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spk01: Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the New Lake Capital Partners third quarter 2022 earnings conference call. Today's call is being recorded. I will now turn the call over to Val Serpinto, managing director of KCSA Strategic Communications. Please go ahead, sir.
spk02: Thank you, operator. Good morning and welcome, everyone. to the New Lake Capital Partners Third Quarter 2022 Earnings Conference Call. I'm joined today by Gordon Dugan, Chairman of the Board, Anthony Coniglio, President and Chief Executive Officer, Lisa Meyer, Chief Financial Officer, and Jared Annenberg, Director of Acquisitions. Before we begin, I'd like 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 yesterday evening and filed with the SEC on Form 8K, as well as the company's PENQ and other reports filed periodically with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether 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. A complete reconciliation containing adjustments from GAAP net income attributable to common shareholders to FFO and AFFO and definitions of terms are included at the end of our press release. Please refer to that press release for more information. The company's guidance is based on current plans and assumptions and subject to risks and uncertainties more fully described in the company's filing with the U.S. Securities and Exchange Commission. This outlook reflects management's view of current and future market conditions, including assumptions such as the pace of future acquisitions and dispositions, 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. Gordon Dugan. Gordon, please go ahead.
spk06: Thank you, Walter, and thank you, everyone, for joining our call. As we near the conclusion of 2022, I'm very happy with the performance of our business through a challenging macroeconomic environment, and I continue to be bullish on the long-term opportunities for New Lake and our shareholders. We had another strong quarter delivering significant year-over-year growth and declaring our sixth consecutive quarterly dividend increase, announcing a 2022 third-quarter dividend of $0.37 per share or $1.48 annually. As many of you know, the cannabis industry has a number of headwinds, including delays in federal legalization, price compression, and lack of capital availability, to name a few. Some of these favor New Lake, acting as a moat around our business, while some are natural ebbs and flows of an industry maturing and getting to scale. Our belief in the growth of the cannabis industry remains steadfast, and operators will continue to require access to non-dilutive capital to fuel the projected growth of the cannabis industry for many years to come. Earlier this year, I told you our long-term success will be built upon the discipline we continue to exercise when making investment decisions. and that we are focused on quality, not quantity. These continue to be our guiding principles as they have allowed us to have one of the highest quality portfolios in the industry today. We are proud of the rigorous underwriting process we have established and the results it has delivered for our shareholders, as reflected by our very strong third quarter financial results. Additionally, our team has worked diligently to build relationships across the industry and source transactions for strategic cannabis real estate, resulting in a very high quality pipeline. Having said that, we are being cautious in our deployment of capital today as we watch and evaluate the various forces at play in the cannabis industry to make the best investment decisions possible. There is no doubt that converting the estimated $80 billion licit and illicit cannabis market into a federally legal market will take time, but our conviction remains unwavering toward the industry having tremendous attractive long-term value. We do not think about this opportunity in months or quarters as the cannabis sector is still today in its infancy. It will have peaks and valleys like all other nascent industries that experience rapid growth. For example, in the data center industry, we saw early movers with quality transactions reap significant value appreciation, even as the industry experienced the volatility associated with rapid growth. Similarly, we believe our focus on high-quality operators and properties in limited licensed states will serve us well as we continue to execute only the best transactions. Our collective experience in real estate, financial services, and cannabis, in our opinion, sets us apart in the industry and gives us a significant competitive advantage as we navigate these volatile times and deliver long-term value for our shareholders. I would now like to turn the call over to Anthony Coniglio, our Chief Executive Officer.
