NewLake Capital Partners, Inc. ($NLCP)

Good morning, and welcome to the New Lake Capital Partners First Quarter 2026 Earnings Conference Call. Today's call is being recorded. I will now turn the call over to Valter Pinto, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the New Lake Capital Partners First Quarter 2026 Financial Results Conference Call. Joining me on the call today are Gordon DuGan, Chairman; Anthony Coniglio, President and Chief Executive Officer; and Lisa Meyer, Chief Financial Officer. Before we begin, please note that certain statements made during today's call may be considered forward-looking under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks and uncertainties. During the call, we'll also reference non-GAAP financial measures, including FFO and AFFO. Reconciliations to the most directly comparable GAAP measures are included in our earnings release. With that, I'd now like to turn the call over to our Chairman, Gordon DuGan.

Thank you, Valter, and good morning, everyone. 2026 is shaping up to be an important year for the cannabis industry. With the recent rescheduling of medical cannabis we've reached a meaningful regulatory milestone and are beginning to see tangible progress after many years of uncertainty. Moving cannabis to Schedule III is a historic moment and begins to address one of the industry's most significant structural headwinds, namely the burden of 280E taxation. Over time, this change has the potential to improve operator cash flow and credit profiles and it may also for further reforms, including improved access to capital markets and the possibility of retroactive 280E relief. In addition, pending actions such as a potential synthetic THC ban could further strengthen long-term industry fundamentals. That said, while these developments are constructive, the environment remains challenging for certain operators, as an example, the cannabis recently announced that it had entered bankruptcy proceedings in Canada. Anthony will discuss our specific exposure and positioning in more detail but this situation underscores the financial and operational stress that continues to exist across parts of this sector. It also highlights why we have consistently approached this market with discipline and caution rather than assuming that regulatory progress alone would quickly translate into improved fundamentals. Against this backdrop, our team continues to focus on actively managing portfolio risk working to reposition assets where appropriate, improve lease terms and protect long-term value. We remain disciplined in navigating the current environment while positioning the business to benefit from longer regulatory and industry tailwinds as they materialize and hopefully soon. Importantly, the strength of our balance sheet, we are the only REIT I know of that has no debt, the durability of our cash flow generation and the stability of our dividend remain core differentiators for New Lake. For the first quarter, we generated $0.48 of AFFO and declared a first quarter 2026 dividend of $0.43 per share, which was paid on April 15. Since our IPO in 2021, we have now paid cumulative dividends of $7.29 per share. We have been and continue to be the best positioned company to meet the challenges and opportunities of this industry. With that, I'll turn the call over to Anthony.

