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spk03: Stand by, we're about to begin. Good day and welcome to the New Lake Capital Partners Second Quarter 2022 Earnings Conference Call. Today's conference is being recorded. For opening remarks, I would now like to turn the conference over to Walter Pinto, Managing Director at KCSA Strategic Communications. Please go ahead.
spk04: Thank you, Operator. Good morning and welcome everyone to the New Lake Capital Partners Second Quarter 2022 Earnings Conference Call. I'm joined today by Anthony Canicola. President and Chief Executive Officer, Lisa Meyer, Chief Financial Officer, and Jared Annenberg, Director of Acquisitions. Before we begin, I'm going to remind everyone that statements made during today's conference call may be deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995. And actual results may differ materially due to a variety of risks and uncertainties and other factors. For a detailed discussion of some of the ongoing risks and uncertainties in the company's business, I refer you to the press release issued this morning and filed with the SEC on Form 8K, as well as the company's 10-Q and other reports filed periodically with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements as a result of new information, future events, or otherwise. FFO and AFFO are supplemental non-GAAP financial measures used in the real estate industry to measure and compare the operating performance of real estate companies. The reconciliation containing adjustments from GAAP net income available to common shareholders to FFO and AFFO and definitions of terms are included at the end of our press release. Please refer to the press release for more information. The company's guidance is based on current plans and assumptions and subject to the risks and uncertainties more fully described in the company's filings with the U.S. Securities and Exchange Commission. This outlook reflects management's view of current and future market conditions and including assumptions such as the pace of future acquisitions and best decisions, rental rates, occupancy levels, leasing activity, uncollectible rents, operating and general administrative expenses, weighted average diluted shares outstanding, and interest rates. With that, it's my pleasure to turn the call over to Mr. Anthony Coniglio. Please go ahead.
spk07: Thank you, Walter, and thank you again to everyone for joining our call today. We're very pleased with the achievements our team has made thus far in 2022. Amidst a challenging macro environment across all industries and a slowing of growth more recently in the cannabis sector, we were able to declare a 2022 second quarter dividend of 35 cents per share. That reflects our fifth consecutive quarterly dividend increase and $1.40 per share annualized. With the investments we made in the second quarter, We now have fully invested the proceeds from last year's IPO. Recently, we increased our credit facilities from $30 million to $90 million at very attractive interest rates. And we're very proud of these accomplishments, which we believe are a testament to our team, our model, and our disciplined approach. We recently appointed Lisa Meyer as Chief Financial Officer, and I transitioned to Chief Executive Officer, succeeding David Weinstein, who will remain on our board. On behalf of our company, I would like to congratulate our former CFO, Fred Starker, for a long and successful career and on his retirement. And we want to thank David Weinstein for leading the company through our transformative merger in March of 21 and our IPO. The board of directors and the entire New Lake team wish both of them the best and thank them for their contributions to the company. We're so excited to see Lisa join our team and bringing extensive experience providing financial leadership to various public and private entities in the real estate industry. Turning to the macro environment we're operating in, we all know there are many factors negatively impacting the economy, in particular, consumer inflation. While inflation is positive for REITs such as New Lakes, By increasing the replacement costs of our properties and creating more value for our in-place rents, we think that the persistent and elevated level of consumer inflation is having a particularly negative impact on what was already a difficult operating environment for cannabis operators. We anticipate this environment to continue for some time and see few catalysts for a reversal of the trends in the near term. This perspective certainly impacts our investment decisions, and we will continue to apply our conservative underwriting approach as we evaluate pipeline opportunities. This approach has served us well thus far, and we've collected all rent due on time since the inception of our company. While we're proud of that track record, we can tell you