Newlake Cap Partners Inc

Good day and welcome to the New Lake Capital Partners second quarter 2025 conference call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, you may press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Walter Pinto from Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome, everyone, to the New Lake Capital Partners second quarter 2025 earnings conference call. I'm joined today by Gordon Dugan, Chairman, Anthony Coniglio, President and Chief Executive Officer, and Lisa Meyer, Chief Financial Officer. Before we begin, I'd like to remind everyone the statements made during today's conference call may be deemed forward-looking statements within the meaning of the safe harbor of the Private Security Delegation Reform Act of 1995. The actual results may differ materially due to a variety of risks, 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 8 , as well as the company's 10 , 10 , and other reports filed periodically with the SEC. 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. With that, it's my pleasure to turn the call over to Mr. Gordon again. Gordon, please go ahead.

Thank you, Walter, and good morning, everyone. I appreciate you all joining us today. We were pleased with our second quarter results as New Lake delivered solid performance in a challenging cannabis landscape. Our second quarter dividend of 43 cents per share represented an AFFO payout ratio of 79%, just below our targeted range of 80 to 90%. Our portfolio has remained resilient through a difficult period for the cannabis sector, though we recognize we are not immune to the ongoing financial pressures faced by some industry participants. Anthony will provide more detail on an emerging default with a tenant representing approximately 5.9% of our annualized base rent a little later on this call. I think what's important for our shareholders is that we actively enforce our rights under the lease agreements and remain committed to maximizing shareholder value in these distressed situations. Additionally, our 79% payout ratio provides some cushion to navigate the situation and continue to support our dividend distributions in the near term as we work through this situation and any other potential situations. In an environment where some peers are distributing a larger share of earnings, New Lake's lower payout ratio gives us valuable flexibility to manage potential challenges. I would also point out that cumulatively, we've paid over $6 in dividends since going public in 2021, which is a nice indication of the dividend paying capacity of our company. Looking ahead, we expect the industry will continue to face headwinds as it awaits federal reform and works through elevated levels of leverage. Against this backdrop, we will remain vigilant and proactive in monitoring new developments and are steadfast in our focus on maximizing long-term value for our shareholders. Thank you for joining us today, and with that, I'll turn the call over to Anthony.

Thank you, Gordon, and good morning, everyone. While second quarter results were in line with expectations, we are disappointed to see that future quarters may be adversely impacted by the restructuring activities at Air Wellness. I'll start with Air, then I'll move to commentary on second quarter financial performance, portfolio activity, and industry development. for turning it over to Lisa. Last week, Air Wellness announced that it had entered into a restructuring support agreement with its senior note holders. The restructuring plan involves the purchase of certain air assets and operations by the senior note holders with a sale or a wind down of the remaining air assets and operations. We currently lease two properties to Air, a 38,000 square foot cultivation facility in Pennsylvania and a 56,000 square foot cultivation facility in Nevada. Together, these properties represent approximately 5.9% of our annualized based rent. AIR has made monthly lease payments on these properties through and including July 2025. However, as of today, August rent payments have not been received. We do not expect the two properties currently leased to AIR to be part of the transaction with senior note holders, and thus we're preparing for operations at these facilities to either be sold or wound down. The company holds approximately three and a half months of security deposit on each property, and we intend to fully enforce our rights under the lease agreements and aggressively work to replace any defaulting tenants. We'll provide updates as appropriate. Pivoting to our second quarter financial performance, we collected all rent due during the second quarter, which is noteworthy given the difficult climate for the cannabis industry. Revenue and AFFO were higher than last year, and our payout ratio was under 80%. In fact, Since our IPO four years ago, New Lake's payout ratio has remained within or below our target of 80 to 90%. I want to remind everyone that the payout ratio is the percent of our AFFO or free cash flow that is used to pay our dividend. As shareholders, this is an important ratio because a more conservative payout ratio provides a buffer for inevitable portfolio disruptions supporting dividend distributions. Next, I'd like to talk about our portfolio. During the quarter, we acquired a dispensary in Ohio and entered into a lease with Cresco Labs for an aggregate investment of approximately $875,000, including tenant improvement allowance, which is expected to be funded over the next 12 months. We also executed a dispensary swap with Curaleaf. Our tenant's dispensary was located in a town that opted out of adult use when the state transitioned from a medical to adult use program. Similar to what we have done with others, we worked with our tenant on a deed-for-deed exchange, accomplishing their goals and maximizing value for our shareholders. At our Fitchburg, Massachusetts facility, leased to Revolutionary Clinics, the tenant remained in the premises longer than expected, providing New Lake with additional rent through the end of the second quarter. In early July, our tenant vacated the building, and we've been actively marketing the property for re-leasing. There's been some early interest, but given the difficulty of the Massachusetts market, we expect that it will take some time to release the property. Also during the quarter, we welcomed a new tenant, Butter, to the portfolio with their acquisition of a Connecticut dispensary from Acreage that we own. There were no tenant improvement disbursements during the quarter. On our last call, we mentioned that C3 was reevaluating the build-out of their Connecticut cultivation facility where they received final construction costs far in excess of their and our expectations. C3 continues to pay rent on the facility while they're evaluating options. Next, let's take a look at the latest developments in the industry. There has been a lot of noise recently around reform for the cannabis sector, but no definitive statements from the Trump administration. If you recall, President Trump expressed support for cannabis rescheduling, as well as safe banking and the States Act. It's not a surprise that the administration is focused on other priorities during the first seven months of its term. However, with a new DEA administrator recently confirmed and increasing support from those influential to his administration, we do anticipate some indication of reform potential in the second half of this year. Away from the federal level, it was great to see Texas expand their medical cannabis program. The modifications that will be implemented will broaden patient access and grow the number of licensees, which should fuel demand for real estate capital in this state of 30 million people. Delaware launched adult use sales last week. Kentucky is preparing for their first medical cannabis sales later this year. Minnesota's adult use program should launch later this year, and Pennsylvania's legislators continue to debate legalizing adult use in the Commonwealth. Notwithstanding the slow pace of reform at the federal level, it's great to see this continued progress within the states. With that, I'll turn the call over to Lisa.

