INNOVATIVE INDUSTRIAL PROPERTIES INC [IIPR] Filings

10-Q 1 iipr-20240930x10q.htm 10-Q

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 SEPTEMBER 30, 2024
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 November 7, 2024 there were 28,331,833 shares of common stock outstanding.

Table of Contents

INNOVATIVE INDUSTRIAL PROPERTIES, INC.

FORM 10-Q – QUARTERLY REPORT

SEPTEMBER 30, 2024

TABLE OF CONTENTS

PART I


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	7
	Notes to the Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39

PART II


Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	40

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS

Innovative Industrial Properties, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)


	September 30,		December 31,
Assets	2024		2023
Real estate, at cost:
Land	$	146,043	$	142,524
Buildings and improvements		2,209,720		2,108,218
Construction in progress		59,998		117,773
Total real estate, at cost		2,415,761		2,368,515
Less accumulated depreciation		(253,165)		(202,692)
Net real estate held for investment		2,162,596		2,165,823
Construction Loan receivable		22,000		22,000
Cash and cash equivalents		147,128		140,249
Restricted cash		—		1,450
Investments		25,315		21,948
Right of use office lease asset		1,051		1,355
In-place lease intangible assets, net		7,600		8,245
Other assets, net		29,641		30,020
Total assets	$	2,395,331	$	2,391,090

Liabilities and stockholders’ equity
Liabilities:
Exchangeable Senior Notes, net	$	—	$	4,431
Notes due 2026, net		297,503		296,449
Building improvements and construction funding payable		9,204		9,591
Accounts payable and accrued expenses		14,961		11,406
Dividends payable		54,817		51,827
Rent received in advance and tenant security deposits		61,084		59,358
Other liabilities		11,225		5,056
Total liabilities		448,794		438,118
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, liquidation preference of $25.00 per share, 1,002,673 and 600,000 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively		23,632		14,009
Common stock, par value $0.001 per share, 50,000,000 shares authorized: 28,331,833 and 28,140,891 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively		28		28
Additional paid-in capital		2,119,798		2,095,789
Dividends in excess of earnings		(196,921)		(156,854)
Total stockholders’ equity		1,946,537		1,952,972
Total liabilities and stockholders’ equity	$	2,395,331	$	2,391,090

See the accompanying notes to the condensed consolidated financial statements.

Table of Contents

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 Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Revenues:
Rental (including tenant reimbursements)	$	76,052	$	77,286	$	230,219	$	228,734
Other		474		540		1,554		1,616
Total revenues		76,526		77,826		231,773		230,350

Expenses:
Property expenses		7,295		6,318		20,867		17,700
General and administrative expense		9,330		10,981		28,553		31,924
Depreciation and amortization expense		17,944		16,678		52,567		50,096
Total expenses		34,569		33,977		101,987		99,720
Gain (loss) on sale of real estate		—		—		(3,449)		—
Income from operations		41,957		43,849		126,337		130,630
Interest income		2,685		2,075		8,435		6,625
Interest expense		(4,427)		(4,330)		(13,136)		(13,322)
Gain (loss) on exchange of Exchangeable Senior Notes		—		—		—		22
Net income		40,215		41,594		121,636		123,955
Preferred stock dividends		(564)		(338)		(1,240)		(1,014)
Net income attributable to common stockholders	$	39,651	$	41,256	$	120,396	$	122,941
Net income attributable to common stockholders per share (Note 8):
Basic	$	1.38	$	1.46	$	4.21	$	4.36
Diluted	$	1.37	$	1.45	$	4.16	$	4.32
Weighted-average shares outstanding:
Basic		28,254,565		27,983,004		28,216,946		27,971,544
Diluted		28,579,687		28,265,605		28,548,050		28,248,054

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Innovative Industrial Properties, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)


