EDGAR 10-K Filing

Company CIK: 1677576
Filing Year: 2021
Filename: 1677576_10-K_2021_0001558370-21-001890.json

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ITEM 1. BUSINESS
Item 1.
Business

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ITEM 1A. RISK FACTORS
Item 1A.
Risk Factors

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
As of December 31, 2020, we owned the following 66 properties, which were 99.3% leased (based on square footage) with a weighted-average remaining lease term of approximately 16.6 years:
Rentable Square
Property
Market
Closing Date
Feet(1)
Investment(2)
(In thousands)
Pharm AZ
Arizona
December 15, 2017
358,000
$
20,000
Pharm AZ Retail
Arizona
September 19, 2019
2,000
2,500
Sacramento CA
California
February 8, 2019
43,000
12,710
Kings Garden CA Portfolio
California
Various
364,000
69,972
(3)
Esperanza CA
California
July 23, 2019
35,000
13,000
(4)
Vertical CA Portfolio
California
Various
79,000
17,300
(5)
Columbia Care CO
Colorado
October 30, 2018
58,000
11,250
(6)
LivWell CO Retail Portfolio
Colorado
Various
8,000
3,349
(7)
Trulieve FL
Florida
October 23, 2019
120,000
17,000
Parallel FL Portfolio
Florida
Various
593,000
60,308
(8)
Ascend IL
Illinois
December 21, 2018
165,000
41,891
(9)
Cresco IL Portfolio
Illinois
October 22, 2019
90,000
45,454
(10)
Curaleaf IL
Illinois
October 30, 2019
120,000
23,300
(11)
PharmaCann IL
Illinois
October 30, 2019
66,000
27,426
(12)
GTI IL
Illinois
March 6, 2020
231,000
35,833
(13)
Holistic MD
Maryland
May 26, 2017
72,000
21,721
(14)
PharmaCann MA
Massachusetts
May 31, 2018
58,000
30,500
Holistic MA
Massachusetts
July 12, 2018
55,000
14,750
(15)
Trulieve MA
Massachusetts
July 26, 2019
150,000
43,500
Ascend MA
Massachusetts
April 2, 2020
199,000
33,775
(16)
Cresco MA
Massachusetts
June 30, 2020
118,000
8,904
(17)
4Front MA
Massachusetts
December 17, 2020
67,000
15,500
Green Peak MI
Michigan
August 2, 2018
56,000
15,799
Emerald Growth MI
Michigan
June 7, 2019
45,000
10,000
Ascend MI
Michigan
July 2, 2019
145,000
19,750
LivWell MI
Michigan
October 9, 2019
156,000
41,500
(18)
Green Peak MI Retail Portfolio
Michigan
Various
31,000
11,784
(19)
Cresco MI
Michigan
April 22, 2020
115,000
10,510
(20)
Holistic MI
Michigan
September 1, 2020
63,000
7,904
(21)
Vireo MN
Minnesota
November 8, 2017
89,000
9,710
MJardin NV
Nevada
July 12, 2019
43,000
9,489
(22)
Curaleaf NJ
New Jersey
July 13, 2020
111,000
18,940
(23)
Columbia Care NJ Portfolio
New Jersey
July 16, 2020
54,000
13,033
(24)
PharmaCann NY
New York
December 19, 2016
127,000
30,000
(25)
Vireo NY
New York
October 23, 2017
40,000
6,717
(26)
Curaleaf ND
North Dakota
December 20, 2019
33,000
12,190
(27)
PharmaCann OH
Ohio
March 13, 2019
58,000
20,000
Vireo OH
Ohio
May 14, 2019
11,000
3,550
Cresco OH
Ohio
January 24, 2020
50,000
10,600
(28)
GTI OH
Ohio
January 31, 2020
101,000
9,566
(29)
Jushi PA
Pennsylvania
April 6, 2018
89,000
13,381
(30)
Maitri PA
Pennsylvania
April 24, 2019
51,000
21,402
(31)
Green Leaf PA
Pennsylvania
May 20, 2019
266,000
13,592
(32)
PharmaCann PA
Pennsylvania
August 9, 2019
54,000
25,730
(33)
GTI PA
Pennsylvania
November 12, 2019
148,000
39,600
Curaleaf PA
Pennsylvania
December 20, 2019
72,000
25,749
(34)
Holistic PA
Pennsylvania
June 10, 2020
108,000
15,007
(35)
Green Leaf VA
Virginia
January 15, 2020
82,000
19,750
4Front WA
Washington
December 17, 2020
114,000
17,500
Total
5,363,000
$
1,022,696
(1) Includes estimated rentable square feet at completion of construction.
(2) Includes purchase price and development and tenant reimbursement commitments funded, if any. Excludes transaction costs and development and tenant reimbursement commitments not funded as of December 31, 2020.
(3) Portfolio consists of four properties acquired on April 16, 2019, one property acquired on May 12, 2020 and one property acquired on November 16, 2020. Excludes available tenant improvement allowance of $25.0 million.
(4) In January 2020, the tenant defaulted on its obligations to pay rent to us pursuant to our lease. As of December 31, 2020, this tenant was in receivership and in ongoing default of its rent obligations. In January 2021, the property was leased to a new tenant.
(5) Portfolio consists of three properties acquired on August 29, 2019 and one property acquired on September 11, 2019. In November and December 2020, affiliates of Medical Investor Holdings LLC (“Vertical”) made partial payments of contractual rent due and approximately $424,000 of security deposits were applied to the payment of rent and associated lease penalties.
(6) Columbia Care, Inc. acquired The Green Solution during 2020.
(7) Portfolio consists of one property acquired on February 19, 2020 and one property acquired on February 21, 2020. Excludes remaining tenant improvement allowance of approximately $801,000.
(8) Portfolio consists of one property acquired on March 11, 2020 and one property acquired on September 18, 2020. Excludes remaining aggregate tenant improvement allowances of approximately $39.6 million.
(9) Excludes remaining tenant improvement allowance of approximately $9.1 million.
(10) Portfolio consists of two properties and excludes remaining tenant improvement allowance of approximately $1.1 million.
(11) Curaleaf Holdings, Inc. (“Curaleaf”) acquired GR Companies, Inc. (“Grassroots”) during 2020. Excludes remaining tenant improvement allowance of approximately $5.8 million.
