NewLake Capital Partners, Inc. (NLCP) Earnings Call Transcript & Summary

We have a lot to cover over the next hour. But let's start with the introduction of the company, especially for those who are not too familiar with your business model and with New Lake. Thank you.

Yes, for sure. So for those that don't know us or are new to our story, New Lake is a Real Estate Investment Trust focused on sale-leaseback transactions to the cannabis industry. As of today, we own approximately 1.7 million square feet of retail and industrial properties across -- excuse me, retail and industrial real estate across 31 properties in 12 states. We have some of the leading companies in the industry in our portfolio, names like Curaleaf, or Trulieve, or a Cresco just to name a few. In our most recent quarter, we reported $11.5 million of revenue, $10.1 million of AFFO for those that don't know, available funds from operations or AFFO, is the free cash flow measure for REIT and it is what we really look at and focus at and manage to on an annual basis. Year-to-date, our AFFO was up more than 7% from the first 9 months of 2022. And we did, in the third quarter, pay a dividend of $0.39 a share. Our model is we pay quarterly dividends to our shareholders as a REIT. We collect rents from our tenants. We pay expenses, and then we like to distribute 80% to 90% of our free cash flow or our AFFO to our shareholders. And so, we had $0.47 a share in the third quarter of AFFO, and we paid out $0.39 a share in the dividend, which is about an 83% payout ratio. So a little bit about our stock. We're excited to be here to talk to you about the company today.

That's great. So just staying on that subject, on sale-leaseback, specifically, benchmark that you offer versus other debt, nonequity capital alternatives for cannabis companies. We know that this is a capital start industry, right, demand/supply and balance on capital, certainly, but just benchmark sale-leaseback versus other alternatives. And if possible, discuss also your private and public competitors in the sale-leaseback space specifically? And how are you different?

Okay. Okay. So let's start with how is the product that we provide to our tenants different than a debt platform because there are a number of differences. We own the properties as opposed to lending against the properties. That's the primary difference. So we're focusing on acquiring properties from or for cannabis operators. And the reason I say from or for is, we could buy a property that an operator owns today that's currently operating or we could acquire a property that they don't yet occupy. We could acquire it for them and then provide capital, either to do a ground-up construction called a build-to-suit or to provide capital to rehabilitate or improve an existing building that they may want to convert to a dispensary or to a cultivation facility. And so, with that as being different than debt, we're looking at the cost basis of the property. We're looking at the alternative value of that property outside of cannabis. And we're looking at providing funds for that cost basis of the property, whereas an in-debt land, many of the debt providers, it's just a different product, neither one better than the other. But in debt land, they will often look at that property value and then they'll take a discount and then make an advance rate against that property value. And often, even when you look at banks that provide capital to the sector, they'll take that advance rate off of a noncannabis value. And so, what you often find is that through a sale-leaseback transaction, where we're purchasing the property and we're entering into a 15- to 20-year lease with the tenant, you're typically finding that we can provide greater proceeds to the operator in that transaction versus a traditional debt transaction. Another key difference is, while we start with an initial rent and that rent does escalate every year, anywhere from 2% to 3% across our portfolio, its average is about 2.5% escalations. So all that rent payment will go up, that is a fixed schedule that the operator has some certainty around what it will cost them. Whereas with debt, many of the debt facilities tend to be floating rate debt, and for folks that may have entered into those debt facilities a couple of years ago, they've seen that cost of capital accelerate rapidly and significantly. And so, there is a bit more certainty to the cash flow needs to service the lease versus the debt facility, and then there's also the refinance risk. And some CFOs and some companies are comfortable with taking that refinance risk. It certainly has -- there's time commitments to the refinance risk and there's some uncertainty. And as you're seeing across the cannabis space, lots of these facilities are getting extended as opposed to refinance. And so, I think ultimately, why do people pick a sale-leaseback versus a debt facility? I think, by and large, it comes down to risk tolerance and value creation for their investors. And so, sometimes if the debt has to come with an equity rider or warrants, right, there's an equity component to that, it increases the cost. And so, we have 31 properties with 13 tenants, sale-leaseback by the way, I should say, is -- and then I'll get to the competitors, I haven't forgotten your question. Sale-leaseback isn't just for the cannabis industry. So it's not a product that was created for cannabis. It's a product that's used across the retail and industrial real estate sectors. So think of names such as Starbucks or Walgreens on the Retail side; or a Home Depot or a FedEx on the Industrial Building side, where they utilize sale-leaseback as a part of their overall funding strategy on how to fund their real estate needs. With respect to...

Before you move on to the competitors, just -- again, for those who are not so familiar, explain the concept of escalators, right? Like when you're saying 2 points, that doesn't mean that if I start at 10%, I'm going to be at 12% in year 2, 14% in year 2 and then I go for another 15 years. Can you explain that, please?

Yes. Thank you for asking a clarifying question because we often just get used to when we live in the business, we get used to these acronyms. And so, if a tenant has a $100,000 rent payment, just to use that number or a $10,000 or $100,000 rent payment, their rent would step up at a 2% escalation to $102,000. So it's 2% of the rent payment on an annual basis in that example, that goes up. And so, that increases over time.