spk04: Thanks, Gordon, and thank you, everyone, for joining our call today. I have four areas I want to cover on today's call. Our financial results, New Lake's pipeline and quality, the election results and legislative actions, and then lastly, I'll provide an update on our efforts to Uplist. We're very pleased with our third quarter financial results delivering strong year-over-year growth in revenue and AFFO. Total revenue for the quarter increased 50% year-over-year to $12.1 million. compared to $8 million from the prior year quarter. Q3 2022 ASFO increased approximately 75% year over year to $10.6 million as compared to 6.1 million from Q3 2021. For the nine months ended September 30th, 2022, we collected 100% of contractual rent and reported revenue of $32.6 million, a 71% increase from 19.1 million in the first nine months of 2021. AFFO for the first three quarters of 2022 was 27.7 million, up 90% from 14.6 million in the same period last year. As Gordon mentioned, we once again increased our quarterly dividend for the third quarter to 37 cents a share or $1.48 annualized, and our long-term expected target AFFO payout ratio continues to remain between 80 and 90%. Given our operating structure, as we continue to experience growth, our business will scale without having to make significant increases in headcount or other operating expenses, providing us with significant operating leverage. Last quarter, we mentioned that our pipeline for new investments was as robust as we've seen, and this pace has not slowed. However, during the third quarter, we remained patient and very selective in the transactions we evaluated as challenges remain at the industry, operator, and state level. We're in a fortunate position to have a significant capital available to us and to be selective in investing that capital with only the best operators in the industry that meet all of our rigorous underwriting requirements. We're proud of the quality of our investments and our track record of having industry-leading rent collection since inception of our company. With that being said, we have consistently communicated that any net lease business with a 14-year remaining average lease term will encounter tenant disruptions at some point. We are seeing that across the industry, and we previously discussed that we've been closely watching tenants in Pennsylvania and Massachusetts, particularly those that are not vertically integrated. Jarrett will provide us with more detail on the portfolio, but I want to reiterate that when the time comes for a tenant disruption, our team will be well prepared to address those issues and minimize the impact on our portfolio. We think it's also important to note that we are active in the management of our portfolio to proactively minimize risk. We are hands-on, working with our tenants and industry participants more broadly, understand the operating environment and continually reassess the risk profile of our investments and our broader strategy. From time to time, we'll work with our tenants to identify opportunities to reposition assets. Jarrett will walk us through a few examples. This is the behind the scenes work that optimizes long-term value for shareholders. Turning to election results from earlier this week, the industry saw less success than in previous election cycles. On Tuesday, voters approved adult-use cannabis in Missouri and Maryland while rejecting similar measures in Arkansas, North Dakota, and South Dakota. We are thrilled for our Missouri tenants and see this legalization as a meaningful boost to their business outlook and long-term credit quality. Yes, it is disappointing the industry didn't have a clean sweep at the ballot box, but it's noteworthy that this cycle saw cannabis on the ballot in some very red states. Overall, looking at the results, there is clear movement among the electorate in these states towards legalization. Many also ask how these results will impact federal legislation and specifically the prospects of the safe banking bill. While getting ever closer, I am worried that the crowded legislative calendar and the lamed-up session will not be conducive to passing the safe banking bill. Notwithstanding a likely delay in safe banking, the existing fundamentals supporting the cannabis industry are already well-entrenched, and momentum is certainly building for legalization as consumers and the industry demand reform. The stigma and tone towards cannabis has been evolving quickly as more states shift their policies towards adult use. And perhaps the greatest example of this shift in sentiment is the recent pardon made by President Biden for federal convictions of simple possession of marijuana. New Jersey is another great example. In only eight short months after legalizing adult use, it is projected that this state alone is on a $1 billion run rate. meaning significant consumer demand for the product. So our view is the march towards federal legalization is well underway, and this week's election results reaffirm our investment thesis and the great long-term opportunity in cannabis real estate. Before turning the call over to Jarrett to provide more details on an operator-by-operator basis, I would like to make a comment regarding uplifting the company onto a national exchange. We know this is an important topic for all of our investors, including management who own a meaningful percentage of the company. We remain focused on investigating all possible solutions as we continue our efforts to unlock shareholder value. But given the progress that has remained the same for an extended period of time, I do want to reiterate my caution to investors to not expect an uplist to occur without regulatory relief or a change in legal status of cannabis. With that, I'll hand it over to our Director of Acquisitions, Jared Annenberg, to walk through our portfolio in more detail. Jared, over to you. Thanks, Anthony.
