Earnings call transcript: Newlake Capital Partners Q4 2024 sees earnings miss

Newlake Capital Partners reported its fourth-quarter 2024 earnings, revealing an EPS of $0.29, falling short of the expected $0.36. Revenue also missed forecasts, coming in at $12.5 million against a projected $12.75 million. Despite these misses, the stock showed a marginal increase of 0.09% in post-earnings trading, closing at $16.11. According to InvestingPro analysis, the company maintains a "GREAT" financial health score of 3.57 out of 5, and current valuations suggest the stock is trading below its Fair Value.

Key Takeaways

• Newlake Capital Partners missed both EPS and revenue forecasts for Q4 2024.
• The company’s stock price remained stable, reflecting cautious investor sentiment.
• Annual revenue grew by 6%, and the dividend increased by 8% year-over-year.
• The cannabis industry continues to face regulatory and market challenges.

Company Performance

Newlake Capital Partners reported a 6% increase in annual revenue to $50.1 million for 2024, despite a 3.9% year-over-year decline in Q4 revenue. Net income for 2024 rose to $26.1 million from $24.6 million in 2023, indicating solid overall performance in a challenging market. The company continues to expand its portfolio, completing significant construction projects and acquisitions.

Financial Highlights

• Revenue: $12.5 million in Q4 2024, a 3.9% decrease year-over-year.
• Earnings per share: $0.29, missing the forecast of $0.36.
• Annual dividend increased to $1.72 per share, an 8% rise from 2023.
• AFFO: $43.7 million, or $2.08 per share, a 7.5% increase year-over-year.

Earnings vs. Forecast

Newlake Capital Partners’ Q4 2024 EPS of $0.29 fell short of the $0.36 forecast, a 19.4% miss. Revenue also missed expectations, coming in at $12.5 million versus the forecasted $12.75 million, a 2% shortfall. This marks a notable miss in both key financial metrics, reflecting industry challenges.

Market Reaction

Despite missing earnings and revenue forecasts, Newlake Capital Partners’ stock price experienced a slight increase of 0.09%, closing at $16.11. While the stock trades near its 52-week low, InvestingPro analysts maintain a strong buy recommendation with a 46% potential upside from current levels. The stock’s attractive valuation has earned it a spot on the Most Undervalued Stocks list.

Outlook & Guidance

The company maintains a cautious outlook for 2025, focusing on disciplined growth and quality investments. Newlake Capital Partners plans to strategically use share buyback and ATM programs while monitoring tenant debt maturities in 2026-2027.

Executive Commentary

CEO Anthony Coniglio emphasized the company’s strategic focus, stating, "We never expected to have a flawless track record, especially in such a dynamic sector." He added, "It’s hard for us to be anything but cautious right now around the industry," highlighting the challenges faced by the cannabis sector.

Risks and Challenges

• Regulatory uncertainty and potential changes in federal policy.
• Industry headwinds impacting growth prospects.
• Tenant-specific challenges, particularly with Revolutionary Clinics and Calypso.
• Market saturation and competition in the cannabis sector. InvestingPro has identified several positive factors for Newlake Capital, including strong cash position exceeding debt and consecutive dividend increases for four years. Subscribers can access 8 additional ProTips and comprehensive financial metrics through the Pro Research Report, providing deeper insights into the company’s competitive position and growth potential.

Q&A

During the earnings call, analysts inquired about the PharmaCann IPR situation, with management confirming minimal spillover. The company also discussed potential property re-tenanting strategies and reiterated a conservative approach to industry growth.

Full transcript - Newlake Capital Partners Inc (NLCP) Q4 2024:

Conference Call Operator: Good morning. I will be your conference call operator today. At this time, I would like to welcome everyone to the New Lake Capital Partners Fourth Quarter and Full Year twenty twenty four Earnings Conference Call. Today’s call is being recorded. I will now turn the call over to Walter Pinto, Managing Director of KCSA Strategic Communications.

