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

I have the pleasure of introducing the CEO of NewLake Capital Partners, a sale-leaseback operator, Anthony Coniglio. Anthony, welcome.

Hi, Pablo, how are you?

Doing fine, doing fine. Look, I mean, we're all waiting for that well. We were waiting for January 31, right? But now we're waiting, I guess, for February 15, from February 28 but we'll get to that. The focus of the call for the audience, it's about sale-leaseback about the NewLake Capital Partners business, what the stock can offer in the current macro context. And of course, we're also touch on macro things like rescheduling. Anthony, a brief introduction about NewLake for those who are not so familiar with the company. And if you can try to benchmark your company in general top-down terms, your performance, growth, book, profitability defaults versus other -- the other sale-leaseback operator in cannabis, IIPR versus noncannabis sale-leaseback operators and then we'll come back to more NewLake specific questions later on. But whatever color you can give there would be good here at the start.

Great. Well, Pablo, thanks for having me. There's a lot there. We'll get to all of that. If I miss some of what you asked, please, I'm sure you'll redirect me. And so for those that aren't familiar with our company, NewLake Capital Partners is a net lease REIT. We are the second largest owner of cannabis real estate in the U.S., and we're a sale-leaseback REIT. And what that means is that we purchase properties from and for cannabis operators. And we enter into long-term leases for them to operate, whether it be a cultivation, processing or dispensary at that particular property. And to give you a sense, we have a 12-year remaining weighted average lease term. And so you can see that there's a meaningful amount of duration. I'm sure we'll get to that more later. And we also have a yield on our leased portfolio of approximately 13%. And so if you're in the real estate world, you'd be talking cap rates. And so when you think about cap rates, having a cap rate that averages across the lease portfolio of about 13% is above market, and I think that reflects the risk that we take by focusing on the cannabis sector. Listen, our business model, as you know, Pablo, is very simple. We enter into long-term leases. We collect monthly rent. And as a real estate investment trust or REIT we're required to pay out quarterly distributions to our investors. So we collect rent, we pay out a dividend on a quarterly basis. As we sit here today, we own 34 properties across 12 states with about 15 of those properties structured or built for cultivation capacity and the other 19 of those properties are dispensaries. Our top 3 tenants to give folks a sense for it would be names like Curaleaf, Cresco and Trulieve that represents about half of our annualized base rent. To give you a little bit more color on the business, founded in 2019. So we've been at it for a while. We've been at it for about 7 years now. I think we're one of the older ones that have been focused on the space. We went public in 2021. And since becoming a public company, to give you some sense, we've grown our dividend about 80% since our IPO in mid-2021. So we had significant growth with the marketplace. I will say that, that growth is somewhat leveled off as we've been a bit more judicious in the deals that we've been looking to do over the last couple of years. As we've seen the sentiment and the environment for cannabis, let's just say soften. I'm sure we'll get into that. I'm sure we will get into that. Non-cannabis REITs, you asked me to compare ourselves to non-cannabis REITs. If you look at non-cannabis REITs their yield tends to be lower. It's a different risk profile. There are REITs out there that focus, say, on retail-only facilities or industrial facilities or cell towers. These are regular way real estate categories that may have cap rates in the 6% or 7% range or average around 6%, 6.5% to give you a sense. So we're meaningfully above that. And again, we're taking significant risk. In terms of comparing ourselves to IIPR, as you asked, we do the same thing as they do. Now they've made an additional investment outside of cannabis. We've not done that. We've announced that we always evaluate deals outside of cannabis to look for quality opportunities for our investors, but we've not made any investments outside of cannabis. But pretty much the same type of model. And you might be getting to this, but some people would say, "Well, geez, Anthony, why are they listed on the New York Stock Exchange and you're only on OTC?" Well, we operate our business to list on New York and NASDAQ, but they won't have us because we focus on cannabis exclusively. IIPR went public before the rules changed and they were grandfathered on to the New York Stock Exchange. They weren't kicked off, so to speak. So that's a little bit of a difference for us.

That's great color. And then just one quick follow-up in terms of the comparison with the non-cannabis sale-leaseback operators. Do you have a sense of where they are in terms of dividend yields or maybe a discount to NAV. Any color there?

Yes, you would look that they generally trade around that net asset value, some a little bit above, some a little bit below and their dividend yields for the net lease REITs would be in the mid-single digits, call it somewhere around a 6% to 7% dividend yield. And I'm sure we'll get an opportunity for me to talk about why our dividend yield is so much higher and how we think about that and how we think investors should think about that.

Yes. No, that's good. That's great. Thank you. That's great color on NewLake. I mean we'll touch on macro themes now and then we'll come back to NewLake later on. But just talking about what I call the finance company sector in general, right? And there, I'm talking for those who are not so familiar, maybe explain the differences between sale-leaseback operators and mortgage REITs and BDCs, in terms of duration, in terms of interest rate exposure, in terms of what you offer, right, versus those. And then by the same token, when does it make sense for the borrower, in this case, cannabis operators, when does it make sense to be choosing between your services, a mortgage REIT or a BDC? Because it would seem that you're competing for the same pie, but to some extent, perhaps it's a different track, right? So if you can give color there, let's start with that first.

