UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________

Commission file number: 001-37949

Innovative Industrial Properties, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland	81-2963381
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)
1389 Center Drive, Suite 200 Park City, UT 84098	(858) 997-3332
(Address of principal executive offices)	(Registrant’s telephone number)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbols (s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	IIPR	New York Stock Exchange
Series A Preferred Stock, par value $0.001 per share	IIPR-PA	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company  ☐
			Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of August 4, 2022 there were 27,973,429 shares of common stock outstanding.

INNOVATIVE INDUSTRIAL PROPERTIES, INC.

FORM 10-Q – QUARTERLY REPORT

JUNE 30, 2022

TABLE OF CONTENTS

Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Stockholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to the Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36

Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43

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PART I

ITEM 1. FINANCIAL STATEMENTS

Innovative Industrial Properties, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

	June 30,		December 31,
Assets	2022		2021
Real estate, at cost:
Land	$	136,123	$	122,386
Buildings and improvements		1,220,821		979,417
Tenant improvements		699,856		620,301
Construction in progress		68,909		—
Total real estate, at cost		2,125,709		1,722,104
Less accumulated depreciation		(109,100)		(81,938)
Net real estate held for investment		2,016,609		1,640,166
Construction loan receivable		17,698		12,916
Cash and cash equivalents		45,432		81,096
Restricted cash		530		5,323
Investments		309,442		324,889
Right of use office lease asset		1,921		1,068
In-place lease intangible assets, net		9,535		9,148
Other assets, net		24,515		9,996
Total assets	$	2,425,682	$	2,084,602
Liabilities and stockholders’ equity
Exchangeable Senior Notes, net	$	6,374	$	32,232
Notes due 2026, net		294,478		293,860
Tenant improvements and construction funding payable		31,210		46,274
Accounts payable and accrued expenses		6,428		7,718
Dividends payable		49,439		38,847
Rent received in advance and tenant security deposits		59,899		52,805
Other liabilities		2,082		1,167
Total liabilities		449,910		472,903
Commitments and contingencies (Notes 6 and 11)
Stockholders’ equity:
Preferred stock, par value $0.001 per share, 50,000,000 shares authorized: 9.00% Series A cumulative redeemable preferred stock, $15,000 liquidation preference ($25.00 per share), 600,000 shares issued and outstanding at June 30, 2022 and December 31, 2021		14,009		14,009
Common stock, par value $0.001 per share, 50,000,000 shares authorized: 27,973,429 and 25,612,541 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively		28		26
Additional paid-in capital		2,056,568		1,672,882
Dividends in excess of earnings		(94,833)		(75,218)
Total stockholders’ equity		1,975,772		1,611,699
Total liabilities and stockholders’ equity	$	2,425,682	$	2,084,602

See the accompanying notes to the condensed consolidated financial statements.

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Innovative Industrial Properties, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except share and per share amounts)

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Revenues:
Rental (including tenant reimbursements)	$	69,995	$	48,867	$	134,109	$	91,752
Other		516		—		906		—
Total revenues		70,511		48,867		135,015		91,752
Expenses:
Property expenses		2,427		482		4,409		1,252
General and administrative expense		8,707		5,604		17,484		11,204
Depreciation and amortization expense		15,233		9,841		29,101		18,680
Total expenses		26,367		15,927		50,994		31,136
Income from operations		44,144		32,940		84,021		60,616
Interest and other income		581		91		638		215
Interest expense		(4,504)		(3,692)		(9,270)		(5,565)
Loss on exchange of Exchangeable Senior Notes		(7)		—		(125)		—
Net income		40,214		29,339		75,264		55,266
Preferred stock dividends		(338)		(338)		(676)		(676)
Net income attributable to common stockholders	$	39,876	$	29,001	$	74,588	$	54,590
Net income attributable to common stockholders per share (Note 8):
Basic	$	1.42	$	1.21	$	2.77	$	2.27
Diluted	$	1.42	$	1.17	$	2.75	$	2.22
Weighted-average shares outstanding:
Basic		27,850,561		23,889,761		26,741,568		23,889,580
Diluted		28,036,690		26,168,682		27,159,774		26,166,494

See accompanying notes to the condensed consolidated financial statements.

