Newlake Capital Partners at 15th Annual LD Micro: Strategic Insights on Cannabis REIT

On Thursday, 10 April 2025, Newlake Capital Partners (OTC Markets: NLCP) presented at the 15th Annual LD Micro Invitational 2025. The company, a real estate investment trust (REIT) focused exclusively on the cannabis sector, shared insights into its strategic operations, highlighting both strengths and challenges. While Newlake boasts a strong cash flow and minimal debt, it faces market disadvantages trading on the OTC market.

Key Takeaways

• Newlake owns 33 properties across 12 states, leased to major cannabis operators.
• The company maintains a high dividend yield of 13% with a low debt ratio of 0.2x debt to EBITDA.
• Federal cannabis reforms could enhance tenant credit quality and operating stability.
• The company emphasizes tenant quality and strategic state selection to maximize profitability.
• Trading on the OTC market presents structural challenges, but potential legislative changes could alleviate these.

Financial Results

• Revenue Generation: Newlake generates revenue through long-term leases, collecting monthly rent.
• Dividend Payout: Despite a high dividend yield, the company assures coverage through robust cash flow.
• Debt Level: With only $7.5 million in debt against $450 million in assets, Newlake maintains a low leverage.
• Credit Facility: An available credit facility of $90 million, with $83 million unused, offers financial flexibility.
• AFFO Payout Ratio: The AFFO payout ratio stood at 83% in the fourth quarter, with resilience even if revenue drops by 14%.

Operational Updates

• Portfolio Size: Encompassing 1.7 million square feet, Newlake's portfolio spans 33 properties.
• Tenant Base: Key tenants include Curaleaf, Cresco, and Trulieve, among others.
• Lease Structure: Operates under a triple-net lease, transferring property costs to tenants.
• Underwriting Approach: Focuses on tenant quality, license limitations, and real estate fundamentals.

Future Outlook

• Industry Growth: Anticipates continued growth in the cannabis sector driven by public approval and demographic trends.
• Federal Reforms: Potential rescheduling to Schedule 3 and the SAFE Banking Act could improve tenant credit quality and operational stability.
• Potential Legal Challenges: Noted ongoing legal challenges to cannabis scheduling by prominent law firms.

Q&A Highlights

• Rescheduling Economics: Shifting to Schedule 3 would enhance tenant credit quality by removing the 280E tax burden.
• SAFE Banking Competition: Expected to validate the asset class without immediate competitive pressure.
• Insurance & Liability: Tenants are required to maintain comprehensive property insurance.

For further details, please refer to the full transcript below.

Full transcript - 15th Annual LD Micro Invitational 2025:

Unidentified speaker: Our business model is simple. We purchase properties from and for cannabis operators. We enter into long term leases with those operators, and we collect rent on a monthly basis providing dividends to our investors. One of the unique differences that often here in attending this conference and other small cap conferences, investors are fairly surprised in this in this environment to find a company that has the cash flow profile that we do and the dividend that that we pay out. So I'm gonna walk you through our presentation today.

I love q and a, so I'm gonna move pretty quick through this and see if we can get some q and a where I think the real reality is for you. Okay. Overview for for New Lake. So we're founded in 02/2019. Again, exclusively focused on the cannabis sector that deployed nearly $450,000,000 into this sector.

We own 33 properties across 12 states with 13 tenants. Our tenants are some of the leading cannabis operators in the country, in fact, the world. If you look at our largest tenant, Curaleaf, they are a global player in the cannabis industry. Our second largest tenant, which is Cresco. Our top three will be Curaleaf, Cresco, and Trulieve.

All three top players in the cannabis industry. Muselorum so Muselorum duration is is over thirty years. Twelve percent. So if you think about that in context with long duration to those yields. And we manage the business with a very disciplined eye towards towards expenses.

I've been around the block for over thirty five years with running a number of businesses. And one of the things I've learned is you wanna lean one of them That's not a forward looking statement in terms of what will happen in the future, but it's a statement about what our strategy was to enter this market and grow the portfolio. So when we start this business back in 2019, what we realized was a real important to not just understand real estate. I mean, let's face it. We are a real estate investment trust, so you need to understand real estate.