Please go ahead.

Walter Pinto, Managing Director of KCSA Strategic Communications, KCSA Strategic Communications: Thank you, operator. Good morning and welcome everyone to the New Lake Capital Partners fourth quarter and full year twenty twenty four earnings conference call. I’m joined today by Gordon Dugan, Chairman Anthony Coniglio, President and Chief Executive Officer Lisa Meyer, Chief Financial Officer and Jared 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. 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 eight 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 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, Chairman, New Lake Capital Partners: Thank you, Walter, and good morning, everyone. I appreciate you joining us today. While 2024 was another challenging year for the cannabis industry, Nulay continued to deliver stable financial results in annual growth for our shareholders across all financial metrics of our business. We achieved growth in AFFO per share of 10% year over year, marking yet another year of sustained growth since our founding in 2019 and our IPO in 2021. We also increased our annual dividends in 2024 to $1.7 per share, an 8% rise over 2023, underscoring our commitment to delivering value to shareholders.

These results, despite the ongoing industry challenges, are a testament to the strength of our underwriting process and the capabilities for our team in proactively managing portfolio risks. As we look ahead to 2025, we anticipate continued headwinds for the sector, while we await key developments, including the DEA’s rescheduling decision, state level catalyst and the potential for broader federal reform under a President who has expressed support for the industry. With a strong liquidity position, one of the lowest levels of debt in the REIT industry, I believe the lowest leverage level in the REIT industry and ample credit capacity, New Lake is well positioned to continue investing prudently in high quality tenants and navigating the evolving landscape. I’d also like to take a moment to welcome Dina Rollman to our Board of Directors. As many of you know, in December, we announced that Pete Cadence will retire from the New Lake Board at the end of his current term in June.

Pete has been a valued partner and his deep knowledge of the cannabis industry has been invaluable to our success. We thank him for his contributions and we wish him the best and we will miss him dearly as Pete is one of the great people in the industry. In preparation for Pete’s planned departure, we have added Dina Roman to our Board. Dina brings over a decade of experience in the cannabis industry with recognized leadership in legal and regulatory affairs. She spent nine years at Green Thumb Industries, one of the most well run cannabis companies in the sector, and we are thrilled to have her join our team.

Her insights will be invaluable as legal and regulatory considerations continue to take center stage in shaping the industry’s future. With that, I’ll turn it over to our CEO, Anthony Coniglio.

Anthony Coniglio, President and Chief Executive Officer, New Lake Capital Partners: Thank you, Gordon, and thank you all for joining the call today. I’d like to start today by expressing my appreciation for the New Lake team and their hard work throughout 2024, which was instrumental to our ability to deliver growth in revenue, AFFO and our dividend in the face of significant headwinds in the cannabis industry. It’s a remarkable achievement. Our ability to execute, adapt and deliver stands out And that’s a testament to the strength of our team. So thank you to the New Lake team.

I want to briefly comment on revolutionary clinics and Calypso, which remain the only two tenants who have had issues paying contractual rent. In an evolving and highly regulated industry like cannabis or in any industry for that matter, it’s unrealistic to expect zero issues in a long term net lease portfolio. The fact that we’ve only had to manage these two situations during considerable adversity for the industry, I believe demonstrates the strength of our underwriting and our proactive portfolio management approach. I believe the NewLink team has done a great job navigating these matters and maximizing value for our shareholders. We will continue to bring that discipline as we work diligently through these and any other issues that may arise in the future.

We never expected to have a flawless track record, especially in such a dynamic sector, but what we have shown in my opinion is that our underwriting approach works. Our focus on limited license states and property level cash flows have helped us manage risk and deliver results for our shareholders. Turning to the DEA’s rescheduling process, while we were certainly disappointed by the recent delays, I remain optimistic that cannabis will ultimately be rescheduled from Schedule one to Schedule three. This is the most consequential drug rescheduling in DEA history. And although it’s taking longer than any of us expected or would like, we do believe the process will conclude with a positive outcome, bringing substantial benefits to the industry and further strengthening the credit quality of our portfolio.

