EDGAR 10-K Filing

Company CIK: 1677576
Filing Year: 2022
Filename: 1677576_10-K_2022_0001558370-22-001947.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, 2021, we owned the following 103 properties, which had 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
Holistic CA
California
July 23, 2019
35,000
13,879
(3)
Gold Flora CA
California
October 15, 2021
201,000
54,670
(4)
Kings Garden CA Portfolio
California
Various
544,000
82,675
(5)
Sacramento CA
California
February 8, 2019
43,000
12,710
Vertical CA Portfolio
California
Various
79,000
17,300
(6)
Columbia Care CO
Colorado
October 30, 2018
58,000
11,250
LivWell CO Retail Portfolio
Colorado
Various
8,000
3,349
(7)
Parallel FL Portfolio
Florida
Various
593,000
104,325
(8)
Trulieve FL Portfolio
Florida
Various
415,000
56,051
(9)
4Front IL
Illinois
August 3, 2021
250,000
8,316
(10)
Ascend IL
Illinois
December 21, 2018
166,000
68,493
(11)
Cresco IL Portfolio
Illinois
October 22, 2019
90,000
46,352
(12)
Curaleaf IL
Illinois
October 30, 2019
127,000
29,069
GTI IL
Illinois
March 6, 2020
208,000
50,000
PharmaCann IL
Illinois
October 30, 2019
66,000
28,000
Trulieve MD
Maryland
August 13, 2021
112,000
22,308
(13)
Holistic MD
Maryland
May 26, 2017
72,000
28,672
(14)
4Front MA
Massachusetts
December 17, 2020
67,000
15,500
Ascend MA
Massachusetts
April 2, 2020
199,000
49,000
Cresco MA
Massachusetts
June 30, 2020
118,000
22,652
(15)
Holistic MA
Massachusetts
July 12, 2018
55,000
17,092
(16)
PharmaCann MA
Massachusetts
May 31, 2018
58,000
30,500
Temescal MA
Massachusetts
May 26, 2021
71,000
6,928
(17)
Trulieve MA
Massachusetts
July 26, 2019
150,000
43,500
Ascend MI
Michigan
July 2, 2019
145,000
19,750
Cresco MI
Michigan
April 22, 2020
115,000
32,000
Emerald Growth MI
Michigan
June 7, 2019
45,000
10,000
Green Peak MI Portfolio
Michigan
Various
231,000
37,878
(18)
Green Peak MI Retail Portfolio
Michigan
Various
31,000
11,784
(19)
Holistic MI
Michigan
September 1, 2020
63,000
25,000
LivWell MI
Michigan
Various
205,000
83,045
(20)
Sozo MI
Michigan
May 14, 2021
85,000
15,626
(21)
Vireo MN
Minnesota
November 8, 2017
89,000
9,710
Calyx MO
Missouri
September 17, 2021
83,000
8,696
(22)
Las Vegas NV
Nevada
July 12, 2019
43,000
9,600
Columbia Care NJ Portfolio
New Jersey
July 16, 2020
54,000
13,985
Curaleaf NJ
New Jersey
July 13, 2020
123,000
35,000
PharmaCann NY
New York
December 19, 2016
167,000
34,526
(23)
Vireo NY
New York
Various
364,000
28,912
(24)
Curaleaf ND
North Dakota
December 20, 2019
33,000
12,190
AYR OH
Ohio
May 14, 2019
11,000
3,550
Cresco OH
Ohio
January 24, 2020
50,000
12,417
(25)
GTI OH
Ohio
January 31, 2020
98,000
29,833
(26)
PharmaCann OH
Ohio
March 13, 2019
58,000
20,000
Curaleaf PA
Pennsylvania
December 20, 2019
72,000
26,640
Columbia Care PA
Pennsylvania
May 20, 2019
266,000
41,228
(27)
GTI PA
Pennsylvania
November 12, 2019
148,000
39,600
Holistic PA
Pennsylvania
June 10, 2020
108,000
19,250
Jushi PA
Pennsylvania
April 6, 2018
129,000
32,468
(28)
Maitri PA
Pennsylvania
April 24, 2019
51,000
22,250
Parallel PA
Pennsylvania
May 13, 2021
239,000
66,007
(29)
PharmaCann PA
Pennsylvania
August 9, 2019
56,000
28,000
Parallel TX
Texas
March 10, 2021
63,000
6,957
(30)
CO/PA/ND Portfolio
Various
December 14, 2021
179,000
71,585
(31)
Columbia Care VA
Virginia
January 15, 2020
82,000
19,750
(32)
4Front WA
Washington
December 17, 2020
114,000
17,500
Total
7,745,000
$
1,689,828
(1) Includes estimated rentable square feet at completion of construction.
(2) Includes purchase price and development and improvement allowances commitments funded, if any. Excludes transaction costs and development and improvement allowance not funded as of December 31, 2021.
(3) In January 2021, the property was leased to a new tenant. Excludes remaining improvement allowance of approximately $10.1 million.
