UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED | |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________ |
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As of May 5, 2022 there were
INNOVATIVE INDUSTRIAL PROPERTIES, INC.
FORM 10-Q – QUARTERLY REPORT
MARCH 31, 2022
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |
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34 |
2
PART I
ITEM 1. FINANCIAL STATEMENTS
Innovative Industrial Properties, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share amounts)
| March 31, |
| December 31, | |||
Assets | 2022 | 2021 | ||||
Real estate, at cost: | ||||||
Land | $ | | $ | | ||
Buildings and improvements |
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Tenant improvements |
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Total real estate, at cost |
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Less accumulated depreciation |
| ( |
| ( | ||
Net real estate held for investment |
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Construction loan receivable | | | ||||
Cash and cash equivalents |
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Restricted cash | | | ||||
Investments |
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Right of use office lease asset | | | ||||
In-place lease intangible assets, net | | | ||||
Other assets, net |
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Total assets | $ | | $ | | ||
Liabilities and stockholders’ equity | ||||||
Exchangeable Senior Notes, net | $ | | $ | | ||
Notes due 2026, net | | | ||||
Tenant improvements and construction funding payable | | | ||||
Accounts payable and accrued expenses |
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Dividends payable |
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Other liabilities |
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Rent received in advance and tenant security deposits |
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Total liabilities |
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Commitments and contingencies (Notes 6 and 11) |
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Stockholders’ equity: |
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Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Dividends in excess of earnings |
| ( |
| ( | ||
Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | |
See the accompanying notes to the condensed consolidated financial statements.
3
Innovative Industrial Properties, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except share and per share amounts)
| For the Three Months Ended |
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March 31, | |||||||
| 2022 |
| 2021 |
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Revenues: |
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Rental (including tenant reimbursements) | $ | | $ | | |||
Other revenue |
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| — | |||
Total revenues |
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Expenses: | |||||||
Property expenses |
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General and administrative expense |
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Depreciation and amortization expense |
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Total expenses |
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Income from operations |
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Interest and other income |
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Interest expense | ( | ( | |||||
Loss on exchange of Exchangeable Senior Notes |
| ( |
| — | |||
Net income |
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Preferred stock dividends |
| ( |
| ( | |||
Net income attributable to common stockholders | $ | | $ | | |||
Net income attributable to common stockholders per share (Note 8): |
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Basic | $ | | $ | | |||
Diluted | $ | | $ | | |||
Weighted-average shares outstanding: |
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Basic |
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Diluted |
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See accompanying notes to the condensed consolidated financial statements.
4
Innovative Industrial Properties, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share amounts)
Three Months Ended March 31, 2022 | ||||||||||||||||||
Series A | Shares of | Additional | Dividends in | Total | ||||||||||||||
Preferred | Common | Common | Paid-In- | Excess of | Stockholders’ | |||||||||||||
| Stock |
| Stock |
| Stock |
| Capital |
| Earnings |
| Equity | |||||||
Balance, December 31, 2021 | $ | | | $ | | $ | | $ | ( | $ | | |||||||
Adjustment to opening balance upon adoption of ASU 2020-06 (Note 2) | — | — | — | ( | | ( | ||||||||||||
Net income | — | — | — | — | | | ||||||||||||
Issuance of unvested restricted stock, net of forfeitures | — | | — | ( | — | ( | ||||||||||||
Exchange of Exchangeable Senior Notes | — | | — | | — | | ||||||||||||
Net proceeds from sale of common stock | — | | — | | — | | ||||||||||||
Preferred stock dividend | — | — | — | — | ( | ( | ||||||||||||
Common stock dividend | — | — | — | — | ( | ( | ||||||||||||
Stock-based compensation | — | — | — | | — | | ||||||||||||
Balance, March 31, 2022 | $ | |
| | $ | | $ | | $ | ( | $ | |
Three Months Ended March 31, 2021 | ||||||||||||||||||
Series A | Shares of | Additional | Dividends in | Total | ||||||||||||||
Preferred | Common | Common | Paid-In | Excess of | Stockholders’ | |||||||||||||
| Stock |
| Stock |
| Stock |
| Capital |
| Earnings |
| Equity | |||||||
Balance, December 31, 2020 | $ | | | $ | | $ | | $ | ( | $ | | |||||||
