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spk04: good morning i'll be your conference operator today at this time i'd like to welcome everyone to the new lake capital partners fourth quarter and full year 2022 earnings conference call today's call is being recorded i will now turn the call over to walter pinto managing director of kcsa strategic communications please go ahead thank you operator good morning and welcome everyone the new lake capital partners fourth quarter and full year
spk01: 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, Senior Vice President and Head of Investment. 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 8-K, as well as the company's 10-K 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 filings with the SEC. 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 DeGann. Gordon, please go ahead.
spk05: Thanks, Walter, and good morning, and thank you all for joining our call. During 2022, New Lake delivered outstanding financial results despite a challenging year for the cannabis industry, which continues into this year. With 100% of 2022 rent collected, our annual revenue grew nearly 60%, and our annual AFFO grew more than 75% versus the prior year. Additionally, we continue to consistently raise our dividend each quarter during the year. And in fact, our fourth quarter dividend, which was paid in January, was our sixth consecutive quarterly increase to $0.39 per share of common stock or $1.56 annualized. These are impressive results in any year, but particularly so in a year where the sector experienced such significant headwinds. And as many of you have heard me say, I like to think of our business model supplying the shovels and picks. We give the cannabis industry capital and capacity through our real estate transactions, and that will continue to be a very important part of the cannabis sector going forward. I would also like to point out, if you look at our income statement, our revenue of roughly $44.8 million and AFFO of $38.7 million. Those are the best margins of any REIT So, you know, we have a terrific business model as we drive very significant earnings from the revenues we receive. We are proud of these results and believe we have benefited from a rigorous underwriting process developed over the years. Having said that, we are cognizant of the continuing challenges in the cannabis sector, some of which will impact our Q1 2023 revenue. While we have had an impressive track record since the company's founding four years ago, New Lake is not immune to the issues surrounding the cannabis sector. While there have been ups and downs for the cannabis industry in the past, the sector is going through a particularly difficult period. We can't underestimate the difficult environment the operators are enduring. However, if we've learned anything from our collective experience in observing other industries that have gone through similar difficulties, it's those operators that make it to the other side that are well-positioned to dominate the industry for years to come. Now more than ever, it's critical to work with the operators that will truly be the long-term winners in this sector. Having said that, my conviction remains very strong regarding the long-term growth of this industry. The cannabis industry has evolved from sales of $15 billion in 2019 when we started the company to over $26 billion in 2022. And according to Cowen Securities, they expect the U.S. cannabis market to be in excess of $40 billion by 2027. There are few industries that continue to present such attractive growth dynamics, and New Lake will be a key real estate partner for the industry as it scales up by providing attractive non-dilutive capital. I believe our team is well positioned to navigate the credit challenges of today and take advantage of the growth prospects ahead. We benefit from an experienced management team and board, that collectively have diverse backgrounds and expertise in real estate, cannabis, and financial services. In particular, we have a number of team members with significant backgrounds in distressed asset investments and restructuring, which is particularly beneficial in dealing with the issues that may arise in our portfolio. I would recommend that anyone go on our website and look specifically at Joyce Johnson and Alan Carr's resumes as they're both very experienced workout people. We utilize this cumulative experience to manage through difficult situations and maximize long-term value for shareholders. Before I turn it over to Anthony, I just want to say, I think despite the difficulty in the cannabis industry currently, we are extremely well positioned. We have no debt to speak of, essentially. We have a reasonable payout ratio on our dividend, which we have managed conservatively. and we have a $90 million credit facility available to us, so tons of liquidity and capital available to take advantage of opportunities. With that, I'll turn the call over to Anthony.