But we also understood at the outset that it was critically important to understand the cannabis sector. And you can see by the looks of for our management team. You can read it on your own time. We have significant experience across capital markets, across financial services, and other highly regulated businesses, not to mention real estate. Our board of directors, when you look at it, really is that complement of real estate and cannabis.

Gordon began our champion, was the president's CEO of W. P. Cabin, arguably one of the largest net lease REITs in the world. And he also ran a company that was privacy property trust, excuse me, took that from roughly a $300,000,000 market cap company. It was industrial REIT and sold it to Blackstone in 02/2018 for 7 and a half billion dollars.

And so, again, Gordon with decades and decades of net lease REIT experience. Joyce is on the board of one of the leading cannabis operators. Pete Cadence, one of our directors was founder of our complete the most most profitable. Then Dean Roman recently joined us on the board from GTI. Why that's important is because we've institutionalized that cannabis knowledge and the real estate knowledge in coming up with our underwriting approach that's delivered in our opinion whether you look at it qualitatively or quantitatively, the best portfolio focused on the time of this industry.

Industry. It is a growing industry. I mean, cannabis growth come from or comes from states that surprised that Kentucky recently legalized medical marijuana and is currently working to roll out a medical program. But growth also comes from some to a. And why will this industry continue to grow?

Well, if you see some of my stats here on the left, you goal or even in adult use states. And what's driving the American public, according to people in Gallup research polls, what's driving the American public to approve a medical cannabis to the tune of 90% in adult use cannabis to the tune of roughly two thirds. Let's just pause there for a minute. What do we as an electorate? What what do we use?

Very, very few things. But one of them is that adults should have access to to legal cannabis for recreational purposes. And we're seeing Consumers, particularly of the younger cohort, change their buying behavior from alcohol and spirits excuse me, spirits and beer to cannabis related products. So it's a demographic shift in terms of consumption. It's why we've seen a number of the alcohol and beer companies enter into this segment or look for investments in this segment.

So we think the industry will continue to grow for decades to come. What are some of the catalysts for this industry? Because as we know Or maybe you're in Pennsylvania where you're medical, and you're potentially gonna get adult use later this year and next. But what's happening at the federal level? And I get the question, where is Donald Trump on this industry?

Well, in 2024, for the first time ever we had both presidential candidates embracing cannabis for reforms part of their platforms. And for his part, president Trump announced in September his support for four key items around our industry. Addictive and harmful capabilities of a drug like fentanyl. It would take it to schedule three, which would be something that came to town probably. But importantly, it it unlocks two things.

It unlocks research I think the industry surely needs this research for schedule one drugs is necessarily allowed. It eliminates an onerous tax provision which says that deductions for cannabis companies or companies trafficking schedule one and two drugs can limit the deductions. We don't have to go into too much detail, but there's some tax benefits and cash flow benefits. He also, in addition to the schedule one, said he supported adult use cannabis. And given he was a Florida resident and was on the ballot in Florida, he said he was voting for adult use cannabis in Florida.

Then legislatively expressed his support for the safe banking bill, which would open up the banking system to the cannabis industry as well as his support for the state's act. And this one, I think, is the most important. Similar to policies that this administration this last administration had where you push the issue to the states. The states act decriminalize the side of what they want their cannabis policy to be. So you have a lot of catalysts going on at the federal level, both the administrative where that rescheduling is occurring, and the legislative where there's two pieces of legislation that are happening, but also in the legal realm.

And I love that all three branches of our government are active in cannabis. Two points here, and I'll move really quickly through it. There is a case winding its way through the Massachusetts court and now the federal circuit court that's designed to get to the supreme court. No few cases get to the supreme court, But justice Thomas invited this case back in a few years ago when the court dissented on hearing the cannabis case. What justice Thomas said in his dissent to that decision was go behind that.

So there is David Boys, which is a very famous litigator and has argued successful in front of the Supreme Court for Microsoft and for gay marriage, sticking on this case. And so there's a chance we can get to the courts there. And, also, the last point on this page is in the court system, we know we love our guns in The United States. Many I think this works at three or four federal circuit courts have ruled the Controlled Substances Act unconstitutional to take away the rights of their arms. And there are many many state legal consumers who happen to be veterans or nonveterans who have challenged the constitution constitutionality of being unarmed or having their second amendment rights strict because their compliance is law.