Beyond federal rescheduling, state level reforms continue to gain momentum. Kentucky is actively moving forward with the launch of its medical cannabis program with sales potentially starting later this year. In Pennsylvania, Governor Shapiro has again included adult use cannabis in his annual budget. With five of six bordering states, including Ohio, having already legalized adult use, it feels like only a matter of time before Pennsylvania follows suit with their market of 13,000,000 people. In Georgia, the state’s considering expanding its medical marijuana program and in Virginia, the legislature has yet again put an adult use bill in front of the governor.

These are just a few examples of the continuing dialogue in state houses around the country to introduce or expand regulated cannabis markets. At the federal level, as the new administration’s appointees settle into their roles, we’ll be closely watching for key policy signals. While some of the recent appointees have historically shown skepticism towards cannabis reform, the majority have yet to provide commentary on the regulatory positions. For his part, President Trump has publicly supported rescheduling cannabis to Schedule III along with other potential reforms such as banking access to the industry and legislation that would leave cannabis policy to the states. As the new administration’s stance becomes clearer, we will continue to carefully assess the potential impacts and opportunities for Nulink.

Before I turn it over to Jared, I want to touch on two final points, our share buyback and TSX opportunity for Opelist. Regarding the share buyback, we continue to have meaningful capacity under our buyback program and just as we did in 2023, we’re prepared to take advantage of opportunities to create shareholder value by repurchasing shares at attractive prices. Regarding listing, after a careful analysis, we’ve determined that at this time, the structural requirements and associated costs of pursuing a TSX listing do not justify the benefits. We will of course revisit this evaluation if circumstances change. And we know liquidity is critically important and we will continue to seek options and work hard to enhance liquidity and trading of our stock.

With that, I’ll turn it over to Jared.

Jared Annenberg, Senior Vice President and Head of Investments, New Lake Capital Partners: Thanks, Anthony. I’ll provide an overview of our portfolio, an update on projects under construction, give some insight into the current capital markets environment and talk about our pipeline. Starting with our portfolio, as of December 31, we had committed a total of $445,000,000 across 17 dispensaries and 15 cultivation facilities in 12 states with 13 tenants representing approximately 1,700,000 square feet. EBITDA coverage for the latest available quarter was 3.5 times for cultivation and nine point zero times for dispensaries, flat from the previous quarter. These coverages have been relatively stable now for the past year, demonstrating that while the overall market may be volatile, our underwriting focused on critical facilities and more limited licensed markets has led to a more stable cash flow profile.

Please note that we use estimates where appropriate given each company reports slightly differently on a property level basis. Next, I want to give more details on the two operators in the portfolio Anthony noted, Revolutionary Clinics and Calypso. Starting with RevClinics, whose cultivation facility we own in Massachusetts, the company entered into receivership in mid December. While the facility was producing quality products, the company was unable to achieve a level of sales commensurate with their plan to meet the significant liabilities accumulated over the past two years. We have an agreement in place with the receiver for the tenant to continue paying 50% of rent through the receivership period among other expenses and provisions.

If the receiver is not successful in either restructuring or selling the business, we will recover the property and seek to re tenant the building. We’ve had some interest in the building already, but I would temper optimism with the reality that Massachusetts is a difficult cannabis market. We expect the receiver to be in place into and potentially through the end of the second quarter. Moving to Calypso, whose cultivation facility we own in Pennsylvania, we’ve been utilizing their deposits for monthly rent payments since September. In that time, we’ve been working closely with Calypso on finding the right long term solution for the business and the property.