Yes. Listen, I think it's a great question. And it actually creates some confusion in the investor base because people think of these business models as competitors. And that is true to some extent, but by and large, I think of these as separate products that are appropriate for different situations and different transaction objectives. So let me go a little bit deeper there. If you think about BDCs or business development companies, they're generally more focused on underwriting cash flow and looking more like a private credit investor. They have regulated leverage and they tend to be more hands-on or have a more hands-on approach to monitoring the investments and being involved, not necessarily day-to-day decision-making, but they generally are more involved in an active dialogue with the management teams and they tend to be shorter duration. For mortgage REITs, those are organizations that focus on transactions with real estate as the underlying collateral. So yes, they're also looking at cash flow profiles of the companies, but they're valuing the underlying collateral of the real estate that the company owns and they're making an advanced based off of that real estate. And then compare that to us as a sale-leaseback REIT, we acquired the property for that full price. We acquired the property and then we lease it back on a long-term basis. And as I said earlier, we have a 12-year remaining weighted average lease term. We'll enter into 15- to 20-year leases, may be a little bit shorter on the dispensary side. But if you're a BDC or a mortgage REIT, you tend to enter into 3-, 4- or 5-year transactions, so it's shorter duration. So when I get to this concept of their for different scenarios, I think it really depends on what the company's objective is to determine which lever they want to pull. I think if they believe that there's something transformative that will change their cost of capital in the very near term, they may opt for a shorter-duration product like a BDC or a mortgage REIT. If they don't have real estate, well, then obviously, a mortgage REIT or a sale-leaseback REIT doesn't make sense. They need more of that cash flow lending directly from a BDC. If they're proceeds focused, so if they own a piece of real estate and getting it from a lender for a 2- or 3-year period would only result in a 75% advance rate by selling it through a sale-leaseback REIT, you typically can maximize your proceeds and get in that example, say, 100 cents on the $1. So if you're proceed sensitive, you may indeed want to do that. If you have other maturities coming up, you may decide that you don't have the ability or you don't want to have the bandwidth or the suck on your time 2 to 3 years from now to go out and have to refinance or worry about refinancing, and you might like to put away this part of the capital structure. And so those are the primary differences. I'd say that it's the fact that we own the underlying property. We have a longer duration, and we tend to give greater proceeds. And in many cases, that works for people. In other cases, it doesn't work. And the last point I'd say on this is look outside of the cannabis sector and look at regular way industries, and you see companies like FedEx, Starbucks, Walgreens, Home Depot, industrial and retail business or I should say, businesses that utilize industrial and retail properties, and they're utilizing sale-leaseback as a component to fund their real estate needs. Some of them are also using potentially real estate borrowing facilities as well as general credit facilities and maybe high yield or high-grade bonds to fund their capital structure. So it really, I think, depends on the situation in each product fits for a company's needs at a particular time.

Again, that's great color. Look, just a couple of quick follow-ups there. One, why is it that sale-leaseback hasn't made inroads in the Canadian market, right? There's a lot of cultivation there. There's been a capacity that needed to be funded. Was it just that there was a lot of capital available? Because as you said, in the U.S., in the non-cannabis sector, sale-leaseback it's also a common way of financing your business, right? Why is it that sale-leaseback hasn't made inroads in Canada? Or is that an opportunity later on for yourselves?

Well, I think the opportunity internationally, and maybe we can get to talking about internationally, the opportunity internationally is there. In fact, we are going to look at a deal that was recently sent to us in Canada. But why I think that it hasn't been a greater opportunity is because the significant growth in the Canadian real estate needs around cannabis coincided with the legalization in Canada of cannabis. And so that meant that the organizations could have direct access to the banks and in the early days, I think some of those banks stepped up. I also think and it's probably a more relevant point is the one you made, which was there was a lot of capital available. And so a lot of these organizations had the excess capital available to be able to put into these into these facilities. And we've seen, I think, over the last couple of years, we've seen some sales of those properties not necessarily in sale-leaseback structures, but sales of those properties as they've downsized their operations and they've sought to optimize their capital structure.

And one last one, just on the same topic, again, for the borrower, I know it's very difficult to talk apples-to-apples, every case is different. But in terms of cost for the borrower, whether you're looking at a BDC, they're looking at a mortgage REIT or they're looking at a sale-leaseback, what would be the difference in cost? And I know there's a difference in duration but -- and maybe it's not the right way to think about it, right? But is sale-leaseback typically going to be cheaper, but you're just in it for the long term, for a longer period of time. How do you think about that? Or how should the operator think about that?

I think typically, the entry cap rate for a sale-leaseback transaction is less than the coupon that you would pay on a mortgage REIT transaction or a BDC transaction. And there's reasons for that because the -- we actually own the property, right? So if there's a default, we can put the tenant out of the facility, we own the property, we don't have to go through foreclosure. So our risk profile is different. And from the operator perspective, if they believe, again, that their cost of capital would come down significantly, then they would say, "I don't want to lock in a longer duration cap rate of, call it, 12%, I'd rather pay maybe 15% of a coupon for 3 years thinking that my cost of capital will go down significantly." And in fact, back in '21 and '22, we had this very conversation with folks. In '21, a lot of organizations stepped away from what would have been 11%, 11.5% cap rate transactions only to take mid-teens debt thinking that by '24, they were going to be 300 to 400 basis points cheaper, if not more, on a borrowing basis, but yet that never materialized for the industry, that's not specific to those companies, that never materialized for the industry. And so the borrowing rates in the industry have maintained high. And so from a cash flow perspective and from a cost of capital perspective, for many of those, it would have been more beneficial to execute sale-leaseback transactions then to enter into the higher rate debt transactions. And again, some people weren't proceed sensitive, so maybe it was better off. So the short answer to your question is we're typically lower, but because it's longer duration, I think some people decide they want to pay the higher for the near term with the expectation that they'll be repriced pretty quickly...

Right. But on that same point, apologies for that. In the current environment that we're seeing interest rates come down, right? We don't know when the next rate cut will come, but the assumptions that interest rates will continue to come down. Does that put pressure in the sale-leaseback business compared to the shorter duration products right now in the current context?

No, I don't think so because you look at the disclosures for some of those others, and there's a meaningful portion of those transactions or fixed rate transactions. Even for the floating rate ones, you get another 25 or even 50 basis points. When your borrowing rate is 12%, 13%, 14%, yes, every little bit helps. But I don't think that -- I don't think that's a meaningful component of the decision tree for people.