(12) Excludes remaining tenant improvement allowance of approximately $574,000.
(13) Excludes remaining tenant improvement allowance of approximately $14.2 million.
(14) Excludes remaining tenant improvement allowance of approximately $679,000.
(15) Excludes remaining tenant improvement allowance of $3.0 million.
(16) Excludes remaining tenant improvement allowance of approximately $15.2 million.
(17) Excludes remaining tenant improvement allowance of approximately $19.8 million.
(18) Excludes remaining tenant improvement allowance of $500,000.
(19) Portfolio consists of one property acquired on October 25, 2019, three properties acquired on November 4, 2019, one property acquired on November 8, 2019 and one property acquired on November 25, 2019. Excludes remaining tenant improvement allowance of approximately $28,000.
(20) Excludes remaining tenant improvement allowance of approximately $21.5 million.
(21) Excludes remaining tenant improvement allowance of approximately $17.1 million.
(22) Excludes remaining tenant improvement allowance of approximately $111,000.
(23) Excludes remaining tenant improvement allowance of approximately $16.1 million.
(24) Portfolio consists of two properties. Excludes remaining tenant improvement allowance of approximately $952,000.
(25) Excludes available tenant improvement allowance of $31.0 million.
(26) Excludes remaining tenant improvement allowance of approximately $43,000.
(27) Curaleaf acquired Grassroots during 2020.
(28) Excludes available tenant improvement allowance of approximately $2.9 million.
(29) Excludes remaining tenant improvement allowance of approximately $22.6 million.
(30) Vireo Health, Inc. transferred its ownership in the subsidiary tenant at the property to Jushi Holdings Inc. Excludes remaining tenant improvement allowance of approximately $2.4 million.
(31) Excludes remaining tenant improvement allowance of approximately $848,000.
(32) Excludes remaining tenant improvement allowance available of approximately $29.4 million.
(33) Excludes remaining construction funding of approximately $2.3 million.
(34) Curaleaf acquired Grassroots during 2020. Excludes remaining tenant improvement allowance of approximately $891,000.
(35) Excludes remaining tenant improvement allowance of approximately $4.2 million.
See Item 1., “Business - Our Properties,” for more information about our properties.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
We may, from time to time, be a party to legal proceedings, which arise in the ordinary course of our business. We are not aware of any pending or threatened litigation that, if resolved against us, would have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NYSE under the symbol “IIPR.” As of February 25, 2021, there were 17 holders of record of our common shares. This number excludes our common shares owned by stockholders holding under nominee security position listings.
We have elected to be treated as a REIT for U.S. federal income tax purposes. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain (which does not equal net income as calculated in accordance with GAAP), and that it pay U.S. federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income.
To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income tax, we intend to make quarterly distributions of all or substantially all of our taxable income to holders of our common stock out of assets legally available therefor. However, we cannot assure you that distributions will be made or sustained. Any distributions we make will be at the direction of our board of directors and will depend upon a number of factors, including our actual results of operations, economic conditions, maintenance of REIT qualification and the applicable provisions of the MGCL and such other factors as our board may determine in its sole discretion.
Our organizational documents permit us to make distributions from any source. If our cash available for distribution is insufficient to cover our distributions, we expect to use the proceeds from the issuance of securities, the proceeds from borrowings or other sources to pay distributions. During our initial years of operation, we expect that a portion of our distributions declared may be paid from offering proceeds, which would constitute a return of capital to our stockholders.
We anticipate that our distributions generally will be taxable as ordinary income to our stockholders, although a portion of the distributions may be designated by us as qualified dividend income or capital gain or may constitute a return of capital. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain.
There were no unregistered sales of equity securities during the quarter ended December 31, 2020.
Information about our equity compensation plans and other related stockholder matters is incorporated by reference in Item 12 of Part III of this annual report on Form 10-K.
Stock Performance Graph
The following graph shows a comparison from December 1, 2016 (the date that our common stock first began trading on the NYSE) to December 31, 2020 of cumulative total stockholder return, calculated on a dividends reinvested basis, for Innovative Industrial Properties, Inc., the S&P 500 Stock Index, or the S&P 500, and the FTSE NAREIT All Equity REITs Index, which includes all tax-qualified equity REITs listed in the United States. Note that historic stock price performance is not necessarily indicative of future stock price performance. The stock performance graph should not be deemed filed or incorporated by reference into any other filing made by us under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate the stock performance graph by reference in another filing.
Source: SNL Financial

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth our selected consolidated financial and operating data on a historical basis. The following data should be read in conjunction with our financial statements and notes thereto and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
As of and for
the period
from June 15,
2016 (date of
incorporation)
through
As of and for the years ended December 31,
December 31,
(dollars in thousands, except per share data)
Statements of Operations:
Total revenues
$
116,896
$
44,667
$
14,787
$
6,420
$
Income / (loss) from operations
69,737
24,935
5,338
(223)
(4,446)
Net income / (loss)
65,730
23,475
6,985
(72)
(4,392)
Preferred stock dividends
(1,352)
(1,352)
(1,352)
(323)
-
Net income / (loss) attributable to common stockholders
64,378
22,123
5,633
(395)
(4,392)
Net income / (loss) attributable to common stockholders per share - basic
$
3.28
$
2.06
$
0.76
$
(0.13)
$
(4.56)
Net income / (loss) attributable to common stockholders per share - diluted
$
3.27
$
2.03
$
0.75
$
(0.13)
$
(4.56)
Cash dividends declared per common share
$
4.47
$
2.83
$
1.20
$
0.55
$
-
Cash dividends declared per preferred share
$
2.25
$
2.25
$
2.25
$
0.5375
$
-
Balance Sheet Data (at period end):
Total assets
$
1,768,081
$
745,857
$
281,466
$
80,028
$
63,327
Exchangeable senior notes, net
136,693
134,654
-
-
-
Total liabilities
243,109
197,847
17,174
6,479
2,888
Total equity
1,524,972
548,010
264,292
73,549
60,439
Other Data:
Cash flows provided by / (used in):
Operating activities
$
110,814
$
44,934
$
15,693
$
5,015
$
1,693
Investing activities
(1,027,115)
(340,630)
(199,255)
(38,645)
(30,032)
Financing activities
924,991
399,962
184,854
12,385
61,342

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section above entitled “Cautionary Statement Regarding Forward-Looking Statements.” Certain risk factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see Item 1A, “Risk Factors.”
