NewLake Capital Partners Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: Newlake collected all rent for Q2, driving revenue and AFFO higher year-over-year and maintaining a 79% payout ratio to support the dividend.
  • Negative Sentiment: An emerging default at Air Wellness represents ~5.9% of annualized base rent, with August payments unpaid and security deposits to be applied as lease enforcement begins.
  • Positive Sentiment: The balance sheet remains strong with $432.2 million in gross assets, just 1.6% debt-to-assets, no maturities until May 2027 and $104.3 million in available liquidity.
  • Positive Sentiment: Portfolio enhancements included an Ohio dispensary acquisition leased to Cresco Labs, a dispensary swap with Curaleaf and a new Butter tenant in Connecticut, adding quality assets.
  • Neutral Sentiment: Cannabis reform signals may emerge federally in H2 2025, while state markets expand in Texas, Delaware, Kentucky and Minnesota, and Pennsylvania debates adult-use legalization.
AI Generated. May Contain Errors.
Earnings Conference Call
NewLake Capital Partners Q2 2025
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good day, and welcome to the New Lake Capital Partners Second Quarter twenty twenty five Conference Call. All participants will be in the listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Walter Pinto from Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome, everyone, to the Newlake Capital Partners Second Quarter twenty twenty five Earnings Conference Call. I'm joined today by Gordon Dugan, Chairman Anthony Caniglio, President and Chief Executive Officer and Lisa Meyer, Chief Financial Officer. 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. The actual results may differ materially due to a variety of risks, uncertainties and other factors.

Speaker 1

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 eight ks, as well as the company's 10 ks, 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 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.

Speaker 1

With that, it's my pleasure to turn the call over to Mr. Gordon Dugan. Gordon, please go ahead.

Speaker 2

Thank you, Walter, and good morning, everyone. I appreciate you all joining us today. We were pleased with our second quarter results as New Lake delivered solid performance in a challenging cannabis landscape. Our second quarter dividend of 43¢ per share represented an payout ratio of 79%, just below our targeted range of 80 to 90%. Our portfolio has remained resilient through a difficult period for the cannabis sector, but we recognize we are not immune to the ongoing financial pressure pressures faced by some industry participants.

Speaker 2

Anthony will provide more detail on an emerging default with a tenant representing approximately 5.9% of our annualized base rent a little later on this call. I think what's important for our shareholders that we actively enforce our rights under the lease agreements and remain committed to maximizing shareholder value in these distressed situations. Additionally, our 79% payout ratio provides some cushion to navigate the situation and continue to support our dividend distributions in the near term as we work through this situation and any other potential situations in an environment where some peers are distributing a larger share of earnings, New Lakes lower payout ratio gives us valuable flexibility to manage potential challenges. I would also point out that cumulatively we've paid over $6 in dividends since going public in 2021, which is a nice indication of the dividend paying capacity of our company. Looking ahead, we expect the industry will continue to face headwinds as it awaits federal reform and works through elevated levels of leverage.

Speaker 2

Against this backdrop, we will remain vigilant and proactive in monitoring new developments and are steadfast in our focus on maximizing long term value for our shareholders. Thank you for joining us today. And with that, I'll turn the call over to Anthony.

Speaker 3

Thank you, Gordon, and good morning, everyone. While second quarter results were in line with expectations, we are disappointed to see that future quarters may be adversely impacted by the restructuring activities at Air Wellness. I'll start with Air, then I'll move to commentary on second quarter financial performance, portfolio activity and industry developments before turning it over to Lisa. Last week, Air Wellness announced that it had entered into a restructuring support agreement with its senior noteholders. The restructuring plan involves the purchase of certain Aire assets and operations by the senior noteholders with a sale or a wind down of the remaining Aire assets and operations.

Speaker 3

We currently lease two properties to Aire, a 38,000 square foot cultivation facility in Pennsylvania and a 56,000 square foot cultivation facility in Nevada. Together, these properties represent approximately 5.9% of our annualized rent. Aire has made monthly lease payments on these properties through and including July 2025 however, as of today, August rent payments have not been received. We do not expect the two properties currently leased to Aire to be part of the transaction with senior note holders and thus we're preparing for operations at these facilities to either be sold or wound down. The company holds approximately three point five months of security deposit on each property and we intend to fully enforce our rights under the lease agreements and aggressively work to replace any defaulting tenants.

