pay contractual rent in full, as further described below.

In addition, the Company declared a default with respect to a loan for $16.1 million aggregate principal amount pursuant to a secured promissory note (the “MIH Note”) issued to the Company by the purchaser of four properties previously leased to Medical Investor Holdings, LLC.

The Company, through indirect, wholly owned subsidiaries serving as landlords, previously entered into leases (collectively, the “4Front Leases”) with 4Front Ventures Corp.

and its affiliates (collectively, “4Front”) as tenants for four properties that the Company owns, which represented 5.8% of the Company’s contractual rent as of March 31, 2025.

The Company, through indirect, wholly owned subsidiaries serving as landlords, previously entered into leases (collectively, the “Gold Flora Leases”) with Gold Flora, LLC and its affiliates (collectively, “Gold Flora”) as tenants for three properties that the Company owns, which represented 2.9% of the Company’s contractual rent as of March 31, 2025.

The Company, through indirect, wholly owned subsidiaries serving as landlords, previously entered into leases (collectively, the “TILT Leases”) with TILT Holdings Inc.

and its affiliates (collectively, “TILT”) as tenants for two properties that the Company owns, which represented 2.2% of the Company’s contractual rent as of March 31, 2025.

The Company declared each of the 4Front Leases, the Gold Flora Leases, and the TILT Leases in default in March 2025.

Contractual base rent, property management fees and estimated tax and insurance payments owed as of March 31, 2025, for each of the 4Front Leases, the Gold Flora Leases, and the TILT Leases, totaled $9.0 million, $1.7 million, and $2.4 million, respectively.

The Company is taking action to pursue its rights under such leases aggressively, which may include, but is not limited to, commencing eviction proceedings as the Company deems necessary.

The Company previously provided a loan, in the aggregate principal amount of $16.1 million, pursuant to the MIH Note issued by the purchaser of four of the Company’s properties in California previously leased to affiliates of Medical Investor Holdings, LLC.

The MIH Note is secured by such four properties.

The loan pursuant to the MIH Note requires payments of interest only, monthly, in advance and matures on February 29, 2028.

The Company declared the MIH Note in default in March 2025, due to the borrower’s failure to pay approximately $0.8 million of interest and reimbursement for taxes.

As a result, the principal amount of the MIH Note, plus accrued and unpaid interest, are immediately due and payable.

The Company intends to vigorously pursue its rights under the MIH Note, which may include, but is not limited to foreclosing on its security interest in the four properties securing the MIH Note.

In addition, on March 14, 2025, PharmaCann defaulted on its obligations to pay rent for the month of March under nine of its eleven leases for properties located in New York, Illinois, Pennsylvania, Ohio, and Colorado which represented 9.1% of the Company’s total rental revenues for the quarter ended March 31, 2025.

March rent owed for these nine leases, including base rent, property management fees and estimated tax and insurance payments, totaled $2.7 million.

Monthly base rent of $1.3 million for the remaining two leases, which are for cultivation properties in Michigan and Massachusetts, was previously abated in full effective February 1, 2025, pursuant to the lease amendments the Company entered into with PharmaCann in January 2025.

The Company is in continuing discussions with PharmaCann regarding the leases and expects to enforce its rights under the leases aggressively, which may include, but is not limited to, commencing eviction proceedings as the Company deems necessary.

See Note 6 "Investments in Real Estate" in the notes to our condensed consolidated financial statements for further information regarding our leases with PharmaCann.

Factors Impacting Our Operating Results

11 unchanged sentences

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.

The success of our tenants in operating their businesses and their ability to pay rent continues to be significantly influenced by many challenges including the impact of inflation, labor shortages, supply chain constraints on their cost of doing business, and the U.S.

The success of our tenants in operating their businesses and their ability to pay rent continues to be significantly influenced by many challenges including the impact of inflation, interest rates, labor shortages, changes in trade policy, supply chain constraints on their cost of doing business, and the U.S.

consumer financial health.

1 unchanged sentence

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.