As Anthony mentioned, Pennsylvania is again discussing a transition to adult use and is already a $1,600,000,000 annual medical only market. The market’s adult use potential, quality of the building and three stores recently granted to Calypso are all contributing to the significant demand we’ve seen for the property. We believe there will be a resolution resulting in a well capitalized tenant in the near future. The strong activity here really demonstrates the value of a high quality well priced asset in a limited license market. On to construction for the quarter, we disbursed $1,200,000 of construction allowance with the Mints completing their facility in Arizona at the end of twenty twenty four.

As of the end of the year, we had approximately $11,000,000 of allowance outstanding, all of which is for C3 in Connecticut. Now as Anthony and Gordon both noted, the industry continues to experience headwinds as we await federal reform. One issue we are focused on are the upcoming tenant debt maturities in 2026 and 2027. We have been encouraged by recent capital markets activity, in particular, the cannabis recent announcement to restructure and extend their senior notes. We are optimistic that operators will work with their capital providers to allow the runway necessary for these businesses to realize their full potential.

Lastly, on deal activity, subsequent to quarter end, we closed on a dispensary acquisition with Cresco in Ohio. While dispensary transactions are smaller than cultivation, this transaction demonstrates our focus on disciplined underwriting and executing with strong credits in limited license markets. We continue to see opportunities to invest and in today’s environment, the competitive landscape is greatly diminished versus two to three years ago. We have ample capital available on our credit facility to fund growth, while we continue to maintain our underwriting discipline and focus on high quality opportunities. With that, I’ll turn it over to Lisa.

Lisa Meyer, Chief Financial Officer, New Lake Capital Partners: Thank you, Jared. For the full year of 2024, our portfolio generated total revenue of $50,100,000 representing a 6% increase from $47,300,000 in 2023. The key factors contributing to this revenue growth include rental income from the May acquisition of our cultivation facility in Connecticut, where we also committed to fund $12,000,000 in building improvements base rent growth from the funding of $15,100,000 in building improvements across four cultivation facilities and annual rent escalators that consistently boost our revenue. However, the increase in revenue was partially offset by the rent shortfall from revolutionary clinics, which has been paying partial rent since June of twenty twenty four. Also, as Jared mentioned, we applied $1,200,000 of Calypso’s escrow deposit to rent during the period.

As of 12/31/2024, the remaining escrow deposit was $445,000 As a result of this revenue growth, we experienced a corresponding increase in net income and AFFO. Net income attributable to common shareholders for the full year of 2024 totaled $26,100,000 compared to $24,600,000 for the full year of 2023. AFFO for the full year of 2024 totaled $43,700,000 or $2.08 per share, reflecting a 7.5% year over year increase. Moving to the fourth quarter of twenty twenty four. As mentioned in yesterday’s press release, our year over year revenue and net income results were negatively impacted by one time non cash revenue recorded for Revolutionary Clinics warrants received in the fourth quarter of twenty twenty three and a subsequent impairment loss of $522,000 on these warrants in the fourth quarter of twenty twenty four.

Due to these one time non cash items, we experienced a decline in revenue and net income for the three months ended 12/31/2024 compared to the three months ended 12/31/2023. Total revenue was $12,500,000 reflecting a decrease of approximately 3.9% year over year. Net income attributable to common shareholders for the three months ended 12/31/2024, totaled $6,000,000 or $0.29 per share compared to $7,000,000 in the same period last year. While fourth quarter revenues and net income declined, AFFO increased modestly to $10,900,000 or $0.52 per share compared to $10,800,000 or $0.51 per share in the fourth quarter of twenty twenty three, an increase of approximately 1.8% year over year, which was mainly driven by lower property expenses. During the three months ended 12/31/2024, we invested $1,200,000 in building improvements with $11,000,000 in unfunded commitments at the end of the quarter.