Thank you, Gordon, and good morning, everyone. It's an exciting time for the cannabis industry, and we have a lot to cover today. I'll begin with our first quarter results. I'll turn to recent regulatory developments, provide portfolio updates and conclude with an update on our leasing activity. Our Q1 results were in line with our expectations. All contractual rent was received during the quarter, and our AFFO payout ratio was 90%, providing ample coverage for our $0.43 first quarter dividend. We're proud of these results in the face of continued stress in the cannabis sector. The cannabis industry has faced significant headwinds over the past few years and we believe our portfolio has demonstrated resilience through a challenging operating environment driven by disciplined underwriting and a focus on 4-wall coverage. Turning to the broader policy landscape. We're seeing a meaningful activity at both federal and state levels. At the federal level, the rescheduling of medical cannabis to Schedule III represents the most significant reform for the industry in over 50 years. The Department of Justice's formal recognition of accepted medical use and the shift away from Schedule I mark a key regulatory milestone signaling continued normalization and further legitimization of the industry. Rescheduling eliminates the application of 280E for compliant operators, which will improve tenant cash flow, enhance credit profiles and support broader access to capital across the sector. We view this as a positive credit development for all of our tenants. We are also closely monitoring guidance from the Treasury Department and IRS regarding implementation of these changes. To the extent any relief is applied retroactively for 280E, it could meaningfully improve operator balance sheets by reducing uncertain tax position liabilities that have accumulated over time. Resolution of these liabilities would strengthen overall financial health and importantly, further reduce tenant credit risk across our portfolio. We estimate that today, approximately 50% to 55% of our annualized base rent is derived from medical cannabis activities, which are now considered federally legal activities. This is meaningful in the context of exchange listing eligibility as the legal status of our tenant activity remains a gating consideration for listing on the New York and NASDAQ. Importantly, we already meet the other applicable listing requirements, and we view the rescheduling of medical cannabis as an important step in the continued normalization of our business and our ability over time to be able to access a major U.S. exchange. Furthermore, we anticipate the broader rescheduling effort and -- excuse me, the broader rescheduling effort for nonmedical cannabis activities to be concluded later this year, which, if successful, could position NewLake well to meet all the exchange listing requirements. Further supporting the industry's long-term outlook is the federal government's move to prohibit intoxicating hemp-derived THC products with a ban expected to take effect in November 2026. We believe the elimination of these products, which directly compete with our state-regulated tenants will serve as an additional tailwind supporting increased sales across our tenant base to varying degrees depending on the markets in which they operate. At the state level, we continue to see constructive momentum. In Virginia, adult-use legislation could still become law despite the [indiscernible] approaches between the legislature and the governor and we're monitoring that outcome closely. In Massachusetts, reforms to the cannabis program, including higher ownership caps and expanded operational flexibility should improve the competitiveness of the market and strengthen the operating environment for license holders. We are also seeing recent commentary out of Indiana and North Carolina regarding potential medical cannabis programs following the rescheduling announcement of medical marijuana. Overall, we expect state level reform to continue, which should support long-term industry fundamentals. That said, regulatory progress does not immediately resolve existing balance sheet and operating challenges. While the aforementioned developments are constructive, the current operating environment remains difficult for certain operators and that reality continues to manifest across the sector. One such example is the cannabis, which recently announced bankruptcy proceedings in Canada under the CCAA provisions in that country. While this filing was not entirely unexpected given broader sector dynamics, and the forbearance with their creditors we discussed last quarter, it does underscore the ongoing financial strain facing some operators. Regarding our exposure, New Lake currently leases 4 properties to the cannabis, a dispensary and a cultivation facility in Illinois and a dispensary and cultivation facility in Massachusetts. The cannabis remains current on rent, and we hold approximately 1 month of security deposits across these properties. In conjunction with the bankruptcy filing, the cannabis disclosed that it had entered into multiple agreements to sell assets or businesses across several states, including Illinois and Massachusetts, where our properties are located. We're actively evaluating how this process may impact the properties we lease to them, and we're proactively developing interest in these assets should the cannabis ultimately default and we seek to recover possession. We will continue to monitor developments and update investors as appropriate. More broadly, risk mitigation remains a central focus across the portfolio. During the quarter, we retenanted our San Diego dispensary with a higher quality operator, added Holistic Industries as an additional guarantor on one of our Pennsylvania cultivation facilities and added Canopy USA to the guarantor structure on our Massachusetts cultivation facility leased to acreage. Collectively, these actions significantly enhance the credit profile of these assets. With respect to our leasing pipeline, we're actively marketing our available properties and have seen an uptick in activity. Massachusetts reform has driven increased interest and since federal rescheduling announcement in April, dialogue with prospective tenants across the properties has picked up more broadly. As we stated previously, we do not announce letters of intent and will only provide updates once lease agreements are signed. While retenanting is not instantaneous, we are encouraged by the level of inbound interest and the quality of the operators evaluating our assets. In closing, as we witness historic reform and federal cannabis laws, New Lake is well positioned to benefit with a conservative balance sheet, a well-supported dividend and a disciplined portfolio strategy focusing on protecting capital today while positioning the company to capitalize on improving industry fundamentals and future investment opportunities over time. With that, I'll turn the call over to Lisa to walk through our financials in detail.

Thank you, Anthony, and good morning. For the first quarter of 2026, total revenue was $12.3 million compared to $13.2 million in the prior year period. Net income attributable to common stockholders was $5.8 million or $0.28 per share. Funds from operations totaled $9.7 million or $0.46 per share. Adjusted funds from operations totaled $10.1 million or $0.48 per share. The year-over-year decrease in revenue and AFFO was primarily driven by 3 cultivation facilities available for lease in Pennsylvania, Nevada and Massachusetts, which reduced rental income, increased property carrying costs. This impact was partially offset by a full quarter of rental income from 2 dispensaries acquired in 2025, along with annual contractual rent escalators averaging 2.6% across the portfolio. Total expenses decreased modestly compared to the prior year period driven primarily by lower reimbursable property expenses and lower general and administrative expenses, partially offset by property carrying costs. On March 4, 2026, our Board of Directors declared a first quarter cash dividend of $0.43 per share or $1.72 per share on an annualized basis. The dividend was paid on April 15, 2026, to stockholders of record as of May 31, 2026 and represents an AFFO payout ratio of approximately 90%, which remains within our target range of 80% to 90% and is fully supports the sustainability of our dividend. As of March 31, 2026, we had $24.8 million of cash and total liquidity of approximately $107.2 million, including availability under our revolving credit facility. We had only $7.6 million outstanding under the facility with $82.4 million of remaining capacity. We continue to maintain a highly conservative balance sheet with debt representing 1.6% of total gross assets and a debt service coverage ratio of approximately 72x and no debt maturities until May of 2027. Overall, our results for the quarter were in line with expectations. We remain focused on maintaining a strong balance sheet while managing risk across our portfolio. With our liquidity and conservative leverage profile, we believe we are well positioned to pursue growth opportunities as the regulatory environment for cannabis continues to evolve. Operator, please open the line for questions.

