NewLake Capital Partners, Inc.
Q1 2022 Earnings Call Transcript

Published: 12 May 2022

[Operator:]

Good afternoon. I'll be your conference operator today. At this time, I would like to welcome everyone to the NewLake Capital Partners First Quarter 2022 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 afternoon and welcome, everyone to the NewLake Capital Partners first quarter 2022 earnings conference call. I’m joined today by Gordon DuGan, Chairman of Board, 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 some of the ongoing risks and uncertainties in 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-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. The company's guidance is based on current plans and assumptions and subject to risks and uncertainties more fully described in the company's filings with the 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 their positions, rental rates, occupancy levels, leasing activity, uncollectable 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.

[Gordon DuGan:]

Thanks Valter, and thanks again to everyone for joining the call. We couldn’t be more pleased with the progress we made, thus far in 2022. Our portfolio continues to perform very well, and we declared a first quarter dividend of $0.33 a share, an increase of 6.5% over our Q4 2021 dividend. Very importantly, we secured a $30 million revolving credit facility with the opportunity to increase that facility to a $100 million and one thing I would just keep in mind on both our earnings level and our dividend level, as we invest the money that we've committed, our earnings and cash flow should trend up, along -- as we invest that money, which will create more earnings and cash flow and so we have a built-in pipeline of increased earnings and cash flow as long as tenants continue to pay and we continue to fund those deals. So, we're very excited about prospects for the business as we go through 2022. The cannabis industry is not immune to volatility quite the opposite, and there's clearly negative sentiment in the market driven by a number of things, but continued delays in federal legislation is certainly one. Our thesis has always been that legislation will take some time and we will invest our capital with the operators that have the ability to weather the storm and be the long-term winners in the sector. We continue to believe that it's when not if, but when isn't short term, for federal legalization. Our belief in the growth -- however, our belief in the growth of the cannabis industry remains steadfast and our pipeline remains robust with high quality tenants in real estate. Operators will continue to require, access to capital and very significant amounts of capital to fuel the projected growth of the cannabis industry for many years to come. And lastly, I'd like to reiterate what I said last quarter, which is that we are focused on quality, not quantity. And I believe our portfolio is a testament to that. The long-term success of our company will be built upon the discipline we exercise when making investment decisions for our shareholders. We want to create long-term partnerships with the highest quality cannabis operators throughout the United States. And our strategy is, and will continue to be the long-term return on investment for our shareholders. I'd now like to turn it over to David Weinstein, NewLake CEO.

[David Weinstein:]

Thanks Gordon. And thanks again, everyone for joining the call today. As Gordon mentioned, we are focused on quality operators as we continue to grow the portfolio. And in keeping with that discipline on April 1, we acquired a 40,000 square foot cultivation facility in Missouri for $7.3 million and entered into a long term triple net lease with an affiliate of C3 industries. We're also committed to fund an incremental $26.7 million, $5.2 million of which is to complete the construction of existing facility, $16.5 million is to purchase an adjacent parcel of land and construct a 65,000 square foot cultivation facility and $5 million is an interest-only four-year loan that can be drawn over the next year. As Gordon noted, our pipeline remains robust. We still expect to commit the remained of our IPO capital in short order. We expect this next phase of our growth to be financed with debt capital. Early this week, we announced that we entered into a five-year revolving credit facility with a $30 million initial commitment. The facility contemplates an expansion to $100 million as additional lenders are added. The facility has a fixed interest rate of 5.65% for the first three years and a floating rate thereafter. The revolving nature of this facility will help us to officially manage our capital usage and while they can be no guarantee, we will be successful, we continue to explore alternative debt capital sources. Lastly, we are acutely aware of the trading challenges relating to cannabis-related stocks. We are continuing to pursue a potential uplifting on to a major exchange, but as of today, do not have any update to share. This initiative remains a top priority for us. I now like to turn the call over to Anthony to discuss our investment portfolio in more detail.

