Newlake Capital Partners Inc
OTC:NLCP
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Newlake Capital Partners Inc
Earnings Call Analysis
Summary
Q2-2024
NewLake Capital Partners saw revenue and AFFO rise by 9.5% and 11%, respectively, compared to the previous year. The company increased its quarterly dividend by over 9% to $0.43 per share, reflecting an 80% growth since IPO. NewLake maintains a robust balance sheet with $103 million in liquidity and minimal debt. Significant regulatory changes, including cannabis rescheduling, could enhance tenant cash flows by $500 million annually. Upcoming state ballot initiatives in Florida and potential adult-use legislation in Pennsylvania present further opportunities for growth.
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Good morning, and welcome, everyone, to the NewLake Capital Partners Second Quarter 2024 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 morning, and welcome, everyone, to the NewLake Capital Partners Second Quarter 2024 Earnings Conference Call. I'm joined today by Gordon DuGan, Chairman; 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 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 8-K as well as the company's 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 that 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 United States 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.
Thank you, Valter, and thank you, everyone, for joining our call today. 2024 is shaping up to be an important year for the cannabis industry. Front and centers, the DEA's proposal to federally reschedule cannabis from Schedule I to Schedule III. And at the state level, they are important catalysts such as Ohio launching adult-use sales earlier this week and the vote in Florida for adult use this coming November.
While these catalysts are exciting to think about, I'd like to focus my comments today on NewLake in the context of the broader REIT industry. I think what often gets lost is how much this company has achieved and how it fits into the broader landscape as a REIT.
Since NewLake's IPO, 3 years ago, the company has raised its dividend 8 of the last 11 quarters, capped by our most recent increase to $0.43 per share for the second quarter of 2024. The dividend has grown from $0.24 a share for our first quarter as a public company to this $0.43, an 80% increase over the past 3 years. So tremendous progress. Of the more than 200 publicly traded REITs, NewLake ranks among the top tier in terms of dividend increases over this period of time.
I would also like to talk a little bit about our profit margin and cash flow with annualized revenue of roughly $50 million in annualized AFFO of approximately $44 million. NewLake has some of the best profit margins among publicly traded REITs. Our profit margins compare very favorably to other REITs in any other industry whether they're highly regulated like cannabis or gaming or not. You'll see that our margins are superior to other net lease REITs and other REITs in general. And that's something that we're very proud of.
Furthermore, we have only $7.6 million of debt outstanding with only a 0.2x debt to EBITDA, significantly below our peer group average. And with $82 million of available credit capacity, we have one of the best balance sheets in the industry with ample capacity to continue to grow revenue and AFFO. As the cannabis industry continues to evolve, real estate will continue to be central to operators growth strategy and NewLake is very well positioned to capitalize on that demand.
In summary, we have a great business model supplying the picks and shovels to the cannabis industry. And we're doing it with a keen focus on shareholder value while maintaining a very large amount of liquidity and dry powder going forward.
Now I will turn it over to Anthony.
Thank you, Gordon, and thank you, everyone, for joining our call today. We're pleased with our second quarter results with revenue and AFFO up 9.5% and 11%, respectively, as compared to the second quarter of 2023. We raised our dividend yet again for the second quarter, an increase of over 9% year-over-year with a dividend of $0.43 per share, we had an AFFO payout ratio of 82% during the quarter, providing a meaningful coverage for our dividend.
Now shifting to some industry highlights. On May 21, the Department of Justice formally filed a notice of proposed rule making to move cannabis from its current Schedule I to Schedule III. The comment period ended July 22, and we now await a final rule to be published. I would note that this proposed rule had over 43,000 comments, which is unprecedented for a drug rescheduling and had more than 90% of the comments supportive of a move away from Schedule I, which interestingly mirrors the level of national support we've seen for medical cannabis in polls from Pure Research and Gallup over the past few years. This will be in a significant milestone for the cannabis reform effort as this move from Schedule II to Schedule III, would not only allow for important research.
But as I mentioned last quarter, we would remove the onerous Section 280E taxation, which we expect would provide a meaningful tailwind to the cannabis sector. A final rule rescheduling to Schedule III would instantly improve the credit quality and cash flow position for our entire tenant portfolio by reducing the taxes they pay.