(4) Excludes remaining improvement allowance of approximately $5.3 million.
(5) 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 remaining aggregate improvement allowances at certain properties totaling approximately $65.0 million.
(6) Portfolio consists of three properties acquired on August 29, 2019 and one property acquired on September 11, 2019.
(7) Portfolio consists of one property acquired on February 19, 2020 and one property acquired on February 21, 2020. Excludes remaining 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 improvement allowances totaling approximately $3.6 million.
(9) Trulieve Cannabis Corp. (“Trulieve”) acquired Harvest Health & Recreation Inc. (“Harvest”) in 2021. Portfolio consists of one property acquired on October 23, 2019 and one property acquired on January 22, 2021. Excludes remaining improvement allowance of approximately $2.6 million.
(10) Excludes remaining improvement allowance of approximately $41.9 million.
(11) Excludes remaining improvement allowance of approximately $2.5 million.
(12) Portfolio consists of two properties and excludes remaining improvement allowance of approximately $198,000.
(13) Trulieve acquired Harvest in 2021. Excludes remaining improvement allowance of approximately $7.2 million.
(14) Excludes remaining improvement allowance of approximately $1.7 million.
(15) Excludes remaining improvement allowance of approximately $6.1 million.
(16) Excludes remaining improvement allowance of approximately $658,000.
(17) Excludes remaining improvement allowance of approximately $19.9 million.
(18) Portfolio consists of one property acquired on August 2, 2018 and one property acquired on April 16, 2021. Excludes remaining improvement allowance of approximately $22.9 million.
(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 improvement allowance of approximately $28,000.
(20) Original property was acquired on October 9, 2019 and the central utility plant facilities were acquired on December 9, 2021. Excludes remaining improvement allowance of $550,000.
(21) Excludes remaining improvement allowance of approximately $374,000.
(22) Excludes remaining improvement allowance of approximately $19.6 million.
(23) Excludes remaining improvement allowance of approximately $29.0 million.
(24) Original property was acquired on October 23, 2017 and additional land adjacent to the property was acquired on September 24, 2021. Excludes remaining improvement allowance of approximately $34.1 million.
(25) Excludes remaining improvement allowance of approximately $1.1 million.
(26) Excludes remaining improvement allowance of approximately $2.4 million.
(27) Columbia Care, Inc. (“Columbia Care”) acquired Green Leaf Medical, LLC (“Green Leaf”) in 2021. Excludes remaining improvement allowance of approximately $1.8 million.
(28) Excludes remaining improvement allowance of approximately $13.3 million.
(29) Excludes remaining improvement allowance of approximately $1.7 million.
(30) Excludes remaining improvement allowance of approximately $20.4 million.
(31) Portfolio consists of 27 properties leased to multiple tenants with 24 properties located in Colorado, two properties located in North Dakota, and one property located in Pennsylvania. Excludes remaining improvement allowance at certain properties totaling approximately $1.1 million.
(32) Columbia Care acquired Green Leaf in 2021.
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 23, 2022, there were 19 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.
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 January 1, 2017 to December 31, 2021 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 MSCI US REIT 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
Recent Sales of Unregistered Securities
In December 2021, in connection with the Exchange Transactions, our Operating Partnership delivered and paid an aggregate of (a) 1,684,237 shares of the Company’s Common Stock and (b) approximately $2.3 million in cash, collectively, in exchange for approximately $110.4 million principal amount of the Exchangeable Senior Notes. The Exchange Transactions were conducted as a private placement and the shares of Common Stock issued in the Exchange Transactions were issued under the exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) of the Securities Act and were offered only to persons reasonably believed to be institutional “accredited investors” within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D promulgated under the Securities Act that are also “qualified institutional buyers” within the meaning of Rule 144A promulgated under the Securities Act. The Company relied on this exemption from registration based on the representations made by the holders of the Exchangeable Senior Notes participating in the Exchange Transactions.
For information regarding our outstanding indebtedness, which includes our Notes due 2026 and our Exchangeable Senior Notes, see Note 7 in the notes to our consolidated financial statements.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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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 cannabis facilities. We have leased and expect to continue to lease our properties on a triple-net lease basis, where the tenant is generally 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, 2021, we had 18 full-time employees. As of December 31, 2021, we owned 103 properties comprising an aggregate of approximately 7.7 million rentable square feet (including approximately 2.5 million rentable square feet under development/redevelopment) in 19 states, with a weighted-average remaining lease term of approximately 16.6 years. As of December 31, 2021, we had invested an aggregate of approximately $1.7 billion (consisting of purchase price and development and tenant reimbursement commitments funded, if any, but excluding transaction costs) and had committed an additional approximately $316.1 million to reimburse certain tenants and sellers for completion of construction and improvements at our properties. Of the approximately $316.1 million committed to reimburse certain tenants and sellers for completion of construction and improvements at our properties, approximately $46.3 million was incurred as of December 31, 2021. These statistics do not include an $18.5 million loan from us to a developer for construction of a regulated cannabis cultivation and processing facility in California and up to $55.0 million that may be funded between June 15, 2022 and July 31, 2022 pursuant to our lease with a tenant at one of our Pennsylvania properties, as the tenant at that property may not elect to have us disburse those funds and pay us the corresponding base rent on those funds.
