NewLake Capital Partners, Inc.
Q4 2021 Earnings Call Transcript

Published: 17 Mar 2022

[Operator:]

Good morning. I'll be your conference operator today. At this time, I would like to welcome everyone to the NewLake Capital fourth quarter and full year 2021 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.

[Valter Pinto:]

Thank you, operator. Good morning and welcome, everyone to the NewLake Capital Partners fourth quarter and full year 2021 earnings conference call. I’m joined today by David Weinstein, Chief Executive Officer; Anthony Coniglio, President and Chief Investment Officer; Fred Starker, Chief Financial Officer; and Jarrett Annenberg, Director of Acquisitions. Before we begin, I'm going to remind everyone that statements made during today's conference call may be deemed forward-looking statements with 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 the risks and uncertainties of the company's business, I refer you to the press release issued this morning and filed with the SEC on Form 8-K, as well as the company's 10-K and other reports filed periodically with the SEC. the company dis claims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. With that, it’s my pleasure to turn the call over to Mr. David Weinstein. David, please go ahead.

[David Weinstein:]

Thank you, Valter, and thank you again, everyone, for joining our call. 2021 was a transformative year for NewLake. During the first quarter of 2021, we completed our merger of NewLake and GreenAcreage, raising over $100 million in connection with that event. Five months later in August of 2021, we successfully closed on our initial public offering, raising another $100 million in gross proceeds. Over the entirety of 2021, our team has worked diligently to build relationships, source transactions and invest our capital in strategic cannabis real estate, with high quality tenants. While we are proud of our growth, we are keenly focused on quality, not quantity. our long-term success we built upon the discipline we continue to exercise when making investment decisions. Our model is quite simple. We want to create long-term partnerships with the highest quality cannabis operators that are strategically located in limited license States and jurisdictions throughout the United States. While we do not expect to announce a transaction every week, or every month for that matter, the focus of our strategy is long-term ROI for our shareholders. As of December 31, our portfolio had a 14.5 year weighted average lease term, a 12.5% weighted average yield, and built-in growth through unfunded tenant improvements and lease escalators. This built-in growth, combined with our ability to continually invest capital, has allowed us to increase our dividend each quarter since going public. Our conviction in the growth of the business remains strong. The cannabis industry is still in the early innings, expected to go to $46 billion by 2026, from $24 billion in 2021. Operators will need to continue to access capital to fuel this growth. Today, our portfolio is comprised of 28 properties across 11 States totaling 1.4 million square feet, 90% of which are cultivation facilities, and 10% of which are dispensaries. Our nine tenants include premier cannabis operators, both public companies, such as Curaleaf, Cresco, Trulieve, and Columbia Care, and private companies such as Organic Remedies, Mint and Revolutionary Clinics. We also have provided one mortgage loan collateralized by a cultivation facility. Our financial performance reflects the quality of our strategy and portfolio. We recently announced a first quarter dividend of $0.33 per share, or $1.32 annualized. And our long-term expected target AFFO payout ratio is 80% to 90%. As a reminder, aside from $2 million of outstanding seller financing related to our Organic Remedies acquisition, we currently have no outstanding debt. We are actively pursuing with a number of lenders, debt capital to fund additional acquisitions. While there’s no guarantee that we will be able to raise this capital, we are optimistic given the current ongoing discussions. We are currently in negotiation on a number of transactions, and will provide more details on these and any debt capital as these situations progress. Finally, I'd like to address certain dynamics relating to trading in cannabis-related stocks. It has become more challenging for investors to trade in these stocks, as certain banks have restricted secondary trading of cannabis-related stocks that do not trade on either the New York Stock Exchange or NASDAQ. We believe that this has created a less than optimal trading volume and liquidity in all OTC traded cannabis-related stocks, including ours. We have been evaluating alternatives to up list to a major exchange such as NASDAQ. We are currently engaged with NASDAQ regarding a potential approach for an up list, but there is no certainty that we will ultimately receive approval. It is premature for us to say much more, other than we understand that this is an important issue for our company and our shareholders, and we are very focused on working through this issue. I’d now like to turn the call over to Anthony to discuss our investment portfolio in more detail. Anthony?