Additionally, as the financial profile of our tenants improve, we would expect valuations for the sector to improve, setting the stage for companies to consider recapitalizing their balance sheets, thus resulting in further credit improvement for both the industry and our portfolio. We estimate that elimination of 280E would save our tenants a collective $500 million annually.
Also, on the ballot this November in Florida is an adult use initiative that Gordon indicated. And that would legalize marijuana for adults 21 and older in the state. This ballot initiative requires 60% support to pass and recent polling suggests enough support to pass, but there certainly is a long way to go and we'll be watching closely those results.
With over 22 million people in Florida and adult-use program is expected to create another opportunity for our tenant base to increase scale and profitability. As Florida is a terrific medical state today, this would not only benefit our Mount Dora tenant Curaleaf but also our other tenants that have operations throughout the state, most notably Trulieve, Ayr, Cresco and The Cannabist.
It's also been great to see Ohio residents embrace adult-use sales, which commenced earlier this week and we would expect a similar response in Florida. We also see adult use on the horizon for Pennsylvania, where 6 -- excuse me, where 5 of its 6 surrounding states have adult-use programs. While Governor Shapiro included adult-use in his budget, the legislature was just not able to get it over the finish line. However, the industry is optimistic for adult use to become a reality in Pennsylvania in the 2025 legislative session.
During the second quarter, we also implemented an At The Market or ATM program. While we have ample capital at this time with our available credit facility, given the meaningful catalysts in play for the sector, we believe it's prudent to have an ATM in place to take advantage of opportunities if and when they arise. Similar to our shareholder-oriented approach to executing under our share repurchase program in 2023, we will be keenly focused on executing accretive transactions for our shareholders.
Next, I'd like to reiterate from our last quarterly call that our focus on uplisting to a major exchange remains a top priority. We continue to explore the benefits of a listing on the Toronto Stock Exchange but have nothing tangible to share at this time. I know that this is a top of mind for our shareholders and it remains top of mind for our team. We believe unlocking custody for our stock will lead to increased institutional demand. And since we operate the company to qualify for all major exchange listing requirements uplifting can occur fairly quickly once the exchanges begin accepting cannabis-related businesses.
However, I should caution that there is no certainty that this can occur and we are providing no time lines on what it could occur.
Lastly, I want to highlight the work we've been doing over the past few quarters to increase investor awareness of NewLake and the compelling opportunity our company presents. We have criss-crossed the country telling our story in conferences and one-on-one meetings, both in person and virtually. We believe these efforts have been helpful as we have seen trading volume increase in 2024 from prior years. We will continue to engage our current and future shareholders, and we hope to see some of you either in person or virtually in the months and quarters to come.
I'll now turn the call over to Jarrett.
Thanks, Anthony. I'll provide an overview of our current portfolio, activity for the quarter and provide insight into what we are seeing from operators across the country.
Starting with our portfolio, as of June 30, we had committed a total of $445 million across 17 dispensaries and 15 cultivation facilities in 12 states with 13 tenants, representing approximately 1.7 million square feet covered. Our cost basis in retail properties is $389 per square foot. In cultivation properties, it's 254 per square foot. Both of these metrics are well below replacement cost today. 67% of our current rent is from publicly traded operators, 83% is from multistate operators and 93% is from properties in which the tenant is vertically integrated in the state.
EBITDA coverage for the latest available quarter was 3.6x for cultivation and 8.6x for dispensaries, a slight decrease for cultivation and a one turn decrease 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.
Moving to a tenant update. Revolutionary clinics has been revitalizing their garden and implementing a new strategy. Conditions in the Massachusetts market continue to be difficult. And while the company pays full rent in April and May, Rev only paid 50% of June rent. While the facility is back to producing high-quality flower, we expect the company to pay 50% of rent for remainder of the quarter, liquidity and work to lift sales. We're in constant dialogue with Rev's management team and will provide updates as appropriate.
