Newlake Capital Partners Inc
OTC:NLCP
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Newlake Capital Partners Inc
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Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the NewLake Capital Partners Fourth [First] [sic] Quarter and [Full Year 2022] [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.
Thank you, operator. Good afternoon and welcome everyone to the NewLake Capital Partners first quarter 2023 earnings conference call. I am joined today by Gordon DuGan, Chairman of the Board; Anthony Coniglio, President and Chief Executive Officer; Lisa Meyer, Chief Financial Officer; and Jarrett 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 maybe 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, 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, our 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 the press 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 U.S. Securities and Exchange Commission. This outlook reflects management’s view of current and future market conditions, including assumptions such as the pace of future acquisitions and dispositions, rental rates, occupancy levels, leasing activity, uncollectible rents, operating and general administrative expenses, weighted average diluted shares outstanding and interest rates.
With that, it’s my pleasure to turn the call over to Mr. Gordon DuGan. Gordon, please go ahead.
Thanks, Valter. Good morning and thank you all for joining us for this conference call. We are very pleased with our Q1 results and the business continues to perform well and to our expectation. At the same time it's well-known that the cannabis industry is going through a very difficult operating environment. Luckily and through the work and skill of our team, we have positioned our company well for this environment. Our dividend is well covered even with rent collection issues at a major asset of ours in Massachusetts.
We have essentially no debt with the lowest leverage public REIT that I'm aware of. And we have $89 million of undrawn capacity on our debt capital facility, which is very interactively priced. So we sit in a very good position for a difficult operating environment.
And given the capital markets reaction to safe legislation failing to pass prior to the most recent election and swearing in the House of Representatives, operational issues with some operators, stock prices for cannabis-related companies have been significantly impacted yet again. And while we sell the picks and shovels to this industry, which tends to keep volatility down relative to the cannabis operators, then we own mission critical facilities that those operators need to operate to be in the business in the states in which they do business. Sometimes they don't need our picks and shovels and we are seeing that in a current situation in Massachusetts.
We believe that this is a short-term phenomenon as sales grow in these pockets of overcapacity, we think then that will alleviate the overcapacity in the states where we are doing business. And I should point out, we've avoided some of the messes in places like California and Colorado, and elsewhere as we've been very selective in our exposures and our investment criteria. But we've seen some spillover in terms of operational issues in the states like Massachusetts and Pennsylvania, which again we think is a more short-term phenomenon in those states as opposed to some of the Western States.
Also, as you see in our press release, we have a stock buyback, which we've been implementing that's a sign of a well-run company that is in a -- that we are in a position to buyback our stock at these levels, because we've had a very conservative management of our balance sheet over the last several years, which allows us to be in a position to do that. I would also say we're cautious on new investing given the level of our stock price, but we are in the market meeting and discussing transactions with people at the same time.
And let's remember at the same time that these operational difficulties are happening states continue to legalize cannabis. The industry continues to grow. Kentucky is a good example, which is a very red state recently legalized medical cannabis. So we're continuing to see good momentum at the state level, despite some of the operational challenges.
And then the other reason for optimism safe has been reintroduced into Congress, Anthony will speak much more about that. But in summary, the business continues to perform well. We're seeing some challenges and we think we're very well positioned to deal with the challenges that we're seeing.
I'll turn it over to Anthony now.
Thank you, Gordon, and thank you everyone for joining our call today. Today, I'm going to address our portfolio, the industry and our capital management. But first, let's talk about our portfolio. As Gordon mentioned and Jarrett will discuss with us in more detail, we continue to have one property not paying rent. That was the case for the first quarter, as well as thus far in the second quarter. All other properties paid rent in full during Q1 and are current thus far in Q2.
As a result, we're forecasting second quarter rent collection to be similar to Q1 in the range of 90% to 93%, which may include a portion of a security deposit. I also want to point out that when we report rent collection, because some of you have asked about this, when we report rent collection, it's across all the properties we own and 100% of the capital we've deployed. We continue to believe that our strategy of focusing on limited license jurisdictions will serve us well, particularly during this difficult period for the cannabis industry.
