Item 1. Financial
Statements
Innovative Industrial Properties, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per
share amounts)
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Assets
|
|
|
|
|
|
|
|
|
Real estate, at cost:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
37,959
|
|
|
$
|
20,475
|
|
Buildings and improvements
|
|
|
231,252
|
|
|
|
109,425
|
|
Tenant improvements
|
|
|
43,397
|
|
|
|
14,732
|
|
Construction in progress
|
|
|
―
|
|
|
|
6,298
|
|
Total real estate, at cost
|
|
|
312,608
|
|
|
|
150,930
|
|
Less accumulated depreciation
|
|
|
(8,625
|
)
|
|
|
(3,571
|
)
|
Net real estate held for investment
|
|
|
303,983
|
|
|
|
147,359
|
|
Cash and cash equivalents
|
|
|
99,917
|
|
|
|
13,050
|
|
Restricted cash
|
|
|
9,354
|
|
|
|
―
|
|
Short-term investments, net
|
|
|
208,828
|
|
|
|
120,443
|
|
Other assets, net
|
|
|
1,068
|
|
|
|
614
|
|
Total assets
|
|
$
|
623,150
|
|
|
$
|
281,466
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
Exchangeable senior notes, net
|
|
$
|
134,158
|
|
|
$
|
―
|
|
Tenant improvements and construction funding payable
|
|
|
12,700
|
|
|
|
2,433
|
|
Accounts payable and accrued expenses
|
|
|
1,044
|
|
|
|
1,968
|
|
Dividends payable
|
|
|
9,204
|
|
|
|
3,759
|
|
Offering cost liability
|
|
|
62
|
|
|
|
―
|
|
Rent received in advance and tenant security deposits
|
|
|
16,199
|
|
|
|
9,014
|
|
Total liabilities
|
|
|
173,367
|
|
|
|
17,174
|
|
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 September 30, 2019 and December 31, 2018
|
|
|
14,009
|
|
|
|
14,009
|
|
Common stock, par value $0.001 per share, 50,000,000 shares authorized: 11,367,828 and 9,775,800 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
|
|
|
11
|
|
|
|
10
|
|
Additional paid-in capital
|
|
|
452,634
|
|
|
|
260,540
|
|
Dividends in excess of earnings
|
|
|
(16,871
|
)
|
|
|
(10,267
|
)
|
Total stockholders’ equity
|
|
|
449,783
|
|
|
|
264,292
|
|
Total liabilities and stockholders’ equity
|
|
$
|
623,150
|
|
|
$
|
281,466
|
|
See the accompanying notes to the condensed
consolidated financial statements.
Innovative Industrial Properties, Inc.
Condensed Consolidated Statements of
Income
(Unaudited)
(In thousands, except share and per
share amounts)
|
|
For the Three Months
Ended
September 30,
|
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$
|
11,198
|
|
|
$
|
3,716
|
|
|
$
|
26,054
|
|
|
$
|
9,639
|
|
Tenant reimbursements
|
|
|
357
|
|
|
|
210
|
|
|
|
941
|
|
|
|
365
|
|
Total revenues
|
|
|
11,555
|
|
|
|
3,926
|
|
|
|
26,995
|
|
|
|
10,004
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property expenses
|
|
|
357
|
|
|
|
210
|
|
|
|
941
|
|
|
|
365
|
|
General and administrative expense
|
|
|
2,156
|
|
|
|
1,442
|
|
|
|
6,667
|
|
|
|
4,393
|
|
Depreciation expense
|
|
|
2,221
|
|
|
|
703
|
|
|
|
5,054
|
|
|
|
1,715
|
|
Total expenses
|
|
|
4,734
|
|
|
|
2,355
|
|
|
|
12,662
|
|
|
|
6,473
|
|
Income from operations
|
|
|
6,821
|
|
|
|
1,571
|
|
|
|
14,333
|
|
|
|
3,531
|
|
Interest and other income
|
|
|
1,537
|
|
|
|
261
|
|
|
|
3,702
|
|
|
|
788
|
|
Interest expense
|
|
|
(1,838
|
)
|
|
|
―
|
|
|
|
(4,462
|
)
|
|
|
―
|
|
Net income
|
|
|
6,520
|
|
|
|
1,832
|
|
|
|
13,573
|
|
|
|
4,319
|
|
Preferred stock dividend
|
|
|
(338
|
)
|
|
|
(338
|
)
|
|
|
(1,014
|
)
|
|
|
(1,014
|
)
|
Net income attributable to common stockholders
|
|
$
|
6,182
|
|
|
$
|
1,494
|
|
|
$
|
12,559
|
|
|
$
|
3,305
|
|
Net income attributable to common stockholders per share (Note 8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.56
|
|
|
$
|
0.22
|
|
|
$
|
1.22
|
|
|
$
|
0.50
|
|
Diluted
|
|
$
|
0.55
|
|
|
$
|
0.21
|
|
|
$
|
1.20
|
|
|
$
|
0.49
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,918,477
|
|
|
|
6,636,638
|
|
|
|
10,088,036
|
|
|
|
6,388,058
|
|
Diluted
|
|
|
11,057,697
|
|
|
|
6,785,800
|
|
|
|
10,225,574
|
|
|
|
6,534,300
|
|
See accompanying notes to the condensed
consolidated financial statements.
Innovative Industrial Properties, Inc.
Condensed Consolidated Statements of
Stockholders’ Equity
(Unaudited)
(In thousands, except share amounts)
|
|
Three Months Ended September 30, 2019
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
Series A
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Dividends in
|
|
|
Total
|
|
|
Series A
|
|
|
Shares of
|
|
|
|
|
|
Additional
|
|
|
Dividends in
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Shares of
|
|
|
Common
|
|
|
Paid-In-
|
|
|
Excess of
|
|
|
Stockholders’
|
|
|
Preferred
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Excess of
|
|
|
Stockholders’
|
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
Balances at beginning of period
|
|
$
|
14,009
|
|
|
|
9,809,171
|
|
|
$
|
10
|
|
|
$
|
266,356
|
|
|
$
|
(14,187
|
)
|
|
$
|
266,188
|
|
|
$
|
14,009
|
|
|
|
6,785,800
|
|
|
$
|
7
|
|
|
$
|
145,862
|
|
|
$
|
(8,293
|
)
|
|
$
|
151,585
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,520
|
|
|
|
6,520
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,832
|
|
|
|
1,832
|
|
Net proceeds from sale of common stock
|
|
|
—
|
|
|
|
1,558,000
|
|
|
|
1
|
|
|
|
185,623
|
|
|
|
—
|
|
|
|
185,624
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net issuance of unvested restricted stock
|
|
|
—
|
|
|
|
657
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Preferred stock dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(338
|
)
|
|
|
(338
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(338
|
)
|
|
|
(338
|
)
|
Common stock dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,866
|
)
|
|
|
(8,866
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,375
|
)
|
|
|
(2,375
|
)
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
655
|
|
|
|
—
|
|
|
|
655
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
386
|
|
|
|
—
|
|
|
|
386
|
|
Balances at end of period
|
|
$
|
14,009
|
|
|
|
11,367,828
|
|
|
$
|
11
|
|
|
$
|
452,634
|
|
|
$
|
(16,871
|
)
|
|
$
|
449,783
|
|
|
$
|
14,009
|
|
|
|
6,785,800
|
|
|
$
|
7
|
|
|
$
|
146,248
|
|
|
$
|
(9,174
|
)
|
|
$
|
151,090
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
Series A
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Dividends in
|
|
|
Total
|
|
|
Series A
|
|
|
Shares of
|
|
|
|
|
|
Additional
|
|
|
Dividends in
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Shares of
|
|
|
Common
|
|
|
Paid-In
|
|
|
Excess of
|
|
|
Stockholders’
|
|
|
Preferred
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Excess of
|
|
|
Stockholders’
|
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
Balances at beginning of period
|
|
$
|
14,009
|
|
|
|
9,775,800
|
|
|
$
|
10
|
|
|
$
|
260,540
|
|
|
$
|
(10,267
|
)
|
|
$
|
264,292
|
|
|
$
|
14,009
|
|
|
|
3,501,147
|
|
|
$
|
4
|
|
|
$
|
66,248
|
|
|
$
|
(6,712
|
)
|
|
$
|
73,549
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,573
|
|
|
|
13,573
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,319
|
|
|
|
4,319
|
|
Equity component of exchangeable senior notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,569
|
|
|
|
—
|
|
|
|
5,569
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net proceeds from sale of common stock
|
|
|
—
|
|
|
|
1,558,000
|
|
|
|
1
|
|
|
|
185,623
|
|
|
|
—
|
|
|
|
185,624
|
|
|
|
—
|
|
|
|
3,220,000
|
|
|
|
3
|
|
|
|
79,311
|
|
|
|
—
|
|
|
|
79,314
|
|
Net issuance of unvested restricted stock
|
|
|
—
|
|
|
|
34,028
|
|
|
|
—
|
|
|
|
(939
|
)
|
|
|
—
|
|
|
|
(939
|
)
|
|
|
—
|
|
|
|
64,653
|
|
|
|
—
|
|
|
|
(390
|
)
|
|
|
—
|
|
|
|
(390
|
)
|
Preferred stock dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,014
|
)
|
|
|
(1,014
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,014
|
)
|
|
|
(1,014
|
)
|
Common stock dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,163
|
)
|
|
|
(19,163
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,767
|
)
|
|
|
(5,767
|
)
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,841
|
|
|
|
—
|
|
|
|
1,841
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,079
|
|
|
|
—
|
|
|
|
1,079
|
|
Balances at end of period
|
|
$
|
14,009
|
|
|
|
11,367,828
|
|
|
$
|
11
|
|
|
$
|
452,634
|
|
|
$
|
(16,871
|
)
|
|
$
|
449,783
|
|
|
$
|
14,009
|
|
|
|
6,785,800
|
|
|
$
|
7
|
|
|
$
|
146,248
|
|
|
$
|
(9,174
|
)
|
|
$
|
151,090
|
|
See accompanying notes to the condensed
consolidated financial statements.