Overview
We are an internally-managed REIT focused on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities. 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. As of December 31, 2020, we had 15 full-time employees. As of December 31, 2020, we owned 66 properties that were 99.3% leased (based on square footage) to state-licensed cannabis operators and comprising an aggregate of approximately 5.4 million rentable square feet (including approximately 2.0 million rentable square feet under development/redevelopment) in 17 states, with a weighted-average remaining lease term of approximately 16.6 years. As of December 31, 2020, we had invested an aggregate of approximately $1.0 billion (consisting of purchase price and development and tenant reimbursement commitments funded, if any, but excluding transaction costs) and had committed an additional approximately $287.8 million to reimburse certain tenants and sellers for completion of construction and tenant improvements at our properties. These statistics treat our Los Angeles, California property as not leased, due to the tenant being in receivership and its ongoing default in its obligation to pay rent at that location as of December 31, 2020.
Factors Impacting Our Operating Results
Our results of operations are affected by a number of factors and depend on the rental revenue we receive from the properties that we acquire, the timing of lease expirations, general market conditions, the regulatory environment in the medical-use cannabis industry, and the competitive environment for real estate assets that support the regulated medical-use cannabis industry.
Rental Revenues
We receive income primarily from rental revenue generated by the properties that we acquire. The amount of rental revenue depends upon a number of factors, including:
● our ability to enter into leases with increasing or market value rents for the properties that we acquire; and
● rent collection, which primarily relates to each of our current and future tenant’s financial condition and ability to make rent payments to us on time.
The properties that we acquire consist of real estate assets that support the regulated medical-use cannabis industry. Changes in current favorable state or local laws in the cannabis industry may impair our ability to renew or re-lease properties and the ability of our tenants to fulfill their lease obligations and could materially and adversely affect our ability to maintain or increase rental rates for our properties.
Conditions in Our Markets
Positive or negative changes in regulatory, economic or other conditions and natural disasters in the markets where we acquire properties may affect our overall financial performance.
Competitive Environment
We face competition from a diverse mix of market participants, including but not limited to, other companies with similar business models, independent investors, hedge funds and other real estate investors, hard money lenders, as well as would-be tenants, cannabis operators themselves, all of whom may compete with us in our efforts to acquire real estate zoned for cannabis cultivation and production operations. Competition from others may diminish our opportunities to acquire a desired property on favorable terms or at all. In addition, this competition may put pressure on us to reduce the rental rates below those that we expect to charge for the properties that we acquire, which would adversely affect our financial results.
Operating Expenses
Our operating expenses include general and administrative expenses, including personnel costs, legal, accounting, and other expenses related to corporate governance, public reporting and compliance with the various provisions of U.S. securities laws. We generally expect to structure our leases so that the tenant is responsible for real estate taxes, maintenance, insurance, and structural repairs with respect to the premises throughout the lease term. Increases or decreases in such operating expenses will impact our overall financial performance.
Our Qualification as a REIT
We have been organized and operate our business so as to qualify, to be taxed as a REIT for U.S. federal income tax purposes. Shares of our common stock and Series A Preferred Stock are subject to restrictions on ownership and transfer that are intended, among other purposes, to assist us in qualifying and maintaining our qualification as a REIT. In order for us to qualify as a REIT under the Code, the relevant sections of our charter provide that, subject to certain exceptions, no person or entity may own, or be deemed to own, by virtue of the applicable constructive ownership provisions of the Code, more than 9.8% (in value or number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of stock or Series A Preferred Stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of our outstanding common stock or any class or series of our outstanding preferred stock.
Results of Operations
Investments
See Note 6 in the notes to the consolidated financial statements for information regarding our investments in real estate and property portfolio activity during the year ended December 31, 2020.
Comparison of the Years Ended December 31, 2020, 2019 and 2018 (in thousands)
Increase / (Decrease)
Years Ended December 31,
2020 vs.
2019 vs.
Revenues:
Rental (excluding tenant reimbursements)
$
112,255
$
43,352
$
14,342
$
68,903
$
29,010
Tenant reimbursements
4,641
1,315
3,326
Total revenues
116,896
44,667
14,787
72,229
29,880
Expenses:
Property expenses
4,952
1,315
3,637
General and administrative expense
14,182
9,818
6,375
4,364
3,443
Depreciation expense
28,025
8,599
2,629
19,426
5,970
Total expenses
47,159
19,732
9,449
27,427
10,283
Income from operations
69,737
24,935
5,338
44,802
19,597
Interest and other income
3,424
4,846
1,647
(1,422)
3,199
Interest expense
(7,431)
(6,306)
-
(1,125)
(6,306)
Net income
65,730
23,475
6,985
42,255
16,490
Preferred stock dividends
(1,352)
(1,352)
(1,352)
-
-
Net income attributable to common stockholders
$
64,378
$
22,123
$
5,633
$
42,255
$
16,490
Revenues
Rental (excluding tenant reimbursements). Rental revenues for the year ended December 31, 2020 increased by approximately $68.9 million, or 159%, to approximately $112.3 million, compared to approximately $43.4 million for the year ended December 31, 2019. The increase in rental revenue was attributable to:
● The 20 properties we acquired in 2020 which generated approximately $25.6 million of rental revenue in 2020;
● The 35 properties we acquired in 2019 which generated approximately $54.5 million of rental revenue in 2020, including related rents on the amendments which increased the tenant improvement allowances on eight of the leases, compared to approximately $15.7 million in 2019, an increase of approximately $38.8 million; and
● The amendments to increase the tenant improvement allowances of seven properties we acquired prior to 2019 and the annual rent escalations on the eleven properties we acquired prior to 2019, which collectively resulted in approximately $4.5 million in additional rental revenue during the year ended December 31, 2020.
