EDGAR 10-K Filing

Company CIK: 1677576
Filing Year: 2023
Filename: 1677576_10-K_2023_0001558370-23-002394.json

---

ITEM 1. BUSINESS
Item 1.
Business

---

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

---

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

---

ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
As of December 31, 2022, we owned the following 110 properties, of which 108 properties were leased with a weighted-average remaining lease term of approximately 15.3 years:
Rentable Square Feet
Invested/Committed Capital (in thousands)
Under Development
Invested
Committed
Total
Property
Property Type(1)
Market
Closing Date
Operating
or Redevelopment
Total
Capital
Capital
Capital
East Cherry Street
Industrial
Arizona
April 27, 2022
17,000
-
17,000
$
5,238
$
-
$
5,238
West Greenhouse Drive
Industrial
Arizona
December 15, 2017
358,000
-
358,000
20,000
-
20,000
64125 19th Avenue
Industrial
California
October 15, 2021
131,000
70,000
201,000
61,984
1,516
63,500
McLane Street
Industrial
California
May 12, 2020
70,000
-
70,000
17,500
-
17,500
63795 19th Avenue
Industrial
California
April 16, 2019
56,000
-
56,000
15,000
-
15,000
North Anza Road
Industrial
California
April 16, 2019
24,000
-
24,000
6,309
-
6,309
North Anza Road & Del Sol Road
Industrial
California
April 16, 2019
22,000
-
22,000
5,788
-
5,788
1804 Needles Highway
Industrial
California
August 29, 2019
6,000
-
6,000
-
West Broadway
Industrial
California
August 29, 2019
7,000
-
7,000
1,471
-
1,471
3253 Needles Highway
Industrial
California
August 29, 2019
20,000
-
20,000
4,841
-
4,841
3241 & 3247 Needles Highway
Industrial
California
September 11, 2019
46,000
-
46,000
10,100
-
10,100
Sacramento
Industrial
California
February 8, 2019
43,000
-
43,000
12,710
-
12,710
Steele Street
Industrial
Colorado
October 30, 2018
58,000
-
58,000
11,250
-
11,250
Washington Street
Industrial
Colorado
December 14, 2021
18,000
-
18,000
9,917
-
9,917
West Barberry Place
Industrial
Colorado
December 14, 2021
12,000
-
12,000
3,276
-
3,276
Hamilton Road
Industrial
Florida
September 18, 2020
220,000
-
220,000
56,400
-
56,400
West Lake Drive
Industrial
Florida
March 11, 2020
373,000
-
373,000
51,500
-
51,500
NW Highway 441
Industrial
Florida
January 22, 2021
295,000
-
295,000
41,650
-
41,650
Ben Bostic Road
Industrial
Florida
October 23, 2019
120,000
-
120,000
17,000
-
17,000
East Mazon Avenue
Industrial
Illinois
October 30, 2019
66,000
-
66,000
28,000
-
28,000
Revolution Road
Industrial
Illinois
December 21, 2018
166,000
-
166,000
71,000
-
71,000
East 4th Street
Industrial
Illinois
March 6, 2020
266,000
-
266,000
50,000
-
50,000
Industrial Drive
Industrial
Illinois
October 30, 2019
127,000
-
127,000
40,000
-
40,000
S US Highway 45 52
Industrial
Illinois
October 22, 2019
51,000
-
51,000
25,496
25,600
Centerpoint Way
Industrial
Illinois
October 22, 2019
39,000
-
39,000
20,950
-
20,950
Adams Street
Industrial
Illinois
August 3, 2021
-
250,000
250,000
47,326
22,824
70,150
(2)
South Street
Industrial
Maryland
August 13, 2021
115,000
-
115,000
28,901
29,515
Alaking Court
Industrial
Maryland
May 26, 2017
72,000
-
72,000
33,719
33,750
Western Maryland Parkway
Industrial
Maryland
April 13, 2022
84,000
-
84,000
25,000
-
25,000
Hopping Brook Road
Industrial
Massachusetts
May 31, 2018
58,000
-
58,000
30,500
-
30,500
Chestnut Hill Avenue
Industrial
Massachusetts
April 2, 2020
199,000
-
199,000
63,900
-
63,900
Worcester Road
Industrial
Massachusetts
September 1, 2022
104,000
-
104,000
21,500
-
21,500
Canal Street/7 North Bridge Street
Industrial
Massachusetts
July 26, 2019
150,000
-
150,000
43,500
-
43,500
Palmer Road
Industrial
Massachusetts
July 12, 2018
55,000
-
55,000
19,234
19,750
Everett Street
Industrial
Massachusetts
January 28, 2022
57,000
-
57,000
16,000
-
16,000
(3)
East Main Street
Industrial
Massachusetts
December 17, 2020
67,000
-
67,000
15,500
-
15,500
Curran Highway
Industrial