Innovative Industrial Properties, Inc.
Condensed Consolidated Statements of
Cash Flows
(Unaudited)
(In thousands)
|
|
For
the Nine Months
Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
13,573
|
|
|
$
|
4,319
|
|
Adjustments
to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,054
|
|
|
|
1,715
|
|
Stock-based
compensation
|
|
|
1,841
|
|
|
|
1,079
|
|
Amortization
of discounts on short-term investments
|
|
|
(2,870
|
)
|
|
|
(332
|
)
|
Amortization
of debt discounts and issuance costs
|
|
|
1,181
|
|
|
|
—
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
|
Other
assets, net
|
|
|
46
|
|
|
|
(37
|
)
|
Accounts
payable and accrued expenses
|
|
|
(924
|
)
|
|
|
97
|
|
Rent
received in advance and tenant security deposits
|
|
|
7,185
|
|
|
|
2,710
|
|
Net
cash provided by operating activities
|
|
|
25,086
|
|
|
|
9,551
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisitions
of real estate
|
|
|
(107,644
|
)
|
|
|
(27,177
|
)
|
Reimbursements
of tenant improvements and construction funding
|
|
|
(43,767
|
)
|
|
|
(11,120
|
)
|
Deposits
in escrow for acquisitions
|
|
|
(500
|
)
|
|
|
—
|
|
Purchases
of short-term investments
|
|
|
(249,015
|
)
|
|
|
(65,151
|
)
|
Maturities
of short-term investments
|
|
|
163,500
|
|
|
|
61,500
|
|
Net
cash used in investing activities
|
|
|
(237,426
|
)
|
|
|
(41,948
|
)
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Issuance
of common stock, net of offering costs
|
|
|
185,687
|
|
|
|
79,314
|
|
Net
proceeds from issuance of exchangeable senior notes
|
|
|
138,545
|
|
|
|
—
|
|
Dividends
paid to common stockholders
|
|
|
(13,718
|
)
|
|
|
(4,267
|
)
|
Dividends
paid to preferred stockholders
|
|
|
(1,014
|
)
|
|
|
(999
|
)
|
Taxes
paid related to net share settlement of equity awards
|
|
|
(939
|
)
|
|
|
(390
|
)
|
Net
cash provided by financing activities
|
|
|
308,561
|
|
|
|
73,658
|
|
Net
increase in cash, cash equivalents and restricted cash
|
|
|
96,221
|
|
|
|
41,261
|
|
Cash,
cash equivalents and restricted cash, beginning of period
|
|
|
13,050
|
|
|
|
11,758
|
|
Cash,
cash equivalents and restricted cash, end of period
|
|
$
|
109,271
|
|
|
|
53,019
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
3,056
|
|
|
$
|
—
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Accrual
for reimbursements of tenant improvements and construction funding
|
|
$
|
12,700
|
|
|
$
|
4,341
|
|
Accrual
for common and preferred stock dividends declared
|
|
|
9,204
|
|
|
|
2,713
|
|
Accrual
for stock issuance costs
|
|
|
62
|
|
|
|
21
|
|
See accompanying notes to the condensed
consolidated financial statements.
Innovative Industrial Properties, Inc.
Notes to the Condensed Consolidated
Financial Statements
September 30, 2019
(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 medical-use 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, 2018. Any references to square footage or occupancy percentage, and any amounts derived from these
values in these notes to consolidated financial statements, are outside the scope of our independent registered public accounting
firm’s review.
Management believes that all
adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. This interim financial
information does not necessarily represent or indicate what the operating results will be for the year ending December 31,
2019.
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 consolidated statement of income represent amounts paid for city and state
income and franchise taxes and are included in general and administrative expenses in the accompanying condensed consolidated
statements of income.
Use of Estimates. The
preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make a number of
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results may differ materially from these estimates and assumptions.
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 35 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.
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 three and nine months ended September 30, 2019 and 2018.
Revenue Recognition. Our
leases are and future tenant leases are expected to be 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 anticipate that future leases will be
accounted for as operating leases. Under this method, leases that have fixed and determinable rent increases are recognized on
a straight-line basis over the lease term, unless the collectability of minimum lease payments is not reasonably predictable.
Rental increases based upon changes in the consumer price index are recognized only after the changes in the indexes have occurred
and are then applied according to the lease agreements. Contractually obligated reimbursements from tenants for recoverable real
estate taxes and operating expenses are included in tenant reimbursements in the period when such costs are incurred. Contractually
obligated real estate taxes that are paid directly by the tenant to the tax authorities are not reflected in our consolidated
financial statements.
We record revenue for each of
our properties on a cash basis due to the uncertainty of collectability of lease payments from each tenant due to its limited
operating history and the uncertain regulatory environment in the United States relating to the medical-use cannabis industry.
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 September 30, 2019 for future periods is summarized as follows (in thousands):
Year
|
|
Contractual
Minimum
Rent
|
|
2019 (three months ending
December 31)
|
|
$
|
13,940
|
|
2020
|
|
|
58,971
|
|
2021
|
|
|
60,815
|
|
2022
|
|
|
61,528
|
|
2023
|
|
|
63,526
|
|
Thereafter
|
|
|
940,786
|
|
Total
|
|
$
|
1,199,566
|
|
Cash and Cash Equivalents.
We consider all highly-liquid investments with original maturities of three months or less to be cash equivalents. As of September
30, 2019, approximately $85.9 million were invested in short-term obligations of the U.S. government and money market funds. As
of December 31, 2018, approximately $7.7 million were invested in short-term money market funds and certificates of deposit.
Restricted Cash. Restricted
cash relates to cash held in an escrow account for the reimbursement of tenant improvements for a tenant in accordance with the
lease agreement at one of our properties.
Short-Term Investments.
Short-term investments consist of obligations of the U.S. government 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 are
allocated between a liability component and an equity component in a manner that reflects interest expense at the rate of
similar nonexchangeable debt that could have been issued at such time. The equity component represents the excess initial
proceeds received over the fair value of the liability component of the notes as of the date of issuance. We measured the
estimated fair value of the debt component of our Exchangeable Senior Notes (as defined below) as of the respective issuance
dates based on our nonexchangeable debt borrowing rate with the assistance of a third party valuation specialist. 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 investment 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 nonforfeitable dividends previously paid on
these awards from retained earnings to compensation expense.
Recent Accounting Pronouncements.
In May 2014, the FASB issued
ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 outlines a comprehensive model for companies
to use in accounting for revenue arising from contracts with customers, and will apply to transactions such as the sale of real
estate. The Company’s adoption of ASU 2014-09 beginning on January 1, 2019 did not have a material impact on our consolidated
financial statements.
In February 2016, the FASB issued
ASU 2016-02, Leases; in July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11,
Leases — Targeted Improvements; and in December 2018, the FASB issued ASU 2018-20, Narrow-Scope Improvements for Lessors.
This group of ASUs is collectively referred to as Topic 842 and is expected to be effective for the Company for its Annual Report
on Form 10-K for the year ending December 31, 2019, as a result of the Company’s expectation that it will cease being an
emerging growth company on December 31, 2019. Topic 842 supersedes the existing standards for lease accounting (Topic 840, Leases).
The Company expects to elect
the practical expedients provided by Topic 842, including: the package of practical expedients that allows an entity not to reassess
upon adoption (i) whether an expired or existing contract contains a lease, (ii) whether a lease classification related to expired
or existing lease arrangements, and (iii) whether costs incurred on expired or existing leases qualify as initial direct costs,
and as a lessor, the practical expedient not to separate certain non-lease components, such as common area maintenance, from the
lease component if the timing and pattern of transfer are the same for the non-lease component and associated lease component,
and the lease component would be classified as an operating lease if accounted for separately.
Topic 842 requires lessees to
record most leases on their balance sheet through a right-of-use (“ROU”) model, in which a lessee records an ROU asset
and a lease liability on their balance sheet. Leases that are less than 12 months do not need to be accounted for under the ROU
model. Lessees will account for leases as financing or operating leases, with the classification affecting the timing and pattern
of expense recognition in the income statement. Lease expense will be recognized based on the effective interest method for leases
accounted for as finance leases and on a straight-line basis over the term of the lease for leases accounted for as operating
leases. At September 30, 2019, the Company is the lessee under one office lease that would require accounting under the ROU model.
The accounting by a lessor under
Topic 842 is largely unchanged from that of Topic 840. Under Topic 842, lessors will continue to account for leases as a sales-type,
direct-financing, or operating. A lease will be treated as a sale if it is considered to transfer control of the underlying asset
to 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. Topic 842 requires accounting for a transaction as a financing in a sale
leaseback in certain circumstances, including when the seller-lessee is provided an option to purchase the property from the landlord
at the tenant’s option. The Company expects that this provision could change the accounting for these types of leases in the future.
Topic 842 also includes the concept of separating lease and non-lease components. Under Topic 842, non-lease components, such
as common area maintenance, would be accounted for under Topic 606 and separated from the lease payments. However, the Company
will elect the lessor practical expedient allowing the Company to not separate these components when certain conditions are met.