from decades of experience across our team in the net lease industry that difficult operating environments, such as what we're seeing across the economy, but acutely in the cannabis sector, those will result in tenant challenges that our team will work diligently to resolve as they arise. Tenant difficulties are not new in the net lease arena, and the cannabis industry certainly has not been immune to this part. Part of our strategy is to mitigate any negative impacts on the portfolio by focusing on limited license jurisdictions where we believe there will be demand for our properties. Our portfolio consists of some of the top MSOs in the industry, such as Curaleaf, Trulieve, and Cresco, to name a few. We believe our focus on high-quality operators and properties in limited licensed states will serve us well during this volatile period for this industry. Our team dialogues constantly with our tenants and works closely with them to understand the factors driving their business, particularly at our properties. While the industry is encountering significant headwinds, we continue to believe in the long-term fundamentals of the cannabis industry. Converting an $80 billion illicit cannabis market into a legal cannabis market will certainly have its ebbs and flows, but we believe the long-term trend of consumers purchasing cannabis in a regulated environment is firmly in place. Most high-growth industries encounter volatility often exacerbated by adverse economic conditions, and cannabis is no different. We'll use our collective experience in real estate, cannabis, and financial services to navigate these volatile times and deliver long-term value for our shareholders. Turning to some current performance, we're very pleased with our year-over-year growth in revenue and AFFO. Total revenue for the 2022 second quarter increased 59% year-over-year to $10.5 million, and Q2 AFFO increased approximately 80% year-over-year to $8.7 million, demonstrating the operating leverage of our business model. Our second quarter dividend was $0.35 a share, or $1.40 annualized, and our long-term expected target AFFO payout ratio remains 80% to 90%. During the second quarter, we acquired two properties from a leading publicly traded US MSO and amended an existing lease with another leading publicly traded US MSO to fund an already completed expansion. We also purchased a property with a high quality private MSO. As a result of these transactions, we've added a new publicly listed MSO tenant partner, a new private MSO partner, and we've added a new market to our portfolio, and importantly, we've taken advantage of built-in growth in our portfolio. As I mentioned earlier, it's a difficult operating environment for cannabis operators. While we've received 100% of rent on time, we're monitoring our tenants closely, particularly in markets such as Pennsylvania and Massachusetts that have seen a significant reduction in cannabis pricing driven by a meaningful increase in production capacity. This volatile price environment highlights the benefits of vertical integration, and we have indeed seen greater revenue declines for non-vertically integrated platforms. I would note that approximately 90% of our capital is invested in properties where the operator is vertically integrated in the state. We always consider price compression in our underwriting, and we utilize quarterly property-level financial information we receive to vigilantly observe financial performance at our properties, allowing us to identify emerging financial pressures. As we've observed a more difficult operating environment for cannabis operators over the past six to nine months, we have not only become more conservative on our underwriting, but we have also been focusing on strategies to mitigate risk across the portfolio. As I've said many times previously, While we're proud of our track record in collecting 100% of rent on time since inception, it's just a matter of time until we have a tenant issue to focus on. And when that time comes, our team is well prepared to address any issues that may arise in the portfolio. Before I turn the call over to Jarrett to discuss our portfolio, I'd like to comment on our pursuit to uplist our company onto a national exchange such as NASDAQ or New York. We know this is an important topic for our investors and we've been focused on it during the course of the year. While dialogue is ongoing and we continue to pursue an up list, we're obviously less optimistic today than we were when we started the process in the first quarter. We will continue our efforts, but we do want to caution investors not to expect an up list to occur without some regulatory relief or change in legal status of cannabis. With that, I'll hand it over to our Director of Acquisitions, Jarrett Annenberg, to walk through our portfolio in more detail. Jarrett, over to you. Thanks, Anthony.