[Anthony Coniglio:]

Thanks, David. And thanks everyone for joining the call today. Let's turn to a discussion of our portfolio. We continue to have no defaults or rent deferrals in our portfolio since the inception of the company, which we are very proud of. This is a tremendous achievement driven by our disciplined underwriting approach. The macroeconomic environment and maturation of the cannabis industry is having an impact on several key metric trends, all of which are creating opportunity for NewLake. As we've seen in most states, markets are maturing, which is then in turn normalizing pricing, and it's slowing the previously high growth trends of the industry, resulting in margin compression from many operators. Operators with discipline and financial flexibility will respond to the environment and find the right balance of margin, market share and growth. We're in regular contact with our tenants and we're vigilantly watching their performance, both at the property level, as well as at the parent level. Historically, we've seen similar periods and those periods have created pockets of dislocation leading to long-term opportunity for us to identify high quality partners that fit ideally within our portfolio and this period is no different. With that, let me turn to some specifics on our portfolio. Our largest tenant, Curaleaf recently announced Q1 earnings, where the company generated Q1 revenue over $300 million up 20% year-over-year and adjusted EBITDA of $73 million. The company announced $273 million of cash on the balance sheet and financial performance should benefit from Curaleaf being one of only seven licensees in New Jersey to open for recreational sales. Our second largest tenant Cresco o will announce Q1 results next week. The company's 2021 revenue was $822 million, and they had adjusted EBITDA of $194 million for the year. At December 31, they had $224 million of cash on the balance sheet. Cresco continues to be the leader in the Illinois market, where we own their cultivation facility. The company recently announced the acquisition of another tenant Columbia Care and I'll speak more about that in a moment. Our number three tenant Revolutionary Clinics is private. So as usual, we can't share specific financial information here. We own their cultivation facility in Massachusetts, a state which has seen compression in wholesale pricing as incremental cultivation capacity has come online in the state. Our tenant though is vertically integrated in the state with three well-situated dispensaries in the Boston Metro area, providing the company with the ability to absorb pricing volatility through its retail channel. The company expects to open two additional retail locations by the end of '22 further boosting revenues and diversifying away from wholesale. Our fourth largest tenant is Trulieve. The company reported Q1 earnings this morning. Q1 revenue was $318 million up more than 60% from last year and up 4% from the previous quarter. Trulieve generated $45 million in cash flow from operations during the quarter and reported a cash balance of $267 million at March 31. They continue to deliver industry-leading margins and has one of -- and have one of the largest dispensary footprints in the industry. Rounding out our top five tenants is Columbia Care. They report Q1 earnings next week. For fiscal year 2021, the company generated record revenue of $460 million and recorded adjusted EBITDA of $58 million. The company had $82 million of cash on the balance sheet at the end of 2021 and we expect 2022 results to benefit from Columbia Care also being one of the seven operators approved to launch recreational cannabis sales in New Jersey. As they mentioned previously, Cresco announced the acquisition of Columbia Care earlier this year. After the acquisition, Cresco would become our largest tenant concentration. The combined company would have approximately $1.4 billion of revenue with over 130 retail stores across an 18 state footprint. They would be a market share leader in Illinois and Massachusetts, where most of our properties with them are located. The transaction is subject to customary regulatory approvals, and is expected to close later this year. Regarding our pipeline, we continue to see opportunities for build to suit transactions as well as fully operational facilities. Our relationships and the fact that NewLake has been a steady force through the previous cycles of the cannabis industry dislocations has been serving us and our investors well. We continue to anticipate the full commitment of our equity capital in short order, and I'm excited to have the credit facility open so we can continue to fund the next exciting phase of our growth. With that. I'll hand it over to our CFO, Fred Starker, to walk us through our financial results in more detail. Fred, over to you.

[Fred Starker:]