Massachusetts
May 26, 2021
71,000
-
71,000
26,181
26,800
Hoover Road
Industrial
Michigan
October 9, 2019
205,000
-
205,000
83,045
83,595
East Hazel Street
Industrial
Michigan
July 2, 2019
145,000
-
145,000
24,150
-
24,150
Oliver Drive
Industrial
Michigan
April 22, 2020
115,000
-
115,000
32,000
-
32,000
Davis Highway
Industrial
Michigan
April 16, 2021
97,000
104,000
201,000
50,894
12,106
63,000
Harvest Park
Industrial
Michigan
August 2, 2018
56,000
-
56,000
15,799
-
15,799
Executive Drive
Industrial
Michigan
June 7, 2019
45,000
-
45,000
10,000
-
10,000
77th Street Northeast
Industrial
Minnesota
November 8, 2017
89,000
-
89,000
9,710
-
9,710
Industrial Drive
Industrial
Missouri
September 17, 2021
83,000
-
83,000
27,721
28,250
East Cheyenne Avenue
Industrial
Nevada
July 12, 2019
43,000
-
43,000
9,600
-
9,600
Munsonhurst Road
Industrial
New Jersey
February 10, 2022
80,000
34,000
114,000
39,500
40,000
South Route 73
Industrial
New Jersey
July 13, 2020
123,000
-
123,000
35,000
-
35,000
North West Blvd
Industrial
New Jersey
July 16, 2020
50,000
-
50,000
11,820
-
11,820
Hudson Crossing Drive
Industrial
New York
December 19, 2016
74,000
151,000
225,000
80,562
27,938
108,500
County Route 117
Industrial
New York
October 23, 2017
40,000
324,000
364,000
52,766
10,294
63,060
98th Ave South
Industrial
North Dakota
December 20, 2019
33,000
-
33,000
12,190
-
12,190
Hunts Landing Road
Industrial
Ohio
March 13, 2019
58,000
-
58,000
20,000
-
20,000
Jason Street
Industrial
Ohio
January 31, 2020
98,000
-
98,000
32,200
-
32,200
Springs Way
Industrial
Ohio
January 24, 2020
50,000
-
50,000
12,927
13,545
East Tallmadge Ave.
Industrial
Ohio
May 14, 2019
11,000
-
11,000
3,550
-
3,550
Scott Technology Park
Industrial
Pennsylvania
August 7, 2019
56,000
-
56,000
28,000
-
28,000
New Beaver Avenue
Industrial
Pennsylvania
May 13, 2021
239,000
-
239,000
67,750
-
67,750
East Market Street
Industrial
Pennsylvania
November 12, 2019
300,000
-
300,000
94,600
-
94,600
Wayne Avenue
Industrial
Pennsylvania
December 20, 2019
74,000
105,000
179,000
49,800
11,840
61,640
Horton Drive
Industrial
Pennsylvania
May 20, 2019
270,000
-
270,000
42,891
43,000
Industrial Street
Industrial
Pennsylvania
June 10, 2020
108,000
-
108,000
23,629
2,021
25,650
Rosanna Avenue
Industrial
Pennsylvania
April 6, 2018
145,000
-
145,000
45,800
-
45,800
FM 969
Industrial
Texas
June 14, 2022
-
85,000
85,000
13,586
8,414
22,000
(4)
Decatur Street
Industrial
Virginia
January 15, 2020
82,000
-
82,000
19,750
-
19,750
Lathrop Industrial Drive SW
Industrial
Washington
December 17, 2020
114,000
-
114,000
17,500
-
17,500
East Glendale Avenue
Retail
Arizona
September 19, 2019
2,000
-
2,000
2,500
-
2,500
Dahlia Street
Retail
Colorado
February 21, 2020
5,000
-
5,000
2,300
-
2,300
East Colfax Avenue
Retail
Colorado
December 14, 2021
2,000
-
2,000
1,558
1,673
North 2nd Street
Retail
Colorado
December 14, 2021
6,000
-
6,000
1,307
1,405
West Railroad Avenue
Retail
Colorado
December 14, 2021
4,000
-
4,000
1,148
-
1,148
Southgate Pl
Retail
Colorado
February 19, 2020
3,000
-
3,000
1,049
-
1,049
Wewatta Street
Retail
Colorado
December 14, 2021
4,000
-
4,000
7,338
-
7,338
Southgate Place
Retail
Colorado
December 14, 2021
6,000
-
6,000
4,878
-
4,878
South Peoria Court
Retail
Colorado
December 14, 2021
5,000
-
5,000
4,229
-
4,229
Highway 6 & 24
Retail
Colorado
December 14, 2021
4,000
-
4,000
4,187
-
4,187
North College Avenue
Retail
Colorado
December 14, 2021
5,000
-
5,000
3,977
-
3,977
East Quincy Avenue
Retail
Colorado
December 14, 2021
4,000
-
4,000
3,601
-
3,601
East Montview Boulevard
Retail
Colorado
December 14, 2021
5,000
-
5,000
1,991
-
1,991
South Federal Blvd
Retail
Colorado
December 14, 2021
4,000
-
4,000
1,778
-
1,778
Santa Fe Trail
Retail
Colorado
December 14, 2021
9,000
-
9,000
1,728
-
1,728
Water Street
Retail
Colorado
December 14, 2021
4,000
-
4,000
1,444
-
1,444
Gregory Street
Retail
Colorado
December 14, 2021