See “—Results of Operations—Comparison of the Three Months Ended March 31, 2025 and 2024—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.

4 unchanged sentences

As a result, certain regulated cannabis operators have announced that they are consolidating operations or shuttering certain operations to reduce costs, which if prolonged, could have a material negative impact on operators’ demand for regulated cannabis facilities, including our existing tenants.

Inflation and Supply Chain Constraints

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.

Ongoing labor 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.

Inflation, Tariffs and Supply Chain Disruption

Recent changes in U.S.

trade policy, including the imposition of significant tariffs on imported materials and goods, are expected to increase the costs of key inputs used in cannabis cultivation and production, including equipment, lighting systems, and construction materials.

These added costs are especially impactful to our tenants operating in the regulated cannabis industry, which already faces higher compliance and regulatory burdens compared to other sectors.

In addition, escalating geopolitical tensions and retaliatory trade measures have disrupted global supply chains, which may lead to sourcing challenges, extended lead times, and increased costs for capital projects, including the development and redevelopment of our properties.

These factors may also contribute to cost overruns and delays in commencing operations on certain of our tenants’ projects.

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, 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.

REITs have also experienced steep declines, including significantly reduced capital availability for our company.

In recent years, financial markets have experienced heightened volatility, reflecting increased geopolitical risks and significant tightening of financial conditions.

These factors have contributed to a substantial decline in capital availability for regulated cannabis operators.

Compounding these challenges, recent U.S.

trade policy shifts, including the imposition of tariffs on imports from Canada, Mexico and China, have further strained the industry's financial landscape.

These tariffs are expected to lead to increased costs for essential inputs such as cultivation equipment and packaging, which historically have been predominantly sourced from overseas.

As many regulated cannabis operators face significant debt maturities in the coming years, these compounded financial pressures are expected to pose substantial challenges in refinancing or extending those debt obligations.

The elevated costs resulting from trade policy shifts, coupled with limited access to capital, may hinder operators' ability to secure favorable refinancing terms, potentially impacting their financial stability and operational viability.

Significant Tenants and Concentrations of Risk

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).

As of March 31, 2025, we owned 110 properties located in 19 states leased to 31 tenants (not including five non-cannabis tenants in three 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 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.

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 nine months ended September 30, 2024.

At March 31, 2025, 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 March 31, 2025.

Competitive Environment

15 unchanged sentences

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 nine months ended September 30, 2024.

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

Comparison of the Three Months Ended March 31, 2025 and 2024

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

For the Three Months Ended

For the Nine Months Ended

September 30,

Rental (including tenant reimbursements) $ 71,697 $ 74,914

3 unchanged sentences

Depreciation and amortization expense 18,391 17,150

Impairment loss on real estate 3,527 —

Total expenses 37,758 33,421

Gain (loss) on sale of real estate

Income from operations 33,964 42,033

1 unchanged sentence

Interest expense (4,500) (4,389)

Gain (loss) on exchange of Exchangeable Senior Notes

Net income 31,077 39,428

Preferred stock dividends (781) (338)

1 unchanged sentence

Rental Revenues.

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.

Rental revenues for the three months ended March 31, 2025 decreased by $3.2 million, or 4%, to $71.7 million, compared to $74.9 million for the three months ended March 31, 2024.

The decline was primarily driven by a decrease of $4.4 million on properties leased to PharmaCann due to the tenant's default, a decrease of $1.6 million on properties leased to TILT due to the tenant's default, a decrease of $0.7 million related to one property that the Company took back possession of in September 2024, and a decrease of $0.3 million related to one property sold in May 2024.

This decline was partially offset by an increase of $2.2 million related to new acquisitions and new leases executed on existing properties that commenced since March 31, 2024, and an increase of $1.6 million primarily driven by contractual rent escalations.

For the three months ended March 31, 2025, we applied $5.8 million of security deposits for payment of rent on properties leased to PharmaCann, Gold Flora, TILT and Sozo.