On 12/12/2024, the company declared a fourth quarter cash dividend of $0.43 per share of common stock paid on 01/15/2025. On 03/04/2025, the company’s Board of Directors declared a first quarter cash dividend of $0.43 per share of common stock, equivalent to an annualized dividend of $1.72 per share. The dividend is payable on 04/15/2025 to stockholders of record at the close of business on 03/31/2025. On 12/31/2024, our balance sheet remains strong with $431,000,000 in gross real estate assets, only $8,000,000 in debt outstanding and a debt to EBITDA ratio of less than 0.2 times. Our liquidity is solid with $103,000,000 available, including $20,200,000 in cash and $82,400,000 in untapped revolving credit facility capacity.

The company is strategically positioned to execute our business strategy to grow earnings for investors as we prudently deploy our capital. And now, I will turn the call back over to the operator for Q and A.

Conference Call Operator: Thank you. We will now be conducting a question and answer session. You. The first question is from Pablo Zuaneck from Zuaneck and Associates. Please go ahead.

Pablo Zuaneck, Analyst, Zuaneck and Associates: Thank you. Good morning, everyone. Look, my first question is what about the PharmaCann and the IPR situation. Obviously, the IPR stock is down about 30% since that happened. Your stock has not done as much, but it’s been impacted.

Can you just give any color you can provide in terms of read across or spillover effect from that matter? Or is this something that you are immune to? I’m particularly focused on whether rate cuts are going to be necessary, rental rate cuts. And we saw in the case of Massachusetts and Michigan, they pretty much let their tenant walk away from those leases. Just any comments you can provide, Anthony, on this subject.

And I know it’s awkward because we’re talking about a competitor, but I’m just trying to understand the spillover to New Lake, if any at all. Thanks.

Anthony Coniglio, President and Chief Executive Officer, New Lake Capital Partners: Yes. Thank you for the question, Pablo. We’ve not seen a spillover. And I actually would point you back to your own research piece that you put out back in December, where you talked about the property level economics on a per square foot basis. And you heard us talk on the call here about our focus on the property level cash flow coverage, which we think is one of the key ingredients to underwriting in this particular sector and real estate in general.

And so when you look at your analysis, I think was fairly accurate in sizing up the cost of the leases on a per square foot basis. We believe that our EBITDAR coverage, as Jared disclosed, demonstrates that there’s ample cash flow coverage at the property level to be able to pay the leases from what’s in our portfolio here at New Lake. And so, no, we’ve not seen any sort of rollover from what transpired between those two parties over to New Lake.

Pablo Zuaneck, Analyst, Zuaneck and Associates: Thank you. That’s helpful color. So now just in terms of the CALIFORN revolutionary clinic situation, I’m just trying to understand the, when you if you recover those once you recover those properties, whether you can reten on them for other purposes that are not cannabis related, is that something that feasible or impossible because it’s already a cultivation facility? And if you do that, is there a big rental cut that you have to take? I’m just trying to understand, I guess, I don’t want to call it worst case scenario, but is that you recover the property and you lease it outside of cannabis.

But again, I’m trying to understand if that can be done and what’s the income effect, if any?

Anthony Coniglio, President and Chief Executive Officer, New Lake Capital Partners: Let’s take them in pieces. Let’s first talk about revolutionary clinics. Well, first, I would say for cultivation facilities in general, given the equipment and the construction that goes into place that takes place to prepare it for cultivation activities, clearly cannabis is the best purpose for that property. And we’d be best positioned to be able to and would first try to re tenant the facility with the cannabis operator. But for all of our properties, when we underwrite them, we’re understanding what that alternative use could be.

And certainly for almost all, if not all of our properties, we would be able to pivot away from cannabis to a non cannabis activity. There may be some friction cost around preparing it for that new activity. And so it’s always an option, Pablo, but we’re always going to look to the cannabis market first as an opportunity re tenant. For Calypso, what I wanted to say was, you heard Jared talk about the demand for the property in the business. And there, we think that’s more about not recapturing the property, but finding the right tenant to occupy the building and operate out of the facility.