Got it. And before we move on, just in terms of the sentiment on the sector in general, in terms of finance companies, not just cannabis, does the current malaise, some people use that term, sentiment wise on private credit, also impact sale-leaseback operators if you can touch on that. And also, how does the current macro volatile macro climate from an economical and geopolitical point of view, impact the sale-leaseback operators? Or is it just a more steady sector that's less impacted by those type of issues?

Yes. I don't think sentiment around private credit really impacts NewLake or even those that operate in the cannabis industry. I mean, there are a few of us left that are focused on this sector and providing capital to the sector. And I think that the availability and pricing of that capital is really focused on the quality of the portfolios and the quality of the business that's being done and not so much on some of that externalized input that you're referring to. I think for others outside of this industry, maybe it has an impact, I don't think it really has a meaningful impact on us.

Right. And just moving on, but similar conversation. In terms of the pitch to investors, right, that can go on by cannabis, mortgage REIT, cannabis BDC or cannabis sale-leaseback operator, what's the pitch to investors in that sense? Sector wise, not so much...

Sector wise, yes, listen, I think it's a different way for people to express a view on cannabis and to play cannabis reform. I think if you focus on a yield-oriented product like a REIT model, whether it's equity REIT, mortgage REIT or like a BDC, I think you're getting current income on a quarterly basis to compensate you while you're waiting for that catalyst to occur. Because these are asset-heavy businesses, I think the volatility, both downside and upside is less than if you were to go into a direct operator. And so while you will get paid for that patient and you'll benefit from reform in my opinion, from these yield-oriented investments that focus on the cannabis sector, you won't get the 5x or 6x or 10x that people are hoping on some of the cannabis operators that will occur over time. I think you'll get certainly appreciation in share prices as demand for shares go up and you see the way a lot of these platforms are trading relative to their NAV or relative to the dividend yield, which I hope we get an opportunity to talk about. So there's upside to the share prices, but it's not going to be a 2x or 3x. It kind of would be like having your cake and eating it too, getting paid current income, taking chips off the table, so to speak, while also having that upside.

So let's touch on that. You talk about the dividend income. So now comparing NewLake as an investment for retail investors or institutional investors, so they are versus investing directly in plant-touching cannabis stocks. I mean how would you make that comparison? You just made a comparison between BDC, between mortgage REIT, but now let's compare an investment in NewLake versus investing directly in the plant-touching stock.

Yes. Again, I'd say it's more of what I just mentioned, which is I think the stock price is lower volatility than you would have from the plant-touching businesses. I think that when we consider reform, we think about new investors coming into the sector and paying attention to cannabis and even ultimately, capital providers stepping in, I think you'll see that, by and large, the REITs will end up benefiting their cost of capital first before the operators because those that come in are more likely to want to put capital with a diversified portfolio of commercial real estate or a collateralized lending portfolio, say, in the case of a BDC. And so that will allow us to decrease our cost of capital as we look to serve the industry and do new transactions. And the operators, again, I think, will take a little time. And that's what we saw in '21 and '22. And a lot of the facilities that were announced, I think the REITs and the BDCs tended to lead that before those, by and large, became widely available to the sector itself. It also makes sense if you're a bank risk manager, you're going to feel more comfortable with the diversified portfolio of commercial real estate than you will with a particular company in their operations. And so again, it's that do I get paid current income to wait and potentially benefit from the catalysts or do I go with the higher volatility and potentially have greater upside but not get paid anything while I wait for that.

So -- but on that point, again, I'm talking to investors out there, right? So the dividend yield is in the low teens, right, low mid-teens sometimes. So very attractive in that sense. But there's been some volatility also in the NAV, right, on the discount to NAV. I mean, how would -- what's causing that? Is it just marketing inefficiencies, the lack of liquidity? Where are we at a level? I know we cannot forward guide, but are we at a level where the discount on NAV, it's unlikely to worsen? How would you think about that?

Well, if you look at the balance sheet, the NAV on the face of the balance sheet hasn't been volatile. It's been -- the NAV per share has been fair...

Discount to NAV...

This is more a function of the stock price, right, which is also impacting that dividend yield. And so when we look at the dividend yield, so I don't think that there's a story around the discount to NAV. I think when people look at REITs in general, they look at it more of a yield play, and they're looking at what's the yield I'm getting paid relative to the risk profile. I'm sure people do look at NAV, but I think more for us people are focusing on that yield as opposed to the NAV. And when we look at our yield, and you look at a high yield like this, particularly when the other non-cannabis REITs are trading in that mid-single digit range on a dividend yield and people see a double-digit dividend yield. Two things come to mind. One is they think there's a leverage problem, and two, they think there is a dividend cut around the corner. So why don't we address both of those? Number one, from a leverage perspective, NewLake has a little over $7 million outstanding on over $400 million balance sheet. In fact, we're in a net cash position because if you take the over $20 million of cash we had on the balance sheet, we have net cash on the balance sheet, right? We just paid down the debt tomorrow. So very few REITs that are in a net cash position that have such little leverage. So it's not a leverage issue. And we do have available capacity under our $90 million facility to be able to do new transactions and grow the portfolio. So clearly, it's not a leverage. So then it must be a dividend issue. If you look at the most recent quarter that we announced, an 82% payout ratio. And so for those that are not familiar with the real estate investment trust or REITs, the key measure for us is AFFO or available funds from operations. That is our measure of free cash flow. And as a REIT, we are required under law to distribute 90% of our -- a minimum of 90% of our taxable income. But because we have significant depreciation, that's never really an issue. We target a payout of our free cash flow between 80% and 90%. So at 82% payout ratio in the third quarter. And we did make commentary. I think you even asked a question on our call, we made commentary that with AYR coming back into the portfolio as a vacancy that we were going to see that payout ratio drift over the fourth quarter and into the first quarter to get up closer to 90%. And so still expect it to be within that range between 80% and 90%. So we could also absorb additional delinquencies, additional issues in the portfolio and still have room before where you start to exceed our cash flow. So having a well-covered dividend, is something that I think when we talk about high dividend yields and worrying about dividend cuts that people have. Now there are some out there that when you look at their payout ratio, which is well in excess of 100%. So that would mean that some of the competitors out there have not enough cash flow to actually pay their dividend, which means they're utilizing capital to meet the dividend obligation. And that's not sustainable. And so in those cases, investors say, well, I expect that dividend will need to get cut because typically REITs should not be paying out more than their free cash flow. And so I think we get painted a little bit with that as well. And so people then ask, well, if it's not leverage, if it's not dividend, then why are you trading at this high yield and I think it's because we are trading on the OTC. Again, we qualify in all respects to be New York and NASDAQ, but I think the fact that there is limited institutional demand for NewLake stock because of the custody issues, that a lot of people have talked about, because of the custody issues, I think that limits the amount of institutional investor base that is available to recognize that high dividend yield disconnected with the reality of where the balance sheet is and what our payout ratio is.