Net income | — | — | — | — | | | ||||||||||||
Issuance of unvested restricted stock, net of forfeitures | — | ( | — | ( | — | ( | ||||||||||||
Preferred stock dividend | — | — | — | — | ( | ( | ||||||||||||
Common stock dividend | — | — | — | — | ( | ( | ||||||||||||
Stock-based compensation | — | — | — | | — | | ||||||||||||
Balance, March 31, 2021 | $ | |
| | $ | | $ | | $ | ( | $ | |
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 Three Months Ended | |||||||
March 31, | |||||||
| 2022 |
| 2021 |
| |||
Cash flows from operating activities | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities | |||||||
Depreciation and amortization |
| |
| | |||
Loss on exchange of Exchangeable Senior Notes | | — | |||||
Other non-cash adjustments | | | |||||
Stock-based compensation |
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| | |||
Amortization of discounts on short-term investments |
| ( |
| ( | |||
Amortization of debt discount and issuance costs |
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Changes in assets and liabilities | |||||||
Other assets, net |
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Accounts payable, accrued expenses and other liabilities |
| |
| ( | |||
Rent received in advance and tenant security deposits |
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Net cash provided by operating activities |
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Cash flows from investing activities | |||||||
Purchases of investments in real estate |
| ( |
| ( | |||
Reimbursements of tenant improvements and construction funding |
| ( |
| ( | |||
Funding of construction loan and other investments | ( | — | |||||
Deposits in escrow for acquisitions |
| ( |
| ( | |||
Purchases of short-term investments |
| — |
| ( | |||
Maturities of short-term investments |
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Net cash used in investing activities |
| ( |
| ( | |||
Cash flows from financing activities | |||||||
Issuance of common stock, net of offering costs |
| |
| — | |||
Dividends paid to common stockholders |
| ( |
| ( | |||
Dividends paid to preferred stockholders |
| ( |
| ( | |||
Taxes paid related to net share settlement of equity awards |
| ( |
| ( | |||
Net cash used by financing activities |
| ( |
| ( | |||
Net decrease in cash, cash equivalents and restricted cash |
| ( |
| ( | |||
Cash, cash equivalents and restricted cash, beginning of period |
| |
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Cash, cash equivalents and restricted cash, end of period | $ | | $ | | |||
Supplemental disclosure of cash flow information: | |||||||
Cash paid during the period for interest | $ | | $ | | |||
Supplemental disclosure of non-cash investing and financing activities: | |||||||
Accrual for reimbursements of improvements and construction funding | $ | | $ | | |||
Deposits applied for acquisitions | | | |||||
Accrual for common and preferred stock dividends declared |
| |
| | |||
Accrual for stock issuance costs | | — | |||||
Exchange of Exchangeable Senior Notes for common stock | | — | |||||
Operating lease liability for obtaining right of use asset | | — |
See accompanying notes to the condensed consolidated financial statements.
6
Innovative Industrial Properties, Inc.
Notes to the Condensed Consolidated Financial Statements
March 31, 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,
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.
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 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
7
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
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 |
● | 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.
8
We may adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives.
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 $
Cash and Cash Equivalents. We consider all highly-liquid investments with original maturities of three months or less to be cash equivalents. As of March 31, 2022 and December 31, 2021, approximately $
Restricted Cash. Restricted cash relates to cash held in escrow accounts for the reimbursement of 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-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 $
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.
9
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
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
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 March 31, 2022 and 2021, we recognized office lease expense of approximately $
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 consolidated statements of income. Property taxes paid directly by the lessee to a third party continue to be excluded from our consolidated financial statements.
10
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 March 31, 2022, we owned
The following table sets forth the
For the Three Months Ended | |||||
March 31, 2022 | |||||
Percentage of | |||||
| Number of |
| Rental |
| |
| Leases |
| Revenue |
| |
PharmaCann Inc. |
| | | % | |
SH Parent, Inc. ("Parallel") | | | % | ||
Ascend Wellness Holdings, Inc. |
| | | % | |
Kings Garden Inc. | | | % | ||
Columbia Care, Inc. |
| | | % |
For the Three Months Ended | |||||
March 31, 2021 | |||||
|
| Percentage of |
| ||
| Number of |
| Rental |
| |
| Leases |
| Revenue |
| |
PharmaCann Inc. |
| | | % | |
Ascend Wellness Holdings, LLC |
| | | % | |
Cresco Labs Inc. | | | % | ||
Curaleaf Holdings, Inc. | | | % | ||
Green Thumb Industries, Inc. |
| | | % |
In each of the tables above, these leases include leases with affiliates of each entity, for which the entity has provided a corporate guaranty.