[Anthony Coniglio:]

Thanks, David, and thanks again, everybody, for joining our call, and happy St. Patrick's Day. Today, I plan to cover our Q4 acquisitions. I'll review our overall portfolio, and then provide some commentary around the pipeline. In the fourth quarter, we successfully closed on two transactions. In November, we provided Hero Diversified Associates with a $30 million nine-month senior secured loan. We uniquely structured the loan to convert to a 20-year sale leaseback, unless a specific provision in the loan agreement is satisfied by July 29 of this year. This transaction really is a great testament to the creativity of our team in structuring a transaction to meet the client's needs. While we can't predict the future, we do expect this transaction to convert to a 20-year sale leaseback upon that expiration of July 29. In December, we announced the closing on the purchase of a 70,000 square foot industrial property in Missouri, and we entered into a 17-year triple net lease with Organic Remedies. The total investment in the property will be $21.1 million, which included $16.1 million at closing, and a commitment to fund $5 million of tenant improvement allowances, I would say $3.2 million of which we've funded to date. We're excited to be partnering with the team at Organic Remedies. In part, that team is led by founders of PurePenn, who we've known since 2019, when we provided them a sale leaseback transaction on their Pennsylvania facility. PurePenn, some of you may recall, sold to Trulieve last year, and the management team has now partnered with Organic Remedies on this vertically integrated Missouri business. Turning to a discussion of our overall portfolio, we’re very happy with the health of the portfolio and the outlook for our tenants. To remind you, we have some of the leading operators in the cannabis industry, from large multi-state operators, to best-in-class single State operators. Based on most recent reporting, all but one of our tenants is adjusted EBITDA positive, and that one tenant is expected to achieve that important milestone for cannabis operators during the first half of 2022. Our focus on underwriting based on tenant quality, the cannabis market, the licensing, and the real estate, has really served us well, and we've been collecting 100% of rent due with no abatements or deferral since inception. And our underwriting approach continues to provide a solid foundation for future investment decisions. As you know, we monitor our tenants diligently, and we continue to have confidence in the portfolio's performance. Let's have a quick look at our top five tenant financial results for the fourth water or most recently reported period. Our largest tenant, Curaleaf, where we own 10 dispensaries across six limited license States, and one cultivation facility in Florida, posted Q4 revenue of $320 million, and adjusted EBITDA of $80 million, resulting in full year 2021 revenue of $1.2 billion, and full year 2021 adjusted EBITDA of $298 million. With 117 dispensaries and a sizable wholesale business, we believe Curaleaf is positioned to continue scaling across its 23 State footprint. Our second largest tenant, Cresco, where we own their largest cultivation facility in Illinois, will report Q4 earnings next week. Industry analysts expect Cresco to build upon its record third quarter results, and potentially see continued margin expansion and revenue growth in their Q4 results, as the company added scale via M&A in Pennsylvania and Massachusetts, I would note that adult use sales in Illinois, where Cresco is the top selling brand, and our property is located, that those sales more than doubled in 2021 versus 2020, which was the inaugural year of adult use sales in Illinois, and is proving to be the sizable market we all expected it to be. Our third largest tenant is Revolutionary Clinics. It's a vertically integrated platform with three dispensaries in the Boston Metro area. And we own their cultivation facility in Fitchburg, Massachusetts. While the company is private and we can't share financial information, we could tell you that we continue to be very comfortable with the credit risk profile of this tenant. Trulieve, our fourth largest tenant, where we own a Pennsylvania cultivation facility, will report fourth quarter results at the end of March, but Q3 results delivered $98 million of adjusted EBIDA on an industry-leading 67% gross margin. Trulieve has been demonstrating an ability to expand their margin in their home market of Florida, all while they've seen increased competition. Integration of the Harvest acquisition, should add further scale and diversification of their business, and we look forward to seeing their results. Rounding out our top five tenants is Columbia Care. We own five of their facilities, three dispensaries, and two cultivation facilities. Columbia Care reports next week, but announced preliminary results for the full year 2021, which disclosed over $470 million of revenue, and $85 million of adjusted EBITDA. The company has a strong footprint in large limited license markets, which should bode well for its long-term success. Lastly, some comments on our pipeline. Since inception, we've reviewed over $4 billion of sale leaseback transactions, resulting in a $338 million committed capital. Our pipeline in the fourth quarter was robust. However, as David properly articulated, quality is of the utmost importance. This is indeed a chunky business, serving a highly regulated industry, and transaction timelines don't always line up nicely with quarterly earnings calls. We continue to see a steady flow of opportunities, as the industry focuses on raising non-dilutive capital, while equity valuations are depressed, and a rising rate environment makes debt less attractive for many market participants. Our focus is on quality, and we'll be patient in sourcing the right transactions. Having said that, we continue to have confidence that we will deploy our available capital within six to nine months from our IPO, which takes us through the May period. With that, I'll hand it over to our CFO, Fred Starker, to walk through our financial results in more detail. Fred, over to you.