Got it. And just, again, before we talk about the competitors, if I were to compare a sale-leaseback in cannabis versus sale-leaseback with Starbucks, I understand very 2 different industries; cannabis, capital restricted in many ways. What would be the difference in rates right now? Just roughly on a sale-leaseback, say a 15-year roughly?

Significant 8 to 10 percentage points on a cap rate. But if you think about that, that is the risk premium, right? If you look at a highly-rated credit like Starbucks relative to a cannabis company that's operating a federally legal business in a capital-starved environment. There's a very, very different risk dynamic. And quite frankly, that's part of the value proposition for our investors, because we believe these long-dated contracts will become more valuable as the tenant base improves in credit quality, whether that be a rescheduling to Schedule 3, which is an immediate improvement in credit quality for all of our tenants given the improvement in their cash flow long term. But as the industry further matures as the operators get better at generating free cash flow from operations, all of these aspects are catalysts to improve that credit quality and make the value of our cash flows even greater.

And just to stay on that subject. If I think in terms of, if you can comment, in terms of the cost of capital of a firm like yours in the cannabis space and see an industrial REIT lending to -- I mean, renting to Starbucks or companies like that, would the gap be as wide also, I suppose it is, but just trying to understand that if you can provide a perspective? Or should we assume...

Yes. Our cost of capital is definitely more and I should highlight that. Today, we have virtually no debt. We have $2 million of debt on the balance sheet. So all of our transactions have been funded with equity. We have a $90 million credit facility available to us that's priced at $5.65 for the next 1.5 years until it steps up to prime plus 1. So we do have available capacity to put out to the industry. But for sure, when you look at our cost of capital versus an industrial REIT that executes transactions for like XPO Logistics for a FedEx or other companies like that, the risk profile of our tenant base is higher, so our cost of capital is going to be higher. And that's obviously a component of what goes into the pricing that we have to get with the transactions with our tenants.

Understood. And then just moving on to the competitors in the debt capital space or sale-leaseback space? Can you expand on that, please?

Yes. For sale-leaseback, there really is only one public competitor that's IIPR and only a few private competitors. And in fact, what we've seen over the last 18 to 24 months is a couple of folks exit the industry or stop leaning into the industry. And so if anything, we've seen that competitor pool on the sale-leaseback side shrink a little bit over the last 18 to 24 months. On the debt side, and again, I don't often view them as competitors because I think some people will end up having in their capital stacks, some debt, some sale-leaseback and some other instruments, whether it be a convert. So I think there's room for them both to coexist in a CapStack, but I'd say the same thing from a debt perspective that there are a handful of folks that are out there providing capital. There are some that have fallen to the wayside over the last couple of years. I think the last 18 to 24 months has seen a shakeout not just for the cannabis operators, but also for those around ancillary companies and those that provide capital to the industry. And I'd say no portfolio has been immune to issues over the past 18 months. I think everybody that I'm aware of has had some issue in their portfolio. I think when you look at our portfolio today, we're really happy to have 100% of our properties leased and generating return for our investors. I think that compares favorably to many of the competitors, whether they are debt or sale-leaseback competitors, where in some cases, folks have had to evict tenants, and they're now working to retenant properties. And so, we've always said there'll be issues in our portfolio, in anybody's portfolio. It's kind of hard to assemble a portfolio of assets with 15 years of duration and have credit risk to a tenant base in an emerging industry like cannabis and expect that you wouldn't have a tenant issue, but we think that our ability to get through those issues is really what drives value.

Yes. So let's stay on that. I mean, of course, moving on the conversation here. In terms of the last 12 months, you had a little growth compared to a very strong year after the IPO. What changed? Apparently you became more cautious, the landscape changed. And then talk about any takeaways. Let's answer that first. And then what investors in New Lake should take away from the way that you've resolved the issues with 2 of your tenants, Calypso in Pennsylvania and Revolutionary Clinics in Massachusetts?

Yes. Yes. Okay. So let me start with the first one, which was the last 12 months in context around the decrease in volume. So let's turn back the clock to mid-2022. What we do on a regular basis is we're watching our tenants data. We're watching the states they operate in. We get property level financial information for all of our properties. And so, we could really see what's happening at the properties that we own. And we actually saw, not surprisingly now looking back, we started to see that steep drop in pricing that was occurring in many states, and we're also looking at the 4-wall coverage of our tenants, and we're watching their sales go down and the 4-wall coverage go down; 4-wall coverage again, being what -- it's a measure of free cash flow kind of EBITDAR, think of EBITDA plus rent. So what's their ability to pay rent. And so, we look at that 4-wall cash flow coverage, and we started to see some weakness. So, with all of that input and information, we hit the pause button. And during 2023, it's been much of the same. We have provided approximately $26 million in additional tenant improvement facilities to a few of our existing tenants, but you haven't seen us go out and do many of those new acquisitions like we had in the past. We're starting to see that stabilization. We've seen that stabilization. We've actually been very pleased with what operators across the board have done, by and large, most of them have been able to start generating that positive cash flow from operations. They really rung out the G&A expenses. Many of them have G&A expenses down double digits quarter-over-quarter, year-over-year. And so, we're starting to feel like it's an environment that we can look at investing into again. And so yes, $26 million thus far in 2023, which pales in comparison to what we've done previously. That's not necessarily a bad thing because sometimes the best deals you do are the ones you don't.