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Innovative Industrial Properties, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)

	Three Months Ended June 30, 2022											Three Months Ended June 30, 2021
	Series A		Shares of			Additional		Dividends in		Total		Series A		Shares of			Additional		Dividends in		Total
	Preferred		Common	Common		Paid-In-		Excess of		Stockholders’		Preferred		Common	Common		Paid-In		Excess of		Stockholders’
	Stock		Stock	Stock		Capital		Earnings		Equity		Stock		Stock	Stock		Capital		Earnings		Equity
Balances at beginning of period	$	14,009	26,107,769	$	26	$	1,718,234	$	(85,608)	$	1,646,661	$	14,009	23,926,317	$	24	$	1,557,776	$	(54,191)	$	1,517,618
Net income		—	—		—		—		40,214		40,214		—	—		—		—		29,339		29,339
Issuance of unvested restricted stock, net of forfeitures		—	2,811		—		—		—		—		—	1,987		—		—		—		—
Exchange of Exchangeable Senior Notes		—	47,059		—		3,014		—		3,014		—	—		—		—		—		—
Net proceeds from sale of common stock		—	1,815,790		2		330,883		—		330,885		—	—		—		—		—		—
Preferred stock dividend		—	—		—		—		(338)		(338)		—	—		—		—		(338)		(338)
Common stock dividend		—	—		—		—		(49,101)		(49,101)		—	—		—		—		(33,584)		(33,584)
Stock-based compensation		—	—		—		4,437		—		4,437		—	—		—		2,132		—		2,132
Balances at end of period	$	14,009	27,973,429	$	28	$	2,056,568	$	(94,833)	$	1,975,772	$	14,009	23,928,304	$	24	$	1,559,908	$	(58,774)	$	1,515,167

	Six Months Ended June 30, 2022											Six Months Ended June 30, 2021
	Series A		Shares of			Additional		Dividends in		Total		Series A		Shares of			Additional		Dividends in		Total
	Preferred		Common	Common		Paid-In		Excess of		Stockholders’		Preferred		Common	Common		Paid-In		Excess of		Stockholders’
	Stock		Stock	Stock		Capital		Earnings		Equity		Stock		Stock	Stock		Capital		Earnings		Equity
Balances at beginning of period	$	14,009	25,612,541	$	26	$	1,672,882	$	(75,218)	$	1,611,699	$	14,009	23,936,928	$	24	$	1,559,059	$	(48,120)	$	1,524,972
Adjustment to opening balance upon adoption of ASU 2020-06 (Note 2)		—	—		—		(1,340)		728		(612)		—	—		—		—		—		—
Net income		—	—		—		—		75,264		75,264		—	—		—		—		55,266		55,266
Issuance of unvested restricted stock, net of forfeitures		—	15,174		—		(2,441)		—		(2,441)		—	(8,624)		—		(3,384)		—		(3,384)
Exchange of Exchangeable Senior Notes		—	412,901		—		26,665		—		26,665		—	—		—		—		—		—
Net proceeds from sale of common stock		—	1,932,813		2		351,986		—		351,988		—	—		—		—		—		—
Preferred stock dividend		—	—		—		—		(676)		(676)		—	—		—		—		(676)		(676)
Common stock dividend		—	—		—		—		(94,931)		(94,931)		—	—		—		—		(65,244)		(65,244)
Stock-based compensation		—	—		—		8,816		—		8,816		—	—		—		4,233		—		4,233
Balances at end of period	$	14,009	27,973,429	$	28	$	2,056,568	$	(94,833)	$	1,975,772	$	14,009	23,928,304	$	24	$	1,559,908	$	(58,774)	$	1,515,167

See accompanying notes to the condensed consolidated financial statements.

