Newlake Cap Partners Inc

Ladies and gentlemen, good morning and welcome to the New Lake Capital Partners third quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Walter Pinto. from KCSA Strategic Communications. Please go ahead.

Thank you, Operator. Good morning and welcome everyone to the New Lake Capital Partners Third Quarter 2024 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 8K, as well as the company's 10Q 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 in the end of a press release. Please refer to that press release for more information. 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 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 Anthony.

Thank you, Walter, and thank you, everyone, for joining our call today. Today, I will address the election, Schedule 3, the industry, and our portfolio where we had continued partial rent from one tenant and recognized one month's security deposit from another tenant. The elections. Last week's election delivered mixed results regarding cannabis policy. It's clear Americans support medical cannabis by wide margins, and I expect the expansion of access to medical cannabis to continue. However, there is caution in conservative districts regarding adult use policies. It was unprecedented that during this election cycle, both candidates embraced cannabis reform, with the president-elect expressing support for adult use cannabis, Schedule III, and legislation that would decriminalize cannabis at the federal level, allowing states to decide on their cannabis policy. On election day, Nebraska voted to legalize medical marijuana with the ballot initiative eclipsing 70% support. That's noteworthy since Donald Trump won the state with 60% support. In Kentucky, where the state legislature passed a medical marijuana bill in 2023, voters in more than 100 cities and counties voted voted to allow cannabis businesses to operate in their region. None of those jurisdictions voted against medical cannabis. None. In fact, many jurisdictions saw over 60% and in some cases over 70% support for medical cannabis in a state where the Republican presidential candidate won nearly 65% of the vote. On the other hand, adult use initiatives in red states faced a different fate on election day. Florida's adult use measure had a strong showing with 56% voter support, but unfortunately, it fell short of the 60% supermajority needed to pass. Meanwhile, North and South Dakota adult use initiatives, which only needed a majority of support to pass, received 47% and 44% support, respectively. President-elect Trump carried these red states with 56% in Florida and well over 60% of the vote in North and South Dakota. So to me, what Election Day 2024 has reinforced is that a strong majority of Americans across the political spectrum want access to cannabis for medical purposes, and work also remains in conservative districts to unlock freedom of choice for recreational purposes. I believe the resounding support for medical cannabis across the political spectrum can only be positive for the DEA's process to reschedule cannabis to Schedule III unlocking the opportunity for expanded research into the medical benefits of the plant and setting the stage for continued growth in the medical cannabis segment as more states seek to legalize, such as Kentucky and Nebraska recently did. On the legislative front, where Republicans want control of the Senate, we'll need to watch how upcoming committee membership and chair positions are filled to better understand the opportunity for reform in the upcoming Congress. It's certainly positive that Donald Trump is openly backed rescheduling banking rights for the cannabis industry and states' rights to decide on cannabis policy without federal interference. It's also positive for reform that Donald Trump said yesterday he's nominating Matt Gaetz as Attorney General. The former congressman voted yes on safe banking and has been an advocate for legalization. Rescheduling. The DEA's process to reschedule cannabis from Schedule 1 to Schedule 3 continues. There is a preliminary hearing set for next month with testimony scheduled to begin in January and February. As discussed on previous calls, we anticipate that when the rescheduling process happens, our tenants will all benefit from the elimination of IRS Section 280E, which we estimate will provide our tenant base with over $500 million of tax savings in the aggregate. We continue to expect the DEA to finalize the rescheduling process, and it would certainly be a positive if Matt Gaetz is confirmed as Attorney General, since in a congressional hearing, he actually pressed the current DEA administrator on why it was taking so long to reschedule cannabis. Turning to the industry and our portfolio. Looking at the overall industry, the cannabis sector continues to face headwinds from competition, hemp-derived products, and slower rollouts of new state legal programs like adult use in Ohio and adult use in New York. Last year saw many operators restructure, extend debt, and implement new strategies to face the slower growth environment. We are now seeing the fruits of those labors, and in some cases, the results have fallen short of expectations. We've seen this across the industry, and our portfolio is no different. The same two names we spoke about so often during 2023, Revolutionary Clinics and Calypso, continue to be areas of focus for our portfolio management, and the team is working hard to maximize value for our shareholders. Jarrett will provide more detail on this in a moment, but I would highlight that during the third quarter, our AFFO payout ratio was 84%. in the range of our 80% to 90% targeted payout ratio, providing ample protection for our dividend. Before I turn the call over to Jarrett, a quick comment on uplisting. This continues to be a major focus of ours. We understand the inherent limitations on custody and what that means for our shareholders. To remind everybody, we operate New Lake to comply with the listing standards of the NYSE and NASDAQ, but we're precluded from listing on those exchanges because of the industry we focus on. As a result, there are limits to custody of our stock by prime brokers. We know that a TSX listing has expanded custody for cannabis operators that restructured their business. We've been working with Council and the TSX to develop a structure that could work for the exchange, the company, and most importantly, our shareholders. This work continues, and while we cannot provide certainty or a timeline, I can pledge that we'll continue to pursue all avenues to expand custody and liquidity of our stock. With that, I will turn it over to Jared.

