INNOVATIVE INDUSTRIAL PROPERTIES INC

Previous wording

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: rates of default on leases for our assets; concentration of our portfolio of assets and limited number of tenants; the estimated growth in and evolving market dynamics of the regulated cannabis market; the demand for regulated cannabis facilities; inflation dynamics; the impact of pandemics on us, our business, our tenants, or the economy generally; war and other hostilities, including the conflicts in Ukraine and Israel; 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 regulated cannabis industry; our understanding of our competition and our potential tenants’ alternative financing sources; the expected medical-use or adult-use cannabis legalization in certain states; shifts in public opinion regarding regulated cannabis; the potential impact on us from litigation matters, including rising liability and insurance costs; the additional risks that may be associated with certain of our tenants cultivating, processing and/or dispensing adult-use cannabis in our facilities; the state of the U.S. economy genera…

Excerpt shortened here; the source contains the full paragraph.

Current wording

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: rates of default on leases for our assets; concentration of our portfolio of assets and limited number of tenants; the estimated growth in and evolving market dynamics of the regulated cannabis market; the demand for regulated cannabis facilities; inflation dynamics; the impact of pandemics on us, our business, our tenants, or the economy generally; war and other hostilities, including the conflicts in Ukraine and Israel; 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 regulated cannabis industry; our understanding of our competition and our potential tenants’ alternative financing sources; the expected medical-use or adult-use cannabis legalization in certain states; shifts in public opinion regarding regulated cannabis; the potential impact on us from litigation matters, including rising liability and insurance costs; the additional risks that may be associated with certain of our tenants cultivating, processing and/or dispensing adult-use cannabis in our facilities; the state of the U.S. economy genera…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

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, 2023. 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.

Current wording

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, 2023, 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.

Previous wording

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 March 31, 2024, we had 21 full-time employees.

Current wording

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 June 30, 2024, we had 22 full-time employees.

Previous wording

As of March 31, 2024, we owned 108 properties comprising 8.9 million square feet (including 897,000 rentable square feet under development/redevelopment) in 19 states. As of March 31, 2024, we had invested $2.4 billion in the aggregate (consisting of purchase price and funding of draws for construction funding and improvements submitted by tenants, if any, but excluding transaction costs) and had committed an additional $41.3 million to fund draws to certain tenants and vendors for improvements at our properties. Of the $41.3 million committed to fund draws to certain tenants and vendors for improvements at our properties, $10.4 million was incurred but not funded as of March 31, 2024. These statistics do not include a $23.0 million loan commitment from us to a developer for construction of a regulated cannabis cultivation and processing facility in California, of which we have funded $22.0 million as of March 31, 2024.

Current wording

As of June 30, 2024, we owned 108 properties comprising 9.0 million square feet (including 722,000 rentable square feet under development/redevelopment) in 19 states. As of June 30, 2024, we had invested $2.4 billion in the aggregate (consisting of purchase price and funding of draws for construction funding and improvements submitted by tenants, if any, but excluding transaction costs) and had committed an additional $61.9 million to fund draws to certain tenants and vendors for improvements at our properties. Of the $61.9 million committed to fund draws to certain tenants and vendors for improvements at our properties, $7.2 million was incurred but not funded as of June 30, 2024.

Previous wording

Of these 108 properties, we include 103 properties in our operating portfolio, which were 95.2% leased as of March 31, 2024, with a weighted-average remaining lease term of 14.8 years. We do not include in our operating portfolio the following properties (all of which were under development/redevelopment as of March 31, 2024, and together are expected to comprise 715,000 rentable square feet upon completion of development/redevelopment):

Current wording

Of these 108 properties, we include 104 properties in our operating portfolio, which were 95.6% leased as of June 30, 2024, with a weighted-average remaining lease term of 14.4 years. We do not include in our operating portfolio the following properties (all of which were under development/redevelopment as of June 30, 2024, and together are expected to comprise 692,000 rentable square feet upon completion of development/redevelopment):

Previous wording

As of March 31, 2024, we owned 108 properties located in 19 states leased to 30 tenants (not including three non-cannabis tenants in two properties). Many of our tenants are tenants at multiple properties. We seek to manage our portfolio-level risk through geographic diversification and by minimizing dependence on any single property or tenant. At March 31, 2024, our largest property was located in New York and accounted for 5.5% of our net real estate held for investment. No other properties accounted for more than 5% of our net real estate held for investment at March 31, 2024. See Note 2 “Concentration of Credit Risk” in the notes to our condensed consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest percentage of our total rental revenues for the three months ended March 31, 2024.