Thank you, Anthony. Rental income for the three months ended March 31, 2020 to increase by approximately $4.8 million to approximately $9.2 million compared to approximately $4.4 million for the three months ended March 31, 2021. The increase in rental income was primarily attributable to the 19 properties we acquired in March 2021 in connection with the merger, generated an increase of approximately $2.7 million of rental revenue during a three months ended March 31, 2022. The four properties we acquired after the first quarter of 2021 generated approximately $2 million of rental revenue during a three months ended March 31, 2022. Rental income from the pre-merger portfolio properties generated an increase of approximately $100,000 of rental income during the three months ended March 31, 2022. In addition, interest income from the mortgage loan oriented into during the fourth quarter of 2021 generated $900,000 of revenue during the first quarter of 2022. Net income attributable to common shareholders through three months ended March 31, 2022 increased to $5 million as compared to a net income attributable to common shareholders of $1.5 million for the same period in 2021. General and administrative expense for the three months ended March 31, 2022 increased by approximately $900,000 to approximately $1.8 million compared to approximately $900,000 for the three month ended March 31, 2021. The increase in general, administrative expenses was primarily due to increased payroll D&O insurance, investor relations, recruiting, potential restructuring and other expenses related to becoming a public company. As David previously mentioned, our recently announced credit facility is a five-year revolver of $30 million initial commitment. The credit facility contemplates an expansion to a $100 million as additional lenders are added. The credit facility has a fixed interest rate of 5.65% for the first three years and a floating rate thereafter. For the first quarter of 2022 FFO and AFO attributable to common shareholders is approximately $7.7 million and $8.1 million respectively as compared to $2.5 million and $3.4 million respectively for the first quarter of 2021. Looking ahead, the company expects full year revenue to be the approximate range of $42 million to $44 million and SG&A expenses exclusive of potential restructuring costs that would be in connection with a possible uplifting to be approximately $7 million to $7.2 million. On March 15, 2022, the company declared a first quarter 2022 cash dividend to $0.33 per share of common stock of equivalent to an annualized dividend of a $1.32. The dividend was for a period beginning on January 01, 2022 through the end of the first quarter March 31st, 2022 and it was paid on April 14th, 2022 to stockholders of record at the close of business on March 31st, 2022. FFO and AFO were supplemental non-GAAP financial measures used in the real estate industry to measure and prepare the operating performance of real estate companies. A complete reconciliation containing adjustments from GAAP net income attributable to common share 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 Gordon for closing remark.

[Gordon DuGan:]

Thanks Fred and thanks everyone for joining us today. As you heard from the call, we are very pleased with how the company is doing today. We're very excited about the prospects going forward. As the volatility has hit the markets, we think our investment opportunities have gotten even more interesting than they were and they were already pretty interesting. And so we look forward to executing on our business plan this year and thank you for your support. Operator, please open up the call for questions.

[Operator:]

And our first question will come from John Massocca with Ladenburg Thalmann.

[John Massocca:]

Good afternoon.

[David Weinstein:]

Hey John.

[John Massocca:]

So, maybe starting off with the newest piece of news, what is the outlook on your end in terms of timing for utilizing and drawing down part or all of the new credit facility? And I guess what is the outlook maybe for expanding it per the terms of the accordion?

[David Weinstein:]

Hey, John's David. So we are currently working with the lead bank to add other participants into that facility and we don't expect to draw on the facility until we actually need the capital.

[John Massocca:]

Okay. And then appreciate the color on some of the top tenants, but maybe as you look at some of the smaller tenants of the portfolio and underwriting new transactions, how are you thinking about access of those tenants to alternative sources of capital? What does that environment look like today? And is it changing the type of deals you're looking at?

[Anthony Coniglio:]

Yeah, it's Anthony. Hi, John. We've always looked if you remember how we underwrite our transactions, we're underwrite four things, and one of them is the tenant. We always talk about how, when we look at the tenants, we look at their ability to manage a high growth business in a highly regulated industry. And we also look at their ability to raise capital. One thing we know from being in the business for the past three-plus years is we understand the cannabis industry has cycles. And so we're always looking when we underwrite transactions at the management's ability to raise capital, not just in good markets, but their ability to run a business that can raise capital when they need it as well. And so it's not just a new focus for us in this environment. It's always been a focus for us. In terms of changing the deal -- changing how we look at deals, we've always expected margin compression in the markets. And so whenever we underwrite our transactions, we underwrite those with the expectation that our tenant will have margin compressions. So this is not surprising to us. And in fact, in markets such as Massachusetts or even in Pennsylvania, we almost can predict the margin compression 12 months to 18 months ahead of time because we see all of those transaction decks, as they're making the rounds to get funded. And so we know when that additional capacity is likely to come on. So it's a long-winded answer to come back to. It's been -- it's been of core part of our underwriting from when we started the business. And we absolutely expect that the larger and the smaller tenants will be able to run their businesses in a lower margin environment. And in fact, if you just one final point, if you look at the most recent transaction, we announced with C3 industries, they've been running businesses in unlimited licensed states that seen significant margin compression over the last couple of years. And they've do been doing that in a very profitable way. And so those are the types of tenants we like to partner with in our transactions.