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 cannabis industry, and the competitive environment for real estate assets that support the regulated 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 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.
The ongoing COVID-19 pandemic, or the future outbreak of any other highly infectious or contagious diseases, could materially and adversely impact or cause disruption to our tenants and their operations, and in turn our performance, financial condition, results of operations and cash flows. The extent to which the ongoing COVID-19 pandemic impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the outbreak and containment measures, among others. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, supply chains and consumer spending as well as other unanticipated consequences remain unknown.
Our tenants’ ability to pay their rent obligations to us depends, in part, on whether our tenants can continue their regulated cannabis operations and the ability and willingness of consumers to visit dispensary businesses. In the large majority of states that have legalized cannabis, state governmental authorities have recognized both medical-use and adult-use cannabis operations, including supply chain activities such as cultivation, processing, distribution and dispensary activities, as “essential businesses”, allowing them to remain open and operational. While laws and practices vary from state to state, state and local governmental authorities and regulated cannabis businesses have taken additional measures to ensure the safety and well-being of employees, patients and consumers, including but not limited to restrictions associated with social distancing requirements and additional levels of protection for medical cannabis patients with more vulnerability to health complications from COVID-19. Despite these measures, cannabis dispensaries may experience declines in customer traffic or may be required to close in response to new government regulatory orders, which may result from a prolonged outbreak or resurgence of COVID-19 cases, and could have a significant adverse financial impact on certain of our tenants.
In 2020, we undertook in-depth discussions with each of our tenants as they navigated the COVID-19 pandemic and associated severe economic disruption. In light of those discussions, in 2020, we granted temporary base rent and property management fee deferrals to three affected tenants. In connection with these deferrals, we entered into lease amendments with the three affected tenants to apply a portion of the security deposits that we hold under the leases to pay a portion of the March 2020 rent (for one tenant), pay April 2020 rent in full, defer rent for May and June 2020 in full, and provide for the pro rata repayment of the security deposit and deferred rent over an 18 month time period starting July 1, 2020. Pursuant to these amendments, a total of approximately $940,000 of security deposits were applied to the payment of base rent, property management fees and associated lease penalties for March and April 2020, including approximately $185,000 related to the partial payment of the March 2020 base rent and property management fees for one of the tenants; and a total of approximately $1.5 million in rent was deferred for May and June 2020. As of December 31, 2021, we have not executed deferrals for any other tenants, other than the deferrals for the three tenants discussed above.
Significant Tenants and Concentrations of Risk
As of December 31, 2021, we owned 103 properties located in 19 states. Many of our tenants are tenants at multiple properties. We seek to manage our portfolio-level risk through geographic diversification and by minimizing dependence on any single property or tenant. At December 31, 2021, none of our properties accounted for 5% or more of our net real estate held for investment. See Note 2 in the notes to the consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest percentage of our total rental revenues for the year ended December 31, 2021.
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, 2021. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020 for a comparison of the years ended December 31, 2020 and December 31, 2019.
Comparison of the Years Ended December 31, 2021 and 2020 (in thousands)
Increase / (Decrease)
Years Ended December 31,
2021 vs.
Revenues:
Rental (including tenant reimbursements)
$
204,551
$
116,896
$
87,655
Total revenues
204,551
116,896
87,655
Expenses:
Property expenses
4,443
4,952
(509)
General and administrative expense
22,961
14,182
8,779
Depreciation and amortization expense
41,776
28,025
13,751
Total expenses
69,180
47,159
22,021
Income from operations
135,371
69,737
65,634
Interest and other income
3,424
(3,027)
Interest expense
(18,086)
(7,431)
(10,655)
Loss on induced exchange of Exchangeable Senior Notes
(3,692)
-
(3,692)
Net income
113,990
65,730
48,260
Preferred stock dividends
(1,352)
(1,352)
-
Net income attributable to common stockholders
$
112,638
$
64,378
$
48,260
Revenues
Rental revenues for the year ended December 31, 2021 increased by approximately $87.7 million, or 75%, to approximately $204.6 million, compared to approximately $116.9 million for the year ended December 31, 2020. The increase in rental revenue was attributable to:
● The 37 properties we acquired in 2021 which generated approximately $18.6 million of rental revenue in 2021, including related rents on amendments which increased the improvement allowances on three of the leases;
● The 20 properties we acquired in 2020 which generated approximately $67.8 million of rental revenue in 2021, including related rent on an amendment to one lease which increased the improvement allowance, compared to approximately $25.6 million in 2020, an increase of approximately $42.2 million; and
● The amendments to increase the improvement allowances of six properties we acquired prior to 2020, additional purchases of land which were included in the corresponding leases for two properties, the annual rent escalations on the 46 properties we acquired prior to 2020, and the repayment of deferred rents and property management fees from three tenants which we granted temporary rent deferrals in 2020, which collectively resulted in approximately $27.1 million in additional rental revenue during the year ended December 31, 2021.