And just specifically in the case of Calypso and Revolutionary Clinics, can you give more color there? Like for example, obviously, you worked successfully with your tenants there, resolved the issues and -- but in other cases, maybe the sale-leaseback company will take their property back. Maybe just provide some context in terms of the options you have with those 2 clients and then how things turned out?

Sure, sure. Well, over the last 45 days, we've actually shared 3 substantial portfolio-related announcements on Rev Clinics and Calypso and then there was one other one for Mint. And so, I'll get to those. But let me first start this off by saying when you have an issue or a default, you have a choice as the landlord, any landlord has that choice, you can either evict them, take the property back and retenant it; or you can seek a path forward. And for us, the decision-making processes around NPV, we're always focused on what's the best net present value of that decision tree for our shareholders. And so, that type of analysis guides our thinking in how we create the value for our shareholders. And some what do we do with these 3 transactions. First, we reached a resolution of the rent default at that Massachusetts property with Rev Clinics. We recovered a portion of past due rent. We provided a rent modification, we established some rent step-ups as revenue increases for them, we took 10% of the company in warrants. And so there, we were -- we thought it was a better net present value to come to that type of transaction. They're one of the leading wholesalers in the State of Massachusetts. They carry the Kiva brand, which is a very, very popular brand in Massachusetts. And when we looked at what got them into financial difficulty, the cultivation issues of 2022 and some of the changes they had implemented, including getting 2 new adult-use dispensaries online, it gave us some confidence that the best NPV at that time was to enter into that transaction. Secondly, let's stay on Massachusetts for Mint. We sold the Massachusetts property during the quarter, it was a small transaction. We sold the property to assist that tenant. They wanted to scale back their footprint in the State of Massachusetts. We have bought a property for them. We're providing capital to convert it into a cultivation facility. But as we saw the industry in Massachusetts, it evolved during 2022 into 2023 collectively with the tenant decided it would be better for them to utilize that capital in their home state of Arizona where we're doing a build-to-suit transaction. So we sold that Massachusetts property for them and reallocated that capital over to the Arizona property. Now we sold that Massachusetts property to a noncannabis buyer and our cost basis. And I think that's important because it demonstrates the underwriting and the value of our underwriting process to be able to sell that property at our basis to a noncannabis buyer. And then, the third update we provided in Pennsylvania was around Calypso. Calypso was a tenant that in 2022 had to lay off 75% of their staff. There were dynamics going on in the Pennsylvania market. I don't want to get too into the weeds that with their cultivator-only licensed created significant operating headwinds for them. And they did a terrific job of downsizing the staff, sizing the business to sell the market, they paid rent all the way through the end of the third quarter 2023 as they were seeking a sale. And so, that management team did a terrific job, and they sold the company to Canvas Acquisition Corp. Canvas is bringing to the state a portfolio of brands, products and relationships that we think will allow the tenant to be a better competitor in the state. And so, we now have a tenant that's not only going to be a better competitor, we have a tenant that also is better capitalized than the previous guarantor on our lease. And so, what does all this mean? Let me try to wrap that because it's kind of what you were getting at. I think, we -- I think, it actually demonstrates that hands-on approach that we take to portfolio management in order to maximize returns for our investors. I go back to what I said earlier. We've always said for the last couple of years to investors that don't expect that there will be 0 issues in any portfolio with long duration, particularly in this emerging industry like cannabis. So, we were trying to be ready for those inevitable issues, work through those and get 100% of our properties generating return for our investors, the best NPV approach, in our opinion.

Yes. And I'm just staying on that point. I mean, obviously, we try to be very respectful about other companies and competitors, and directly in this case, IPR. I mean, maybe for the audience, in the case of IPR, we've seen them take more properties back, right? And you're saying in your case, you would do it also, it just comes down to an NPV calculation. But is it that in their case, you have to take more properties back because of the states they are in, like in California or other states are maybe more challenging. And I know we cannot answer the question for them. But I'm just trying to understand, in their case, I would say there's been more of a taking property back. I don't know if you want to share any thoughts there?

Well, I would start by saying I have great respect for the team over at IPR. I think they've been very successful and built a large portfolio. What I can say is our focus at New Lake has always been to focus on limited license jurisdictions and property level cash flows as well as the corporate tenant. And I think that served us well, and I think it served our investors well. Because in the limited license jurisdictions, you have a better operating environment and there's typically greater demand for the licenses and the properties for somebody to take them over. And then, when we look at the 4-wall coverage, we always ran our analysis expecting there to be a significant drop in pricing. And so, we always looked at can the property sustain the level of rent that we're entering into this contract on, even through a particular downturn in pricing. And so, I think those are the 2 key factors for us that have served our portfolio well. And it's not just California, if you look at California, we actually have a property in California, but it's in San Diego, we have a dispensary where it's a limited license jurisdiction, there's roughly only 36 dispensaries for 3.3 million people. And when I look at the performance of that dispensary relative to how we underwrote it, the cash flow levels for that dispensary how we underwrote it 4 years ago is right in line with our expectations. And so again, great respect and it's hard to -- people always want to criticize a deal here or there. I think until you're in the room, it's difficult to do that. I just leave it as we really like our process and our focus on limited license jurisdictions and property level cash flows.

But to be clear, understood. But in terms of retaking a property, you have to factor broker fees, the retenanting the current cost of penalties...