4,000
-
4,000
1,321
-
1,321
West 20th Avenue
Retail
Colorado
December 14, 2021
5,000
-
5,000
1,089
-
1,089
South Federal Blvd.
Retail
Colorado
December 14, 2021
2,000
-
2,000
-
West 6th Street
Retail
Colorado
December 14, 2021
2,000
-
2,000
-
Elm Avenue
Retail
Colorado
December 14, 2021
13,000
-
13,000
-
Bent Avenue North
Retail
Colorado
December 14, 2021
2,000
-
2,000
-
Coolidge Rd
Retail
Michigan
October 25, 2019
3,000
-
3,000
3,372
3,400
South Cedar Street
Retail
Michigan
November 4, 2019
14,000
-
14,000
2,225
-
2,225
West Pierson Road
Retail
Michigan
November 4, 2019
6,000
-
6,000
2,180
-
2,180
Wilder Road
Retail
Michigan
November 4, 2019
4,000
-
4,000
1,740
-
1,740
East Front Street
Retail
Michigan
November 25, 2019
2,000
-
2,000
1,272
-
1,272
South Mason Drive
Retail
Michigan
November 8, 2019
2,000
-
2,000
-
N Delsea Dr
Retail
New Jersey
July 16, 2020
4,000
-
4,000
2,165
-
2,165
24th Street East
Retail
North Dakota
December 14, 2021
5,000
-
5,000
2,045
-
2,045
Highway 2 East
Retail
North Dakota
December 14, 2021
4,000
-
4,000
1,614
-
1,614
Main Street
Retail
Pennsylvania
December 14, 2021
3,000
-
3,000
1,058
-
1,058
South 17th Street
Retail
Pennsylvania
March 23, 2022
3,000
-
3,000
2,750
-
2,750
Esperanza Street
Industrial/Retail
California
July 23, 2019
35,000
-
35,000
13,977
14,250
Grape Street
Industrial/Retail
Colorado
December 14, 2021
33,000
-
33,000
8,206
-
8,206
US 50 Business and Baxter Road
Industrial/Retail
Colorado
December 14, 2021
8,000
-
8,000
2,165
-
2,165
South Fox Street
Industrial/Retail
Colorado
December 14, 2021
6,000
-
6,000
1,299
-
1,299
West Street
Industrial/Retail
Massachusetts
June 30, 2020
124,000
-
124,000
24,806
3,944
28,750
Mozzone Boulevard
Industrial/Retail
Massachusetts
May 16, 2022
104,000
-
104,000
40,000
-
40,000
Stephenson Highway
Industrial/Retail
Michigan
September 1, 2020
63,000
-
63,000
27,934
28,500
Hoover Road
Industrial/Retail
Michigan
May 14, 2021
85,000
-
85,000
17,071
17,230
Leah Avenue
Industrial/Retail
Texas
March 10, 2021
-
63,000
63,000
8,231
19,169
27,400
Inland Center Drive
Under Development
California
November 16, 2020
-
192,000
192,000
35,729
-
35,729
Perez Road
Under Development
California
March 25, 2022
-
23,000
23,000
8,158
-
8,158
63795 19th Avenue Expansion
Under Development
California
February 5, 2021
-
180,000
180,000
24,152
-
24,152
(5)
Total
7,134,000
1,581,000
8,715,000
$
2,208,926
$
125,495
$
2,334,421
(1) “Industrial” reflects facilities utilized or expected to be utilized for regulated cannabis cultivation and/or distribution activities, which can consist of industrial and/or greenhouse space.
(2) The purchase price included approximately $3.2 million attributable to the property which did not satisfy the requirements for sale-leaseback accounting; therefore, this amount is recognized as a financing note receivable and is included in other assets, net on our consolidated balance sheet.
(3) The acquisition of the property did not satisfy the requirements for sale-leaseback accounting; therefore, this amount is recognized as a financing note receivable and is included in other assets, net on our consolidated balance sheet.
(4) The purchase price included approximately $908,000 attributable to the property which did not satisfy the requirements for sale-leaseback accounting; therefore, this amount is recognized as a financing note receivable and is included in other assets, net on our consolidated balance sheet.
(5) Represents parcel under development that is part of the lease with Kings Garden at the 19th Avenue property.
See Item 1., “Business - Our Properties,” for more information about our properties.
In November 2022, we sold one of our Pennsylvania properties that was leased to a subsidiary of Maitri for $23.5 million (approximately $461 per square foot), excluding transaction costs, and recognized a gain on sale of property of approximately $3.6 million.