And so there's more opportunity there for the courts to provide positive impact. So those are those are the key catalysts. I spent so much time on that page because this is what drives value for our shareholders over the long term. We'll talk about our dividend. Yes.

But, ultimately, this is what really unlocks value of the properties that we own. We are in 12 states, 1,700,000 square feet. I mentioned our top three our top three tenants are Curaleaf, Cresco, and True Leaf, some of the leading names in the industry. We also have nonpublic names, some of you may never have heard of, like a Mint or a C for the private companies that are performing very, very well. In fact, they've they've said this publicly publicly, so I should share that they're profitable, free cash flow positive, and have what's what the public companies would love to have in terms of margins and profitability.

How do we underwrite these properties? What is our approach? Three course legs to the stool. One, of course, is the tenant tenant quality. Now, of course, whenever you're renting real estate, you have to understand the tenant that you By having the limited number of licenses, you can see here in PA, thirty three licenses versus, say, of of Washington that has over 1,200.

Oregon Oregon, 16 hundred. Limited licenses means less competition. It means that means better margin, which means better cash flow, which means better credit quality, more likely to pay license rent. And when I look at the issues that occurred for landlords across this industry, it's been primarily in those unlimited license jurisdictions like California, Colorado, Michigan, or Oregon. And so understanding that market is critically important, not just the state, but down to the particular county and in some places, the city.

We need a deep understanding of of these jurisdictions and the perspective of how they'll evolve. And then third is the real estate. Of course, we're real estate trust, so we have to pay attention to the real estate. It's all about location, location, location. But here for us, it really is about cash flow, cash flow, cash flow.

Because at the end of the day, if the tenant is generating cash flow for your location, they're more likely to pay rent. And so we focus on what we call EBITDA. That's EBITDA plus rent. It's a very well used term in the in the net lease industry. So that really has when you see a 13% yield, typically, people say, this is a yield trap.

You're gonna cut your dividend, and it's usually one of two things. You either have a debt problem or you've got a portfolio problem, and trouble is ahead. So why are you at 13%, and why should I not be scared scared of that? Well, let's take it apart. You look at debt.

I may have mentioned earlier, and if I skipped over, shame on me. We only have 7 and a half million dollars of debt on $4,540,000,000 of assets, almost unlevered as a real estate investment trust. Points 0.2 times debt to EBITDA. We wanna say it again. 0.2 times debt to EBITDA.

We do have a $90,000,000 credit facility with $83,000,000 available to us today, only 7,000,000 outstanding. And if we took down the entirety of that, we'd still be well over two times debt to EBITDA. So it's not a leverage issue. K? It's clearly not a leverage issue.

So maybe you have a a terrible portfolio. One of our main competitors, the largest in the industry, has recently announced significant defaults in their portfolio. We had in the fourth quarter an 83% payout ratio. So for those not familiar with REITs, AFFO, available funds from operations, are a measure of free cash flow. And as a real estate investment trust, we have to pay out 90% of net income.

There are some differences because of noncash items between your net income and your AFFO. So we paid out 83% of our AFFO in the fourth quarter for dividends. We do have one property in our portfolio where the tenant has ownership. And when you look at the impact on AFFO, if that receiver is not successful in selling the business and and keeping the tenants in that location, we get that property back. AFFO goes from I'm doing the math for you to figure it out from the public information.

We go from, say, 83% to 85, 80 six percent. And that's the that's the one name in the portfolio that is currently in default. And so when you look at that, take the inverse from a %, and that means that once that comes back to us, if it comes back to us, we still would have 14% of our revenue could go away, and we could still cover the dividend. And so when you compare that to others in the industry that have seven, ten, 20 percent defaults in their portfolio, you can see in my opinion with a well covered dividend and a quality portfolio. I don't think it's a portfolio issue.

So people say, well, if it's not debt and it's not portfolio, well, then what is it? Well, I think part of it is structural. Part of it is that we trade on the OTC. We run our company to comply in all respects with the New York and NASDAQ listing requirements, but they won't have us. And why?