The increase in rental revenue was partially offset due to a decrease in tenant reimbursements revenue for property taxes and insurance, which decreased by approximately $209,000 to approximately $4.4 million for the year ended December 31, 2021, compared to approximately $4.6 million for the year ended December 31, 2020.
Rental revenues for the year ended December 31, 2021 also included approximately $625,000 in stipulated rent paid by the receivership in place previously at our Los Angeles, California property related to rent owed to us by the receivership in 2020. The receivership concluded and we re-leased the property in January 2021 to a subsidiary of Holistic Industries Inc.
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.
General and Administrative Expense. General and administrative expense for the year ended December 31, 2021 increased by approximately $8.8 million, or 62%, to approximately $23.0 million, compared to approximately $14.2 million for the year ended December 31, 2020. 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, 2021 and 2020 included approximately $8.6 million and $3.3 million, respectively, of non-cash stock-based compensation.
Depreciation and Amortization 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 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 was primarily due to lower interest bearing investments and cash balances.
Interest Expense. Interest expense related to our Exchangeable Senior Notes issued in February 2019 and Notes due 2026 issued in May 2021. For the year ended December 31, 2021, interest expense increased by approximately $10.7 million, or 143%, to approximately $18.1 million, compared to $7.4 million for the year ended December 31, 2020. The increase in interest expense was primarily due to the additional interest expense on our Notes due 2026 issued in May 2021.
Loss on Induced Exchange of Exchangeable Senior Notes. Loss on induced exchange of Exchangeable Senior Notes is attributable to the exchange agreements we executed with certain holders of our Exchangeable Senior Notes in December 2021, pursuant to which we exchanged approximately $110.4 million principal amount of the Exchangeable Senior Notes for shares of common stock and cash (see Note 7 in the notes to the consolidated financial statements for further information).
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
$
188,747
$
110,814
Net cash used in investing activities
(384,093)
(1,027,115)
Net cash provided by financing activities
155,759
924,991
Ending cash, cash equivalents and restricted cash
86,419
126,006
Cash flows provided by operating activities for the years ended December 31, 2021 and 2020 were approximately $188.7 million and $110.8 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 2020 to 2021 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 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, 2021 and 2020 were approximately $384.1 million and $1.0 billion, respectively. Cash flows used in investing activities decreased from 2020 to 2021 primarily due to less purchases and increases in maturities of short-term investments, partially offset by increases in purchases of new properties, funding of improvement allowances and construction funding.
Cash flows provided by financing activities for the year ended December 31, 2021 were approximately $155.8 million, primarily related to approximately $293.2 million in net proceeds from the issuance of our Notes due 2026, partially offset by dividend payments of approximately $132.3 million to common and preferred stockholders, approximately $3.4 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees, and approximately $1.7 million related to the induced exchange of Exchangeable Senior Notes pursuant to the Exchange Transactions.
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 related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock 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 Notes due 2026 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 and Notes due 2026 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 May 2021, we received an investment grade rating from a ratings agency. We sought to obtain an investment grade rating to facilitate access to the investment grade unsecured debt market as part of our overall strategy to maximize our financial flexibility and manage our overall cost of capital. On May 25, 2021, our Operating Partnership issued $300.0 million aggregate principal amount of Notes due 2026. The Notes due 2026 are the Operating Partnership’s general unsecured and unsubordinated obligations, are fully and unconditionally guaranteed by us and all of the direct and indirect subsidiaries of the Operating Partnership, and rank equally in right of payment with all of the Operating Partnership’s existing and future senior unsecured indebtedness, including the Exchangeable Senior Notes. The terms of the Notes due 2026 are governed by an indenture, which requires compliance with various financial covenants including limits on the amount of total leverage and secured debt maintained by the Operating Partnership and which require the
Operating Partnership to maintain minimum levels of debt service coverage. Management believes that it was in compliance with those covenants as of December 31, 2021. Subject to the terms of the indenture, any new subsidiary of the Operating Partnership will also guarantee the Notes due 2026. In addition, the terms of the indenture provide that if the debt rating on the Notes due 2026 is downgraded or withdrawn entirely, interest on the Notes due 2026 will increase to a range of 6.0% to 6.5% based on such debt rating.
We are party to equity distribution agreements with certain sales agents, pursuant to which we may offer and sell from time to time through an “at-the-market” offering program, or ATM Program, up to $500.0 million in shares of our common stock. As of December 31, 2021, we had approximately $231.7 million in shares of common stock available for issuance under the ATM Program and did not issue any shares of common stock under the ATM Program during the year ended December 31, 2021.
