Filed Pursuant to Rule 424(b)(3)
Registration No. 333-259416
Prospectus Supplement No. 5
(to Prospectus dated May 16, 2022)
NewLake Capital Partners, Inc.
Common Stock
This prospectus amends and supplements the prospectus dated May 16, 2022 (the “Prospectus”), which forms a part of our Registration Statement on Form S-11 (Registration Statement No. 333-259416). This prospectus supplement is being filed to update and supplement the information included in the prospectus with the information contained in our Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 10, 2022 (the “Form 10-Q”). Accordingly, we have attached the Form 10-Q to this prospectus supplement.
Our common stock is listed on the OTCQX® Best Market operated by OTC Markets Group, Inc. (the “OTCQX”) under the symbol “NLCP.” On November 29, 2022, the last sale price of our common stock, as reported on the OTCQX, was $17.50 per share.
We are an “emerging growth company” and a “smaller reporting company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 8 of the prospectus for a discussion of certain risk factors that you should consider before investing in our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.
The date of this Prospectus Supplement No. 5 is November 30, 2022
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to ________
Commission file number 000-56327
NewLake Capital Partners, Inc.
(Exact name of registrant as specified in its charter)
Maryland |
83-4400045 |
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(State or other jurisdiction of |
(I.R.S. Employer Identification No.) |
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50 Locust Avenue, First Floor, New Canaan CT 06840 |
203-594-1402 |
||||
(Address of principal executive offices) |
(Registrants Telephone number) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
||||||||||||
None |
None |
None |
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
Accelerated filer ☐ |
Non-accelerated filer ☒ |
Smaller reporting company ☒ |
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Emerging Growth Company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
The number of shares of the registrant’s Common Stock, par value $0.01 per share, outstanding as of November 8, 2022 was 21,403,817.
NewLake Capital Partners, Inc.
FORM 10-Q
September 30, 2022
TABLE OF CONTENTS
Page No. |
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Item 1. |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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PART I - FINANCIAL INFORMATION
NEWLAKE CAPITAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
September 30, 2022 |
December 31, 2021 |
|||||||
|
(Unaudited) |
(Audited) |
||||||
Assets: | ||||||||
Real Estate |
||||||||
Land |
$ | 21,146 | $ | 15,649 | ||||
Building and Improvements |
375,051 | 272,432 | ||||||
Total Real Estate |
396,197 | 288,081 | ||||||
Less Accumulated Depreciation |
(16,757 | ) | (9,155 | ) | ||||
Net Real Estate |
379,440 | 278,926 | ||||||
Cash and Cash Equivalents |
45,023 | 127,097 | ||||||
Loans Receivable |
5,000 | 30,000 | ||||||
In-Place Lease Intangible Assets, net |
22,492 | 24,002 | ||||||
Other Assets |
2,667 | 858 | ||||||
Total Assets |
$ | 454,622 | $ | 460,883 | ||||
Liabilities and Equity: |
||||||||
Liabilities: |
||||||||
Accounts Payable and Accrued Expenses |
$ | 1,967 | $ | 1,404 | ||||
Revolving Credit Facility |
1,000 | — | ||||||
Loan Payable, net |
1,980 | 3,759 | ||||||
Dividends and Distributions Payable |
8,064 | 6,765 | ||||||
Security Deposits Payable |
7,310 | 6,047 | ||||||
Interest Reserve |
— | 2,144 | ||||||
Rent Received in Advance |
862 | 1,429 | ||||||
Other Liabilities |
276 | — | ||||||
Total Liabilities |
21,459 | 21,548 | ||||||
Commitments and Contingencies |
||||||||
Equity: |
||||||||
Preferred Stock, $0.01 Par Value, 100,000,000 Shares Authorized, 0 and 0 Shares Issued and Outstanding, Respectively |
— | — | ||||||
Common Stock, $0.01 Par Value, 400,000,000 Shares Authorized, 21,403,817 and 21,235,914 Shares Issued and Outstanding, Respectively |
214 | 213 | ||||||
Additional Paid-In Capital |
456,352 | 450,916 | ||||||
Accumulated Deficit |
(30,811 | ) | (23,574 | ) | ||||
Total Stockholders' Equity |
425,755 | 427,555 | ||||||
Noncontrolling Interests |
7,408 | 11,780 | ||||||
Total Equity |
433,163 | 439,335 | ||||||
Total Liabilities and Equity |
$ | 454,622 | $ | 460,883 |
The accompanying notes are an integral part of the consolidated financial statements
NEWLAKE CAPITAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Revenue: |
||||||||||||||||
Rental Income |
$ | 11,639 | $ | 8,048 | $ | 30,317 | $ | 19,083 | ||||||||
Interest Income from Loans |
434 | — | 2,301 | — | ||||||||||||
Total Revenue |
12,073 | 8,048 | 32,618 | 19,083 | ||||||||||||
Expenses: |
||||||||||||||||
Depreciation and Amortization Expense |
3,630 | 2,464 | 9,113 | 5,601 | ||||||||||||
General and Administrative Expenses: |
||||||||||||||||
Compensation expense |
760 | 805 | 3,898 | 2,209 | ||||||||||||
Stock-Based Compensation |
280 | 816 | 1,201 | 1,820 | ||||||||||||
Professional fees |
279 | 574 | 1,486 | 1,351 | ||||||||||||
Other general and administrative expenses |
414 | 631 | 1,249 | 1,009 | ||||||||||||
Total general and administrative expenses |
1,733 | 2,826 | 7,834 | 6,389 | ||||||||||||
Total Expenses |
5,363 | 5,290 | 16,947 | 11,990 | ||||||||||||
Loss on Sale of Real Estate |
— | — | (60 | ) | — | |||||||||||
Income From Operations |
6,710 | 2,758 | 15,611 | 7,093 | ||||||||||||
Other Income (Expenses): |
||||||||||||||||
Interest Income |
7 | 21 | 103 | 40 | ||||||||||||
Interest Expense |
(94 | ) | — | (167 | ) | — | ||||||||||
Total Other Income (Expense) |
(87 | ) | 21 | (64 | ) | 40 | ||||||||||
Net Income |
6,623 | 2,779 | 15,547 | 7,133 | ||||||||||||
Preferred Stock Dividends |
— | — | — | (4 | ) | |||||||||||
Net Income Attributable to Noncontrolling Interests |
(113 | ) | (82 | ) | (262 | ) | (236 | ) | ||||||||
Net Income Attributable to Common Stockholders and Participating Securities |
$ | 6,510 | $ | 2,697 | $ | 15,285 | $ | 6,893 | ||||||||
Net Income per Common Share - Basic |
$ | 0.30 | $ | 0.14 | $ | 0.71 | $ | 0.44 | ||||||||
Net Income per Common Share - Diluted |
$ | 0.30 | $ | 0.14 | $ | 0.71 | $ | 0.44 | ||||||||
Weighted Average Shares of Common Stock Outstanding - Basic |
21,428,905 | 19,410,307 | 21,417,149 | 15,588,544 | ||||||||||||
Weighted Average Shares of Common Stock Outstanding - Diluted |
21,802,487 | 19,555,867 | 21,815,763 | 15,637,064 |
The accompanying notes are an integral part of the consolidated financial statements
NEWLAKE CAPITAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(In thousands, except share amounts)
Common Stock |
Additional Paid-in |
Accumulated |
Noncontrolling |
Total |
||||||||||||||||||||
Shares |
Par |
Capital | Deficit | Interest | Equity | |||||||||||||||||||
Balance as of December 31, 2021 |
21,235,914 | $ | 213 | $ | 450,916 | $ | (23,574 | ) | $ | 11,780 | $ | 439,335 | ||||||||||||