No security deposits were applied for rent during three months ended March 31, 2024.

We have re-leased three properties in which rent commencement is contingent on the tenants obtaining the requisite approvals to operate.

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

Other Revenues.

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.

Other revenues for the three months ended March 31, 2025 and 2024 consist of interest revenue related to leases for property acquisitions that did not satisfy the requirements for sale-leaseback accounting.

Other revenues for the three months ended March 31, 2025 decreased by $0.5 million compared to the three months ended March 31, 2024 primarily due to non-collection of rent related to one property leased to 4Front.

Property Expenses.

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 for the three months ended March 31, 2025 increased by $0.7 million to $7.4 million, compared to $6.7 million for the three months ended March 31, 2024.

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 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.

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 employees and directors.

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.

General and administrative expense for the three months ended March 31, 2025 decreased by $1.1 million to $8.5 million, compared to $9.6 million for the three months ended March 31, 2024.

The decrease in general and administrative expense was primarily due to lower stock-based compensation expense driven by PSUs granted in 2022 that were forfeited on December 31, 2024 as they did not meet the performance thresholds.

The decrease was partially offset by an increase in legal and payroll expenses during the three months ended March 31, 2025.

Compensation expense for the three months ended March 31, 2025 and 2024 included $2.1 million and $4.3 million, respectively, of non-cash stock-based compensation expense.

Depreciation and Amortization Expense.

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 in May 2024 (see Note 6 “Investments in Real Estate” to our condensed consolidated financial statements included in this report for more information).

Depreciation and amortization expense for the three months ended March 31, 2025 increased by $1.2 million to $18.4 million, compared to $17.2 million for the three months ended March 31, 2024.

The increase in depreciation and amortization expense was primarily related to depreciation for properties that we acquired in 2024, one property we acquired in February 2025 and the placement into service of construction and improvements at certain of our properties.

Impairment Loss on Real Estate.

Impairment loss on real estate for the three months ended March 31, 2025 related to one of our properties located in Palm Springs, California which is under contract to be sold for less than its carrying value.

Interest Income.

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 income for the three months ended March 31, 2025 decreased by $0.2 million to $1.6 million, compared to $1.8 million for the three months ended March 31, 2024.

The decrease was due to having less interest-bearing investments and lower rates earned on those investments during the three months ended March 31, 2025 compared to the three months ended March 31, 2024, partially offset by additional 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 $0.6 million and $20,000 during the three months ended March 31, 2025 and 2024, respectively.

Interest Expense.

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

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,

Interest expense for the three months ended March 31, 2025 increased by $0.1 million to $4.5 million, compared to $4.4 million for the three months ended March 31, 2024, which was primarily due to an increase in non-cash interest expense related to the Revolving Credit Facility.

Comparison of the Three Months Ended March 31, 2025 and 2024 (in thousands)

Three Months Ended March 31,

2025 2024 Change

Net cash provided by (used in) operating activities $ 54,242 $ 71,566 $ (17,324)

1 unchanged sentence

Net cash provided by (used in) financing activities (55,321) (45,368) (9,953)

Ending cash, cash equivalents and restricted cash

Ending cash and cash equivalents 128,010 153,502 (25,492)

Operating Activities

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 for the three months ended March 31, 2025 and 2024 were $54.2 million and $71.6 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.

The decrease in cash flows provided by operating activities for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 was primarily due to lower net income and the application of $5.8 million of security deposits for contractual rent related tenant defaults.

Cash flows provided by operating activities for the three months ended March 31, 2024 also included the one-time payment of $4.8 million received in advance from our tenant Holistic Industries, Inc.

related to the sale of our property in Los Angeles, California.

Investing Activities

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.

Cash flows used in investing activities for the three months ended March 31, 2025 was $17.2 million, of which $16.9 million was related to investments in real estate and funding of draws for improvement and construction funding at our properties and $0.3 million was related to net purchases and maturities of short-term investments.