Upon adoption of Topic 842, the Company expects to combine tenant reimbursements with rental revenues on its consolidated statements
of income. Further, the Company has historically capitalized allocated payroll cost incurred as part of the leasing process, which
will no longer qualify for classification as initial direct costs under Topic 842. The Company will elect the lessor practical
expedient, allowing the Company to continue to amortize previously capitalized initial direct leasing costs incurred prior to
the adoption and Topic 842 and does not expect a material impact to its consolidated financial statements related to the capitalization
of leasing costs. Also, the Narrow-Scope Improvements for Lessors under ASU 2018-20 allow the Company to continue to exclude from
revenue, costs paid by our tenants on our behalf directly to third parties, such as property taxes.
Topic 842 provides two transition
alternatives. The Company expects to apply this standard based on the prospective optional transition method, in which comparative
periods will continue to be reported in accordance with Topic 840. The Company also anticipates expanded disclosures upon adoption,
as the new standard requires more extensive quantitative and qualitative disclosures as compared to Topic 840 for both lessees
and lessors. We are continuing to evaluate this guidance and the impact to us, as both lessor and lessee, on our consolidated financial
statements.
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. Companies will have to disclose significantly
more information, including information they use to track credit quality by year of origination for most financing receivables.
Companies will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning
of the first reporting period in which the guidance is adopted. This standard is expected to be effective for the Company on January
1, 2020, as a result of the Company’s expectation that it will cease being an emerging growth company on December 31, 2019,
with early adoption permitted. We do not expect this amendment to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued
ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”),
which clarifies or provides guidance relating to eight specific cash flow classification issues. The standard should be applied
retrospectively for each period presented, as appropriate. The Company’s adoption of ASU 2016-15 beginning on January 1,
2019 did not have a material impact on our consolidated financial statements.
In February 2017, the FASB issued
ASU 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying
the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“Subtopic 610-20”).
A contract may involve the transfer of both nonfinancial assets and financial assets (e.g., cash and receivables). The amendments
clarify that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial
asset. The amendments also define the term in substance nonfinancial asset. The amendments clarify that nonfinancial assets within
the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example,
a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. A contract
that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20
if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial
assets. The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset
promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The Company’s adoption
of ASU 2017-05 beginning on January 1, 2019 did not have a material impact on our consolidated financial statements.
Concentration of Credit Risk.
As of September 30, 2019, we owned 31 properties located in Arizona, California, Colorado, Illinois, Maryland, Massachusetts,
Michigan, Minnesota, New York, Nevada, Ohio and Pennsylvania. The ability of any of our tenants to honor the terms of its lease
is dependent upon the economic, regulatory, competition, natural and social factors affecting the community in which that tenant
operates. During the three months and nine months ended September 30, 2019, PharmaCann LLC's (“PharmaCann”) leases
at certain of our properties located in New York, Massachusetts, Ohio and Pennsylvania accounted for approximately 25% and 28%,
respectively, of our rental revenues. During the three and nine months ended September 30, 2018, PharmaCann’s leases at
certain of our properties located in New York and Massachusetts accounted for approximately 36% and 41%, respectively, of our
rental revenues. In addition, during the three months and nine months ended September 30, 2019, Ascend Wellness Holdings, LLC’s
(“AWH”) leases at certain of our properties located in Illinois and Michigan accounted for approximately 14% and 12%,
respectively, of our rental revenue. The tenant at our property in Maryland accounted for approximately 6% and 18% of our rental
revenues for the three months ended September 30, 2019 and 2018, respectively, and approximately 8% and 20% of our rental revenues
for the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019 and December 31, 2018, one of our properties
in New York accounted for approximately 9% and 20%, respectively, 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
September 30, 2019, we had cash accounts in excess of FDIC insured limits. We have not experienced any losses in such accounts.
Reclassifications. Certain
prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had
no effect on the reported results of operations.
3. Common Stock
As of September 30, 2019, the
Company was authorized to issue up to 50,000,000 shares of common stock, par value $0.001 per share, and there were 11,367,828
shares of common stock issued and outstanding.
In July 2019, we issued 1,495,000
shares of common stock, including the exercise in full of the underwriters’ option to purchase an additional 195,000 shares,
resulting in net proceeds of approximately $180.1 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. In September 2019, we sold 63,000 shares of our common stock for net proceeds of approximately $5.6 million under the ATM
Program, and paid approximately $118,000 to one sales agent as commission for such sales.
4. Preferred Stock
As of September 30, 2019, 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 nine months ended September 30, 2019:
Declaration Date
|
|
Security Class
|
|
Amount
Per Share
|
|
Period Covered
|
|
Dividend Paid
Date
|
|
Dividend
Amount
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 12, 2019
|
|
Common Stock
|
|
$
|
0.45
|
|
January 1, 2019 to March 31, 2019
|
|
April 15, 2019
|
|
$
|
4,412
|
March 12, 2019
|
|
Series A preferred stock
|
|
$
|
0.5625
|
|
January 15, 2019 to April 14, 2019
|
|
April 15, 2019
|
|
$
|
338
|
June 14, 2019
|
|
Common Stock
|
|
$
|
0.60
|
|
April 1, 2019 to June 30, 2019
|
|
July 15, 2019
|
|
$
|
5,885
|
June 14, 2019
|
|
Series A preferred stock
|
|
$
|
0.5625
|
|
April 15, 2019 to July 14, 2019
|
|
July 15, 2019
|
|
$
|
338
|
September 13, 2019
|
|
Common Stock
|
|
$
|
0.78
|
|
July 1, 2019 to September 30, 2019
|
|
October 15, 2019
|
|
$
|
8,866
|
September 13, 2019
|
|
Series A preferred stock
|
|
$
|
0.5625
|
|
July 15, 2019 to October 14, 2019
|
|
October 15, 2019
|
|
$
|
338
|
6. Investments in Real Estate
The Company acquired the following properties
during the nine months ended September 30, 2019 (dollars in thousands):
Property
|
|
Market
|
|
Closing
Date
|
|
Rentable
Square
Feet (1)
|
|
|
Initial
Purchase
Price
|
|
|
Transaction
Costs
|
|
|
Total
|
|
Sacramento CA
|
|
California
|
|
February 8, 2019
|
|
|
43,000
|
|
|
$
|
6,664
|
|
|
$
|
35
|
|
|
$
|
6,699
|
(2)
|
PharmaCann OH
|
|
Ohio
|
|
March 13, 2019
|
|
|
58,000
|
|
|
|
700
|
|
|
|
11
|
|
|
|
711
|
(3)
|
Southern CA Portfolio
|
|
California
|
|
April 16, 2019
|
|
|
102,000
|
|
|
|
27,097
|
|
|
|
51
|
|
|
|
27,148
|
|
Maitri PA
|
|
Pennsylvania
|
|
April 24, 2019
|
|
|
51,000
|
|
|
|
6,250
|
|
|
|
234
|
|
|
|
6,484
|
(4)
|
Vireo OH
|
|
Ohio
|
|
May 14, 2019
|
|
|
11,000
|
|
|
|
1,018
|
|
|
|
18
|
|
|
|
1,036
|
(5)
|
Green Leaf PA
|
|
Pennsylvania
|
|
May 20, 2019
|
|
|
266,000
|
|
|
|
13,000
|
|
|
|
207
|
|
|
|
13,207
|
|
Emerald Growth MI
|
|
Michigan
|
|
June 7, 2019
|
|
|
45,000
|
|
|
|
6,860
|
|
|
|
18
|
|
|
|
6,878
|
(6)
|
Ascend MI
|
|
Michigan
|
|
July 2, 2019
|
|
|
145,000
|
|
|
|
4,750
|
|
|
|
18
|
|
|
|
4,768
|
(7)
|
MJardin NV
|
|
Nevada
|
|
July 12, 2019
|
|
|
43,000
|
|
|
|
3,830
|
|
|
|
26
|
|
|
|
3,856
|
(8)
|
DYME CA
|
|
California
|
|
July 23, 2019
|
|
|
35,000
|
|
|
|
13,000
|
|
|
|
19
|
|
|
|
13,019
|
(9)
|
Trulieve MA
|
|
Massachusetts
|
|
July 26, 2019
|
|
|
150,000
|
|
|
|
3,500
|
|
|
|
25
|
|
|
|
3,525
|
(10)
|
PharmaCann PA
|
|
Pennsylvania
|
|
August 9, 2019
|
|
|
54,000
|
|
|
|
942
|
|
|
|
12
|
|
|
|
954
|
(11)
|
Vertical CA Portfolio
|
|
California
|
|
Various
|
|
|
79,000
|
|
|
|
17,300
|
|
|
|
32
|
|
|
|
17,332
|
(12)
|
The Pharm AZ - Retail
|
|
Arizona
|
|
September 19, 2019
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
27
|
|
|
|
2,027
|
(13)
|
Total
|
|
|
|
|
|
|
1,084,000
|
|
|
$
|
106,911
|
|
|
$
|
733
|
|
|
$
|
107,644
|
|
|
(1)
|
Includes expected rentable square feet at completion
of construction of certain properties.
|
|
(2)
|
The seller of the property is expected to complete
redevelopment of the property, for which we have agreed to provide reimbursement of up to approximately $4.8 million as additional
purchase price. As of September 30, 2019, we incurred and funded approximately $4.7 million of the additional purchase price.
|
|
(3)
|
Concurrent with the closing, we entered into
a long-term lease and development agreement with a subsidiary of PharmaCann, which is expected to construct two buildings
at the property, for which we have agreed to provide reimbursement of up to $19.3 million. As of September 30, 2019, we incurred
approximately $13.2 million of the development costs, of which we funded approximately $11.9 million.
|
|
(4)
|
The tenant is expected to complete redevelopment
of the property for which we have agreed to provide reimbursement of up to $10.0 million. As of September 30, 2019, we incurred
approximately $1.7 million of the redevelopment costs, of which we funded approximately $694,000.