	Three Months Ended September 30, 2024
	Shares of	Series A		Shares of			Additional		Dividends in		Total
	Series A	Preferred		Common	Common		Paid-In-		Excess of		Stockholders’
	Preferred Stock	Stock		Stock	Stock		Capital		Earnings		Equity
Balances at beginning of period	600,000	$	14,009	28,331,833	$	28	$	2,115,482	$	(182,319)	$	1,947,200
Net income	—		—	—		—		—		40,215		40,215
Net proceeds from sale of preferred stock	402,673		9,623	—		—		—		—		9,623
Preferred stock dividends	—		—	—		—		—		(564)		(564)
Common stock dividends	—		—	—		—		—		(54,253)		(54,253)
Stock-based compensation	—		—	—		—		4,316		—		4,316
Balances at end of period	1,002,673	$	23,632	28,331,833	$	28	$	2,119,798	$	(196,921)	$	1,946,537


	Nine Months Ended September 30, 2024
	Shares of	Series A		Shares of			Additional		Dividends in		Total
	Series A	Preferred		Common	Common		Paid-In		Excess of		Stockholders’
	Preferred Stock	Stock		Stock	Stock		Capital		Earnings		Equity
Balances at beginning of period	600,000	$	14,009	28,140,891	$	28	$	2,095,789	$	(156,854)	$	1,952,972
Net income	—		—	—		—		—		121,636		121,636
Issuance of unvested restricted stock, net of forfeitures	—		—	39,310		—		(750)		—		(750)
Exchange of Exchangeable Senior Notes	—		—	28,408		—		—		—		—
Net proceeds from sale of preferred stock	402,673		9,623	—		—		—		—		9,623
Net proceeds from sale of common stock	—		—	123,224		—		11,757		—		11,757
Preferred stock dividends	—		—	—		—		—		(1,240)		(1,240)
Common stock dividends	—		—	—		—		—		(160,463)		(160,463)
Stock-based compensation	—		—	—		—		13,002		—		13,002
Balances at end of period	1,002,673	$	23,632	28,331,833	$	28	$	2,119,798	$	(196,921)	$	1,946,537

Table of Contents


	Three Months Ended September 30, 2023
	Shares of	Series A		Shares of			Additional		Dividends in		Total
	Series A	Preferred		Common	Common		Paid-In		Excess of		Stockholders’
	Preferred Stock	Stock		Stock	Stock		Capital		Earnings		Equity
Balances at beginning of period	600,000	$	14,009	28,040,054	$	28	$	2,076,357	$	(137,174)	$	1,953,220
Net income	—		—	—		—		—		41,594		41,594
Issuance of unvested restricted stock, net of forfeitures	—		—	(224)		—		—		—		—
Preferred stock dividends	—		—	—		—		—		(338)		(338)
Common stock dividends	—		—	—		—		—		(50,741)		(50,741)
Stock-based compensation	—		—	—		—		4,934		—		4,934
Balances at end of period	600,000	$	14,009	28,039,830	$	28	$	2,081,291	$	(146,659)	$	1,948,669


	Nine Months Ended September 30, 2023
	Shares of	Series A		Shares of			Additional		Dividends in		Total
	Series A	Preferred		Common	Common		Paid-In		Excess of		Stockholders’
	Preferred Stock	Stock		Stock	Stock		Capital		Earnings		Equity
Balances at beginning of period	600,000	$	14,009	27,972,830	$	28	$	2,065,248	$	(117,392)	$	1,961,893
Net income	—		—	—		—		—		123,955		123,955
Issuance of unvested restricted stock, net of forfeitures	—		—	34,800		—		(568)		—		(568)
Exchange of Exchangeable Senior Notes	—		—	32,200		—		1,964		—		1,964
Preferred stock dividends	—		—	—		—		—		(1,014)		(1,014)
Common stock dividends	—		—	—		—		—		(152,208)		(152,208)
Stock-based compensation	—		—	—		—		14,647		—		14,647
Balances at end of period	600,000	$	14,009	28,039,830	$	28	$	2,081,291	$	(146,659)	$	1,948,669