Look, I mean, the last question in terms of -- on the same topic, and I'm sorry to go back to it, but in terms of talking to investors, right, let's say, I'm an investor, I'm looking at buying NewLake shares, just very focused on the dividend yield, attractive, well covered, like you mentioned, but I think as an investor, I also can be worried about the discount to NAV, right? This is not a fixed income security. And although your NAV has been stable for the most part, right, the discount has moved, right? So as an investor if I'm coming to the stock, but not fully educated on the story, right? I'm looking at that low mid-teens dividend yield, should I worry the discount to NAV to expand or what could cause that discount or maybe it's pretty safe? There's not much room for it to expand in terms of this come to NAV.

Listen, any investor that's looking at an investment in NewLake or any other company shouldn't worry that at all, right? So absolutely, they should be looking at that. So let's talk about what impacts net asset value per share. So obviously, the share price going up or down, on a constant NAV. The other aspect that will impact that would be if we were to sell a property at a loss, right? And so we book -- we're not marking up the value of our assets, right? Our assets are booked at our acquisition cost and we're depreciating those assets over the standard 38-year depreciation. And so the things that could impact that NAV would -- on our balance sheet would be -- if we were to take an impairment, if we were to sell a property at a loss, those are the types of things. But I believe when you look at investing in REITs, you should be looking at that yield. I just keep coming back to it. And so the value of our properties, if we're getting a 12% yield, 12.5% or 13% yield off of our rented properties, that's much more valuable than if the same properties were rented out at a 6% yield if we are focusing on carwashes as an example, or we're focusing on strip malls where maybe that yield is less. So obviously, if a property can generate more cash flow over a longer period of time, that property should be worth more.

Okay. Got it. Look, I'm going to shift the conversation now in terms of opportunities for you outside of plant-touching companies in the U.S. I'm going to ask a few and you can touch on them. Would you enter tenancy agreements outside countries? You mentioned them at the beginning, I think you may be looking at them. Can you deal with -- can you also deal with non-plant-touching companies in the cannabis ecosystem? I don't know if sale-leaseback would apply to a company offering picks and shovel services or tech services or others. Do you see opportunities for NewLake in the hemp industry? Or is that of limits due to unclear regulations? Could you also enter deals with customers outside the U.S., right? You mentioned Canada, what about Europe? If you can touch on all of that, please?

Yes, quick answer and then I'll go into detail is yes to all of it except for hemp, and we'll talk about it. So the first was outside of cannabis. We were asked a question during the third quarter about do we ever look at deals outside of the cannabis sector? And the answer is yes. But I want to be clear, it's not a haphazard "Hey, we'll look at anything." We think that we've built a core competency -- a core competency around complex operating businesses that are highly regulated and often out of favor with mainline funding organizations. And so we're looking to extend that capability to other asset classes. And so that's the screen through which we are evaluating other opportunities. And so we've been doing that for a while, and we always do that. In terms of non-plant-touching companies in the cannabis ecosystem, for sure. Yes. I mean there's less real estate requirement for the non-plant-touching companies, particularly if you're a software provider, if you're a flow hub or if you're some of the other organizations, very, very light real estate footprint that is typically more office space than it is industrial or retail. But yes, no reason we couldn't provide capital to those organizations. And then you mentioned overseas, and then we'll finish up with hemp. You mentioned overseas, yes, you and I saw each other in Europe a couple of times last year. We've been paying attention to that market for about 18 months now watching it. We've even looked at a couple of deals, whether it be in Germany or in Portugal, in Canada. We've looked at some as well. The cannabis industry is international, but it continues to evolve. And one of the reasons we haven't yet pulled the trigger internationally is because I think the sands are still shifting when it comes to a regulatory environment. So even in Germany, where there's a lot of excitement and there's a lot of growth, I still think that you could see a regulatory structure that's different 3 years from now in Germany than it is today. It doesn't mean that they'll roll back adult use, but that does have an impact, depending on the regulatory structure does have an impact on a particular property and its value in the cannabis ecosystem for that jurisdiction. So yes, we're always looking at international opportunities. And then lastly on hemp. I just think it's way too much volatility for us to spend time looking at hemp right now. There's an existential risk on the horizon. I think it's November 12. Maybe it's extended, maybe it doesn't. How do you underwrite that. And so for us right now, we're going to hold off on focusing on those types of opportunities.