Speaker 3

We'll provide updates as appropriate. Pivoting to our second quarter financial performance, we collected all rent due during the second quarter, which is noteworthy given the difficult climate for the cannabis industry. Revenue and AFFO were higher than last year and our payout ratio was under 80%. In fact, since our IPO four years ago, New Lake's payout ratio has remained within or below our target of 80% to 90%. I want to remind everyone that the payout ratio is the percent of our AFFO or free cash flow that is used to pay our dividend.

Speaker 3

As shareholders, this is an important ratio because a more conservative payout ratio provides a buffer for inevitable portfolio disruptions supporting dividend distributions. Next, I'd like to talk about our portfolio. During the quarter, we acquired a dispensary in Ohio and entered into a lease with Cresco Labs for an aggregate investment of approximately $875,000 including tenant improvement allowance, which is expected to be funded over the next twelve months. We also executed a dispensary swap with Curaleaf. Our tenant's dispensary was located in a town that opted out of adult use when the state transitioned from a medical to adult use program.

Speaker 3

Similar to what we have done with others, we worked with our tenant on a deed for deed exchange, accomplishing their goals and maximizing value for our shareholders. At our Fitchburg, Massachusetts facility leased to Revolutionary Clinics, the tenant remained in the premises longer than expected, providing Newlake with additional rent through the end of the second quarter. In early July, our tenant vacated the building and we've been actively marketing the property for re leasing. There's been some early interest but given the difficulty of the Massachusetts market, we expect that it will take some time to re lease the property. Also during the quarter, we welcomed a new tenant, Butter, to the portfolio with their acquisition of a Connecticut dispensary from Acreage that we own.

Speaker 3

There were no tenant improvement disbursements during the quarter. On our last call, we mentioned that C3 was reevaluating the build out of their Connecticut cultivation facility where they received final construction costs far in excess of their and our expectations. C3 continues to pay rent on the facility while they're evaluating options. Next, let's take a look at the latest developments in the industry. There has been a lot of noise recently around reform for the cannabis sector but no definitive statements from the Trump administration.

Speaker 3

If you recall, President Trump expressed support for cannabis rescheduling as well as Safe Banking and the States Act. It's not a surprise that the administration is focused on other priorities during the first seven months of its term. However, with a new DEA administrator recently confirmed and increasing support from those influential to his administration, we do anticipate some indication of reform potential in the second half of this year. Away from the federal level, it was great to see Texas expand their medical cannabis program. The modifications that will be implemented will broaden patient access and grow the number of licensees, which should fuel demand for real estate capital in this state of 30,000,000 people.

Speaker 3

Delaware launched adult use sales last week. Kentucky is preparing for their first medical cannabis sales later this year Minnesota's adult use program should launch later this year and Pennsylvania's legislatures continue to debate legalizing adult use in the Commonwealth. Notwithstanding the slow pace of reform at the federal level, it's great to see this continued progress within the states. With that, I'll turn the call over to Lisa.

Speaker 4

Thank you, Anthony. In the 2025, our portfolio generated total revenue of $12,900,000 a 3.8% increase year over year, reflecting the quality of our portfolio. Key drivers of this increase include a full quarter of rental income from our Connecticut cultivation facility acquired in May 2024, and our Ohio dispensary acquired earlier this year. We also began receiving rent in the quarter from our May 2025 acquisition of a second dispensary in Ohio. While we did not fund any tenant improvements during the second quarter, we received a full quarter of rental income from $3,800,000 in improvements funded after 06/30/2024 across our cultivation facilities in Arizona, Connecticut, Missouri and Pennsylvania.

Speaker 4

And finally, our annual rent escalators, which continue to provide consistent revenue growth across the portfolio. As mentioned, Revolutionary Clinics continue to pay 50% of contractual rent during the second quarter. The tenant vacated the building in mid July, and we do not expect any further rental payments. The estimated reduction in revenue is expected to be approximately 1.7¢ per share per quarter, excluding carrying costs, until the property is released. During the three months ended 06/30/2025, our acquisition activity included the acquisition of a dispensary in Ohio for $500,000 along with a commitment to fund $375,000 in improvements.

