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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________

Commission file number: 001-37949

Innovative Industrial Properties, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

81-2963381

(State or other jurisdiction of incorporation or

(I.R.S. Employer Identification No.) 

organization) 

1389 Center Drive, Suite 200

Park City, UT 84098

(858) 997-3332

(Address of principal executive offices)

(Registrant’s telephone number)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbols (s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

IIPR

 

New York Stock Exchange

Series A Preferred Stock, par value $0.001 per share

 

IIPR-PA

 

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

 

 

 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of August 6, 2020 there were 21,700,428 shares of common stock outstanding.

INNOVATIVE INDUSTRIAL PROPERTIES, INC.

FORM 10-Q – QUARTERLY REPORT

JUNE 30, 2020

TABLE OF CONTENTS

PART I

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Income

4

 

Condensed Consolidated Statements of Stockholders’ Equity

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to the Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

PART II

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

34

2

PART I

ITEM 1. FINANCIAL STATEMENTS

Innovative Industrial Properties, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

June 30, 

December 31, 

    

2020

    

2019

Assets

Real estate, at cost:

 

  

 

  

Land

$

58,467

$

48,652

Buildings and improvements

 

530,274

 

382,035

Tenant improvements

 

226,651

 

87,344

Total real estate, at cost

 

815,392

 

518,031

Less accumulated depreciation

 

(23,823)

 

(12,170)

Net real estate held for investment

 

791,569

 

505,861

Cash and cash equivalents

 

50,174

 

82,244

Restricted cash

11,468

35,072

Short-term investments, net

 

323,255

 

119,595

Right of use office lease asset

1,091

1,202

Other assets, net

 

1,591

 

1,883

Total assets

$

1,179,148

$

745,857

Liabilities and stockholders’ equity

 

 

  

Exchangeable senior notes, net

$

135,661

$

134,654

Tenant improvements and construction funding payable

 

22,781

 

24,968

Accounts payable and accrued expenses

 

3,235

 

3,417

Dividends payable

 

20,108

 

12,975

Office lease liability

1,149

1,202

Rent received in advance and tenant security deposits

 

26,243

 

20,631

Total liabilities

 

209,177

 

197,847

Commitments and contingencies (Notes 6 and 11)

 

 

  

Stockholders’ equity:

 

 

  

Preferred stock, par value $0.001 per share, 50,000,000 shares authorized: 9.00% Series A cumulative redeemable preferred stock, $15,000 liquidation preference ($25.00 per share), 600,000 shares issued and outstanding at June 30, 2020 and December 31, 2019

 

14,009

 

14,009

Common stock, par value $0.001 per share, 50,000,000 shares authorized: 18,614,561 and 12,637,043 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

 

19

 

13

Additional paid-in capital

 

988,220

 

553,932

Dividends in excess of earnings

 

(32,277)

 

(19,944)

Total stockholders’ equity

 

969,971

 

548,010

Total liabilities and stockholders’ equity

$

1,179,148

$

745,857

See the accompanying notes to the condensed consolidated financial statements.

3

Innovative Industrial Properties, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except share and per share amounts)

For the Three Months Ended

For the Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Revenues:

 

  

 

  

 

  

 

  

Rental (including tenant reimbursements)

$

24,346

$

8,617

$

45,476

$

15,440

Total revenues

 

24,346

 

8,617

 

45,476

 

15,440

Expenses:

 

 

 

 

Property expenses

 

414

 

337

 

1,014

 

584

General and administrative expense

 

3,010

 

2,593

 

6,356

 

4,511

Depreciation expense

 

6,746

 

1,615

 

11,653

 

2,833

Total expenses

 

10,170

 

4,545

 

19,023

 

7,928

Income from operations

 

14,176

 

4,072

 

26,453

 

7,512

Interest and other income

 

989

 

1,172

 

2,433

 

2,165

Interest expense

 

(1,855)

 

(1,832)

 

(3,704)

 

(2,624)

Net income

 

13,310

 

3,412

 

25,182

 

7,053

Preferred stock dividend

 

(338)

 

(338)

 

(676)

 

(676)

Net income attributable to common stockholders

$

12,972

$

3,074

$

24,506

$

6,377

Net income attributable to common stockholders per share (Note 8):

 

 

 

 

Basic

$

0.73

$

0.31

$

1.46

$

0.64

Diluted

$

0.73

$

0.30

$

1.45

$

0.64

Weighted average shares outstanding:

 

 

 

 

Basic

 

17,530,721

 

9,667,079

 

16,657,509

 

9,665,933

Diluted

 

17,644,829

 

9,807,503

 

16,771,460

 

9,802,616

See accompanying notes to the condensed consolidated financial statements.

4

Innovative Industrial Properties, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019

Series A

Shares of

Additional

Dividends in

Total

Series A

Shares of

Additional

Dividends in

Total

Preferred

Common

Common

Paid-In-

Excess of

Stockholders’

Preferred

Common

Common

Paid-In

Excess of

Stockholders’

    

Stock

    

Stock

    

Stock

    

Capital

    

Earnings

    

Equity

    

Stock

    

Stock

    

Stock

    

Capital

    

Earnings

    

Equity

Balances at beginning of period

$

14,009

17,035,674

$

17

$

870,433

$

(25,480)

$

858,979

$

14,009

9,806,194

$

10

$

265,733

$

(11,376)

$

268,376

Net income

 

 

 

 

13,310

 

13,310

3,412

3,412

Net proceeds from sale of common stock

 

1,577,748

 

2

 

116,965

 

 

116,967

Net issuance of unvested restricted stock

 

1,139

 

 

 

 

2,977

Preferred stock dividend

 

 

 

 

(338)

 

(338)

(338)

(338)

Common stock dividend

 

 

 

 

(19,769)

 

(19,769)

(5,885)

(5,885)

Stock-based compensation

 

 

 

822

 

 

822

623

623

Balances at end of period

$

14,009

 

18,614,561

$

19

$

988,220

$

(32,277)

$

969,971

$

14,009

9,809,171

$

10

$

266,356

$

(14,187)