[Operator Instructions] And our first question will come from Craig Kucera with Lucid Capital Markets.

I appreciated the color on the Massachusetts leasing interest, but are you also seeing rising interest at your Nevada and Pennsylvania assets that are vacant?

Yes. I would say across the board, we have seen an uptick in interest in properties. I want to caution that just because we see an uptick in interest doesn't mean it will ultimately convert. But certainly, we have seen the dialogue increase.

And Anthony, probably fair to say maybe more in the other 2 than Massachusetts.

More interest, correct? Is that fair? Do you agree with that?

Yes. Yes, I do.

Okay. Great. Just changing gears, does rescheduling change how you're looking at the acquisition environment, particularly in medical use space?

No. No. We are looking -- we continue to look at 4-wall coverage and the opportunity to make sure rent is covered from the cash flow at any particular site to the extent that medical activities become more profitable because of the lack of 280E, yes, that's a long-term positive. But the reality is over the last couple of years, the medical operators were not utilizing cash flow to pay the 280E portion of their taxes. They were accumulating that liability, as I mentioned in the prepared remarks, in their uncertain tax position line item on the balance sheet. And so until we actually see a sustained change in the cash flow profile of a property because of the changes, then we'll consider modifying. But I think our underwriting process has served us well thus far, and we'll continue to keep the same approach.

Okay. Got it. Just given the announcement, which as you mentioned in your commentary is the biggest thing to happen in 50 years to the industry. Are you hearing any increased chatter regarding M&A on the operator side?

For sure. We've heard significant chatter about it. There are meaningful -- particularly with the public, there's meaningful public company expenses for some of the larger operators. And so those platforms have, let's call it, low-hanging fruit available to them in a merger scenario. It is complicated by the state regulations and the potential overlap and the regulatory time line that it would take to shed assets in a combination. And in fact, over the last 4 years, we have seen some larger transactions faltering get canceled because they weren't able to clear those divestiture requirements. But we are certainly hearing more chatter about it, and we do think that over the next 18 to 24 months, we will see some of these get across the finish line.

Okay. And I just want to circle back to your commentary on listing on an exchange. Does the 50% to 55% medical allow you to effectively qualify? Or is there another gating factor to get there? Do you need to be at 100%? Or how should we think about that?

Yes. Let's first go over, again, why we're not listed on a major exchange. We qualify in all respects from a governance perspective and from listing requirements perspective other than the fact that our tenants are entirely in the cannabis sector. And those illegal activities are the real gating item. And what we were trying to highlight is that with roughly 50% of our revenues now being in a federally legal activity that we're making progress towards eliminating -- it's not really us, the regulatory environment is evolving towards a place where hopefully, at some point in the future, we have revenue activity that's coming from entirely legal channels. There's no way to predict how long that would take. There's no way to predict at what point the exchanges decide enough is enough. There's no way to predict if there's guidance from treasury, but we have received some questions since the rescheduling about what level of activity is now legal, and that's why we provided that information.

I might just add to that, but it is a judgment call. It is not a -- there's no federal law related to what the exchanges can do on this matter. So it's clearly a judgment call there. As you may -- as you well know, there is already at least one REIT listed on the New York Stock Exchange that does exactly what we do. And yet, that entity has continued to maintain its listing. And I've never really gotten a fully cogent answer as to why that's listed and we're not. So it's a judgment call, and we continue to engage with the major exchanges to see when we get to that tipping point. And we just don't know when that is.

Okay. I guess, are you seeing any of your operators that don't have a medical license now pursuing it because it can be so potentially beneficial to them from a tax perspective? And are you encouraging them to do so perhaps?

