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spk06: Good morning. I'll be your conference operator today. At this time, I'd like to welcome everyone to the New Lake Capital Partners Second Quarter 2023 Earnings Conference Call. Today's call is being recorded. I will now turn the call over to Valter Pinto, Managing Director of KCSA Strategic Communications. Please go ahead.
spk04: Thank you, operator. Good morning and welcome everyone to the New Lake Capital Partners Second Quarter 2023 Earnings Conference Call. I'm joined today by Anthony Coniglio, President and Chief Executive Officer, Lisa Meyer, Chief Financial Officer, and Jared Annenberg, Senior Vice President and Head of Investments. 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 and filed with the SEC on form AK, as well as the company's 10-K, 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, whether as a result of new information, future events, or otherwise. FFO and AFFO are supplemental non-GAAP financial measures using 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 the 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 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 and administrative expenses, weighted average of those shares outstanding in interest rates. And with that, it's my pleasure to turn the call over to Mr. Anthony Coniglio. Anthony, please go ahead.
spk02: Thank you, Volker. And thank you, everyone, for joining our call today. are pleased with our 2023 second quarter results which were in line with the guidance provided last quarter our second quarter dividend of 39 cents per share was well covered with a payout ratio of 85 percent for the quarter even after accounting for the rent collection issue that persisted at revolutionary clinics one of our larger massachusetts cultivation facilities importantly in regard to that tenant our team made significant progress resolving the situation and we're providing full-year AFFO guidance, anticipating resolution later this quarter. While no portfolio is immune to tenant credit risk, our team was prepared and has worked diligently with the tenant on a potential resolution that we believe provides the best long-term value for our shareholders. I expect many of you will have questions about what a potential resolution could look like. However, nothing is done until it's done. And so we will not discuss it today, but we certainly will provide additional information if and when details are finalized. Aside from revolutionary clinics, we received 100% of rent during the quarter. We believe our focus on properties and limited license jurisdictions with quality property level cash flows has resulted in one of the best credit quality portfolios in the industry. This isn't to say we will never have an issue, but these dynamics are important to resolving issues when they inevitably arise. As we look to the future, the environment for cannabis operators is showing some signs of stabilization. Marginal capacity is coming out of certain markets, prices are firming in some markets, and the benefits of cost cutting and business rationalization will begin to improve operators' operating cash flow. At the same time, legalization continues to expand. Maryland recently launched adult use sales and similar ballot initiatives are underway in Florida and Ohio. which if they pass, could add over 30 million people to the adult use market in these states. With virtually no debt and $89 million available to us under our attractively priced credit facility, we're in a very good position to weather the current macro headwinds and deploy capital into quality transactions. As you saw in our press release, we repurchased over 50,000 shares during the second quarter. While it's great to buy back stock at accretive levels, we would all prefer to have our stock price more accurately reflect the value of our quality portfolio. With an above-market weighted average yield, 14.5 years of remaining lease term, and only $2 million of debt, we believe that our stock is well undervalued, and we continue to focus our efforts on broadening our investor base to drive demand for our stock. The most impactful catalyst for this would be acceptance of New Lake's stock by institutional custody agents or uplisting to a major exchange. That continues to be a focus for us, and we will be relentless in our pursuit of the objective. We've been watching TerraCent's recent uplisting to the Toronto Stock Exchange, or TSX, and have been encouraged to see the institutional custody agents begin accepting their stock. We will continue to monitor that progress and we will evaluate whether a restructure