Yes. It's not just that -- yes, it's not just you take it back and you retenant, there are costs involved. So when you take back the property, you have to pay the insurance, you have to pay the property taxes depending on where it is, you have to keep the heat on, you have to keep the lights on, you have to play the parking lot for fire access, you have to model a lot. And you have all of those expenses during this period. And then when you retenant, you're typically utilizing a broker, there's broker fees as well. And so, the longer you hold that asset without retenanting the more expensive it is. And so, all of that math goes into how long do you think it will take to retenant, at what price or what rent do I think I could retenant that property to either, am I retenanting to somebody in cannabis or am I retenanting to somebody outside of cannabis. And so, it all goes into the model in coming up with that NPV analysis.

And in that analysis, those cap rates down the road would be lower or not necessarily? Or you could have the demand for higher rate...

Yes. Again, it kind of depends what -- it comes down to, in my opinion, it comes down to the property level cash flows. I think, if somebody looks at that property and says, I can generate 4x EBITDAR, 5x EBITDAR out of this property, there's probably going to be demand for that property. But if they can't cover the rent or if they can't generate more than 1 turn of EBITDA, there's going to be less demand for that property. And so, that's one of the reasons we really focus on property level cash flows. And I think, again, when you go back to what I talked about with Calypso, I would -- I think, if you were to speak to the Canvas folks, they would say that they looked at that property. They looked at the amount of cash flow they think they could generate from that property with their strategy and the limited competition in Pennsylvania, not to mention we still have adult use to get turned on in Pennsylvania. And I think they would say that they thought they could make an attractive return out of that facility.

Good. Thank you. Look, so now we'll move the discussions, obviously, to the outlook, company outlook and your views on the reform outlook, staying level -- fair level. But before we go there, just from a purely modeling perspective and maybe not -- I mean, without giving guidance, as people think about the fourth quarter and first quarter of '24, how much line of sight you have on new tenants? Because I suppose it takes time for the process -- for these negotiations to happen and for the evaluation. So you probably know right now, if your AFFO isn't growing much in 4Q or 1Q, whatever you can comment on share there, if you can, anything?

Yes. Well, certainly, we'll try to stay away from forward-looking statements. But what we've done already is we've provided guidance for full year 2023 AFFO. Again, our AFFO is that key metric that we manage to and our investors -- our REIT investors focus on. And we've guided 2023 AFFO $39.8 million to $40.8 million for the full year. And at the midpoint of that range on our third quarter earnings call, we talked about the midpoint of that range, we would be up mid-single digits versus our 2022 full year AFFO. And it reflects our cautious approach to investing our capital this year without -- and so, without provide forward-looking statements, that's what I'd say with respect to full year 2023. And then looking forward, I'd expect our conservative posture to continue into the first half of 2024 because the dynamics I described that caused us to be cautious into 2023, while some of those are opening up, it's still a difficult operating environment for many.

So look, I mean, just staying there, without talking about changes at the federal level, but you do have states that are going to -- that are in the process of legalizing right, right? Timing may be a question mark Ohio, Minnesota, right, Pennsylvania, Virginia, we'll see what happens in Florida. I mean, you would think that some people would be expanding capacity right now and the demand would be there for deals for companies like ourselves or is that the wrong assumption?

So I think it's a depends answer. I think that when you look at a state like Ohio, it's important to analyze the existing cultivation capacity, understanding what the rules are going to be and how fast will the sales ramp up? And what I'd say coming out of the operators is a more cautious approach to CapEx and build-out than had been, say 2 years ago, say a lead up to Missouri as an example, with a significant CapEx, significant build-out in the lead-up to Missouri. I think people have been much more cautious and appropriately so. We applaud it to taking on those kind of CapEx expenses. And so, as we see Ohio finalize its rules and finalize its timing, I think people would rather -- operators would rather maybe fall short a little with the initial sales if they had to, rather than front-loading, taking on the expense of a build-out. And so, I think you'll see a little bit more of that ramp-up in states as they come online, depending on the existing capacity. For instance, Pennsylvania, there's already a lot of cultivation capacity in Pennsylvania that was built up in expectation for adult use. So when Pennsylvania ultimately converts there will be, I think, more limited demand for CapEx for expansion in the first year until that market really develops and people have confidence in the sustainable level of sales.

Right. And it also goes to the issue of how developed the medical market is, right? Our estimate Pennsylvania Medical is quite developed. So if this -- brag maybe 1.5x, 2x, Ohio maybe it's more 3x to 4x, Virginia, you're probably 6%. So yes, understood. But just on the same point, we project that sales as more states legalize and I'm still assuming illegality at the federal level, that by the CAGR in terms of growth for the industry until 2027 is about 10%. If that's true, should we assume that your AFFO, should grow above that or in line with that? And I know, we're talking about like a 40-year comment here. But I'm just trying to, I mean, do you grow in line with the industry or that's not the right way to think about it anyway?