Current wording

As of June 30, 2024, we owned 108 properties located in 19 states leased to 30 tenants (not including three non-cannabis tenants in two properties). Many of our tenants are tenants at multiple properties. We seek to manage our portfolio-level risk through geographic diversification and by minimizing dependence on any single property or tenant. At June 30, 2024, our largest property was located in New York and accounted for 5.5% of our net real estate held for investment. No other properties accounted for more than 5% of our net real estate held for investment at June 30, 2024. See Note 2 “Concentration of Credit Risk” in the notes to our condensed consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest percentage of our total rental revenues for the three and six months ended June 30, 2024.

Previous wording

We face competition from a diverse mix of market participants, including but not limited to, other companies with similar business models, independent investors, hedge funds, lenders and other real estate investors, as well as potential tenants (cannabis operators themselves), all of whom may compete with us in our efforts to acquire real estate zoned for regulated cannabis operations. Competition from others may diminish our opportunities to acquire a desired property on favorable terms or at all. In addition, this competition may put pressure on us to reduce the rental rates below those that we expect to charge for the properties that we acquire, which would adversely affect our financial results.

Current wording

We face competition from a diverse mix of market participants, including but not limited to, other companies with similar business models, independent investors, hedge funds, lenders and other real estate investors, as well as potential tenants (cannabis operators themselves), all of whom may compete with us in our efforts to acquire real estate zoned for regulated cannabis operations. Competition from others may diminish our opportunities to acquire a desired property on favorable terms or at all. In addition, this

Previous wording

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.

Current wording

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 Internal Revenue Code of 1986, as amended (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.

Previous wording

See Note 6 “Investment in Real Estate” in the notes to the condensed consolidated financial statements for information regarding our investments in real estate activity and property portfolio activity during the three months ended March 31, 2024.

Current wording

See Note 6 “Investment in Real Estate” in the notes to the condensed consolidated financial statements for information regarding our investments in real estate activity and property portfolio activity during the six months ended June 30, 2024.

Previous wording

Comparison of the Three Months Ended March 31, 2024 and 2023

Current wording

Comparison of the Three and Six Months Ended June 30, 2024 and 2023

Previous wording

No security deposits were applied for rent during the three months ended March 31, 2024. Rental revenue received for the three months ended March 31, 2023 included the application of $4.2 million of security deposits for payment of rent.

Current wording

Rental revenue received for the three months ended June 30, 2024 included the application of $0.6 million of security deposits for payment of rent, of which $0.5 million was replenished by a tenant in July 2024. Rental revenue received for the three months ended June 30, 2023 included the application of $1.5 million of security deposits for payment of rent.

Previous wording

Rental Revenues. Rental revenues for the three months ended March 31, 2024 decreased by $0.6 million, or 1%, to $74.9 million, compared to $75.5 million for the three months ended March 31, 2023. The decrease was primarily due to a $5.6 million decline in contractual rent and property management fees received during the three months ended March 31, 2024 related to properties that we took back possession of since March 2023, and a $1.3 million decrease related to two leases that were re-classified as sales-type leases starting January 1, 2024 (see Note 2 “Lease Accounting” to our condensed consolidated financial statements included in this report for more information). The decrease was partially offset by a $6.0 million increase to contractual rent and property management fees, which was primarily driven by contractual rent escalations and amendments to leases for additional improvement allowances at existing properties that resulted in adjustments to rent, a full period of contractual rent and property management fees related to the two properties acquired during the three months ended March 31, 2023, and new leases entered into since March 31, 2023. The decrease was also partially offset by a $0.3 million increase to tenant reimbursements, which was primarily due to higher property tax reimbursements collected during the period.