Rental revenues for the year ended December 31, 2020 included approximately $379,000 of rent and associated lease penalties received through the drawdown of the security deposit at our Los Angeles, California property where the tenant was in receivership and defaulted on its lease obligations commencing in January 2020; and approximately $424,000 of rent received through the drawdown of security deposits at our properties leased to Vertical in southern California, in which Vertical made partial payments of contractual rent due. Rental revenues for the year ended December 31, 2020 also included drawdown of part of the security deposits totaling approximately $940,000 at certain properties leased to three tenants to pay part of the rent and associated lease penalties in accordance with the rent deferral programs described in Note 6 in the notes to the consolidated financial statements.
Rental revenues for the year ended December 31, 2019 increased by approximately $29.0 million, or 202%, to approximately $43.4 million, compared to approximately $14.3 million for the year ended December 31, 2018. The increase in rental revenue was attributable to:
● The 35 properties we acquired 2019 which generated approximately $15.7 million of rental revenue in 2019;
● The six properties we acquired in 2018 which generated approximately $14.7 million of rental revenue in 2019, including related rents on the amendments which increased the tenant improvement allowances on five of the leases, compared to approximately $2.8 million in 2018, an increase of approximately $11.9 million; and
● The amendments to increase the tenant improvement allowances of two properties we acquired prior to 2018 and the annual rent escalations on the five properties we acquired prior to 2018 which resulted in approximately $1.4 million in additional rental revenue during the year ended December 31, 2019.
Tenant Reimbursements. Tenant reimbursements related to reimbursements by tenants for property insurance premiums and real estate taxes paid at certain properties. Tenant reimbursements for the year ended December 31, 2020 included approximately $43,000 of reimbursements received through the drawdown of the remaining security deposit at our Los Angeles, California property. The increase in tenant reimbursements for each year primarily related to the additional properties that we acquired over the years.
Expenses
Property Expenses. Property expenses related to property insurance premiums and real estate taxes paid at certain of our properties, which are reimbursable by the tenants in accordance with the leases. The increase in property expenses for each year primarily related to the additional properties that we acquired over the three years.
General and Administrative Expense. General and administrative expense for the year ended December 31, 2020 increased by approximately $4.4 million, or 44%, to approximately $14.2 million, compared to $9.8 million for the year ended December 31, 2019. The increase in general and administrative expense was primarily due to higher compensation to employees, the hiring of additional employees and higher public company, travel and occupancy costs.
General and administrative expense for the year ended December 31, 2019 increased by approximately $3.4 million, or 54%, to approximately $9.8 million, compared to $6.4 million for the year ended December 31, 2018. The increase in general and administrative expense was primarily due to higher compensation to employees, the hiring of additional employees and higher public company, travel and occupancy costs.
Compensation expense for the years ended December 31, 2020, 2019 and 2018 included approximately $3.3 million, $2.5 million and $1.5 million, respectively, of non-cash stock-based compensation.
Depreciation Expense. The increase in depreciation expense for each year was related to depreciation on properties that we acquired in the respective current and prior years, and the placement into service of tenant improvements and construction funding at certain of our properties.
Interest and Other Income. Interest and other income primarily related to interest earned on our short-term investments and cash and cash equivalents. The decrease in interest and other income for the year ended December 31, 2020 compared to 2019 was due to lower rates earned on interest bearing investments and cash balances. The increase in interest and other income for the year ended December 31, 2019 compared to 2018 was due to amortization of discounts on short-term investments and higher interest bearing investment and cash balances.
Interest Expense. Interest expense related to our Exchangeable Senior Notes issued in February 2019.
Preferred Stock Dividends. Preferred stock dividends related to dividends for our Series A Preferred Stock, which we issued in October 2017.
Cash Flows
The following summary discussion of our cash flows is based on the consolidated statements of cash flows in Item 8, “Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (in thousands):
Years Ended December 31,
Net cash provided by operating activities
$
110,814
$
44,934
$
15,693
Net cash used in investing activities
(1,027,115)
(340,630)
(199,255)
Net cash provided by financing activities
924,991
399,962
184,854
Ending cash, cash equivalents and restricted cash
126,006
117,316
13,050
Cash flows provided by operating activities for the years ended December 31, 2020, 2019 and 2018 were approximately $110.8 million, $44.9 million and $15.7 million, respectively. Cash flows provided by operating activities primarily related to contractual rent and security deposits from our properties, partially offset by general and administrative expenses. Cash flows provided by operating activities increased from 2018 to 2019 and from 2019 to 2020 primarily due to leases for properties we acquired during these time periods, annual escalations of base rent on our leases, and amendments to existing leases to increase tenant improvement allowances at those properties, which resulted in a corresponding increase in base rents, partially offset by higher cash compensation to employees and higher public company, travel and occupancy costs.
Cash flows used in investing activities for the years ended December 31, 2020, 2019 and 2018 were approximately $1.0 billion, $340.6 million and $199.3 million, respectively. Cash flows used in investing activities increased from 2018 to 2019 and from 2019 to 2020 primarily related to the purchases of new properties and additional funding of tenant improvement allowances, construction funding and net purchases and maturities of short-term investments.
Cash flows provided by financing activities for the year ended December 31, 2020 were approximately $925.0 million, primarily related to approximately $1.0 billion in net proceeds from our follow-on public offerings of common stock completed in January, May and July 2020 and sales of common stock during 2020 under our ATM Program, partially offset by approximately $76.8 million in dividend payments to holders of our common stock and Series A Preferred Stock and approximately $2.2 million in withholding taxes paid by us related to net share settlement of restricted stock awards that vested for certain employees.
Cash flows provided by financing activities for the year ended December 31, 2019 were approximately $400.0 million, primarily related to approximately $286.3 million in net proceeds from our follow-on public offering of common stock completed in July 2019 and sales of common stock during 2019 under our ATM Program, and approximately $138.5 million in net proceeds from the issuance of our Exchangeable Senior Notes in February 2019, partially offset by approximately $23.9 million in dividend payments to holders of our common stock and Series A Preferred Stock and approximately $939,000 in withholding taxes paid by us related to net share settlement of restricted stock awards that vested for certain employees.
Cash flows provided by financing activities for the year ended December 31, 2018 were approximately $184.9 million, primarily related to approximately $193.2 million in net proceeds from our follow-on public offerings of common stock completed in January and October 2018, partially offset by approximately $7.9 million in dividend payments to holders of our common stock and Series A Preferred Stock and approximately $390,000 in withholding taxes paid by us related to net share settlement of restricted stock awards that vested for certain employees.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements. We expect to use significant cash to acquire additional properties, develop and redevelop existing properties, pay dividends to our stockholders, fund our operations, service our Exchangeable Senior Notes and meet other general business needs.