As of March 31, 2022 and December 31, 2021, none of our properties individually represented more than
We have deposited cash with a financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $
3. Common Stock
As of March 31, 2022, the Company was authorized to issue up to
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 $
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During the three months ended March 31, 2022, we issued
4. Preferred Stock
As of March 31, 2022, the Company was authorized to issue up to
5. Dividends
The following table describes the dividends declared by the Company during the three months ended March 31, 2022:
|
| Amount |
|
| Dividend |
| Dividend | |||||
Declaration Date | Security Class | Per Share | Period Covered | Paid Date | Amount | |||||||
| (In thousands) | |||||||||||
March 14, 2022 | Common stock | $ | | January 1, 2022 to March 31, 2022 | April 14, 2022 | $ | | |||||
March 14, 2022 | Series A preferred stock | $ | | January 15, 2022 to April 14, 2022 | April 14, 2022 | $ | |
6. Investments in Real Estate
Acquisitions
The Company acquired the following properties during the three months ended March 31, 2022 (dollars in thousands):
Rentable | ||||||||||||||||||
Square | Purchase | Transaction | ||||||||||||||||
Property |
| Market |
| Closing Date |
| Feet(1) |
| Price |
| Costs |
| Total | ||||||
4Front MA |
| Massachusetts | January 28, 2022 |
| | $ | | $ | | $ | | (2) | ||||||
Ascend NJ |
| New Jersey | February 10, 2022 |
| |
| |
| |
| | (3) | ||||||
Verano PA |
| Pennsylvania | March 23, 2022 |
| |
| |
| |
| | |||||||
Kings Garden CA | California | March 25, 2022 | | | | | (4) | |||||||||||
Total |
| | $ | | $ | | $ | | (5) |
(1) | Includes expected rentable square feet at completion of construction of certain properties. |
(2) | The acquisition of the property did not satisfy the requirements for sale-leaseback accounting and therefore, the transaction is recognized as a note receivable and is included in other assets, net on our condensed consolidated balance sheet. |
(3) | The tenant is expected to complete improvements at the property, for which we agreed to provide reimbursement of up to $ |
(4) | The purchase price includes $ |
(5) | Approximately $ |
The properties acquired during the three months ended March 31, 2022 generated approximately $
12
In addition, we acquired additional land adjacent to one of our existing properties in Pennsylvania on February 2, 2022. In connection with the acquisition, we amended the lease for the existing property to incorporate this land into the leased area and reduced the existing improvement allowance under the lease by an amount equal to the purchase price for the land, which was approximately $
Acquired In-Place Lease Intangible Assets
In-place lease intangible assets and related accumulated amortization as of March 31, 2022 and December 31, 2021 is as follows (in thousands):
| March 31, 2022 |
| December 31, 2021 | |||
In-place lease intangible assets | $ | | $ | | ||
Accumulated amortization |
|
| ( |
| ( | |
In-place lease intangible assets, net | $ | | $ | |
Amortization of in-place lease intangible assets classified in depreciation and amortization expense in our condensed consolidated statements of income was approximately $
Year |
| Amount | |
2022 (nine months ending December 31) | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter |
| | |
Total | $ | |
Above-Market Lease
The above-market lease and related accumulated amortization included in other assets, net on our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 is as follows (in thousands):
| March 31, 2022 |
| December 31, 2021 | |||
Above-market lease | $ | | $ | | ||
Accumulated amortization |
|
| ( |
| ( | |
Above-market lease, net | $ | | $ | |
The above-market lease is amortized on a straight-line basis as a reduction to rental revenue over the remaining lease term of approximately
Lease Amendments
In February 2022, we amended our lease with Green Peak Industries, Inc. at one of our Michigan properties, increasing the improvement allowance under the lease by $
In March 2022, we amended our lease with Holistic Industries Inc. at one of our Michigan properties, increasing the improvement allowance under the lease by $
13
In March 2022, we amended our lease with a subsidiary of Ascend Wellness Holdings, Inc. at one of our Michigan properties, increasing the improvement allowance under the lease by $
In March 2022, we amended our lease with a subsidiary of Ascend Wellness Holdings, Inc. at one of our Massachusetts properties, increasing the improvement allowance under the lease by $
Including all of our properties, during the three months ended March 31, 2022, we capitalized costs of approximately $
Future contractual minimum rent (including base rent and property management fees) under the operating leases as of March 31, 2022 for future periods is summarized as follows (in thousands):
Year |
| Contractual Minimum Rent | |
2022 (nine months ending December 31) | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter |
| | |
Total | $ | |
7. Debt
Exchangeable Senior Notes