Current wording

Rental revenues for the six months ended June 30, 2024 increased by $2.8 million, or 2%, to $154.2 million, compared to $151.4 million for the six months ended June 30, 2024. The increase was primarily driven by the $3.9 million disposition-contingent lease termination fee that was received in connection with the sale of our property in Los Angeles, California, a $9.5 million increase to contractual rent and property management fees, which was primarily driven by contractual rent escalations, amendments to leases for additional improvement allowances at existing properties that resulted in adjustments to rent, new leases entered into since March 31, 2023 and a $0.6 million increase to tenant reimbursements, which was primarily due to higher property tax reimbursements collected during the period. The increase was partially offset by a $8.6 million decline in contractual rent and property management fees received during the six months ended June 30, 2024 related to properties that we took back possession of since March 2023, and a

Previous wording

Other Revenues. Other revenues for the three months ended March 31, 2024 and 2023 consisted of interest revenue related to leases for property acquisitions that did not satisfy the requirements for sale-leaseback accounting.

Current wording

Other Revenues. Other revenues for the three and six months ended June 30, 2024 and 2023 consisted of interest revenue related to leases for property acquisitions that did not satisfy the requirements for sale-leaseback accounting.

Previous wording

Property Expenses. Property expenses for the three months ended March 31, 2024 increased by $1.1 million to $6.7 million compared to $5.6 million for the three months ended March 31, 2023. The increase was due to additional investment in existing properties, which resulted in higher property tax that we paid for our properties, as well as higher property expenses related to properties that we have taken possession of but not yet leased. Property expenses related to leased properties are generally reimbursable to us by the tenants under the terms of the leases.

Current wording

Property Expenses. Property expenses for the three months ended June 30, 2024 increased by $1.1 million to $6.9 million, compared to $5.8 million for the three months ended June 30, 2023. Property expenses for the six months ended June 30, 2024 increased by $2.2 million to $13.6 million, compared to $11.4 million for the six months ended June 30, 2023. The increase in both periods was due to additional investment in existing properties, which resulted in higher property tax that we paid for our properties, as well as higher property expenses related to properties that we have taken possession of but not yet leased. Property expenses related to leased properties are generally reimbursable to us by the tenants under the terms of the leases.

Previous wording

General and Administrative Expense. General and administrative expense for the three months ended March 31, 2024 decreased by $0.8 million to $9.6 million, compared to $10.4 million for the three months ended March 31, 2023. The decrease in general and administrative expense was primarily due to lower litigation-related expense incurred during the period and lower compensation to employees. The lower compensation was primarily due to the expiration of the PSUs granted in 2021 on December 31, 2023 (which were forfeited in their entirety as they failed to meet the threshold for any payout as of that date) and lower payroll related fees for relocation, which was partially offset by higher payroll salary and bonus expense. Compensation expense for three months ended March 31, 2024 and 2023 included $4.3 million and $4.8 million, respectively, of non-cash stock-based compensation.

Current wording

General and Administrative Expense. General and administrative expense for the three months ended June 30, 2024 decreased by $0.9 million to $9.7 million, compared to $10.6 million for the three months ended June 30, 2023. General and administrative expense for the six months ended June 30, 2024 decreased by $1.7 million to $19.2 million, compared to $20.9 million for the six months ended June 30, 2023. The decrease in general and administrative expense for both periods was primarily due to lower litigation-related expense incurred during the period and lower compensation to employees. The lower compensation was primarily due to the expiration of the PSUs granted in 2021 on December 31, 2023 (which were forfeited in their entirety as they failed to meet the threshold for any payout as of that date), which was partially offset by increases to payroll salary, bonus expense and non-PSU related stock-based compensation for employee and directors. Compensation expense for the three and six months ended June 30, 2024 included $4.4 million and $8.7 million, respectively, of non-cash stock-based compensation. Compensation expense for the three and six months ended June 30, 2023 included $4.9 million and $9.7 million, respectively, of non-cash stock-based compensation.