Yes. It's -- I think of demand for our capital being driven by the CapEx needs and the industry's desire to raise nondilutive capital. And so, it's not only from increased demand for product. I think it's -- a big part of it is the turn on of states and the need for nondilutive capital. But let me go through our growth drivers, because it comes right now from 3 primary areas; #1 is the 2.5% escalators across the portfolio, and so every year the rent goes up, and every year we get growth to AFFO because we're not adding more expenses in line with growing the rent from the existing tenant base, so 2.5% roughly growth from that; #2 is going to be we have TI that we have outstanding, these are tenant improvement dollars, commitments that we've made to provide capital. And once we provide that capital, we start to pay rent on -- we start to receive rent on it. And so, that's roughly $20 million at the end of the third quarter. We did announce some additional, I believe it was after the quarter. So once we get that capital put out, that's yet another driver of growth. And then as I said before, we have the $90 million of available credit capacity. So as we do new deals, we'll be able to add some growth to AFFO there. So that's where the near-term line of sight growth is from. In terms of long term, 10% growth, I mean, again, I'm not going to give a forward-looking statement, but I think it really depends more on the state activations, what happens with Florida? What ultimately happens with Ohio? Does Virginia really get going now that the house has changed? When does that get turned on? When does Texas get turned on? And so, now Alabama is handing out licenses smaller market, but there's also, I think, some good opportunities there. Unfortunately, I think for our investors, it's a little chunkier, right, while do big deals. And so, that can drive some outsized growth, and maybe that falls in a quarter or outside of a quarter, just the nature of our business.

Okay. And in terms of the dividend, obviously, you said 80% to 90% of AFFO. Again, without making forward comments. I think you said something like until middle of 2024, somewhat moderate growth. How should people think about the regular dividend? How that grows over time? And then, is there a room for a special dividend here? And maybe you can also touch in the way that you're using share buybacks as a way to provide returns to shareholders also.

Yes. Well, I'll first start with the special dividend and then come back to some comments around dividend. We don't actually necessarily pay special dividends, special from a REIT perspective, REITs are required to pay out over 90% of their net earnings on an annual basis in accordance with the IRS rules and the requalification rules. And so, when you look at our business, our business is fairly predictable from a rent-roll perspective. Where do you see special dividends is from, say, mortgage REITs where they're a lender, and they may be getting fees, let's say, there's an early payoff and there's an early payoff fee. And so, that additional income needs to be distributed. And so, they will often set a sustainable level of dividend. And then to the extent they have extra income in order to meet that IRS threshold, they will make a special dividend. And so now, we aren't in the business, we've never made a special dividend, and we don't see the need to do that. For our dividend, it's really sized for sustainable cash flows from the rent rolls that we provide. And so, when we look at sizing our dividend, we want to have some confidence that we'll be able to sustain that for our investors. And we do have an 80% and 90% payout ratio for AFFO, and that's our target. And so, we're always looking at the sustainability of cash flows and the ability to meet that 80% to 90% guidance that we've provided to investors.

Understood. And then, in terms of just the competitor -- we touched on the competitor, last year at the beginning, but we saw Cresco recently take mortgage around 8%, MariMed also with Bank Needham, and they repaid some of those mortgage REITs out there. Do you see those more as a one-off or a new trend and a new source of competition for capital?

Yes. Listen, I think the bank facilities have been there for a while. We've seen GTI execute. We've seen Verano execute. We've seen Cresco, we've seen others. I think that bank capacity has been there for the last few years. I'd say it's a little bit less today than I've seen in the past. But we certainly coexist with the bank capacity and, in fact, step away from cannabis for a minute and look at other specialty real estate REITs, whether they're serving industrial properties or office properties or retail properties or storage properties, all of those businesses compete with the banks in their business. And so, there is a place for REITs to play. There's a place for banks to play in the CapStack. There's a place for lenders to play in the CapStack.. What I would say is when you get an operator and you talk to the operator about owning real estate, most people would say long term, utilizing their investors' capital to own a piece of real estate that has a limited upside of return for those investors, isn't capital efficient relative to what they could do with that capital to generate EBITDA for the investors in return and impact stock price. And so I don't -- I look at all of these properties and I say it's not no. It's just a matter of when. When does the cost of capital for them line up to execute because, like I said, I'm yet to meet somebody that says, I want to use my investors' money to own real estate, really they should be using investor capital to drive return. And so, it's just a matter of time until sale-leaseback is a part of their business because with sale-leaseback, it's no interruption to their operations. It's a financial transaction.

And then just on the same topic, obviously, we have different things from companies out there. But would it be incorrect to say that to some extent, in the current context of higher interest rate, sale-leasebacks are becoming less preferred by companies, especially when you factor escalators?

Yes, I think...

Especially, they are coming to lock in rates were 15%, 20%...

I would say that, that's not a true statement. I would say that, we had conversations with people 2 years ago when they were looking at debt versus sale-leaseback and they look back today and they look at the cost of that debt capital that maybe they took. And relative to where they would have been taking a sale-leaseback and they would have saved significant cash flow, having executed. And so, every environment is a new opportunity to analyze. And so yes, some people today, if they have the view that rates are going to drop significantly over the next 3 years, which was the view 2 years ago by a lot of people. They thought their cost of capital was going to drop precipitously and they were going to refinance into a 6% cost of capital. You see today, people are refinancing into mid- or high-teens borrowing rates. And so, I go back -- you heard me say it earlier, risk tolerance. I think if I were a CFO, I think about what's my risk tolerance. Do I want to have the refinance risk? Do I want to have the rate risk? Do I want to have the covenant risk? Do I want to have more certainty around what my cash flow means will be for the rent? And then, I'll make that decision. Again, different answers for different companies and different levels of risk and different pricing.