During the quarter, we closed on a new transaction with existing partner C3 in Connecticut for 60,000 square foot of facility, with a $4 million purchase price and will provide a construction allowance of $12 million for a total investment of $16 million. This transaction demonstrates our ability to find quality deals with strong tenants in state markets with regulatory dynamics set up for success even in a tight capital environment. We are excited to grow our partnership with C3, one of the top private companies in the sector.
In regard to our properties under development, we deployed $3.5 million of construction allowance in the first quarter. $2.5 million went to C3 in Missouri, which finished construction on their expansion. The remainder went to the Mint and Phoenix, where we also agreed to provide an additional $800,000 as they complete construction of their facility. As of June 30, we had $15.8 million of allowance outstanding, consisting mainly of the $12 million recently committed to C3's Connecticut facility.
Now on the ground, we continue to see mature markets stabilize with compressed margins. As new stores open up, we see average top line store revenue and unit retail prices drop with greater competition. However, in most instances, lower prices and easier consumer access for a higher volume and greater demand for wholesale products. Stronger operators are adjusting to this dynamic as demonstrated on Q2 earnings calls from our tenants Ayr, Cannabist, Curaleaf and Trulieve, all who noted and higher wholesale revenue offsetting a decline in retail.
As for newer markets, we continue to see growth and recently transition growth to new states such as Connecticut, Missouri, Maryland as well as New York, which is starting to show its potential as more legal dispensaries open and regulators make progress shutting down the illegal retail channels.
Additionally, as Anthony mentioned, Ohio launched adult-use on Tuesday. We are encouraged by the quick implementation following the positive vote in November of 2023 with limited licenses and the regulator allowing medical operators to convert to adult use on day 1. We own 2 dispensaries in Ohio, but our tenants Ayr, Acreage, Cannabist, Curaleaf, Cresco, Trulieve and PharmaCann, all have operations in the state. And their financial performance should benefit from the increase in sales in the state of nearly 12 million people where the medical program was smaller due to limited medical conditions. For reference, Pennsylvania, which has approximately the same population, had $1.5 billion in medical sales in 2023 versus Ohio, which sold under $500 million. This is a program that should have a lot of upside.
I also think it's often overlooked that Ohio, a state that has become increasingly red in recent years, supported the adult-use initiative last year, and it's great to see sales commence so quickly. I also want to make note of the recent increase in sales of intoxicating hemp products made possible by a loophole in the 2018 Farm Bill. Since the product is unregulated, sales data is difficult to obtain.
We have observed the increased prevalence nationally and believe it is emerging as a competitive product for state legal operators. We have also seen cannabis operators Curaleaf and GTI entered the space recently as they can sell directly to consumers online and in regular way retail. Given the unregulated nature of the product, we have started to see some states adopt restrictions on sales such as Missouri in the last few weeks. And this effort in Washington to close the loophole that was created in 2018. We will continue to follow this trend closely as it evolves.
Lastly, on deal activity. We continue to see increased deal flow as operators restructure their debt, M&A picks up and state level transitions start to move forward. We have ample capital available on our credit facility to fund growth while we maintain our underwriting discipline and focus our capital on high-quality opportunities.
Over to you, Lisa.
Thank you, Jarrett. In the second quarter of 2024, our portfolio generated total revenue of $12.5 million, which is a 9.5% increase from the previous year. Reflecting the quality of our portfolio. The key factors contributing to this increase includes the acquisition of a $4 million cultivation facility in Connecticut that we also committed to fund an additional $12 million in improvement, base rent growth from the funding of building and tenant improvements in our Arizona and Missouri cultivation facilities, and annual rent escalators that consistently boost our revenue.
Also, rental payments from Revolutionary clinics, which did not pay contractual rent in the second quarter of 2023 contributed to the increase in revenue. As Jarrett mentioned, Revolutionary clinics pay only 50% of June rent, and we expect them to pay 50% of their contractual rent in the third quarter as they work through their liquidity issues. During the 3 months ended June 30, 2024, we invested $7.5 million across 3 properties and ended the quarter with a total unfunded commitments of $15.8 million.