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Innovative Industrial Properties, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	For the Nine Months Ended
	September 30,
	2024		2023
Cash flows from operating activities
Net income	$	121,636	$	123,955
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization		52,567		50,096
Loss (gain) on exchange of Exchangeable Senior Notes		—		(22)
Loss (gain) on sale of real estate		3,449		—
Other non-cash adjustments		79		83
Stock-based compensation		13,002		14,647
Amortization of discounts on investments		(504)		(2,894)
Amortization of debt discount and issuance costs		1,214		1,021
Changes in assets and liabilities
Other assets, net		(2,800)		(2,905)
Accounts payable, accrued expenses and other liabilities		10,271		5,077
Rent received in advance and tenant security deposits		1,726		404
Net cash provided by (used in) operating activities		200,640		189,462

Cash flows from investing activities
Purchases of investments in real estate		(13,026)		(34,906)
Proceeds from sale of real estate asset		9,100		—
Funding of draws for improvements and construction		(45,642)		(129,502)
Funding of Construction Loan and other investments		—		(3,535)
Purchases of short-term investments		(45,110)		(91,772)
Maturities of short-term investments		42,247		253,716
Net cash provided by (used in) investing activities		(52,431)		(5,999)

Cash flows from financing activities
Issuance of common stock, net of offering costs		11,757		—
Issuance of preferred stock, net of offering costs		9,623		—
Principal payment on Exchangeable Senior Notes		(4,436)		—
Payment of deferred financing costs		(261)		—
Dividends paid to common stockholders		(157,699)		(151,969)
Dividends paid to preferred stockholders		(1,014)		(1,014)
Taxes paid related to net share settlement of equity awards		(750)		(568)
Net cash provided by (used in) financing activities		(142,780)		(153,551)
Net increase (decrease) in cash, cash equivalents and restricted cash		5,429		29,912
Cash, cash equivalents and restricted cash, beginning of period		141,699		88,572
Cash, cash equivalents and restricted cash, end of period	$	147,128	$	118,484

Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of interest capitalized	$	7,806	$	8,253
Supplemental disclosure of non-cash investing and financing activities:
Accrual for current-period additions to real estate	$	8,574	$	10,520
Deposits applied for acquisitions		—		250
Accrual for common and preferred stock dividends declared		54,817		51,079
Reclassification from other assets to real estate held for investment		3,152		—
Exchange of Exchangeable Senior Notes for common stock		—		1,964

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Innovative Industrial Properties, Inc.

Notes to the Condensed Consolidated Financial Statements

September 30, 2024

(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, 2023. 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, 2024.

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 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. The most significant estimates and assumptions made include the determination of lease accounting and fair value of acquisition of real estate properties.

Table of Contents

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 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 revenues over the remaining term of the applicable lease.

Certain acquisitions of real estate did not satisfy the requirements for sale-leaseback accounting and therefore as of September 30, 2024 and December 31, 2023, acquisitions of $16.8 million and $20.0 million, respectively have been recognized as notes receivable and are included in other assets, net on our condensed consolidated balance sheets. During the three months ended September 30, 2024, a $3.2 million acquisition of real estate which previously did not satisfy the requirements for sale-leaseback accounting was reclassified to real estate held for investment as the requirements for sale-leaseback accounting were satisfied.

Sale of Real Estate. When a real estate asset is sold, we evaluate the provisions of Accounting Standards Codification (“ASC”) 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”) to determine whether the asset is within the scope of ASC 610-20, including an evaluation of whether the asset being sold is a nonfinancial asset and whether the buyer has gained control of an asset within the scope of ASC 610-20. In assessing whether the buyer has gained control of the asset, we must determine whether the contract criteria in ASC 606, Revenue from Contracts with Customers (Topic 606) have been met, including 1) the parties to the contract have approved the contract and the contract has commercial substance, 2) we can identify each party’s rights regarding the asset to be transferred, 3) we can identify the payment terms for the asset to be transferred, and 4) it is probable that we will collect substantially all of the consideration to which we will be entitled in exchange for the asset to be transferred. If all of the contract criteria have been met, the carrying amount of the applicable asset is derecognized with a corresponding gain or loss from the sale recognized in our consolidated statements of income. If the contract criteria are not all met, the asset transferred is not derecognized and we continue to report the asset in our condensed consolidated balance sheet. See Note 6 “Investments in Real Estate - Property Disposition” for further information.