to comply with PSX rules would be beneficial for our shareholders. Additionally, there are regulatory reform initiatives that may also provide catalysts to broaden institutional focus on cannabis and ancillary businesses such as New Lake. These include the passing of safe banking, the Coal Memo 2.0 if it comes out, rescheduling of cannabis away from being a Schedule 1 controlled substance, rescinding 280E and of course, federal legalization. Each of these catalysts will have varying degrees of impact, but changes to one or more of these could set in motion increased demand for cannabis, acceptance of the industry as a whole, and drive the value of cannabis stocks. Aside from positively impacting new late, higher equity prices across the sector would allow operators the opportunity to recapitalize their balance sheets where necessary and improve their credit profiles. And all that would be a positive for the industry overall, thus further driving institutional demand. We're very, very cautious in predicting when any or if, if or any of these might occur. But the topic of cannabis has seen significantly more discussion in Washington, D.C. over the past 12 months. And as the 2024 election cycle heats up, we would not be surprised to see increased conversation and forward progress on any of these issues. similarly to what we saw with the Biden administration just prior to the midterm elections last year. For now, we will continue to be focused on the fundamentals of our business, executing our strategy, and working hard to deliver attractive long-term returns for our investors. Lastly, before I turn it over to Jarrett, I want to say that as we celebrate the two-year anniversary of our IPO in a couple of days, we're reminded of and take pride in the company's accomplishments. Since our IPO, ASFO is up 66%. Dividends are up 63%. And we secured a $90 million credit facility at an attractive fixed rate. In fact, we have paid out nearly $58 million in dividends over the past two years. In addition, we have secured a leadership transition, bolstered our executive management team, and positioned New Lake as one of the leading capital providers to the cannabis industry. There's a lot to be proud of and build upon as we celebrate these milestones and look forward to the future. With that, I'll turn the call over to Jarrett.
spk03: Thanks, Anthony. I'll be covering our current portfolio, activity in the second quarter, and outlook for the rest of 2023. In regard to our current portfolio, I'll start with Revolutionary Clinics as they are the one tenant that has not paid rent in 2023. Similarly to Q1, we applied 25% of their security deposit towards outstanding rent in Q2. As Anthony noted, we are working very closely with RevClinics and think we will come to a long-term solution by the end of Q3. I do want to provide a bit of color on why we are deciding to work with them versus foreclosure, as that is our right. We believe the issues with RevClinics were temporary problems that the company could overcome. They had two cultivation issues in short succession that destroyed crops, and they had delays in opening two adult-use stores. In the past six months, the company has worked with industry experts to revamp its cultivation processes, which has produced strong results. They opened two new adult-use stores in Somerville and Leominster and have significantly reduced operating expenses. RevClinics has continued to produce sought-after products in Massachusetts, with their house brands, as well as partnerships with Kiva and El Blunto. We are encouraged by the progress of the company as they work through this difficult period. Another tenant we have discussed over the past few quarters is Calypso, whose cultivation and processing facility we own in Pennsylvania. Calypso has done a commendable job of weathering the volatility in the Pennsylvania market as an independent and continues to pay originally contracted rent on a weekly schedule. The company has been working on a sale for quite some time now, and we believe that they are close to the finish line. I expect they will complete the process by the end of the third quarter, and we are working with them through that process. Moving to the overall portfolio, as of June 30th, we have committed a total of $427 million across 17 dispensaries and 15 cultivation facilities in 12 states with 13 tenants. inclusive of one tenant that has been provided with a loan along with the sale leaseback representing approximately 1.7 million square feet covered. Our basis in retail properties is $389 per square foot and cultivation is 248 per square foot. Both metrics