Conversion of Vested RSUs to Common Stock |
88,182 | 1 | 125 | — | (126 | ) | — | |||||||||||||||||
Conversion of OP Units to Common Stock |
79,721 | — | 1,586 | — | (1,586 | ) | — | |||||||||||||||||
Stock-Based Compensation |
— | — | 1,201 | — | — | 1,201 | ||||||||||||||||||
Dividends to Common Stock |
— | — | — | (22,410 | ) | — | (22,410 | ) | ||||||||||||||||
Dividend Equivalents to Restricted Stock Units |
— | — | — | (112 | ) | — | (112 | ) | ||||||||||||||||
Distributions to OP Unit Holders |
— | — | — | — | (398 | ) | (398 | ) | ||||||||||||||||
Adjustment for Noncontrolling Interest Ownership in Operating Partnership |
— | — | 2,524 | — | (2,524 | ) | — | |||||||||||||||||
Net Income |
— | — | — | 15,285 | 262 | 15,547 | ||||||||||||||||||
Balance as of September 30, 2022 |
21,403,817 | $ | 214 | $ | 456,352 | $ | (30,811 | ) | $ | 7,408 | $ | 433,163 |
The accompanying notes are an integral part of the consolidated financial statements
NEWLAKE CAPITAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(In thousands, except share amounts)
Series A Preferred |
Common Stock |
Additional Paid-in |
Accumulated |
Noncontrolling |
Total |
|||||||||||||||||||||||
Stock |
Shares |
Par |
Capital | Deficit | Interest | Equity | ||||||||||||||||||||||
Balance as of December 31, 2020 |
$ | 61 | 7,758,145 | $ | 78 | $ | 151,778 | $ | (17,154 | ) | $ | 6,266 | $ | 141,029 | ||||||||||||||
Net Proceeds from the Issuance of Common Stock |
— | 5,777,882 | 58 | 133,027 | — | — | 133,085 | |||||||||||||||||||||
Issuance of Common Stock for Merger Transaction |
— | 7,699,887 | 77 | 162,776 | — | — | 162,853 | |||||||||||||||||||||
Issuance of Warrants for Merger Transaction |
— | — | — | 4,820 | — | — | 4,820 | |||||||||||||||||||||
Redemption of Series A Preferred Stock |
(61 | ) | — | — | — | (64 | ) | — | (125 | ) | ||||||||||||||||||
Issuance of 88,200 OP Units for Property Acquisition |
— | — | — | — | — | 2,205 | 2,205 | |||||||||||||||||||||
Stock-Based Compensation |
— | — | — | 1,820 | — | — | 1,820 | |||||||||||||||||||||
Dividends to Preferred Stock |
— | — | — | — | (4 | ) | — | (4 | ) | |||||||||||||||||||
Dividends to Common Stock |
— | — | — | — | (11,002 | ) | — | (11,002 | ) | |||||||||||||||||||
Dividend Equivalents to Restricted Stock Units |
— | — | — | — | — | (90 | ) | (90 | ) | |||||||||||||||||||
Distributions to OP Unit Holders |
— | — | — | — | — | (281 | ) | (281 | ) | |||||||||||||||||||
Adjustment for Noncontrolling Interest Ownership in Operating Partnership |
— | — | — | (3,399 | ) | — | 3,399 | — | ||||||||||||||||||||
Net Income |
— | — | — | — | 6,897 | 236 | 7,133 | |||||||||||||||||||||
Balance as of September 30, 2021 |
$ | — | 21,235,914 | $ | 213 | $ | 450,822 | $ | (21,327 | ) | $ | 11,735 | $ | 441,443 |
The accompanying notes are an integral part of the consolidated financial statements
NEWLAKE CAPITAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(In thousands, except share amounts)
Common Stock |
Additional Paid-in |
Accumulated |
Noncontrolling |
Total |
||||||||||||||||||||
Shares |
Par |
Capital | Deficit | Interest | Equity | |||||||||||||||||||
Balance as of June 30, 2022 |
21,318,637 | $ | 213 | $ | 456,083 | $ | (29,395 | ) | $ | 7,422 | $ | 434,323 | ||||||||||||
Conversion of Vested RSUs to Common Stock |
85,180 | 1 | (1 | ) | — | — | — | |||||||||||||||||
Stock-Based Compensation |
— | — | 280 | — | — | 280 | ||||||||||||||||||
Dividends to Common Stock |
— | — | — | (7,919 | ) | — | (7,919 | ) | ||||||||||||||||
Dividend Equivalents to Restricted Stock Units |
— | — | — | (7 | ) | — | (7 | ) | ||||||||||||||||
Distributions to OP Unit Holders |
— | — | — | — | (137 | ) | (137 | ) | ||||||||||||||||
Adjustment for Noncontrolling Interest Ownership in Operating Partnership |
— | — | (10 | ) | — | 10 | — | |||||||||||||||||
Net Income |
— | — | — | 6,510 | 113 | 6,623 | ||||||||||||||||||
Balance as of September 30, 2022 |
21,403,817 | $ | 214 | $ | 456,352 | $ | (30,811 | ) | $ | 7,408 | $ | 433,163 |
Series A Preferred |
Common Stock |
Additional Paid-in |
Accumulated |
Noncontrolling |
Total |
|||||||||||||||||||||||
Stock |
Shares |
Par |
Capital | Deficit | Interest | Equity | ||||||||||||||||||||||
Balance as of June 30, 2021 |
$ | — | 17,329,964 | $ | 173 | $ | 359,514 | $ | (19,455 | ) | $ | 8,877 | $ | 349,109 | ||||||||||||||
Net Proceeds from the Issuance of Common Stock |
— | 3,905,950 | 40 | 93,467 | — | — | 93,507 | |||||||||||||||||||||
Stock-Based Compensation |
— | — | — | 816 | — | — | 816 | |||||||||||||||||||||
Dividends to Common Stock |
— | — | — | — | (4,628 | ) | — | (4,628 | ) | |||||||||||||||||||
Dividend Equivalents to Restricted Stock Units |
— | — | — | — | 59 | (90 | ) | (31 | ) | |||||||||||||||||||
Distributions to OP Unit Holders |
— | — | — | — | — | (109 | ) | (109 | ) | |||||||||||||||||||
Adjustment for Noncontrolling Interest Ownership in Operating Partnership |
— | — | — | (2,975 | ) | — | 2,975 | — | ||||||||||||||||||||
Net Income |
— | — | — | — | 2,697 | 82 | 2,779 | |||||||||||||||||||||
Balance as of September 30, 2021 |
$ | — | 21,235,914 | $ | 213 | $ | 450,822 | $ | (21,327 | ) | $ | 11,735 | $ | 441,443 |
NEWLAKE CAPITAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months Ended |
||||||||
September 30, 2022 |
September 30, 2021 |
|||||||
Cash Flows from Operating Activities: |
||||||||
Net Income |
$ | 15,547 | $ | 7,133 | ||||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
||||||||
Stock-Based Compensation |
1,201 | 1,820 | ||||||
Loss on Sale of Real Estate |
60 | — | ||||||
Depreciation and Amortization Expense |
9,113 | 5,601 | ||||||
Amortization of debt issuance costs |
72 | — | ||||||
Non-cash financing expense |
20 | — | ||||||
Changes in Assets and Liabilities |
||||||||
Prepaid Expenses and Other Assets |
(1,618 | ) | 232 | |||||
Accounts Payable and Accrued Expenses |
577 | (1,814 | ) | |||||
Security Deposits Payable |
1,263 | 2,179 | ||||||
Interest Reserve |
(2,144 | ) | — | |||||
Rent Received in Advance |
(567 | ) | 623 | |||||
Net Cash Provided by Operating Activities |
23,524 | 15,774 | ||||||
Cash Flows from Investing Activities: |
||||||||
Cash Acquired from Merger Transaction |
— | 64,355 | ||||||
Payment of Merger Related Transaction Costs |
— | (2,144 | ) | |||||
Reimbursements of Tenant Improvements |
(43,518 | ) | (8,449 | ) | ||||
Investment in Loans Receivable |
(5,000 | ) | — | |||||
Acquisition of Real Estate |
(35,419 | ) | (44,650 | ) | ||||
Disposition of Real Estate |
761 | — | ||||||
Net Cash (Used in) Provided by Investing Activities |
(83,176 | ) | 9,112 | |||||
Cash Flows from Financing Activities: |
||||||||
Proceeds from Issuance of Common Stock, Net of Offering Costs |
— | 133,085 | ||||||
Preferred Stock Dividends Paid |
— | (4 | ) | |||||
Common Stock Dividends Paid |
(21,074 | ) | (9,298 | ) | ||||
Restricted Stock Units Dividend Equivalents Paid |
(147 | ) | (84 | ) | ||||