Net income attributable to common shareholders for the 3 months ended June 30, 2024, totaled $6.8 million or $0.33 per share, AFFO for the 3 months ended June 30, 2024, was $11 million or $0.53 per share, an increase of 11.2% when compared to the same period in 2023.
On a sequential basis, there was a slight decrease in revenue in the second quarter of 2024, largely attributable to reimbursables recorded in the first quarter. However, AFFO grew modestly by 0.5% compared to the first quarter, driven by the increase in rental income from our investment activity and annual escalators.
We increased our second quarter dividend -- cash dividend to $0.43 per share of common stock equivalent to an annualized dividend of $1.72 per share of common stock. The dividend is fully supported by the earnings power of our portfolio with a second quarter payout ratio of 82%. This demonstrates our commitment to delivering consistent shareholder returns while maintaining a strong balance sheet.
The second quarter dividend was paid on July 15, 2024, to stockholders of record at the close of business on June 28, 2024. On June 30, 2024, our balance sheet remains strong with $428 million in gross real estate assets and only $8 million in debt outstanding with a debt-to-EBITDA ratio of less than 0.2x. Our liquidity position is solid with $103 million available, including $20.7 million in cash and $82.6 million in untapped capacity on our credit facility.
Finally, in the second quarter, we entered into an equity distribution agreement for an at-the-market program, allowing us to issue up to $50 million of our common stock. The program was implemented to strengthen our position for ongoing growth. The company is strategically positioned to execute our business strategy to grow earnings for investors as we prudently deploy capital.
And with that, I will turn the call back to the operator for Q&A.
[Operator Instructions]
Our first question comes from the line of Pablo Zuanic with Zuanic & Associates.
Anthony, I have a few questions around the pipeline, but maybe let's start first with Ohio. At your Investor Day, you play down the initial spirit in CapEx needed, making the argument that there was enough capacity. I don't know if you want to review that estimate right now, if you want to provide some color around that.
I'll provide some high-level commentary, and then I'll hand it over to Jarrett for some more detail. So what we were talking about in Ohio is that leading into the launch and with the uncertainty around when those licenses would be granted. We saw operators taking a more judicious approach to build out ahead of that adult-use launch versus what we had seen in other markets. In previous years, you had seen a lot more build out in advance of the launch. And so I was giving commentary about a little bit more tepid demand.
Jarrett, why don't you provide some additional color?
Sure. I think that, that still maintains Pablo, I think that operators are being more cautious here than they had been previously due to low supply in other states as well as regulatory dynamics in Ohio, which prevent operators growing past a certain Canopy level. So while we are seeing some activity in Ohio, we don't think it will be the same as when some other states transition, i.e., Illinois, but there is selectivity.
Okay. Understood. And then just staying on pipeline-related questions. Can you talk about with existing clients? I know that it's sort of about having right of first refusal, but I would assume that clients that arrange our books and they may need to expand in Florida or other places that they would come to you first because you already have a relationship with them or the industry doesn't necessarily work that way.
That's exactly right. And we -- that's exactly right, Pablo. And what's important about having been one of the early movers in the sector as we've been developing relationships with the industry for over 5 years. And when you have a lease in place, it's much easier for an organization that has familiarity with you, has a negotiated document with you to turn to you. And we certainly do see those conversations coming across the transom on a regular basis. It doesn't mean that those properties and those transactions all fit our credit risk profile on a particular property or the economics work for us and can be accretive to our shareholders, but we certainly do see a fair amount of that from our existing tenant base.
Okay. And staying on the same topic, and maybe this is for people who are not so familiar with the industry, but I understand that the services that sell leaseback operator like yourself and your peer offer may be different when the mortgage REIT companies like AFCG and refi offer. But I'm just trying to understand from a customer perspective, from a borrower perspective, do they choose one versus the other depending on what states they are in the industry cycle on the size of investment? I'm just trying to understand what is the real competition between one and the other?
Yes, let me first say more macro that both a sale-leaseback product and a mortgage product can exist in the company's capital stack, and they were appropriate at certain times. We ultimately believe that the industry recognizes that it's not a good use of their capital to invest it in a hard asset like commercial real estate.