spk08: Thank you, Gordon, and thank you, everyone, for joining our call today. I'd like to pick up on Gordon's comments regarding the industry. Indeed, the cannabis industry continues on its long-term secular growth trend, 2022 was a slower and much more difficult year for the industry, but we see this as a natural part of its evolution as an emerging high-growth industry as opposed to a shift in future growth trends. The sector's correction isn't too surprising when you consider that the state legal industry, which is relatively young and rapidly expanding, is trying to convert illegal sales to legal channels with minimal help from the federal government to date. As a result, operators need to navigate multiple state regulatory structures that create micro economies across the mosaic of legalized states each one impacted by variables different than next in today's environment operators are learning and adapting as are the state regulators we see companies both big and small right-sizing staffing levels modifying production levels optimizing processes pausing capital expenditures, slowing expansion, exiting operations, and in some cases, calling off M&A transactions. These are all difficult but necessary steps for the industry. We see them within our portfolio and more broadly across the industry. Like any other sector that experiences hardship, the result will be that long-term players who remain disciplined will become stronger. We believe our tenants are in this category, and we're targeting these types of organizations for our pipeline. We see the current environment as an adjustment period for the industry with a longer-term trend upward. With over 400,000 jobs, according to Leasley, the cannabis industry is a significant component of the U.S. economy. It's growing, and indeed, it has a bright future ahead. In fact, legalization at the state level continues to expand And we're now seeing progress for cannabis policy in more of the historically politically conservative states. For example, Missouri residents voted in favor of adult use in November and sales commenced recently in February. Or take Mississippi, which recently started its medical program, or even North Carolina, where last week the state Senate approved a medical cannabis bill with an overwhelming majority of the Republican-controlled Senate. The march of legalization will continue. Having commented on that state progress, we certainly are all frustrated by the lack of progress in Washington. But the truth is, we've never been closer to accomplishing cannabis' legislative goals. Progress is slow, but there is progress nonetheless. In December, President Biden signed into law a cannabis research bill, which followed his executive action to pardon federal prisoners for cannabis possession. The lame duck period saw cannabis in the mainstream dialogue of legislative activity, and it's continued into this Congress with the Senate Veterans Affairs Committee three weeks ago approving the VA Medicinal Cannabis Research Act, which is intended to require the VA to research the therapeutic potential of cannabis for veterans with PTSD and chronic pain. I think that's progress indeed. It will still take some time to see legislation on banking or full legalization, but in my opinion, it's undeniable that cannabis policy is getting closer to fruition. In the meantime, the industry is proving it can be recession resistant, which is an important factor given an uncertain economic environment ahead. We certainly saw the impact of inflation on the cannabis consumer in 2022, but price points and basket sizes appear to be adjusting to consumer behavior and the significant volatility from 2022 appears to have subsided. In fact, lost in the focus on pricing volatility is the fact that industry sales expanded 4% during 2022, demonstrating the continued demand for cannabis products. Looking forward, there are meaningful catalysts for industry growth and profitability on the horizon as more states legalize medical adult use, As states decouple their tax structure with 280E, which is a proposal making its way through New Jersey, as the federal government provides access to the U.S. banking system, and then ultimately the elimination of 280E and legalization of cannabis. We're still in the early innings of the industry's development, and I'm excited about its future. Turning to rent. As Gordon mentioned, we collected 100% of our rent in 2022. We're proud of the quality of our investments and our track record of having industry-leading rent collections since the inception of our company. With that being said, we've consistently communicated to you that any net lease business with a 14-year remaining average lease term will encounter tenant disruptions at some point. We're seeing that across the industry, and we previously discussed that we've been closely watching all tenants with a keen focus on certain states and particularly those tenants that are not vertically integrated. Thus far in Q1, All tenants are current on payment except one, Revolutionary Clinics. Jarrett will provide more detail on that, but I want to reiterate my message from previous quarters. Our focus has been to be prepared for tenant disruption so our team can quickly address issues when they arise and maximize returns for our shareholders. Looking specifically at Q1 2023, we expect to collect 90% to 93% of rent, which may include a portion of Revolutionary Clinics security deposits. Also, thus far in Q1, we've exercised our option with respect to expansion in Missouri and signed an LOI to provide additional TI to our Build to Suit project in Phoenix, so we continue to look for growth opportunities. Lastly, we continue to receive questions about uplisting to our major exchange. While I have nothing new to report, we understand the importance of this and will be relentless in our pursuit of a path to uplisting. With that, I'll hand it over to our head of investments, Jarrett Annenberg, to walk through our portfolio in more detail. Jarrett, over to you.