We have filed an automatic shelf registration statement, which may permit us, from time to time, to offer and sell common stock, preferred stock, warrants, debt securities of our Operating Partnership and other securities to the extent necessary or advisable to meet our liquidity needs.
We expect to meet our short-term and long-term 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 our 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 2021, we declared cash dividends on our common stock totaling $5.72 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.
All dividends declared during the years ended December 31, 2021, 2020 and 2019 were characterized as ordinary income for federal income tax purposes, except for $1.40 of the common stock dividend with a record date of December 31, 2021, which is allocable to 2022 and for which the tax treatment has not been finalized. $1.02 of the common stock dividend with a record date of December 31, 2020 was allocated to 2021, and $0.49 of the common stock dividend with a record date of December 31, 2019 was allocated to 2020.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2021 (in thousands):
Payments Due
Exchangeable
by Year
Notes due 2026
Senior Notes
Interest
Office Rent
Total
$
-
$
-
$
17,751
$
$
17,992
-
-
17,751
18,000
-
33,373
16,677
50,306
-
-
16,500
16,764
300,000
-
6,646
306,941
Total
$
300,000
$
33,373
$
75,325
$
1,305
$
410,003
As of December 31, 2021, we had (1) approximately $269.8 million outstanding in commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease; and (2) $5.6 million outstanding in commitments to fund a
construction loan, which the developer is required to complete by June 2022, subject to extension in certain circumstances. In addition, we are obligated to fund up to $55.0 million between June 15, 2022 and July 31, 2022 pursuant to our lease with a tenant at one of our Pennsylvania properties, if the tenant at that property elects to have us disburse those funds.
Supplemental Guarantor Information
In March 2020, the SEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities. The amendments became effective on January 4, 2021. Our Notes due 2026 and our Exchangeable Senior Notes are the unsecured senior obligations of our Operating Partnership and are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by us and all of our direct and indirect wholly-owned subsidiaries, which are listed on Exhibit 22.1 hereto and which we refer to collectively as “Subsidiary Guarantors.” Only the Notes due 2026 and the related guarantees are registered securities under the Securities Act. See Note 7 in the notes to our consolidated financial statements for a description of certain terms of our Notes due 2026.
The offer and sale of the Exchangeable Senior Notes and the related guarantees were not and will not be registered under the Securities Act or the securities laws of any other jurisdiction and instead were issued in reliance upon an exemption from such registration. Unless they are subsequently registered under the Securities Act, the Exchangeable Senior Notes and the related guarantees may be offered and sold only in transactions that are exempt from the registration requirements under the Securities Act and the applicable securities laws of any other jurisdiction.
As a result of the amendments to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that the subsidiary obligor is consolidated into the parent company’s consolidated financial statements, the parent guarantee is “full and unconditional” and, subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 of Regulation S-X is provided, which includes narrative disclosure and summarized financial information. Accordingly, separate consolidated financial statements of our Operating Partnership and the Subsidiary Guarantors have not been presented.
Furthermore, as permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, we have excluded the summarized financial information for the Operating Partnership and the Subsidiary Guarantors because the combined assets, liabilities, and results of operations of the Operating Partnership and the Subsidiary Guarantors are not materially different than the corresponding amounts in our condensed consolidated financial statements, and management believes such summarized financial information would be repetitive and would not provide incremental value to investors.
Non-GAAP Financial Information and Other Metrics
Funds from Operations, Normalized 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 non-GAAP 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.
We compute normalized funds from operations (“Normalized FFO”) by adjusting FFO, as defined by NAREIT, to exclude certain GAAP income and expense amounts that we believe are infrequent and unusual in nature and/or not related to our core real estate operations. Exclusion of these items from similar FFO-type metrics is common within the equity REIT industry, and management believes that presentation of Normalized FFO and Normalized FFO per share provides investors with a metric to assist in their evaluation of our operating performance across multiple periods and in comparison to the operating performance of other companies, because it removes the effect of unusual items that are not expected to impact our operating performance on an ongoing basis. Normalized FFO is used by management in evaluating the performance of our core business operations. Items included in calculating FFO that may be excluded in calculating Normalized FFO include certain transaction-related gains, losses, income or expense or other non-core amounts as they occur.
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 adjusting Normalized FFO for certain non-cash items.
For the three months ended December 31, 2021, September 30, 2021, June 30, 2021, March 31, 2021 and December 31, 2020 and the twelve months ended December 31, 2021, FFO (diluted), Normalized FFO, AFFO and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock. 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, Normalized FFO, AFFO and FFO, Normalized FFO and AFFO per diluted share for such periods.
For the three and twelve months ended December 31, 2021, 81,414 shares issuable upon vesting of performance share units (“PSUs”) granted to certain employees in January 2021 were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of December 31, 2021. For the three months ended September 30, 2021, 78,582 shares issuable upon vesting of the PSUs were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of September 30, 2021. No shares were issuable upon vesting of the PSUs for the three months ended June 30, 2021 and March 31, 2021, as the performance thresholds for vesting of the PSUs were not met as measured as of the end of those respective periods.