And just on the point on Europe, although Germany continues to grow, what we are seeing is just imports grow, right? And more Canadian producers expanding capacity in the case in Canada or even acquiring capacity. So I wouldn't be surprised to see opportunities for you all in Canada. So just moving on now to rescheduling. We want to touch on from different points of view. But first, the impact from the cannabis -- the positive cannabis regulatory news flow in your business. Is there more demand for your services, let's say, since December 18 because of the announcements that came out of the White House? And also, while operator cash flow should improve because of the removal of the ADE and the increase in the credit quality of your tenants, there could also be more competition, right, from other credit suppliers. I mean I don't know if this is true or not. But what are you seeing so far in terms of demand for your services? And given the positive news flow and more competition potentially on the credit side?

Yes. So it's still new. Let's remember, this is only 6 or 7 weeks -- well, there I go right, 6 or 7 weeks ago, the announcement happened and then we had holidays in between. I would say there's definitely more chatter. We've seen just the level of dialogue we're having with different participants in cannabis is definitely elevated over the course of January. Does that result in future deal flow? Yes, it probably does. We look at Schedule 3 really as the catalyst. It's a catalyst for so many things. It's a catalyst for potential credit improvement, it's a catalyst for new investors to come into the sector. It's a catalyst for states to expand medical programs, catalysts for states potentially convert from medical to adult use, new states to adopt a medical cannabis program. And so that will lead to, we think, a series of opportunities over the course of '26 and '27. And so it's an undeniable positive to have had that executive order. The reason I say chatter and not deal activity is because I still think this is very much a, "Hey, we've got an executive order, but we need to see it filed." I think people certainly expect that there will be lawsuits once the final rule is filed in the Federal register, but people want to see the rule get filed in the Federal Register. So it's not just another politician saying, "Hey, we're going to do this without getting that actual real reform." Now I think most people believe that it will happen. And as you started this segment off -- we -- you started off with why people were waiting for January 31? Is it February 15. Who knows? None of us know. But I do believe it will happen. I really truly do believe it will happen. And that's when I think that chatter converts into more tangible opportunities.

Right. And on the same topic, right, and this is an assumption, let's say, we get the final rule by December -- by February 28. When does Schedule III become effective for 280E purposes from what you are hearing. There's some debate on that. Does 280E get removed from 1st of January? Does it get removed from the day of the final rule or do we have to wait for it to be enacted after the litigation is clear. What's your opinion in that regard?

That's certainly a question for a tax accounting. But based on the conversations we've had, it would apply for the tax year, that's what I've heard. Now I think that could be a fluid conversation. I think it depends what is filed, if anything, is filed in the Federal Register if there's any guidance that comes out. With that, but that's what I've heard most people talk about, which is when you look at 280E, it says you can't deduct it doesn't say for the day specific. It says you can't deduct for it. And so unless there is a specific date in there related to 280E, I think people will take the liberty and assume it's for the full taxable year and then let the IRS come back and tell them otherwise.

And one more. I know it's again a question for the tax accountant, but in terms of what you're hearing or what do you think any predictions of what happens to the unpaid portion of past 280E tax liabilities on the balance sheet. Most operators, they call them long term and certain tax benefits. Is that a part, a full part on a haircut, restructuring payment plans. How do you see that happening?

Yes. So here, I have an opinion. I don't think it's a free lunch at all. I think the IRS is going to want to get paid for the past taxes. I think that the IRS is not in the business of putting companies out of business. Otherwise, they won't get paid. So my best guess is that we will see deals cut, and there will be payment plans for those past taxes for the IRS to get paid over time. Now I know there's some court cases where people are challenging the applicability of 280E to the IRS. I'll leave it for those legal folks to argue if there's really something there to win. We hope they do because that would be a huge win for the sector, but our underwriting and our approach is the expectation that the bill will need to get paid. It just will become an installment loan that will get paid over time and probably sized with the expected cash flows of that organization and in some cases, maybe even discounted for the expected cash flows.

And obviously, I mean, if we get to 280E valuations will go up, companies will be able to issue equity or be in a better position to borrow at lower cost. So we'll be in a better position to pay that and enter those agreements, right? So that's the good news there. Look, again, crystal ball question before we go back to NewLake. Okay. Let's say, we get scheduling. It's -- we get the final rule, it's enacted, implemented. Do we get anything else before November, meaning safer or other types of cannabis-related bills? And I know it's a crystal ball question.

Yes. I mean I'm not going to prognosticate. I've been wrong in most of the things. So even if I told you something, I could -- I think I could paint a very credible argument for why something should happen before November. And I can equally paint a credible argument why something is not going to happen until November, notoriously difficult to get legislation done in an election year. And unless this is going to be about Section 10 which is that anti-discriminatory language, anti-operation choke point language, the de-banking language that is unless it becomes about that and wanting to really get that across the finish line is a political win before the midterms. I'm not sure cannabis banking is the type of political win that legislators in Washington, D.C. feel they need to have heading into the midterms.

Right. Before we go back to NewLake on the same topic of our regulatory news flow, if we get rescheduling, I will assume that you, NewLake would be in a better position to talk to NASDAQ and get up listing for your stock. Is that wishful thinking? And I'm not talking about a plant-touching company, although you are indirectly or directly because you own the assets, but you have the argument that IIPR is was as listed, if you get rescheduling, am I exaggerating and saying that you should be in a great position to get NASDAQ listing at least?