---

ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
For a description of our legal proceedings, see Note 11 “Commitments and Contingencies - Litigation” to our consolidated financial statements, which is hereby incorporated by reference.

---

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

---

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 28, 2023, there were 30 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, 2018 to December 31, 2022 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
During the year ended December 31, 2022, we issued 413,166 shares of our common stock upon exchange by holders of approximately $26.9 million of outstanding principal amount of our Exchangeable Senior Notes. Such shares of our common stock were issued in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended.
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.

---

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

---

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, 2022, we had 19 full-time employees.
As of December 31, 2022, we owned 110 properties comprising approximately 8.7 million square feet (including approximately 1.6 million rentable square feet under development/redevelopment) in 19 states. As of December 31, 2022, we had invested approximately $2.2 billion in the aggregate (consisting of purchase price and funding of draws for construction funding and improvements submitted by tenants, if any, but excluding transaction costs) and had committed an additional approximately $125.5 million to fund draws to certain tenants and sellers for construction and improvements at our properties. Of the approximately $125.5 million committed to fund draws to certain tenants and sellers for construction and improvements at our properties, approximately $28.9 million was incurred but not funded as of December 31, 2022. These statistics do not include an $18.5 million loan commitment from us to a developer for construction of a regulated cannabis cultivation and processing facility in California, of which we have funded approximately $18.0 million as of December 31, 2022.
Of these properties, we include 108 properties in our operating portfolio, which were 100% leased to state-licensed cannabis operators as of December 31, 2022, with a weighted-average remaining lease term of approximately 15.3 years. Rent collection for our operating portfolio (calculated as base rent and property management fees collected as a percentage of contractually due base rent and property management fees, including an aggregate of approximately $2.7 million of security deposits applied for payment of rent for our leases with Kings Garden and Sozo Health, Inc. (“Sozo”)) was approximately 97% for the year ended December 31, 2022. Rent collection for our operating portfolio (including approximately $541,000 of security deposits applied for payment of rent from our lease with Sozo) was approximately 94% for the three months ended December 31, 2022.
We do not include in our operating portfolio two of our properties, which were previously leased to Kings Garden, and an expansion project at a property where Kings Garden continues to occupy the property pursuant to a confidential, contingent settlement agreement, all of which were under development as of December 31, 2022, and together are expected to comprise approximately 395,000 rentable square feet upon completion of development.
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, drought, and natural disasters in the markets where we acquire properties may affect our overall financial performance.
The success of our tenants in operating their businesses and their ability to pay rent continue to be significantly influenced by many challenges including the impact of inflation, labor shortages, supply chain constraints on their cost of doing business, and the U.S. consumer financial health. Additionally, market dynamics and the regulatory regime in the states where they operate create challenges that may impact our tenants’ businesses and/or decrease future demand for regulated cannabis cultivation and production facilities. The potential impact of current economic challenges on the Company’s financial condition, results of operations, and cash flows is subject to change and continues to depend on the extent and duration of these risks and uncertainties.
Market Dynamics in Regulated Cannabis State Programs
States vary significantly in their market dynamics, driven by many factors, including, but not limited to, regulatory frameworks, enforcement policies with respect to illicit, unlicensed cannabis operations, taxation and licensing structures. For example, in California, according to Global Go Analytics, the illicit market for cannabis remains a much larger portion of overall sales in the state, and state and local authorities have assessed significant taxes on regulated cannabis products, both of which have had the impact of significantly limiting the growth and profitability for operators in the state’s regulated cannabis market.
Many states continue to experience significant declines in unit pricing for regulated cannabis products, with that decline more pronounced in certain states than in others, which compresses operating margins for operators. As a result, certain regulated cannabis operators have announced that they are consolidating operations or shuttering certain operations to reduce costs, which if prolonged, could have a material negative impact on operators’ demand for regulated cannabis facilities, including our existing tenants.
Inflation and Supply Chain Constraints
The U.S. economy is experiencing a sustained increase in inflation rates, which we believe is negatively impacting our tenants. This inflation has impacted costs for labor and production inputs for regulated cannabis operators, in addition to increasing costs of construction for development and redevelopment projects. Ongoing labor shortages and global supply chain issues also continue to adversely impact costs and timing for completion of these development and redevelopment projects, which are resulting in cost overruns and delays in commencing operations on certain of our tenants’ projects.
Reduced Capital Availability for Tenants and the Company
Recently, financial markets have been volatile, reflecting heightened geopolitical risks and material tightening of financial conditions since the U.S. Federal Reserve began increasing interest rates in spring of 2022 and continued uncertainty regarding monetary policy.
Driven in part by overall macroeconomic conditions, capital availability has significantly declined for regulated cannabis operators. According to Viridian, total equity and debt capital raising for public and private cannabis companies in North America decreased by more than 65% in 2022 versus 2021. Even more pronounced, total capital raised for the U.S. regulated cannabis cultivation and retail sector was down over 70% in 2022 versus 2021, with equity capital raised in the sector down over 96% and no equity deal in 2022 raising more than $25 million, according to Viridian. Cannabis stock prices (measured by the MSOS ETF) had declined more than 70% by the end of 2022, and were trading at multi-year lows.
According to Viridian, mergers and acquisitions activity in the U.S. regulated cannabis industry also declined significantly in 2022, with aggregate transaction volume in dollar terms down nearly 70% on nearly 50% fewer transactions versus 2021.