Thanks, Anthony. I'll provide an overview of our portfolio, an update on projects under construction, give some insight into what we're seeing on the ground, and talk about our pipeline. Starting with our portfolio, as of September 30th, we had committed a total of $445 million across 17 dispensaries and 15 cultivation assets in 12 states with 13 tenants representing approximately 1.7 million square feet. EBITDA coverage for the latest available quarter was 3.4 times for cultivation and 8.8 times for dispensaries, a slight decrease for cultivation and a slight increase for dispensaries from the previous quarter. Please note that we use estimates where appropriate, given each company reports slightly differently on a property-level basis. Next, I want to talk in more detail about the two operators Anthony mentioned, Revolutionary Clinics and Calypso, both of whom went through transitions last year. starting with Rev Clinics, whose cultivation facility we own in Massachusetts. The company paid 50% of contractual rent for the quarter, as expected and discussed on our last earnings call. While the garden is producing quality product, the Massachusetts market continues to be difficult, as they work to grow their wholesale and retail businesses through various channels. We are in constant communication with leadership, as well as Rev's stakeholders, as we continuously evaluate the situation. Second is Calypso, whose cultivation facility we own in Pennsylvania, and a new operator took over the company in November of 2023. Calypso did not pay their contractual rent in September or October, and we applied their security deposit to the rent for each of these months. It has taken the new operator longer than anticipated to enact their operational and product enhancements at the facility. That said, the Pennsylvania market has a positive outlook. Independent operators such as Calypso we're granted a license for three dispensaries, and the market is expected to transition to adult use. Philipsa is evaluating all options for the business, and we are confident there is demand for the high-quality facility in a state with positive tailwinds. Moving to properties under development, we disbursed $2.6 million of construction allowance in the quarter across four projects, of which C3's Missouri expansion and Air Pottsville are now complete. As of September 30th, we have approximately $12.2 million of allowance outstanding, the majority of which is for C3 in Connecticut, as the Mint is expecting to get their certificate of occupancy for their Phoenix facility within the next few weeks. On the ground, we continue to see operators grind through the new normal of mature markets as they adjust to price compression amidst greater competition. In almost all mature markets, we have seen flat growth as unit sales increase offset by lower pricing. We've always underwritten with the assumption of price compression, and this is why we so often talk about the importance of property-level EBITDA coverage in our analysis. As for newer markets, some of the expected growth has been slower than anticipated. Connecticut continues to be under a $300 million market, as there are not yet enough wholesalers to provide new stores with quality product at competitive pricing. especially as they compete with neighboring Massachusetts. In Ohio, adult use sales have not lived up to expectations in the first few months as operators are still working under medical-only regulations with lower THC content and the inability to advertise. Over the first three months, Ohio had approximately $145 million of adult use sales. on pace for just under $600 million in its first year, which would bring the total addressable market to almost $1 billion. While that is 100% growth, people expect Ohio to be closer to Illinois with $2 billion of total sales, especially given Ohio's neighbor, Pennsylvania, is a $1.6 billion medical-only market. We still expect Ohio to ramp closer to a $2 billion market over time as additional dispensaries open adult use regulations are enacted and pricing becomes more competitive. Lastly, on deal activity, we continue to see strong deal flow from three sources. First, new licenses like Ohio dispensaries and the upcoming Kentucky market as operators don't want to use their capital to fund real estate expansion. Two, through M&A, where we haven't yet completed a transaction but are confident we will at some point in the future. And third, operators monetizing real estate on their balance sheet. We have ample capital available on our credit facility to fund growth, but as always, we will maintain our underwriting discipline and focus our capital on high-quality opportunities. With that, over to you, Lisa.