spk05: As we look at the portfolio today, we have committed a total of $421.6 million across 12 states with 12 tenants, inclusive of one tenant that we provided with a loan, along with a sale leaseback, representing approximately 1.7 million square feet. As of June 30th, our portfolio had a weighted average lease term remaining of 14 and a half years and approximate 12.2% current yield with built-in growth through unfunded tenant improvements and lease escalators. As of June 30th, we had approximately 12.2 million in unfunded commitments and a 16 and a half million dollar purchase option representing approximately 235,000 square feet of properties under development. With that overview, let us look into the most recent results from the top five tenants in our portfolio, which represent 66% of Nulex revenue. Our largest tenant, Curaleaf, announced Q2 earnings on Monday, where the company stated Q2 revenue of $338 million, up 8% sequentially, and adjusted EBITDA of $86 million, an 18% sequential increase. Additionally, Curaleaf generated $12 million of positive operating cash flow for the first half of 2022, and has $187 million of cash on the balance sheet. CureLeaf should continue to benefit in the second half of 2022, being one of only seven licensees in New Jersey to open for recreational sales. Our second largest tenant, Cresco, will announce Q2 results next week. The company's Q1 revenue was $214 million, and they had adjusted EBITDA $50.7 million for the quarter. On March 31st, they had $179 million of cash on the balance sheet. Cresco continues to be the leader in the Illinois market, where we own their largest cultivation facility. Additionally, the company announced earlier this year the acquisition of another one of our tenants, Columbia Care. Our third largest tenant, Revolutionary Clinics, is private. So as usual, we can't share specific financial information here. We own their cultivation facility in Massachusetts, a state which has seen significant compression in wholesale pricing, as incremental cultivation capacities come online. Revolutionary Clinics is vertically integrated in the state, with three well-situated medical dispensaries in the Boston metro area, providing the company with the ability to absorb some pricing volatility through its retail channel. The company expects to open two additional adult-use retail locations by the end of the year, further boosting revenues and diversifying away from wholesale. Our fourth largest tenant is Trulieve. The company reported Q2 earnings this morning. Q2 revenue was $320 million, up 49% from last year and 1% sequentially. Trulieve generated $110 million of adjusted EBITDA during the quarter and reported a cash balance of $181 million as of June 30th. They continue to integrate the harvest acquisition and have one of the largest dispensary footprints in the industry. Rounding out our top five tenants is Columbia Territory. They report Q2 earnings next week. For Q1, the company reported revenue of $123 million and recorded adjusted EBITDA of $16.8 million. The company had $168 million of cash on the balance sheet as of March 31st. We expect second half 2022 results to benefit from ColumbiaCare also being one of the seven operators approved to launch recreational sales in New Jersey. As I mentioned earlier, ColumbiaCare is being acquired by Cresco. the transaction has been approved by shareholders, but remains subject to state-by-state regulatory approval. Now, in addition to tracking our tenants at the guarantor level, as Anthony mentioned, we also monitor performance on a property level basis each quarter, as it is important to understand our tenants' ability to generate cash flow from each individual property. The metric we use most is four-wall or EBITDA coverage. For Q1, our average EBITDA coverage in our 16 operating dispensary locations was approximately 11 times, and our average EBITDA coverage across the 11 operating cultivation facilities was approximately 5.4 times. Please note that all companies report property level financials differently, so we do use some estimates in our tracking to make for a true comparison. While our properties are performing well, we are seeing coverages reduce in the markets we expected, namely Massachusetts and Pennsylvania. In Massachusetts, while there are caps on both cultivation capacity and number of dispensaries owned, there has been significant price compression as incremental cultivation capacity came online in the past year. Prices have dropped from $3,500 per pound at the end of 2021 to $2,000 per pound in July. In Pennsylvania, wholesale prices have dropped from $3,400 a pound at the end of 2021 down to $2,200 per pound today. This price compression has been especially difficult on independent operators whose license does not provide for vertical integration, and therefore they are unable to sell product through their own stores, creating not only price compression, but excess inventory as many MSOs bring additional cultivation capacity online and deliver product to their own dispensaries. The only two properties we own where the operator is not vertically integrated in the state are in Pennsylvania. One is Acreage, which we believe is performing well by leveraging its multi-state relationships with other MSOs operating in the state. The other is Calypso, which recently converted from a loan to a sale-leaseback transaction as expected. Calypso announced a headcount reduction last week in an attempt to right-size their business. The company has been actively pursuing a sale process as well. We have been observing a deterioration in their sales over the past number of months and have been in regular dialogue with the company. Calypso has paid 100% of rent due to date. There's also been a lot of discussion in the industry lately about California and Michigan, two unlimited licensed states that also experienced significant price compression with wholesale pricing dropping below $1,000 a pound. We don't own any property in Michigan, and we only own one property in California, which is the Columbia Care Dispensary in the limited licensed jurisdiction of San Diego, where there are only 36 dispensaries allowed for a population of 3.3 million people. ColumbiaCare is vertically integrated in California, and EBITDA coverage at the dispensary we own is performing well and consistent with our original underwriting when we closed the transaction. As Anthony said, our underwriting always assumes a level of price compression, since we always expected competition would increase in these markets. We will continue to work with our tenants and monitor their progress as they work through this challenging environment. A core part of our thesis was to focus on limited license states where demand for licenses will serve to mitigate the severity of any potential defaults, especially in states like Pennsylvania, where the upside of adult use is on the horizon. The macroeconomic environment and stock market volatility have had an impact on liquidity and ability for operators to access growth capital. As you might expect, this has resulted in a robust pipeline for us across the operator spectrum, from the largest multi-state operators to single-state companies. We will continue to focus on high-quality operators and approach this investment environment very conservatively. With that, I'll hand it over to our CFO, Lisa Meyer, to walk through our financial results in more detail.