Cash flows used in investing activities for the three months ended March 31, 2024 was $14.4 million, of which $16.5 million was related to funding of draws for improvement and construction funding at our properties and other investments, partially offset by $2.1 million related to net purchases and maturities of short-term investments.

Financing Activities

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.

Net cash used in financing activities of $55.3 million during the three months ended March 31, 2025 was the result of dividend payments of $54.8 million to common and preferred stockholders, partial principal payment on the Notes due 2026 of $8.7 million, $0.7 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees, and $0.3 million related to repurchase of common stock, partially offset by $9.2 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 $45.4 million during the three months ended March 31, 2024 was primarily due to $11.8 million in net proceeds from the issuance of our common stock, offset by dividend payments of $51.8 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.

Liquidity and Capital Resources

5 unchanged sentences

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 September 30, 2024, we owned 108 properties.

As of March 31, 2025, we owned 110 properties.

Of these properties, the 107 properties in our operating portfolio were 98.4% leased, with a weighted-average remaining lease term of 13.5 years.

4 unchanged sentences

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 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.

For the three months ended March 31, 2025, property expenses included $0.7 million 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.

3 unchanged sentences

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

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

The Notes due 2026 are the Operating Partnership’s general unsecured and unsubordinated obligations, and rank equally in right of payment with all of the Operating Partnership’s future senior unsecured indebtedness.

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 September 30, 2024.

Management believes that it was in compliance with those covenants as of March 31, 2025.

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

In 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 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 February 2025, we filed a new shelf registration statement to replace our prior shelf registration statement, which terminated on January 24, 2025, 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.

Following the filing of the new registration statement, we filed with the SEC a prospectus supplement that continues our at-the-market” offering program (“ATM Program”), pursuant to which we may offer and sell from time to time, 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 three months ended March 31, 2025 , we sold 385,147 shares of our Series A Preferred Stock for net proceeds of $9.2 million.

As of March 31, 2025, shares of the Company’s common stock and Series A Preferred Stock having an aggregate offerin g price of up to approximately $480.3 million remain available for of fer and sale pursuant to the ATM Program.

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.

2 unchanged sentences

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 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.

There were no amounts outstanding under the Loan Agreement as of March 31, 2025.

We expect to meet our liquidity needs through cash and investments on hand, cash flows from operations, draws on our Revolving Credit Facility and cash flow from sources discussed above.

6 unchanged sentences

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

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

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

companies are not REITs can.

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 nine months ended September 30, 2024:

Security Class

Period Covered

Dividend Amount

The following table describes the dividends declared by the Company during the three months ended March 31, 2025:

Date Security Class Amount

Share Period Covered Dividend

Paid Date Dividend Amount

(In thousands)

March 15, 2024

January 1, 2024 to March 31, 2024

April 15, 2024

March 15, 2024

Series A preferred stock

January 15, 2024 to April 14, 2024

April 15, 2024

June 14, 2024

April 1, 2024 to June 30, 2024

July 15, 2024

June 14, 2024

Series A preferred stock

April 15, 2024 to July 14, 2024

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

March 14, 2025 Common stock $ 1.90 January 1, 2025 to March 31, 2025 April 15, 2025 $ 54,463

March 14, 2025 Series A preferred stock $ 0.5625 January 15, 2025 to April 14, 2025 April 15, 2025 $ 781

Contractual Obligations

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

Notes due 2026

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;

The following table summarizes our contractual obligations as of March 31, 2025 (in thousands):

by Year Notes due 2026 Interest Office Rent Total

2025 (nine months ended December 31)

$ — $ 12,013 $ 395 $ 12,408

291,215 6,451 543 298,209

Total $ 291,215 $ 18,464 $ 983 $ 310,662

Additionally, as of March 31, 2025, we had (1) $26.2 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) $1.2 million outstanding in commitments related to contracts with vendors for improvements at our properties, which are expected to be incurred by June 30, 2025;

and (3) $0.2 million outstanding in commitments to fund the 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.