Previous wording

*Depreciation and Amortization Expense.Depreciation and amortization expense for the three months ended March 31, 2024 increased $0.4 million to $17.2 million, compared to $16.7 million for the three months ended March 31, 2023. *The increase in depreciation and amortization expense was related to depreciation on properties that we acquired in 2023 and the placement into service of construction and improvements at certain of our properties.

Current wording

*Depreciation and Amortization Expense.Depreciation and amortization expense for the three months ended June 30, 2024 increased $0.8 million to $17.5 million, compared to $16.7 million for the three months ended June 30, 2023. Depreciation and amortization expense for the six months ended June 30, 2024 increased by $1.2 million to $34.6 million, compared to $33.4 million for the six months ended June 30, 2023. *The increase in depreciation and amortization expense was primarily related to depreciation on properties that we acquired in 2023 and the placement into service of construction and improvements at certain of our properties.

Previous wording

Interest Expense. Interest expense primarily consists of interest on our Exchangeable Senior Notes and our Notes due 2026. Interest expense for the three months ended March 31, 2024 decreased by $0.1 million to $4.4 million, compared to $4.5 million for the three months ended March 31, 2023. The decrease was primarily due to the capitalization of $0.2 million of interest during the three months ended March 31, 2024, partially offset by $55,000 non-cash interest expense related to the Revolving Credit Facility. Interest expense for the three months ended March 31, 2024 and 2023 included $0.4 million and $0.3 million, respectively, of non-cash interest expense.

Current wording

Interest Expense. Interest expense primarily consists of interest on our Notes due 2026. Interest expense for the three months ended June 30, 2024 decreased by $0.2 million to $4.3 million, compared to $4.5 million for the three months ended June 30, 2023. Interest expense for the six months ended June 30, 2024 decreased by $0.3 million to $8.7 million, compared to $9.0 million for the six months ended June 30, 2023.The decrease in both periods was primarily due to the capitalization of $0.2 million and $0.4 million of interest during the three and six months ended June 30, 2024, respectively, and the maturity of the Exchangeable Senior Notes in February 2024. The decrease was partially offset by $68,000 and $0.1 million non-cash interest expense related to the Revolving Credit Facility for the three and six months ended June 30, 2024, respectively. Interest expense for the three months ended June 30,

Previous wording

Comparison of the Three Months Ended March 31, 2024 and 2023 (in thousands)

Current wording

Comparison of the Six Months Ended June 30, 2024 and 2023 (in thousands)

Previous wording

Cash flows provided by operating activities for the three months ended March 31, 2024 and 2023 were $71.6 million and $64.6 million, respectively. Cash flows provided by operating activities were generally from contractual rent from our properties, partially offset by our general and administrative expense, interest expense, property expenses in excess of tenant reimbursements and property expenses at properties that were not leased. Cash flows provided by operating activities for the three months ended March 31, 2024 also included $4.8 million received in advance from our tenant Holistic Industries Inc. relating to the expected sale of our property in Los Angeles, California and concurrent lease termination (see Note 12 “Subsequent Events” to our condensed consolidated financial statements included in this report for more information).

Current wording

Cash flows provided by operating activities for the six months ended June 30, 2024 and 2023 were $135.8 million and $126.4 million, respectively. Cash flows provided by operating activities were generally from contractual rent from our properties, partially offset by our general and administrative expense, interest expense, property expenses in excess of tenant reimbursements and property expenses at properties that were not leased. The increase in cash flows provided by operating activities for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily due to the $3.9 million disposition-contingent lease termination fee that was received concurrently with the sale of our property in Los Angeles, California, higher contractual rent collection (including deferred lease payments received on sales-type leases), proceeds from property insurance claims, higher interest income and changes in working capital due to timing of vendor payments.