Listen, I can't be a cheerleader on that point. I'd love for it to happen. I focus on the facts and they are as follows: they will not list us, New York and NASDAQ, because we currently violate federal law doing what we do. And yes, they've grandfathered IIPR. Schedule III doesn't change that. So unless they have a change in sentiment, unless they have a change in policy, unless they have a change in perspective, which is entirely possible, I don't see it. I think it would need a safe harbor, I mean, antimonate money laundering laws, Bank Secrecy Act, all of those regulatory acts that have significant consequences for the exchanges and the custody agents are significant enough that I think they say the opportunity isn't meaningful enough for us to pivot without having that safe harbor. Now listen, they could totally change their mind. That's my view, and that's the assumption we're going to make, and we're going to push for -- once we get Schedule III, we're going to push hard for safer banking with the right safe harbor language so that this industry can have regular way access to the U.S. capital markets.

I'm sorry to keep pushing on the same point. And I know you're sharing your opinions, and we very much appreciate that, and I'm not going to ask you to share private conversations with exchanges. But I would assume that you are constantly in touch with the exchanges, right? So when you are giving us these answers, it's not based on an opinion, it's based on the feedback they are giving you pretty much week to week?

Yes. Listen, we're not talking to exchanges on a week-to-week basis. It's kind of silly because there's really not much to talk about. Even with the executive order and it's an executive order, you actually need to see the regulatory reform. But yes, we've talked to the exchanges on a fairly regular basis since we -- since before our IPO because we wanted to get on the exchanges directly through our 2021 IPO. So that dialogue has been there for over 5 years. We have relationships there now and a consistent dialogue. I'd say I've not seen much daylight from conversation to conversation in terms of a change in attitude. Never say never, but we're going to operate as if we need to get safer banking done with the right safe harbor language so that we can have access.

Thank you. Going back to NewLake, a brief recap of third quarter results, but more than that because we all have access to them. Any comments on tenant issues that happened recently or have happened over the last 1 or 2 years, specifically, I'm talking about AYR, I'm talking which you touched on Rev Clinics and Calypso. Any color you want to give there? A brief recap for the [ 3Q ]?

Yes. So what I can speak to is our last reported information, as you know, which was -- we recovered the AYR properties, the 2 AYR properties that they vacated. We've cleaned them up. We've been in active dialogue, trying to retenant the properties, 1 in Pennsylvania and 1 in Nevada.

Sorry, retenant for cannabis purposes?

For cannabis purposes. Correct. That's what we're actively trying to do. We always have the option to go non-cannabis, but we think the best use for these properties is indeed cannabis, and that will be the best value for our shareholders. On the Rev Clinics front, that property came back to us over the summer. Same thing, cleaned it out, have a broker, and we're actively looking to market to bring in operator or potentially multiple operators to that property. Calypso is really a nonevent. Yes, no issues, like that's not been really a discussion for at least a year or 2. And so that's where we stand on our portfolio.

That's good. And you already explained why the dividend is well covered. So we'll not touch on that. I think in the past, you made a point that NewLake is somewhat different from other, let's call them, lenders or sale-leaseback operators out there in terms of where that you work together with tenants in solving problem situations. So again, I don't want to exaggerate, but is that something that makes you really unique and different?

Well, whenever you say unique and different, I mean its different things to different people. We try -- let's say it this way, we try to service our clients and not just do deals and forget them. We recognize, particularly when you have a longer-dated relationship with somebody like a 15-year lease, your success is really tied to each other. And we underwrite properties looking at the cash flow at the particular property. And so we could see through the regular quarterly reporting, how a particular property is cash flowing. Is the cash flow improving? Is it decreasing? Now we could have proactive conversations, and we have with operators around the property or around the state or around a particular license in order to maximize the overall return for them and for us. And one example was last year we announced that we had moved a dispensary with Curaleaf. They had a dispensary in Illinois, that when we first did the transaction, it was a medical market. This was a medical dispensary. As that market a few years ago, transitioned to adult use, the community in which that dispensary did exist, did not embrace or allow adult use. So that dispensary was only relegated to medical sales which is an impact, right? They're utilizing a license, they can be getting better return if that was situated elsewhere. We could have been difficult and said, sorry, you got to pay us, that decision is on you. Instead, we work collaboratively to find a solution where they can have a dispensary in another location and do a deed-for-deed swap so that we can continue to get the return for our investors and they could move out of that facility into a different facility and get a better yield or better return for their investors. We've done that now a handful of times across cultivation and dispensary assets. We think it's important to do to not just optimize the value for our shareholders, but to be a good partner, and we think that if you're building a long-term business, being a good partner is one of those attributes that will have tenants coming back to you for future transactions.

I know you can't really make forward comments here and you haven't reported 4Q results yet, but what can you say about 2026 in general? Can we see more growth in your book than in 2025? Based on your disclosure, all other tenants are current, so there's not much to say, right? But I could argue that based on the news flow cannabis, pharma can or potentially could be problematic. Acreage seems to be -- we don't have data on acreage, because it's private now. But what can you comment in general just about how to think about 2026 for NewLake?

Yes. I can't give any forward-looking comments around what we expect in terms of financial performance for the year. I can tell you -- what I can tell you though is I think the operating landscape in cannabis hasn't changed from where it was in 2025. It continues to be a difficult environment with a lack of access to regular way capital markets. I think the industry got a shot in the arm at the end of last year with that executive order, which could bring some additional new capital to the table if there's follow-through, but people still need to be executing their business model and generating sufficient cash flow at the property level. What we also saw when we see a lot of people talking about prognosticating about is an increase in M&A activity. And so we know there are certain states where there are opportunities for M&A activity and growth for companies through M&A, people to consolidate states that maybe they already have a dominant position in and our tenants are no different in that regard. And so some of them will participate that, and some of them won't participate in that. So I think -- as an outlook for 2026, I think we all should expect continued volatility across the cannabis sector and continued distress where there is distress until we get finalization of Schedule III or at least the filing of the Federal Register to solidify some of the new interest in this sector that seems to be circling.