|
|
(5)
|
The tenant is expected to complete redevelopment
of the property for which we have agreed to provide reimbursement of up to approximately $2.6 million. As of September 30,
2019, we incurred approximately $2.4 million of the redevelopment costs, of which we funded approximately $2.2 million.
|
|
(6)
|
The tenant is expected to complete redevelopment
of the property for which we have agreed to provide reimbursement of up to approximately $3.1 million. As of September 30,
2019, we incurred approximately $2.6 million of the redevelopment costs, of which we funded approximately $2.4 million.
|
|
(7)
|
The tenant is expected to complete redevelopment
of the property for which we have agreed to provide reimbursement of up to $15.0 million. As of September 30, 2019, we incurred
approximately $261,000, of which no amount 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 $5.8 million. As of September 30,
2019, we incurred approximately $2.8 million of the redevelopment costs, of which we funded approximately $2.4 million.
|
|
(9)
|
The tenant is expected to complete redevelopment
of the property for which we have agreed to provide reimbursement of up to $2.0 million. As of September 30, 2019, no amount
has been incurred.
|
|
(10)
|
The tenant is expected to complete redevelopment
of the property for which we have agreed to provide reimbursement of up to $40.0 million, which funding is subject to reduction
at the tenant’s option within the first six months of the lease term. As of September 30, 2019, the tenant has not submitted any request for reimbursement.
|
|
(11)
|
Concurrent with the closing, we entered into
a long-term lease and development agreement with a subsidiary of PharmaCann, which is expected to construct two buildings
at the property, for which we have agreed to provide reimbursement of up to $25.1 million. The construction funding may be
increased by up to an additional $4.0 million at PharmaCann’s election within the first nine months of the lease term,
subject to the satisfaction of certain conditions. As of September 30, 2019, we incurred approximately $706,000
of the development costs, of which no amount was funded.
|
|
(12)
|
Portfolio consists of four properties, with three properties closing on August 29, 2019 and the remaining property
closing on September 11, 2019.
|
|
(13)
|
The tenant is expected to complete development
of the property for which we have agreed to provide reimbursement of up to $500,000. As of September 30, 2019, we incurred
approximately $310,000 of the development costs, of which no amount was funded.
|
In addition, in June 2019, we entered
into an amendment to our lease with Green Peak Industries, LLC (“GPI”)at one of our Michigan properties, making
available an additional $18.0 million in funding for further expansion of cannabis cultivation and processing facilities at
the property. Assuming full payment of the additional funding, our total tenant improvement allowance will be approximately
$25.5 million and our total investment in the property will be $31.0 million. As of September 30, 2019, we
incurred approximately $9.8 million of the redevelopment costs, of which $9.5 million was funded.
In September 2019, we entered into
an amendment to our lease with a wholly owned subsidiary of AWH at one of our Illinois properties, making available an
additional $8.0 million in funding for further expansion of cannabis cultivation and processing facilities at the property.
Assuming full payment of the additional funding, our total tenant improvement allowance will be $14.0 million and our
total investment in the property will be $33.0 million. As of September 30, 2019, we incurred approximately $10.7 million of
the redevelopment costs, of which $4.5 million was funded.
In September 2019, we entered into
an amendment to our lease with Holistic Industries, Inc. (“Holistic”) at one of our Massachusetts properties, making
available up to $2.0 million in reimbursement for tenant improvements at the property, which is subject to reduction at the
tenant’s option before March 31, 2020. Assuming full payment of the additional funding, our total investment in the
property will be approximately $14.8 million. As of September 30, 2019, no amounts have been incurred.
In September 2019, we entered
into amendments to our lease and development agreement with a subsidiary of PharmaCann at one of our Massachusetts
properties, making available an additional $8.0 million in construction funding for further expansion of cannabis cultivation
and processing facilities at the property. Assuming full payment of the additional funding, our total construction funding
will be $23.5 million and our total investment in the property will be $26.5 million. As of September 30, 2019, we incurred
approximately $17.3 million of the redevelopment costs, of which $16.5 million was funded.
In September 2019, we entered into
an amendment to our lease with a subsidiary of Vireo Health, Inc. at our Minnesota property, making available an additional
$2.6 million in reimbursement for tenant improvements at the property. Assuming full payment of the additional funding, our
total tenant improvements will be approximately $5.6 million and our total investment in the property will be $8.6 million.
As of September 30, 2019, we incurred approximately $3.8 million of the redevelopment costs, of which $3.5 million was
funded.
Including all of our properties, during
the nine months ended September 30, 2019, we capitalized costs of approximately $54.0 million relating to tenant improvements
and construction activities at our properties.
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 September 30, 2019 was 14.37298 shares
of our common stock per $1,000 principal amount of Notes and the exchange price at September 30, 2019 was approximately $69.575
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.
As of September 30, 2019, we have the intent and ability to settle the Exchangeable Senior Notes in cash.
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):
|
|
Three Months Ended
September 30,
2019
|
|
|
Nine Months Ended
September 30,
2019
|
|
Cash coupon
|
|
$
|
1,349
|
|
|
$
|
3,281
|
|
Amortization of debt discount
|
|
|
262
|
|
|
|
632
|
|
Amortization of issuance costs
|
|
|
227
|
|
|
|
549
|
|
Total interest expense
|
|
$
|
1,838
|
|
|
$
|
4,462
|
|
The following table details the carrying
value of our Exchangeable Senior Notes on our condensed consolidated balance sheets (in thousands):
|
|
September 30,
2019
|
|
Principal amount
|
|
$
|
143,750
|
|
Unamortized discount
|
|
|
(5,144
|
)
|
Unamortized issuance costs
|
|
|
(4,448
|
)
|
Carrying value
|
|
$
|
134,158
|
|
Accrued interest payable for the Exchangeable
Senior Notes was approximately $225,000 as of September 30, 2019.
8. Net Income Per Share
Grants of restricted stock of
the Company 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.
Through September 30, 2019,
all of the Company’s participating securities received dividends at an equal dividend rate per share. As a result, distributions
to participating securities for the three and nine months ended September 30, 2019 and 2018 have been included in net income attributable
to common stockholders to calculate net income per basic and diluted share. As the Company has the intent and ability to settle
the debt component of the Exchangeable Senior Notes in cash and the excess exchange premium in shares, the Company only includes
the effect of the excess exchange premium in the calculation of diluted shares. For the three and nine months ended September
30, 2019, the effect of the excess exchange premium was anti-dilutive and therefore, excluded from the calculation of diluted
shares. Computations of net income per basic and diluted share (in thousands, except share data) were as follows:
|
|
For
the Three Months
Ended
September 30,
|
|
|
For
the Nine Months
Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net income
|
|
$
|
6,520
|
|
|
$
|
1,832
|
|
|
$
|
13,573
|
|
|
$
|
4,319
|
|
Preferred stock dividend
|
|
|
(338
|
)
|
|
|
(338
|
)
|
|
|
(1,014
|
)
|
|
|
(1,014
|
)
|
Distribution
to participating securities
|
|
|
(109
|
)
|
|
|
(52
|
)
|
|
|
(256
|
)
|
|
|
(127
|
)
|
Net
income attributable to common stockholders used to compute net income per share
|
|
$
|
6,073
|
|
|
$
|
1,442
|
|
|
$
|
12,303
|
|
|
$
|
3,178
|
|
Weighted average common share outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,918,477
|
|
|
|
6,636,638
|
|
|
|
10,088,036
|
|
|
|
6,388,058
|
|
Diluted
|
|
|
11,057,697
|
|
|
|
6,785,800
|
|
|
|
10,225,574
|
|
|
|
6,534,300
|
|
Net income attributable to common stockholders per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.56
|
|
|
$
|
0.22
|
|
|
$
|
1.22
|
|
|
$
|
0.50
|
|
Diluted
|
|
$
|
0.55
|
|
|
$
|
0.21
|
|
|
$
|
1.20
|
|
|
$
|
0.49
|
|
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 September 30,
2019 and December 31, 2018:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Short-term investments (1)
|
|
$
|
208,828
|
|
|
$
|
208,828
|
|
|
$
|
120,443
|
|
|
$
|
120,443
|
|
Exchangeable Senior Notes (2)
|
|
$
|
134,158
|
|
|
$
|
207,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(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 as of September 30, 2019.
|
At September 30, 2019, cash
equivalent instruments consisted of $27.0 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, accounts payable, accrued expenses and
other liabilities approximate their relative 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.
A summary of the activity under
the 2016 Plan and related information is included in the table below.
|
|
Unvested
Restricted
Shares
|
|
|
Weighted-
Average
Grant
Date Fair
Value
|
|
Balance at December 31, 2018
|
|
|
147,359
|
|
|
$
|
23.98
|
|
Granted
|
|
|
54,745
|
|
|
$
|
55.19
|
|
Vested
|
|
|
(41,753
|
)
|
|
$
|
26.21
|
|
Forfeited (1)
|
|
|
(20,717
|
)
|
|
$
|
18.98
|
|
Balance at September 30, 2019
|
|
|
139,634
|
|
|
$
|
36.29
|
|
|
(1)
|
Shares
that were forfeited to cover the employees’ tax withholding obligation upon vesting.
|
The remaining unrecognized compensation
cost of $3.4 million will be recognized over a weighted-average amortization period of approximately 1.8 years as of September
30, 2019.
11. Commitments and Contingencies
Tenant Improvement Allowances.
As of September 30, 2019, we had approximately $49.0 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.
Construction Funding. As of September
30, 2019, we had approximately $6.2 million, $6.0 million and $24.4 million of commitments relating to construction funding for
the development of certain properties in Massachusetts, Ohio and Pennsylvania, which the tenant has agreed to use commercially
reasonable efforts to complete by March 31, 2020, June 13, 2020 and February 9, 2021, respectively.