spk02: Lisa?
spk00: Thank you, Jerry.
spk01: Total revenues for the second quarter of 2022 totaled $10.5 million, an increase of approximately $3.9 million, or 59%, compared to $6.6 million for the three months ended June 30th, 2021. ASFO for the second quarter of 2022 totaled $8.7 million, which excludes the impact of one-time severance costs of $1.6 million compared to $4.9 million for the same period in the prior year. This year-over-year increase in ASFO demonstrates the power of our business model to leverage expense base and grow earnings for investors as we deploy our capital. On a sequential basis, revenue increased 3.3% from the first quarter of 2022, as we invested $10.9 million during the second quarter through the acquisition and TI funding for C3 Industries in Missouri. The $20.1 million of TI funding securely occurred in mid-June, and the acquisition we announced for the AIR strategy of $13.6 million in Nevada and $14.5 million in Pennsylvania closed on the last day of the quarter. Therefore, the full revenue impact of these transactions will occur in our third quarter results. Our general and administrative expenses for the three months ended June 30th of 2022 increased by approximately $3.9 million compared to approximately $1.8 million for the three months ended June 30th of 2021. The increase in general administrative expenses was primarily due to the one-time severance costs related to the separation agreement of two executive officers. Such agreements were contemplated as part of the succession plan at the time of the company merger in 2021. While the one-time severance costs did not impact ASFO, they did impact net income attributable to common shareholders, and FFO, attributable to common shareholders. Net income attributable to common shareholders for the three months ended June 30, 2022, increased to $3.8 million, compared to net income attributable to common shareholders of $2.8 million for the same period in 2022. For the second quarter of 2022, FFO attributable to common shareholders was approximately $6.5 million compared to $4.8 million in the prior year. On March 15, 2022, the company declared a second quarter 2022 cash dividend of 35 cents per share of common stock, equivalent to an annualized dividend of $1.40 per share of common stock. The dividend was paid on July 15th, 2022 to stockholders of record at the close of business on June 30th of 2022. Looking ahead, the company continues to expect full-year revenue to be in the approximate range of $42 to $44 million and G&A exclusive of one-time severance costs and potential uplisting restructuring costs. would be approximately $7 million to $7.2 million.
spk00: With that, I will turn the call over to the operator for questions.
spk03: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 if you would like to ask a question. And we'll pause for just a moment to allow everyone an opportunity to signal. Once we get that star one, we'll take our first question from John Masoka from Leidenberg Thalmann. Please go ahead.
spk06: Good morning.
spk03: Good morning, John.
spk06: How are you? Good morning, John. Good. Sorry if I cut out. My connection is a little bit choppy here. Maybe on the acquisition front, given what you're seeing in terms of maybe a tougher operating environment for tenants, a tighter capital markets environment, how is that flowing through to cap rates on transactions as you look to the back half of this year, maybe even 23?