5

Innovative Industrial Properties, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	For the Six Months Ended
	June 30,
	2022		2021
Cash flows from operating activities
Net income	$	75,264	$	55,266
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		29,101		18,680
Loss on exchange of Exchangeable Senior Notes		125		—
Other non-cash adjustments		127		47
Stock-based compensation		8,816		4,233
Amortization of discounts on short-term investments		(513)		(199)
Amortization of debt discount and issuance costs		689		1,174
Changes in assets and liabilities
Other assets, net		2,568		220
Accounts payable, accrued expenses and other liabilities		(1,290)		2,278
Rent received in advance and tenant security deposits		7,094		7,693
Net cash provided by operating activities		121,981		89,392
Cash flows from investing activities
Purchases of investments in real estate		(129,562)		(99,073)
Funding of draws for tenant improvements and construction		(291,408)		(152,052)
Funding of construction loan and other investments		(21,360)		(6,000)
Deposits in escrow for acquisitions		(600)		(150)
Purchases of short-term investments		(219,040)		(439,878)
Maturities of short-term investments		235,000		410,000
Net cash used in investing activities		(426,970)		(287,153)
Cash flows from financing activities
Issuance of common stock, net of offering costs		351,988		—
Gross proceeds from issuance of Notes due 2026		—		300,000
Payment of deferred financing costs from issuance of Notes due 2026		—		(6,484)
Dividends paid to common stockholders		(84,339)		(61,387)
Dividends paid to preferred stockholders		(676)		(676)
Taxes paid related to net share settlement of equity awards		(2,441)		(3,384)
Net cash provided by financing activities		264,532		228,069
Net (decrease) increase in cash, cash equivalents and restricted cash		(40,457)		30,308
Cash, cash equivalents and restricted cash, beginning of period		86,419		126,006
Cash, cash equivalents and restricted cash, end of period	$	45,962	$	156,314
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	8,876	$	2,696
Supplemental disclosure of non-cash investing and financing activities:
Accrual for draws for tenant improvements and construction funding	$	31,210	$	60,670
Deposits applied for acquisitions		25		200
Accrual for common and preferred stock dividends declared		49,439		33,922
Accrual for deferred financing costs		—		196
Exchange of Exchangeable Senior Notes for common stock		26,665		—
Operating lease liability for obtaining right of use asset		1,017		—

See accompanying notes to the condensed consolidated financial statements.

6

Innovative Industrial Properties, Inc.

Notes to the Condensed Consolidated Financial Statements

June 30, 2022

(Unaudited)

1. Organization

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

We are an internally-managed real estate investment trust (“REIT”) focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated cannabis facilities. We have acquired and intend to continue to acquire our properties through sale-leaseback transactions and third-party purchases. We have leased and expect to continue to lease our properties on a triple-net lease basis, where the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term, including structural repairs, maintenance, real estate taxes and insurance.

We were incorporated in Maryland on June 15, 2016. We conduct our business through a traditional umbrella partnership real estate investment trust, or UPREIT structure, in which our properties are owned by our Operating Partnership, directly or through subsidiaries. We are the sole general partner of our Operating Partnership and own, directly or through subsidiaries, 100% of the limited partnership interests in our Operating Partnership.

2. Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements

Basis of Presentation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements.

This interim financial information should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Any references to square footage or occupancy percentage, and any amounts derived from these values in these notes to the condensed consolidated financial statements, are outside the scope of our independent registered public accounting firm’s review.

Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2022.