[John Massocca:]

Okay. And understanding is a purely hypothetical question because there haven't been any historical tenant credit issues, but if you were to see some type of historic tenant credit issue or even a theoretical default, how do you think that type of situation plays out within the portfolio, what are targets if there are any for recoveries on kind of in place rent etcetera.

[Anthony Coniglio:]

Yeah. So again, it starts at the underwriting and so we're very confident in the tenants we have. And I also want to emphasize part of our underwriting and we disclose in our deck is the EBITDA coverage ratio at our properties. So when we think about lower margins, we think about the cash flows that our properties present to us, and excuse me, the cash flow that our properties generate for the tenant and that drives their ability to pay rent. We are in regular dialogue with our tenants, we get quarterly financials, we're on top of any sort of evolving risk issues. To the extent we ever did get to a default, I'd remind you, we do also have parent guarantees in our transactions in where we have multiple properties with tenants, we do cross default and cross collateralized security deposit. So if somebody in that scenario were to default on the rent, we could pull security deposits from other dispensaries and that's beneficial because many of these locations, as I said earlier, have very high EBITDA coverage ratios and their locations are tenants would want keep open. But if we did need to, um, put a tenant out, we think by focusing on limited license states, these properties are unlikely to go dark by having tenants in excuse me, in limited license states, those licenses have real intrinsic value. And I think we've seen in other instances where operators have experienced difficulty, they're likely to monetize those licenses through an M&A transaction and we'd have a better credit quality counterparty in that scenario, step in and continue paying rent to continue to operate the facility.

[David Weinstein:]

And John, we've seen it's a good question and one that we've grappled with, like what does a workout look like in the cannabis world? There are parallels to just the general net lease world, where we own mission-critical facilities with good EBITDA coverage. We should be okay, but it's also cannabis. So interruptions and cash flow could happen. So we've been watching how other people are doing their workouts as best as we can figure them out and we'll just have to see. I think that the mission critical nature of these buildings and the fact that there's still more need for capacity in this industry will ultimately allow the workouts to happen and happen to the satisfaction of the landlords. Like it's kind of done in other net lease industries except where there's over capacity of space and so we'll see how it all works. Like, with cannabis, somebody could call up and say, I'm just not paying you. How do you like that? And then we're going to have to deal with that kind of situation, but we haven't had to, but it's a weird cannabis is a different, is a different animal. And so we're we watch how others work things out and my sense is that by and large things are getting worked out. Okay. The other REITs I think everyone else has had to get into workout mode. We haven't yet, but we'll -- they work them out, I think. I don't know how much -- I don't know how much transparency they give, but -- things are getting worked out. Look, they need to keep the lights on. They're going to pay the rent, whether they -- whether they pause for a workout, that's not tip like that happens.

[John Massocca:]

Okay fair. And then, apologies if I missed this in the prepared remarks, in the press release earnings release, you gave kind of an expected revenue number for 2022, what's contemplated in that range? Is that just, the in place portfolio and announced acquisitions, or does that include some kind of hypothetical future investment activity?

[David Weinstein:]

That includes future investment activity? It's funding, the commitments we have today and new investments.

[Gordon DuGan:]

And one thing John, just to add to that, that's been consistent. Everything seems to take longer in the cannabis world. So funding the -- funding, our deals takes longer, the M&A transactions at the MSO level take forever. Everything just tends to take longer. So from our perspective, getting the money out the door has been slower, not so much from an origination standpoint, but like, if you look at how much we expected to fund in our construction, we funded less than we expected to. And that's been kind of a consistent mantra in the cannabis world. Maybe it's just, everybody has rosy projections and they're always trying to catch up to them, I don't know.

[John Massocca:]

I understood. That's it for me. Thank you very much.

[Operator:]

At this time, there are no further questions,

[Gordon DuGan:]

Super. Thanks everyone for joining us and as always, you can reach out to David, Anthony, myself, anybody on the team, Fred, Jared and we look forward to speaking soon. Thanks again.

[Operator:]

Thank you. And this concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.