spk02: Thanks, Anthony. I'll be covering our current portfolio, activity in Q4 and full year 2022, provide updates on a few tenants, and outlook for the rest of 2023. As of today, we have committed a total of $421 million across 17 dispensaries and 15 cultivation facilities, In 12 states with 13 tenants, inclusive of one tenant that has been provided a loan along with the sale leaseback, representing approximately 1.7 million square feet covered. For retail, our basis across the portfolio is $389 per square foot. For cultivation, our basis across the portfolio is $243 per square foot, well below current replacement cost. 64% of our fully committed capital is with publicly traded operators. 90.5% is committed to properties in which the tenant is vertically integrated in the state. EBITDA coverage for the latest available quarter was 5.5 times for cultivation and 10.4 times for dispensaries. Please note that we use estimates where appropriate, given each company reports slightly differently on a property level basis. As of December 31st, 2022, our portfolio had a weighted average lease term remaining of 14.6 years and an approximate 12.1% yield with built-in growth through unfunded tenant improvements and lease escalators. To recap 2022, we committed 69 million across four new transactions with two new operators, Air and C3, one expansion for Cura Leaf in Florida, and a retail location we purchased from Pharmacan in Ohio. We also deployed 24.3 million of TI in addition to the Cura Leaf Florida expansion. Thus far in Q1, we have deployed 1.4 million in TI. Additionally, we closed on the previously announced option for C3's expansion in Missouri. We purchased the adjacent partial for $350,000 and committed 16.15 million of TI to build out a 57,000 square foot expansion to their cultivation facility as the adult use market kicks off in Missouri. The total building will be approximately 95,000 square feet and our basis will be $29 million for 306 per square foot. Additionally, we have signed a non-binding LOI to provide our tenant, the Mint, with up to 7.5 million of improvements for the 100,000 square foot cultivation and processing facility in Phoenix. If the transaction closes and we finish our total funding, our basis in the facility will be 22 million, or 220 per square foot. Including the Mint LOI, We have approximately $25.3 million in unfunded commitments, which is almost entirely comprised of the Mint and C3 transactions. We expect the C3 project to be completed over the next 15 months and the Mint facility to be operational by the end of Q3. Next, I'm going to provide updates on two tenants we've been tracking closely now for the last few quarters. Revolutionary Clinics is our third largest tenant, representing approximately 10% of our current portfolio. We own their cultivation and processing facility in Massachusetts. As Anthony mentioned, they have not yet paid rent in Q1. Delays in opening their adult use dispensaries and issues with the recent harvest have limited current cash flow for the company. That said, the company has a leading edible in Massachusetts with Kiva and a leading pre-roll brand with Big Poppy. We see long-term value in the company and are working with them as they navigate this period. We currently hold three months security deposit on the property. I also wanted to provide an update on Calypso, a tenant in Pennsylvania we've discussed over the past two quarters. The company has done a nice job of adjusting their operations since last summer's reorganization and continues to pay their originally contracted rents, although we have allowed them to temporarily pay on a weekly schedule to better match their cash flow. Beyond revolutionary clinics, all tenants are current and we continue to watch the portfolio closely for potential issues. We methodically review property level and parent level financial information we receive quarterly. We also monitor each state to understand the operating environment and maintain close contact with all of our tenants. The variables impacting the industry are many, some of which I'll touch on momentarily, so it is imperative for us to remain vigilant. Now, I'll talk a little bit about those variables, provide a bit more color on the state of the industry, and how that shapes our opportunities for the rest of the year. Price compression across all state markets, increased COGS, the impact of 280E, and lack of access to capital are forcing operators to optimize operations and focus on their existing footprints. Price compression was inevitable and this is a normal, even healthy cycle for a new industry. Operators who are able to navigate this environment should be able to expand margins, pick up market share, and come out the other side stronger. In addition to price compression, New markets that are the driver of growth in the industry have slowed in their implementation of their programs, as we have seen in New York and Georgia. Even New Jersey, which started adult-use sales in April last year, has fewer than 25 stores currently open in the state allowed to sell adult-use product. While this has all led to slower capital markets, we are excited about the opportunities in front of us. Recent debt transactions in the industry show that the effective cost of capital is in excess of 15% for even the top MSOs. There's a general lack of capital in the industry, and with our available $90 million credit line at 5.65%, we are confident we will be able to execute accretive transactions with quality partners. Our long-term success will be defined by quality, not quantity. and we remain vigilant in our underwriting process and confident in our ability to execute in the current environment. With that, I'll hand it over to our CFO, Lisa Meyer, to walk through our financial results in more detail. Lisa?