$

266,188

Six Months Ended June 30, 2020

Six Months Ended June 30, 2019

Series A

Shares of

Additional

Dividends in

Total

Series A

Shares of

Additional

Dividends in

Total

Preferred

Common

Common

Paid-In

Excess of

Stockholders’

Preferred

Common

Common

Paid-In

Excess of

Stockholders’

    

Stock

    

Stock

    

Stock

    

Capital

    

Earnings

    

Equity

    

Stock

    

Stock

    

Stock

    

Capital

    

Earnings

    

Equity

Balances at beginning of period

$

14,009

12,637,043

$

13

$

553,932

$

(19,944)

$

548,010

$

14,009

9,775,800

$

10

$

260,540

$

(10,267)

$

264,292

Net income

 

 

 

25,182

 

25,182

7,053

7,053

Equity component of exchangeable senior notes

5,569

5,569

Issuance of exchangeable senior notes

14

1

1

Net proceeds from sale of common stock

5,988,999

6

434,806

434,812

Net issuance of unvested restricted stock

 

(11,495)

 

(2,166)

 

 

(2,166)

33,371

(939)

(939)

Preferred stock dividend

 

 

 

(676)

 

(676)

(676)

(676)

Common stock dividend

 

 

 

(36,839)

 

(36,839)

(10,297)

(10,297)

Stock-based compensation

 

 

1,647

 

 

1,647

1,186

1,186

Balances at end of period

$

14,009

 

18,614,561

$

19

$

988,220

$

(32,277)

$

969,971

$

14,009

9,809,171

$

10

$

266,356

$

(14,187)

$

266,188

See accompanying notes to the condensed consolidated financial statements.

5

Innovative Industrial Properties, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

For the Six Months Ended

June 30, 

    

2020

    

2019

Cash flows from operating activities

 

  

 

  

Net income

$

25,182

$

7,053

Adjustments to reconcile net income to net cash provided by operating activities

 

 

Depreciation

 

11,653

 

2,833

Other non-cash adjustments

97

Stock-based compensation

 

1,647

 

1,186

Amortization of discounts on short-term investments

 

(1,910)

 

(1,843)

Amortization of debt discounts and issuance costs

 

1,008

 

692

Changes in assets and liabilities

 

 

Other assets, net

 

3

 

(77)

Accounts payable and accrued expenses

 

(182)

 

1,551

Rent received in advance and tenant security deposits

 

5,612

 

3,222

Net cash provided by operating activities

 

43,110

 

14,617

Cash flows from investing activities

 

 

Purchases of investments in real estate

 

(138,319)

 

(62,163)

Reimbursements of tenant improvements and construction funding

 

(160,579)

 

(19,878)

Deposits in escrow for acquisitions

 

(400)

 

(750)

Purchases of short-term investments

 

(388,750)

 

(116,945)

Maturities of short-term investments

 

187,000

 

100,500

Net cash used in investing activities

 

(501,048)

 

(99,236)

Cash flows from financing activities

 

 

Issuance of common stock, net of offering costs

 

434,812

 

(74)

Net proceeds from issuance of exchangeable senior notes

 

 

138,545

Dividends paid to common stockholders

 

(29,706)

 

(7,833)

Dividends paid to preferred stockholders

 

(676)

 

(676)

Taxes paid related to net share settlement of equity awards

 

(2,166)

 

(939)

Net cash provided by financing activities

 

402,264

 

129,023

Net increase in cash, cash equivalents and restricted cash

 

(55,674)

 

44,404

Cash, cash equivalents and restricted cash, beginning of period

 

117,316

 

13,050

Cash, cash equivalents and restricted cash, end of period

$

61,642

 

57,454

Supplemental disclosure of cash flow information:

Cash paid during the period for interest

$

2,696

$

Supplemental disclosure of non-cash investing and financing activities:

 

 

Accrual for reimbursements of tenant improvements and construction funding

$

22,781

$

8,823

Deposits applied for acquisitions

650

Accrual for common and preferred stock dividends declared

 

20,108

 

6,223

Accrual for stock issuance costs

55

64

Exchange of exchangeable senior notes

1

See accompanying notes to the condensed consolidated financial statements.

6

Innovative Industrial Properties, Inc.

Notes to the Condensed Consolidated Financial Statements

June 30, 2020

(Unaudited)

1. Organization

As used herein, the terms “we”, “us”, “our” or the “Company” refer to Innovative Industrial Properties, Inc., a Maryland corporation, and any of our subsidiaries, including IIP Operating Partnership, LP, a Delaware limited partnership (our “Operating Partnership”).

We are an internally-managed real estate investment trust (“REIT”) focused on the acquisition, ownership and management of specialized properties leased to experienced, state-licensed operators for their regulated state-licensed cannabis facilities. We have acquired and intend to continue to acquire our properties through sale-leaseback transactions and third-party purchases. We have leased and expect to continue to lease our properties on a triple-net lease basis, where the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term, including structural repairs, maintenance, taxes and insurance.

We were incorporated in Maryland on June 15, 2016. We conduct our business through a traditional umbrella partnership real estate investment trust, or UPREIT structure, in which our properties are owned by our Operating Partnership, directly or through subsidiaries. We are the sole general partner of our Operating Partnership and own, directly or through subsidiaries, 100% of the limited partnership interests in our Operating Partnership.

2. Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements

Basis of Presentation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements.

This interim financial information should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Any references to square footage or occupancy percentage, and any amounts derived from these values in these notes to condensed consolidated financial statements, are outside the scope of our independent registered public accounting firm’s review.

The Company considered the impact of COVID-19 on its assumptions and estimates used and determined that there were no material adverse impacts on the Company's results of operations and financial position at June 30, 2020. A prolonged outbreak could have a material adverse impact on the financial results and business operations of the Company. See Note 6 for further discussion.

Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2020.

Federal Income Taxes. We believe that we have operated our business so as to qualify to be taxed as a REIT for U.S. federal income tax purposes. Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income. Assuming our dividends equal or exceed our taxable net income, we generally will not be required to pay federal corporate income taxes on such income. The income taxes recorded on our condensed consolidated statements of income represent amounts paid for city and state income and franchise taxes and are included in general and administrative expenses in the accompanying condensed consolidated statements of income.