Right. Now let's talk about NewLake's ability to raise funds, assuming that you have growth opportunities in 2026. How high can you take that leverage. Remind us about your existing credit lines, further borrowing potential. Also, can you raise equity or not if you're trading at a discount to NAV, how do you think about that? And then related to that, just remind us of the spread, right, your cost of funds versus your yield to maturity in the book?

Yes. So we have a $90 million credit facility, a little over $7 million outstanding. So we have ample, ample credit capacity to execute new transactions. And as you pointed out, we've been fairly slow and cautious on deploying new capital. The cost of our capital for that credit line because we'd be issuing debt for doing new transactions. We actually have some excess cash, and we could utilize some of our cash. But if we were to draw down on our credit facility, it's priced at prime plus 1. So at today's rates, was at 7.5%, I believe, right now, 7.75%. So that's what that cost of capital would be. And so there would be a nice healthy margin between the new cap rate and the borrowing rate. And that's what we need for our shareholders. In terms of opportunities, I want to come back to that point, which is -- we're only going to do deals that we think are quality deals. We're not going to do transactions. We're not going to try to put $20 million, $30 million, $40 million, $50 million of new deals out there, if we're going to worry about collecting rent. These -- again, these are long-term leases, and you have to collect the rent on a monthly basis. And so we're only going to do deals that we feel very confident in the operator and very confident in the cash flow profile of the property.

Right. That's good. Thank you. Look, I know we're running out of time here, but I'm going to ask you to comment on some of the states in which you have exposure, right? Obviously, in your disclosure, it's all very clear, how much of the book is in what states do you even indicating what operators. We touch on Pennsylvania, Florida, Illinois, Missouri, Massachusetts, those are your 5 states. Any prognosis you want to give on those states, right? We all read the same news, right? The government in Pennsylvania continues to push for reg legalization. And clearly, it will happen. Florida, we know what's happening there with the Supreme Court and the Attorney General. But again, your thoughts and brief views on those 5 states. And how to think about NewLake's exposure in those 5 states. Do things get better, the same or worse in 2026. And again, I know we have to be mindful about forward commentary here.

Yes. Yes. So I'll touch on the states, but I did realize I didn't answer part of your previous question on yield, and I want to make sure I communicate to folks you asked about how much we could potentially lever up the REIT because some investors may be thinking, REITs use significant leverage. And if you are a mortgage REIT, and you may be thinking about some of the agency mortgage REITs as an investor that were problems back in the last financial crisis where they use 6x, 7x leverage, that's nothing like what we would do. As an equity REIT and particularly one focused on the cannabis sector, we have no interest in taking leverage up significantly for here. And so that $90 million credit facility on nearly $450 million balance sheet, it would still be one of the lower levered REITs out there. So it will be very modest. You can even do more leverage on that and feel very, very comfortable. But for the near term, I don't see us going anywhere near or above what we have available to us today. All right. Let's focus on the states. Boy, Pennsylvania, I think all of us would have expected that Pennsylvania would have moved to a recreational state, particularly given that 5 of the 6 states surrounding it already have adult use and they know that they're losing tax revenue to people that are going to adjacent states. So here we are. We have the budget that's been presented yet again, it's been presented in the budget. I can't tell you. I thought last year it was going to happen. I was wrong. I'm hoping this year is the year it gets across the finish line, I think a move to Schedule III does make that easier. I know it may seem weird to say, well, how does it move to Schedule III, which is medical really get support for adult use. I just think it's a little bit safer. It's a little bit more mainstream for folks to get behind it. But it's very clear to me now as we sit here today and we saw what happened last year with the budget discussions. This is a political football in Pennsylvania or actually in most states, but in Pennsylvania. And there's going to be a horse trade and the Republicans didn't get what they wanted last year in order to give on the cannabis legalization. And so we'll see if those political wins play out. You have a governor that is running for reelection. He should be more inclined to try to cut a deal for a balanced budget and maybe really push hard. He didn't really push that hard. My understanding is he wasn't putting a shoulder into cannabis legalization last year. And so the question I think -- the big question is, will the governor really push to get it done? Will he put his shoulder behind it and will he deal to get it done? But the thing about Pennsylvania as it continues to be a very robust medical state and continues to operate and provide good return for folks in that market.

I mean, you answered my follow-up question on PA, which is exactly that, right? It's still a license restricted state, attractive economics. There are some medical markets that become very price competitive. We've seen some pressures in PA, but for the most part, remains very attractive compared to other states. You thought in Florida. I know we are running out of time here...

Florida, here we are again in terms of fight at the State Supreme Court around ballots and with the state attorney general for ballots and our people supporting the ballot initiative over those signatures valid or not. We'll see how that plays out. It's clear that the -- that in Florida, the population wants it. Yes, we couldn't get to 60%, that was with a backdrop of DeSantis running really, really hard at it. I think if we could take -- if we could get the bill done in Florida, I say, wait, I'm honestly not behind it. But if this bill in Florida can get done that addresses public consumption. I think it takes a real argument off the table that DeSantis and others were pushing in the last referendum. So I think we're going to have to wait and see that one, I think, is a coin to us. If it does get on and you don't have a DeSantis that's as powerful as he was 2 years ago, I think it's got a really good shot of passing. Illinois, another strong state that for some people is really successful for others. It's been a struggle. I think the growth in dispensaries there has been very good for that state. I think it creates greater access for the consumer. I think it's provided a little bit more stability for some of the operators that we're able to create relationships with the social equity licensees. And so we like the Illinois market, but you need to be careful in it. Missouri. Missouri has been consolidating, and there's really a handful of large what I would call, leaders in that market, a couple of which we have in our portfolio with the exposure we have there. Missouri is a little bit wonky from a regulator perspective. It's not always -- and I'm not as close to it as some of our tenants and others that are in the industry, but it appears to me to be one in which the regulator has been volatile and inconsistent in the way they've policed and approached the department. And so we're going to watch Missouri to see if there's any changes in that state regulatory construct, but a nice growth in store count and we're aware of people in that state that are doing quite well. And then lastly, Massachusetts. I mean, Rev Clinics is one that we talked about in Massachusetts, and we've said for the last couple of calls that we thought it would be difficult and would take us some time to backfill that property given the dynamics at play in mass. We've actually been seeing in the data and anecdotally to talking to those in Massachusetts, that it's stabilized in terms of pricing. And in some cases, I've actually heard some people say it's turning into an okay market, not a good, but a better market. As we've absorbed new dispensaries coming online, as we've opened up availability to the consumer, and we've seen some stabilization in pricing over the past year. But what's exciting people in Massachusetts are competing bills out of the State Senate and the state legislature to increase the cap on dispensaries from 3, one proposal as I think 4, the other 1 is 5 or the other one is 6. So there's going to be a reconciliation. So people are optimistic in Massachusetts that at some point this year, we could see the cap raised, and then maybe there might be some movement also in the ability to affiliate with other dispensaries. And so with that the growth in the cap, you might see some additional consolidation around dispensaries create better economics for operators. And so we're hopeful that we can see some tailwinds in Massachusetts if we can get that cap. I mean honestly, though, the cap 5 or 6 is still, I think the state would be better served increasing the cap beyond that, but that's a positive momentum there.