Distributions to OP Unit Holders |
(401 | ) | (266 | ) | ||||
Redemption of Preferred Stock |
— | (125 | ) | |||||
Borrowings from revolving line of credit |
1,000 | — | ||||||
Payment of Loan Payable |
(1,800 | ) | — | |||||
Net Cash (Used in) Provided by Financing Activities |
(22,422 | ) | 123,308 | |||||
Net Increase (Decrease) in Cash and Cash Equivalents |
(82,074 | ) | 148,194 | |||||
Cash and Cash Equivalents - Beginning of Period |
127,097 | 19,617 | ||||||
Cash and Cash Equivalents - End of Period |
$ | 45,023 | $ | 167,811 | ||||
Supplemental Disclosure of Non-Cash Investing and Financing Activities: |
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Accrual for Dividends and Distributions Payable |
$ | 8,064 | $ | 268 | ||||
Real Estate Assets, In-Place Leases, Other Assets and Liabilities Acquired through the Issuance of Common Stock and Warrants |
$ | — | $ | 103,319 | ||||
Issuance of 88,200 OP Units for Property Acquisition |
$ | — | $ | 2,205 | ||||
Operating lease liability for obtaining right of use asset |
$ | 277 | $ | — | ||||
Conversion of Mortgage Loan Receivable to Real Estate |
$ | 30,000 | $ | — |
The accompanying notes are an integral part of the consolidated financial statements
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 1 - Organization
NewLake Capital Partners, Inc. (the “Company”), a Maryland corporation, was formed on April 9, 2019, under the Maryland General Corporation Law, as GreenAcreage Real Estate Corp. (“GARE”). The Company is an internally managed Real Estate Investment Trust (“REIT”) focused on providing long-term, single-tenant, triple-net sale-leaseback and build-to-suit transactions for the cannabis industry. The Company’s year-end is December 31. On March 17, 2021, GARE completed a merger (the “Merger”) with another company (the “Target”) that owned a portfolio of cultivation facilities and dispensaries utilized in the cannabis industry, and renamed itself “NewLake Capital Partners, Inc.” The Merger was completed through the issuance of 7,699,887 shares of common stock valued at $21.15 per share and warrants to purchase up to 602,392 shares of the Company’s common stock valued at approximately $4.8 million. The Company also incurred approximately $2.1 million in merger-related transaction costs. The consideration issued was based upon the relative value of the two entities, such that the shareholders of the Company and the Target, immediately prior to the Merger, owned 56.79% and 43.21%, respectively, of the outstanding post-merger common stock of the Company. The Company issued warrants to Target shareholders based on the pre-merger options outstanding, using the equivalent proportion described in the previous sentence. Upon completion of the Merger, the Company owned 24 properties across nine states. The Merger was treated as an asset acquisition, and the Company was treated as the accounting acquirer. In connection with the Merger, the Company also entered into various arrangements and agreements with certain of our significant stockholders, including director nomination rights.
The Company conducts its business through its subsidiary, NLCP Operating Partnership LP, a Delaware limited partnership (the “Operating Partnership” or “OP”). The Company holds an equity interest in the Operating Partnership and is the sole general partner. Subsequent to the Merger, the name of the Operating Partnership was changed from GreenAcreage Operating Partnership LP to NLCP Operating Partnership LP.
On August 13, 2021, the Company completed its initial public offering ("IPO") of 3,905,950 shares of common stock, with a par value $0.01 per share. The public offering price was $26.00 per share for gross proceeds of approximately $102.0 million, before deducting placement agent fees and offering expenses. Net proceeds were approximately $93.5 million. The Company's common stock trades on the OTCQX® Best Market operated by the OTC Markets Group, Inc., under the symbol “NLCP”.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company, the Operating Partnership, as well as wholly owned subsidiaries of the Operating Partnership’s and variable interest entities ("VIEs") in which the Company is considered the primary beneficiary. The accompanying unaudited financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. In managements opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been made. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the operating results for the full year or any future period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and filed with the Securities and Exchange Commission (“SEC”) on March 18, 2022.
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies (continued)
Substantially all of the Company's asset are held by and all of its' operations are conducted through the Operating Partnership. The Company is the sole managing general partner of the Operating Partnership. Noncontrolling investors in the Operating Partnership are included in Noncontrolling Interest in the Company's consolidated financial statements. Refer to Note 7 for details. The Operating Partnership is a variable interest entity (“VIE”) because the holders of limited partnership interests do not have substantive kick-out rights or participating rights. Furthermore, the Company is the primary beneficiary of the Operating Partnership because it has the obligation to absorb losses and the right to receive benefits from the Operating Partnership and the exclusive power to direct the activities of the Operating Partnership. As of September 30, 2022 and December 31, 2021, the assets and liabilities of the Company and the Operating Partnership are substantially the same, as the Company does not have any significant assets other than its investment in the Operating Partnership.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management will adjust such estimates when facts and circumstances dictate. Such estimates include, but are not limited to, useful lives for depreciation of property, the fair value of property and in-place lease intangibles acquired, and the fair value of stock-based compensation. Actual results could differ from those estimates.
Reclassification
Certain prior year balances have been reclassified to conform to our current year presentation.
Significant Accounting Policies
There have been no significant changes to our accounting polices included in Note 2 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses, which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, which among other updates, clarifies that receivables arising from operating leases are not within the scope of this guidance and should be evaluated in accordance with Topic 842. This standard will be effective for the Company as of January 1, 2023. The Company does not anticipate this standard will have a material impact on our consolidated financial statements due to the limited nature of financial assets held by the Company subject to ASU 2016-13.