When we look at the landscape of operator difficulties and defaults, they're largely concentrated in unlimited licensed jurisdictions such as Michigan, Colorado, Oregon and California. These unlimited licensed jurisdictions have pricing, taxation and competitive dynamics that challenge even the best operators. In fact, we've recently seen a few such as Curaleaf exit those markets recognizing the extreme difficulty in generating profit and cash flow from those states. We've avoided those unlimited licensed markets.
We do have one dispensary in the limited license jurisdiction of San Diego, where there are only 36 dispensaries serving 3.3 million people and that transaction and property is performing in line with our underwriting at the time of the transaction. So again, limited license jurisdictions we think are important to not only our initial underwriting, but to navigating the current environment.
Focusing now on the broader industry, while there certainly continues to be headwinds in the cannabis industry, we're starting to see signs of some stabilization. Operators have been making the hard decisions to improve their bottom lines. We've seen tenants and operators lay off employees back out of M&A activity, exit markets where they were underperforming and adjust operations to focus on improving their margins and their cash flow. While these measures are difficult to implement, they are necessary.
And I believe that we'll see a much more efficient landscape of operators and a much stronger industry as a result of these efforts and when we get to the other side of this difficult period. At the same time, we see tenants improving their operations. The industry as a whole continues to grow. Canada sales on [420] (ph), which is one indicator of demand, were up 5% to 10% year-over-year from 22%, 23% according to Flowhub and Gene Technologies.
On a state-by-state basis, we're seeing many areas of growth and optimism, adult use sales in Missouri and Connecticut are off to a strong start for the year, Delaware had legalized recreational use and Maryland just recently passed rules to implement a recreational market and begin operating an adult use program this summer.
Kentucky has legalized medical cannabis and we look forward to that program launching in ’24 and additionally, Georgia finally approved dispensaries and one of our tenants Curaleaf was one of the first two companies approved to begin medical sales in that state and they successfully launched at the end of April. There are signs of continued growth in the industry and when coupled with the fact that approximately half the country has yet to see adult use legalized, the table is set for future investment opportunities for NewLake is the industry scale into these new and exciting markets.
At the federal level, we see other areas of optimism and positive momentum for the industry. With the hearing on safe banking being held tomorrow and a number of cannabis-related bills introduced over the past few weeks. While we've been subdued on the likelihood of safe passing, it is noteworthy that the most recent bipartisan bill was introduced in both the Senate and the House in a coordinated fashion and a hearing in the Senate banking committee was convened fairly quickly. We're cautiously optimistic, but we'll know more after the hearing and if and when the bill hits the floor and other provisions are provided. Then we'll be able to give a better view if we think it will actually pass.
Lastly, some commentary regarding capital management. I wanted to reinforce Gordon's point that we seek to be highly disciplined around our capital decisions. We continue to believe that investing in cannabis real estate will provide our shareholders with attractive long-term returns. However, the market just is not appropriately valuing our stock. And as a result, we've begun taking the opportunity to buyback shares at accretive prices, further enhancing our capital structure for the benefit of our shareholders. We will continue to be disciplined about taking advantage of our low stock price and deploying capital into new investments.
Regarding new investments, we remain very patient in the deployment of capital. In our view, this is a marathon, not a sprint. We have approximately $90 million available to invest and we've been observing market developments to ensure we focus on quality properties in quality jurisdictions with quality tenants.
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.
Thanks, Anthony. I'll be covering our current portfolio, activity in the first quarter and outlook for the rest of 2023. We first want to provide an update on Revolutionary Clinics and Calypso. As Anthony noted, Revolutionary Clinics was Massachusetts cultivation and processing facility we own and represents approximately 10% of our rental income, has not paid rents in 2023. The company is working to rebuild their business after two unfortunate harvest related issues in 2022 and delays in opening adult use dispensaries.
During the first quarter, we applied 25% of their security deposit towards outstanding rents and will evaluate use of the security deposit on a quarterly basis as facts and circumstances evolve. We continue to believe the company can work through the current difficulties and cash flow constraints. Consultants have been hired to assist the company in managing through this period, including reducing expenses and improving operations. We are working with management on a long-term solution. They are close to harvesting their new crop planted in February and recently received approval to open their first adult use store in Summerville, which will boost revenue and margins as the year progresses.