Variable Interest Entities. From time to time, the Company may acquire properties utilizing a reverse like-kind exchange under Section 1031 of the Internal Revenue Code (“Reverse 1031 Exchange”) in order to defer taxable gains on the subsequent sale of real estate properties. During the six months ended June 30, 2022, the Company acquired four properties for a total purchase price of approximately $82.3 million, excluding transaction costs, as part of Reverse 1031 Exchanges. The acquired properties are in the possession of limited liability companies whose legal equity interests are owned by a qualified intermediary engaged to execute the Reverse 1031 Exchanges until the Reverse 1031 Exchanges are completed or terminated. The limited liability companies were deemed to be variable interest entities (“VIEs”) for which the Company is deemed to be the primary beneficiary as the Company has the ability to direct the activities of the entity that most significantly impact its economic performance and the Company has all of the risks and rewards of ownership. As such, the VIEs, including the acquired properties, are included in the Company’s condensed consolidated financial statements as a consolidated VIE until legal title is transferred to the Company upon the completion of the Reverse 1031 Exchanges. There were four consolidated VIEs on the Company’s condensed consolidated financial statements as of June 30, 2022.

Federal Income Taxes. We believe that we have operated our business so as to qualify to be taxed as a REIT for U.S. federal income tax purposes. Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income. Assuming our dividends equal or exceed our taxable net income, we generally will not be required to pay federal corporate income taxes on such income. The income taxes recorded on our condensed consolidated statements of income

7

represent amounts paid for city and state income and franchise taxes and are included in general and administrative expenses in the accompanying the condensed consolidated statements of income.

Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates and assumptions.

Reportable Segment. We are engaged in the business of providing real estate for the regulated cannabis industry. Our properties are similar in that they are leased to the state-licensed operators on a long-term triple-net basis, consist of improvements that are reusable and have similar economic characteristics. Our chief operating decision maker reviews financial information for our entire consolidated operations when making decisions related to assessing our operating performance. We have aggregated the properties into one reportable segment as the properties share similar long-term economic characteristics and have other similarities, including the fact that they are operated using consistent business strategies. The financial information disclosed herein represents all of the financial information related to our one reportable segment.

Acquisition of Real Estate Properties. Our investment in real estate is recorded at historical cost, less accumulated depreciation. Upon acquisition of a property, the tangible and intangible assets acquired and liabilities assumed are initially measured based upon their relative fair values. We estimate the fair value of land by reviewing comparable sales within the same submarket and/or region. We estimate the fair value of buildings and improvements and tenant improvements as if the property was vacant, taking into consideration current replacement costs and other relevant market rate information and may engage third-party valuation specialists. Acquisition costs are capitalized as incurred. All of our acquisitions to date were recorded as asset acquisitions.

The fair value of acquired in-place leases is derived based on our assessment of estimated lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amounts recorded for acquired in-place leases are reflected as in-place lease intangible assets, net on our condensed consolidated balance sheets and are amortized on a straight-line basis as a component of depreciation and amortization expense over the remaining term of the applicable leases.

The fair value of the above-market component of an acquired in-place operating lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) our estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease. The amount recorded for one above-market operating lease is included in other assets, net on our condensed consolidated balance sheets and is amortized on a straight-line basis as a reduction of rental revenue over the remaining term of the applicable lease.

Cost Capitalization and Depreciation. We capitalize costs associated with development and redevelopment activities and tenant improvements when we are considered to be the accounting owner of the resulting assets. The development and redevelopment activities may be funded by us pursuant to the lease. We are generally considered the accounting owner for such improvements that are attached to or built into the premises, which are required under the lease to be surrendered to us upon the expiration or earlier termination of the lease. Typically, such improvements include, but are not limited to, ground up development, and enhanced HVAC, plumbing, electrical and other building systems.

Amounts capitalized are depreciated over estimated useful lives determined by management. We depreciate buildings and improvements and tenant improvements based on our evaluation of the estimated useful life of each specific asset, not to exceed 40 years. For the three months ended June 30, 2022 and 2021, we recognized depreciation expense of approximately $15.0 million and $9.8 million, respectively, which is included in depreciation and amortization expense in our condensed consolidated statements of income. For the six months ended June 30, 2022 and 2021, we recognized depreciation expense of approximately $28.7 million and $18.7 million, respectively, which are included in depreciation and amortization expense in our condensed consolidated statements of income. We depreciate office equipment and furniture and fixtures over estimated useful lives ranging from three to seven years. We depreciate the leasehold improvements at our corporate office over the shorter of the estimated useful lives or the remaining lease term.

Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment. Project costs that are clearly associated with the acquisition and development or redevelopment of a real estate project, for which we are the accounting owner, are capitalized as a cost of that project. Expenditures that meet one or more of the following criteria generally qualify for capitalization:

● the expenditure provides benefit in future periods; and

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● the expenditure extends the useful life of the asset beyond our original estimates.

Provision for Impairment. On a quarterly basis, we review current activities and changes in the business conditions of all of our properties prior to and subsequent to the end of each quarter to determine the existence of any triggering events or impairment indicators requiring an impairment analysis. If triggering events or impairment indicators are identified, we review an estimate of the future undiscounted cash flows for the properties, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration.

Long-lived assets are individually evaluated for impairment when conditions exist that may indicate that the carrying amount of a long-lived asset may not be recoverable. The carrying amount of a long-lived asset to be held and used is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Impairment indicators or triggering events for long-lived assets to be held and used are assessed by project and include significant fluctuations in estimated net operating income, occupancy changes, significant near-term lease expirations, current and historical operating and/or cash flow losses, construction costs, estimated completion dates, rental rates, and other market factors. We assess the expected undiscounted cash flows based upon numerous factors, including, but not limited to, construction costs, available market information, current and historical operating results, known trends, current market/economic conditions that may affect the property, and our assumptions about the use of the asset, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration. Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value. We may adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives. No impairment losses were recognized during the six months ended June 30, 2022 and 2021.

Revenue Recognition. Our leases are triple-net leases, an arrangement under which the tenant maintains the property while paying us rent. We account for our current leases as operating leases and record revenue for each of our properties on a cash basis due to the uncertain regulatory environment in the United States pertaining to the regulated cannabis industry, the limited operating history of certain tenants and the resulting uncertainty of collectability of lease payments from each tenant over the duration of the lease term. Contractually obligated reimbursements from tenants for recoverable real estate taxes, insurance and operating expenses are included in rental revenues in the period when such costs are reimbursed by the tenants. Contractually obligated real estate taxes that are paid directly by the tenant to the tax authorities are not reflected in our condensed consolidated financial statements.

Construction Loan. In June 2021, we executed a construction loan agreement with a developer, pursuant to which we agreed to lend up to $18.5 million for the development of a regulated cannabis cultivation and processing facility in California. We have an option to purchase the property, and may execute a negotiated lease with an affiliate of the developer or with another third party, if we determine to exercise our purchase option. The developer is required to complete construction by December 1, 2022, subject to extension in certain circumstances. Interest on the construction loan is payable at maturity, which is December 25, 2022. As of June 30, 2022, we had funded approximately $17.7 million of the construction loan.

Cash and Cash Equivalents. We consider all highly-liquid investments with original maturities of three months or less to be cash equivalents. As of June 30, 2022 and December 31, 2021, approximately $32.6 million and $72.0 million, respectively, were invested in short-term money market funds, obligations of the U.S. government and certificates of deposit with an original maturity at the time of purchase of less than or equal to three months.

Restricted Cash. Restricted cash relates to cash held in escrow accounts for future draws for improvements for tenants in accordance with certain lease agreements.

Investments. Investments consist of obligations of the U.S. government and certificates of deposit with an original maturity at the time of purchase of greater than three months. Investments are classified as held-to-maturity and stated at amortized cost.