Additional Purchase Price. As of
September 30, 2019, we had approximately $57,000 of commitments relating to certain development milestones for a property in California,
which the seller is required to complete by December 31, 2019.
Office and Equipment Leases. As
of September 30, 2019, we had approximately $98,000 outstanding in commitments related to our office and equipment leases, with
approximately $23,000 to be paid in the remainder of 2019 and approximately $75,000 to be paid in 2020.
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
In October 2019, we sold
485,300 shares of our common stock for net proceeds of approximately $41.3 million under our ATM Program.
In October 2019, we executed a lease
amendment for our principal executive offices with our current landlord, pursuant to which we agreed to lease a larger space
comprising approximately 6,000 rentable square feet for a term of five years and four months, with one option to extend the
term of the lease for an additional five years. Subject to a base rent abatement, the initial annual base rent is
approximately $228,000, subject to an annual adjustment of three percent during the initial term.
Subsequent to September 30, 2019, the
Company acquired the following properties, including commitments to fund tenant improvements and construction (dollars in thousands):
Property
|
|
Market
|
|
Closing Date
|
|
Rentable
Square
Feet (1)
|
|
|
Purchase
Price
|
|
|
Tenant Improvement and Construction Commitments
|
|
|
Total (2)
|
|
LivWell MI
|
|
Michigan
|
|
October 9, 2019
|
|
|
156,000
|
|
|
$
|
19,000
|
|
|
$
|
23,000
|
|
|
$
|
42,000
|
|
Cresco IL Portfolio
|
|
Illinois
|
|
October 22, 2019
|
|
|
90,000
|
|
|
$
|
32,800
|
|
|
$
|
13,750
|
|
|
$
|
46,550
|
(3)
|
Trulieve FL
|
|
Florida
|
|
October 23, 2019
|
|
|
120,000
|
|
|
$
|
17,000
|
|
|
$
|
—
|
|
|
$
|
17,000
|
|
GPI MI - Retail Portfolio
|
|
Michigan
|
|
Various
|
|
|
27,000
|
|
|
$
|
7,775
|
|
|
$
|
1,245
|
|
|
$
|
9,020
|
(4)
|
PharmaCann IL
|
|
Illinois
|
|
October 30, 2019
|
|
|
66,000
|
|
|
$
|
18,000
|
|
|
$
|
7,000
|
|
|
$
|
25,000
|
(5)
|
Grassroots IL
|
|
Illinois
|
|
October 30, 2019
|
|
|
120,000
|
|
|
$
|
10,500
|
|
|
$
|
—
|
|
|
$
|
10,500
|
(6)
|
Total
|
|
|
|
|
|
|
579,000
|
|
|
$
|
105,075
|
|
|
$
|
44,995
|
|
|
$
|
150,070
|
|
|
(1)
|
Includes expected rentable square feet at completion of construction
of certain properties.
|
|
(2)
|
Excludes transaction costs.
|
|
(3)
|
Includes two properties comprising approximately 39,000 and 51,000 rentable square feet.
|
|
(4)
|
Portfolio consists of four properties, with one property closing on October 25, 2019 and the remaining three properties closing
on November 4, 2019.
|
|
(5)
|
Tenant improvements include funding for the construction of an approximately 18,000 square foot expansion.
|
|
(6)
|
Tenant improvements exclude funding for the construction of an approximately 50,000 square foot expansion of
approximately $10.7 million and $7.0 million, which are subject to reduction at the tenant’s option before April 30,
2020 and July 30, 2020, respectively.
|
ITEM 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion
should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this
report. We make statements in this report that are “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. In particular, statements pertaining to our capital resources, portfolio performance and results
of operations contain forward-looking statements. Likewise, our statements regarding anticipated growth in our funds from operations
and anticipated market and regulatory conditions, our strategic direction, demographics, results of operations, plans and objectives
are forward-looking statements. Forward-looking statements involve numerous risks and uncertainties, and you should not rely on
them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect
or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen
as described (or that they will happen at all). You can identify forward-looking statements by the use of forward-looking terminology
such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,”
“intends,” “plans,” “estimates” or “anticipates” or the negative of these words and phrases
or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
The following factors, among others, could cause actual results and future events to differ materially from those set forth or
contemplated in the forward-looking statements: our business and investment strategy; our projected operating results; actions
and initiatives of the U.S. or state governments and changes to government policies and the execution and impact of these actions,
initiatives and policies, including the fact that cannabis remains illegal under federal law; availability of suitable investment
opportunities in the medical-use cannabis industry; concentration of our portfolio of assets and limited number of tenants; our
understanding of our competition and our potential tenants’ alternative financing sources; the estimated growth in and evolving
market dynamics of the medical-use cannabis market; the demand for medical-use cannabis cultivation and processing facilities;
the expected medical-use or adult-use cannabis legalization in certain states; shifts in public opinion regarding medical-use
cannabis; the additional risks that may be associated with certain of our tenants cultivating and processing adult-use cannabis
in our facilities; the state of the U.S. economy generally or in specific geographic areas; economic trends and economic recoveries;
our ability to access equity or debt capital; financing rates for our assets; our expected leverage; changes in the values of
our assets; our expected portfolio of assets; our expected investments; interest rate mismatches between our assets and our borrowings
used to fund such investments; changes in interest rates and the market value of our assets; rates of default on leases for our
assets; the degree to which any interest rate or other hedging strategies may or may not protect us from interest rate volatility;
impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; our ability to
maintain our qualification as a REIT for U.S. federal income tax purposes; our ability to maintain our exemption from registration
under the Investment Company Act of 1940; availability of qualified personnel; and market trends in our industry, interest rates,
real estate values, the securities markets or the general economy.
The risks included here are
not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks
included in other sections of this report. In addition, we discussed a number of material risks in our Annual Report on
Form 10-K for the year ended December 31, 2018, in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2019 and June 30, 2019 and in Part II, Item 1A below. Those risks continue to be relevant to our performance and
financial condition. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from
time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such
risk factors on our Company’s business or the extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements. Any forward-looking statement made by us speaks only
of the date on which we make it. The Company undertakes no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, except as may be required by law. Stockholders and investors
are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company’s
filings and reports.
The purpose of this Management’s
Discussion and Analysis (“MD&A”) is to provide an understanding of the Company’s consolidated financial condition,
results of operations and cash. MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s
condensed consolidated financial statements and accompanying notes.
Overview
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 (the “Operating Partnership”).
We are an internally-managed REIT focused
on the acquisition, ownership and management of specialized properties leased to experienced, state-licensed operators for their
regulated medical-use cannabis facilities. We have leased and expect to continue to lease our properties on a triple-net lease
basis, where the tenant is responsible for all aspects of and costs related to the property and its operation during the lease
term, including structural repairs, maintenance, 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 September 30, 2019, we had eleven full-time employees.
As of September 30, 2019, we owned 31
properties located in Arizona, California, Colorado, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New York,
Ohio and Pennsylvania, totaling approximately 2.2 million rentable square feet (including approximately 687,000 rentable square
feet under development/redevelopment), which were 100% leased with a weighted-average remaining lease term of approximately 16.0
years. As of September 30, 2019, we had invested an aggregate of $298.7 million (consisting of purchase price, and development
and tenant reimbursement commitments funded, if any, but excluding transaction costs) and had committed an additional $100.4 million
to reimburse certain tenants and sellers for completion of construction and tenant improvements at our properties.
Emerging Growth Company
We have elected to be an emerging
growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company
may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that
are otherwise generally applicable to public companies. As an emerging growth company, among other things:
|
·
|
we
are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control
over financial reporting pursuant to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);
|
|
·
|
we are permitted
to provide less extensive disclosure about our executive compensation arrangements;
|
|
·
|
we are not required
to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements; and
|
|
·
|
we have elected
to use an extended transition period for complying with new or revised accounting standards.
|
We may take advantage of the
other provisions until the last day of the fiscal year following the fifth anniversary of the completion of our initial public
offering or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company
upon the earliest to occur of: (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion,
(ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock that is held by
non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii)
the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. Based on
the market value of our common stock held by non-affiliates as of June 30, 2019, we expect to cease to be an emerging growth company
effective as of December 31, 2019.
Factors Impacting Our Operating Results
Our results of operations are
affected by a number of factors and depend on the rental revenue we receive from the properties that we acquire, the timing of
lease expirations, general market conditions, the regulatory environment in the medical-use cannabis industry, and the competitive
environment for real estate assets that support the regulated medical-use cannabis industry.
Rental Revenues
We receive income primarily
from rental revenue generated by the properties that we acquire. The amount of rental revenue depends upon a number of factors,
including:
|
·
|
our
ability to enter into leases with increasing or market value rents for the properties that we acquire; and
|
|
·
|
rent
collection, which primarily relates to each of our tenant’s financial condition and ability to make rent payments to us
on time.
|
The properties that we acquire
consist of real estate assets that support the regulated medical-use cannabis industry. Changes in federal law and 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.