While we remain cautiously optimistic, we maintain all of our rights under the lease and are prepared to take proper action, if and when we conclude it's in our shareholders' best interest. We cannot provide a timeline for resolution today, but we will continue to keep you posted on our progress. Regarding Calypso, this cultivation and processing facility we own in Pennsylvania. I wanted to note that they continue to work through their sale process and pay rent is originally contracted on a weekly schedule.
Moving to the overall portfolio. As of March 31, 2023, 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 alone along with the facilities there, representing approximately 1.7 million square feet. For retail, our basis across the portfolio was $389 per square foot. For cultivation, our basis is $243 per square foot, well below current replacement costs.
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 4.3 times for cultivation and 9.9 times for dispensaries. Please note that we use estimates where appropriate given each company reports slightly differently on a property level basis.
As of March 31, our portfolio had a weighted average lease term remaining of 14.6 years and an approximate 12.1% yield assuming all rent is collected with built-in growth through unfunded tenant improvements and lease escalators. In Q1, we deployed $1.4 million in tenant improvements for TI and closed on the previously announced option for C3's expansion in Missouri where construction is now underway.
As a reminder, we purchased the adjacent parcel for $350,000 and committed $16.15 million of TI to build 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 is expected to be $29 million to $306 per square foot.
Additionally in Q1, we signed a non-binding LOI to provide our tenant the miss with up to $6.5 million of improvements to the 100,000 square foot cultivation and processing facility in Phoenix. Please note that this is down from the original amount of $7.5 million indicated last quarter as the tenant is contributing an additional $1 million to the build out. If the transaction [Technical Difficulty] total funding, our basis in the facility is expected to [Technical Difficulty] 210 per square foot.
Including the Mint LOI, we have approximately $23.5 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 12-months and the Mint facility to be complete towards the end of Q3 beginning of Q4.
Last thing Q1, we mutually decided with the Mint to sell their facility in Massachusetts given the change in market dynamics. Our basis in the property is approximately $2 million or $50 per square foot and the Mint continues to pay rent as scheduled while we seek to sell the asset. This is an example of how we utilize our market knowledge and tenant relationships to make decisions that are beneficial to both our tenants and our shareholders by mitigating risk in the portfolio and allowing our tenants to better deploy their capital.
Beyond Revolutionary Clinics, all tenants are current across the entirety of our portfolio. Our tenants have all taken difficult, the necessary steps to optimize their operations, while we continue to watch the portfolio closely for potential issues. We methodically review property level, impair level financial information we received quarterly to try to identify problems before they emerge.
As the Massachusetts example shows, we monitor each state to understand the operating environment and maintain close contact with our tenants. Given the state of the cannabis market and economy as a whole, it is imperative for us to remain vigilant in managing the portfolio and conservative in our underwriting approach. While the industry is in the midst of a difficult period, we have started to see price stabilization across multiple state markets.
The U.S. average wholesale price for indoor flower has risen and is now about $1,350 per pound. This increase is driven by more mature markets that had previously seen significant price compression, such as Massachusetts where pricing has risen back to $1,600 per pound up from $975 in early March. In Illinois, which has seen pricing drop 43% from a tie in October of 2021, pricing has stabilized in the $2,300 per pound range in the past 60 days.
While we expect continued price compression in states like Illinois and Pennsylvania, it appears to be at a much slower pace. On the capital market side, it remains quiet with total raises in the operator sector down 87% year-to-date, compared to 2022. That said, stronger operators have been able to access capital and we're starting to see more interest in funding for private companies that are either cash flow positive or on that path.
As we look at the rest of 2023, we continue to underwrite new deals conservatively, utilizing our in-depth industry knowledge and learnings over the past four plus years. This approach will allow us to take advantage of our market position with $90 million of available capital to execute on accretive transactions with quality partners, who have been able to navigate the current environment and should be the long-term winners in the industry.
With that, I'll hand it over to our CFO, Lisa Meyer to walk you through our financial results in more detail.
Thank you, Jerry. For the first quarter of 2023, our portfolio generated total revenue of $11.4 million, an increase of 12.3%, compared to the same period in 2022. Property acquisitions, tenant improvement allowance with that existing properties, and the expansion of our Florida cultivation facility mainly drove the increase in total revenue.