Thank you, Jared. In the third quarter of 2024, our portfolio generated total revenue of $12.5 million. which is an increase of 9.3% from the previous year, reflecting the quality of our portfolio. The key factors contributing to this increase include rental income from the acquisition of our cultivation facility in Connecticut, where we committed to fund an additional $10 million in building improvements, base rent growth from funding of building and tenant improvements across four cultivation facilities, and annual rent escalators that consistently boost our revenue. Additionally, rental payments received from Revolutionary Clinics who did not pay their contractual rent in the third quarter of 2023 also contributed to the increase in revenue. As discussed on our previous call, Revolutionary Clinics has continued to pay 50% of its contractual rent in the third quarter, and we expect that to continue for some time. During the three months ended September 30th, 2024, we invested $2.6 million across four properties and ended the quarter with a total unfunded commitment of $12.2 million. Net income attributable to common shareholders for the three months ended September 30th, 2024, totaled $6.4 million or 31 cents per share. ASFO for the same period was $10.6 million dollars or 51 cents per share, reflecting a 6.7% increase compared to the third quarter of 2023. Sequentially, revenues increased slightly in the third quarter of 2024 due to rent generated from funding building and tenant improvements, a full quarter of income from our kinetic cultivation facility acquired in May of 2024, and reimbursable expenses recorded in the third quarter. However, AFFO decreased modestly compared to the second quarter, driven by increased professional fees. We declared a third quarter 2024 cash dividend of 43 cents per share of common stock, equivalent to $1.72 per share of common stock on an annualized basis. The dividend is fully supported by the earnings power of our portfolio with a third quarter payout ratio of 84%. This demonstrates our commitment to delivering consistent shareholder returns while maintaining a solid balance sheet. The third quarter dividend was paid on October 15th, 2024 to stockholders of record at the close of business on September 30th, 2024. As of September 30th, 2024, our balance sheet remained strong with $430 million in gross real estate assets and only $8 million in debt outstanding and a debt to EBITDA ratio of less than 0.2 times. Our liquidity is solid with $102 million available, including $19.8 million in cash and $82.6 million in untapped revolving credit facility capacity. We continue to maintain a conservative balance sheet with strong liquidity. With $8.2 million available under our share repurchase program and our $10 million ATM program, the company is strategically positioned to execute our business strategy to grow earnings for investors as we prudently deploy our capital. And with that, I will turn the call over to Anthony.

Thank you, Lisa. In closing, our business continues to generate robust profits with a strong AFFO payout ratio of 84% supported by a quality tenant portfolio. As Lisa mentioned, we have over $8 million remaining under our share repurchase program to take advantage of accretive opportunities in our stock. While there were cross currents for cannabis policy coming out of the 2024 elections, we're progressing on a solid path to reform, with the president-elect expressing support for adult use, Schedule III, and legislation that would decriminalize cannabis at the federal level, and we remain optimistic about the prospects for growth as we supply much-needed capital to this dynamic industry. I will now turn the call back to the operator for Q&A.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you would 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. Ladies and gentlemen, we will wait for a moment while we poll for questions. The first question comes from the line of Pablo Zuanek from Zuanek and Associates. Please go ahead.