Sources and Uses of Cash
We derive all of our revenues from the leasing of our properties, collecting rental income and operating expense reimbursements based on contractual arrangements with our tenants. This source of revenue represents our primary source of liquidity to fund our dividends, Exchangeable Senior Notes interest payments, general and administrative expenses, property development and redevelopment activities, property operating expenses and other expenses incurred related to managing our existing portfolio and investing in additional properties. To the extent additional resources are needed, we expect to fund our investment activity generally through equity or debt issuances either in the public or private markets. Where possible, we also may issue limited partnership interests in our Operating Partnership to acquire properties from existing owners seeking a tax-deferred transaction.
In January 2020, we issued 3,412,969 shares of common stock, including the exercise in full of the underwriters’ option to purchase an additional 445,170 shares, resulting in net proceeds of approximately $239.6 million.
In May 2020, we issued 1,550,648 shares of common stock, including the exercise in full of the underwriter’s option to purchase an additional 202,259 shares, resulting in net proceeds of approximately $114.9 million.
In July 2020, we issued 3,085,867 shares of common stock, including the exercise in full of the underwriters’ option to purchase an additional 402,504 shares, resulting in net proceeds of approximately $248.2 million.
In September 2019, we entered into equity distribution agreements with three sales agents, pursuant to which we were able to offer and sell from time to time through an “at-the-market” offering program (the “Prior ATM Program”) up to $250.0 million in shares of our common stock. During the year ended December 31, 2020, we sold 1,499,382 shares of our common stock at a weighted-average sales price of $94.23 per share for net proceeds of approximately $138.4 million under the Prior ATM Program, which includes the payment of approximately $2.8 million to one sales agent as commission for such sales.
In November 2020, we terminated the Prior ATM Program and entered into new equity distribution agreements with six sales agents, pursuant to which we may offer and sell from time to time through an “at-the-market” offering program (the “New ATM Program”) up to $500.0 million in shares of our common stock. During the year ended December 31, 2020, we sold 1,762,500 shares of our common stock at a weighted-average sales price of $152.25 per share for net proceeds of approximately $262.9 million under the New ATM Program, which includes the payment of approximately $5.4 million to one sales agent as commission for such sales. As of December 31, 2020, we had approximately $231.7 million in shares of common stock available for issuance under the New ATM Program.
We expect to meet our liquidity needs through cash and short-term investments on hand, cash flows from operations and cash flows from sources discussed above. We believe that our liquidity and sources of capital are adequate to satisfy our cash requirements. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs. Our investment guidelines also provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at the time of any new borrowing, subject to our board of directors’ discretion.
Dividends
The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to qualify and maintain its qualification as a REIT. As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. During 2020, we declared cash dividends on our common stock totaling $4.47 per share, and cash dividends on our Series A Preferred Stock totaling $2.25 per share. Our ability to continue to pay dividends is dependent upon our ability to continue to generate cash flows, service any debt obligations we have, including our Exchangeable Senior Notes, and make accretive new investments.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2020 (in thousands):
Payments Due
Exchangeable
by Year
Senior Notes
Interest
Office Rent
Total
$
-
$
5,391
$
$
5,626
-
5,391
5,633
-
5,391
5,640
143,749
144,769
-
-
Thereafter
-
-
-
-
Total
$
143,749
$
16,937
$
1,070
$
161,756
Additionally, as of December 31, 2020, we had approximately $250.7 million outstanding in commitments related to tenant improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease and approximately $624,000 of commitments relating to construction funding for the development of a property in Pennsylvania, which we funded in full in February 2021.
Non-GAAP Financial Information and Other Metrics
Funds from Operations and Adjusted Funds from Operations
In addition to the required GAAP presentations, we use certain non-GAAP performance measures as we believe these measures improve the understanding of our operational results. We continually evaluate the usefulness, relevance, limitations, and calculation of our reported non-GAAP performance measures to determine how best to provide relevant information to the public and thus such reported measures could change.
Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, depreciation and amortization and impairment related to real estate properties, and after adjustments for unconsolidated partnerships and joint ventures.
Management believes that net income, as defined by GAAP, is the most appropriate earnings measurement. However, management believes FFO and FFO per share to be supplemental measures of a REIT’s performance because they provide an understanding of the operating performance of our properties without giving effect to certain significant non-cash items, primarily depreciation expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. We believe that by excluding the effect of depreciation, FFO and FFO per share can facilitate comparisons of operating performance between periods. We report FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share.
Management believes that adjusted funds from operations (“AFFO”) and AFFO per share are also appropriate supplemental measures of a REIT’s operating performance. We calculate AFFO by adding to FFO certain non-cash or infrequent or unpredictable expenses which may impact comparability, consisting of non-cash stock-based compensation expense and non-cash interest expense generally.
For the three months ended December 31, 2020, FFO (diluted), AFFO and FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock. As a result, for purposes of calculating FFO (diluted), cash and non-cash interest expense of the Exchangeable Senior Notes was added back to FFO, and the total diluted weighted-average common shares outstanding increased by 2,158,837 shares for the period, which were the potentially issuable shares as if the Exchangeable Senior Notes were exchanged at the beginning of the period. These adjustments applied only for the three months ended December 31, 2020. The
Exchangeable Senior Notes were anti-dilutive for purposes of calculating earnings per diluted share for all other periods presented, and as such, were treated as anti-dilutive for purposes of calculating FFO, AFFO and FFO and AFFO per diluted share for all fiscal years presented and the three months ended December 31, 2019.
Our computation of FFO and AFFO may differ from the methodology for calculating FFO and AFFO utilized by other equity REITs and, accordingly, may not be comparable to such REITs. Further, FFO and AFFO do not represent cash flow available for management’s discretionary use. FFO and AFFO should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. FFO and AFFO should be considered only as supplements to net income computed in accordance with GAAP as measures of operations.