Net income attributable to common shareholders for the first quarter of 2023 increased to $5.9 million, compared to net income attributable common shareholders of $5 million for the same period in 2022. On a sequential basis, we experienced a decline in our financial results from the fourth quarter of 2022, due to the non-payment of contractual rent from Revolutionary Clinics, which was approximately $1.3 million.
However, we applied 25% or $315,000 from their security deposit to partially offset the decrease in rental income. We continue to evaluate the situation and determine if and how much the remaining security deposit will be applied in future quarters. As Anthony mentioned, our rent collection is projected for the second quarter of 2023 to be in the range of 90% to 93%.
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 investment. For the first quarter of 2023, our portfolio generated FFO of $9.5 million or $0.44 per diluted share. AFFO of $9.9 million or $0.45 per diluted share. And we declared a cash dividend of $0.39 per common share. Our dividend is fully supported by the earnings power of our portfolio.
With a first quarter payout ratio of 85.6%. The dividend was paid on April 14, 2023 to shareholders of record at the close of business on March 31, 2023 equivalent to $1.56 per common share. Also, to improve shareholder value, pursuant to our stock repurchase plan, we acquired 49,307 shares of common stock at an average price of $12.63 per share.
At March 31, 2023, we continue to have a strong balance sheet with $399 million in gross real estate assets and total debt of only $2 million. We have $89 million available under our revolving credit facility, and we believe the company is well positioned to execute on our business strategy to grow earnings from investors, as well as redeployed capital.
And now, I will turn the call back to the operator for Q&A.
Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from John Massocca with Ladenburg Thalmann. Please proceed with your question.
Good morning.
Good morning.
So, maybe in terms of Revolutionary Clinics, maybe kind of go through the logic of why using the 25% of the security deposit in the quarter, was that something negotiated with the tenant? Are they on a schedule to repay that or any other future security deposit amounts that are used for rents?
We did not clear with the tenant John according to our documents and the way our leases work, that's not something that we have to get that approval from. We looked at the potential time horizon for resolution and wanted to take a very conservative approach to recognizing that security deposit. And so as we work through their restructuring of the business, we're going to continue to look out on a quarterly basis if in how we recognize the remainder of that.
Okay. And then maybe it sounds like the answer is not yet, but is there any kind of formal deferral or agreement or abatement agreement in place today and maybe any updates or color you can give on the progress towards some, kind of, more structured, kind of, new rent agreement in place for that asset?
There's no formal agreement in place yet, John. We're allowing them and their consultants to do is to rebuild the business and demonstrate what we really believe is the opportunity for this to be a growing thriving business again. But it is a situation where we need to see that before we take other options off the table. So we still have 75% of the security deposit left and we still have all of our rights and we'll be -- we talk to them on a regular basis at least once a week, if not multiple times a week. So we're watching the situation very closely and we'll make a decision once the landscape of what their future looks like is that we'll make a decision if we want to participate or if we want to take back the property. And then we'll make those decisions at that time when we have all the information.
Okay. And then maybe with regards to Mint, can you maybe provide some color maybe background on the logic behind the sale of the asset or the potential sale of the asset in Massachusetts? Maybe how is that disposition market in that state look today? And I guess maybe why sell the property or look to sell the property rather than look to retenant the property?
Sure. And sure, so when we entered into that purchase with the Mint -- the Massachusetts market in a very different place. Construction schedule there was behind in pricing admittedly was higher than originally anticipated to build out the facility. Given the current Massachusetts wholesale market and construction pricing where our basis is at $50 a foot, we agreed with Mint, it was better to reposition the asset for sale, most likely to a non-cannabis user given our current basis rather than move forward.
Two points I'd add, one in Massachusetts, given the excess supply in the wholesale market that exists, it became cheaper for the operator to acquire a third-party product versus manufacturing their own in that market. And then point number two, was the capital that the tenant would have put into that property in their opinion and we would agree with it is better served building out their platform in other areas and getting a better ROE on that capital, for instance acquiring dispensaries in Arizona, where we are building their build to suit. So they're going more vertical in Arizona where we're going to have a cultivation facility and from our perspective, we would fully support that capital decision between the two.
Okay. Is that Massachusetts asset -- cultivation asset producing at this point or is it still kind of…
No.