[Fred Starker:]

Thanks, Anthony. Good morning, everyone. Our rental income for the three months ended December 31, 2021, increased by approximately $4.3 million to approximately $8.4 million compared to approximately $4.1 million for the three months ended December 31, 2020. Rental income for the 12 months ended December 31, 2021, increased by approximately $15.9 million to approximately $27.6 million, compared to $11.7 million for the 12 months ended December 31, 2020. The increases in rental income were significantly impacted by the 19 properties acquired in March 2021 in connection with the merger. Net income attributable to common shareholders for the three months ended December 31, 2021, increased to $4.3 million as compared to a net income attributable to common shareholders of $2.9 million for the same period in 2020. Net income attributable to common shareholders for the 12 months ended December 31, 2021, increased to $11.2 million, as compared to a net loss attributable to common shareholders of $10.7 million for the same period in 2020. The 2020 net loss was attributable to the internalization of our external manager in July 2020. Our general and administrative expenses for the three month, December 31, 2021, increased by approximately $1.1 million to approximately $1.9 million, as compared to approximately $800,000 for the three months ended December 31, 2020. For the 12 months ended December 31, 2021, our G&A expense increased by approximately $2.3 million to approximately $6.4 million, as compared to $4.1 million for the 12 months ended December 31, 2020. It's important to note that the increase of our G&A expense was significantly impacted by non-recurring merger and public company expenses. Going forward, we anticipate recurring general administrative expenses to be around $7 million for the year. For the fourth quarter of 2021, AFFO attributable to common shareholders was approximately $7 million. For the 12 months of 2021, AFFO attributable to common shareholders was approximately $21 million. In mid-December, we declared a fourth quarter 2021 cash dividend of $0.31 per share, equivalent to an annualized dividend of $1.24, as compared to our third quarter annualized dividend of $0.96. On March 15, we declared a first quarter 2022 cash dividend of $0.33 per share, equivalent to an annualized dividend of $1.32. Note that 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 attributed 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, I will turn it back over to David for closing remarks.

[David Weinstein:]

Thank you, Fred. And again, thank you all for joining us this morning. In closing, I'm proud of what our team has accomplished in a rather short period. Given the trajectory of the cannabis industry and our growing pipeline, we expect to continue to execute and grow, while exercising a continued discipline approach. I would now like to open up the call for questions. Operator?

[Operator:]

Our first question comes from the line of John Massocca with Ladenburg Thalmann. Please proceed with your questions.

[John Massocca:]

Good morning. So, I've got to start with your comments on up listing, even though I know you might not be able to talk too much on it. Is the barrier to you listing on NASDAQ at this time, just the structure of your ownership interest in the properties and the portfolio? NASDAQ is clearly comfortable with mortgage REITs listing on the exchange. So, is it just really being driven by your direct equity position in the real estate?

[David Weinstein:]

That's the primary focus, yes.

[John Massocca:]

Okay. There's nothing else that would need to be kind of changed in terms of the portfolio in order to get NASDAQ comfortable with the listing?

[Anthony Coniglio:]

Yes, John, we've always run the company to qualify for listing on a New York or a NASDAQ. And the only thing that precludes us is that ownership, that legal ownership of the properties at this time.

[John Massocca:]

Okay. and switching gears a little bit, I mean, how does the pipeline look today? Are you still kind of thinking about nine months as the timeline to deploy the IPO capital that was raised, or is it just because of different market dynamics, macroeconomic volatility is going to take a little more time to kind of deploy all of that capital?

[Anthony Coniglio:]

Yes. I'm going to hand it off to Jarrett. I'd say from - this is Anthony. I'll hand it off to Jarrett. From a macro perspective, as I said in the prepared remarks, we feel confident that we'll be able to fulfill the promise that we made to investors when we were launching the IPO and raising our capital, that we would be fully deployed in six to nine months. That takes us through the May period. But Jarrett, why don't you give a flavor for what we're seeing in the pipeline?

[Jarrett Annenberg:]

Yes, absolutely. Thanks, Anthony. So, from our perspective, the pipeline remains as robust as really it has been since inception, and we're active in negotiations with operators, discussions with operators across the country. As David noted, the sales cycle in this business is chunky and unpredictable. Really it ebbs and flows with the cannabis market overall, but we see a tremendous demand for our capital. I think, as Anthony said, we'll continue with that guidance of six to nine months from the IPO, but we also need to be diligent as we maintain our focus on seeking out transactions with quality operators in limited license jurisdictions.