The table below is a reconciliation of net income attributable to common stockholders to FFO and AFFO for the years ended December 31, 2020, 2019 and 2018 (in thousands, except share and per share amounts):
Years Ended December 31,
Net income attributable to common stockholders
$
64,378
$
22,123
$
5,633
Real estate depreciation
28,025
8,599
2,629
FFO attributable to common stockholders
$
92,403
$
30,722
$
8,262
Stock-based compensation
3,330
2,495
1,465
Non-cash interest expense
2,040
1,678
-
AFFO attributable to common stockholders
$
97,773
$
34,895
$
9,727
FFO per share - basic
$
4.75
$
2.91
$
1.16
FFO per share - diluted
$
4.72
$
2.88
$
1.13
AFFO per share - basic
$
5.03
$
3.31
$
1.36
AFFO per share - diluted
$
5.00
$
3.27
$
1.34
Weighted average shares outstanding - basic
19,443,602
10,546,016
7,138,952
Weighted average shares outstanding - diluted
19,557,619
10,684,068
7,285,801
The table below is a reconciliation of quarterly net income attributable to common stockholders to FFO and AFFO for the years ended December 31, 2020 and 2019 (in thousands, except share and per share amounts):
Three Months Ended (1)
December 31, 2020
September 30, 2020
June 30, 2020
March 31, 2020
Net income attributable to common stockholders
$
20,995
$
18,877
$
12,972
$
11,534
Real estate depreciation
8,726
7,646
6,746
4,907
FFO attributable to common stockholders (basic)
$
29,721
$
26,523
$
19,718
$
16,441
Cash and non-cash interest expense
1,866
-
-
-
FFO attributable to common stockholders (diluted)
31,587
26,523
19,718
16,441
Stock-based compensation
Non-cash interest expense
-
AFFO attributable to common stockholders
$
32,429
$
27,877
$
21,047
$
17,767
FFO per common share - basic
$
1.30
$
1.23
$
1.12
$
1.04
FFO per common share - diluted
$
1.26
$
1.22
$
1.12
$
1.03
AFFO per common share - basic
$
1.36
$
1.29
$
1.20
$
1.13
AFFO per common share - diluted
$
1.29
$
1.28
$
1.19
$
1.12
Weighted-average common shares outstanding - basic
22,804,185
21,594,637
17,530,721
15,784,296
Restricted stock and restricted stock units
114,077
114,088
134,108
113,795
Dilutive effect of Exchangeable Senior Notes
2,158,837
-
-
-
Weighted-average common shares outstanding - diluted
25,077,099
21,708,725
17,644,829
15,898,091
.
Three Months Ended (1)
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
Net income attributable to common stockholders
$
9,564
$
6,182
$
3,074
$
3,303
Real estate depreciation
3,545
2,221
1,615
1,218
FFO available to common stockholders
$
13,109
$
8,403
$
4,689
$
4,521
Stock-based compensation
Non-cash interest expense
AFFO available to common stockholders
$
14,260
$
9,547
$
5,796
$
5,292
FFO per common share - basic
$
1.10
$
0.77
$
0.49
$
0.47
FFO per common share - diluted
$
1.09
$
0.76
$
0.48
$
0.46
AFFO per common share - basic
$
1.20
$
0.87
$
0.60
$
0.55
AFFO per common share - diluted
$
1.18
$
0.86
$
0.59
$
0.54
Weighted-average common shares outstanding - basic
11,905,021
10,918,477
9,667,079
9,664,775
Restricted stock
139,581
139,220
140,424
132,901
Weighted-average common shares outstanding - diluted
12,044,602
11,057,697
9,807,503
9,797,676
(1) The sum of quarterly financial data may vary from annual data due to rounding and differences in the dilutive effect of potentially issuable shares of each reporting period.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with GAAP, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates and assumptions. Set forth below is a summary of our accounting policies that we believe are critical to the preparation of our consolidated financial statements. Our accounting policies are more fully discussed in Note 2 to the consolidated financial statements.
Acquisition of Rental Property, Depreciation and Impairment
Upon acquisition of 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, the fair value of buildings on an as-if vacant basis and may engage third-party valuation specialists. Acquisition costs are capitalized as incurred since all of our acquisitions to date were recorded as asset acquisitions.
We depreciate each of our buildings and improvements over its estimated remaining useful life, not to exceed 40 years. We depreciate tenant improvements at our buildings where we are considered the owner over the estimated useful lives of the improvements, not to exceed 40 years.
We review current activities and changes in the business conditions of all of our properties to determine the existence of any triggering events or impairment indicators requiring an impairment analysis. If triggering events or impairment indicators are identified, we review an estimate of the future undiscounted cash flows for the properties, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration.
Long-lived assets are individually evaluated for impairment when conditions exist that may indicate that the carrying amount of a long-lived asset may not be recoverable. The carrying amount of a long-lived asset to be held and used is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Impairment indicators or triggering events for long-lived assets to be held and used are assessed by project and include significant fluctuations in estimated net operating income, occupancy changes, significant near-term lease expirations, current and historical operating and/or cash flow losses, construction costs, estimated completion dates, rental rates, and other market factors. We assess the expected undiscounted cash flows based upon numerous
factors, including, but not limited to, construction costs, available market information, current and historical operating results, known trends, current market/economic conditions that may affect the property, and our assumptions about the use of the asset, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration. Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value. We may adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives.
Revenue Recognition
Our existing tenant leases and future tenant leases are generally expected to be triple-net leases, an arrangement under which the tenant maintains the property while paying us rent and property management fees. We account for our leases as operating leases. Operating leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term, unless the collectability of lease payments is not probable. Rental increases based upon changes in the U.S. Consumer Price Index (“CPI”) are recognized only after the changes in the indexes have occurred and are then applied according to the lease agreements. Contractually obligated reimbursements from tenants for recoverable real estate taxes, insurance and operating expenses are included in rental revenue in the period when such costs are incurred. Contractually obligated real estate taxes that are paid directly by the tenant to the tax authorities are not reflected in our consolidated financial statements.
We record revenue for each of our properties on a cash basis due to the uncertain regulatory environment in the United States relating to the medical-use cannabis industry and the uncertainty of collectability of lease payments from each tenant due to its limited operating history.