Yes. No, I understood. Look, we're going to move the discussion now to a reform outlook. Look, there may be a couple of things before that. I'll jump around here and only answer if you can, right? And maybe you can't on this one, but so why ask, right? But -- so if I look at your portfolio, I look at Acreage and Acreage is a company that is supposed to be in the process of being acquired by Canopy Growth, right? But that's still on hold because of all the issues with whether they want to give other national listing or not. So I don't know what can you comment, if anything at all? And if you can't comment, just say no comment, but...

I mean, bridge is a public company, so everybody sees it. I'd say we worry about everything all the time, Acreage included. You look at the performance financially and it does rise to the top in anybody's list of companies that are focused. But what we see is, we see a company that has a really good state profile. They're going to benefit from Ohio recreational sales. And they've got a nice complement of states in that portfolio. Canopy Growth is continuing to position itself to ultimately own Acreage because I think Canopy Growth values the complement of states that Acreage is in. I know, there has been some turnover in management, and we meet with them and talk with them. And we know they're working hard to accomplish what they think is important to accomplish from a financial performance perspective and an operating performance perspective. And so, when we look at the future for Acreage, we're happy that they have some catalysts ahead of them in the turn-ons for some of these conversions from medical to adult use. And so hopefully, the management team continues this focus on better execution as well as extracting real value out of some of these turn ons from medical to adult use.

And short -- there is a very short question by e-mail, you know, maybe short answers. One is asking, you have a $90 million credit facility, mostly unutilized, right, are the fees on the facility even if it's not being used very high?

This is disclosed in our statements. We have no unused fees. Okay. Really. Is that -- I'm sorry, is that a norm? Is that normal? Or is that unique? I can't speak for it. I mean, I've spent a big part of my career in banking. And often, there are unused fees. But I can't speak for what others have in the industry.

And in the case of New York State, right, and again, we are all hearing different things, right? Are you getting more inbound demand from people that may want to build capacity there as more stores are added? How are you guys thinking on New York? And is it real to say that there's more demand for capital they are for companies like yourselves, or not at the moment?

Not at the moment. Not at moment. I think there's -- I think when you look at New York, and you look at the development of the wholesale market because that's really where the opportunity is near term for the ROs. Yes, they can, I saw Curaleaf open up their adult use. Yes, you get that one dispensary and then you get an additional turn on, I think it's 6 months from now. So they could sell wholesale into the nonaffiliated dispensaries. But there's a few of them, right? I have seen anywhere from 25 to 31, I don't know what the exact number is. But what I can tell you, though, is even if it's 31 or 40, that's not a lot of dispensaries for what is now today 6, but ultimately 10 ROs that will be competing to sell wholesale. So I think that the existing capacity in the state from a wholesale perspective is probably sufficient to meet the near-term demands and it's going to take the state of New York to really ramp up the dispensary opens and once you get many, many more doors open, then you can see the expansion in cultivation -- excuse me, the expansion in demand and then we could start assessing if the industry actually needs to expand capacity in order to meet that demand. But I think we're at least a year off, if not 2 before we start seeing that.

Yes, I agree. We calculate roughly that you need about 400 acres planted for 100 stores, right? And we are well below 100 stores like you said right now, and there's 380 acres roughly implanted, right? Sure, we're going to know the quality of that product. But look, another question coming through here through a chat. So one person is asking, and we'll go back to our flow in a minute. One person asking, I assume the property you sold at its basis was depreciated. How much was it depreciated? Or how much of a cash loss was taken considering purchase price and sale price only?

Yes. Well, thanks for the question. It wasn't appreciated because we hadn't put it into service yet. So the way it works with accounting since that property was in development, once it's placed into service is when you start depreciating the asset, because as we were going to deploy capital, we would have been adding capital to that investment. So once you're done adding the capital to the investment, that's when you set the value and you start the depreciation.

Right. Look, and we have more questions, but I want to come back to one subject here. Just on the stock itself, Obviously, you trade about a 30% discount to NAV IIPR, depending on the day, 15% premium to 22%. Obviously, they are NYSE-listed, larger market cap, a significantly more liquid. Just talk about, in your opinion, I think we both agree that discount is unwarranted. But how do the technical impact this, right? And going to tell investors about will you ever be able to uplist? Does the TSX or CBOE provide a potential path? Just some thoughts on that.

Yes. Yes. It's -- I think, and our team believes it's one of the key issues for the company today and one that we are laser-focused on figuring out a solution for because it's our belief that it's the lack of custody that is driving the lack of institutional demand. That's not a New Lake story. That's a cannabis industry story. But when you look at the -- what we think is the value of our portfolio relative to that discount, we do think there's a compelling opportunity there. And so, we're working hard. We're watching what is happening at TSX. We see Curaleaf now going to start trading. We've been watching what's been happening with TerrAscend. And importantly, who is custodying those stocks is important to see is that and unlock. And so, we'll take a look, a hard look at TSX to figure out if we can get our dividend-oriented platform, right, where dividend paying stock, if we can figure out a way to get that ring-fencing that TSX requires or does CBOE with cannabis and now Verano, does that unlock some custody. And so 2024 is that year, we really need to, while we focused 2023 by and large on retail investors and expanding our reach, and we've grown our liquidity during the course of 2023. We're going to -- we haven't ignored the institution, we're going to come back in '24 and really focus on institutions, particularly on the back of what we think will be a catalyst with their proposed regulation around Schedule 3. That custody is the most important issue for us.