Exchangeable Notes. The liability and equity components of exchangeable debt instruments that may be settled in cash upon exchange, including partial cash settlement, are required to be separately accounted for in a manner that reflects the issuer’s nonexchangeable debt borrowing rate. The initial proceeds from the sale of our Exchangeable Senior Notes (as defined below) were allocated between a liability component and an equity component in a manner that reflects interest expense at the rate of similar nonexchangeable debt that could have been issued at such time. The equity component represents the excess initial proceeds received over the fair value of the liability component of the Exchangeable Senior Notes as of the date of issuance. We measured the estimated fair value of the debt component of our Exchangeable Senior Notes as of the date of issuance based on our estimated nonexchangeable debt borrowing rate with the assistance of a third-party valuation specialist as we do not have a history of borrowing arrangements and there is limited empirical data available related to the Company’s industry due to the regulatory uncertainty of the cannabis market in which the Company’s tenants operate. The equity component of our Exchangeable Senior Notes was reflected within additional paid-

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in capital on our condensed consolidated balance sheets, and the resulting debt discount was amortized over the period during which the Exchangeable Senior Notes are expected to be outstanding (through the maturity date) as additional non-cash interest expense.

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models, and convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature, will no longer be allocated between debt and equity components. ASU 2020-06 also updates the earnings per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or shares. We adopted ASU 2020-06 on January 1, 2022 and recognized a cumulative-effect adjustment of approximately $728,000 to the opening balance of retained earnings and derecognized approximately $1.3 million of the remaining equity component relating to the outstanding principal balance of our Exchangeable Senior Notes at the date of adoption.

Deferred Financing Costs. The deferred financing costs that are included as a reduction in the net book value of the related liability on our condensed consolidated balance sheets reflect issuance and other costs related to our debt obligations. These costs are amortized as non-cash interest expense using the effective interest method over the life of the related obligations.

Stock-Based Compensation. Stock-based compensation for equity awards is based on the grant date fair value of the equity awards and is recognized over the requisite service or performance period. If awards are forfeited prior to vesting, we reverse any previously recognized expense related to such awards in the period during which the forfeiture occurs and reclassify any non-forfeitable dividends and dividend equivalents previously paid on these awards from retained earnings to compensation expense. Forfeitures are recognized as incurred. Certain equity awards are subject to vesting based upon the satisfaction of various market conditions. Forfeiture of share awards with market-based restrictions does not result in a reversal of previously recognized share-based compensation expense.

Lease Accounting. We adopted Topic 842 effective as of January 1, 2019 using the effective date method and elected the package of practical expedients that allows an entity not to reassess upon adoption (i) whether an expired or existing contract contains a lease, (ii) whether a lease classification related to expired or existing lease arrangements, and (iii) whether costs incurred on expired or existing leases qualify as initial direct costs, and as a lessor, the practical expedient not to separate certain non-lease components, such as common area maintenance, from the lease component if  the timing and pattern of transfer are the same for the non-lease component and associated lease component, and the lease component would be classified as an operating lease if accounted for separately. We also elected the lessor practical expedient, allowing us to continue to amortize previously capitalized initial direct leasing costs incurred prior to the adoption of Topic 842.

As lessee, we recognized a liability to account for our future obligations and a corresponding right-of-use asset related to our corporate office lease. The lease liability was initially measured based on the present value of the future lease payments discounted using the estimated incremental borrowing rate of 7.25%, which was the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments. In November 2021, we amended the lease to extend the term from April 2025 to January 2027 in connection with an expansion of the leased space which did not commence until February 2022. As a result of the lease amendment, we re-measured the lease liability relating to the existing leased space and measured the lease liability relating to the expansion space based on the present value of the respective future lease payments (excluding the extension option that we are not reasonably certain to exercise), discounted using the estimated incremental borrowing rate of 5.5%, which was the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments. Subsequently, the lease liability is accreted by applying a discount rate established at the lease commencement date to the lease liability balance as of the beginning of the period and is reduced by the payments made during the period.

The right-of-use asset is measured based on the corresponding lease liability. We did not incur any initial direct leasing costs and any other consideration exchanged with the landlord prior to the commencement of the lease. Subsequently, the right-of-use asset is amortized on a straight-line basis during the lease term. For the three months ended June 30, 2022 and 2021, we recognized office lease expense of approximately $122,000 and $57,000, respectively, which are included in general and administrative expense in our condensed consolidated statements of income. For the six months ended June 30, 2022 and 2021, we recognized office lease expense of approximately $223,000 and $114,000, respectively, which are included in general and administrative expense in our condensed consolidated statements of income. For the six months ended June 30, 2022 and 2021, amounts paid and classified as operating activities in our condensed consolidated statements of cash flows for the office lease were approximately $161,000 and $117,000, respectively.