Thank you, Anthony. In the second quarter of 2025, our portfolio generated total revenue of $12.9 million, a 3.8% increase year over year, reflecting the quality of our portfolio. Key drivers of this increase include... a full quarter of rental income from our Connecticut cultivation facility acquired in May of 2024 and our Ohio dispensary acquired earlier this year, we also began receiving rent in the quarter from our May 2025 acquisition of a second dispensary in Ohio. While we did not fund any tenant improvements during the second quarter, we received a full quarter of rental income from $3.8 million in improvements funded after June 30, 2024, across our cultivation facilities in Arizona, Connecticut, Missouri, and Pennsylvania. And finally, our annual rent escalators, which continue to provide consistent revenue growth across the portfolio. As mentioned, Revolutionary Clinics continued to pay 50% of contractual rent during the second quarter. The tenant vacated the building in mid-July, and we do not expect any further rental payments. The estimated reduction in revenue is expected to be approximately 1.7 cents per share per quarter, excluding carrying costs until the property is released. During the three months ended June 30th, 2025, our acquisition activity included the acquisition of a dispensary in Ohio for $500,000, along with a commitment to fund $375,000 in improvements. The dispensary was leased to Cresco. A deed-for-deed like-kind exchange with CureLease involving the transfer of a Mokina, Illinois dispensary for a Brookville, Pennsylvania dispensary. The exchange involved assets of similar value, and the new lease extended the term by two and a half years. Net income attributable to common shareholders for the three months ended June 30th, 2025 was $7.3 million or 35 cents per diluted share. Adjusted funds from operations totaled $11.5 million for the quarter, representing a 4% increase year over year. The growth was primarily driven by the increase in revenues discussed earlier, along with lower general and administrative expenses, most notably in compensation and professional fees. We declared a second quarter 2025 cash dividend of 43 cents per share of common stock, or $1.72 on an annualized basis. The dividend continues to be fully supported by the earnings power of our portfolio, with a second quarter payout ratio of only 79%. This reflects our ongoing commitment to delivering consistent returns to shareholders while maintaining a strong balance sheet. The dividend was paid on July 15, 2025, to stockholders of record as of June 30, 2025. As of June 30, 2025, our balance sheet remained solid, with $432.2 million in gross real estate assets and a very conservative debt profile, with a 1.6% debt to total gross assets. and no maturity until May of 2027. Liquidity remains strong with $104.3 million available, including $21.9 million in cash and $82.4 million in capacity under our revolving credit facility. We have ample flexibility to execute on our business strategy and grow earnings by continuing to invest in quality assets. Lastly, I wanted to briefly touch on air wellness, which we mentioned in both our earnings release and our 10Q. We currently lease two properties to air, a cultivation facility in Pennsylvania and another in Nevada. As of now, we've received rent payments through July and hold approximately three and a half months of security deposit, which will be applied toward unpaid rent as we work through this situation. We are closely monitoring the situation and intend to exercise all rights available to us under the lease agreements. With that, I will turn the call over to the operator for Q&A. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Pablo Zuanek with Zuanek and Associates. Please go ahead.

Good morning, everyone. This is Rahul on for Pablo. We have a few questions, and for my first question, So far this year, you have only acquired three stores. Without the start of rec sales in any major state, do you see room in 2025 for more large-scale activity in terms of acquisition or build out of cultivation facilities this year?

Hi, Ravel. Anthony here. So, thanks for your question. The development of cultivation properties for sure is significantly less than previous years, and it's for a number of reasons. As you point out, there are fewer state conversions. You also do have Kentucky trying to stand up an industry, and there's also interest in building capacity in Minnesota. But I would say, by and large, I do expect a subdued level of demand for cultivation projects in the second half of 2025 versus prior years.

Got it. And next, regarding the $11 million in unfunded commitments with C3 Industries, will that be funded or not?

Yeah, I made some comments earlier. At this time, we're working with our tenant to evaluate options. And so for the time being, investors should expect that we'll continue our pause on funding that additional TI for the foreseeable future.