spk05: As of today, we have committed a total of $404 million across 12 states with 13 tenants, inclusive of one tenant that has been provided with a loan, along with a sale leaseback, representing approximately 1.6 million square feet covered. As of September 30th, Our portfolio had a weighted average lease term remaining of 14.9 years and an approximately 12.2% current yield with built-in growth through unfunded tenant improvements and lease escalators. Currently, we have approximately $4.7 million in unfunded commitments, the majority of which is for a 100,000-square-foot grounded cultivation facility in Phoenix for the Mint, which I will touch on in more detail momentarily. Additionally, we have a $16.5 million option, to fund a 60,000 square foot ground-up expansion project in Missouri. With that overview, let us look into the most recent results from the top five tenants in our portfolio, which represent 64% of New Lake's revenue. Our largest tenant, Curaleaf, announced Q3 earnings on Tuesday, with the company's stated Q3 revenue of $340 million, up 1% sequentially, and adjusted EBITDA of $84 million, an 18% year-over-year increase. Additionally, CureLeaf generated $60 million of positive operating cash flow in the third quarter and has $189 million of cash on the balance sheet. This past quarter, we worked with CureLeaf to transfer their Arkansas dispensary to Greenlight, an MSO based in Missouri, and we were excited about this new tenant relationship as Greenlight looks to expand across the Midwest. Our second largest tenant, Cresco, will announce Q3 results next week. The company's Q2 revenue was $218 million, and they had adjusted EBITDA of $51 million for the quarter, an 11% increase year over year. At June 30th, they had $90 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, Cresco continues to move forward with their acquisition of another one of our tenants, ColumbiaCare, which they have indicated will close this year. 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. As a reminder, Revolutionary Clinics is vertically integrated in the state with three well-situated medical dispensaries in the Boston metro area, and we expect them to open two adult use stores in 2023. RevClinics has been able to compete effectively while the market has experienced price compression, by partnering with exciting brands such as Big Papi and Kiva. Our fourth largest tenant is Trulieve. The company reported Q3 earnings yesterday. Q3 revenue was $301 million, up more than 34% year-over-year. Trulieve generated $99 million of adjusted EBITDA during the quarter and reported a cash balance of $114 million at September 30th. Rounding out our top five tenants is ColumbiaCare. They report Q3 earnings next week. For Q2, the company reported revenue of $130 million and recorded adjusted EBITDA of $12 million. The company had $81 million of cash on the balance sheet as of June 30th. Columbia Care and Cresco announced last week they had a definitive agreement to sell assets in Illinois, Massachusetts, and New York. While we expect the divestitures to include some properties in our portfolio, we've not received any formal notice from either party. Our rights under our standard lease documents will ensure that our tenant and guarantor are well capitalized. We expect the transaction to close by the end of the year, as both ColumbiaCare and Cresco have stated. Additionally, we continue to closely monitor our tenant's performance on a property-level basis. As I noted last quarter, the main metric we use is four-wall or EBITDA coverage. calculated as EBITDA plus rent divided by rent. For Q2, our average EBITDA coverage in our 16 operating dispensary locations was approximately 10 times, and our average EBITDA coverage across the 12 cultivation facilities that have been operational for more than a quarter was approximately five 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 and have four-wall coverages significantly above averages in other triple net rate industries, we did see slight reductions in coverage as macroeconomic inflation coupled with price compression has reduced margins. This is not surprising, and as we have mentioned before, we underwrite all transactions with the expectation of price compression over time. Last quarter, we touched on the difficulties we are seeing in the Massachusetts and Pennsylvania markets. and we wanted to provide a high-level update. In Massachusetts, we are starting to see some price stabilization at the wholesale level due to most of the additional capacity having already come online. Wholesale prices have hovered in the $2,000 per pound range for quality indoor products for the past few months, still in excess of the cost of production. In Pennsylvania, we continue to see the price compression at the wholesale level during Q3. with prices dropping below $2,000 per pound. This continues to more negatively affect independent operators who cannot sell products through their own stores and pick up the additional margin through retail. We are seeing operators adapt to this environment and we expect the pricing declines to decelerate over the next few months. As Anthony noted, we are in consistent dialogue with our tenants and industry stakeholders to actively manage and optimize our portfolio. One example is a transaction we closed last week with one of our tenant partners, Pharmacan, in Ohio. To give context, in Q1 of 2020, we executed a portfolio deal with Pharmacan for three dispensaries, one of which was a build-a-suit project in Franklin, Massachusetts. As Pharmacan finalized the permit process, it became clear to both New Lake and Pharmacan that the location's value had declined due to competitors opening up more quickly in the area. In Q1 of this year, we sold the land back to Pharmacam, agreeing to find a substitution property. Last two weeks ago, we closed on an operational dispensary in Wapakoneta, Ohio, that generates significant revenue as it is the only dispensary within 40 miles. A better outcome for our tenant and a better risk profile for us with quality EBITDA coverage. Another example is from 2021, when we worked with Cure Relief to substitute two underperforming dispensaries in Oklahoma with two quality dispensaries in the limited licensed states of Illinois and North Dakota. It was apparent to us that the Oklahoma market was going to deteriorate, and we worked hard to reposition our capital from what is now a very difficult market into better limited licensed states. Currently, we have only one non-operational project under construction. representing 3 million of our total TI remaining, which is 100,000 square foot ground up indoor cultivation and processing facility with the Mint in Phoenix, Arizona. Anthony and I visited the site a few weeks ago, and while there have been delays due to resource availability in Phoenix, specifically a delay in pouring concrete, they are making significant progress. We also worked with the Mint early on in the process to order materials in advance, so the majority of the building is already on site and we don't expect more significant delays. Moving to pipeline, we continue to see significant deal flow, and I want to echo Gordon and Anthony that we continue to be very diligent as we evaluate opportunities. With inflation and rising interest rates, the cost of capital has risen for operators. In looking at a few recent debt transactions, The effective cost of capital is in the 13% to 15% range, even for the top multi-state operators. The relationships that we have built over the past four years have made us a go-to source for growth capital in the industry, as we have proven ourselves to be reliable partners. We currently have over $90 million of capital available, and we are excited about the opportunities in front of us to grow our portfolio. With that, I'll hand it over to our CFO. Thank you. Lisa Meyer, to walk through our financial results in more detail. Lisa?