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, hard money 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 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
structure our leases so that the tenant is responsible for 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
We acquired the following properties during
the nine months ended September 30, 2019 (dollars in thousands):
Property
|
|
Market
|
|
Closing Date
|
|
Rentable
Square
Feet (1)
|
|
|
Initial
Purchase
Price
|
|
|
Transaction
Costs
|
|
|
Total
|
|
Sacramento CA
|
|
California
|
|
February 8, 2019
|
|
|
43,000
|
|
|
$
|
6,664
|
|
|
$
|
35
|
|
|
$
|
6,699
|
(2)
|
PharmaCann OH
|
|
Ohio
|
|
March 13, 2019
|
|
|
58,000
|
|
|
|
700
|
|
|
|
11
|
|
|
|
711
|
(3)
|
Southern CA Portfolio
|
|
California
|
|
April 16, 2019
|
|
|
102,000
|
|
|
|
27,097
|
|
|
|
51
|
|
|
|
27,148
|
|
Maitri PA
|
|
Pennsylvania
|
|
April 24, 2019
|
|
|
51,000
|
|
|
|
6,250
|
|
|
|
234
|
|
|
|
6,484
|
(4)
|
Vireo OH
|
|
Ohio
|
|
May 14, 2019
|
|
|
11,000
|
|
|
|
1,018
|
|
|
|
18
|
|
|
|
1,036
|
(5)
|
Green Leaf PA
|
|
Pennsylvania
|
|
May 20, 2019
|
|
|
266,000
|
|
|
|
13,000
|
|
|
|
207
|
|
|
|
13,207
|
|
Emerald Growth MI
|
|
Michigan
|
|
June 7, 2019
|
|
|
45,000
|
|
|
|
6,860
|
|
|
|
18
|
|
|
|
6,878
|
(6)
|
Ascend MI
|
|
Michigan
|
|
July 2, 2019
|
|
|
145,000
|
|
|
|
4,750
|
|
|
|
18
|
|
|
|
4,768
|
(7)
|
MJardin NV
|
|
Nevada
|
|
July 12, 2019
|
|
|
43,000
|
|
|
|
3,830
|
|
|
|
26
|
|
|
|
3,856
|
(8)
|
DYME CA
|
|
California
|
|
July 23, 2019
|
|
|
35,000
|
|
|
|
13,000
|
|
|
|
19
|
|
|
|
13,019
|
(9)
|
Trulieve MA
|
|
Massachusetts
|
|
July 26, 2019
|
|
|
150,000
|
|
|
|
3,500
|
|
|
|
25
|
|
|
|
3,525
|
(10)
|
PharmaCann PA
|
|
Pennsylvania
|
|
August 9, 2019
|
|
|
54,000
|
|
|
|
942
|
|
|
|
12
|
|
|
|
954
|
(11)
|
Vertical CA Portfolio
|
|
California
|
|
Various
|
|
|
79,000
|
|
|
|
17,300
|
|
|
|
32
|
|
|
|
17,332
|
(12)
|
The Pharm AZ – Retail
|
|
Arizona
|
|
September 19, 2019
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
27
|
|
|
|
2,027
|
(13)
|
Total
|
|
|
|
|
|
|
1,084,000
|
|
|
$
|
106,911
|
|
|
$
|
733
|
|
|
$
|
107,644
|
|
|
(1)
|
Includes expected rentable square feet at completion
of construction of certain properties.
|
|
(2)
|
The seller of the property is expected to complete
redevelopment of the property, for which we have agreed to provide reimbursement of up to approximately $4.8 million as additional
purchase price. As of September 30, 2019, we incurred and funded approximately $4.7 million of the additional purchase price.
|
|
(3)
|
Concurrent with the closing, we entered into
a long-term lease and development agreement with a subsidiary of PharmaCann, which is expected to construct two buildings
at the property, for which we have agreed to provide reimbursement of up to $19.3 million. As of September 30, 2019, we incurred
approximately $13.2 million of the development costs, of which we funded approximately $11.9 million.
|
|
(4)
|
The tenant is expected to complete redevelopment
of the property for which we have agreed to provide reimbursement of up to $10.0 million. As of September 30, 2019, we incurred
approximately $1.7 million of the redevelopment costs, of which we funded approximately $694,000.
|
|
(5)
|
The tenant is expected to complete redevelopment
of the property for which we have agreed to provide reimbursement of up to approximately $2.6 million. As of September 30,
2019, we incurred approximately $2.4 million of the redevelopment costs, of which we funded approximately $2.2 million.
|
|
(6)
|
The tenant is expected to complete redevelopment
of the property for which we have agreed to provide reimbursement of up to approximately $3.1 million. As of September 30,
2019, we incurred approximately $2.6 million of the redevelopment costs, of which we funded approximately $2.4 million.
|
|
(7)
|
The tenant is expected to complete redevelopment
of the property for which we have agreed to provide reimbursement of up to $15.0 million. As of September 30, 2019, we incurred
approximately $261,000, of which no amount 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 $5.8 million. As of September 30,
2019, we incurred approximately $2.8 million of the redevelopment costs, of which we funded approximately $2.4 million.
|
|
(9)
|
The tenant is expected to complete redevelopment
of the property for which we have agreed to provide reimbursement of up to $2.0 million. As of September 30, 2019, no amount
has been incurred.
|
|
(10)
|
The tenant is expected to complete redevelopment
of the property for which we have agreed to provide reimbursement of up to $40.0 million, which funding is subject to reduction
at the tenant’s option within the first six months of the lease term. As of September 30, 2019, the tenant has not submitted
any request for reimbursement.
|
|
(11)
|
Concurrent with the closing, we entered into
a long-term lease and development agreement with a subsidiary of PharmaCann, which is expected to construct two buildings
at the property, for which we have agreed to provide reimbursement of up to $25.1 million. The construction funding may be
increased by up to an additional $4.0 million at PharmaCann’s election within the first nine months of the lease term,
subject to the satisfaction of certain conditions. As of September 30, 2019, we incurred approximately $706,000
of the development costs, of which no amount was funded.
|
|
(12)
|
Portfolio consists of four properties, with three properties closing on August 29, 2019 and the remaining property
closing on September 11, 2019.
|
|
(13)
|
The tenant is expected to complete development
of the property for which we have agreed to provide reimbursement of up to $500,000. As of September 30, 2019, we incurred
approximately $310,000 of the development costs, of which no amount was funded.
|
In addition, in June 2019, we
entered into an amendment to our lease with GPI at one of our Michigan properties, making available an additional $18.0
million in funding for further expansion of cannabis cultivation and processing facilities at the property. Assuming full
payment of the additional funding, our total tenant improvement allowance will be approximately $25.5 million and our total
investment in the property will be $31.0 million. As of September 30, 2019, we incurred approximately $9.8 million of the
redevelopment costs, of which $9.5 million was funded.
In September 2019, we entered into
an amendment to our lease with a wholly owned subsidiary of AWH at one of our Illinois properties, making available an
additional $8.0 million in funding for further expansion of cannabis cultivation and processing facilities at the property.
Assuming full payment of the additional funding, our total tenant improvement allowance will be $14.0 million and our
total investment in the property will be $33.0 million. As of September 30, 2019, we incurred approximately $10.7 million of
the redevelopment costs, of which $4.5 million was funded.
In September 2019, we entered into an
amendment to our lease with Holistic at one of our Massachusetts properties, making available up to $2.0 million
in reimbursement for tenant improvements at the property, which is subject to reduction at the tenant’s option before March
31, 2020. Assuming full payment of the additional funding, our total investment in the property will be approximately $14.8 million.
As of September 30, 2019, no amounts have been incurred.
In September 2019, we entered
into amendments to our lease and development agreement with a subsidiary of PharmaCann at one of our Massachusetts
properties, making available an additional $8.0 million in construction funding for further expansion of cannabis cultivation
and processing facilities at the property. Assuming full payment of the additional funding, our total construction funding
will be $23.5 million and our total investment in the property will be $26.5 million. As of September 30, 2019, we incurred
approximately $17.3 million of the redevelopment costs, of which $16.5 million was funded.
In September 2019, we entered into
an amendment to our lease with a subsidiary of Vireo Health, Inc. at our Minnesota property, making available an additional
$2.6 million in reimbursement for tenant improvements at the property. Assuming full payment of the additional funding, our
total tenant improvements will be approximately $5.6 million and our total investment in the property will be $8.6 million.
As of September 30, 2019, we incurred approximately $3.8 million of the redevelopment costs, of which $3.5 million was
funded.
Comparison of the Three and Nine Months Ended
September 30, 2019 and 2018
The following table sets forth
the results of our operations (in thousands):
|
|
For the Three Months
Ended
September 30,
|
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$
|
11,198
|
|
|
$
|
3,716
|
|
|
$
|
26,054
|
|
|
$
|
9,639
|
|
Tenant reimbursements
|
|
|
357
|
|
|
|
210
|
|
|
|
941
|
|
|
|
365
|
|
Total revenues
|
|
|
11,555
|
|
|
|
3,926
|
|
|
|
26,995
|
|
|
|
10,004
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property expenses
|
|
|
357
|
|
|
|
210
|
|
|
|
941
|
|
|
|
365
|
|
General and administrative expense
|
|
|
2,156
|
|
|
|
1,442
|
|
|
|
6,667
|
|
|
|
4,393
|
|
Depreciation expense
|
|
|
2,221
|
|
|
|
703
|
|
|
|
5,054
|
|
|
|
1,715
|
|
Total expenses
|
|
|
4,734
|
|
|
|
2,355
|
|
|
|
12,662
|
|
|
|
6,473
|
|
Income from operations
|
|
|
6,821
|
|
|
|
1,571
|
|
|
|
14,333
|
|
|
|
3,531
|
|
Interest and other income
|
|
|
1,537
|
|
|
|
261
|
|
|
|
3,702
|
|
|
|
788
|
|
Interest expense
|
|
|
(1,838
|
)
|
|
|
―
|
|
|
|
(4,462
|
)
|
|
|
―
|
|
Net income
|
|
|
6,520
|
|
|
|
1,832
|
|
|
|
13,573
|
|
|
|
4,319
|
|
Preferred stock dividend
|
|
|
(338
|
)
|
|
|
(338
|
)
|
|
|
(1,014
|
)
|
|
|
(1,014
|
)
|
Net income attributable to common stockholders
|
|
$
|
6,182
|
|
|
$
|
1,494
|
|
|
$
|
12,559
|
|
|
$
|
3,305
|
|
Revenues.