Supplemental Guarantor Information

Our Notes due 2026 are the unsecured senior obligations of our Operating Partnership and are fully and unconditionally guaranteed on an unsecured basis by us.

The Notes due 2026 and the related guarantee are registered securities under the Securities Act.

See Note 7 “Debt” to our condensed consolidated financial statements included in this report for a description of certain terms of our Notes due 2026.

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

Accordingly, separate consolidated financial statements of our Operating Partnership have not been presented.

Furthermore, as permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, we have excluded the summarized financial information for the Operating Partnership because the assets, liabilities, and results of operations of the Operating Partnership are not materially different than the corresponding amounts in our condensed consolidated financial statements, and management believes such summarized financial information would be repetitive and would not provide incremental value to investors.

Non-GAAP Financial Information

4 unchanged sentences

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 in May 2024.

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 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.

6 unchanged sentences

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

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.

For the three months ended March 31, 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.

Performance share units (“PSUs”) granted to certain employees were included in dilutive securities to the extent the performance thresholds for vesting of the PSUs were met as measured as of the end of each respective period.

For the three months ended March 31, 2024, the performance share units (“PSUs”) granted to certain employees were not included in dilutive securities as the performance thresholds for vesting of the PSUs were not met as measured as of March 31, 2024.

The PSUs expired on December 31, 2024.

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.

2 unchanged sentences

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 nine months ended September 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 months ended March 31, 2025 and 2024 (in thousands, except share and per share amounts):

For the Three Months Ended

For the Nine Months Ended

September 30,

Net income attributable to common stockholders $ 30,296 $ 39,090

Real estate depreciation and amortization 18,391 17,150

Disposition-contingent lease termination fee, net of loss on sale of real estate (1)

Impairment loss on real estate 3,527 —

FFO attributable to common stockholders (basic) 52,214 56,240

2 unchanged sentences

Litigation-related expense 406 146

Loss (gain) on exchange of Exchangeable Senior Notes

Loss (gain) on partial repayment of Notes due 2026 (32) —

Normalized FFO attributable to common stockholders (diluted) 52,588 56,414

12 unchanged sentences

Weighted average common shares outstanding – diluted 28,588,022 28,461,986

(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 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).

(1) 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 Medical Investor Holdings, which is recognized as a deposit liability and is included in other liabilities in our condensed consolidated balance sheet as of March 31, 2025, as the transaction did not qualify for recognition as a completed sale.

(2) 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 March 31, 2025, 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.

6 unchanged sentences

This discussion of our critical accounting estimates is intended to supplement the description of our accounting policies in the footnotes to our condensed 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 in

our Annual Report on Form 10-K for the year ended December 31, 2023 and to our condensed consolidated financial statements included in this report.

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 in our Annual Report on Form 10-K for the year ended December 31, 2024 and to our condensed consolidated financial statements included in this report.

Lease Accounting

2 unchanged sentences

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 nine months ended September 30, 2024.

A decrease of 5% in the estimated unguaranteed residual value of our properties would not change the lease classification of any new leases or leases that were modified during the three months ended March 31, 2025.

Acquisition of Rental Property, Depreciation and Impairment

35 unchanged sentences

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 nine months ended September 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 September 30, 2024.

During the three months ended March 31, 2025, real estate assets related to one of our properties in Palm Springs, California were determined to be impaired.

In April 2025, we marketed the property for sale and have executed a purchase and sale agreement with a prospective buyer in which the estimated net proceeds from sale is less than the carrying value of the property.

As a result, we recognized an impairment loss on real estate of $3.5 million during the three months ended March 31, 2025 to reduce its carrying value to the estimated fair value.

For all other operating properties that were evaluated, we determined that the 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 months ended March 31, 2025.

Impact of Real Estate and Credit Markets

6 unchanged sentences

Interest Rate Risk

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.

As of March 31, 2025, we had $291.2 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.

2 unchanged sentences

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

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

As of March 31, 2025, we had no outstanding borrowings on our Revolving Credit Facility.

Impact of Inflation

4 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