Cost Capitalization and Depreciation. We capitalize costs (including interest) associated with development and redevelopment activities and 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 on a straight-line basis over the estimated useful lives determined by management. We depreciate buildings and improvements based on our evaluation of the estimated useful life of each specific asset, not to exceed 40 years. For the three months ended September 30, 2024 and 2023, we recognized depreciation expense of $17.7 million and $16.5 million, respectively, and for the nine months ended September 30, 2024 and 2023, we recognized depreciation expense of $51.9 million and $49.5 million, respectively. Depreciation expense relating to our real estate held for investment is included in depreciation

Table of Contents

and amortization expense in our condensed consolidated statements of income. We depreciate office equipment and furniture and fixtures on a straight-line basis over the estimated useful lives ranging from three to seven years. We depreciate the leasehold improvements at our corporate office on a straight-line basis over the shorter of the estimated useful lives or the remaining lease term. Depreciation expense relating to our corporate assets is included in general and administrative expense in our condensed consolidated statements of income.

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.

We define redevelopment properties as existing properties for which we expect to spend significant development and construction costs that are not reimbursements to tenants for improvements at the properties. When existing properties are determined to be redevelopment properties, the net carrying value of the buildings and improvements are transferred to construction in progress while the redevelopment activities are in process. Costs capitalized to construction in progress related to redevelopment properties are transferred to buildings and improvements at historical cost of the properties as the redevelopment project or phases of projects are placed in service.

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.

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 three and nine months ended September 30, 2024 and 2023.

Revenue Recognition. Our leases are triple-net leases, an arrangement under which the tenant maintains the property while paying us rent. We recognize revenue for each of the leases at our properties that are classified as operating leases 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. Additionally, for operating leases, 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 incurred and 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.

For the three and nine months ended September 30, 2024, rental revenue recognized included the application of $1.4 million and $2.0 million of security deposits for rent, respectively. For the three and nine months ended September 30, 2023, rental revenue recognized included the application of $2.2 million and $8.0 million of security deposits for rent, respectively.

Construction Loan. We executed a construction loan agreement with a developer, 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”). 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 Construction Loan matures on December 31, 2024. As of both September

Table of Contents

30, 2024 and December 31, 2023, we had funded $22.0 million of the $23.0 million total commitment. Interest income on the Construction Loan is recognized on a cash basis.

Cash and Cash Equivalents. We consider all highly-liquid investments with original maturities of 90 days or less to be cash equivalents, which is comprised of 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 90 days.

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 short-term obligations of the U.S. government and certificates of deposit with an original maturity at the time of purchase of greater than 90 days. Investments in obligations of the U.S. government are classified as held-to-maturity and stated at amortized cost. Investments in certificates of deposit are classified as held-to-maturity and stated at cost.

Deferred Financing Costs. The deferred financing costs relating to our Notes due 2026 are included as a reduction in the net book value of the related liability on our condensed consolidated balance sheet. These costs are amortized as non-cash interest expense using the effective interest method over the life of the related obligations. Deferred financing costs relating to our Revolving Credit Facility are included in other assets, net in our condensed consolidated balance sheets. These costs are being amortized on a straight-line basis and recognized as non-cash interest expense over the remaining term of the Revolving Credit Facility.