Exchangeable Notes
The “Debt with Conversion and Other Options” Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification requires the liability and equity components of exchangeable debt instruments that may be settled in cash upon exchange, including partial cash settlement, to be separately accounted for in a manner that reflects the issuer’s nonexchangeable debt borrowing rate. The initial proceeds from the sale of exchangeable notes are 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 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 respective issuance dates 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 is reflected within additional paid-in capital on our consolidated balance sheets, and the resulting debt discount is 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. The additional non-cash interest expense attributable to our Exchangeable Senior Notes will increase in subsequent periods through the maturity date as the Exchangeable Senior Notes accrete to the par value over the same period.
Lease Accounting
In February 2016, the FASB issued ASU 2016-02, Leases; in July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases - Targeted Improvements; and in December 2018, the FASB issued ASU 2018-20, Narrow-Scope Improvements for Lessors. This group of ASUs is collectively referred to as Topic 842 and was effective for the Company for its consolidated financial statements for the year ended December 31, 2019.
We adopted Topic 842 effective as of January 1, 2019 using the effective date method and elected the package of practical expedients that allows an entity not to reassess upon adoption (i) whether an expired or existing contract contains a lease, (ii) whether a lease classification related to expired or existing lease arrangements, and (iii) whether costs incurred on expired or existing leases qualify as initial direct costs, and as a lessor, the practical expedient not to
separate certain non-lease components, such as common area maintenance, from the lease component if the timing and pattern of transfer are the same for the non-lease component and associated lease component, and the lease component would be classified as an operating lease if accounted for separately. We also elected the lessor practical expedient, allowing us to continue to amortize previously capitalized initial direct leasing costs incurred prior to the adoption of Topic 842.
As lessee, we recognized a liability to account for our future obligations related to our corporate office lease, which has a remaining lease term of approximately 4.3 years as of December 31, 2020, excluding the extension option that we are not reasonably certain to exercise, and a corresponding right-of-use asset. The lease liability is measured based on the present value of the future lease payments discounted using the estimated incremental borrowing rate of 7.25%, which is the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments. Subsequently, the lease liability is accreted by applying a discount rate established at the lease commencement date to the lease liability balance as of the beginning of the period and is reduced by the payments made during the period.
The right-of-use asset is measured based on the corresponding lease liability. We did not incur any initial direct leasing costs and any other consideration exchanged with the landlord prior to the commencement of the lease. Subsequently, the right-of-use asset is amortized on a straight-line basis during the lease term.
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 in Topic 842. 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. Our leases continued to be classified as operating leases under Topic 842 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.
In April 2020, in response to the coronavirus pandemic and associated severe economic disruption, we amended leases at certain of our properties to provide for temporary base rent and property management fee deferrals through June 30, 2020. The FASB has issued additional guidance for companies to account for any coronavirus related rent concessions in the form of FASB staff and board members' remarks at the April 8, 2020 public meeting and the FASB staff question-and-answer document issued on April 10, 2020. We have elected the practical expedient which allows us to not have to evaluate whether concessions provided in response to coronavirus pandemic are lease modifications. This relief is subject to certain conditions being met, including ensuring the total remaining lease payments are substantially the same or less as compared to the original lease payments prior to the concession being granted.
Lease amendments that are not associated with the coronavirus pandemic 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.
One of our leases that was entered into prior to 2019 provides the lessee with a purchase option to purchase the leased property at the end of the initial lease term in September 2034, subject to the satisfaction of certain conditions. The purchase option provision allows the lessee to purchase the leased property at the greatest of (a) the fair value; (b)
the value determined by dividing the then-current base rent by 8%; and (c) an amount equal to our gross investment in the property (including the purchase price at acquisition and any additional investment in the property made by us during the term of the lease), indexed to inflation. At December 31, 2020, our gross investment in the property with the purchase option was approximately $30.5 million. At December 31, 2020, the purchase option was not exercisable.
Stock-Based Compensation
Stock-based compensation for equity awards is based on the grant date fair value of the equity instrument and is recognized over the requisite service 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 previously paid on these awards from retained earnings to compensation expense.
Income Taxes
We have been organized to operate our business so as to qualify to be taxed as a REIT, for U.S. federal income tax purposes, commencing with our taxable year ended December 31, 2018. Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income for U.S. federal income tax purposes. As long as our dividends equal or exceed our taxable net income, we generally will not be required to pay U.S. federal income tax on such income.
The Tax Cuts and Jobs Act was enacted in December 2018 and is generally effective for tax years beginning in 2018. See also Item 1A, “Risk Factors,” under the caption “Legislative, regulatory or administrative changes could adversely affect us or our stockholders.”
Adoption of New or Revised Accounting Standards
Prior to December 31, 2019, as an “emerging growth company” under the JOBS Act, we took advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We ceased being emerging growth company on December 31, 2019 and as a result, are no longer eligible to delay adoption of such new or revised accounting pronouncements applicable to public companies.
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, the U.S. credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.
Off-Balance Sheet Arrangements
We have no unconsolidated investments or any other off-balance sheet arrangements.
Interest Rate Risk
In February 2019, our Operating Partnership issued $143.75 million aggregate principal amount of the Exchangeable Senior Notes, which bears interest at a fixed rate of 3.75% per annum until maturity. The Exchangeable Senior Notes are the only debt we have outstanding. At this time, we have no plans to issue additional debt instruments. It is possible that a property we acquire in the future would be subject to a mortgage, which we may assume.
Impact of Inflation
We enter into leases that generally provide for annual fixed increases in rent, and in certain cases have entered into leases that provide for annual increases in rent equal to the greater of a fixed increase and the increase in annual CPI. We
expect these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.
Seasonality
We do not expect our business to be subject to material seasonal fluctuations.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our Exchangeable Senior Notes bears interest at a fixed rate of 3.75% per annum until maturity and is the only debt we have outstanding.
Our investments in short-term money market funds, certificates of deposit and short-term investments in obligations of the U.S. government with an original maturity at the time of purchase of greater than three months are less sensitive to market fluctuations than a portfolio of long-term securities. Accordingly, we believe that a significant change in interest rates would not have a material effect on consolidated financial statements.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to our Financial Statements beginning on page of this report.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such information is accumulated and communicated to our company’s management, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and principal financial officers have concluded that such disclosure controls and procedures were effective as of December 31, 2020 (the end of the period covered by this Annual Report).