Capital raising activities by U.S. REITs experienced a steep decline in 2022, with that decline more pronounced in the second half of 2022. According to NAREIT, U.S. REITs raised $41.5 billion in debt and equity during 2022, compared to $133.6 billion in 2021, representing the lowest level since 2009.
Significant Tenants and Concentrations of Risk
As of December 31, 2022, we owned 110 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, 2022, 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, 2022.
In July 2022, Kings Garden, a tenant of ours at six properties that we own in southern California, defaulted on its obligations to pay rent. In November 2022, Parallel defaulted on its obligations to pay rent at one of our properties in Pennsylvania, and Green Peak defaulted on its obligations to pay rent at one our properties in Michigan. See Part I, Item 3. Legal Proceedings and Note 11 “Commitments and Contingencies - Litigation” to our consolidated financial statements for more information regarding Kings Garden, Parallel and Green Peak.
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, lenders and other real estate investors, as well as potential tenants (cannabis operators themselves), all of whom may compete with us in our efforts to acquire real estate zoned for regulated cannabis 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, stock-based compensation, and 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, 2022. 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, 2021 for a comparison of the years ended December 31, 2021 and December 31, 2020.
Comparison of the Years Ended December 31, 2022 and 2021 (in thousands)
Years Ended December 31,
Change
Revenues:
Rental (including tenant reimbursements)
$
274,377
$
204,551
$
69,826
Other
1,982
-
1,982
Total revenues
276,359
204,551
71,808
Expenses:
Property expenses
10,520
4,443
6,077
General and administrative expense
38,520
22,961
15,559
Depreciation and amortization expense
61,303
41,776
19,527
Total expenses
110,343
69,180
41,163
Gain on sale of real estate
3,601
-
3,601
Income from operations
169,617
135,371
34,246
Interest and other income
3,195
2,798
Interest expense
(18,301)
(18,086)
(215)
Loss on exchange of Exchangeable Senior Notes
(125)
(3,692)
3,567
Net income
154,386
113,990
40,396
Preferred stock dividends
(1,352)
(1,352)
-
Net income attributable to common stockholders
$
153,034
$
112,638
$
40,396
Revenues
Rental Revenues. Rental revenues for the year ended December 31, 2022 increased by approximately $69.8 million, or 34%, to approximately $274.4 million, compared to approximately $204.6 million for the year ended December 31, 2021. The increase in rental revenue was attributable to:
● The nine properties we acquired in 2022 which generated approximately $10.2 million of rental revenue in 2022;
● The 37 properties we acquired in 2021 which generated approximately $47.9 million of rental revenue in 2022, including related rents on amendments which increased the improvement allowances on four of the leases, compared to approximately $18.6 million in 2021, an increase of approximately $29.3 million;
● The amendments to increase improvement allowances for eight properties that we acquired prior to 2021, the additional purchase of land which was included in the corresponding lease for one property, the annual rent escalations on the 64 properties we acquired prior to 2021, which collectively resulted in approximately $24.6 million in additional rental revenue during the year ended December 31, 2022 versus 2021;
● An increase of approximately $5.7 million in tenant reimbursements revenue for property tax and insurance, to approximately $10.1 million for the year ended December 31, 2022, compared to approximately $4.4 million for the year ended December 31, 2021.
The increase in rental revenues was partially offset by a decrease in rental revenues of approximately $716,000, which was the result of the cessation of lease payments after the sale of one of our Pennsylvania properties that was leased to a subsidiary of Maitri in November 2022.
Rental revenues for the year ended December 31, 2022 also included an aggregate of approximately $3.3 million of security deposits applied for payment of rent (including tenant reimbursements) for our leases with Kings Garden and Sozo.
Rental revenues for the year ended December 31, 2022 were negatively impacted by non-collection of rent during the period totaling approximately $8.6 million (consisting of approximately $8.2 million of contractual base rents and property management fees from four tenants, Kings Garden, Medical Investor Holdings, LLC (“Vertical”), Green Peak and Parallel, and approximately $440,000 for tenant reimbursements for property insurance premiums and property taxes from two tenants, Kings Garden and Vertical).
Other Revenues. Other revenues for the year ended December 31, 2022 consists of interest revenue related to leases for property acquisitions that did not satisfy the requirements for sale-leaseback accounting.
Expenses
Property Expenses. Property expenses for the year ended December 31, 2022 increased by approximately $6.1 million, compared to 2021. The increase was primarily due to new property acquisitions and additional investment in existing properties which resulted in higher property insurance premiums and property taxes that we paid for our properties. Property expenses are generally reimbursable to us by the tenants under the terms of the leases. For the year ended December 31, 2022, property expenses included approximately $440,000 of non-reimbursed expenses related to Kings Garden and Vertical lease defaults.
General and Administrative Expense. General and administrative expense for the year ended December 31, 2022 increased by approximately $15.5 million, or 68%, to approximately $38.5 million, compared to approximately $23.0 million for the year ended December 31, 2021. The increase in general and administrative expense was primarily due to higher compensation to employees, the hiring of additional employees, higher public company, travel and occupancy costs and approximately $3.0 million in litigation-related expenses incurred during the year ended December 31, 2022 related to matters described in Note 11 “Commitments and Contingencies - Litigation” to our consolidated financial statements included in this report.
Compensation expense for the years ended December 31, 2022 and 2021 included approximately $17.5 million and $8.6 million, respectively, of non-cash stock-based compensation.
Depreciation and Amortization Expense. The increase in depreciation and amortization expense was related to depreciation on properties that we acquired and the placement into service of construction and improvements 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 increase in interest and other income was primarily due to higher interest bearing investments.
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, 2022, interest expense increased by approximately $215,000, or 1%, to approximately $18.3 million, compared to $18.1 million for the year ended December 31, 2021. The increase in interest expense was primarily due to the additional interest expense on our Notes due 2026 issued in May 2021, partially offset by a decrease in interest expense on our Exchangeable Senior Notes due to exchanges by holders of approximately $26.9 million of outstanding principal amount of our Exchangeable Senior Notes during the year ended December 31, 2022 and the induced exchange of approximately $110.4 million principal amount of our Exchangeable Senior Notes in December 2021. See Note 7 in the notes to the consolidated financial statements included in this report for further information.