Right. And just to be fair, I think that your liquidity, although I say it's a liquid, it has improved at least somewhat, right?

It has, yes. No, it's improved significantly from 2022, but it's still nowhere near what we want it to be for our investors. And also from a value perspective, just so, folks know we're putting our money where our mouth is. We've been buying back stock. You can see in our disclosures that we had announced a $10 million stock buyback program in late-2024. We executed on over $9 million, approximately $9 million on that program. And in September, announced that we were adding another $10 million to it. And so, through the end of the third quarter, we created over 3% of AFFO accretion per share and book value accretion per share. So, really driving value for investors by taking advantage of the undervalued stock price.

Yes. But if I said -- and maybe this is -- you don't agree with this, but if I said that you will not be able to uplist -- or let me put it in a different way. Without uplisting, it's difficult to think that NAV discount can narrow. Would that be inaccurate?

I think it depends on the landscape in which you're talking. I think if you're talking about a scenario where there is a Schedule 3 rule change by the DEA, and that goes final, I think it really brings in additional folks to the industry and believing that the additional catalyst to come, it certainly improves the value of our cash flows, because the credit quality of all of our tenants improves with that event. And I think personally, the value becomes so compelling that people will start figuring out more of a way to do that. And I think we also could see maybe some movement on exchanges, although I'm not holding my breath. I'm not telling anybody to invest based on that. So I think that Schedule 3 will drive more demand, and I think people will be looking at our company as a key way to play the sector to get paid while they're waiting for the additional catalyst come, because we pay that quarterly dividend.

We are going to use it as a segue for your outlook on federal reform. The other thing I'd say is that it just seems that for the stock to work in terms of federal reform changes, things will have to happen first, right? Like because I would argue that when you saw it almost go up 70% over 2 weeks late-August to mid-September, your stock moved up but nowhere near that, right? So it's like for stocks for that discount to narrow, I guess, we have to see real change being implemented at a fairer level?

You know what, I'm going to be a little bit more optimistic than that. I take your point, Pablo, I'm going to be a little bit more optimistic than that and say that we're going to continue to be out with investors, both large and small, seeking ways to improve investors' access to our stock and trying to drive more demand for our shares and keep explaining to people and articulating to people the value that we see at the current trading level and working to narrow that gap.

Yes. And pretty much, not to promote our report, we recently initiated on the company, and that's precisely our argument, right? It's like why wait for those events to happen. The values here right now, you're getting almost a 20% -- 12% dividend yield, 30% NAV discount, I would say, a low-risk portfolio compared to maybe peers. So you know that value will be realized. We can argue about what the catalyst will be, but why wait for those catalyst to happen, you might as well buy here, right? So look, I mean, a question that someone is asking, which is, I guess, maybe similar to along those lines, what are the biggest risk factors you see in the next 5 years? Obviously, at 11% dividend yield, the market is pricing in significant risk. But given the conservative management, tenant diversification and tenant quality, the risks seem overblown.

We would tend to agree, and hence, that's why we think it's undervalued. I'd say the key risks for our platform or anyone like us is the continuation of rent payments. And so, when we spent that time earlier talking about some of the tenant base, it's going to be about us continuing to manage the portfolio and ensuring that we're getting the best NPV out of the stream of cash flows that we have. That's kind of the biggest risk to this business, right now, is what happens with the operators, if you don't get a Schedule 3 designation, if there's a further downturn in pricing, are there issues amongst the tenant base that get in the way of them being able to pay rent. That's the biggest issue, and that's what we focus on every single day.

Good. So look, just to finish now over the next 10 minutes, your views on the federal reform outlook, if you can touch on Rescheduling, SAFER Banking, Garland Memo, maybe the David Joyce bill, and the loss of the David boys, we do talk -- thee states going right, I know there's a lot there. What are we going to be more focused on? What do you think in terms of the timing, actual cash flow benefits to the company's credit quality. Let's start with our rescheduling.

Yes, Rescheduling. So my first broad comment for all of these is, I believe that -- the key driver for all of these is more politics than it is policy. And while we in the industry carry the flag of cannabis reform, I just don't see that in Washington, there is a very, very strong political will for cannabis reform. And so to me, it becomes more political. So let's start with Schedule 3, thrilled to see that the administrative branch announced the request of the HHS over a year ago, HSS, then delivered its recommendation. -- everybody assumes it's Schedule 3 and now we're waiting for DEA. Putting it through my political lens. It seemed to work last October when President Biden asked the HHS to review. I don't know if it was a direct result, but there was a decent turnout for young voters in support of the Democrats in the midterms. And while this isn't the only issue that drives that constituent, I think when you look at some of Biden's polling, he's starting to lose a little bit of support here again. And so you could see the political motivation to try to get this done during this next election cycle. And listen, nobody actually knows what's going to happen here, but the people who seem to have the best information and the best perspective on this, it kind of makes sense what they're saying, which is HHS wouldn't have made a recommendation and need it so publicly even though they haven't disclosed without managing expectations better. So in the world of you never know, I think we've got better than 50% chance of getting a Schedule 3 designation by the DEA.