Previous wording

Cash flows used in investing activities for the three months ended March 31, 2024 were $14.4 million, of which $16.5 million was related to funding of draws for improvement and construction funding at our properties, partially offset by $2.1 million related to net purchases and maturities of short-term investments. Cash flows used in investing activities for the three months ended March 31, 2023 were $62.7 million, of which $101.3 million was related to investments in real estate and funding of draws for improvement and

Current wording

Cash flows used in investing activities for the six months ended June 30, 2024 were $58.8 million, of which $50.0 million was related to investments in real estate and funding of draws for improvement and construction funding at our properties, $17.9 million was related to net purchases and maturities of short-term investments, partially offset by $9.1 million in proceeds related to the sale of our Los Angeles, California property. Cash flows used in investing activities for the six months ended June 30, 2023 were $18.4 million, of which $149.3 million was related to investments in real estate and funding of draws for improvement and construction funding at our properties and other investments, partially offset by $130.9 million related to net purchases and maturities of short-term investments.

Previous wording

Net cash used in financing activities of $45.4 million during the three months ended March 31, 2024 was the result of $11.8 million in net proceeds from the issuance of our common stock, offset by dividend payments of $51.8 million to common and preferred stockholders, principal payment on the Exchangeable Senior Notes of $4.4 million and $1.0 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees and payment of deferred financing costs.

Current wording

Net cash used in financing activities of $97.8 million during the six months ended June 30, 2024 was the result of $11.8 million in net proceeds from the issuance of our common stock, offset by dividend payments of $104.1 million to common and preferred stockholders, principal payment on the Exchangeable Senior Notes of $4.4 million, and $1.0 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees and payment of deferred financing costs.

Previous wording

Net cash used in financing activities of $51.4 million during the three months ended March 31, 2023 was the result of dividend payments of $50.8 million to common and preferred stockholders and $0.6 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.

Current wording

Net cash used in financing activities of $102.5 million during the six months ended June 30, 2023 was the result of dividend payments of $101.9 million to common and preferred stockholders and $0.6 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.

Previous wording

As of March 31, 2024, we owned 108 properties. Of these properties, the 103 properties in our operating portfolio were 95.2% leased, with a weighted-average remaining lease term of 14.8 years.

Current wording

As of June 30, 2024, we owned 108 properties. Of these properties, the 104 properties in our operating portfolio were 95.6% leased, with a weighted-average remaining lease term of 14.4 years.

Previous wording

We expect to incur some property-level operating costs from time to time in periods during which properties that become vacant are being remarketed or re-positioned. In addition, we may recognize an expense for certain property costs, such as insurance premiums and real estate taxes billed in arrears, if we believe the tenant is likely to vacate the property before making payment on those obligations or may be unable to pay such costs in a timely manner. Property costs are generally not significant to our operations, but the amount of property costs can vary quarter to quarter based on the number of property vacancies and whether we have any underperforming properties. We may advance certain property costs on behalf of our tenants but expect that the majority of these costs will be reimbursed by the tenant and do not anticipate that they will be significant to our operations. In addition, for properties that are not leased and are under development or redevelopment, we may make significant additional investments in these properties in order to get them ready for their intended use and to re-lease them. For the three months ended March 31, 2024, property expenses included $0.7 million of non-reimbursed expenses related to operating properties that were not leased.

Current wording

We expect to incur some property-level operating costs from time to time in periods during which properties that become vacant are being remarketed or re-positioned. In addition, we may recognize an expense for certain property costs, such as insurance premiums and real estate taxes billed in arrears, if we believe the tenant is likely to vacate the property before making payment on those obligations or may be unable to pay such costs in a timely manner. Property costs are generally not significant to our operations, but the amount of property costs can vary quarter to quarter based on the number of property vacancies and whether we have any underperforming properties. We may advance certain property costs on behalf of our tenants but expect that the majority of these costs will be reimbursed by the tenant and do not anticipate that they will be significant to our operations. In addition, for properties that are not leased and are under development or redevelopment, we may make significant additional investments in these properties in order to get them ready for their intended use and to re-lease them. For the three and six months ended June 30, 2024, property expenses included $1.0 million and $1.7 million, respectively, of non-reimbursed expenses related to operating properties that were not leased.

Previous wording

In January 2023, we entered into equity distribution agreements with four sales agents, pursuant to which we may offer and sell from time to time through an “at-the-market” offering program (the “ATM Program”) up to $500.0 million in shares of our common stock. During the three months ended March 31, 2024, we sold 123,224 shares of our common stock pursuant to the ATM Program for net proceeds of $11.8 million.