Gain on Sale of Real Estate. Gain on sale of real estate is attributable to the sale in November 2022 of one of our Pennsylvania properties that was leased to a subsidiary of Maitri for $23.5 million, excluding transactions costs.
Loss on Exchange of Exchangeable Senior Notes. Loss on exchange of Exchangeable Senior Notes is attributable to the exchange agreements we executed with certain holders of our Exchangeable Senior Notes. See Note 7 in the notes to the consolidated financial statements included in this report 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):
Year Ended December 31,
Change
Net cash provided by operating activities
$
234,130
$
188,747
$
45,383
Net cash used in investing activities
(396,201)
(384,093)
(12,108)
Net cash provided by financing activities
164,224
155,759
8,465
Ending cash, cash equivalents and restricted cash
88,572
86,419
2,153
Cash flows provided by operating activities for the years ended December 31, 2022 and 2021 were approximately $234.1 million and $188.7 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 2021 to 2022 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 rent payment defaults by certain tenants, higher cash compensation to employees, higher public company, travel and occupancy costs and increased litigation expenses.
Cash flows used in investing activities for the years ended December 31, 2022 and 2021 were approximately $396.2 million and $384.1 million, respectively. Cash flows used in investing activities increased from 2021 to 2022 primarily due to less net maturities of short-term investments, partially offset by a decrease in purchases of new properties, a decrease in funding of improvement allowances and construction funding, and receipt of the proceeds from sale of one of our Pennsylvania properties previously leased to Maitri.
Cash flows provided by financing activities for the year ended December 31, 2022 were approximately $164.2 million, primarily related to approximately $352.0 million in net proceeds from the issuance of our common stock, partially offset by dividend payments of approximately $185.3 million to common and preferred stockholders and approximately $2.5 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.
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.
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 substantially 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. Because substantially all our leases are triple net, our tenants are generally responsible for the maintenance, insurance and property taxes associated with the properties they lease from us. If a tenant defaults on one of our leases or the lease term expires with no tenant renewal, we would incur the property costs not paid by the tenant during the time it takes to re-lease or sell the property.
As of December 31, 2022, we owned 110 properties. Of these properties, we include 108 properties in our operating portfolio, which were 100% leased to state-licensed cannabis operators, with a weighted-average remaining lease term of approximately 15.3 years. Rent collection for our operating portfolio (calculated as base rent and property management fees collected as a percentage of contractually due base rent and property management fees, including an aggregate of approximately $2.7 million of security deposits applied for payment of rent for our leases with Kings Garden and Sozo) was approximately 97% for the year ended December 31, 2022. Rent collection for our operating portfolio (including approximately $541,000 of security deposits applied for payment of rent for our lease with Sozo) was approximately 94% for the three months ended December 31, 2022.
In July 2022, Kings Garden defaulted on its obligations to pay rent at all of the properties that Kings Garden leases from us. Two of our properties, which were previously leased to Kings Garden, and an expansion project at a property where Kings Garden continues to occupy the property pursuant to a confidential, contingent settlement agreement, were under development as of December 31, 2022, and together are expected to comprise approximately 395,000 rentable square feet upon completion of development. In November 2022, Parallel defaulted on its obligations to pay rent at one of our properties in Pennsylvania, and Green Peak defaulted on its obligations to pay rent at one our properties in Michigan. See Part I, Item 3. Legal Proceedings and Note 11 “Commitments and Contingencies - Litigation” to our consolidated financial statements for more information regarding Kings Garden, Parallel and Green Peak.
We expect to incur some property-level operating costs from time to time in periods during which properties that become vacant are being remarketed. In addition, we may recognize an expense for certain property costs, such as insurance premiums and real estate taxes billed in arrears, if we believe the tenant is likely to vacate the property before making payment on those obligations or may be unable to pay such costs in a timely manner. Property costs are generally not significant to our operations, but the amount of property costs can vary quarter to quarter based on the number of property vacancies and whether we have any underperforming properties. We may advance certain property costs on behalf of our tenants but expect that the majority of these costs will be reimbursed by the tenant and do not anticipate that they will be significant to our operations. For the year ended December 31, 2022, property expenses included approximately $440,000 of non-reimbursed expenses related to Kings Garden and Vertical lease defaults.
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, 2022. 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.
In April 2022, we issued 1,815,790 shares of common stock in an underwritten public offering, which includes the exercise in full of the underwriters’ option to purchase an additional 236,842 shares, resulting in net proceeds of approximately $330.9 million.
During the year ended December 31, 2022, we issued 413,166 shares of our common stock upon exchange by holders of approximately $26.9 million of outstanding principal amount of our Exchangeable Senior Notes.
During the year ended December 31, 2022, we sold 117,023 shares of our common stock for net proceeds of approximately $21.1 million under the Prior ATM Program.
In January 2023, we terminated the Prior ATM Program and entered into new equity distribution agreements for the ATM Program, pursuant to which we may offer and sell from time to time up to $500.0 million of shares of our common stock. As of February 28, 2023, we had not issued any shares of common stock under this ATM Program.
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.
Recently, financial markets have been volatile in general, which has also significantly reduced our access to capital. If sustained, this would have a material adverse effect on our business, financial condition and results of operations, including our ability to continue to make acquisitions of new properties and fund investments for improvements at existing properties.
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 2022, we declared cash dividends on our common stock totaling $7.10 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.
Year Ended December 31,
Ordinary income distributions
$