Thank you. Good morning. Can we start with Florida? Anthony, I know it's just been a few days since Amendment 3 did not pass, but what are operators telling you there? Some people expanded somewhat aggressively ahead of the amendment. It did not pass. What's your exposure to the state? What are you hearing from operators there? Does the state become a lot riskier? Thank you.

Yeah. So what I'd say, a couple of things on Florida. Number one, Florida going into Election Day was a very strong medical state that has performed very well. And it's going to continue to be a strong medical state and perform well. Number two is Florida will have adult use legalization. It's just going to take longer than any of us want. Number three, when I think about the overcapacity you're referencing in Florida versus what we've seen in other states, I would say by and large, this industry was the operators in Florida were more cautious to not overbuild the way you saw that occur in other states. And I think the companies were better positioned from a balance sheet and P&L perspective to handle any overcapacity that may come into the market. So we expect it to continue to be a good market for the next couple of years as it repositions its strategy to get adult use passed. In terms of our exposure in the state, Cureleaf is the one property we have there. It's what we would call a mission-critical facility. It's a cultivation facility which provides product for all of their dispensaries throughout the state. And we feel very good about the state. We feel very good about that facility. And we feel very good about the tenant cure relief.

All right. Thank you. And then, I mean, Jared mentioned something in terms of the growth pipeline, but he also talked about completing an M&A transaction. Can you expand on that? I mean, are you looking at acquiring?

Yeah, let me clarify.

Yeah, thank you.

Let me clarify. He was talking about M&A within the cannabis sector. And so think of this concept where, Company A is trying to acquire Company B. Company B wants cash. Company B may actually own a property. You can execute a leaseback transaction to raise non-dilutive capital and deliver that cash at closing. That's what he was talking about. And given the elevated level of M&A dialogue that we've seen across the sector in the last six months, we've seen more and more of those discussions come to the fore.

Right. Understood. Thank you. But just in terms of the private sale leaseback operators out there, maybe some of those books are up for sale. Could that be of interest or it wouldn't make sense in the current landscape?

Yeah, listen, our job as a management team is to look for opportunities across the strategic spectrum. And in fact, New Lake today is itself the combination of a merger that occurred back in 2021. So I'd say we're always looking at all avenues of growth, including that. but and I think those in organizations are well known and there's always dialogues occurring and so yes stuff comes up we'll absolutely be looking at that and we'll make a determination if it's in the best interest of our shareholders to execute on any of those okay look and the last question I know that like you said makes results from the election some positive some some less so but when I think of if the growth outlook is is lesser than we expected before

And a lot of the capital demand is going to come from companies that need to refinance, right? People talk about this war of refinancing coming up in 26 and later. A lot of those companies, to my knowledge, don't have an encumber asset that they could use, right? So the time for you in that context is less. What am I missing there? Or is that the wrong interpretation? Thank you.

What I would say, Pablo, is that there are There's real estate that is sitting on the balance sheet of companies that could be monetized through a sale-leaseback transaction that would provide greater net cash proceeds than pledging them in a borrowing base. And I think as you see operators approach refinancings, they'll look at how they can raise capital to pay down debt through getting a better advance rate from a sale-leaseback transaction versus pledging those assets for another two, three, or four-year credit facility. And when you look at some of the larger companies, there still is billions of dollars that we estimate on the balance sheet of operators, and those are future deals. And the timing of those deals is just the uncertainty in my mind. Is that a 25 transaction? Is that a 26 transaction? Or in some cases, maybe it's when there's reform in our cost of capital and the pricing we can provide in a facility may intersect better with their objectives of executing on a sale-leaseback.

Thank you. Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and 1.

As there are no further questions, I would now hand the conference over to Anthony Coniglio for closing comments. Anthony?

Yes. Thank you, Operator. And thank you, everybody, for joining our call. Have a great rest of your November and a happy Thanksgiving.

Thank you. The Conference of New Lake Capital Partners has now concluded. Thank you for your participation. You may now disconnect your lines.