Okay. [Multiple Speakers]
[Technical Difficulty] paying, right, but the cultivate, it was never built out there.
Never operational.
They never got it to that point where it's operational.
That makes sense. And then just to kind of clarify something anything that was kind of implied in your remarks. But essentially there's been no security deposits applied toward 2Q ‘23 rent at this point, obviously there’s potential maybe with revolutionary. But no either other tenants or even at this point yet revolutionary in the 2Q ‘23 rent?
Yes. So I'll be crystal clear that the only security deposit we've ever applied was the $300,000 that Lisa talked about applying Q1 for Revolutionary Clinics. We have not even through Q2 at any discussion with Revolutionary Clinics amongst ourselves about what to do security deposit wise for them. And I want to reiterate the commentary that thus far in Q2, all of our tenants are current in their rental payments aside from rent [Indiscernible].
Okay. Perfect. And then maybe kind of bigger picture, what's your outlook right now for deploying additional capital? It sounds like you're being relatively conservative just given the kind of environment, but has that also been a product of maybe the demand for capital from tenants decreasing as operators have looked to kind of pair back operations a little bit and focus on being kind of EBITDA and cash flow positive?
Why don't you talk about TI in the timeframes around the TI and I'll take the macro part of that?
Yes. So from a TI perspective, we expect the $23.5 million outstanding to go out over the next call it 12 months between C3 and the Mint. And then from a macro perspective, we continue to see transactions. We're being conservative in our underwriting and do think you made the point, operators are being more conservative in their expansion plans given the state of the market and focus on positive cash flow. But we're also seeing new markets coming online. New Jersey, Connecticut, Missouri, Maryland, so we are seeing activity, it's just a function of being conservative in our underwriting and using our capital wisely in this market.
And what everybody is pulling back on CapEx in the industry in order to preserve cash in my opinion very appropriately. So remember that when we provide capital for the real estate, whether it's a dispensary or a cultivation facility, it also requires capital on the part operating expense capital on the part of the operators themselves to either acquire inventory for dispensary or to acquire equipment to get into the facility and hire people. So that CapEx and that type of expense endeavor is something that people in the industry are trying to avoid right now and instead they're reducing costs and optimizing the existing platform to maximize their cash flow from operations.
Okay. And then you touched on safe banking a little bit in the prepared remarks. But as we kind of think about that whole process and how it maybe will go through in Washington or be worked around in Washington? How does that impact deal flow and maybe even cap rates? Is that something that operators are thinking about today as they think about their cost of capital and maybe changes to their cost of capital in the future? Or is that just they're really more focused on the here and now and if they need capital, they're going to kind of take the pricing that's out there?
My observation is that the operators have evolved and they're thinking it used to be two or three years ago. Operators would say when safe banking happens, the world is my oyster and my cost of capital drops to the mid-single-digits. I think people are realistic now that if safe banking does happen, then it will bring in some more capital to the industry. But I don't believe that the operators expect to realize the significant cost of capital compression that they were thinking they would get a couple of years ago.
Now I think they're excited to just have the opportunity to have an expanded base of investors to raise some debt and potentially equity capital from. For us, we think it's an extreme positive for the industry. We would be encouraged if there were provisioned in safe banking to allow credit card transactions. Most people estimate anywhere from 10% to 20% increase in top line sales if they started accepting credit cards. So beyond the safety and soundness of the provisions of safe banking for moving from cash to non-cash transactions, there is that boost to top line revenue, which will really help this industry from a credit perspective and really boost their operating cash flow. And that's obviously very positive from a landlord perspective anything that improves their operations.
Okay. And then one last kind of detail one as we think about all the turmoil that's occurred in the kind of regional banking market over the last couple of weeks and months, does that impact your ability to kind of use the revolving credit facility you have at all or is that kind of a non-issue given that's all just in place today?
It's a non-issue, because it's already in place. So we have very good banking relationships without -- with the regional banks that we deal with. So it's not an issue.
Okay. That's it for me. Thank you very much.
Thank you, John.
Thanks, John.
[Operator Instructions] Thank you. There are no further questions at this time. This concludes the question-and-answer session. And this concludes…
Thanks, everybody. Have a wonderful day.
This concludes today's conference. You may disconnect your lines at this time. Thank you for participating and have a pleasant day.