Well, we're not necessarily encouraging anybody. We don't tell our tenants how to run their business. When we look at our portfolio, almost all of our properties share a license with medical. And that's part of how we're able to get to that 50% to 50% of revenue because while they share medical, you may have a preponderance of particular dispensary that has adult-use sales as well. There's only, I think, 2 dispensaries that are adult-use only. What we are seeing and hearing anecdotally is at the point of sale, the suggestion, this isn't just across our portfolio. This is across the industry, the suggestion for consumers to utilize their medical marijuana card if they have one. And so I think you're seeing the operators themselves look for ways to move their sales more into the medical bucket. I also have been hearing about regulators across the various states thinking about how they could expand medical access for consumers and have more of their program in the federally legal bucket because when you think about a lot of the states that have legalized, particularly around social equity licensees, many of those licenses were provided more in an adult-use context since they came into the program later. And so there is this concern by state regulators that right now, some of those social equity licensees don't have the benefit of moving to Schedule III. And so they're trying to figure out how they could appropriately comply with the federal regulations, but try to broaden the scope of medical sales in their particular jurisdictions. So I'd summarize all of that by saying people are very aware of the economic benefit of eliminating 280E and trying to figure out ways to make sure that the economic benefits of that reach greater -- reach more licensees and more transactions.

Our next question will come from Pablo Zuanic with Zuanic & Associates.

Just in terms of arrangements with Canopy Growth or maybe with Canopy U.S.A. Just to be clear, so they set a guarantee on the on the lease in Massachusetts, but what about the one in Pennsylvania? And I'm just trying to understand the mechanics why one state yes and not the other and whether it was with CUSA or with CGC. And then related question to that if I can add -- I'm going to add one more, if I may, Anthony, just on the same topic. In the case of cannabis, to my knowledge, we know who they sold their assets in Ohio to. I know that you're talking about Illinois and you mentioned Massachusetts. Do we know what are the buyers of those assets for cannabis in those 2 states?

So let's -- on your first question, Pablo, let's go back. We had 3 acreage properties about 2 years ago. One of our dispensaries with acreage was sold to an organization called Butter, which in that transaction, we were able to get a guarantee from Green Thumb Industries, GTI. So then we were down to 2 properties. What we disclosed in our Q was that at the Pennsylvania property with acreage they entered into a financing transaction. As part of that transaction, we received a guarantee from holistic industries. And so also part of that transaction, we were able to secure a guarantee on the Massachusetts property from Canopy USA. And you may know that Canopy USA is the top holding company in the U.S. for not just Acreage but Wana, Jetty and also the minority interest in TerrAscend and previously, we only had an acreage guarantee. So before I move to cannabis, did I answer your question there?

Yes. Thank you.

On cannabis, it is not publicly available yet who the potential buyer is for Illinois assets and Massachusetts assets. What cannabis has disclosed is that they have multiple buyers for assets across 6 or 7 states that remain after the Ohio and the Delaware sale that was approved by the bankruptcy court a couple of weeks ago. I'd reiterate that cannabis properties continue to pay rent and are current through today. They've paid May rent and April rent as well. And so we're going to continue to monitor what happens with the properties. And if all of them or a subset of our properties are part of these transactions and what the quality of those buyers are. And in the meantime, we're also not just using hope as a strategy. We're actively working to try to develop interest in these assets should the cannabis not be able to conclude transactions for them.

Just on a separate question, in terms of your private company tenants, most of your book, of course, is with public MSOs, and we have access to their financials. But whatever color you would give in this public forum, in my opinion, would be helpful, especially for larger tenants in terms of C3 codes and Mint, obviously, I can do research on my own on them, but whatever color you can give here would be helpful.

Yes. And of course, I am somewhat limited since they are private companies. What I can tell you about Mint and C3 is in the past, they have made public statements about running businesses that generate free cash flow, running businesses that are profitable. And when I think about those operations, I think they've continued to operate those businesses consistently with prior years. What I would also say, if you looked at C3 is that they have -- and you look at what they've said publicly, they have really focused over the last 18 months on building out their dispensary capacity. And so I would expect that 2026 is a year where you're going to see a lot of improved and increased revenue and cash flow as they bring those dispensaries and retail outlets online. When you think about one of our other private companies, Calypso, which is a cultivation platform in Pennsylvania, an entirely federally legal business today given the rescheduling of medical cannabis because they're a single-state operator. So that certainly bolsters their profile because the entirety of their transactions are medical sales. So we have good insight, not just to the overall financial performance, Pablo, of the companies, but I'd really focus on the property level. You heard me say earlier in the prepared remarks that in our underwriting, we focus on the 4-wall coverage. And I think that is just as important, if not more important than the overall corporate financial profile because the best defense to financial distress is a property that can generate free cash flow for the tenant. And those are typically the properties that persist and have robust demand even if you have to pivot away from the current tenant. And when we look and we disclosed our -- in our investor presentation, we actually disclosed the EBITDAR coverage ratios for our assets. And I think what you'd find is that they've been pretty stable across the portfolio.