Speaker 4

The dispensary was leased to Cresco. A deed for deed like kind exchange with Curaleaf involving the transfer of our Mokena, Illinois dispensary for a Brookville, Pennsylvania dispensary. The exchange involved assets of similar value, and the new lease extended the term by two and a half years. Net income attributable to common shareholders for the three months ended 06/30/2025 was $7,300,000 or $0.35 per diluted share. Adjusted funds from operations totaled $11,500,000 for the quarter, representing a 4% increase year over year.

Speaker 4

The growth was primarily driven by the increase in revenues discussed earlier, along with lower general and administrative expenses, most notably in compensation and professional fees. We declared a second quarter twenty twenty five cash dividend of $0.43 per share of common stock, or $1.72 on an annualized basis. The dividend continues to be fully supported by the earnings power of our portfolio, with a second quarter payout ratio of only 79%. This reflects our ongoing commitment to delivering consistent returns to shareholders while maintaining a strong balance sheet. The dividend was paid on 07/15/2025 to stockholders of record as of 06/30/2025.

Speaker 4

As of 06/30/2025, our balance sheet remains solid with $432,200,000 in gross real estate assets and a very conservative debt profile with a 1.6% debt to total gross assets and no maturity until May 2027. Liquidity remains strong with $104,300,000 available, including $21,900,000 in cash and $82,400,000 in capacity under our revolving credit facility. We have ample flexibility to execute on our business strategy and grow earnings by continuing to invest in quality assets. Lastly, I wanted to briefly touch on AiR Wellness, which we mentioned in both our earnings release and our 10 Q. We currently lease two properties to AYR, a cultivation facility in Pennsylvania and another in Nevada.

Speaker 4

As of now, we've received rent payments through July and hold approximately three and a half months of security deposit, which will be applied toward unpaid rent as we work through this situation. We are closely monitoring the situation and intend to exercise all rights available to us under the lease agreements. With that, I will turn the call over to the operator for Q and A. Operator?

Operator

Thank you. We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. Our first question comes from Pablo Zuenik with Zuenik and Associates.

Operator

Please go ahead.

Speaker 5

Good morning, everyone. This is Rahul on for Pablo. We have a few questions. And for my first question, so far this year, you have only acquired three stores. Without the start of rec sales in any major state, do you see room in 2025 for more large scale activity in terms of acquisition or build out of cultivation facilities this year?

Speaker 3

Hi, Bravo. Anthony here. So, for your question. The development of cultivation properties for sure is significantly less than previous years and it's for a number of reasons. First, as you point out, there are fewer state conversions.

Speaker 3

You also do have Kentucky trying to stand up an industry and there's also interest in building capacity in Minnesota. But I would say by and large, I do expect a subdued level of demand for cultivation projects in the '5 versus prior years.

Speaker 5

Got it. And next, regarding the $11,000,000 in unfunded commitments with C3 Industries, will that be funded or not?

Speaker 3

Yeah. So, I made some comments earlier. At this time, we're working with our tenant to evaluate options. And so, for the time being, investors should expect that we'll continue our pause on funding that additional TI for the foreseeable future.

Speaker 5

Sure. Got it. And can you confirm Acreage is up to date with rental payments?

Speaker 3

Yes. Aside from what we've mentioned on this call with Air, all of our tenants are current through and including August rent.

Speaker 5

Got it. And my final question is, are some MSOs becoming more open to sale leaseback than in the past? This morning Verano seemed to leave the door open to sale leaseback.

Speaker 3

Well, I do want to point out that we own 34 properties and 31 are leased to multi state operators. So I think historically over our six plus year history, we've been able to execute deals with MSOs. To answer your question about the perspective today, sale leaseback transactions are an important tool for companies across all industries to fund those real estate capital needs. So this isn't something specific for cannabis. All industries utilize sale leaseback as that real estate capital tool.

Speaker 3

I do believe that MSOs are open to leasing and sale leasebacks. Again, we have a very sizable portfolio with MSOs. I think the hesitancy for some has been the pricing historically and for some it's been the duration of the leases. But again, away from cannabis, net lease REITs such as New Lake compete every day very effectively versus Main Street banks and private landlords because they become experts in an asset class and they serve the needs of the tenant very well. And that's what we're building here at New Lake.