Sure, got it. And can you confirm acreage is up to date with rental payments?

Yes. Aside from what we've mentioned on this call with AIR, all of our tenants are current. through and including August rent.

Got it. And my final question is, are some MSOs becoming more open to sale lease back than in the past? This morning, Verano seemed to leave the door open to sale lease back.

Well, I do want to point out that we own 34 properties and 31 are leased to multi-state operators. So, I think historically over our six-plus year, history we've been able to execute deals with MSOs. To answer your question about the perspective today, sell-leaseback transactions are an important tool for companies across all industries to fund those real estate capital needs. So this isn't something specific for cannabis. All industries utilize sell-leaseback as that real estate capital tool. I do believe that MSOs are open to leasing and sell-leasebacks. Again, we have a very sizable portfolio with MSOs. I think the hesitancy for some has been the pricing historically, and for some it's been the duration of the leases. But again, away from cannabis, net lease rates such as New Lake compete every day very effectively versus Main Street banks and private landlords because they become experts in an asset class and they serve the needs of the tenant very well. And that's what we're building here at New Lake. And so we expect to see demand for the product and capital that we have for our tenants. And I think when you look at what we just did with Curaleaf, working with them to move a property, and we've done that now a handful of times with tenants, it shows that we understand the industry and we could be a good long-term partner with our tenants.

Got it, Anthony. Thank you. That's all for me. Thank you.

Thank you. Again, if you have a question, please press star, then one. Our next question comes from Michael Peterson with Peterson Wells. Please go ahead.

Yeah, Anthony. I had a couple quick questions. One regarding the lack of leverage on the balance sheet, and secondly, you list the real estate assets being around $432 million, yet your market cap of the company is close to $285 million. With your lack of leverage, 1.6% leverage, I'm assuming actually if you take the cash, you could eliminate the debt if you wanted to, which there's no reason to, but... At the 12.75% or 12.5% yield the stock trades at, the question I have is if marijuana or cannabis was made illegal, Trump signs an order to make it illegal, and everybody was out of business, the real estate that you show on the books at $430 million, is that the cost that you paid for, or is that an updated estimate of the value of the real estate, or... How would you comment on how you come up with a $432 million number?

So the real estate assets are recorded in accordance with GAAP. So when we acquire an asset, that asset is recorded on the balance sheet at its fair value, and then we don't fair value it going forward. So it's at the acquisition cost and any improvements that we put into that asset. Under GAAP, we're not required to fair value real estate assets. unless it's held for sale.

Okay. So, you know, at paying out currently 79% of free cash flow, you know, even with, let's say, you don't recover anything of the levy that you're no longer paying, I mean, starting at a 1250 yield on the stock, I mean, can you explain why, I mean, where the risk is that you would see going forward from a shareholder perspective?

So, Michael, thank you for the question. I think the risk in our business, and it's one that we've talked about on all of our calls since we've gone public, is around the tenancy and the collection of rent for this industry. It's one of the reasons why our yield, when you look at our disclosed yield, it's higher than what you would see for a typical REIT, because the cannabis industry itself is more high risk and more volatile than other industries in the U.S. And that's particularly driven by the newness of the industry, but also this disconnect between state and federal law, where we have over 40 states that have some form of legal cannabis infrastructure, but it's still a Schedule I drug at the federal level. And so for us, the biggest risk that we manage is in the underwriting and looking to lease to quality tenants in this industry and then the ongoing collection of rent.

Right. You know, my question is, you know, in those REITs that, you know, don't have those specific risks, you know, there are many cases 40, 50, 60, and even up to 70% leverage. You know, do you not feel that with the... lack of leverage basically at all, that that wouldn't de-risk the portfolio to some extent, even if, I mean, obviously you want to continue collecting rent, but I'm just saying, worst case scenario, the real estate is probably worth more than what the stock trades at, or would that not be a fair estimate?

I certainly don't want to speculate on stock valuation at all. What I can say is is that when we look at constructing the portfolio and underwriting the portfolio, we're targeting companies that we fully expect can continue to pay rent over the life of that lease. And when you look at the remaining weighted average lease term, we're around 13 years for the portfolio. So there's meaningful duration. The other point that I would make is that even though we're under levered today, We look at leverage as the opportunity to find incremental growth. We're not going to seek transactions just so we can lever up. We're seeking only quality transactions that we think will be long-term accretive to our shareholders. And so we like sitting here with very light leverage as we watch this industry continue to unfold and hopefully get some federal reform in the near to intermediate term.

Okay, no, appreciate the answers and great work, you know, working through a difficult environment. And I think your lack of leverage is going to pay huge dividends going forward if there are opportunities. Thanks.

Thank you, Michael. Thank you. Ladies and gentlemen, to ask a question, you may please press star, then 1. We have no further questions at this time. I would now like to turn the conference back over to Anthony Coniglio for closing remarks.

Thank you, Operator, and thank you, everyone, for joining our call today. Have a great remainder of the summer.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.