Our computation of FFO, Normalized FFO and AFFO may differ from the methodology for calculating FFO, Normalized FFO and AFFO utilized by other equity REITs and, accordingly, may not be comparable to such REITs. Further, FFO, Normalized FFO and AFFO do not represent cash flow available for management’s discretionary use. FFO, Normalized 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, Normalized FFO and AFFO should be considered only as supplements to net income computed in accordance with GAAP as measures of operations.
The table below is a reconciliation of net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the years ended December 31, 2021, 2020 and 2019 (in thousands, except share and per share amounts):
Years Ended December 31,
Net income attributable to common stockholders
$
112,638
$
64,378
$
22,123
Real estate depreciation and amortization
41,776
28,025
8,599
FFO attributable to common stockholders (basic)
$
154,414
$
92,403
$
30,722
Cash and non-cash interest expense on Exchangeable Senior Notes
7,517
-
-
FFO attributable to common stockholders (diluted)
$
161,931
$
92,403
$
30,722
Acquisition-related expense
Financing expense
-
-
Loss on induced exchange of Exchangeable Senior Notes
3,692
-
-
Normalized FFO attributable to common stockholders (diluted)
165,649
92,708
30,819
Stock-based compensation
8,616
3,330
2,495
Non-cash interest expense
2,040
1,678
Above-market lease amortization
-
-
AFFO attributable to common stockholders (diluted)
$
174,984
$
98,078
$
34,992
FFO per common share - diluted
$
6.17
$
4.72
$
2.88
Normalized FFO per common share - diluted
$
6.31
$
4.74
$
2.88
AFFO per common share - diluted
$
6.66
$
5.01
$
3.28
Weighted average common shares outstanding - basic
23,903,017
19,443,602
10,546,016
Restricted stock and RSUs
96,174
114,017
138,052
PSUs
81,414
-
-
Dilutive effect of Exchangeable Senior Notes
2,180,550
-
-
Weighted average common shares outstanding - diluted
26,261,155
19,557,619
10,684,068
The table below is a reconciliation of quarterly net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the years ended December 31, 2021 and 2020 (in thousands, except share and per share amounts):
Three Months Ended(1)
December 31, 2021
September 30, 2021
June 30, 2021
March 31, 2021
Net income attributable to common stockholders
$
28,292
$
29,756
$
29,001
$
25,589
Real estate depreciation
12,205
10,891
9,841
8,839
FFO attributable to common stockholders (basic)
$
40,497
$
40,647
$
38,842
$
34,428
Cash and non-cash interest expense on Exchangeable Senior Notes
1,880
1,885
1,879
1,873
FFO attributable to common stockholders (diluted)
$
42,377
$
42,532
$
40,721
$
36,301
Acquisition related expense
-
Loss on induced exchange of Exchangeable Senior Notes
3,692
-
-
-
Normalized FFO attributable to common stockholders (diluted)
$
46,076
$
42,532
$
40,732
$
36,309
Stock-based compensation
2,192
2,191
2,132
2,101
Non-cash interest expense
-
Above-market lease amortization
-
-
-
AFFO attributable to common stockholders (diluted)
$
48,570
$
45,022
$
42,982
$
38,410
FFO per common share - diluted
$
1.61
$
1.62
$
1.56
$
1.39
Normalized FFO per common share - diluted
$
1.75
$
1.62
$
1.56
$
1.39
AFFO per common share - diluted
$
1.85
$
1.71
$
1.64
$
1.47
Weighted-average common shares outstanding - basic
23,941,930
23,890,537
23,889,761
23,889,398
Restricted stock and RSUs
98,093
98,093
96,230
92,194
PSUs
81,414
78,582
-
-
Dilutive effect of Exchangeable Senior Notes
2,142,148
2,193,492
2,182,691
2,170,959
Weighted-average common shares outstanding - diluted
26,263,585
26,260,704
26,168,682
26,152,551
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
Acquisition-related expense
Financing expense
-
-
Normalized FFO attributable to common stockholders (diluted)
$
31,670
$
26,536
$
19,740
$
16,628
Stock-based compensation
Non-cash interest expense
-
AFFO attributable to common stockholders (diluted)
$
32,512
$
27,890
$
21,069
$
17,954
FFO per common share - diluted
$
1.26
$
1.22
$
1.12
$
1.03
Normalized FFO per common share - diluted
$
1.26
$
1.22
$
1.12
$
1.05
AFFO per common share - diluted
$
1.30
$
1.28
$
1.19
$
1.13
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
114,108
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
(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 Estimates
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.
We continually evaluate the estimates and assumptions we use to prepare our consolidated financial statements. Our critical accounting estimates are defined as accounting estimates or assumptions made in accordance with GAAP, which involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations. The following critical accounting estimates discussion reflects what we believe are the most significant estimates and assumptions used in the preparation of our consolidated financial statements. This discussion of our critical accounting estimates is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates and assumptions. For further discussion of our significant accounting policies, see Note 2 “Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements” to our consolidated financial statements included in this report.