Rental. Rental revenues for the three months
ended September 30, 2019 increased by approximately $7.5 million, or 201%, to approximately $11.2 million, compared to approximately
$3.7 million for the three months ended September 30, 2018. Rental revenues for the nine months ended September 30, 2019 increased
by approximately $16.4 million, or 170%, to approximately $26.1 million, compared to approximately $9.6 million for the nine months
ended September 30, 2018. The increase in rental revenues for both periods was related to rent and property management fees generated
from leases for properties we acquired in 2018 and 2019, as well as annual escalations of base rent on certain leases and amendments
to certain leases to increase tenant improvement allowances at the properties, which resulted in corresponding increases to base
rent.
Tenant Reimbursements. Tenant reimbursements
related to reimbursements by tenants for property insurance premiums and property tax paid at certain properties.
Expenses.
Property Expense. Property expense related
to property insurance premiums and property tax paid at certain of our properties, which were reimbursed by the tenants.
General and Administrative Expense. General
and administrative expense for the three months ended September 30, 2019 increased by approximately $714,000 to approximately
$2.2 million, compared to $1.4 million for the three months ended September 30, 2018. General and administrative expense for the
nine months ended September 30, 2019 increased by approximately $2.3 million to approximately $6.7 million, compared to $4.4 million
for the nine months ended September 30, 2018. The increase in general and administrative expense was primarily due to higher compensation
to employees, the hiring of additional employees and higher public company costs, travel and occupancy costs. Compensation expense
for the three and nine months ended September 30, 2019 included approximately $655,000 and $1.8 million, respectively, of non-cash
stock-based compensation. Compensation expense for the three and nine months ended September 30, 2018 included approximately $386,000
and $1.1 million, respectively, of non-cash stock-based compensation.
Depreciation Expense. The increase in depreciation
expense was related to depreciation on properties that we acquired and the placement into service of construction and tenant improvements
at certain of our properties.
Interest and Other Income. The increase in
interest and other income is primarily due to higher interest bearing investments resulting from proceeds from our common stock
offerings and issuance of our Exchangeable Senior Notes.
Interest Expense. Interest expense related
to our Exchangeable Senior Notes issued in February 2019.
Cash Flows
Comparison of the Nine Months Ended
September 30, 2019 and 2018
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Net cash provided by operating activities
|
|
$
|
25,086
|
|
|
$
|
9,551
|
|
|
$
|
15,535
|
|
Net cash used in investing activities
|
|
|
(237,426
|
)
|
|
|
(41,948
|
)
|
|
|
(195,478
|
)
|
Net cash provided by financing activities
|
|
|
308,561
|
|
|
|
73,658
|
|
|
|
234,903
|
|
Ending cash, cash equivalents and restricted cash balance
|
|
|
109,271
|
|
|
|
53,019
|
|
|
|
56,252
|
|
Operating Activities
Cash flows provided by operating
activities for the nine months ended September 30, 2019 and 2018 were approximately $25.1 million and $9.6 million,
respectively. Cash flows provided by operating activities were generally from contractual rent and security deposits from our
properties, partially offset by our general and administrative expense.
Investing Activities
Cash flows used in investing
activities for the nine months ended September 30, 2019 were approximately $237.4 million, of which approximately $151.4 million
related to the purchases of investments in real estate and funding of a portion of the tenant improvement allowances and construction
funding at our properties, approximately $500,000 related to deposits to escrow for acquisitions, and approximately $85.5 million
related to net purchases and maturities of short-term investments. Cash flows used in investing activities for the nine months
ended September 30, 2018 were approximately $42.0 million, of which approximately $38.3 million primarily related to the purchase
of investment in real estate and funding of a portion of the tenant improvement allowances and construction funding at our properties,
and the remaining approximately $3.7 million related to the net purchases and maturities of short-term investments.
Financing Activities
Net cash provided by financing
activities of approximately $308.6 million during the nine months ended September 30, 2019 was the result of approximately $138.5
million in net proceeds from the issuance of our Exchangeable Senior Notes, $180.1 million in net proceeds from the follow-on
issuance of shares of our common stock in July, and $5.6 million in net proceeds from the issuance of shares of our common stock
pursuant to our ATM Program in September, partially offset by dividend payments of approximately $14.7 million to common and preferred
stockholders and approximately $939,000 related to net share settlement of equity awards to pay the required withholding taxes
upon vesting of restricted stock for certain employees.
Net cash provided by financing activities
of approximately $73.7 million during the nine months ended September 30, 2018 was the result of approximately $79.3 million in
net proceeds from the sale of 3,220,000 shares of common stock, offset by dividend payments of approximately $5.3 million to common
and preferred stockholders and approximately $390,000 related to net share settlement of equity awards to satisfy withholding
taxes upon vesting of restricted stock for certain employees.
Liquidity and Capital Resources
Liquidity is a measure of our
ability to meet potential cash requirements. We expect to use significant cash to acquire our target properties, pay dividends
to our stockholders, make interest payments on our Exchangeable Senior Notes, fund our operations, and meet other general business
needs.
Sources and Uses of Cash
We derive all of our revenues
from the leasing of our properties, collecting rental income and operating expense reimbursements based on contractual arrangements
with our tenants. This source of revenue represents our primary source of liquidity to fund our dividends, general and administrative
expenses, property operating expenses and other expenses incurred related to managing our existing portfolio, service our Exchangeable
Senior Notes and invest in additional properties. To the extent additional resources are needed, we expect to fund our investment
activity generally through equity or debt issuances either in the public or private markets. Where possible, we also may issue
limited partnership interests in our Operating Partnership to acquire properties from existing owners seeking a tax-deferred transaction.
In February 2019, our Operating
Partnership issued $143.75 million aggregate principal amount of Exchangeable Senior Notes, including the exercise in full of
the initial purchasers’ option to purchase additional Exchangeable Senior Notes, resulting in net proceeds of approximately $138.5
million, after deducting the initial purchasers’ discounts and offering expenses.
In July 2019, we issued 1,495,000
shares of common stock, including the exercise in full of the underwriters’ option to purchase an additional 195,000 shares,
resulting in net proceeds of approximately $180.1 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. In September, we sold 63,000 shares of our common stock for net proceeds of approximately $5.6 million under the ATM
Program. In October, we sold 485,300 shares of our common stock for net proceeds of approximately $41.3 million under the
ATM Program. As of November 7, 2019, we had approximately $201.9 million in shares of common stock available for future
issuance under the ATM Program.
We expect to meet our liquidity
needs through cash on hand, cash flows from operations and cash flows from sources discussed above. We believe that our liquidity
and sources of capital are adequate to satisfy our cash requirements. We cannot, however, be certain that these sources of funds
will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs. Our investment
guidelines also provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible
assets at the time of any new borrowing, subject to our board of directors’ discretion.
Dividends
The Company is required to pay dividends
to its stockholders at least equal to 90% of its taxable income in order to qualify and maintain its qualification as a REIT.
As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund its ongoing operations
to the same extent that other companies whose parent companies are not REITs can. Our ability to continue to pay dividends is
dependent upon our ability to continue to generate cash flows, service any debt obligations we have, including our Exchangeable
Senior Notes, and make accretive new investments.
Contractual Obligations
As of September 30, 2019, we
had approximately $49.0 million outstanding in commitments related to tenant improvement allowances, which generally may be requested
by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease, approximately
$6.2 million, $6.0 million and $24.4 million of commitments relating to construction funding for the development of the properties
in Massachusetts, Ohio and Pennsylvania, which the tenant has agreed to use commercially reasonable efforts to complete by March
31, 2020, June 13, 2020 and February 9, 2021, respectively, and approximately $57,000 of commitments relating to certain development
milestones for the property in California, which the seller is required to complete by December 31, 2019. Additionally, we had
approximately $98,000 outstanding in commitments related to our office and equipment leases, with approximately $23,000 to be
paid in the remainder of 2019 and approximately $75,000 to be paid in 2020.
In October 2019, we executed a
lease amendment for our principal executive offices with our current landlord, pursuant to which we agreed to lease a larger
space comprising approximately 6,000 rentable square feet for a term of five years and four months, with one option to extend
the term of the lease for an additional five years. Subject to a base rent abatement, the initial annual base rent is
approximately $228,000, subject to an annual adjustment of three percent during the initial term.
Subsequent to September 30,
2019, we acquired ten properties for purchase prices totaling approximately $105.1 million and committed to
providing additional reimbursements for tenant improvements and construction funding totaling approximately $45.0 million,
which excludes approximately $17.7 million that is subject to reduction at the tenant’s option. See Note 12 in the
accompanying notes to the condensed consolidated financial statements for more information.
Our Exchangeable Senior Notes
require interest payments semiannually at a rate of 3.75% per annum and will mature on February 21, 2024.
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 and Adjusted Funds from Operations
Funds from operations (“FFO”)
and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc.
(“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance
equal to “net income, computed in accordance with accounting principles generally accepted in the United States (“GAAP”),
excluding gains (or losses) from sales of property, plus depreciation and amortization related to real estate properties, and
after adjustments for unconsolidated partnerships and joint ventures.”
Management believes that net
income, as defined by GAAP, is the most appropriate earnings measurement. However, management believes FFO and FFO per share to
be supplemental measures of a REIT’s performance because they provide an understanding of the operating performance of our
properties without giving effect to certain significant non-cash items, primarily depreciation expense. Historical cost accounting
for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time.
However, real estate values instead have historically risen or fallen with market conditions. We believe that by excluding the
effect of depreciation, FFO and FFO per share can facilitate comparisons of operating performance between periods. We report FFO
and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry
and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research
analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and
discuss FFO and FFO per share.