[John Massocca:]

Okay. And maybe as a follow up, I mean, how important to maybe your TAM or even the pipeline directly, is kind of the rollout of adult use programs to some of these larger Northeastern States, New York, Connecticut, New Jersey, et cetera?

[David Weinstein:]

Yes. As you can imagine, we're having conversations with the operator in those States as those programs roll out. I do think that most of those operators want to get ahead of those markets, and they're starting to think about expansion long before those programs are implemented, but we see opportunities in those markets, as well as markets like Missouri, where we expect medical to turn into adult use, Maryland where we expect the same thing. And then some new States that are coming online like Georgia, Mississippi, which just turned online as well.

[John Massocca:]

Okay. And then one last one on kind of the debt side of things, you mentioned it’s still an attractive place for you to raise capital. How has pricing trended there, just given maybe some of the macro and economic uncertainty and interest rate uncertainty that's out there? But obviously any transaction with you would be fairly bespoke, given what you own and is kind of your unique position in the REIT market.

[David Weinstein:]

Yes, John, I would - this is David. I would say, first of all, we have no debt essentially, and we also have a great portfolio. So, it's not that challenging for us to get debt. I think we'd probably end up in mid-single digits.

[John Massocca:]

Okay. That's all for me. Thank you all very much.

[Operator:]

Thank you. . The next question is from the line of Merrill Ross with Compass Point. Please proceed with your questions.

[Merrill Ross:]

Good morning. Thank you. On the Hero Diversified loan, are the terms of the share re-spec significantly different than the terms of loan? I would assume the loan is smaller than the proceeds from the sale of the property. But what kind of yield is on that instrument when it converts?

[Anthony Coniglio:]

Yes, the transaction size doesn't change. It's an extension of the term, not extension. It switches into a sale leaseback. So, it becomes a 20-year sale leaseback, but the yield doesn't change. It's not a whole new transaction. It really - that triggering event allows us to then purchase the building and enter into that long-term lease, which has already been negotiated and signed and in place as part of that conversion.

[David Weinstein:]

Merrill, you should think of that transaction as, it was structured in a loan form similar to a sale leaseback from the beginning, with the anticipation that it would convert to a sale leaseback.

[Merrill Ross:]

So, the conversion happened on completion of occupancy, a certificate occupancy or what?

[Anthony Coniglio:]

It's not occupancy. We can't disclose what the trigger event is, but what we can say, Merrill, is that we do feel good that the transaction will convert to a sale leaseback on July 29. But listen, there are no guarantees, and perhaps it gets repaid. If it does get repaid, then there's - when you look at the totality of the yield on that transaction with the exit fee, we're going to feel really good about the return on having deployed that capital for the nine-month period.

[Merrill Ross:]

And I have an unrelated question. Are you seeing at the retail level, price pressures or pricing wars on the cannabis product that would maybe lessen your tenants profitability? I know we're seeing it in California, and I just want to see - hear from you if there's similar supply dynamics in any of the limited license states.

[Anthony Coniglio:]

For sure. Jarrett, why don't you give a sense for what we're seeing at the retail level?

[Jarrett Annenberg:]

Yes. I think that each State is obviously a very different market and a unique market. As we see in a State like Massachusetts, as more operators bring cultivation space online, you're starting to see price compression, which obviously trickles down to the retail level. In Florida, you're seeing the same as groups bring on additional cultivation space. Curaleaf in particular is cutting into Trulieve’s margins in Florida by lowering pricing. But we've built that into our models. I think we've always been very conservative in our underwriting, and we've expected compression in the limited license states as additional cultivation has been brought online. But it's really nothing like what you see in California, where it's an unlimited license State

[Anthony Coniglio:]

And I would add, Merrill, that specifically with respect to retail, when you get below say $5 million, you actually see a fairly strong bid from say 1031 buyers that are willing to go to a cap rate that just isn't attractive for our business

[Merrill Ross:]

I understand that. Thank you.

[Operator:]

. Thank you. At this time, there are no additional questions. I'll turn the floor back to management for further remarks.

[David Weinstein:]

All right. Well, thank you everyone for joining, and we look forward to the future. We're very confident, as I said in the growth of the business. So, take care, everyone.

[Operator:]

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.