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As lessor, for each of our real estate transactions involving the leaseback of the related property to the seller or affiliates of the seller, we determine whether these transactions qualify as sale and leaseback transactions under the accounting guidance. For these transactions, we consider various inputs and assumptions including, but not necessarily limited to, lease terms, renewal options, discount rates, and other rights and provisions in the purchase and sale agreement, lease and other documentation to determine whether control has been transferred to the Company or remains with the lessee. A transaction involving a sale leaseback will be treated as a purchase of a real estate property if it is considered to transfer control of the underlying asset from the lessee. A lease will be classified as direct-financing if risks and rewards are conveyed without the transfer of control and will be classified as a sales-type lease if control of the underlying asset is transferred to the lessee. Otherwise, the lease is treated as an operating lease. These criteria also include estimates and assumptions regarding the fair value of the leased facilities, minimum lease payments, the economic useful life of the facilities, the existence of a purchase option, and certain other terms in the lease agreements. The lease accounting guidance requires accounting for a transaction as a financing in a sale leaseback when the seller-lessee is provided an option to purchase the property from the landlord at the tenant’s option. Substantially all of our leases continued to be classified as operating leases and we continue to record revenue for each of our properties on a cash basis. Our tenant reimbursable revenue and property expenses continue to be presented on a gross basis as rental revenue and as property expenses, respectively, on our condensed consolidated statements of income. Property taxes paid directly by the lessee to a third party continue to be excluded from our condensed consolidated financial statements.

Lease amendments are evaluated to determine if the modification grants the lessee an additional right-of-use not included in the original lease and if the lease payments increase commensurate with the standalone price of the additional right-of-use, adjusted for the circumstances of the particular contract. If both conditions are present, the lease amendment is accounted for as a new lease that is separate from the original lease.

Our leases generally contain options to extend the lease terms at the prevailing market rate or at the expiring rental rate at the time of expiration. Certain of our leases provide the lessee with a right of first refusal or right of first offer in the event we market the leased property for sale.

Concentration of Credit Risk. As of June 30, 2022, we owned 110 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Texas, Virginia and Washington. The ability of any of our tenants to honor the terms of their leases is dependent upon the economic, regulatory, competition, natural and social factors affecting the community in which that tenant operates.

The following table sets forth the five tenants in our portfolio that represented the largest percentage of our total rental revenues for the three and six months ended June 30, 2022 and 2021, including tenant reimbursements:

	For the Three Months Ended			For the Six Months Ended
	June 30, 2022			June 30, 2022
		Percentage of			Percentage of
	Number of	Rental		Number of	Rental
	Leases	Revenue		Leases	Revenue
PharmaCann Inc. ("PharmaCann")	11	13	%	11	14	%
SH Parent, Inc. ("Parallel")	4	10	%	4	10	%
Ascend Wellness Holdings, Inc. ("Ascend")	4	10	%	4	9	%
Kings Garden Inc.	6	8	%	6	8	%
Trulieve Cannabis Corp. ("Trulieve")	6	6	%	6	7	%

	For the Three Months Ended
	June 30, 2021
		Percentage of
	Number of	Rental
	Leases	Revenue
PharmaCann	5	13	%
Parallel	4	10	%
Ascend	3	9	%
Cresco Labs Inc.	5	8	%
Kings Garden Inc.	5	7	%

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	For the Six Months Ended
	June 30, 2021
		Percentage of
	Number of	Rental
	Leases	Revenue
PharmaCann	5	13	%
Ascend	3	9	%
Parallel	4	8	%
Cresco Labs Inc.	5	8	%
Curaleaf Holdings, Inc.	4	7	%

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

On July 13, 2022, Kings Garden defaulted on its obligations to pay rent at all of the properties it leases with us. See Note 12 “Subsequent Events” to our condensed consolidated financial statements included in this report for more information.