are well below replacement cost. 63% 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 4.5 times for cultivation and 10.8 times for dispensers. Both increases from the previous quarter, demonstrating the price stabilization in some of our key markets. Please note that we use estimates where appropriate, given each company reports slightly differently on a property level basis. In Q2, we deployed 1.6 million in tenant improvements and closed on the previously announced amendment with the Mint to provide up to 6.5 million in allowance for improvements to their 100,000 square foot cultivation and processing facility in Phoenix. The project is well underway and we expect it to be completed in Q4. After total funding, our basis in the facility will be 21 million for $210 per square foot and one of the most sought after industrial markets in the country. As of June 30th, we had approximately $22.8 million in unfunded commitments, which is almost entirely comprised of the Mint and C3 transactions. One more item to note relating to our portfolio is that the Cresco ColumbiaCare merger was recently terminated. Cresco represents 12% of our committed capital and ColumbiaCare represents 8%. We are in close contact with both tenants and believe they are in position to succeed as separate companies moving forward. It's clear to us that the difficulty in clearing regulatory hurdles were well known, and both companies had been preparing for this eventuality. Both have been working independently to reduce expenses, as evidenced by ColumbiaCare disposing of non-cash flowing assets in California and reducing headcount, which should bolster operating performance. When we look specifically at our portfolio, we have strong EBITDA coverage at our properties, reinforcing the importance of our focus on mission-critical facilities. Taking a step back, while the industry is by no means out of the woods yet, we have started to see stabilization in multiple states, unit sales increasing, and reason for optimism as new markets come online. The U.S. average wholesale price for indoor flower continues to be in excess of $1,300 per pound, as consumers will pay a premium for high-quality product, and supply has started to rationalize. In Illinois... June sales increased of 8% year over year as almost 30 new stores came online, driving a 15% increase in the number of products sold, offsetting price compression of more than 30% over the same period. As Anthony mentioned, we are excited about the prospects in Ohio. On Tuesday, the state referendum to raise the threshold to 60% for constitutional amendments failed, keeping the threshold at 50% at the ballot. While this wasn't seen as a measure on cannabis, if the newly delivered signatures put adult-use cannabis on the ballot this November, it is much more likely to pass. As far as new markets, Maryland launched adult-use sales in July and saw 87 million in sales in its first month. In Missouri, June sales eclipsed $121 million. Both markets allowed existing medical operators to easily join the adult-use markets. providing consumers with quality access while maintaining a limited license structure that best positions operators for success. Contrast those states with New Jersey and Connecticut, where sales have remained below initial projections as new licensees have had trouble raising capital to become operational, leaving each state with less than one dispensary per 200,000 adults. More capital will need to come into the industry to allow these programs to grow to their potential. To that end, our capital deployment continues to be at a slower pace, driven by operators focusing on existing operations and new states launching slower than anticipated, or in some instances, states already having sufficient capacity to transition from a medical to adult use market. That said, we do continue to see interest from quality operators as they seek to open in these new states or monetize real estate currently on their balance sheets. We are also seeing an uptick in retail opportunities as higher interest rates have driven some of the 1031 buyers to more traditional retail assets. With $89 million of available capital, we continue to be excited about our opportunity to capitalize on transactions with operators that are poised to be the industry's long-term winners. The next few quarters will be about execution from operators, and we will remain vigilant within our current portfolio and in our underwriting as we focus on long-term success in a difficult macro environment. With that, I'll hand it over to our CFO, Lisa Meyer, to walk through our financial results in more detail.