Current wording

In May 2024, we terminated the previously existing “at-the-market” offering program (the “Prior ATM Program”) and entered into new equity distribution agreements with four sales agents, pursuant to which we may offer and sell from time to time through an “at-the-market” offering program (the “ATM Program”), including on a forward basis, shares of our common stock and 9.00% Series A Cumulative Redeemable Preferred Stock, $0.001 par value per share (the “Series A Preferred Stock”), up to an aggregate offering price of $500.0 million. As of June 30, 2024, we had not sold any shares of common stock or Series A Preferred Stock under the ATM Program, including on a forward basis. During the six months ended June 30, 2024, we sold 123,224 shares of our common stock pursuant to the Prior ATM Program for net proceeds of $11.8 million.

Previous wording

In October 2023, our Operating Partnership entered into a loan and security agreement (the “Loan Agreement”) with a federally regulated commercial bank, as lender and as agent for lenders that become party thereto from time to time. The Loan Agreement matures on October 23, 2026, and provides $45.0 million in aggregate commitments for secured revolving loans (the “Revolving Credit Facility”). The Loan Agreement also allows the Operating Partnership, subject to the satisfaction of certain conditions, to request additional revolving incremental loan commitments up to a specified amount. The Loan Agreement is subject to certain liquidity and operating covenants and includes customary representations and warranties, affirmative and negative covenants and events of default. There were no amounts outstanding under the Loan Agreement as of March 31, 2024.

Current wording

In October 2023, our Operating Partnership entered into a loan and security agreement (the “Loan Agreement”) with a federally regulated commercial bank, as lender and as agent for lenders that become party thereto from time to time. The Loan Agreement matures on October 23, 2026, and provides $50.0 million in aggregate commitments for secured revolving loans (the “Revolving Credit Facility”). The Loan Agreement also allows the Operating Partnership, subject to the satisfaction of certain conditions, to request additional revolving incremental loan commitments up to a specified amount. The Loan Agreement is subject to certain liquidity and operating covenants and includes customary representations and warranties, affirmative and negative covenants and events of default. There were no amounts outstanding under the Loan Agreement as of June 30, 2024.

Previous wording

Subsequent to March 31, 2024, we sold a property in Los Angeles, California for $9.1 million (excluding closing costs), received a lease termination fee from the tenant concurrent with the closing of $3.9 million and received tenant reimbursement of our closing and other costs related to the sale of the property.

Current wording

In May 2024, we sold a property in Los Angeles, California for $9.1 million (excluding closing costs), received a disposition-contingent lease termination fee from the tenant concurrently with the closing of $3.9 million and received tenant reimbursement of our closing and other costs related to the sale of the property.

Previous wording

We expect to meet our liquidity needs through cash and investments on hand, cash flows from operations, our Revolving Credit Facility and cash flow from sources discussed above. We believe that our liquidity and sources of capital are adequate to satisfy our cash requirements. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet our liquidity needs. Our investment guidelines also provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at the time of any new borrowing, subject to our board of directors’ discretion.

Current wording

We expect to meet our liquidity needs through cash and investments on hand, cash flows from operations, draws on our Revolving Credit Facility and cash flow from sources discussed above. We believe that our liquidity and sources of capital are adequate to satisfy our cash requirements. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet our liquidity needs. Our investment guidelines also provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at the time of any new borrowing, subject to our board of directors’ discretion.

Previous wording

The following table describes the dividends declared by the Company during the three months ended March 31, 2024:

Current wording

The following table describes the dividends declared by the Company during the six months ended June 30, 2024:

Previous wording

Additionally, as of March 31, 2024, we had (1) $24.1 million outstanding in commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease; (2) $6.8 million outstanding in commitments related to contracts with vendors for improvements at our properties, which are expected to be incurred by December 31, 2024; and (3) $1.0 million outstanding in commitments to fund a construction loan. The commitments discussed in this paragraph are excluded from the table of contractual obligations above, as improvement allowances generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease, there is no explicit time frame for incurring the obligations related to our contracts with vendors, and construction loan funding generally may be requested by the borrower from time to time, subject to satisfaction of certain conditions.