As of March 31, 2022, our Operating Partnership had outstanding approximately $
During the three months ended March 31, 2022, we issued
The following table details our interest expense related to the Exchangeable Senior Notes (in thousands):
For the Three Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Cash coupon | $ | | $ | | ||
Amortization of debt discount | — | | ||||
Amortization of issuance cost |
| | | |||
Total interest expense | $ | | $ | |
14
The following table details the carrying value of our Exchangeable Senior Notes (in thousands):
| At March 31, 2022 |
| At December 31, 2021 | |||
Principal amount | $ | | $ | | ||
Unamortized discount |
|
| — |
| ( | |
Unamortized issuance cost |
|
| ( |
| ( | |
Carrying value | $ | | $ | |
Accrued interest payable for the Exchangeable Senior Notes as of March 31, 2022 and December 31, 2021 was approximately $
Notes due 2026
On May 25, 2021, our Operating Partnership issued $
In connection with the issuance of the Notes due 2026, we recorded approximately $
The following table details our interest expense related to the Notes due 2026 (in thousands):
For the Three Months Ended | |||
| March 31, 2022 | ||
Cash coupon | $ | | |
Amortization of issuance cost |
| | |
Total interest expense | $ | |
The following table details the carrying value of our Notes due 2026 (in thousands):
| At March 31, 2022 |
| December 31, 2021 | |||
Principal amount | $ | | $ | | ||
Unamortized issuance cost |
|
| ( |
| ( | |
Carrying value | $ | | $ | |
The Operating Partnership may redeem some or all of the notes at its option at any time at the applicable redemption price. If the notes are redeemed prior to February 25, 2026, the redemption price will be equal to
The terms of the indenture for the Notes due 2026 require compliance with various financial covenants, including minimum level of debt service coverage and limits on the amount of total leverage and secured debt maintained by the Operating Partnership. Management believes that it was in compliance with those covenants as of March 31, 2022.
15
Accrued interest payable for the Notes due 2026 as of March 31, 2022 and December 31, 2021 was approximately $
The following table summarizes the principal payments on our outstanding indebtedness as of March 31, 2022 (in thousands):
Payments Due | |||
by Year |
| Amount | |
2022 (nine months ended December 31) | $ | — | |
2023 | — | ||
2024 | | ||
2025 | — | ||
2026 | | ||
Thereafter | — | ||
Total | $ | |
8. Net Income Per Share
Grants of restricted stock and restricted stock units (“RSUs”) of the Company in share-based payment transactions are considered participating securities prior to vesting and, therefore, are considered in computing basic earnings per share under the two-class method. The two-class method is an earnings allocation method for calculating earnings per share when a company’s capital structure includes either two or more classes of common stock or common stock and participating securities. Earnings per basic share under the two-class method is calculated based on dividends declared on common shares and other participating securities (“distributed earnings”) and the rights of participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends accruing during the period. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage of each security to the total number of outstanding participating securities. Earnings per basic share represents the summation of the distributed and undistributed earnings per share class divided by the total number of shares.
Through March 31, 2022, all of the Company’s participating securities received dividends or dividend equivalents at an equal dividend rate per share or unit. As a result, distributions to participating securities for the three months ended March 31, 2022 and 2021 have been included in net income attributable to common stockholders to calculate net income per basic and diluted share.
The
For the three months ended March 31, 2022,
16
Computations of net income per basic and diluted share (in thousands, except share and per share data) were as follows:
For the Three Months Ended | |||||||
March 31, | |||||||
| 2022 |
| 2021 |
| |||
Net income | $ | | $ | | |||
Preferred stock dividends | ( | ( | |||||
Distribution to participating securities | ( | ( | |||||
Net income attributable to common stockholders used to compute net income per share - basic | | | |||||
Dilutive effect of Exchangeable Senior Notes | | | |||||
Net income attributable to common stockholders used to compute net income per share - diluted | $ | | $ | | |||
Weighted-average common shares outstanding: | |||||||
Basic | | | |||||
Restricted stock and RSUs | | | |||||
PSUs | | — | |||||
Dilutive effect of Exchangeable Senior Notes | | | |||||
Diluted | | | |||||
Net income attributable to common stockholders per share: | |||||||
Basic | $ | | $ | | |||
Diluted | $ | | $ | |
9. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Includes other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activities, therefore requiring an entity to develop its own assumptions.