Acquisition of Rental Property, Depreciation and Impairment
All of our acquisitions of rental properties to date were accounted for as asset acquisitions and not business combinations because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings, and related intangible assets). The accounting model for asset acquisitions requires that the acquisition consideration (including acquisition costs) be allocated to the individual assets acquired and liabilities assumed on a relative fair value basis.
We exercise judgement to determine key assumptions used in each valuation technique. For example, we are required to use judgment and make a number of assumptions, including those related to projected growth in rental rates and operating expenses, anticipated trends and market/economic conditions. The use of different assumptions can affect the amount of consideration allocated to the acquired depreciable/amortizable asset, which in turn can impact our net income due to the recognition of the related depreciation/amortization expense in our consolidated statements of operations.
We depreciate buildings and improvements and tenant improvements where we are considered the owner for accounting purposes based on our evaluation of the estimated useful life of each specific asset, not to exceed 40 years. Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment.
The determination of whether we are or the tenant is the owner of tenant improvements for accounting purposes is subject to significant judgment. In making that determination, we consider numerous factors and perform a detailed evaluation of each individual lease. No one factor is determinative in reaching a conclusion. The factors we evaluate include but are not limited to the following:
● whether the lease agreement requires landlord approval of how the tenant improvement allowance is spent prior to installation of the tenant improvements;
● whether the lease agreement requires the tenant to provide evidence to the landlord supporting the cost and what the tenant improvement allowance was spent on prior to payment by the landlord for such tenant improvements;
● whether the tenant improvements are unique to the tenant or reusable by other tenants;
● whether the tenant is permitted to alter or remove the tenant improvements without the consent of the landlord or without compensating the landlord for any lost utility or diminution in fair value; and
● whether the ownership of the tenant improvements remains with the landlord or remains with the tenant at the end of the lease term.
When we conclude that we are the owner of tenant improvements for accounting purposes using the factors discussed above, we record the cost to construct the tenant improvements as our capital asset.
We evaluate our real estate assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a given asset may not be recoverable. We evaluate our real estate assets for impairment on a property-by-property basis. Indicators we use to determine whether an impairment evaluation is necessary include:
● deterioration in rental rates for a specific property;
● deterioration of a given rental submarket;
● significant change in strategy or use of a specific property or any other event that could result in a decreased holding period, including classifying a property as held for sale, or significant development delay;
● evidence of material physical damage to the property; and
● default by a significant tenant when any of the other indicators above are present.
When we evaluate for potential impairment our real estate assets to be held and used, we first evaluate whether there are any indicators of impairment. If any impairment indicators are present for a specific real estate asset, we then perform an undiscounted cash flow analysis and compare the net carrying amount of the real estate asset to the real estate asset’s estimated undiscounted future cash flow over the anticipated holding period. If the estimated undiscounted future cash flow is less than the net carrying amount of the real estate asset, we perform an impairment loss calculation to determine if the fair value of the real estate asset is less than the net carrying value of the real estate asset. Our impairment loss calculation compares the net carrying amount of the real estate asset to the real estate asset’s estimated fair value, which may be based on estimated discounted future cash flow calculations or third-party valuations or appraisals. We recognize an impairment loss if the amount of the asset’s net carrying amount exceeds the asset’s estimated fair value. If we recognize an impairment loss, the estimated fair value of the asset becomes its new cost basis.
For a depreciable long-lived asset, the new cost basis would be depreciated (amortized) over the remaining useful life of that asset. If a real estate asset is designated as real estate held for sale, it is carried at the lower of the net carrying value or estimated fair value less costs to sell, and depreciation ceases.
Our undiscounted cash flow and fair value calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flow and property fair values, including determining our estimated holding period and selecting the discount or capitalization rate that reflects the risk inherent in future cash flow. Estimating projected cash flow is highly subjective as it requires assumptions related to future rental rates, tenant allowances, operating expenditures, property taxes, capital improvements, and occupancy levels. We are also required to make a number of assumptions relating to future economic and market events and prospective operating trends. Determining the appropriate capitalization rate also requires significant judgment and is typically based on many factors including the prevailing rate for the market or submarket, as well as the quality and location of the properties. Further, capitalization rates can fluctuate resulting from a variety of factors in the overall economy or within regional markets. If the actual net cash flow or actual market capitalization rates significantly differ from our estimates, the impairment evaluation for an individual asset could be materially affected.
For each property where such an indicator occurred, we completed an impairment evaluation. After completing this process, we determined that for each of the operating properties evaluated, undiscounted cash flows over the holding period were in excess of carrying value and, therefore, we did not record any impairment losses for these properties for the years ended December 31, 2021 and 2020.