Current wording

Additionally, as of June 30, 2024, we had (1) $52.2 million outstanding in commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease; (2) $2.5 million outstanding in commitments related to contracts with vendors for improvements at our properties, which are expected to be incurred by December 31, 2024; and (3) $1.0 million outstanding in commitments to fund the Construction Loan. The commitments discussed in this paragraph are excluded from the table of contractual obligations above, as improvement allowances generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease, there is no explicit time frame for incurring the obligations related to our contracts with vendors, and Construction Loan funding generally may be requested by the borrower from time to time, subject to satisfaction of certain conditions.

Previous wording

Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, depreciation, amortization and impairment related to real estate properties, and after adjustments for unconsolidated partnerships and joint ventures.

Current wording

Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, depreciation, amortization and impairment related to real estate properties, and after adjustments for unconsolidated partnerships and joint ventures. The Company also excludes the disposition-contingent lease termination fee relating to the sale of our property in Los Angeles, California.

Previous wording

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.

Current wording

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.

Previous wording

For the three months ended March 31, 2024 and 2023, FFO (diluted), Normalized FFO and AFFO, and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock. As a result, for purposes of calculating FFO (diluted), cash and non-cash interest expense of the Exchangeable Senior Notes was added back to FFO, and the total diluted weighted-average common shares outstanding increased by 38,079 and 102,210 shares for the three months ended March 31, 2024 and 2023, respectively, which were the potentially issuable shares as if the Exchangeable Senior Notes were exchanged at the beginning of the period.

Current wording

For all periods presented other than the three months ended June 30, 2024, FFO (diluted), Normalized FFO and AFFO, and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock as if the Exchangeable Senior Notes were exchanged at the beginning of the respective reporting period. The Exchangeable Senior Notes matured in February 2024.

Previous wording

For the three months ended March 31, 2024 and 2023, the performance share units (“PSUs”) granted to certain employees were not included in dilutive securities as the performance thresholds for vesting of the PSUs were not met as measured as of the respective periods.

Current wording

Performance share units (“PSUs”) granted to certain employees were included in dilutive securities to the extent the performance thresholds for vesting of the PSUs were met as measured as of the end of each respective period.

Previous wording

The table below is a reconciliation of net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the three months ended March 31, 2024 and 2023 (in thousands, except share and per share amounts):

Current wording

The table below is a reconciliation of net income attributable to common stockholders to FFO, Normalized FFO and AFFO for the three and six months ended June 30, 2024 and 2023 (in thousands, except share and per share amounts):

Previous wording

We continually evaluate the estimates and assumptions we use to prepare our consolidated financial statements. Our critical accounting estimates are defined as accounting estimates or assumptions made in accordance with GAAP, which involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations. The following critical accounting estimates discussion reflects what we believe are the most significant estimates and assumptions used in the preparation of our consolidated financial statements. This discussion of our critical accounting estimates is intended to supplement the description of our accounting policies in the footnotes to our condensed consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates and assumptions. For further discussion of our significant accounting policies, see Note 2 “Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements” to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2023 and to our condensed consolidated financial statements included in this report.

Current wording

We continually evaluate the estimates and assumptions we use to prepare our consolidated financial statements. Our critical accounting estimates are defined as accounting estimates or assumptions made in accordance with GAAP, which involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations. The following critical accounting estimates discussion reflects what we believe are the most significant estimates and assumptions used in the preparation of our consolidated financial statements. This discussion of our critical accounting estimates is intended to supplement the description of our accounting policies in the footnotes to our condensed consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates and assumptions. For further discussion of our significant accounting policies, see Note 2 “Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements” to our consolidated financial statements in

Previous wording

We account for our leases under Accounting Standards Codification 842, Leases, which requires significant estimates and judgments by management in its application. Upon lease inception or lease modification, we assess the lease classification of both the land and building components of the property. The determination of lease classification requires the calculation of the rate implicit in the lease, which is driven by significant estimates relating to the unguaranteed residual value of the assets at the end of the non-cancelable lease term. A decrease of 5% in the estimated unguaranteed residual value of our properties would result in changes to the lease classification of one lease that was modified during the three months ended March 31, 2024.