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 3 - Real Estate
As of September 30, 2022, the Company owned 31 properties located in 12 states. The following table presents the Company's real estate portfolio as of September 30, 2022 (dollars in thousands):
Tenant |
Market |
Site Type |
Land |
Building and Improvements |
Total Real Estate |
Accumulated Depreciation |
Net Real Estate |
|||||||||||||||||
Acreage |
Connecticut |
Dispensary |
$ | 395 | $ | 534 | $ | 929 | $ | (53 | ) | $ | 876 | |||||||||||
Acreage |
Massachusetts |
Cultivation |
481 | 9,310 | 9,791 | (816 | ) | 8,975 | ||||||||||||||||
Acreage |
Pennsylvania |
Cultivation |
952 | 9,209 | 10,161 | (778 | ) | 9,383 | ||||||||||||||||
Ayr Wellness, Inc. |
Nevada |
Cultivation |
1,002 | 12,577 | 13,579 | (109 | ) | 13,470 | ||||||||||||||||
Ayr Wellness, Inc. |
Pennsylvania |
Cultivation |
2,964 | 11,565 | 14,529 | (116 | ) | 14,413 | ||||||||||||||||
Bloom Medicinal |
Missouri |
Cultivation |
598 | 11,167 | 11,765 | (50 | ) | 11,715 | ||||||||||||||||
Calypso Enterprises |
Pennsylvania |
Cultivation |
1,486 | 28,514 | 30,000 | (167 | ) | 29,833 | ||||||||||||||||
Columbia Care |
California |
Dispensary |
1,082 | 2,692 | 3,774 | (133 | ) | 3,641 | ||||||||||||||||
Columbia Care |
Illinois |
Dispensary |
162 | 1,053 | 1,215 | (50 | ) | 1,165 | ||||||||||||||||
Columbia Care |
Illinois |
Cultivation |
801 | 10,560 | 11,361 | (508 | ) | 10,853 | ||||||||||||||||
Columbia Care |
Massachusetts |
Dispensary |
108 | 2,212 | 2,320 | (118 | ) | 2,202 | ||||||||||||||||
Columbia Care |
Massachusetts |
Cultivation |
1,136 | 12,690 | 13,826 | (809 | ) | 13,017 | ||||||||||||||||
Cresco Labs |
Illinois |
Cultivation |
276 | 50,456 | 50,732 | (3,921 | ) | 46,811 | ||||||||||||||||
Curaleaf |
Connecticut |
Dispensary |
184 | 2,748 | 2,932 | (141 | ) | 2,791 | ||||||||||||||||
Curaleaf |
Florida |
Cultivation |
388 | 75,595 | 75,983 | (3,626 | ) | 72,357 | ||||||||||||||||
Curaleaf |
Illinois |
Dispensary |
69 | 525 | 594 | (28 | ) | 566 | ||||||||||||||||
Curaleaf |
Illinois |
Dispensary |
65 | 959 | 1,024 | (53 | ) | 971 | ||||||||||||||||
Curaleaf |
Illinois |
Dispensary |
606 | 1,128 | 1,734 | (61 | ) | 1,673 | ||||||||||||||||
Curaleaf |
Illinois |
Dispensary |
281 | 3,072 | 3,353 | (161 | ) | 3,192 | ||||||||||||||||
Curaleaf |
North Dakota |
Dispensary |
779 | 1,395 | 2,174 | (80 | ) | 2,094 | ||||||||||||||||
Curaleaf |
Ohio |
Dispensary |
574 | 2,788 | 3,362 | (170 | ) | 3,192 | ||||||||||||||||
Curaleaf |
Pennsylvania |
Dispensary |
877 | 1,041 | 1,918 | (71 | ) | 1,847 | ||||||||||||||||
Curaleaf |
Pennsylvania |
Dispensary |
216 | 2,011 | 2,227 | (105 | ) | 2,122 | ||||||||||||||||
Greenlight |
Arkansas |
Dispensary |
238 | 1,919 | 2,157 | (101 | ) | 2,056 | ||||||||||||||||
Mint |
Arizona |
Cultivation |
2,400 | 9,032 | 11,432 | — | 11,432 | |||||||||||||||||
Mint |
Massachusetts |
Cultivation |
380 | 1,569 | 1,949 | — | 1,949 | |||||||||||||||||
Organic Remedies |
Missouri |
Cultivation |
204 | 20,615 | 20,819 | (825 | ) | 19,994 | ||||||||||||||||
PharmaCann |
Massachusetts |
Dispensary |
411 | 1,701 | 2,112 | (158 | ) | 1,954 | ||||||||||||||||
PharmaCann |
Pennsylvania |
Dispensary |
44 | 1,271 | 1,315 | (61 | ) | 1,254 | ||||||||||||||||
Revolutionary Clinics |
Massachusetts |
Cultivation |
926 | 41,934 | 42,860 | (1,559 | ) | 41,301 | ||||||||||||||||
Trulieve |
Pennsylvania |
Cultivation |
1,061 | 43,209 | 44,270 | (1,929 | ) | 42,341 | ||||||||||||||||
Total Real Estate |
$ | 21,146 | $ | 375,051 | $ | 396,197 | $ | (16,757 | ) | $ | 379,440 |
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 3 – Real Estate (continued)
(1) GL Partners, Inc. (Greenlight) took over as tenant however Curaleaf remains the guarantor subject to certain conditions in the lease agreement.
Real Estate Acquisitions
During the nine months ended September 30, 2022, the Company invested approximately $65.4 million to acquire four cultivation facilities. The following table presents the real estate acquisitions for the nine months ended September 30, 2022 (in thousands):
Tenant |
Market |
Site Type |
Closing Date |
Real Estate Acquisitions |
||||
Bloom Medicinal |
Missouri |
Cultivation |
April 1, 2022 |
$ | 7,301 | (1) | ||
Ayr Wellness, Inc. |
Pennsylvania |
Cultivation |
June 30, 2022 |
14,529 | ||||
Ayr Wellness, Inc. |
Nevada |
Cultivation |
June 30, 2022 |
13,579 | ||||
Calypso Enterprises |
Pennsylvania |
Cultivation |
August 5, 2022 |
30,000 | (2) | |||
Total | $ | 65,409 |
(1) Includes $5.0 million of TI funded at closing of the property.
(2) The Company entered into a $30.0 million mortgage loan on October 29, 2021, which converted to a 20-year sale-leaseback on August 5, 2022.
Tenant Improvements Funded
During the nine months ended September 30, 2022, the Company funded approximately $43.5 million of tenant improvements. The following table presents the tenant improvements funded for the nine months ended September 30, 2022 (in thousands):
Tenant |
Market |
Site Type |
Closing Date |
TI Funded |
Unfunded Commitments |
||||||||
Curaleaf |
Florida |
Cultivation |
August 4, 2020 |
$ | 20,983 | (1) | $ | — | |||||
Mint |
Massachusetts |
Cultivation |
April 1, 2021 |
349 | — | (4) | |||||||
Mint |
Arizona |
Cultivation |
June 24, 2021 |
5,906 | (2) | 3,063 | |||||||
PharmaCann |
Massachusetts |
Dispensary |
March 17, 2021 |
25 | — | ||||||||
Trulieve |
Pennsylvania |
Cultivation |
March 17, 2021 |
7,046 | (3) | — | |||||||
Organic Remedies |
Missouri |
Cultivation |
December 20, 2021 |
4,745 | 282 | ||||||||
Bloom Medicinal |
Missouri |
Cultivation |
April 1, 2022 |
4,464 | 752 | (5) | |||||||
Ayr Wellness, Inc. |
Pennsylvania |
Cultivation |
June 30, 2022 |
— | 750 | ||||||||
$ | 43,518 | $ | 4,847 |
(1) On June 16, 2022, the Company funded the expansion of an existing property.