7

Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates and assumptions.

Reportable Segment. We are engaged in the business of providing real estate for the regulated cannabis industries. Our properties are similar in that they are leased to the state-licensed operators on long-term triple-net basis, consist of improvements that are reusable and have similar economic characteristics. Our chief operating decision maker reviews financial information for our entire consolidated operations when making decisions related to assessing our operating performance. We have aggregated the properties into one reportable segment as the properties share similar long-term economic characteristics and have other similarities, including the fact that they are operated using consistent business strategies. The financial information disclosed herein represents all of the financial information related to our one reportable segment.

Acquisition of Real Estate Properties. Our investment in real estate is recorded at historical cost, less accumulated depreciation. Upon acquisition of a property, the tangible and intangible assets acquired and liabilities assumed are initially measured based upon their relative fair values. We estimate the fair value of land by reviewing comparable sales within the same submarket and/or region, the fair value of buildings on an as-if vacant basis and may engage third-party valuation specialists. Acquisition costs are capitalized as incurred. All of our acquisitions to date were recorded as asset acquisitions.

Depreciation. We are required to make subjective assessments as to the estimated useful lives of our depreciable assets. We consider the period of future benefit of the assets to determine the appropriate estimated useful lives. Depreciation of our assets is charged to expense on a straight-line basis over the estimated useful lives. We depreciate each of our buildings and improvements over its estimated remaining useful life, generally not to exceed 40 years. We depreciate tenant improvements at our buildings over the shorter of the estimated useful lives or the terms of the related leases.

We depreciate office equipment and furniture and fixtures over estimated useful lives ranging from three to six years. We depreciate the leasehold improvements at our corporate office over the shorter of the estimated useful lives or the initial lease term.

Provision for Impairment. On a quarterly basis, we review current activities and changes in the business conditions of all of our properties prior to and subsequent to the end of each quarter to determine the existence of any triggering events or impairment indicators requiring an impairment analysis. If triggering events or impairment indicators are identified, we review an estimate of the future undiscounted cash flows for the properties, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration.

Long-lived assets are individually evaluated for impairment when conditions exist that may indicate that the carrying amount of a long-lived asset may not be recoverable. The carrying amount of a long-lived asset to be held and used is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Impairment indicators or triggering events for long-lived assets to be held and used are assessed by project and include significant fluctuations in estimated net operating income, occupancy changes, significant near-term lease expirations, current and historical operating and/or cash flow losses, construction costs, estimated completion dates, rental rates, and other market factors. We assess the expected undiscounted cash flows based upon numerous factors, including, but not limited to, construction costs, available market information, current and historical operating results, known trends, current market/economic conditions that may affect the property, and our assumptions about the use of the asset, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration. Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value. We may adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives. No impairment losses were recognized during the six months ended June 30, 2020 and 2019.

8

Revenue Recognition. Our leases are triple-net leases, an arrangement under which the tenant maintains the property while paying us rent. We account for our current leases as operating leases and record revenue for each of our properties on a cash basis due to the uncertain regulatory environment in the United States relating to the regulated cannabis industry and the uncertainty of collectability of lease payments from each tenant due to its limited operating history. Contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses are included in rental revenue in the period when such costs are reimbursed by the tenants. Contractually obligated real estate taxes that are paid directly by the tenant to the tax authorities are not reflected in our condensed consolidated financial statements.

Cash and Cash Equivalents and Restricted Cash. We consider all highly-liquid investments with original maturities of three months or less to be cash equivalents. As of June 30, 2020 and December 31, 2019, $49.1 million and $60.1 million, respectively, were invested in short-term money market funds, obligations of the U.S. government and certificates of deposit with an original maturity at the time of purchase of less than or equal to three months.

Restricted cash relates to cash held in an escrow account for the reimbursement of tenant improvements for tenants in accordance with the lease agreement at two of our properties.

Investments. Investments consist of obligations of the U.S. government and certificates of deposit with an original maturity at the time of purchase of greater than three months. Investments are classified as held-to-maturity and stated at amortized cost.

Exchangeable Notes. The “Debt with Conversion and Other Options” Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification requires the liability and equity components of exchangeable debt instruments that may be settled in cash upon exchange, including partial cash settlement, to be separately accounted for in a manner that reflects the issuer’s nonexchangeable debt borrowing rate. The initial proceeds from the sale of exchangeable notes were allocated between a liability component and an equity component in a manner that reflects interest expense at the rate of similar nonexchangeable debt that could have been issued at such time. The equity component represents the excess initial proceeds received over the fair value of the liability component of the notes as of the date of issuance. We measured the estimated fair value of the debt component of our Exchangeable Senior Notes (as defined below) as of the respective issuance dates based on our estimated nonexchangeable debt borrowing rate with the assistance of a third-party valuation specialist as we do not have a history of borrowing arrangements and there is limited empirical data available related to the Company’s industry due to the regulatory uncertainty of the cannabis market in which the Company’s tenants operate. The equity component of our Exchangeable Senior Notes is reflected within additional paid-in capital on our condensed consolidated balance sheets, and the resulting debt discount is amortized over the period during which the Exchangeable Senior Notes are expected to be outstanding (through the maturity date) as additional non-cash interest expense. The additional non-cash interest expense attributable to our Exchangeable Senior Notes will increase in subsequent periods through the maturity date as the Exchangeable Senior Notes accrete to the par value over the same period.

Deferred Financing Costs. The deferred financing costs that are included as a reduction in the net book value of the related liability on our condensed consolidated balance sheets reflect issuance and other costs related to our Exchangeable Senior Notes. These costs are amortized as non-cash interest expense using the effective interest method over the life of the Exchangeable Senior Notes.

Stock-Based Compensation. Stock-based compensation for equity awards is based on the grant date fair value of the equity awards and is recognized over the requisite service period. If awards are forfeited prior to vesting, we reverse any previously recognized expense related to such awards in the period during which the forfeiture occurs and reclassify any non-forfeitable dividends and dividend equivalents previously paid on these awards from retained earnings to compensation expense. Forfeitures are recognized as incurred.