That's great color on those 5 states, Anthony. I know we're almost out of time. Look I'm going to just read some brief questions from the audience. But just brief answers. Someone is asking, and I think this comes up every now and then. It's only the big risk to have a tenant who accounts for 24% of your revenues, whether you want to diversify your holdings in the future?

Absolutely want to diversify the holdings in the future. The 24% is across multiple properties. We have over 10 properties with them. And we look at each property from a cash flow perspective, how is that property cash flowing? And so -- so yes, you don't really want to -- you don't enjoy having that level of concentration, but where we're going to have that type of concentration is going to be what we think are the long-term winners in the space, like a Cresco, Curaleaf and Trulieve.

Right. Someone asking about whether management own shares in the business. I don't know if you want to touch on that or remind us of the shareholder structure of NewLake?

Yes, it's public. Insiders -- if you look at the Board and management, we own roughly 5% of the company, 6% of the company. If you look at insiders, which are some of our foundational investors, the institutions that were there from the beginning, you have roughly 1/3 of the company is owned by those what are called insiders. You could take a look at our proxy and all of that information is there. I've never sold a share, and in fact, I bought some back in December.

Okay. That's great. Look, one last one. These questions will be political. I'm going to try to phrase it the right way. Someone -- I guess someone is implicitly making the assumption that as long as President Trump remains President, rescheduling will happen this year, 100%. So the only risk to rescheduling according to your question, would be a 25th amendment or impeachment. And I'm not going to ask you to comment on that. But I mean, do you agree with the setup of the question? Pretty much the only risk is the President Trump is not President. The only risk to rescheduling is that. I mean, don't ask anything...

I would first define what does rescheduling mean. And it's an important distinction because does it mean the filing in the Federal Register? Or does it mean the actual final implementation after legislation. So I think if it was the former, if it was the actual filing, it's hard for me to expect that this is going to lead into 2027. It just -- it would be unconscionable -- but then again, we don't know what happens on the horizon. Look what happened last year, we had a government shutdown. We did have a government shutdown this past weekend, but it was limited. Do we have another government shutdown? Is there a war with Iran? Is Pam Bondi fired? Do you get a new DOJ like there's so many variables that are going to impact the timing. But I would generally agree that we should see the final rule filed in the Federal Register by the end of the year. Yes, I would tend to agree with that. Take off the table, war with Iran, take off the table, some rate exogenous factor. But I want to come at the point around Trump staying in office. Let's actually say Trump is removed from office. And I said, well, okay, then what let's say, Vance is put in there. Is Vance going to go back on what was done? Well, why was it done in the first place? I think it was done because it was wildly popular. I'm not sure Vance is going to unwind something that Trump did. Even if he doesn't agree with it, I don't think he'd be garnering new support because he went and did something. He's either going to have that support or he's not. And if a Democrat was put in for some reason, let's say, something happened where it switched parties, I think the Democrats started this under Biden. So regardless of who's in the White House, I think we ultimately get this. I don't see it going backwards. I really don't, particularly given the pervasiveness of the hemp-derived products and how popular some of the hemp-derived low-dose drinks were and how that started to really mean stream THC products.

That's great. That's great color, Anthony, I appreciate you answering that question. Look, closing remarks, if you want to feature your stock again to investors. But again, thank you very much from our side for all the color you provided here on NewLake. Thanks and the industry, of course.

Yes. No. Listen, thank you for the opportunity to chat with you and chat with the folks that tune in here. If people want more information, I'd encourage you go to newlake.com. There's a lot of information on our website. If you want to talk with us, please feel free to connect with us through the website, and we'll try to set up a call. And again, if you're thinking about investing in businesses that focus on the cannabis sector, I think there's a higher volatility, potentially higher return with the plant-touching businesses and there's some great quality companies out there. I also think if you look at some of the yield-oriented plays that are REITs, I think there's a real opportunity to invest in a business that has quality portfolio with a quality yield that's well covered with an 82% AFFO payout ratio in the third quarter that will also respond positively to the catalysts that are on the horizon. Don't expect a 2x or in our stock to happen overnight, the way you may get with some of the plant touching, but you'll get paid a nice dividend while you wait for those catalysts to occur. And I think those are some of the differences and the benefits of being in a stock like NewLake. And thanks for giving me the opportunity to chat with your folks about it.

That's great. Thank you, Anthony. Everyone, have a good day. Thanks for tuning in.

Bye-bye.