(2) The tenant has been paying rent on the remaining commitment since July 2022 in accordance with the lease agreement.
(3) The tenant had been paying rent on the TI since December 2021 in accordance with the lease agreement. As of May 2022, the TI had been fully funded.
(4) Does not include approximately $2.7 million of commitments that the Company was released from its' commitment to fund subsequent to September 30, 2022.
(5) The $0.8 million of unfunded commitments does not include a $16.5 million option but not obligation to acquire an adjacent property from an existing tenant.
Disposal of Real Estate
On March 21, 2022, the Company sold one of our PharmaCann Massachusetts properties for approximately $0.8 million. The Company recognized a loss on sale of the property of $60 thousand. The Company continues to collect the rent that would have been received from the PharmaCann Massachusetts property through increased lease payments from each of the remaining properties operated by PharmaCann in our portfolio.
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 3 – Real Estate (continued)
Construction in Progress
Construction in progress was $10.6 million and $13.1 million on September 30, 2022 and December 31, 2021, respectively, and is included in "Buildings and Improvements" in the accompanying consolidated balance sheet.
Depreciation and Amortization
Depreciation expense for the three months ended September 30, 2022 and 2021, was $3.1 million and $2.0 million, respectively and for the nine months ended September 30, 2022 and 2021 it was $7.6 million and $4.5 million, respectively.
Amortization of the Company’s acquired in-place lease intangible assets for the three months ended September 30, 2022 and 2021 was approximately $0.5 million and $0.5 million, respectively and was approximately $1.5 million and $1.1 million, respectively, for the nine months ended September 30, 2022 and 2021. The acquired in-place lease intangible assets have a weighted average remaining amortization period of 11.4 years.
Depreciation and Amortization
The following table presents the future amortization of the Company’s acquired in-place leases as of September 30, 2022 (in thousands):
Year |
Expense |
|||
2022 (three months ending December 31, 2022) |
$ | 503 | ||
2023 |
2,013 | |||
2024 |
2,013 | |||
2025 |
2,013 | |||
2026 |
2,013 | |||
Thereafter |
13,937 | |||
Total |
$ | 22,492 |
The following table presents the future contractual minimum rent under the Company’s operating leases as of September 30, 2022 (in thousands):
Year |
Rent |
|||
2022 (three months ending December 31, 2022) |
$ | 12,014 | ||
2023 |
48,858 | |||
2024 |
50,153 | |||
2025 |
51,447 | |||
2026 |
52,774 | |||
Thereafter |
610,900 | |||
Total |
$ | 826,146 |
Concentration of Credit Risk
The ability of any of our tenants to honor the terms of its lease are dependent upon the economic, regulatory, competitive, natural and social factors affecting the community in which that tenant operates.
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 3 – Real Estate (continued)
The following table presents the tenants in our portfolio that represented the largest percentage of our total rental income for each of the periods presented:
For the Three Months Ended September 30, |
||||||||||||||||
2022 |
2021 |
|||||||||||||||
Number of Leases |
Percentage of Rental Income |
Number of Leases |
Percentage of Rental Income |
|||||||||||||
Curaleaf |
10 | 24 |
% |
11 | 29 |
% |
||||||||||
Cresco Labs |
1 | 14 |
% |
1 | 19 |
% |
||||||||||
Revolutionary Clinics |
1 | 11 |
% |
1 | 16 |
% |
||||||||||
Trulieve |
1 | 11 |
% |
1 | 12 |
% |
||||||||||
Columbia Care |
5 | 9 |
% |
5 | 13 |
% |
||||||||||
Acreage |
3 | 6 |
% |
3 | 9 |
% |
||||||||||
Organic Remedies |
1 | 5 |
% |
N/A | N/A | |||||||||||
AYR |
2 | 6 |
% |
N/A | N/A | |||||||||||
Calypso |
1 | 5 |
% |
N/A | N/A |
For the Nine Months Ended September 30, |
||||||||||||||||
2022 |
2021 |
|||||||||||||||
Number of Leases |
Percentage of Rental Income |
Number of Leases |
Percentage of Rental Income |
|||||||||||||
Curaleaf |
10 | 24 |
% |
11 | 34 |
% |
||||||||||
Cresco Labs |
1 | 16 |
% |
1 | 24 |
% |
||||||||||
Revolutionary Clinics |
1 | 13 |
% |
1 | 7 |
% |
||||||||||
Trulieve |
1 | 13 |
% |
1 | 10 |
% |
||||||||||
Columbia Care |
5 | 10 |
% |
5 | 11 |
% |
||||||||||
Acreage |
3 | 7 |
% |
3 | 11 |
% |
||||||||||
Organic Remedies |
1 | 6 |
% |
N/A | N/A |
Impairment
The Company reviewed tenant activities and changes in the business condition of all of its properties and did not identify the existence of any triggering events or impairment indicators. Accordingly, as of September 30, 2022 and December 31, 2021 no impairment losses were recognized.
Note 4 – Loans Receivable
Mortgage Loan
The Company funded a $30 million nine-month mortgage loan to Hero Diversified Associates, Inc. (“HDAI”) on October 29, 2021. The Company determined that HDAI met the definition of a VIE because the equity investors did not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company consolidates a VIE in accordance with Accounting Standards Codification (“ASC”) 810, Consolidation, when it is the primary beneficiary of such VIE. Based on a number of factors, including that the Company does not have the power to direct the VIE’s activities that most significantly impact the VIE’s economic performance, the Company determined that it did not have a controlling financial interest and was not the primary beneficiary. The Company is required to reconsider its evaluation of whether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE.
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 4 – Loans Receivable (continued)
On August 5, 2022 the mortgage loan converted to a 20 year sale-leaseback and the Company recorded land, building and improvements which is included in "Total Real Estate" on the Consolidated Balance Sheets as of September 30, 2022.
Loan Receivable
The Company funded a $5.0 million unsecured loan to Bloom Medicinals on June 10, 2022. The loan initially will bear interest at a rate of 10.25% and is structured to increase by 0.225% on each anniversary of the disbursement date. The loan can be prepaid at any time without penalty and matures on June 30, 2026. The loan is cross defaulted with their lease agreement with the Company. As of September 30, 2022, the aggregate principal amount outstanding on the unsecured loan receivable was $5.0 million.
Note 5 – Financings
Seller Financing
In connection with the purchase and leaseback of a cultivation facility in Chaffee, Missouri on December 20, 2021, the Company entered into a $3.8 million loan payable to the seller, which is an independent third party from the tenant. The loan bears interest at a rate of 4.0% per annum. Principal on the loan is payable in annual installments of which $1.8 million was paid in January 2022. The remaining principal is payable in annual installments of $1.0 million in each of January 2023 and 2024. The loan's outstanding balance as of September 30, 2022 was $2.0 million and the remaining unamortized discount was $20.3 thousand.