9

Lease Accounting. As lessor for each of our real estate transactions involving the leaseback of the related property to the seller or affiliates of the seller, we determine whether these transactions qualify as sale and leaseback transactions under the accounting guidance. For these transactions, we consider various inputs and assumptions including, but not necessarily limited to, lease terms, renewal options, discount rates, and other rights and provisions in the purchase and sale agreement, lease and other documentation to determine whether control has been transferred to the Company or remains with the lessee. A transaction involving a sale leaseback will be treated as a purchase of a real estate property if it is considered to transfer control of the underlying asset from the lessee. A lease will be classified as direct-financing if risks and rewards are conveyed without the transfer of control. Otherwise, the lease is treated as an operating lease. These criteria also include estimates and assumptions regarding the fair value of the leased facilities, minimum lease payments, the economic useful life of the facilities, the existence of a purchase option, and certain other terms in the lease agreements. The lease accounting guidance requires accounting for a transaction as a financing in a sale leaseback when the seller-lessee is provided an option to purchase the property from the landlord at the tenant’s option. All of our leases are classified as operating leases. Our tenant reimbursable revenue and property expenses are presented on a gross basis as rental revenue and as property expenses, respectively, on our condensed consolidated statements of income.

In April 2020, in response to the coronavirus pandemic and associated severe economic disruption, we amended leases at certain of our properties to provide for temporary base rent and property management fee deferrals through June 30, 2020. The FASB has issued additional guidance for companies to account for any coronavirus related rent concessions in the form of FASB staff and board members’ remarks at the April 8, 2020 public meeting and the FASB staff question-and-answer document issued on April 10, 2020. We have elected the practical expedient which allows us to not have to evaluate whether concessions provided in response to the coronavirus pandemic are lease modifications. This relief is subject to certain conditions being met, including ensuring the total remaining lease payments are substantially the same or less as compared to the original lease payments prior to the concession being granted.

One of our leases that was entered into prior to 2019 provides the lessee with a purchase option to purchase the leased property at the end of the initial lease term in September 2034, subject to the satisfaction of certain conditions. The purchase option provision allows the lessee to purchase the leased property at the greatest of (a) the fair value; (b) the value determined by dividing the then-current base rent by 8%; and (c) an amount equal to our gross investment in the property (including the purchase price at acquisition and any additional investment in the property made by us during the term of the lease), indexed to inflation. At June 30, 2020, our gross investment in the property with the purchase option was approximately $30.5 million. At June 30, 2020, the purchase option was not exercisable.

Our leases generally contain options to extend the lease terms at the prevailing market rate or at the expiring rental rate at the time of expiration. Certain of our leases provide the lessee with a right of first refusal or right of first offer in the event we market the leased property for sale.

Recent Accounting Pronouncements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses, which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, which among other updates, clarifies that receivables arising from operating leases are not within the scope of this guidance and should be evaluated in accordance with Topic 842. For available-for-sale debt securities with unrealized losses, companies will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. These standards were effective for the Company on January 1, 2020 and did not have a material impact on our condensed consolidated financial statements.

Concentration of Credit Risk. As of June 30, 2020, we owned 58 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New York, North Dakota, Ohio, Pennsylvania and Virginia. The ability of any of our tenants to honor the terms of their leases is dependent upon the economic, regulatory, competition, natural and social factors affecting the community in which that tenant operates.

10

The following table sets forth the tenants in our portfolio that represented the largest percentage of our total rental revenue for each period presented, including tenant reimbursements:

For the Three Months Ended 

For the Six Months Ended 

 

June 30, 2020

June 30, 2020

Percentage of

Percentage of

    

Number of 

    

  Rental 

    

Number of 

    

 Rental 

 

    

Leases

    

Revenue

    

Leases

    

Revenue

PharmaCann Inc.(1)

 

5

 

21

%

5

 

22

%

Ascend Wellness Holdings, LLC(1)

 

3

 

12

%

3

 

11

%

Cresco Labs Inc.(1)

 

5

 

9

%

5

 

8

%

Vireo Health, Inc.(1)

 

4

 

6

%

4

 

6

%

SH Parent, Inc. (Parallel) (1)

 

1

 

6

%  

1

 

4

%

For the Three Months Ended 

For the Six Months Ended 

 

June 30, 2019

June 30, 2019

 

    

    

Percentage of 

    

    

Percentage of 

 

 

Number of 

 

Rental 

 

Number of 

 

Rental 

    

Leases

    

Revenue

    

Leases

    

Revenue

PharmaCann Inc.(1)

 

3

 

28

%  

3

 

29

%

Holistic Industries Inc.(1)

 

2

 

13

%  

2

 

15

%

Vireo Health, Inc.(1)

 

4

 

10

%  

4

 

11

%

Ascend Wellness Holdings, LLC(1)

 

1

 

10

%  

1

 

11

%

Kings Garden Inc. (1)

 

5

 

10

%  

5

 

5

%

The Pharm, LLC

 

1

 

8

%  

1

 

9

%

Green Peak Industries, LLC

 

1

 

7

%  

1

 

7

%

(1)     Includes leases with affiliates of the entity, for which the entity has provided a corporate guaranty.

At June 30, 2020, we had a property in each of Florida, Michigan, and Pennsylvania that individually accounted for approximately 5% of our net real estate held for investment. At December 31, 2019, one of our properties in New York accounted for approximately 6% of our net real estate held for investment.

We have deposited cash with a financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of June 30, 2020, we had cash accounts in excess of FDIC insured limits. We have not experienced any losses in such accounts.

3. Common Stock

As of June 30, 2020, the Company was authorized to issue up to 50,000,000 shares of common stock, par value $0.001 per share, and there were 18,614,561 shares of common stock issued and outstanding.

In January 2020, we issued 3,412,969 shares of common stock, including the exercise in full of the underwriters' option to purchase an additional 445,170 shares, resulting in net proceeds of approximately $239.6 million.