And we believe that over time, those organizations that still have real estate capital on their balance sheet, will unburden the balance sheet, recycle that capital into more productive use because I do believe that investors when they provide capital to a company, they want that company to deploy the capital in its main revenue business. And so investors in a cannabis company want that management team to be growing revenues and growing EBITDA and earnings with that capital.
So strongly believe that over time, this industry will find that there's no need for it to own capital. And I will tell you that over the last couple of years, we've engaged in this dialogue with management teams about do they take the shorter-term debt, do they enter into a sale-leaseback process. And I'll share with you what we tell them is what we find is the companies that choose sale-leaseback are doing so because not only is it competitively priced relative to where the debt opportunity is today, not only do they want to get maximum proceeds because usually your sale-leaseback transaction provides greater proceeds that mortgage that.
But also many times, they don't want to have to have stringent covenants to have to worry about, and they don't want to have the burden of having to start thinking about refinancing that debt a year or 2 before it comes due. It's a part of the capital structure that can get put away for 15 to 20 years under a sale-leaseback transaction. And so different people make different decisions. And in fact, we've seen people make decisions in the past for mortgage that are now coming back around and evaluating sale leaseback as a more permanent option for them.
And one last one on the same topic. From outside, when I look at your growth over the last year, could someone make an argument that maybe you've been too cautious where other people have been perhaps more aggressive? And I know it's easy to play Monday morning quarterback. But I mean I understand every company will have different policies, but when you look back, where are you too cautious over the last year in growing your book?
Pablo, I would say that we're very comfortable with where we sit today. We know that over the last 18 to 24 months, the cannabis industry has undergone an extremely difficult period in terms of cash flow and operating margins. And our job here is to be good stewards of capital for our shareholders and make the right risk-adjusted return decisions. And again, remember, these are 15- to 20-year leases. So the decisions we make stay with us for a very prolonged period of time. And we're very comfortable with the decisions we've made. And as we all know, sometimes the best deal you can do is the one that you don't.
Right. And last one, last one. I mean, obviously, you have a high profile in the industry and it's not just about your company, but you're also participate in various forums. So if you don't mind, can you share your latest views in terms of how you're thinking risk-scale will play out. If I read or hear you on some of the recent conferences, I think your argument is that we should have hearings because it would be part of crossing all the Ts and dotting all the eyes and making sure that the process is going in the right way and you minimize litigation risk down the road, right?
But of course, if that happens, the process will get delayed, and we don't know if we get it done by Inauguration Day, right? But I don't know if you want to share your latest thoughts on that. And again, if it's not part of the conference call, then don't answer Anthony.
No, no. I'm happy to share thoughts. I would make one correction. I haven't said that I think that they should have ALG hearing. What I've said is I believe when I read through the request, I should first start with saying, we don't know. This is all speculation. We are not experts in this. We talk to experts in this area, and we try to gather as much knowledge on this sector as possible and as much knowledge on this topic because it's important to our business. And so all of what we talk about here is just speculation.
But my best read from talking with folks is that if the DOJ and the DEA want to have the most defensible record possible, it could benefit that approach by having a hearing. Also when you look through some of the requests for hearing, some had a reasonable argument to have a hearing. And I think it's a tossup based on experts that I talked to, it's a toss-up whether or not the hearings will be granted. I do believe that ultimately, we will get the rescheduling action, and the big question is when. Again in the category of don't know. When I look at past rescheduling processes and look at how this process has unfolded, our best guess here is it happening sometime you get the final rule posted to the Federal Register sometime in the December, January time frame.
I just think there's a lot of work with over 43,000 comments. I hope it happens earlier, but we all know that you can hope for the best, but you have to plan for what you -- what may happen. So our best guess at this point is sometime in the December, January period you get that final role posted.
[Operator Instructions]
As there are no further questions, I would now hand the conference over to Anthony Coniglio, President and Chief Executive Officer, for his closing comments. Anthony?
Thank you, everybody, for joining our call today. We hope to see you on the road sometime soon and we hope you have an enjoyable remainder of the summer.
Thank you. The conference of NewLake Capital Partners has now concluded. Thank you for your participation. You may now disconnect your lines.