Revolving Credit Facility
On May 6, 2022, the Company's Operating Partnership entered into a loan and security agreement (the “Loan and Security Agreement”) with a commercial federally regulated bank, as a lender and as agent for lenders that become party thereto from time to time (the “Agent”). The Loan and Security Agreement matures on May 6, 2027. The Loan and Security Agreement provides, subject to the Accordion Feature described below, $30.0 million in aggregate commitments for secured revolving loans (“Revolving Credit Facility”), the availability of which is based on a borrowing base consisting of fee simple owned real properties that satisfy eligibility criteria specified in the Loan and Security Agreement and the lease income thereunder which are owned by certain subsidiaries of the Operating Partnership. On July 29, 2022, the Operating Partnership, entered into an amendment to the Revolving Credit Facility, amending the Loan and Security Agreement, to increase the aggregate commitment under the Revolving Credit Facility from $30.0 million to $90.0 million and added two additional lenders.The Loan and Security Agreement also allows the Company, subject to certain conditions, to request additional revolving incremental loan commitments such that the Revolving Credit Facility may be increased to a total aggregate principal amount of up to $100.0 million. Borrowings under the Revolving Credit Facility may be voluntarily prepaid and re-borrowed, subject to certain fees. The Revolving Credit Facility bears a fixed rate of 5.65% for the first three years and thereafter a variable rate based upon the greater of (a) the Prime Rate quoted in the Wall Street Journal (Western Edition) (“Base Rate”) plus an applicable margin of 1% or (b) 4.75%. The facility is subject to certain liquidity and operating covenants and includes customary representations and warranties, affirmative and negative covenants and events of default. As of September 30, 2022, the Company is compliant with the covenants of the agreement.
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 5 – Financings (continued)
The outstanding borrowings under the Revolving Credit Facility was $1.0 million as September 30, 2022.
Note 6 - Related Party Transactions
Merger Agreement
In connection with the Merger, the Company entered into an investor rights agreement (the “Investor Rights Agreement”). The Investor Rights Agreement provides the stockholders party thereto with certain rights with respect to the nomination of members to our board of directors. Prior to the completion of our IPO, pursuant to the Investor Rights Agreement, HG Vora Capital Management, LLC (“HG Vora”) had the right to nominate four directors to our board of directors. Following the completion of our IPO, for so long as HG Vora owns (i) at least 9% of our issued and outstanding common stock for 60 consecutive days, HG Vora may nominate two of the members of our board of directors, and (ii) at least 5% of our issued and outstanding common stock for 60 consecutive days, HG Vora may nominate one member of our board of directors. If HG Vora owns less than 5% of our issued and outstanding common stock for 60 consecutive days, then HG Vora may not nominate any members of our board of directors pursuant to the Investor Rights Agreement.
Prior to the completion of our IPO, NLCP Holdings, LLC had the right to designate three directors to our board of directors. Subsequent to our IPO, NLCP Holdings, LLC no longer has these rights.
Prior to the completion of our IPO, West Investment Holdings, LLC, West CRT Heavy, LLC, Gary and Mary West Foundation, Gary and Mary West Health Endowment, Inc., Gary and Mary West 2012 Gift Trust and WFI Co-Investments acting unanimously, collectively referred to as the “West Stockholders,” did not have a director nomination right. Following the completion of our IPO, the West Stockholders may nominate one member of our board of directors for so long as the West Stockholders own in the aggregate at least 5% of the issued and outstanding shares of our common stock. If the West Stockholders own in the aggregate less than 5% of our issued and outstanding common stock for 60 consecutive days, then the West Stockholders may not nominate any members of our board of directors pursuant to the Investor Rights Agreement.
Prior to the completion of our IPO, NL Ventures, LLC (“Pangea”) did not have a director nomination right. Following the completion of our IPO, Pangea may nominate one member of our board of directors for so long as Pangea owns at least 4% of our issued and outstanding common stock for 60 consecutive days. If Pangea owns less than 4% of our issued and outstanding common stock for 60 consecutive days, then Pangea may not nominate any members of our board of directors pursuant to the Investor Rights Agreement. The Company made payments to Pangea for reimbursed expenses and services of $0 and $71,472 during the nine months ended September 30, 2022 and 2021, respectively.
Separation and Retirement of Executive Officers
In connection with the separation agreements of the former chief financial officer in June 2022 and the former chief executive officer, in July 2022, the Company incurred one-time severance costs of approximately $1.7 million. Such agreements were contemplated as part of the succession plan at the time of the merger in March 2021.
Note 7 - Noncontrolling Interests
Noncontrolling interests represent limited partnership interest in the Operating Partnership not held by the Company. Noncontrolling interests in the Operating Partnership are shown in the Consolidated Statements of Changes in Equity.
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 7 - Noncontrolling Interests (continued)
The following table presents the activity for the Company’s noncontrolling interests issued by the Operating Partnership for the nine months ended September 30,:
2022 |
2021 |
|||||||||||||||
OP Units |
Noncontrolling |
OP Units |
Noncontrolling |
|||||||||||||
Balance at January 1, |
453,303 | 2.1 | % | 365,103 | 4.5 |
% |
||||||||||
OP Units Issued |
— | 88,200 | ||||||||||||||
OP Units Converted |
(79,721 | ) | — | |||||||||||||
Balance at September 30, |
373,582 | 1.7 | % | 453,303 | 2.1 |
% |
Note 8 - Stock Based Compensation
Our board of directors adopted our 2021 Equity Incentive Plan (the “Plan”), to provide employees of the Company and its subsidiaries, certain consultants and advisors who perform services for the Company or its subsidiaries, and non-employee members of the board of directors of the Company with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, stock units, other stock-based awards, and cash awards to enable us to motivate, attract and retain the services of directors, officers and employees considered essential to the long term success of the Company. Under the terms of the Plan, the aggregate number of shares of awards will be no more than 2,275,727 shares. If and to the extent shares of awards granted under the Plan, expire or are canceled, forfeited, exchanged or surrendered without having been exercised, or if any stock awards, stock units or other stock-based awards are forfeited, terminated or otherwise not paid in full, the shares subject to such grants shall again be available for issuance or transfer under the Plan. The Plan has a term of ten years until August 12, 2031. As of September 30, 2022, there were approximately 2,148,441 shares available for issuance under the Plan.
Restricted Stock Units
During the nine months ended September 30, 2022, the Company granted 19,362 RSUs to certain directors of the Company. Total outstanding RSUs as of September 30, 2022 are 54,175. Of the 54,175 outstanding RSUs, 9,041 RSUs were not issued pursuant to a formal plan, were granted prior to the IPO, and became fully vested upon the IPO. 45,134 RSUs were granted pursuant to the Plan subsequent to the IPO. During the nine months ended September 30, 2022, 20,173 RSUs vested and 8,566 RSUs were forfeited. RSUs are subject to restrictions on transfer and may be subject to a risk of forfeiture if the award recipient ceases to be an employee or director of the Company prior to vesting of the award. Each RSU represents the right to receive one share of common stock upon vesting. Each RSU is also entitled to receive a dividend equivalent payment equal to the dividend paid on one share of common stock upon vesting. Unearned dividend equivalents on unvested RSUs as of September 30, 2022 and 2021 were $35,850 and $0, respectively.
The amortization of compensation costs for the awards of RSUs are included in "Stock-Based Compensation" in the accompanying consolidated statements of operations and amounted to approximately $0.8 million and $1.8 million for the nine months ended September 30, 2022 and 2021, respectively. Included in the $0.8 million of stock-based compensation for the nine months ended September 30, 2022, is approximately $0.2 million of accelerated expense related to the retirement and separation of certain officers. Amortization of compensation costs for the awards of RSUs amounted to $0.1 million and $0 million for the three months ended September 30, 2022 and 2021, respectively. The remaining unrecognized compensation cost of approximately $0.6 million for RSU awards is expected to be recognized over a weighted average amortization period of 0.8 years as of September 30, 2022.