Stock-Based Compensation
Compensation cost for all share-based awards requires an estimate of fair value on the grant date and compensation cost is recognized on a straight-line basis over the service vesting period, which represents the requisite service period. The grant date fair value for compensation programs that contain market conditions, like modifiers based on total stockholder return (a “market condition”), are performed using complex pricing valuation models that require the input of assumptions, including judgments to estimate expected stock price volatility, expected life, and forfeiture rate. See Note 10 “Common Stock Incentive Plan” to our consolidated financial statements included in this report for further discussion the assumptions and estimates.
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.
Interest Rate Risk
As of December 31, 2021, we had $300.0 million principal amount of Notes due 2026 and approximately $33.4 million principal amount of Exchangeable Senior Notes outstanding at fixed interest rates, and therefore, if interest rates decline, our required payments may exceed those based on current market rates. It is possible that a property we acquire in the future would be subject to a mortgage, which we may assume.
Impact of Inflation
We enter into leases that generally provide for fixed increases in rent. 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
Our business has not been, and we do not expect our business in the future 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 bear interest at a fixed rate of 3.75% per annum until maturity, and our Notes due 2026 bear interest at a fixed rate of 5.50% per annum until maturity, and collectively are 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 the 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, 2021 (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, 2021 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, 2021, 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, 2021, 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, 2021, 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, 2021, 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, 2021 and 2020, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule, and our report dated February 24, 2022 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 24, 2022

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
On February 23, 2022, JMP Securities LLC delivered notice to the Company terminating the equity distribution agreement with JMP Securities, dated November 6, 2020 (the “JMP Equity Distribution Agreement”), effective as of February 23, 2022. The JMP Equity Distribution Agreement permitted the Company to offer and sell, from time to time, up to $500,000,000 in aggregate offering price of shares of the Company’s Common Stock through JMP Securities. As a result of the termination of the JMP Equity Distribution Agreement, no further offers or sales of the Company’s Common Stock will be made through JMP Securities pursuant to the Company’s ATM Program. The Company’s separate equity distribution agreements with each of BTIG, LLC, Roth Capital Partners, LLC, Compass Point Research & Trading, LLC, Ladenburg Thalmann & Co. Inc. and Piper Sandler & Co., dated as of November 6, 2020, remain in full force and effect.

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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 2022 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 2022 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 2022 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 2022 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 2022 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 2022 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 2022 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, TMI Trust Company, as trustee (as successor-in-interest to GLAS Trust Company LLC), and Securities Transfer Corporation, as registrar (as successor-in-interest to GLAS Trust Company LLC), including the Form of Note representing IIP Operating Partnership, LP’s 3.75% Exchangeable Senior Notes due 2024.(5)
4.3
Indenture, dated as of May 25, 2021, among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP, the Subsidiary Guarantors set forth on the signature page thereto, TMI Trust Company, as trustee (as successor-in-interest to GLAS Trust Company LLC), and Securities Transfer Corporation, as registrar (as successor-in-interest to GLAS Trust Company LLC), including the form of 5.50% Senior Note due 2026.(6)
4.4
Innovative Industrial Properties, Inc. Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.(7)
10.1
Agreement of Limited Partnership of IIP Operating Partnership, LP.(8)
10.2+
2016 Omnibus Incentive Plan.(8)
10.3+
Form of Restricted Stock Award Agreement for Officers.(9)
10.4+
Form of Restricted Stock Award Agreement for Directors.(9)
10.5+
Form of Restricted Stock Unit Award Agreement.(10)
10.6+
Form of 2021 Performance Share Unit Award Agreement.(11)
10.6+
Form of 2022 Performance Share Unit Award Agreement.(12)
10.7+
Form of Indemnification Agreement between Innovative Industrial Properties, Inc. and each of its Directors and Officers.(4)
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.(13)
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.(13)
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.(13)
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.(14)
10.12+
Director Compensation Policy.(11)
10.13+
Innovative Industrial Properties, Inc. Nonqualified Deferred Compensation Plan.(15)
10.14
Registration Rights Agreement, dated as of May 25, 2021, among Innovative Industrial Properties, Inc., IIP Operating Partnership, LP, the Subsidiary Guarantors set forth on the signature page thereto and BTIG, LLC, as representative of the initial purchasers.(6)
21.1*
List of Subsidiaries of Innovative Industrial Properties, Inc.
22.1
List of Subsidiary Guarantors.(16)
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 herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on May 25, 2021.
(7) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Annual Report on Form 10-K filed with the SEC on February 26, 2021.
(8) 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.
(9) 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.
(10) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 6, 2020.
(11) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 15, 2021.
(12) Incorporated by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 12, 2022.
(13) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on January 24, 2017.
(14) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on June 8, 2017.
(15) Incorporated herein by reference to Innovative Industrial Properties, Inc.’s Current Report on Form 8-K filed with the SEC on November 18, 2019.
(16) Incorporated by reference to Innovative Industrial Properties, Inc.’s Registration Statement on Form S-3 (File No. 333-262320) filed with the SEC on January 24, 2022.