spk00: Thank you, Jared. Total revenues for the third quarter of 2022 totaled $12.1 million, an increase of approximately $4 million, or 50%, compared to $8 million for the three months ended September 30th, 2021. On a sequential basis, revenue increased 15% from the second quarter of 2022. as we invested $4.7 million during the quarter through TI funding and recognize a full quarter of revenue from the $20.1 million of TI funding to CureLeave that occurred in mid-June and the AIR strategies acquisitions of $13.6 million in Nevada and $14.5 million in Pennsylvania that closed on the last day of the second quarter. Our general and administrative expenses, excluding stock-based compensation for the three months ended September 30, 2022, decreased by approximately $1 million, compared to the same period in the prior year. The decrease in general and administrative expenses was primarily due to lower professional fees, mainly from the elimination of our outsourced accounting function, lower DNO insurance, and lower non-recurring legal fees. Net income attributable to common shareholders for the third quarter increased to $6.5 million compared to net income attributable to common shareholders of $2.7 million for the same period in 2021. For the third quarter of 2022, SFO increased to $10.3 million compared to $5.2 million in the prior year. ASFO for the third quarter of 2022 increased 75% to $10.6 million, compared to $6.1 million for the same period in the prior year. The 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 September 15, 2022, The company declared a third quarter 2022 cash dividend of 37 cents per share to an annualized dividend of $1.48 per share of common stock. The dividend was paid on October 14th, 2022 to shareholders of record at the close of business on September 30th, 2022. Looking ahead, the company expects full-year revenue to be in the approximate range of $43 million to $44 million, and GNA exclusive of one-time severance costs and potential uplifting restructuring costs to be approximately $6.8 million to $7 million. And now, I would like to turn the call back to Anthony. Anthony?
spk04: Thank you, Lisa. To conclude the formal portion of the call, I would like to make a comment on our press release from this morning, announcing the company's $10 million share repurchase program and the formation of an independent environmental, social, and governance committee of the board of directors. Prospects for our business and opportunities to invest in attractively priced investments continue to be great. However, We can't ignore the discount that our share price reflects, providing an attractive investment opportunity. This action underscores our confidence in the quality of our portfolio, our robust pipeline, and the growth opportunity of the cannabis industry for many years to come. Additionally, the board's creation of an ESG committee brings us in line with one of the most timely issues in today's capital markets. This standalone committee at the board level shows our commitment to taking seriously our responsibility around these important topics. While ESG is becoming something that most companies focus on, our board decided that it was important enough to merit a direct committee of the board as opposed to a subcommittee, thus reaffirming our commitment and responsibility to having the highest standard of oversight, strategy, and management of all ESG matters. With that, I'd like to turn the call over to the operator for any questions.
spk01: Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1. to ask a question, and our first question comes from John Masucci. I'm sorry if I mispronounce, from Ladenburg-Thalman.
spk04: Good morning. Good morning, John. Good morning, John.
spk03: Maybe starting with the buyback program, what's the outlook for usage of the repurchase program? Should we think of it as more of a backstop and create a case of kind of price volatility, or is that something which you might use more regularly, you know, as you kind of compare buying back stock versus kind of the return on investments?
spk04: Yeah, I would say, John, that when we look at that significant discount, if investors want to leave that meaningful value on the table, we will be evaluating that value relative to where we think we can deploy capital. And we'll make that decision on a daily, weekly basis. I don't want to get into too much detail here about looking at programmatic. We have We have no specific objective other than saying we just can't leave that value on the table any longer.