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 account for our leases under ASC 842, Leases, and have elected the practical expedient not to separate certain non-lease components 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 short-term lease exception for lessees for leases that are less than 12 months. 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, which ends in January 2027 and contains annual escalations. We measured the lease liability based on the present value of the future lease payments (excluding the extension option that we are not reasonably certain to exercise), discounted using the estimated incremental borrowing rates of 7.25% and 5.5%, which were the interest rates that we estimated we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments at initial commencement in December 2019 and upon an amendment in November 2021, respectively. 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 or exchange any other consideration 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. In each of the three and nine months ended September 30, 2024 and 2023, we recognized office lease expense of $0.1 million and $0.4 million, respectively, which is included in general and administrative expenses in our condensed consolidated statements of income. In each of the nine months ended September 30, 2024 and 2023, amounts paid and classified as operating activities in our condensed consolidated statements of cash flows for the office lease were $0.4 million.

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

Table of Contents

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 are classified as operating leases.

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. In January 2024, the lease modifications for two of our leases to extend the initial term of each lease changed the lease classification from operating lease to sales-type lease that did not satisfy all the criteria for recognition as a completed sale. Accordingly, we have not derecognized the underlying assets and all lease payments received, as well as any future lease payments, will be recognized as a deposit liability and will be included in other liabilities on our condensed consolidated balance sheet until certain criteria are met. As of September 30, 2024, we have received lease payments of $4.4 million that have been included in other liabilities on our condensed consolidated balance sheet. The underlying assets’ land and building and improvements had a gross carrying value of $4.1 million and $28.9 million, respectively, and accumulated depreciation of $3.3 million as of September 30, 2024.

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.

Recent Accounting Pronouncements. In November 2023, the Financial Accounting Standards Board issued Accounting Standards Update 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). The amendments in ASU 2023-07 improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, measures of segment profit and loss, and disclosures of how the chief operating decision maker uses the reported measure(s) of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The amendments are effective for all public entities that are required to report segment information for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024. ASU 2023-07 also requires a public entity that has a single reportable segment to provide all the disclosures required by the amendments in ASU 2023-07 and all existing segment disclosures in Topic 280. Early adoption is permitted. The amendments should be applied retrospectively to all prior periods presented. The Company is currently evaluating the potential impact that this standard will have on its condensed consolidated financial statements and related disclosures.

Concentration of Credit Risk. As of September 30, 2024, we owned 108 properties located in 19 states and leased to 30 tenants (excluding three non-cannabis tenants at two of our properties). 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 nine months ended September 30, 2024 and 2023, including tenant reimbursements:


	For the Three Months Ended
	September 30, 2024
		Percentage of
	Number of	Rental
	Leases	Revenue
PharmaCann Inc. ("PharmaCann")	11	17	%
Ascend Wellness Holdings, Inc. ("Ascend")	4	11	%
Green Thumb Industries, Inc. ("Green Thumb")	3	8	%
Curaleaf Holdings, Inc. ("Curaleaf")	8	7	%
Trulieve Cannabis Corp. ("Trulieve")	6	7	%

Table of Contents


	For the Nine Months Ended
	September 30, 2024
		Percentage of
	Number of	Rental
	Leases	Revenue
PharmaCann	11	17	%
Ascend	4	11	%
Green Thumb	3	8	%
Holistic Industries Inc.	5	8	%
Curaleaf	8	7	%


	For the Three Months Ended
	September 30, 2023
		Percentage of
	Number of	Rental
	Leases	Revenue
PharmaCann	11	15	%
Ascend	4	10	%
Green Thumb	3	8	%
Curaleaf	8	7	%
Trulieve	6	7	%


	For the Nine Months Ended
	September 30, 2023
		Percentage of
	Number of	Rental
	Leases	Revenue
PharmaCann	11	15	%
Ascend	4	10	%
Green Thumb	3	8	%
Curaleaf	8	7	%
SH Parent, Inc. ("Parallel")⁽¹⁾	4	7	%

(1)We regained possession of two properties previously leased to Parallel in Texas and Pennsylvania in 2023.

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 September 30, 2024 and December 31, 2023, our largest property was located in New York and accounted for 5.5% and 5.4%, respectively, of our net real estate held for investment. No other properties accounted for more than 5% of our net real estate held for investment as of September 30, 2024 and December 31, 2023.