Current wording

We account for our leases under Accounting Standards Codification 842, Leases, which requires significant estimates and judgments by management in its application. Upon lease inception or lease modification, we assess the lease classification of both the land and building components of the property. The determination of lease classification requires the calculation of the rate implicit in the lease, which is driven by significant estimates relating to the unguaranteed residual value of the assets at the end of the non-cancelable lease term. A decrease of 5% in the estimated unguaranteed residual value of our properties would result in changes to the lease classification of one lease that was modified during the six months ended June 30, 2024.

Previous wording

cash flow over the anticipated holding period. If the estimated undiscounted future cash flow is less than the net carrying amount of the real estate asset, we perform an impairment loss calculation to determine if the fair value of the real estate asset is less than the net carrying value of the real estate asset. Our impairment loss calculation compares the net carrying amount of the real estate asset to the real estate asset’s estimated fair value, which may be based on estimated discounted future cash flow calculations or third-party valuations or appraisals. We recognize an impairment loss if the amount of the asset’s net carrying amount exceeds the asset’s estimated fair value. If we recognize an impairment loss, the estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis would be depreciated (amortized) over the remaining useful life of that asset. If a real estate asset is designated as real estate held for sale, it is carried at the lower of the net carrying value or estimated fair value less costs to sell, and depreciation ceases.

Current wording

When we evaluate for potential impairment our real estate assets to be held and used, we first evaluate whether there are any indicators of impairment. If any impairment indicators are present for a specific real estate asset, we then perform an undiscounted cash flow analysis and compare the net carrying amount of the real estate asset to the real estate asset’s estimated undiscounted future cash flow over the anticipated holding period. If the estimated undiscounted future cash flow is less than the net carrying amount of the real estate asset, we perform an impairment loss calculation to determine if the fair value of the real estate asset is less than the net carrying value of the real estate asset. Our impairment loss calculation compares the net carrying amount of the real estate asset to the real estate asset’s estimated fair value, which may be based on estimated discounted future cash flow calculations or third-party valuations or appraisals. We recognize an impairment loss if the amount of the asset’s net carrying amount exceeds the asset’s estimated fair value. If we recognize an impairment loss, the estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis would be depreciated (amortized) over the remaining useful life of that asset. If a real estate asset is designated as real estate held for sale, it is carried at the lower of the net carrying value or estimated fair value less costs to sell, and depreciation ceases.

Previous wording

For each property where such an indicator occurred, we completed an impairment evaluation. After completing this process, we determined that for each of the operating properties evaluated, undiscounted cash flows over the holding period were in excess of carrying value and, therefore, we did not record any impairment losses for these properties for the three months ended March 31, 2024 and 2023. Significant adverse changes in the critical accounting estimates used in the impairment evaluation are required for the undiscounted cash flows over the holding period to be less than the carrying value as of March 31, 2024.

Current wording

For each property where such an indicator occurred, we completed an impairment evaluation. After completing this process, we determined that for each of the operating properties evaluated, undiscounted cash flows over the holding period were in excess of carrying value and, therefore, we did not record any impairment losses for these properties for the three and six months ended June 30, 2024 and 2023. Significant adverse changes in the critical accounting estimates used in the impairment evaluation are required for the undiscounted cash flows over the holding period to be less than the carrying value as of June 30, 2024.

Previous wording

The U.S. economy has experienced a sustained increase in inflation rates in recent years. We enter into leases that generally provide for fixed increases in rent. During times when inflation is greater than the fixed increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation. Our Revolving Credit Facility bears interest at a variable rate based on the greater of the prime rate and an applicable margin and a stipulated interest rate; therefore, if interest rates increase, our required payments on any amounts outstanding on our Revolving Credit Facility may also increase. As of March 31, 2024, we had no outstanding borrowings on our Revolving Credit Facility.

Current wording

The U.S. economy has experienced a sustained increase in inflation rates in recent years. We enter into leases that generally provide for fixed increases in rent. During times when inflation is greater than the fixed increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.