In May 2020, we issued 1,550,648 shares of common stock, including the exercise in full of the underwriter’s option to purchase an additional 202,259 shares, resulting in net proceeds of approximately $114.9 million.

Subsequent to June 30, 2020, in July 2020, we issued 3,085,867 shares of common stock, including the exercise in full of the underwriters' option to purchase an additional 402,504 shares, resulting in gross proceeds of approximately $258.7 million.

In September 2019, we entered into equity distribution agreements with three sales agents, pursuant to which we may offer and sell from time to time through an “at-the-market” offering program, or ATM Program, up to $250.0 million in shares of our common stock. During the three months ended June 30, 2020, we sold 27,100 shares of our common stock for net proceeds of approximately $2.1 million under the ATM Program, which includes the payment of approximately $42,000 to one sales agent as commission for such sales. During the six months ended June 30, 2020, we sold 1,025,382 shares of our common stock for net proceeds of approximately $80.3 million under the ATM Program, which includes the payment of approximately $1.6 million to one sales agent as commission for such sales.

11

4. Preferred Stock

As of June 30, 2020, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value $0.001 per share, and there were issued and outstanding 600,000 shares of 9.00% Series A Cumulative Redeemable Preferred Stock, $0.001 par value per share (the “Series A Preferred Stock”). Generally, the Company is not permitted to redeem the Series A Preferred Stock prior to October 19, 2022, except in limited circumstances relating to the Company’s ability to qualify as a REIT and in certain other circumstances related to a change of control/delisting (as defined in the articles supplementary for the Series A Preferred Stock). On or after October 19, 2022, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends on such Series A Preferred Stock up to, but excluding the redemption date. Holders of the Series A Preferred Stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in certain other circumstances.

5. Dividends

The following table describes the dividends declared by the Company during the six months ended June 30, 2020:

Amount

Per

Dividend

Declaration Date

    

Security Class

    

Share

    

Period Covered

    

Paid Date

    

Dividend Amount

 

(In thousands)

March 13, 2020

Common Stock

$

1.00

January 1, 2020 to March 31, 2020

April 15, 2020

$

17,070

March 13, 2020

Series A preferred stock

$

0.5625

January 15, 2020 to April 14, 2020

April 15, 2020

$

338

June 15, 2020

Common Stock

$

1.06

April 1, 2020 to June 30, 2020

July 15, 2020

$

19,770

June 15, 2020

Series A preferred stock

$

0.5625

April 15, 2020 to July 14, 2020

July 15, 2020

$

338

6. Investments in Real Estate

Acquisitions

The Company acquired the following properties during the six months ended June 30, 2020 (dollars in thousands):

Rentable

Square

Purchase

Transaction

Property

    

Market

    

Closing Date

    

Feet (1)

    

Price

    

Costs

    

Total

Green Leaf VA

Virginia

January 15, 2020

82,000

$

11,740

73

11,813

(2)

Cresco OH

Ohio

January 24, 2020

50,000

10,600

12

10,612

(3)

GTI OH

Ohio

January 31, 2020

21,000

2,900

27

2,927

(4)

LivWell CO - Retail Portfolio

Colorado

Various

8,000

3,300

27

3,327

(5)

GTI IL

Illinois

March 6, 2020

231,000

9,000

23

9,023

(6)

Parallel FL

Florida

March 11, 2020

373,000

35,300

26

35,326

(7)

Ascend MA

Massachusetts

April 2, 2020

199,000

26,750

20

26,770

(8)

Cresco MI

Michigan

April 22, 2020

115,000

5,000

16

5,016

(9)

Kings Garden CA

California

May 12, 2020

70,000

17,500

9

17,509

Holistic PA

Pennsylvania

June 10, 2020

108,000

8,870

12

8,882

(10)

Cresco MA

Massachusetts

June 30, 2020

118,000

7,750

14

7,764

(11)

Total

 

1,375,000

$

138,710

$

259

$

138,969

(12)

(1) Includes expected rentable square feet at completion of construction of certain properties.
(2) The tenant is expected to complete development of the property for which we have agreed to provide reimbursement of up to approximately $8.0 million. As of June 30, 2020, we incurred and funded the entire $8.0 million.
(3) The tenant is expected to complete redevelopment of the property for which we agreed to provide reimbursement of up to approximately $1.9 million. In June, we amended the lease, which increased the tenant improvement allowance by $1.0 million to a total of approximately $2.9 million. Assuming full payment of the tenant improvement allowance, our total investment in the property will be approximately $13.5 million. As of June 30, 2020, we incurred approximately $106,000 of the redevelopment costs, of which none was funded.

12

(4) The tenant is expected to complete redevelopment of the property for which we have agreed to provide reimbursement of up to $4.3 million. As of June 30, 2020, we incurred approximately $4.1 million of the redevelopment costs, of which we funded approximately $3.7 million.
(5) The portfolio consists of two retail properties, with one property closing on February 19, 2020 and one property closing on February 21, 2020. The tenant is expected to complete tenant improvements at one of the properties, for which we agreed to provide reimbursement of up to $850,000. As of June 30, 2020, we incurred and funded approximately $49,000 of the redevelopment costs.
(6) The tenant is expected to complete redevelopment of the property for which we have agreed to provide reimbursement of up to $41.0 million. As of June 30, 2020, we incurred approximately $14.8 million of the redevelopment costs, of which we funded approximately $13.5 million.
(7) The tenant is expected to complete redevelopment of the property for which we have agreed to provide reimbursement of up to $8.2 million. As of June 30, 2020, we incurred approximately $1.1 million of the redevelopment costs, of which none was funded.
(8) The tenant is expected to complete redevelopment of the property, for which we have agreed to provide reimbursement of up to approximately $22.3 million. As of June 30, 2020, we incurred approximately $2.3 million of the redevelopment costs, of which we funded approximately $1.4 million.
(9) The tenant is expected to complete redevelopment of the property, for which we originally agreed to provide reimbursement of up to $11.0 million. In June, we amended the lease, which increased the tenant improvement allowance by $16.0 million to a total of $27.0 million. As of June 30, 2020, we incurred approximately $53,000 of the redevelopment costs, of which none was funded.
(10) The tenant is expected to complete redevelopment of the property, for which we have agreed to provide reimbursement of up to approximately $6.4 million. As of June 30, 2020, we incurred approximately $2.4 million of the redevelopment costs, of which none was funded.
(11) The tenant is expected to complete redevelopment of the property, for which we have agreed to provide reimbursement of up to $21.0 million. As of June 30, 2020, we incurred none of the redevelopment costs.
(12) Approximately $9.8 million was allocated to land and approximately $129.1 million was allocated to buildings and improvements.