That's very helpful. Look, and just going back to the potential for NewLake to uplist. Obviously, if we get a REG reschedule after the hearings, 100% of the business is fairly legal, supposedly, right, see how that plays out. But in the event that REG is not fairly legal and medical is, could there be potential for you to split the 2 companies and have a NewLake, I guess, leasing company that lends to -- that tenancy agreement with medical operators and have leased that company. Would that be a possibility or that would make sense in terms of efficiencies?

Yes. Pablo, I don't want to speculate on what we would do. What we're -- what we may do, I can tell you what we will do, which is once we have that regulatory certainty, we'll, as a Board, get together, look at the future landscape and make a decision about what is the best -- what's in the best interest of our shareholders. And if it's to pursue a transaction like that, perhaps we would. But if it's to keep the business together, perhaps we would as well. And so I don't want to get into the what ifs. Let's see how it gets resolved. I don't think we're going to have to wait very long given the hearings will be starting in late June and are supposed to conclude in July, and then it will take some time for the administrative law judge to deliver their report to the DEA administrator before we get a final rule. So we're not going to have to wait years, I don't think, for the outcome. I think we'll have to wait months, maybe a couple of quarters for the outcome, and then we'll make a determination of the best path forward for shareholders.

But from my point of view, that would not create so much opportunities for your company. A lot of those properties are already leased perhaps. The opportunity is going to come more -- and maybe it would be for the mortgage REIT or BDCs that lend against cash flow, if there's M&A, right? But if a company wants to acquire another one, I'm not sure that creates opportunities on your side, but please correct me if I'm wrong. But by the same token, what are you hearing about expansion plans in Virginia and Texas? It seems to me in the case of Texas, people are a bit of a wait-and-see mode in terms of more clarity on the regulations. And Virginia, of course, let's see what happens between the governor and the legislature, right? But any color there would help.

Yes, Pablo. So thanks for the question. Let's first start by reminding folks where we get growth in AFFO from. It comes from 4 main categories. Number one is our built-in escalators. As Lisa mentioned earlier, 2.6% annual rent escalators across the portfolio. And so AFFO grows from that. Number two would be the funding of any TI. At this point in time, we're at a low cycle with TI remaining with about $375,000 of TI to go out once that money is funded, we start charging rent on it. Third would be the leasing of our available properties that certainly would provide additional AFFO. And then fourth would be new transactions. And so in the context of your question around consolidation, there's actually billions of dollars of real estate that resides on MSO balance sheet. So it will continue to be there even after a combination. Why it continues to reside there is because the cost of capital relative to the need for capital and the cost of capital objectives for the operators has not yet intersected. And so as our cost of capital comes down over time, with the normalization, hopefully getting on a better exchange, seeing the normalization of cannabis and the better valuation of the assets and cash flows we have. Remember, we have nearly 12 years of duration on our portfolio. I think what you'll see is you'll see our offerings intersect with the yield targets that the operators are looking for, and it will no longer be economic for them to retain those assets significantly on their balance sheet. So I do still see the future for transactions for people to unburden their balance sheets. In terms of growth, you mentioned Texas. Texas has been a very, very nascent market, and that entire market needs to get built out. And so there will be meaningful investment needs in Texas. Georgia is another state that we're watching. We think Georgia can be a terrific state, and it's been another very nascent program that has had significant expansion in terms of conditions and what we think that market can become. And so there'll be investment needed there. Some minimal investment in Virginia and certainly, there'll be build-out necessary, but not to a great extent. And then there's new states that can come on. And we've heard Indiana and North Carolina talking about now considering medical marijuana programs. And whenever those programs do come online, they will need capital to build out real estate just like you're seeing in Kentucky with their growing medical program. So I think there's plenty of growth yet to come in the future. It's a matter of how long it takes for those states to turn on. And the last point I want to make in your question was around the operators not being very active. I think what the operators are doing is showing a very prudent approach to capital allocation, particularly in Texas. We're not seeing a rush to build. I think operators are wanting to have durable reforms. They're wanting to manage their balance sheets appropriately before they take on expansion CapEx. They want to make sure that they have strong stability in their current operations. And I think that's a prudent approach.

And this now concludes our question-and-answer session. I would like to turn the floor back over to Anthony Coniglio for closing comments.

Thank you, everybody, for joining us today, and thanks to everyone on the NewLake team. Have a great day.

And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.