NewLake Capital Partners, Inc. (PNK:NLCP) Q4 2023 Earnings Call Transcript

NewLake Capital Partners, Inc. (PNK:NLCP) Q4 2023 Earnings Call Transcript March 11, 2024

NewLake Capital Partners, Inc. beats earnings expectations. Reported EPS is $0.34, expectations were $0.28. NewLake Capital Partners, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. I'll be your conference operator today. At this time, I'd like to welcome everyone to NewLake Capital Partners 2023 Year-end 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 NewLake Capital Partners fourth quarter and full year 2023 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 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 disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. FFO and AFFO are supplemental non-GAAP financial measures used in the real estate industry to measure and compare the operating performance of real estate companies. A complete reconciliation containing adjustments from GAAP net income attributable to common shareholders to FFO and AFFO and definitions of terms are included at the end of our press release. Please refer to that press release for more information. 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 and 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.

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Gordon DuGan: Thank you, Valter, and thank you, everyone, for joining our call. During 2023, NewLake outperformed across our key financial metrics year-over-year despite a very challenging year for the cannabis industry and REITs generally. Against this difficult backdrop, the Company delivered growth as well as record revenue, record net income and record AFFO. Additionally, we raised our dividend in the fourth quarter. And today, we announced another increase in our dividend for the first quarter of 2024. We have raised our dividend every year since the Company's setting in 2019. Since our IPO in 2021, the Company has increased its dividend 67%, paying out over $80 million or $3.85 per share in dividends to shareholders. There are a few items I'd like to highlight from this past year.

As we expect it to occur at some point in 2023, we experienced our first tenant issue in the portfolio. Our team was well prepared and worked diligently to resolve the issue. We ended 2023 with 100% of our invested capital generating returns for our investors and 100% rent collection for the fourth quarter. This is a solid foundation to build upon as we embark on 2024 and drive for continued growth. During 2023, we also took advantage of a low stock price and aggressively repurchased our common shares, buying back nearly 12 million of our stock at an average price of $13 per share. which was nicely accretive, particularly where the stock price sits today and what we see as a future upside for investors. As stewards of our shareholders' capital, we are keenly focused on maximizing returns, and we will continue to apply this return-oriented approach as we evaluate future buyback opportunities.

Lastly, our business generates significant free cash flow as demonstrated by our Q4 2023 payout ratio of 78%. There is a significant cushion for our dividend and potential for growth as we manage to our goal of an 80% to 90% payout ratio. As we look to the future, we see handful opportunities for growth. with virtually no debt and $89 million available to us under our credit facility, which has an attractive interest rate and does not mature until 2027. We are in a very good position to capitalize on our strengths and deploy capital into quality transactions. In closing, I'm proud of what we have accomplished in 2023. I continue to be very bullish on the long-term prospects for our company, and I'm excited for the opportunities that lie ahead.

With that, I'll turn the call over to our CEO, Anthony.

Anthony Coniglio: Thank you, Gordon, and thank you, everyone, for joining our call today. As Gordon said, 2023 was a record year for NewLake and I want to thank our team for their hard work during the year, delivering solid results for our shareholders. As we look forward, I'd like to discuss a number of potential catalysts in 2024 for the cannabis industry and for NewLake. There have been many headlines recently and specifically, President Biden's mention of his cannabis policy during last week's stated Union address, has many investors interested to understand what these potential catalysts mean for NewLake. So, let's look at these federal state and legislative catalysts. First and foremost, we're awaiting the DEA's decision regarding the recommendation by the Health and Human Services Department to reschedule cannabis from Schedule I to Schedule III.

Such a move would eliminate the onerous Section 280E taxation and result in greater free cash flow for the industry, including our tenants. There are a few examples where REIT's entire tenant base has an opportunity to experience a meaningful improvement in credit risk profile and significant increase in cash flow overnight from a single catalyst such as this expected move to Schedule III. Furthermore, we believe a rescheduling to Schedule III will have a positive impact on operator valuations, allowing them to recapitalize their balance sheet by issuing equity and paying down debt. Not only with this improved balance sheet health, but would also reduce their interest expense and further improve their cash flows. This would be yet another improvement in the credit risk profile of the industry and specifically our tenant base.