spk01: Thank you, Jared. For the second quarter of 2023, our portfolio generated total revenue of $11.4 million, an increase of 8.2% compared to the same period in 2022. Property acquisitions, tenant improvement allowances at existing properties, and the development and the expansion of our Missouri and Florida cultivation facilities mainly drove the increase in total revenue year over year. Net income attributable to common shareholders for the second quarter of 2023 increased to $5.8 million, an increase of 54.3% compared to net income attributable to common shareholders of $3.8 million for the same period in 2022. On a sequential basis, our financial results for the second quarter of 2023 were relatively flat from the first quarter. RevClinics did not pay its contractual rent again in the second quarter, which was approximately $1.3 million. We applied 25% or $315,000 from their security deposit to partially offset the decrease in rental revenue. As Jared mentioned, we continue to work closely with RevClinics and hope to come to a long-term solution by the end of the third quarter of 2023. Our rank collection for the second quarter of 2023 was in line with our guidance at 92%, reflecting RevClinics' delinquency. It is important to note that our portfolio continues to perform well and in line with our expectations, which is a direct result of the quality of our investments. For the second quarter of 2023, our portfolio generated SFO of $9.5 million, or 44 cents per diluted share, ASFO of $9.9 million, or 46 cents per diluted share. As Anthony mentioned, We are providing ASFO guidance for the full year of 2023 of $39.8 million to $40.8 million. We declared a cash dividend of 39 cents per share of common stock. A dividend was fully supported by the earnings power of our portfolio with a Q2 payout ratio of 85.4%. The dividend was paid on July 14, 2023, to shareholders of record at the close of business on June 30, 2023, equivalent to $1.56 per share of common stock. Also, in the second quarter, to improve shareholder value pursuant to our Stock with Purchase Plan, we acquired 56,372 shares of common stock at an average price of $12.62 per share. for a total of 105,679 shares. On June 30th, we continue to have a strong balance sheet with $401 million in gross real estate assets and total debt of only $2 million. We have $89 million available on our revolving credit facility, and we believe the company is well positioned to execute a business strategy to grow earnings for our investors as we deploy this capital. And now I will turn the call back to the operator for Q&A.
spk06: Thank you. We'll now be conducting a question and answer session. If you would 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. One moment, please, while we poll for questions. Our first question comes from the line of Pablo Zwanek with Zwanek and Associates. Please proceed with your question.
spk05: Good morning. Anthony, can you expand on the potential for the PSX listing? You talked about needing to do some restructuring. Would you need to have a business in Canada? Would you need to be lending money to operators in Canada? If you can expand on that, and then I have a follow-up. Thank you.
spk02: Yes. Well, good morning, Pablo. So in order to comply with TSX rules, you have to have a nexus in Canada and a business in Canada. You have to have a minimum market cap of shares on the Canadian exchange. So we would need to make some modifications. I think those modifications will be weighed versus the benefit of having access to custody for our shareholders. So, yes, the short answer, we would need to make some modifications. We would need to ring fence assets similar to what Terrasen did. And so it's not a small undertaking, and that's why we want to be cautious in moving forward with that until there's confidence that it will really provide a benefit to our shareholders.
spk05: And then just to follow up, is the notion of gross default provisions becoming more standardized across your portfolio, or is that something that doesn't apply yet to you?
spk02: We've been doing it since the inception of our business, Pablo. We always expected when we started this business over four years ago, nearly five years ago, that there would be issues in this industry. Any emerging industry, any high growth industry is bound to have cycles. And so when we started our business plan, we always tried to incorporate, in fact, for all the relationships where we have multiple properties, we have those cross-default provisions. including also cross-collateralization security deposits. So, again, it isn't because others are doing it, but we've been doing it since the inception of the company.
spk05: Right. Understood. And then, you know, I know you're going to talk about specific clients, but in the case of the Calypso example, speaking maybe somewhat hypothetically, it's waiting for a company to sell their business the only option. Or, you know, depending on the market and the demand and supply dynamics, could that property be leased to someone else, or that's just too hopeful?
spk02: Well, for Calypso, they've been paying rent as originally contracted since the inception of the transaction. So they're not in default. We noted them, started noting them last summer, on this call last summer, as the layoffs. that they were undertaking last summer were in the headlines, and as a number of the other independents were experiencing extreme difficulty, and a couple of them defaulting on obligations and going out of business. And so that heightened the focus of our relationship with Calypso, but I want to reiterate, they've paid rent, they continue to pay rent on a weekly basis, but they have publicly announced that they're executing the transaction, and that's why we continue to provide those updates.
spk05: Understood. Thank you.
spk06: Thank you. Once again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for more questions. There are no further questions at this time. I'd like to turn the call back over to Mr. Coniglio for closing remarks.
spk02: Thank you, operator, and thank you, everybody, for joining our call today. Have a great day.
spk06: Thank you. This concludes today's question and answer session and the end of today's call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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