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 8 - Stock Based Compensation (continued)
The following table sets forth our unvested restricted stock activity for the nine months ended September 30,:
2022 |
2021 |
|||||||||||||||
Number of RSUs |
Weighted Average Fair Value |
Number of RSUs |
Weighted Average Fair Value |
|||||||||||||
Balance at January 1, |
45,018 | $ | 27.49 | 47,403 | $ | 20.99 | ||||||||||
Granted |
19,362 | $ | 20.54 | 39,849 | $ | 21.15 | ||||||||||
Forfeited |
(8,566 | ) | $ | 27.49 | — | — | ||||||||||
Vested |
(20,173 | ) | $ | 27.49 | (87,252 | ) | $ | 21.06 | ||||||||
Balance at September 30, |
35,641 | $ | 23.71 | — | $ | — |
Performance Stock Units
During the nine months ended September 30, 2022, the Company did not grant any Performance Stock Units (“PSUs”) to officers or employees of the Company. Total outstanding PSUs as of September 30, 2022 and 2021 are 66,841 and 0, respectively. During the nine months ended September 30, 2022, 10,901 PSUs were forfeited. PSUs vest subject to the achievement of relative total shareholder return as measured against a peer group of companies and absolute compounded annual growth in stock price during each performance period. The actual number of shares of common stock issued will range from 0 to 133,682 depending upon performance. The performance periods are August 13, 2021 through December 31, 2023 and January 1, 2022 through December 31, 2024, and 18,858 and 47,983 PSUs are scheduled to vest at the end of each performance period, respectively. PSUs are recorded at fair value which involved using a Monte Carlo simulation for the future stock prices of the Company and its corresponding peer group. A fair value of $24.15 and $24.00 were used for PSUs with performance periods ending December 31, 2023 and 2024, respectively.
Performance Stock Units (continued)
PSUs are subject to restrictions on transfer and may be subject to a risk of forfeiture if the award recipient ceases to be an employee of the Company prior to vesting of the award. Each PSU is entitled to receive a dividend equivalent payment equal to the dividend paid on the number of shares of common stock issued per PSU vesting. Unearned dividend equivalents on unvested PSUs as of September 30, 2022 and 2021 were $90,904 and $0, respectively. The amortization of compensation costs for the awards of PSUs are included in "Stock-Based Compensation" in the accompanying Consolidated Statements of Operations and amounted to $0.4 million and $0 for the nine months ended September 30, 2022 and 2021, respectively. Amortization of compensation costs for the awards of PSUs amounted to $0.2 million and $0 for the three months ended September 30, 2022 and 2021, respectively. The remaining unrecognized compensation cost of approximately $1.1 million for PSU awards is expected to be recognized over a weighted average amortization period of 1.0 years as of September 30, 2022.
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 8 - Stock Based Compensation (continued)
The following table sets forth our unvested performance stock activity for the nine months ended September 30,:
2022 |
||||||||
Number of Unvested Shares of |
Weighted Average Grant Value Per Share |
|||||||
Balance at January 1, |
77,742 | $ | 24.04 | |||||
Forfeit |
(10,901 | ) | $ | 24.03 | ||||
Balance at September 30, |
66,841 | $ | 24.04 |
Stock Options
Prior to the completion of the IPO, the Company issued 791,790 nonqualified stock options (the “Options”) to purchase shares of the Company’s common stock, subject to the terms and conditions of the applicable Option Grant Agreements, with an exercise price per share of common stock equal to $24.00 and in such amounts as set forth in the Option Grant Agreements. The Options vested on August 31, 2020. The Options are exercisable upon the earliest of (i) the second anniversary of the Grant Date; (ii) termination of the grantee’s employment or service by the Company other than for cause, or by the grantee for “good reason”, the grantee’s death or disability or (iii) a change in control, as defined. As of September 30, 2022, 615,838 of the 791,790 Option Grants issued to the Company’s former employees and a director are exercisable. The options expire on July 15, 2027.
The following table summarizes stock option activity for the nine months September 30,:
2022 |
2021 |
|||||||||||||||
Number of |
Weighted Average Price |
Number of |
Weighted Average Price |
|||||||||||||
Non-Exercisable at January 1, |
175,952 | $ | 24.00 | 263,928 | $ | 24.00 | ||||||||||
Granted |
— | — | — | — | ||||||||||||
Exercisable |
— | — | (87,976 | ) | — | |||||||||||
Non-Exercisable at September 30, |
175,952 | $ | 24.00 | 175,952 | $ | 24.00 |
Note 9 - Warrants
On March 17, 2021, in connection with the Merger, the Company entered into a warrant agreement which granted the right to purchase 602,392 shares of common stock of the Company at a purchase price of $24.00 per share. Warrants are immediately exercisable and expire on July 15, 2027.
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 9 - Warrants (continued)
The following table summarizes warrant activity for the nine months ended September 30,:
2022 |
2021 |
|||||||||||||||
Number of |
Weighted Price |
Number of Warrants(1)
|
Weighted Price |
|||||||||||||
Exercisable at January 1, |
602,392 | $ | 24.00 | — | $ | 24.00 | ||||||||||
Granted |
— | — | 602,392 | — | ||||||||||||
Exercised |
— | — | — | — | ||||||||||||
Exercisable at September 30, |
602,392 | $ | 24.00 | 602,392 | $ | 24.00 |
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 10 - Earnings Per Share
The following table presents the computation of basic and diluted earnings per share (in thousands, except share data) :
For the Three Months Ended |
For the Nine Months Ended |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Numerator: |
||||||||||||||||
Net Income Attributable to Common Stockholders and Participating securities |
$ | 6,510 | $ | 2,697 | $ | 15,285 | $ | 6,893 | ||||||||
Add: Preferred Stock Dividends |
— | — | — | 4 | ||||||||||||
Add: Net Income Attributable to Noncontrolling Interest |
113 | 82 | 262 | 236 | ||||||||||||
Dilutive Net Income Attributable to Common Stockholders & Participating Securities |
$ | 6,623 | $ | 2,779 | $ | 15,547 | $ | 7,133 | ||||||||
Denominator: |
||||||||||||||||
Weighted Average Shares of Common Stock & Participating Securities Outstanding - Basic |
21,428,905 | 19,410,307 | 21,417,149 | 15,588,544 | ||||||||||||
Dilutive Effect of OP Units |
373,582 | — | 398,614 | — | ||||||||||||
Dilutive Effect of Options and Warrants |
— | 145,560 | — | 48,520 | ||||||||||||
Weighted Average Shares of Common Stock & Participating Securities Outstanding - Diluted |
21,802,487 | 19,555,867 | 21,815,763 | 15,637,064 | ||||||||||||
Earnings Per Share - Basic |
||||||||||||||||
Net Income Attributable to Common Stockholders & Participating Securities |
$ | 0.30 | $ | 0.14 | $ | 0.71 | $ | 0.44 | ||||||||
Earnings Per Share - Diluted |
||||||||||||||||
Net Income Attributable to Common Stockholders & Participating Securities |
$ | 0.30 | $ | 0.14 | $ | 0.71 | $ | 0.44 |
During the three and nine months ended September 30, 2022, the effect of including OP Units were included in our calculation of weighted average shares of common stock outstanding – diluted. The effect of unvested RSUs, outstanding stock options and outstanding warrants were excluded in our calculation of weighted average shares of common stock outstanding – diluted as their inclusion would have been anti-dilutive. During the three and nine months ended September 30, 2021, the effect of including outstanding stock options and outstanding warrants were included in our calculation of weighted average shares of common stock outstanding – diluted. The effect of unvested RSUs and OP Units were excluded in our calculation of weighted average shares of common stock outstanding – diluted as their inclusion would have been anti-dilutive.