The properties acquired during the three and six months ended June 30, 2020 generated approximately $1.9 million and $5.5 million of rental revenue (including tenant reimbursements), respectively, and approximately $1.6 million and $4.1 million of net operating income, respectively, after deducting property and depreciation expenses. The properties acquired during the three and six months ended June 30, 2019 generated approximately $1.2 million and $2.2 million of rental revenue (including tenant reimbursements), respectively, and approximately $862,000 and $1.6 million of net operating income, respectively, after deducting property and depreciation expenses.

Lease Amendments

In January 2020, we amended our lease with Green Peak Industries, LLC (“GPI”) which, among other things, canceled the remaining tenant improvement allowance of approximately $15.2 million and adjusted the corresponding base rent. As of June 30, 2020, our total investment in the property was approximately $15.8 million.

In January 2020, we amended our lease with a subsidiary of Vireo Health, Inc. ("Vireo") at one of our Pennsylvania properties, making available an additional $4.5 million in funding for tenant improvements at the property. In April 2020, we amended the lease to decrease the funding for tenant improvements at the property by $300,000; as a result, the total tenant improvement allowance for the property is approximately $8.0 million, and assuming full payment of the allowance, our total investment in the property will be $13.8 million. As of June 30, 2020, we incurred approximately $7.4 million of the redevelopment costs, of which approximately $7.3 million was funded.

In January 2020, we amended our lease with a subsidiary of The Pharm, LLC at one of our Arizona properties, making available an additional $2.0 million in funding for tenant improvements at the property, and making the total tenant improvement allowance $5.0 million. As of June 30, 2020, we funded the full amount of the redevelopment costs, making our total investment in the property $20.0 million.

In January 2020, we amended our lease with the tenant of our Sacramento, California property, making available an additional approximately $1.3 million in funding for tenant improvements at the property, and making the total tenant improvement allowance approximately $6.0 million. As of June 30, 2020, we funded the full amount of the redevelopment costs, and our total investment in the property was approximately $12.7 million.

13

In February 2020, we amended our lease with a subsidiary of Maitri Medicinals, LLC ("Maitri") at one of our Pennsylvania properties, making available an additional $6.0 million in funding for tenant improvements at the property, and making the total tenant improvement allowance $16.0 million. Assuming full payment of the additional funding, our total investment in the property will be approximately $22.3 million. As of June 30, 2020, we incurred approximately $11.9 million of the redevelopment costs, of which approximately $11.2 million was funded.

In February 2020, we amended our lease and development agreement with a subsidiary of PharmaCann at one of our Massachusetts properties, making available an additional $4.0 million in construction funding at the property. Assuming full payment of the additional construction funding, our total construction funding will be $27.5 million and our total investment in the property will be $30.5 million. We also canceled the optional commitment to provide construction funding of $4.0 million for PharmaCann at one of our Pennsylvania properties. As of June 30, 2020, we incurred $27.5 million of the construction funding at the Massachusetts property, of which approximately $27.4 million was funded.

In March 2020, we amended our lease with a subsidiary of Holistic Industries Inc. at our Maryland property, making available a $5.5 million tenant improvement allowance at the property. Assuming full payment of the funding, our total investment in the property will be $22.4 million. As of June 30, 2020, we incurred approximately $3.9 million of the redevelopment costs, of which approximately $2.2 million was funded.

In April 2020, we amended our leases with two subsidiaries of Vireo for one of our properties in New York and our property in Minnesota, making available an additional approximately $1.4 million in funding for tenant improvements at the properties in the aggregate, and making the total tenant improvement allowances approximately $10.1 million in the aggregate. Assuming full payment of the funding, our total investment in the property in New York will be approximately $6.8 million and our total investment in the property in Minnesota will be approximately $9.7 million. As of June 30, 2020, we incurred approximately $10.1 million of the tenant improvement allowances, of which approximately $9.7 million was funded.

In response to the coronavirus pandemic and associated severe economic disruption, in April 2020, we amended leases at certain of our properties to provide for temporary base rent and property management fee deferrals through June 30, 2020. Each of the tenants remained responsible for the payment of all other costs under the applicable lease during the deferral period.

We amended each of our leases with GPI in Michigan to apply a part of GPI's security deposit at each property for payment of the April 2020 base rent and property management fee, defer the base rent and property management fee for May and June 2020, and amortize the replenishment of the security deposit and payment of the base rent and property management fee deferral over an 18 month period commencing on July 1, 2020.
We amended our lease with Maitri in Pennsylvania to apply a part of Maitri's security deposit for payment of the April 2020 base rent and property management fee, defer the base rent and property management fee for May and June 2020, and amortize the replenishment of the security deposit and the base rent and property management fee deferral over an 18 month period commencing on July 1, 2020.
We amended each of our leases with affiliates of Medical Investor Holdings LLC ("Vertical") in southern California to apply a part of Vertical's security deposit at each property for a partial payment of the March 2020 base rent and property management fee and payment in full of the April 2020 base rent and property management fee, defer the base rent and property management fee for May and June 2020, and amortize the replenishment of the security deposit and payment of the base rent and property management fee deferral over an 18 month period commencing on July 1, 2020.