Management believes that adjusted
funds from operations (“AFFO”) and AFFO per share are also appropriate supplemental measures of a REIT’s operating
performance. We calculate AFFO by adding to FFO certain non-cash or infrequent or unpredictable expenses which may impact comparability,
consisting of non-cash stock-based compensation expense and non-cash interest expense.
Our computation of FFO and AFFO
may differ from the methodology for calculating FFO and AFFO utilized by other equity REITs and, accordingly, may not be comparable
to such REITs. Further, FFO and AFFO do not represent cash flow available for management’s discretionary use. FFO and AFFO should
not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of our financial performance
or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative
of funds available to fund our cash needs, including our ability to pay dividends or make distributions. FFO and AFFO should be
considered only as supplements to net income computed in accordance with GAAP as measures of operations.
The table below is a reconciliation
of net income to FFO and AFFO for the three and nine months ended September 30, 2019 and 2018 (in thousands, except share and
per share amounts):
|
|
For the Three Months
Ended
September 30,
|
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net income attributable to common stockholders
|
|
$
|
6,182
|
|
|
$
|
1,494
|
|
|
$
|
12,559
|
|
|
$
|
3,305
|
|
Real estate depreciation
|
|
|
2,221
|
|
|
|
703
|
|
|
|
5,054
|
|
|
|
1,715
|
|
FFO available to common stockholders
|
|
|
8,403
|
|
|
|
2,197
|
|
|
|
17,613
|
|
|
|
5,020
|
|
Stock-based compensation
|
|
|
655
|
|
|
|
386
|
|
|
|
1,841
|
|
|
|
1,079
|
|
Non-cash interest expense
|
|
|
489
|
|
|
|
—
|
|
|
|
1,181
|
|
|
|
—
|
|
AFFO available to common stockholders
|
|
$
|
9,547
|
|
|
$
|
2,583
|
|
|
$
|
20,635
|
|
|
$
|
6,099
|
|
FFO per share — basic
|
|
$
|
0.77
|
|
|
$
|
0.33
|
|
|
$
|
1.75
|
|
|
$
|
0.79
|
|
FFO per share — diluted
|
|
$
|
0.76
|
|
|
$
|
0.32
|
|
|
$
|
1.72
|
|
|
$
|
0.77
|
|
AFFO per share — basic
|
|
$
|
0.87
|
|
|
$
|
0.39
|
|
|
$
|
2.05
|
|
|
$
|
0.95
|
|
AFFO per share — diluted
|
|
$
|
0.86
|
|
|
$
|
0.38
|
|
|
$
|
2.02
|
|
|
$
|
0.93
|
|
Weighted average shares outstanding — basic
|
|
|
10,918,477
|
|
|
|
6,636,638
|
|
|
|
10,088,036
|
|
|
|
6,388,058
|
|
Weighted average shares outstanding — diluted
|
|
|
11,057,697
|
|
|
|
6,785,800
|
|
|
|
10,225,574
|
|
|
|
6,534,300
|
|
As the Company has the intent
and ability to settle the debt component of the Exchangeable Senior Notes in cash and the excess exchange premium in shares, the
Company only includes the effect of the excess exchange premium in the calculation of diluted shares. For the three and nine months
ended September 30, 2019, the effect of the excess exchange premium was anti-dilutive and therefore, excluded from the calculation
of diluted shares.
Average Current Yield on Invested Capital
In addition, we have provided
our calculation of our average current yield on invested capital, which is a measure of financial performance used by management
to evaluate its current investment returns on capital invested or committed to invest in our properties. Average current yield
on invested capital is not a substitute for financial results as reported in accordance with GAAP, and should not be utilized
in place of such GAAP results. We believe that average current yield on invested capital is a meaningful measure because it quantifies
our effectiveness in generating returns relative to the capital we have invested or have committed to invest in our properties.
Our computation of average current yield on invested capital may also differ from the methodology for calculating average current
yield on invested capital by other real estate companies, and, accordingly, may not be comparable to such real estate companies.
As of September 30, 2019, our
average current yield on invested capital was approximately 14.5% for the 31 properties that we own, calculated as the sum of
the current base rents (after the expiration of applicable base rent abatement or deferral periods), supplemental rent (with respect
to the lease with PharmaCann at one of our New York properties) and property management fees of approximately $57.7 million,
divided by our aggregate investment in these properties of approximately $399.1 million (excluding transaction costs and including
the aggregate potential reimbursements to tenants and sellers for tenant improvements and development of $100.4 million). These
statistics do not include up to $40.0 million that may be funded in the future pursuant to our lease with Trulieve Cannabis Corp.
at one of our Massachusetts properties, the additional $4.0 million which may be requested by PharmaCann at one of our Pennsylvania
properties or $2.0 million that may be funded in the future pursuant to our lease with Holistic at one of our
Massachusetts properties, as the tenants at those properties may not elect to have us disburse those funds to them and pay us
the corresponding base rent on those funds.
Critical Accounting Policies
Our condensed 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 condensed consolidated
financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ
materially from those estimates and assumptions. Set forth below is a summary of our accounting policies that we believe are critical
to the preparation of our condensed consolidated financial statements.
Acquisition of Rental Property, Depreciation and Impairment
We depreciate each of our buildings
and improvements over its estimated remaining useful life, not to exceed 35 years. We depreciate tenant improvements at our buildings
over the shorter of the estimated useful lives or the terms of the related leases.
Upon acquisition of property,
we allocate the purchase price based upon the relative fair values of all assets acquired and liabilities assumed. For transactions
that are an asset acquisition, acquisition costs are capitalized as incurred. All of our acquisitions to date have been recorded
as asset acquisitions.
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 to be held and used
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.
Exchangeable Senior Notes
The initial proceeds from the sale of our
exchangeable senior notes are allocated between a liability component and an equity component in a manner that reflects interest
expense at the rate of similar nonexchangeable debt that could have been issued at such time. The equity component represents the
excess initial proceeds received over the fair value of the liability component of the notes as of the date of issuance. We measured
the estimated fair value of the debt component of our exchangeable senior notes as of the respective issuance dates based on our
nonexchangeable debt borrowing rate with the assistance of a third party valuation specialist. 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.
Revenue Recognition and Accounts Receivable
Our existing tenant leases are and future tenant leases are
generally expected to be triple-net leases, an arrangement under which the tenant maintains the property while paying us rent
and property management fees. We account for our leases as operating leases. Under this method, leases that have fixed and determinable
rent increases are recognized on a straight-line basis over the lease term, unless the collectability of minimum lease payments
is not reasonably predictable. Rental increases based upon changes in the CPI are recognized only after the changes in the indexes
have occurred and are then applied according to the lease agreements. Contractually obligated reimbursements from tenants for
recoverable real estate taxes and operating expenses are currently included in tenant reimbursements in the period when such costs
are incurred. Contractually obligated real estate taxes that are paid directly by the tenant to the tax authorities are not reflected
in our consolidated financial statements.
We record revenue for each of our properties
on a cash basis due to the uncertainty of collectability of lease payments from each tenant due to its limited operating history
and the uncertain regulatory environment in the United States relating to the medical-use cannabis industry.
Stock-Based Compensation
Stock-based compensation for
equity awards is based on the grant date fair value of the equity instrument and is recognized over the requisite service period.
If awards are forfeited prior to vesting, we reverse any previously recognized expense related to such awards in the period during
which the forfeiture occurs and reclassify any non-forfeitable dividends previously paid on these awards from retained earnings
to compensation expense.
Federal Income Taxes
We have been organized to operate
our business so as to qualify to be taxed as a REIT, for U.S. federal income tax purposes. Under the REIT operating structure,
we are permitted to deduct dividends paid to our stockholders in determining our taxable income for U.S. federal income tax purposes.
As long as our dividends equal or exceed our taxable net income, we generally will not be required to pay U.S. federal income
tax on such income. As we intend to maintain dividends at a level sufficient to meet the REIT distribution requirements, we will
continue to evaluate whether the current levels of distribution are sufficient to do so throughout 2019.
Adoption of New or Revised Accounting Standards
As an “emerging growth
company” under the JOBS Act, we can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the
Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an “emerging
growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private
companies. An “emerging growth company” may opt out of the extended transition period for complying with new or revised
accounting standards. A decision to opt out, however, is irrevocable. We have elected not to opt out of such extended transition
period, which means that when a standard is issued or revised and it has different application dates for public or private companies,
we can adopt the standard for the private company. This may make comparison of our financial statements with a public company
that either is not an “emerging growth company” or is an “emerging growth company” that has opted out of using
the extended transition period difficult or impossible as different or revised accounting standards may be used. We will cease
being an emerging growth company on December 31, 2019, and, as a result, we will no longer be eligible to delay adoption of such
new or revised accounting pronouncements applicable to public companies.
Impact of Real Estate and Credit Markets
In the commercial real estate
market, property prices generally continue to fluctuate. Likewise, during certain periods, the U.S. credit markets have experienced
significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We
continually monitor the commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust
our business strategy accordingly.
Off-Balance Sheet Arrangements
We have no unconsolidated investments
or any other off-balance sheet arrangements.
Interest Rate Risk
As of September 30, 2019, we had approximately
$143.75 million of Exchangeable Senior Notes outstanding at a fixed interest rate, and therefore, if interest rates decline, our
required payments may exceed those based on current market rates. It is possible that a property we acquire in the future would
be subject to a mortgage, which we may assume.
Impact of Inflation
We enter into leases that generally
provide for limited increases in rent as a result of increases in the U.S. Consumer Price Index (typically subject to ceilings)
or fixed increases. We expect these lease provisions to result in rent increases over time. During times when inflation is greater
than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.
Seasonality
Our business has not been, and
we do not expect our business in the future to be, subject to material seasonal fluctuations.