And so where rev clinics may be one where maybe we can re tenant in cannabis, maybe we have to tenant it outside of cannabis, I feel more confident around the Calypso property that it will be utilized in the cannabis sector, given the fact that that’s still a medical only market, with the opportunity to expand to adult use and the quality of that property and the meaningful demand we saw for it over the last few months.

Pablo Zuaneck, Analyst, Zuaneck and Associates: Thank you. Understood. Look, and just one more here. So on the one hand, you have a stock repurchase program, I think $8,000,000 left. On the other hand, you have a $50,000,000 ATM.

I’m just trying to understand one or the other. And what would be the use of ATM if you do make use of that?

Anthony Coniglio, President and Chief Executive Officer, New Lake Capital Partners: Yes. Thank you for the question. It’s an opportunity for me to talk about it. Nearly 50% of REITs that we looked at with our bankers and did analysis have both an ATM and a buyback authority in place. So it’s not unusual to see organizations.

When you think about the cannabis sector and the extreme volatility that occurs, particularly in the equities around the cannabis sector, we want to be prepared to optimize value for our shareholders. And so if there is an attractive price for us to repurchase shares much like we did in 2023 and to remind folks in 2023, we bought back shares and our average buyback price was just around $13 a share, which was very accretive and created meaningful value for our shareholders. And on the ATM program, should we get some of those reforms that we were talking about and the industry catches a bid, we want to be prepared given some of the complexities in settling a primary offering for our business and the exchange we’re on. We want to be prepared to have the flexibility to tap a facility like an ATM to raise capital at accretive prices to our shareholders. So to sum it up, Pablo, it’s all about shareholder focused flexibility to capture opportunity when it presents itself.

Pablo Zuaneck, Analyst, Zuaneck and Associates: Right. Thank you. And one last one. So not to put words in your mouth, but it seems that you seem more cautious about the industry outlook in general more so than in the past. So that’s going to be reflected in slower book growth and that will make sense.

That will be consistent with your views about the industry outlook. But I’m just trying to understand, is that true? Am I correct in saying that you have been maybe more conservative than others for better or worse? And that in the meantime, right now, when you look at ’25, you’re going to be even more conservative than before? And we should factor that in our assumptions about your book growth?

Thanks.

Anthony Coniglio, President and Chief Executive Officer, New Lake Capital Partners: Yes. Pablo, I couldn’t comment if we’re more conservative or not. I’d say we’ve had this posture towards the industry for some time now. And when we did one deal last year, we’ve always said we’re not going to do deals just to do deals. We only want quality growth.

You look at the Cresco deal that Jared mentioned, we think that’s a really good going to be a really good Ohio dispensary with a really good operator. And so we’re going to continue to be slow and steady, focus on quality operators, quality properties with quality property level cash flow. And so we’re going to let the deal flow come and go with that screen and not be reaching to just get growth. Overall, it’s hard to not be cautious around the industry. This industry has been wanting reform for years and reform is always around the corner.

And with the new administration coming in, that creates, I think, real uncertainty around the industry. And we know the industry needs access to capital and uncertainty creates a lack of access to capital as those capital providers will sit on the sideline awaiting clarity. And so it’s hard for us to be anything but cautious right now around the industry. When you have the debt maturities that Jared alluded to, you have Schedule III moving much slower than any of us want and uncertainty around legislation in the federal government and fewer states to turn on for adult use. We lost Florida in November.

And so I think it’s prudent to have a more cautious approach and be happily surprised to the upside if we’re wrong versus the other way.

Pablo Zuaneck, Analyst, Zuaneck and Associates: Understood. Thank you.

Conference Call Operator: There are no further questions at this time. I would like to turn the floor back over to Anthony Coniglio for closing comments.

Anthony Coniglio, President and Chief Executive Officer, New Lake Capital Partners: Great. Thank you, operator. Thank Thank you, everybody for joining our call today. We hope you have a great day and a wonderful rest of the week.

Conference Call Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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