14

Pursuant to these amendments, (1) a total of approximately $940,000 of security deposits was applied to the payment of base rent, property management fees and associated lease penalties for March and April 2020, including approximately $185,000 related to the partial payment of base rent and property management fees by Vertical for March 2020; (2) a total of approximately $743,000 in base rent and property management fees was deferred for May 2020; (3) a total of approximately $781,000 in base rent and property management fees was deferred for June 2020; and (4) a total of approximately $52,000 per month in replenishment of security deposits and approximately $85,000 per month in repayments of base rent and property management fee deferrals are required to be paid each month over an 18 month period commencing on July 1, 2020.

In June 2020, we amended our lease and development agreement with a subsidiary of PharmaCann at one of our Illinois properties, making available an additional $3.0 million in construction funding at the property. Assuming full payment of the additional construction funding, our total construction funding will be $10.0 million and our total investment in the property will be $28.0 million. As of June 30, 2020, we incurred approximately $7.5 million of the construction funding at the Illinois property, of which approximately $7.4 million was funded.

In June 2020, we amended our lease with a subsidiary of Green Leaf Medical, LLC at one of our Pennsylvania properties, making available $30.0 million in funding for tenant improvements at the property. Assuming full payment of the funding, our total investment in the property will be $43.0 million. As of June 30, 2020, we incurred approximately $91,000 of the redevelopment costs, of which none was funded.

Including all of our properties, during the six months ended June 30, 2020, we capitalized costs of approximately $158.4 million and funded approximately $161.0 million relating to tenant improvements and construction activities at our properties.

Future contractual minimum rent (including base rent, supplemental base rent (for one of our properties in New York) and property management fees) under the operating leases as of June 30, 2020 for future periods is summarized as follows (in thousands):

Year

    

Contractual
Minimum
Rent

2020 (six months ending December 31)

$

62,381

2021

 

132,878

2022

 

134,562

2023

 

138,608

2024

 

142,789

Thereafter

 

2,024,238

Total

$

2,635,456

7. Exchangeable Senior Notes

In February 2019, our Operating Partnership issued $143.75 million of 3.75% Exchangeable Senior Notes due 2024 (the "Exchangeable Senior Notes") in a private offering, including the exercise in full of the initial purchasers’ option to purchase additional Notes. The Exchangeable Senior Notes are senior unsecured obligations of our Operating Partnership, are fully and unconditionally guaranteed by us and our Operating Partnership’s subsidiaries and are exchangeable for cash, shares of our common stock, or a combination of cash and shares of our common stock, at our Operating Partnership’s option, at any time prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date. The exchange rate for the Exchangeable Senior Notes at June 30, 2020 was 14.84846 shares of our common stock per $1,000 principal amount of Notes and the exchange price at June 30, 2020 was approximately $67.347 per share of our common stock. The exchange rate and exchange price are subject to adjustment in certain circumstances. The Exchangeable Senior Notes will pay interest semiannually at a rate of 3.75% per annum and will mature on February 21, 2024, unless earlier exchanged or repurchased in accordance with their terms. Our Operating Partnership will not have the right to redeem the Exchangeable Senior Notes prior to maturity, but may be required to repurchase the Exchangeable Senior Notes from holders under certain circumstances.

15

Upon our issuance of the Exchangeable Senior Notes, we recorded an approximately $5.8 million discount based on the implied value of the exchange option and an assumed effective interest rate of 4.65%, as well as approximately $5.2 million of initial issuance costs, of which approximately $5.0 million and $200,000 were allocated to the liability and equity components, respectively, based on their relative fair values. Issuance costs allocated to the liability component are being amortized using the effective interest method and recognized as non-cash interest expense over the expected term of the Exchangeable Senior Notes.

The following table details our interest expense related to the Exchangeable Senior Notes (in thousands):

For the Three Months Ended June 30, 

For the Six Months Ended June 30,

    

2020

    

2019

    

2020

    

2019

Cash coupon

$

1,348

$

1,348

$

2,696

$

1,932

Amortization of debt discount

272

259

540

370

Amortization of issuance cost

235

225

468

322

Total interest expense

$

1,855

$

1,832

$

3,704

$

2,624

The following table details the carrying value of our Exchangeable Senior Notes on our condensed consolidated balance sheets (in thousands):

    

June 30, 2020

    

December 31, 2019

Principal amount

$

143,749

$

143,750

Unamortized discount

 

(4,338)

 

(4,878)

Unamortized issuance costs

 

(3,750)

 

(4,218)

Carrying value

$

135,661

$

134,654

Accrued interest payable for the Exchangeable Senior Notes was approximately $1.6 million as of June 30, 2020 and December 31, 2019 and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.

In March 2020, we issued 14 shares of our common stock upon exchange by holders of $1,000 of outstanding principal amount of our Exchangeable Senior Notes.

8. Net Income Per Share

Grants of restricted stock of the Company and restricted stock units in share-based payment transactions are considered participating securities prior to vesting and, therefore, are considered in computing basic earnings per share under the two-class method. The two-class method is an earnings allocation method for calculating earnings per share when a company’s capital structure includes either two or more classes of common stock or common stock and participating securities. Earnings per basic share under the two-class method is calculated based on dividends declared on common shares and other participating securities (“distributed earnings”) and the rights of participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends accruing during the period. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage of each security to the total number of outstanding participating securities. Earnings per basic share represents the summation of the distributed and undistributed earnings per share class divided by the total number of shares.

16

Through June 30, 2020, all of the Company’s participating securities received dividends or dividend equivalents at an equal dividend rate per share or unit. As a result, distributions to participating securities for the three and six months ended June 30, 2020 and 2019 have been included in net income attributable to common stockholders to calculate net income per basic and diluted share. We have considered the dilutive effect of the shares necessary to settle the Exchangeable Senior Notes on the if-exchanged method basis for the three and six months ended June 30, 2020 and 2019, and as this effect was anti-dilutive for both periods, these shares necessary to settle the Exchangeable Senior Notes were excluded from diluted earnings per share.