The following table presents the carrying value and approximate fair value of financial instruments at March 31, 2022 and December 31, 2021 (in thousands):
At March 31, 2022 | At December 31, 2021 | |||||||||||
|
|
|
| |||||||||
| Carrying Value |
| Fair Value |
| Carrying Value |
| Fair Value | |||||
Investments(1) | $ | | $ | | $ | | $ | | ||||
Exchangeable Senior Notes(2) | $ | | $ | | $ | | $ | | ||||
Notes due 2026(2) | $ | | $ | | $ | | $ | |
(1) | Short-term investments consisting of obligations of the U.S. government with an original maturity at the time of purchase of greater than three months are classified as held-to-maturity and valued using Level 1 inputs. |
(2) | The fair value is determined based upon Level 2 inputs as the Exchangeable Senior Notes and Notes due 2026 were trading in the private market. |
As of March 31, 2022 and December 31, 2021, cash equivalent instruments consisted of $
17
The carrying amounts of financial instruments such as cash equivalents invested in certificates of deposit, obligations of the U.S. government with an original maturity at the time of purchase of less than or equal to three months, construction loan receivable, accounts payable, accrued expenses and other liabilities approximate their fair values due to the short-term maturities and market rates of interest of these instruments.
10. Common Stock Incentive Plan
Our board of directors adopted our 2016 Omnibus Incentive Plan (the “2016 Plan”) to enable us to motivate, attract and retain the services of directors, employees and consultants considered essential to our long-term success. The 2016 Plan offers our directors, employees and consultants an opportunity to own our stock or rights that will reflect our growth, development and financial success. Under the terms of the 2016 Plan, the aggregate number of shares of our common stock subject to options, restricted stock, stock appreciation rights, restricted stock units and other awards, will be no more than
A summary of the restricted stock activity under the 2016 Plan and related information for the three months ended March 31, 2022 is included in the table below:
|
| Weighted- | |||
Unvested | Average | ||||
Restricted | Grant Date Fair | ||||
Stock | Value | ||||
Balance at December 31, 2021 |
| | $ | | |
Granted |
| | $ | | |
Vested |
| ( | $ | | |
Forfeited(1) |
| ( | $ | | |
Balance at March 31, 2022 |
| | $ | |
(1) | Shares that were forfeited to cover the employees’ tax withholding obligation upon vesting. |
The remaining unrecognized compensation cost of approximately $
The following table summarizes our RSU activity for the three months ended March 31, 2022. RSUs are issued as part of the Innovative Industrial Properties, Inc. Nonqualified Deferred Compensation Plan (the “Deferred Compensation Plan”), which allows a select group of management and our non-employee directors to defer receiving certain of their cash and equity-based compensation. RSUs are subject to vesting conditions of the Deferred Compensation Plan and have the same economic rights as shares of restricted stock under the 2016 Plan:
|
| Weighted-Average | |||
Restricted | Grant Date Fair | ||||
Stock Units | Value | ||||
Balance at December 31, 2021 | | $ | | ||
Granted | | $ | | ||
Balance at March 31, 2022 | | $ | |
The remaining unrecognized compensation cost of approximately $
In January 2021, we issued
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over a period commencing on January 11, 2022 and ending on December 31, 2024 (referred to herein together with the 2021 PSU Performance Period as the “Performance Periods”) relative to two different comparator groups of companies.
At the end of the applicable Performance Periods, a recipient of PSUs may receive as few as
The grant date fair values of the PSUs granted in January 2021 and January 2022 were $
| 2021 PSU Award |
|
| 2022 PSU Award |
| ||
Fair Value Assumptions | Fair Value Assumptions | ||||||
Valuation date |
| January 6, 2021 |
| January 7, 2022 | |||
Fair value per share on valuation date | $ | $ | |||||
Expected term | |||||||
Expected price volatility |
|
| |||||
Risk-free interest rate | |||||||
Discount for post vesting restriction |
|
|
The expected share price volatility was based on the historical volatility of our shares of common stock over a period of approximately the applicable Performance Periods. The risk-free interest rate was based on the zero-coupon risk-free interest rate derived from the Treasury Constant Maturities yield curve on the applicable valuation date. The discount for the post vesting restriction was estimated using the Finnerty model.
Stock-based compensation for market-based PSU awards is based on the grant date fair value of the equity awards and is recognized over the applicable Performance Period. For the three months ended March 31, 2022, we recognized stock-based compensation expense of $