We have deposited cash with financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of September 30, 2024, we had cash accounts in excess of FDIC insured limits. We have not experienced any losses in such accounts.

3. Common Stock

As of September 30, 2024, the Company was authorized to issue up to 50,000,000 shares of common stock, par value $0.001 per share, and there were 28,331,833 shares of common stock issued and outstanding.

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. See Note 4 “Preferred Stock” for information regarding the sale of Series A Preferred Stock under the ATM Program.

Table of Contents

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. No shares of common stock were issued pursuant to the Prior ATM Program during the nine months ended September 30, 2023.

During the nine months ended September 30, 2024, we issued 28,408 shares of our common stock related to the exchange premium upon exchange by holders of $4.3 million of outstanding principal amount of our 3.75% Exchangeable Senior Notes due 2024 (the “Exchangeable Senior Notes”).

During the nine months ended September 30, 2023, we issued 32,200 shares of our common stock upon exchange by holders of $2.0 million of outstanding principal amount of our Exchangeable Senior Notes.

4. Preferred Stock

As of September 30, 2024, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value $0.001 per share, and there were 1,002,673 shares issued and outstanding of Series A Preferred Stock. 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.

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.

5. Dividends

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


		Amount			Dividend	Dividend
Declaration Date	Security Class	Per Share		Period Covered	Paid Date	Amount
						(In thousands)
March 15, 2024	Common stock	$	1.82	January 1, 2024 to March 31, 2024	April 15, 2024	$	51,957
March 15, 2024	Series A preferred stock	$	0.5625	January 15, 2024 to April 14, 2024	April 15, 2024	$	338
June 14, 2024	Common stock	$	1.90	April 1, 2024 to June 30, 2024	July 15, 2024	$	54,253
June 14, 2024	Series A preferred stock	$	0.5625	April 15, 2024 to July 14, 2024	July 15, 2024	$	338
September 13, 2024	Common stock	$	1.90	July 1, 2024 to September 30, 2024	October 15, 2024	$	54,253
September 13, 2024	Series A preferred stock	$	0.5625	July 15, 2024 to October 14, 2024	October 15, 2024	$	564

6. Investments in Real Estate

Acquisitions

The Company made the following acquisition during the nine months ended September 30, 2024 (dollars in thousands):

Rentable

Square

Purchase

Transaction

Property

Market

Closing Date

Feet⁽¹⁾

Price

Costs

Total

Ocala

Florida

June 7, 2024

145,000

13,000

13,026

⁽²⁾

Total

145,000

13,000

13,026

⁽³⁾

(1)

Includes expected rentable square feet at completion of construction at the property.

(2)

The tenant is expected to complete improvements at the property, for which we agreed to provide funding of up to $30.0 million.

(3)

$2.1 million was allocated to land and $10.9 million was allocated to building and improvements.

Table of Contents

Acquired In-Place Lease Intangible Assets

In-place lease intangible assets and related accumulated amortization as of September 30, 2024 and December 31, 2023 is as follows (in thousands):


	September 30, 2024		December 31, 2023
In-place lease intangible assets	$	9,979	$	9,979
Accumulated amortization		(2,379)		(1,734)
In-place lease intangible assets, net	$	7,600	$	8,245

Amortization of in-place lease intangible assets classified in depreciation and amortization expense in our condensed consolidated statements of income was $0.2 million in each of the three months ended September 30, 2024 and 2023, and $0.6 million in each of the nine months ended September 30, 2024 and 2023. The weighted-average remaining amortization period of the acquired in-place leases was 9.0 years, and the estimated annual amortization of the value of the acquired in-place leases as of September 30, 2024 is as follows (in thousands):

INNOVATIVE INDUSTRIAL PROPERTIES INC [IIPR] Filings

INNOVATIVE INDUSTRIAL PROPERTIES INC [IIPR-PA] Filings