spk00: Thank you, Jared. For 2022, our portfolio generated total revenue of $44.8 million, an increase of 59.6%. compared to $28.1 million in 2021. For the fourth quarter of 2022, our portfolio generated total revenue of $12.2 million, an increase of 35.7% compared to the same period in 2021. Property acquisitions, tenant improvement allowances at existing properties, and an expansion in our Florida cultivation facility all totaling approximately $112.2 million, mainly drove the increase in total revenue in 2022. Net income attributable to common shareholders for the full year of 2022 totaled $22 million, as compared to $11.2 million for the full year of 2021. Net income for 2022 was impacted by $1.9 million of one-time severance payments from the retirement and separation of certain executive offices of the company and restructuring costs associated with exploring uplisting options. Net income attributable to common shareholders for the fourth quarter of 2022 increased to $6.7 million compared to net income attributable to common shareholders of $3.4 million for the same period in 2021. For the full year of 2022, FFO totaled $35.2 million, an increase of 79% year over year. For the fourth quarter ASFO for 2022, FFO of $10.5 million compared to $7 million for the same period in 2021. ASFO for the full year of 2022 totaled $38.7 million, an increase of 78% year over year. For the fourth quarter of 2022, ASFO totaled $10.9 million, an increase of 52% compared to the same period in 2021. In 2022, our general and administrative expenses totaled $6.2 million, excluding one-time severance costs of $1.8 million and non-cash stock-based compensation of $1.5 million. On December 15th, 2022, the company declared a fourth quarter 2022 cash dividend of 39 cents per share. equivalent to an annualized dividend of $1.56 per share of common stock. The dividend was paid on January 13, 2023 to stockholders of record at the close of business on December 31, 2022. At December 31, 2022, we continue to have a strong balance sheet with $425.1 million in gross real estate assets and total debt of only $3 million. We have $89 million available on our credit facility, and we believe the company is well positioned to execute on our business strategy to grow earnings for investors as we deploy capital. As Anthony mentioned, our rent collection for the first quarter of 2023 is expected to be in the range of 90% to 93% as a result of deferring rent for one tenant. which may include the application of a portion of their security deposit. On March 8th, 2023, the company declared a first quarter 2023 cash dividend of 39 cents per share of common stock. The dividend is payable on April 14th, 2023 to stockholders of record at the close of business on March 31st, 2023. Operator, Please open up the call to Q&A.
spk04: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk03: One moment, please, while we poll for questions. Our first question comes from John Mascotta with Ladenburg-Thalmann. Please proceed with your question.
spk07: Good morning.
spk03: Hi, John.
spk06: Good morning. You touched on it a little bit in the prepared remarks, but can you provide some more color on the factors driving the revolutionary nonpayment of rent in 1Q23?
spk02: Yeah, I mean, I think it's direct in the prepared remarks. They've been delayed in opening adult-use dispensaries, which is a driver of growth, and have had issues with recent harvests. Those are the two pieces.
spk06: Anything specific, particularly on the harvest front? I mean, is that just a one-time operational issue, or is that indicative of issues with pricing in the market?