Computations of net income per basic and diluted share (in thousands, except share data) were as follows:

For the Three Months Ended

 

For the Six Months Ended

June 30, 

 

June 30, 

    

2020

    

2019

    

2020

    

2019

Net income

$

13,310

$

3,412

$

25,182

$

7,053

Preferred stock dividend

 

(338)

 

(338)

(676)

(676)

Distribution to participating securities

 

(121)

 

(83)

(236)

(147)

Net income attributable to common stockholders used to compute net income per share

$

12,851

$

2,991

$

24,270

$

6,230

Weighted average common share outstanding:

 

 

Basic

 

17,530,721

 

9,667,079

16,657,509

9,665,933

Diluted

 

17,644,829

 

9,807,503

16,771,460

9,802,616

Net income attributable to common stockholders per share:

 

 

Basic

$

0.73

$

0.31

$

1.46

$

0.64

Diluted

$

0.73

$

0.30

$

1.45

$

0.64

9. Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Includes other inputs that are directly or indirectly observable in the marketplace.

Level 3—Unobservable inputs that are supported by little or no market activities, therefore requiring an entity to develop its own assumptions.

The following table presents the carrying value in the condensed consolidated financial statements and approximate fair value of financial instruments at June 30, 2020 and December 31, 2019:

June 30, 2020

December 31, 2019

    

Carrying Value

    

Fair Value

    

Carrying Value

    

Fair Value

Short-term investments(1)

$

323,255

$

323,858

$

119,595

$

119,673

Exchangeable Senior Notes (2)

$

135,661

$

205,337

$

134,654

$

185,558

(1) Short-term investments consisting of obligations of the U.S. government with an original maturity at the time of purchase of greater than three months are classified as held-to-maturity and valued using Level 1 inputs.
(2) The fair value is determined based upon Level 2 inputs as the Exchangeable Senior Notes were trading in the private market.

17

At June 30, 2020, cash equivalent instruments consisted of $31.6 million in short-term money market funds that were measured using the net asset value per share that have not been classified using the fair value hierarchy. The fund invests primarily in short-term U.S. Treasury and government securities. Short-term investments consisting of certificate of deposits and obligations of the U.S. government are stated at amortized cost, which approximates their relative fair values due to the short-term maturities and market rates of interest of these instruments.

The carrying amounts of financial instruments such as cash equivalents invested in certificates of deposit, obligations of the U.S. government with an original maturity at the time of purchase of less than or equal to three months, accounts payable, accrued expenses and other liabilities approximate their fair values due to the short-term maturities and market rates of interest of these instruments.

10. Common Stock Incentive Plan

Our board of directors adopted our 2016 Omnibus Incentive Plan (the “2016 Plan”) to enable us to motivate, attract and retain the services of directors, employees and consultants considered essential to our long-term success. The 2016 Plan offers our directors, employees and consultants an opportunity to own our stock or rights that will reflect our growth, development and financial success. Under the terms of the 2016 Plan, the aggregate number of shares of our common stock subject to options, restricted stock, stock appreciation rights, restricted stock units and other awards, will be no more than 1,000,000 shares. The 2016 Plan has a term of ten years from the date it was adopted by our board of directors.

The following table summarizes our restricted stock activity under the 2016 Plan:

    

    

Weighted-

Unvested

Average

Restricted

Date Fair

Shares

Value

Balance at December 31, 2019

 

139,546

$

37.03

Granted

 

15,918

$

75.11

Vested

 

(45,975)

$

37.01

Forfeited (1)

 

(28,552)

$

19.72

Balance at March 31, 2020

 

80,937

$

50.64

Granted

1,139

$

87.82

Vested

(4,675)

$

62.08

Balance at June 30, 2020

77,401

$

50.49

(1) Shares that were forfeited to cover the employees’ tax withholding obligation upon vesting.

As of June 30, 2020, the remaining unrecognized compensation cost of $2.9 million relating to restricted stock awards will be recognized over a weighted-average amortization period of approximately 1.7 years.

The following table summarizes our restricted stock unit activity. Restricted stock units have the same economic rights as shares of restricted stock under the 2016 Plan:

    

Unvested

    

Weighted- Average

Restricted

Date Fair

Stock Units

Value

Balance at December 31, 2019

$

Granted

33,954

$

75.11

Balance at March 31, 2020

33,954

$

75.11

Granted

2,733

$

87.82

Balance at June 30, 2020

36,687

$

76.06

As of June 30, 2020, the remaining unrecognized compensation cost of $2.3 million relating to restricted stock units will be recognized over an amortization period of approximately 2.4 years.

18

11. Commitments and Contingencies

Office Lease. The future contractual lease payments for our office lease and the reconciliation to the office lease liability reflected in our condensed consolidated balance sheets as of June 30, 2020 is presented in the table below (in thousands):

Year

    

Amount

2020 (six months ending December 31)

$

114

2021

 

235

2022

 

242

2023

 

249

2024

 

256

Thereafter

 

88

Total future contractual lease payments

 

1,184

Effect of discounting

 

(35)

Office lease liability

$

1,149

Tenant Improvement Allowances. As of June 30, 2020, we had approximately $158.3 million of commitments related to tenant improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease. This amount does not include approximately $24.1 million which may be canceled by certain tenants at their option.

Construction Funding. As of June 30, 2020, we had approximately $12.4 million of commitments relating to construction funding for the development of one of our properties in Pennsylvania, and for which the tenant has agreed to use commercially reasonable efforts to complete by February 9, 2021.

Environmental Matters. We follow the policy of monitoring our properties, both targeted acquisition and existing properties, for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liabilities that would have a material adverse effect on our financial condition, results of operations and cash flow, or that we believe would require disclosure or the recording of a loss contingency.

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

12. Subsequent Events

Common Stock Offering

In July 2020, we completed an underwritten public offering of 3,085,867 shares of common stock, including the exercise in full of the underwriters’ option to purchase an additional 402,504 shares, resulting in gross proceeds of approximately $258.7 million.

Acquisitions

Subsequent to June 30, 2020, we acquired the following properties, including commitments to fund tenant improvements (dollars in thousands):

Rentable

Tenant

Closing

Square

Purchase

Improvement

Property

Market

Date

Feet (1)

Price

Commitments

Total (2)

Curaleaf NJ

New Jersey

July 13, 2020