Right. I agree. Before we move on to SAFER banking. In the event that President Biden were to say, I'm noting to run again. And then you get, I guess, younger or perhaps more progressive candidate. You would think that Newsom or even Kamala Harris, we have even a more active cannabis policy, right? So because some people would say, well, if he steps down and we have it sold, we're starting from scratch, I find that it's -- it would be marginally positive in that sense, more...

Maybe. I think it depends who they're running against, it depends on the political landscape because if they push the policy too much, then I think it becomes a political liability, let's just take Kamala Harris, you could see where the criticism would come from the other side to say this is what she's focusing on while we need to deal with Russia, China, et cetera, et cetera, et cetera, et cetera. And in fact, you saw McConnell do that. And someone I read something even yesterday where somebody highlighted that, McConnell did that last year in the run-up, Democrats are focused on this versus that. So again, I think it's all political, and I think that maybe they say it, but I don't think it will be part of anyone's platform.

And before you move on to SAFER banking and the other reforms. In terms of the actual cash flow benefit, I mean, I think made a nuance between cash flow benefit and rescheduling versus credit quality, right? In my view the actual benefit is limited, because -- and then -- but the credit quality improves. Any thoughts on that?

Yes. No, it's a great point. It's a great point. Everybody gets excited around Schedule 3, and it is exciting. It would be wonderful. But when I look at the cash flow statements for companies in the industry, the cash flow statements for 2024, we're going to be largely the same worth or without the reform. The reason I say that is because most companies aren't paying their current year taxes. And if 2024 is the year in which the rescheduling actually occurs, I'm not aware of anybody that believes that it will be retroactive to previous years, which mean you still have to pay your previous year taxes. And so, it's really going to be a matter of impacting 2025 cash flows because you'll have a lower tax bill in 2025 for our 2024 taxes. So I think it depends on the timing. Why I say it's a real positive for us from a cash flow perspective is, we look forward to the quality of our tenants for the next 10 to 15 years. And when you add up that cash savings over that period of time, it's quite significant either on an actual basis or on an NPV basis.

Of course. In the case of SAFER banking, just briefly, I mean, I think last week, we had some of the top bankers there. And some of them said JPMorgan and others that SAFER will make a big difference to them, but any quick thoughts on that.

No, I don't think so. I'll take the other side of that. I think just look at what happened in the Senate Banking Committee recently, when top CEOs like JPMorgan, Bank of America were asked by Senator Warnock about their view on SAFER, and there was a lot of equivocating looking at each other. It wasn't until Senator Warnock positioned it as, would you be supportive of equity in the context of this that he was able to get some tentative assents from the group. So I didn't -- I read that, and I never thought that the big banks would actually be big players in it once SAFER passes, because think about it. They now have to step in and provide compliance infrastructure for businesses that are legal in some states and illegal and others, never been done before. I just don't see SAFER happening unless it becomes a Section 10 bill, again, back to politics. I think Section 10, that's the biggest section of the entire bill and it deals with preventing another operation chokepoint. I think that's a component of the bill that conservatives can get behind in the House and in the Senate can grow support for it. And so, I think if it becomes more about Section 10 and less about cannabis, then maybe it has a shot, but I think it's got a real uphill battle.

Yes. And I guess the last one, your view in terms of care, of course, we don't know what -- I mean, supposedly, if they're rescheduled, they need to have some framework. If there's no framework, there's a Garland Memo, right, that would provide safe harbor for the industry, even maybe for exchanges, it would be insane issue. So that could provide an opportunity for our listing, not for the MSOs and even for yourself, but any thoughts on that -- we don't know what the is going to look like...

Yes. Maybe, maybe. I mean, if a Garland memo comes out, I think the real question is how is it different than the coal memo? And I'm not meaning what it says necessarily, meaning the concept that there was a coal memo and then there wasn't a coal memo, it was rescinded. And so, if a Garland Memo comes out, how can somebody rely that Garland Memo is going to persist and continue to be in place and provide guidance or does it get rescinded January of '25. And so that will be -- if there's a memo that comes out, that's what we will be focusing on is, what's the durability of that memo administration-to-administration. And if there's some durability to it, then perhaps it can influence folks in and around the industry, if there's not durability, then I question how much folks can really rely on that to make decisions.

Thank you. Anthony, we covered a lot. Any closing remarks here. And again, maybe free to pitch your stock to our audience here. And thank you very much for joining today.

Well, Pablo, thanks for the opportunity. I always enjoy chatting with you. I'm not really going to pitch the stock other than say if you want to learn more about New Lake, newlake.com or [email protected]. You've heard us say a couple of times here, folks that we think we're fairly undervalued for the reasons that we talk about. I think we have one of the best teams in the industry and one of the best portfolios in the industry to drive value, and that hands-on approach to portfolio management is I think what will drive the most value for investors over the long term. So don't hesitate to reach out to us if you'd like some additional information to chat directly. And Pablo, thank you again for the opportunity to chat with you, love our sessions and love getting caught up with you.

Me too, of course. Thank you, Anthony, and thanks, everyone, for joining today. Everyone, have a good day. Bye, thanks.