spk08: You know, John, it's a private company, and we want to be – we want to be careful about what we say since they are private. I'd make two comments here. Jarrett mentioned in the prepared marks, we believe that there's long-term value at the company, and we're working with them to help get them through this period. We do currently see it as a temporary period. I also would say that my second point is if you look at other operators in the state, where you have a cultivation facility similarly situated to the one we own, plus three dispensaries, especially at this pricing level today, they're doing fine. And so we think this is more of a temporary disruption as opposed to a systemic issue or a systemic problem you would see with the business model that maybe you would see in some of the more unlimited licensed states that are out there.
spk06: Okay. Um, and maybe this is something you can't speak on at the moment, but any color you can provide on potential plans going forward with revolutionary, um, if they're, you know, they continue to be unable to pay rent.
spk02: So we don't want to predict the exact, you know, how the timing of rev clinics, but we'll continue to provide updates as appropriate. Uh, and we're working with the company to get through the temporary period. Anthony mentioned.
spk09: Okay.
spk06: And then in terms of the security deposit, is that the delta between the 90 and 93% collection guidance? And I guess maybe just either in terms of rent per month or on a gross number, how much security deposit do you have from the tenant?
spk08: There are three months security deposit that we have from the tenant and the 90 to 93 is a range of what we may or may not do. As Jarrett pointed out, they represent 10% of our investment, which is roughly equivalent to what they represent around revenue. Okay.
spk05: But, Anthony, it's fair to say that the range we've given does not assume a full drawdown of the security deposit. Correct. Which we may do. Okay. We may or may not do.
spk06: Okay. And then maybe beyond revolutionary in Calypso, how does the rest of the portfolio look from a tenant credit watch list perspective?
spk02: So Calypso has done, as I said, a nice job of restructuring the business and continues to pay rent, albeit on a weekly schedule. And for the rest of the companies, you know, we vigilantly watch the financials. We're in constant communication with our tenants and We also revamped our tenant credit metrics the past two quarters to really focus in on the three pieces, which is facility level, tenant level, state level, and guarantor level financials. So, you know, we're constantly watching everybody.
spk06: Okay. And how are you thinking about new investments in capital deployment, both broadly and specifically with operators not currently in the portfolio? you know, given the current cannabis market and interest rate conditions?
spk02: Sure. So we've always been focused on quality, not quantity. I'll say our pipeline is slightly smaller today than it has been historically. But I also think that it's more focused than it has been historically, as we've seen some less serious operators exit the space. And from a pricing perspective, I think we all know interest rates with where they are have expanded. then it's really going to be a focus on partnering with both existing operators that we like entering new markets and potentially new tenants out there that we don't currently have in the portfolio.
spk07: Any kind of rough facts on the size of the pipeline today? No, we've never really given guidance on the size of the pipeline. Okay.
spk06: And then just one last one from me on the MIT transaction. How did that kind of come about? Just any color on the logic and the conversation behind that deal?
spk02: Sure. So we always actually in our original lease had additional TI planned for the MIT at the facility. And as they are finishing the project, we basically looked at the original lease and repricing generally in the construction market and give them the additional TI to finish the majority of the interior rooms at the facility on the cultivation side.
spk08: Yeah, I'm going to add that, John. If you go back to the beginning, way back when we underwrote that a couple of years ago, there was some uncertainty around how that market would evolve. And so in order to not go long and have a very high basis, in a building, in a market where we knew it wasn't going to undergo a transition from medical to adult use, we wanted to watch how it developed. And so that's why we had that mechanism in there that earmarked potential for future TI. And so now having observed that, having watched the tenant, having seen how the tenant's financially performing, we're excited to unlock this additional value And when you look at the completion, Phoenix being one of the hotter industrial markets in the country right now, when you look at our basis, after the traditional TPI, very, very attractive basis in a very attractive industrial market.
spk07: Okay, that makes sense and is very helpful. That's it for me as well. I'll see you before. Thank you. Thank you.
spk04: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment while we poll for questions. We've reached the end of the question and answer session. I would now like to turn the call over to Anthony Coniglio for closing comments.
spk08: Great. Thank you very much. Thank you everyone for joining our call today. We hope to have a great quarter, and we'll look forward to our next call. Thank you. Bye-bye.
spk04: This concludes today's conference. You may disconnect your lines at this time, and we thank you for participating.
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