spk06: John, I would add, I would think of it a little bit more as a backstop. The phrase I heard the other day is you can't shrink a company to greatness, so shrinking an already small REIT isn't the first choice, but at the same time, given the price volatility, we felt that we just had to have, you know, a program that could act as a backstop if, you know, things continue to deteriorate in the markets. And because we throw off so much free cash flow, you know, we're very comfortable with that. We have, you know, basically no leverage today. And, you know, and obviously we're always thinking about, you know, where can we put out money versus where can we buy back the stock? But it's not I would think of it more as sort of a backstop as we're still trying to grow this business.
spk03: Okay. And then maybe with regards to the in-place portfolio, you kind of mentioned keeping an eye on any potential tenant disruptions. Are there any you're seeing right now, and I guess maybe in that same vein, any updated thoughts on the Calypso property and PA versus last quarter?
spk04: You know, the Calypso transaction continues to perform and we continue to collect rent as expected. That company continues its sale process, so no meaningful update for you there. And I'd say I think that when you look at the earnings we turned in for Q3 and the confidence we have to announce a buyback, we feel good about the portfolio, how it's performing and what the prospects are.
spk03: Okay. And then you mentioned the ColumbiaCare Cresco merger. Any updated thoughts maybe on the impact that has on the portfolio? And can you just remind us, do they stay as kind of the guarantor on that credit?
spk04: Yeah, why don't we have Jarrett comment on that?
spk05: Sure. So we haven't received formal notice from either group. But the way our standard leases work, the guarantor does. stay on the hook for the term. But we'll evaluate once we get formal notice and have more discussions with both groups.
spk04: But I would also reinforce, John, that our EBITDA coverage at those properties continues to be well within the underwriting that we did originally when we closed all those transactions a couple of years ago. So we continually feel that those are mission-critical properties whether they stay with Columbia Care or Cresco or whether they move to an acquirer.
spk03: Okay, and then with regards to Missouri, what's the thought process on that purchase option now that adult use has been legalized in the state or legislation has passed to legalize adult use?
spk04: We think it was prudent on the part of our tenant to Uh, to hold back and evaluate, I think this is a characteristic that we like to believe would be endemic across our tenant base where they be prudent and thoughtful about not over extending their balance sheet, not over extending their cash flow to build out too much ahead of an important vote like that. Um, and Jared, why don't you talk a little bit more specifically about what we think they may do? Um. Going forward. Yep.
spk05: Absolutely. To reiterate Anthony's point, we were happy that they took the time and were prudent to wait for the election results. We're in consistent dialogue with Bloom Medicinals on what they want to do. We do think that based on the market and the expected adult use market, it's likely that we move forward with them on the option, but we're evaluating that over the next handful of weeks.
spk03: And then in the broader acquisition market, what do you see maybe versus last quarter in terms of cap rate expansion? And what's the thought process as to deploying kind of remaining capital you have available to yourself?
spk05: So we still see a lot of transactions coming in, given the lack of alternatives in the market and growth capital needed. Cap rates continue to expand. I think operators are slowly coming along. to the new capital environment with interest rates the way that they are. So I think that it asks spread is getting closer. That being said, there's some optimism with SAFE coming up. So I think that some groups may wait to hear if SAFE passes in the lame duck before moving forward to see if that changes rates.
spk04: And regarding our pace of investment, John, You know, I want to reiterate what we've said, which is we're going to be thoughtful and careful. And we're about quality, not quantity. So we're not looking to rush the capital out. And we'll be providing an update regarding our plans going into our investor day in December.
spk06: John, I would just add into it. I think everybody's kind of on pause until we see what happens in the lame duck session today. with SAFE because, you know, it has implications for us. It has implications for operators. And so, you know, I would – and it's only 60 days, right? So I think everybody's just going to see what happens before making any big decisions.
spk03: Okay. Understood. That's it for me. Thank you very much. Thanks, John.
spk08: And once again, if you would like to ask a question, please press star 1. Again, if you'd like to ask a question, please press star 1. OK. Well.
spk01: I'd like to turn the call back to Anthony Camiglio for closing remarks.
spk04: Thank you, everybody, for joining our call, and we look forward to speaking with you next quarter.
spk07: Have a great day.
spk08: This concludes the call.
spk07: Thank you.
spk01: This concludes today's conference call. You may disconnect. Thank you for participating and have a pleasant day.
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