As of June 30, 2022 and December 31, 2021, none of our properties individually represented more than 5% of our net real estate held for investment.

We have deposited cash with a financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of June 30, 2022, we had cash accounts in excess of FDIC insured limits. We have not experienced any losses in such accounts.

3. Common Stock

As of June 30, 2022, the Company was authorized to issue up to 50,000,000 shares of common stock, par value $0.001 per share, and there were 27,973,429 shares of common stock issued and outstanding.

In April 2022, we issued 1,815,790 shares of common stock in an underwritten public offering, including the exercise in full of the underwriters’ option to purchase an additional 236,842 shares, resulting in net proceeds of approximately $330.9 million.

We are party to equity distribution agreements with certain sales agents, pursuant to which we may offer and sell from time to time through an “at-the-market” offering program (the “ATM Program”) up to $500.0 million in shares of our common stock. During the six months ended June 30, 2022, we sold 117,023 shares of our common stock for net proceeds of approximately $21.1 million under the ATM Program, which includes the payment of approximately $434,000 to one sales agent as commission for such sales.

During the three and six months ended June 30, 2022, we issued 47,059 and 412,901 shares, respectively, of our common stock upon exchange by holders of approximately $3.1 million and $26.9 million, respectively, of outstanding principal amount of our Exchangeable Senior Notes.

4. Preferred Stock

As of June 30, 2022, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value $0.001 per share, and there were issued and outstanding 600,000 shares of 9.00% Series A Cumulative Redeemable Preferred Stock, $0.001 par value per share (the “Series A Preferred Stock”). Generally, the Company is not permitted to redeem the Series A Preferred Stock prior to October 19, 2022, except in limited circumstances relating to the Company’s ability to qualify as a REIT and in certain other circumstances related to a change of control/delisting (as defined in the articles supplementary for the Series A Preferred Stock). On or after October 19, 2022, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends on such Series A Preferred Stock up to, but excluding the redemption date. Holders of the Series A Preferred Stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in certain other circumstances.

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5. Dividends

The following table describes the dividends declared by the Company during the six months ended June 30, 2022:

		Amount			Dividend	Dividend
Declaration Date	Security Class	Per Share		Period Covered	Paid Date	Amount
						(In thousands)
March 14, 2022	Common stock	$	1.75	January 1, 2022 to March 31, 2022	April 14, 2022	$	45,830
March 14, 2022	Series A preferred stock	$	0.5625	January 15, 2022 to April 14, 2022	April 14, 2022	$	338
June 15, 2022	Common stock	$	1.75	March 1, 2022 to June 30, 2022	July 15, 2022	$	49,101
June 15, 2022	Series A preferred stock	$	0.5625	April 15, 2022 to July 14, 2022	July 15, 2022	$	338

6. Investments in Real Estate

Acquisitions

The Company acquired the following properties during the six months ended June 30, 2022 (dollars in thousands):

					Rentable
					Square		Purchase		Transaction
Property	Market	Closing Date			Feet(1)		Price		Costs		Total
4Front MA	Massachusetts		January 28, 2022			57,000	$	16,000	$	20	$	16,020	(2)
Ascend NJ	New Jersey		February 10, 2022			114,000		35,400		8		35,408	(3)
Verano PA	Pennsylvania		March 23, 2022			3,000		2,750		68		2,818
Kings Garden CA	California		March 25, 2022			23,000		8,158		11		8,169	(4)
MCP MD	Maryland		April 13, 2022			84,000		25,000		290		25,290	(5)
Harvest AZ	Arizona		April 27, 2022			17,000		5,238		11		5,249	(5)
TILT MA	Massachusetts		May 16, 2022			104,000		40,000		32		40,032	(5)
Texas Original TX	Texas		June 14, 2022			85,000		12,040		23		12,063	(5)(6)
Total				​</