At the state level, Ohio approved recreational cannabis at the ballot box in November, and we expect an adult-use program to launch later this year. Many of our tenants have operations in Ohio, such as Ayr, Acreage, Cannabis, Cresco, Trulieve, and PharmaCann, and their financial performance is expected to benefit from the anticipated increase in sales in the state of nearly 12 million people. We're excited about the potential credit improvement within our tenant base as well as the potential for incremental investment opportunities in the state. Additionally, we await the Florida Supreme Court's decision regarding adult-use cannabis on the Florida bill. Most observers expect the State Supreme Court to allow the ballot initiative to proceed.

With over 21 million people and adult-use program in Florida will benefit our Mt. Dora, Florida tenant Curaleaf as well as our other tenants that have operations in the state, notably Trulieve, Ayr, Cresco and the Cannabis, creating yet another opportunity for our tenant base to increase scale and profitability. Two weeks ago, Virginia's legislature approved legislation to implement an adult-use program, which was approved back in 2021. The legislation is awaiting the Governor's signature with the potential to have an adult-use program launch in 2025. With only three operators serving the state with -- excuse me, serving this state with 8.7 million people, there is the opportunity for the incumbents to lead in the adult-use market launch. Our tenant to Cannabis owns 10 of the 21 operational dispensaries in Virginia and is poised to benefit from this conversion to adult use, not to mention the potential for additional investment opportunities.

Let's turn to New York. With New York finally allowing the original medical market operators to participate in the adult-use market, we should see some of our tenants begin to benefit from their significant investments into that state. Such as Acreage, the Cannabis, Cresco, Curaleaf and PharmaCann. We're also hearing that SAFER Banking is again back in the dialogue. Casting the Senate Banking Committee last September, this bill is now becoming the potential vehicle for the anti-Operation Choke Point legislation, now known as Section 10 of the SAFER Banking Act. While we are cautious about predicting legislative action at the federal level, it's notable that Congress continues to have dialogue around this bill, better access to financial services benefits all market participants and we're certainly rooting for passage of SAFER.

So, what does all this mean? Patching in the administrative brands with potential for rescheduling. There is action in the legislative branch around SAFER Banking and other cannabis-oriented legislation, and there's action at the state level were according to Pew Research, more than 50% of our country's population resides in a state with adult-use cannabis. While we think it strongly confirms that cannabis remains on the inevitable path to normalization and ultimately legalization. 2024 could be the year to start realizing some of those industry catalysts, which should benefit our tenants, our portfolio and, of course, our investors. With that, I'll turn it over to Jarrett.

Jarrett Annenberg: Thanks, Anthony. For my remarks, I will be talking about our current portfolio, activity for the quarter, tenant and industry insights and expectations. Starting with our current portfolio. As of December 31, we had committed a total of $428 million across 17 dispensaries and 14 cultivation facilities in 12 states, with 13 tenants, representing approximately 1.6 million square feet covered. Our cost basis in retail properties is $389 per square foot and in cultivation properties, it's $252 per square foot, both metrics are well below replacement costs. 71% of our current rent is from publicly traded operators and 93% is from properties in which the tenant is vertically integrated in the state. EBITDA coverage for the latest available quarter was 3.7x for cultivation and 10.3x for dispensaries, a slight decrease for cultivation and slight increase for dispensaries from the previous quarter.

Please note, we use estimates where appropriate given each company reports slightly differently on a property level basis. As I discussed in our last call, in the fourth quarter, we finalized the lease agreement with Revolutionary Clinics in Massachusetts and the new management team is executing on their transition plan. Additionally, in November, our Pennsylvania tenant Calypso were sold the Canvas Acquisition Corp., a new entrant into the industry. In connection with the sale and under the terms of the revised lease agreement, NewLake has agreed to provide up to $3 million in tenant improvement allowance and has received a six-month rent escrow. We visited the facility two weeks ago to meet with the new team. New strains were in the ground and new processes are being implemented.

In December, Pennsylvania passed a bill that will provide independent cultivators in the state, such as Calypso with three dispensaries, allowing for vertical integration in the state and the potential for increase in both sales and margins. Additionally, Pennsylvania's Governor included taxes from adult-use cannabis sales in his budget for 2025. That action, together with five of the six bordering states having adult-use cannabis sales, is expected to put pressure on the state's legislature to enact adult-use legislation. In regard to our properties under development, we deployed $8.8 million of TI allowance in the fourth quarter and $14.8 million in total for the full year, the majority of which went to our projects for the Mint in Phoenix and C3’s expansion in Missouri.