Because we're we're subcategories industry. Our main competitor is on the New York Stock Exchange. It's an an advantage for them for sure and has been an advantage for them. NASDAQ. They've been licensed outside outsourced their compliance to New York and NASDAQ.

So as an OTC listed stock, these investors can't invest in us. Those rules changed at the prime brokers after we went public. So if you look at a stock chart, stock chart of '22, the institutional support we had in our IPO and after our IPO was unwound because of those restrictions during 2022. So when you look at our investor base today, If it has the right safe harbor for those for the exchanges. It's currently drafted.

It uses the definition that doesn't include broker dealers. The industry has been talking to congressional aides that would draft a reintroduction of that bill to try to get that language changed to an appropriate definition of financial institution that would give the exchanges the explicit safe harbor. I don't, and I don't think anyone should should play New Lake or the industry based on the timing. The way I answer that question is I always take it over when it comes to Washington, DC. Yeah.

So I should have repeated the question. The question was, will reschedule into schedule three change the economics of our business? No. Because it doesn't legalize marijuana. It just moves it to a different schedule.

It does improve the credit quality of our entire portfolio overnight because it eliminates that owners to. The very brief story on to a needs section of the IRS code, which says that if you sell By eliminating that limitation on deductions, it brings them to a normalized corporate tax rate, which improves net cash flow, improves their credit quality. But it doesn't legalize it so they bring in private credit funds and banks, etcetera. You're welcome.

Someone's gonna ask if I have samples to hand out. The answer is no. It's not a bad one. Used to be. Used to be.

People know we're just they're just our tenants. We don't touch the plants, so to speak. But let me let me talk about while you're speaking of additional questions, Let me expand on the commentary or the question around the safe banking act. We often get the question, well, safe banking passes, if banks can service the industry, isn't that bad for you? Or it bring in a whole bunch of competition.

I see quite the opposite actually benefits us, and here's why. In the safe banking bill, it's gone through an it went through an evolution in 2023. One of the key things that changed was the rulemaking period went from six months to one year. Now I spent nearly fifteen years at JP Morgan and some banks before that. So I'm getting the banking world.

One thing I can tell you is banks don't like to move until the rules are set. The other thing I can tell you is that it's gonna take longer for federal regulators to get together and come up with a set of banking regulations for businesses. They go in some states, but illegal in other states. It's gonna be very complicated. So I think it'll be a long period of time before banks provide loan products to to the industry.

Number two, when banks do ultimately enter there's a few individuals that do play in the space today. They typically take an onerous haircut. So I look at 50% of nine cannabis value. We're looking at the property. We're understanding the cash flow profile of this business is, and so we're giving you value somewhat for the cannabis value.

So they can't touch us in terms of understanding the asset class. When you look at the corollary to other real estate asset classes, like a cell tower, like lab space, these highly improved properties, what you find is that banks typically get beat by REITs that specialize in that particular Mhmm. The question was, isn't there a risk to the retailers in the industry that are now operating in cash and debt? The answer is yes. Absolutely.

And what's really fascinating about this industry is it's fairly legal, so it's it's it's difficult to you can't accept credit cards. You have to take in cash. But yet when you pay your state taxes, the taxes go into, say, a Bank of America. Right? I have heard stories of armored cars picking up cash at dispensaries, and then where do they go at the end of the day in certain cities?

They'll literally drive through the doors of the federal reserve in that local city local city to drop off their cash. So it makes it into the federal banking system. Yes. But it is we believe safety is an important element of the safe banking act because it does get cash out of these retail locations. Unfortunately, we have had a couple of people in the industry die in robberies, were shot and killed, and one police officer responded to a theft was shot and killed, unfortunately.

So it's just very beyond the economics of this, there's a real safety issue. Yeah. So the question is around insurance and liability. Because we're a triple net lease rate, all the costs and expenses related to the property are borne by the operator, by the tenant. And so we require similar to the way you have a regular rate lease arrangement.

We require them to have the same type of property casualty insurance that you would if you were an industrial company or cultivation facilities or you were Walgreens. With that, we're gonna close it out. Thank you everybody for joining us here in the room and online. We appreciate the opportunity. If have any questions, NewLink.com is our ticker symbol excuse me, is our website.

Nlcp is our ticker symbol. Feel free to reach out to us. Thank you very much.

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