6.929636
$
5.340000
$
3.940000
Long-term capital gain distributions(1)
0.100364
-
-
Total
$
7.030000
$
5.340000
$
3.940000
(1) Unrecaptured Section 1250 Gain of $0.058864 represents additional characterization of and is part of long-term capital gain distributions for the year ended December 31, 2022.
The common stock distribution with a record date of December 30, 2022 was a split-year distribution, with $0.33 allocable to 2022 for federal income tax purposes and $1.47 allocable to 2023 for federal income tax purposes. The common stock distribution with a record date of December 31, 2021 was a split-year distribution, with $0.10 allocable to 2021 for federal income tax purposes and $1.40 allocable to 2022 for federal income tax purposes. The common stock distribution with a record date of December 31, 2020 was a split-year distribution, with $0.22 allocable to 2020 for federal income tax purposes and $1.02 allocable to 2021 for federal income.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2022 (in thousands):
Payments Due
Exchangeable
by Year
Notes due 2026
Senior Notes
Interest
Office Rent
Total
$
-
$
-
$
16,742
$
$
17,238
-
6,436
16,534
23,481
-
-
16,500
17,026
300,000
-
6,646
307,189
-
-
-
Total
$
300,000
$
6,436
$
56,422
$
2,121
$
364,979
As of December 31, 2022, we had (1) approximately $96.6 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) approximately $479,000 outstanding in commitments to fund a construction loan. The commitments discussed in this paragraph are excluded from the table of contractual obligations above, as improvement allowances 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 construction loan funding generally may be requested by the borrower from time to time, subject to satisfaction of certain conditions.
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 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
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, Normalized Funds from Operations and Adjusted Funds from Operations
Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by 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 all periods presented (other than the twelve months ended December 31, 2020), 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 months ended March 31, 2022, 102,333 shares issuable upon vesting of the performance share units (“PSUs”) were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as of March 31, 2022. No shares were issuable upon vesting of the PSUs for the three months ended December 31, 2022, September 30, 2022 and June 30, 2022 and the twelve months ended December 31, 2022, as the performance thresholds for vesting of the PSUs were not met as measured as of the end of those respective periods.
For the three and twelve months ended December 31, 2021, 81,414 shares issuable upon vesting of 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, 2022, 2021 and 2020 (in thousands, except share and per share amounts):
Years Ended December 31,
Net income attributable to common stockholders
$
153,034
$
112,638
$
64,378
Real estate depreciation and amortization
61,303
41,776
28,025
Gain on sale of real estate
(3,601)
-
-
FFO attributable to common stockholders (basic)
$
210,736
$
154,414
$
92,403
Cash and non-cash interest expense on Exchangeable Senior Notes
7,517
-
FFO attributable to common stockholders (diluted)
$
211,282
$
161,931
$
92,403
Acquisition-related expense
Financing expense
-
Litigation-related expense
3,010
-
-
Loss on exchange of Exchangeable Senior Notes
3,692
-
Normalized FFO attributable to common stockholders (diluted)
214,894
165,649
92,708
Stock-based compensation
17,507
8,616
3,330
Non-cash interest expense
1,255
2,040
Above-market lease amortization
-
AFFO attributable to common stockholders (diluted)
$
233,748
$
174,984
$
98,078
FFO per common share - diluted
$
7.64
$
6.17
$
4.72
Normalized FFO per common share - diluted
$
7.77
$
6.31
$
4.74
AFFO per common share - diluted
$
8.45
$
6.66
$
5.01
Weighted average common shares outstanding - basic
27,345,047
23,903,017
19,443,602
Restricted stock and RSUs
116,046
96,174
114,017
PSUs
-
81,414
-
Dilutive effect of Exchangeable Senior Notes
202,076
2,180,550
-
Weighted average common shares outstanding - diluted
27,663,169
26,261,155
19,557,619
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, 2022 and 2021 (in thousands, except share and per share amounts):
Three Months Ended(1)
December 31, 2022
September 30, 2022
June 30, 2022
March 31, 2022
Net income attributable to common stockholders
$
41,168
$
37,278
$
39,876
$
34,712
Real estate depreciation and amortization
16,302
15,900
15,233
13,868
Gain on sale of real estate
(3,601)
-
-
-
FFO attributable to common stockholders (basic)
$
53,869
$
53,178
$
55,109
$
48,580
Cash and non-cash interest expense on Exchangeable Senior Notes
FFO attributable to common stockholders (diluted)
$
53,941
$
53,250
$
55,177
$
48,914
Acquisition-related expense
-
-
Financing expense
-
Litigation-related expense
2,112
-
Loss on exchange of Exchangeable Senior Notes
-
-
Normalized FFO attributable to common stockholders (diluted)
$
54,969
$
55,391
$
55,407
$
49,127
Stock-based compensation
4,312
4,379
4,437
4,379
Non-cash interest expense
Above-market lease amortization
AFFO attributable to common stockholders (diluted)
$
59,625
$
60,109
$
60,178
$
53,836
FFO per common share - diluted
$
1.92
$
1.89
$
1.97
$
1.86
Normalized FFO per common share - diluted
$
1.95
$
1.97
$
1.98
$
1.87
AFFO per common share - diluted
$
2.12
$
2.13
$
2.15
$
2.04
Weighted-average common shares outstanding - basic
27,938,804
27,938,568
27,850,561
25,620,253
Restricted stock and RSUs
117,831
118,567
82,387
110,457
PSUs
-
-
-
102,333
Dilutive effect of Exchangeable Senior Notes
103,626
100,799
103,742
507,181
Weighted-average common shares outstanding - diluted
28,160,261
28,157,934
28,036,690
26,340,224
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 and amortization
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
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 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
(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.
Lease Accounting
We account for our leases under ASC 842 “Leases”, which requires significant estimates and judgments by management in its application. Upon lease inception or lease modification, we assess the lease classification of both the land and building components of the property. The determination of lease classification requires the calculation of the rate implicit in the lease, which is driven by significant estimates relating to the unguaranteed residual value of the assets at the end of the non-cancelable lease term.
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, 2022 and 2021.
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, 2022, we had $300.0 million principal amount of Notes due 2026 and approximately $6.4 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
The U.S. economy is experiencing a sustained increase in inflation rates. We enter into leases that generally provide for fixed increases in rent. During times when inflation is greater than the fixed increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation. See also the discussion under Item 1A, “Risk Factors,” under the caption “Inflation may adversely affect our business and our tenants’ financial condition and results of operations.”
Seasonality
Our business has not been, and we do not expect our business in the future to be, subject to material seasonal fluctuations.