As of year-end, we had $14.4 million in TI outstanding and we expect the majority to be drawn down by the end of the second quarter as both Mint and C3's projects are completed. The team was in Missouri a few weeks ago touring the two properties we own in the state. Specifically, we were excited to see C3's expansion that we've been funding for the past year. Construction is proceeding well, and the team is excited to put plants in the ground to meet the growing demand in the state. Looking broadly at our tenant base, we continue to see financial improvements as the focus on operational efficiencies have started to take effect and combined with the wholesale pricing stabilization we've been seeing over the past few quarters. Compared with the same quarter last year, many of our tenants have been able to maintain top line revenue with an average gross margin of 40%, while increasing EBITDA from 15.5% to 20% on average across the portfolio.

Additionally, we are seeing operators shore up their balance sheets and provide themselves with additional runway. Ayr restructured and extended their debt until the end of 2026. The Cannabis announced a debt per equity conversion. And Trulieve announced a $130 million debt reduction. These improvements will have a greater impact on our tenant credit in the event of a rescheduling as we estimate our tenants could save an aggregate of over $400 million annually in federal taxes with 280E relief about 20% of annual gross profits. As we look forward, we've seen an uptick in deal activity since the start of the year as operators are becoming more optimistic about potential Schedule III and new state programs coming online. As always, we will maintain discipline when deploying additional capital, focusing on operators with strong financial profiles, quality management teams and in states with regulatory frameworks that provide the best opportunity for long-term success.

With that, I'll turn it over to Lisa.

Lisa Meyer: Thank you, Jarrett. For the fourth quarter of 2023, our portfolio generated total revenue of $13 million, an increase of 6.4% year-over-year. The growth was mainly driven by acquisitions, TI fundings, increasing base rent, annual rent escalators and income related to the valuation of warrants. The increase in rental revenue was partially offset by reduced rent collections from Revolutionary Clinics and Calypso for which we executed lease amendments in the fourth quarter of 2023. The $13 million of revenue for the fourth quarter included approximately $1.3 million of non-recurring revenue associated with Revolutionary Clinics where we captured a $315,000 security deposit, $480,000 of delinquent rents for periods prior to the fourth quarter and $522,000 of non-cash revenue related to the valuation of the warrants received with the lease amendment and forbearance agreements.

Net income attributable to common shareholders for the three months ended December 31, 2023, totaled $6.9 million or $0.34 per share. While fourth quarter AFFO was $10.8 million, a decrease of 1.2% compared to the same period in 2022. On a per share basis, AFFO increased by $0.01 to $0.51 per share in the fourth quarter of 2023 compared to the prior year driven by the value created for our shareholders through our share repurchase program. During the three months ended December 31, 2023, we invested $8.8 million in tenant improvements with $14.4 million in unfunded commitments at quarter end. Moving to the full year 2023 financial results. Our portfolio generated total revenue of $47.3 million, an increase of 5.1% year-over-year. Net income attributable to common shareholders for the full year of 2023 totaled $24.6 million compared to $22 million for the full year of 2022.

For the full year of 2023, AFFO totaled $40.7 million or $1.89 per share, an increase of 5.2% year-over-year. In 2023, we adopted ASC 326 Financial Instruments Credit Loss commonly called CECL. We were required to record an expected credit line as defined by the guidance. The amount of the credit loss recorded was $167,000. As of December 31, 2023, the $5 million note receivable is the only financial instrument that the Company holds that falls under this guidance. The Company is unaware of any information that would lead us to believe that we will not fully recover our $5 million investment in this loan. On December 14, 2023, the Company declared a fourth quarter 2023 cash dividend of $0.40 per share of common stock that was paid on January 12, 2024.

On March 8, the Company's Board of Directors raised the first quarter 2024 cash dividend to $0.41 per share of common stock, equivalent to an annualized dividend of $1.64 per share of common stock. The dividend is payable on April 15, 2024, to stockholders of record at the close of business on March 29, 2024. For the year ending 2023, we repurchased 908,394 shares of common stock at an average price of $13 per share. At December 31, we continued to have a strong balance sheet with $412.3 million in gross real estate assets and only $1 million of outstanding debt on our $90 million revolving credit facility. We have approximately $115 million of liquidity comprised of cash and the remaining availability under our credit facility. We believe the Company is well positioned to execute our business strategy to grow earnings for investors as we deploy capital.

And now, I would like to turn the call back to the operator for Q&A.

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