Changes in Internal Control Over Financial Reporting
There were no changes during the quarter ended December 31, 2020 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our system of internal control over financial reporting was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)). Our management, including our principal executive officer and principal financial officer, evaluated, as of December 31, 2020, the effectiveness of our internal control over financial reporting using the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our principal executive officer and financial officer concluded that our internal controls, as of December 31, 2020, were effective. BDO USA, LLP has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, which appears in this Annual Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Innovative Industrial Properties, Inc.
Park City, Utah
Opinion on Internal Control over Financial Reporting
We have audited Innovative Industrial Properties, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and schedule, and our report dated February 25, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
San Diego, California
February 25, 2021

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning our directors, executive officers and corporate governance required by Item 10 will be included in the Proxy Statement to be filed relating to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference. Pursuant to instruction G(3) to Form 10-K, information concerning audit committee financial expert disclosure set forth under the heading “Information Regarding the Board - Committees of the Board - Audit Committee” will be included in the Proxy Statement to be filed relating to Innovative Industrial Properties, Inc.’s 2021 Annual Meeting of Stockholders and is incorporated herein by reference.
Pursuant to instruction G(3) to Form 10-K, information concerning compliance with Section 16(a) of the Exchange Act concerning our directors and executive officers set forth under the heading entitled “General - Section 16(a) Beneficial Ownership Reporting Compliance” will be included in the Proxy Statement to be filed relating to Innovative Industrial Properties, Inc.’s 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information concerning our executive compensation required by Item 11 will be included in the Proxy Statement to be filed relating to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information concerning the security ownership of certain beneficial owners and management, our equity compensation plans and related stockholder matters required by Item 12 will be included in the Proxy Statement to be filed relating to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information concerning certain relationships and related transactions and director independence required by Item 13 will be included in the Proxy Statement to be filed relating to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information concerning our principal accountant fees and services required by Item 14 will be included in the Proxy Statement to be filed relating to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a)(1) and (2) Financial Statements and Schedule:
Please refer to the Index to Consolidated Financial Statements included under Part II, Item 8, Financial Statements and Supplementary Data.
(3) Exhibits
Exhibit
Number
Description of Exhibit
1.1
Form of Equity Distribution Agreement, dated as of November 6, 2020, between Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and each sales agent.(1)
3.1
Second Articles of Amendment and Restatement of Innovative Industrial Properties, Inc. (including Articles Supplementary Classifying Innovative Industrial Properties, Inc.’s 9.00% Series A Cumulative Redeemable Preferred Stock).(2)
3.2
Second Amended and Restated Bylaws of Innovative Industrial Properties, Inc.(3)
4.1
Form of Certificate for Common Stock.(4)
4.2
Indenture, dated as of February 21, 2019, among IIP Operating Partnership, LP, as issuer, Innovative Industrial Properties, Inc. and the subsidiaries of IIP Operating Partnership, LP, as guarantors, and GLAS Trust Company LLC, as trustee, including the Form of Note representing IIP Operating Partnership, LP’s 3.75% Exchangeable Senior Notes due 2024.(5)
4.3*
Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as amended.
10.1
Agreement of Limited Partnership of IIP Operating Partnership, LP.(6)
10.2+
2016 Omnibus Incentive Plan.(6)
10.3+
Form of Restricted Stock Award Agreement for Officers.(7)
10.4+
Form of Restricted Stock Award Agreement for Directors.(7)
10.5+
Form of Restricted Stock Unit Award Agreement.(8)
10.6+
Form of Performance Share Unit Award Agreement.(9)
10.7+
Form of Indemnification Agreement between Innovative Industrial Properties, Inc. and each of its Directors and Officers.(6)
10.8+
Severance and Change of Control Agreement dated as of January 18, 2017 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and Alan Gold.(10)
10.9+
Severance and Change of Control Agreement dated as of January 18, 2017 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and Paul Smithers.(10)
10.10+
Severance and Change of Control Agreement dated as of January 18, 2017 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and Brian Wolfe.(10)
10.11+
Severance and Change of Control Agreement dated as of June 7, 2017 among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP and Catherine Hastings.(11)
10.12+
Director Compensation Policy.(9)
10.13+
Innovative Industrial Properties, Inc. Nonqualified Deferred Compensation Plan.(12)
10.14
Lease Agreement, dated as of May 31, 2018, between IIP-MA 1 LLC and PharmaCannis Massachusetts Inc.(13)
10.15
First Amendment dated November 13, 2018 to Lease Agreement, dated as of May 31, 2018, between IIP-MA 1 LLC and PharmaCannis Massachusetts Inc.(14)
10.16
Second Amendment dated September 24, 2019 to Lease Agreement, dated as of May 31, 2018, between IIP-MA 1 LLC and PharmaCannis Massachusetts Inc.(15)
10.17
Third Amendment dated February 24, 2020 to Lease Agreement dated May 31, 2018 between IIP-MA 1 LLC and PharmaCannis Massachusetts Inc.(16)
10.18
Fourth Amendment dated December 11, 2020 to Lease Agreement dated May 31, 2018 between IIP-MA 1 LLC and PharmaCannis Massachusetts Inc.(17)
21.1*
List of Subsidiaries of Innovative Industrial Properties, Inc.
23.1*
Consent of BDO USA, LLP.
31.1*
Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
104*
Cover Page Interactive Date File (formatted as Inline XBRL and contained in Exhibit 101).
*
Filed herewith.
+Indicates management contract or compensatory plan.
(1) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on November 6, 2020.
(2) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2020.
(3) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on June 4, 2020.
(4) Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-11, as amended (File No. 333-214148), filed with the SEC on November 17, 2016.
(5) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on February 21, 2019.
(6) Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-11, as amended (File No. 333-214148), filed with the SEC on October 17, 2016.
(7) Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-8 (File No. 333-214919), filed with the SEC on December 6, 2016.
(8) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 6, 2020.
(9) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 15, 2021.
(10) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 24, 2017.
(11) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on June 8, 2017.
(12) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on November 18, 2019.
(13) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on May 31, 2018.
(14) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Annual Report on Form 10-K filed with the SEC on March 14, 2019.
(15) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on September 25, 2019.
(16) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on February 25, 2020.
(17) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on December 14, 2020.