---

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.

---

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.

---

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

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) and 15d-15(b) promulgated under the Exchange Act, our management has evaluated, under supervision of the Audit Committee of the Board of Directors and with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2022. Based on that evaluation, our principal executive
and financial officers concluded that our disclosure controls and procedures were not effective as of December 31, 2022 because of a material weakness in our internal control over financial reporting as described below.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Notwithstanding this material weakness, the Company has concluded that no material misstatements exist in the consolidated financial statements included in this Annual Report on Form 10-K and such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and the results of its operations and its cash flows for the year then ended, in conformity with GAAP.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f), designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have determined that we did not design and maintain effective internal control over financial reporting as of December 31, 2022 related to management’s review and approval of requests for funding disbursements for tenant improvements at the Company’s properties. Specifically, management’s controls are not designed at an appropriate level of precision to prevent or detect a material misstatement in a timely manner.
Our internal control over financial reporting has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report appearing below, which expresses an adverse opinion on the effectiveness of our internal control over financial reporting as of December 31, 2022.
Remediation of Material Weakness
We are committed to the continuous improvement of our internal controls over financial reporting. We immediately commenced measures to remediate the identified material weakness. We have provided additional training to personnel regarding policies and procedures around construction projects and the necessary approvals of requests for funding disbursements in connection with qualifying property improvements at our properties. Our remediation efforts also include (1) enhancing the design of existing procedures and controls over the review and approval of funding requests for tenant improvements; (2) providing additional training and developing tools to implement and monitor our policies and procedures; and (3) supplementing existing resources with the engagement of third-party construction consultants.
While we believe that the efforts taken to date for remediation are appropriate and reasonable steps to remediate the material weakness, the material weakness will not be remediated until the enhanced controls have been implemented for a sufficient period of time and management has concluded, through testing and monitoring, that the new and enhanced controls are designed and operating effectively. We may conclude that additional measures, including resources, are necessary to remediate the material weakness in our internal control over financial reporting, which may necessitate additional evaluation and implementation time. We may also modify certain of the remediation efforts described above.
Changes in Internal Control Over Financial Reporting
Other than the material weakness and remediation efforts discussed above, there have been no changes in our system of internal control over financial reporting during the quarter ended December 31, 2022 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.
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, 2022, 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 did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria. We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.
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, 2022 and 2021, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule (collectively referred to as the “financial statements”), and our report dated February 28, 2023 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.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness regarding management’s failure to design and maintain controls over the review and approval of requests for funding disbursements for tenant improvements at the Company’s properties has been identified and described in management’s assessment. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2022 financial statements, and this report does not affect our report dated February 28, 2023, on those financial statements.
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 28, 2023

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
Not applicable.

---

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 2023 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 2023 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 2023 Annual Meeting of Stockholders and is incorporated herein by reference.

---

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 2023 Annual Meeting of Stockholders and is incorporated herein by reference.

---

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 2023 Annual Meeting of Stockholders and is incorporated herein by reference.

---

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 2023 Annual Meeting of Stockholders and is incorporated herein by reference.

---

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 2023 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBIT 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 January 20, 2023, 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
Third 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 January 23, 2023.
(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 December 8, 2022.
(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 Quarterly Report on Form 10-Q filed with the SEC on August 4, 2022.