spk07: Cap rates are certainly going up compared to where we were six months ago. we are anywhere from 100 basis points to 200 basis points higher. I think if you were to look even where debt is trading for the operators, you'd see that debt is trading higher, inflation is higher. And so, of course, that's having an impact on cap rates and the risk profile as well as increasing.
spk06: Okay. And speaking of risk profile, you kind of mentioned Calypso. Maybe what's the long-term outlook for them um in that property and i guess as you think about a theoretical world where maybe you have a tenant default not necessarily specifically calypso but you know someone similar what's kind of the recovery process and outlook as it stands today yeah yeah first i'd say that as we said in the prepared remarks um tenant difficulties is nothing new in the net lease space it's part and parcel to operating our business
spk07: And we never expected that our business would not have its share of tenant issues. With that said, we don't think it's actually appropriate to comment specifically on Calypso. The company, as we said, is in a sale process. But what we will say is that we believe that the license and the facility are very attractive, especially as the Pennsylvania market sets up for adult use. And so in all of these situations where you have tenant difficulty, We're always going to look to re-tenant that property with another cannabis operator. So we're very focused on that approach.
spk06: Okay. And then can you provide any color maybe? It seems like in terms of an uplisting, you're less optimistic than last earnings call. Is there anything specific that's changed? Just kind of maybe kind of why the change in sentiment on uplisting?
spk07: It would have to do with the length of the dialogue and the lack of traction that we've been able to make thus far. We would have expected when we launched this process in the first quarter that we would have been much farther along than where we are today. And given where we sit today, we thought it was prudent to provide the comments that we did about it. We don't want to, we want to manage expectations. and not let people continue to think that we're having this robust dialogue when it's moving much slower than we would like.
spk06: But I guess there isn't anything maybe specific that you've been told by, you know, the exchanges or lawyers, regulators, whoever it may be, that kind of indicates this process couldn't come to a successful conclusion. It's just that, you know, it's just timing in terms of that taking longer.
spk07: I don't want to get into the direct dialogue between us and any particular exchange. Let's just leave it at, we're not at the point where we feel confident to signal to investors that we think this is likely to occur. And so while we'll continue the process, we wanted to moderate expectations.
spk06: Okay. And then obviously the, the, the, Revolver gives a significant amount of runway here for capital deployment. But maybe even as you look beyond the capacity on the Revolver, what's the market like for additional debt to fund future growth? And I guess how attractive is that versus any kind of alternative form of financing?
spk07: Yes. So we have plenty of capacity, as you mentioned. We have $89 million in capacity. under our credit facility. We do think there is incremental capacity out there that we'll be able to add if we see the need to add banks in the future. As we currently sit here today, we think there is indeed some more capacity available to us should we need it. And in terms of raising additional capital, we think that we have a little bit of room to run here with the debt. We certainly aren't interested in diluting shareholders and issuing stock below book value, we think we can continue to fund our intermediate needs on the investing side through the issuance of debt.
spk06: And I guess, obviously, there's not a near-term need, so maybe this is a bit of a hypothetical question, but pricing today versus what you have in place on the revolver?
spk07: The banks that have come into our facility were on the same pricing and the same terms as when we closed it in May. And that's at a 5.65 interest rate that is fixed for the first three years and then floats for the last two years of the facility.
spk06: Okay. But no, I mean, because they negotiated it, I'm imagining... Was that agreement kind of reached relatively recently, or is that kind of a holdover from a couple of months ago?
spk07: If you're implying was there any OID or any incremental fees to compensate for the coupon, there was not. That is the deal that we cut a while ago, and that is the deal that the banks participated in.
spk06: Okay. That's it for me. Thank you very much.
spk03: Thanks. Thank you.
spk02: Thank you. And once again, that is star 1 if you would like to ask a question.
spk03: With no additional questions in the queue, I would now like to turn the conference back over to management for any additional or closing remarks.
spk07: Thank you, everybody. We really appreciate you taking the time to hear our earnings call today, and we look forward to future communications. Have a great day. Bye-bye.
spk03: Thank you. That does conclude today's conference. We thank you all for your participation. You may now disconnect.
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