Speaker 3

And so, we expect to see demand for the product and capital that we have for our tenants. And I think when you look at what we just did with Curaleaf, working with them to move handful of times with tenants, it shows that we understand the industry and we could be a good long term partner with our tenants.

Speaker 5

Got it, Anthony. Thank you. That's all for me.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from Michael Peterson with Peterson Wells. Please go ahead.

Speaker 6

Yeah. Anthony, I was just I had a couple quick questions. One regarding the lack of leverage on the balance sheet. And secondly, the you know, you list the real estate assets as being around 432,000,000, yet your market cap of the company is close to 285,000,000. You know, if you I mean, with your lack of leverage, 1.6% leverage, I'm assuming actually if you take the cash, you're actually you could eliminate the debt if you wanted to, which there's no reason to.

Speaker 6

But at the twelve and three quarter or 12 and a half percent yield the stock trades at, the question I have is if marijuana I mean, or cannabis was maybe Trump signs an order to make it illegal, and everybody was out of business. The real estate that you show on the books at $430,000,000, is that the cost that you paid for? Or is that an updated estimate of the value of the real estate? Or how would you comment on how you come up with a $432,000,000 number?

Speaker 4

So the real estate assets are recorded in accordance with GAAP. So when we acquire an asset, that asset is recorded on the balance sheet at its fair value. And then we don't fair value it going forward. So it's at the acquisition cost and any improvements that we've put into that asset. Under GATT, we're not required to fair value real estate unless it's held for sale.

Speaker 6

Okay, so, you know, at paying out currently 79% of free cash flow, you know, even with a let's say there you don't recover anything of the leasee that no longer paying. I mean, at starting at a 12.5 yield on the stock, I mean, you explain why, I mean, where the risk is as that you would see going forward from a shareholder perspective?

Speaker 3

I think so Michael, thank you for the question. I think the risk in our business, and it's one that we've talked about on all of our calls since we've gone public, is around the tenancy and the collection of rent for this industry. It's one of the reasons why our yield, when you look at our disclosed yield, it's higher than what you would see for a typical REIT because the cannabis industry itself is more high risk and more volatile than other industries in The US. And that's particularly driven by newness of the industry but also this disconnect between state and federal law where we have over 40 states that have some form of legal cannabis infrastructure but it's still Schedule I drug at the federal level. And so for us, the biggest risk that we manage is in the underwriting and looking to lease to quality tenants in this industry and then the ongoing collection of rent.

Speaker 6

Right. You know, my question is, you know, in in those REITs that, you know, don't have those specific risks, you know, there are many cases forty, fifty, 60, and even up to 70% leverage. You know, do you not feel that with the lack of leverage basically at all that that wouldn't derisk the portfolio to some extent, even if if I mean, I obviously you wanna continue collecting rent, but I'm just saying worst case scenario, the real estate is probably worth more than what the stock trades at or would that not be a fair estimate?

Speaker 3

I certainly don't wanna speculate on stock valuation on at all. What I can say is that when we look at constructing the portfolio and underwriting the portfolio, we're targeting companies that we fully expect can continue to pay rent over the life of that lease and when you look at the remaining weighted average lease term, we're around thirteen years for the portfolio. So there's meaningful duration. The other point that I would make is that even though we're under levered today, we look at leverage as the opportunity to fund incremental growth. We're not going to seek transactions just so we can lever up.

Speaker 3

We're seeking only quality transactions that we think will be long term accretive to our shareholders. And so we like sitting here with very light leverage as we watch this industry continue to unfold and hopefully get some federal reform in the near to intermediate term.

Speaker 6

Okay. No, appreciate the answers and great work, working through a difficult environment. And I think your lack of leverage is going to pay huge dividends going forward if there are opportunities. Thanks.

Speaker 3

Thank you, Michael.

Speaker 2

Thank you.

Operator

We have no further questions at this time. I would now like to turn the conference back over to Anthony Coniglio for closing remarks.

Speaker 3

Thank you, operator, and thank you everyone for joining our call today. Have a great remainder of the summer.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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