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 11 - Stockholders' Equity
Preferred Stock
On April 6, 2021, the Company redeemed the 125 shares of Series A Preferred Stock outstanding. The shares were redeemed at a redemption price of $1,000 per share, plus accrued and unpaid dividends and an early redemption fee for a total payment of $137,416, in cash. As of September 30, 2022 there were no shares of Series A preferred stock outstanding.
On September 15, 2022, the Board of Directors approved all 125 authorized but unissued shares of the Company's 12.5% Series A Redeemable Cumulative Preferred Stock to be reclassified into shares of preferred stock of the Company, $0.01 par value per share without designation as to class or series.
Common Stock
As of September 30, 2022, the Company had 21,403,817 shares of common stock outstanding.
Activity for the three and nine months ended September 30, 2022:
During the three and nine months ended September 30, 2022, 0 and 79,721 OP Units were converted into shares of our common stock, respectively. Additionally, during the three and nine months ended September 30, 2022, 85,180 and 88,182 RSUs were converted into shares of our common stock, respectively.
Activity for the three and nine months ended September 30, 2021:
During January and February 2021, the Company issued 1,871,932 shares of common stock for $21.15 per share, resulting in net proceeds of approximately $39.6 million, after deducting offering expenses.
During March 2021, in connection with the Merger, the Company issued 7,699,887 shares of common stock and warrants to purchase up to 602,392 shares of the Company’s common stock.
On August 13, 2021, the Company closed on its initial public offering ("IPO") of 3,905,950 shares of common stock at a public offering price of $26.00 per share, resulting in net proceeds of approximately $93.5 million, after deducting offering expenses.
Dividends
The following tables present the cash dividends, dividend equivalents on vested RSUs and, in our capacity as general partner of the Operating Partnership, authorized distributions on our OP Units declared by the Company during the nine months ended September 30, 2022 and 2021:
Declaration Date |
Share/Unit |
Period Covered |
Distributions Paid Date |
Amount |
||||||
March 15, 2022 |
$ | 0.33 |
January 1, 2022 to March 31, 2022 |
April 14, 2022 |
$ | 7,200,400 | ||||
June 15, 2022 |
0.35 |
April 1, 2022 to June 30, 2022 |
July 15, 2022 |
7,640,568 | ||||||
September 15, 2022 |
0.37 |
July 1, 2022 to September 30, 2022 |
October 14, 2022 |
8,064,495 | ||||||
Total |
$ | 1.05 | $ | 22,905,463 |
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 11 - Stockholders' Equity (continued)
Dividends (continued)
Declaration Date |
Share/Unit |
Period Covered |
Distributions Paid Date |
Amount |
||||||
February 27, 2021 |
$ | 0.15 |
January 1, 2021 to March 16, 2021 |
March 22, 2021 |
$ | 1,518,070 | ||||
March 15, 2021 |
0.08 |
January 1, 2021 to March 16, 2021 |
March 29, 2021 |
809,665 | ||||||
June 16, 2021 |
0.24 |
March 17, 2021 to June 30, 2021 |
July 15, 2021 |
4,276,968 | ||||||
August 11, 2021 |
0.12 |
July 1, 2021 to August 12, 2021 |
August 12, 2021 |
2,149,253 | ||||||
September 15, 2021 |
0.12 |
August 13, 2021 to September 30, 2021 |
October 15, 2021 |
2,617,967 | ||||||
Total |
$ | 0.71 | $ | 11,371,923 |
The Company had accrued unearned dividend equivalents on unvested RSUs and unvested PSUs of $35,850 and $90,904 as of September 30, 2022. There were no accrued unearned dividend equivalents on unvested RSUs or unvested PSUs as of September 30, 2021.
Note 12 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standards describe three levels of inputs that may be used to measure fair value:
Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Includes other inputs that are directly or indirectly observable in the marketplace.
Level 3 – Unobservable inputs that are supported by little or no market activities, therefore requiring an entity to develop its own assumptions.
The carrying amounts of financial instruments such as cash and cash equivalents, accrued expenses and other liabilities approximate their fair values due to generally short-term nature and the market rates of interest of these instruments. The carrying amounts of the Company's loans receivable, loan payable and Revolving Credit Facility approximate their fair values due to the market interest rates of these instruments.
Note 13 - Commitments and Contingencies
As of September 30, 2022, the Company had aggregate unfunded commitments to invest $4.8 million to develop and improve our existing cultivation facilities in Arizona, Missouri, and Pennsylvania. This does not include the $2.7 million for a Massachusetts cultivation facility of which the Company was released of its obligation to fund subsequent to September 30, 2022. This also does not include the option to acquire an adjacent parcel of land and fund the construction of a cultivation facility of an existing tenant (subject to normal and customary closing conditions and regulatory approvals) for a cost of up to $16.5 million; however, there is no obligation of the Company at this time as there is no guarantee the transaction will close.
As of September 30, 2022, the Company is the lessee under one office lease for a term of four years, subject to annual escalations. The annual rent payments range from approximately $72 thousand in year one to $85 thousand in year four.
NEWLAKE CAPITAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 13 - Commitments and Contingencies (continued)
The Company owns a portfolio of properties that it leases to entities which cultivate, harvest, process and distribute cannabis. Cannabis is an illegal substance under the Controlled Substances Act. Although the operations of the Company’s tenants are legalized in the states and local jurisdictions in which they operate, the Company and its tenants are subject to certain risks and uncertainties associated with conducting operations subject to conflicting federal, state and local laws in an industry with a complex regulatory environment which is continuously evolving. These risks and uncertainties include the risk that the strict enforcement of federal laws regarding cannabis would likely result in the Company’s inability, and the inability of its tenants, to execute their respective business plans.
Note 14 - Subsequent Events
Stock Repurchase Program
On November 7, 2022, the Board of Directors of the Company authorized a stock repurchase program of its common stock up to $10 million through December 31, 2023. Purchases made pursuant to the stock repurchase program will be made in the open market, in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b-18 of the Securities and Exchange Act of 1934, as amended. The authorization of the stock repurchase program does not obligate the Company to acquire any particular amount of common stock. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The stock repurchase program may be suspended or discontinued by us at any time and without prior notice. The Company has not, as of the date hereof, repurchased any shares of common stock under the the stock repurchase program.
Acquisitions
On November 3, 2022, the Company purchased a $1.6 million dispensary in Ohio. The Company entered into a long-term, triple-net lease with an existing tenant, PharmaCann Inc., who is guaranteeing the lease.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
SPECIAL NOTE REGARDING FORWARD LOOKING INFORMATION
NewLake Capital Partners, Inc. ("the Company," "we," "our," "us,") makes statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In particular, statements pertaining to our capital resources, property performance, leasing rental rates, future dividends and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believe,” “continue,” “could,” “expect,” “may,” “will,” “should,” “would,” “seek,” “approximately,” “intend,” “plan,” “pro forma,” “estimates,” “forecast,” “project,” or “anticipate” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
• |
actions and initiatives of the U.S. or state governments and changes to government policies and the execution and impact of these actions, initiatives and policies, including the fact that cannabis remains illegal under federal law; |
• |
reduced liquidity of our common stock resulting from limited availability of clearing firms that will settle our securities offerings; |
• |
the impact of the COVID-19 pandemic, or future pandemics, on us, our business, our tenants, or the economy generally; |
• |
general economic conditions; |
• |
adverse economic or real estate developments, either nationally or in the markets in which our properties are located; |
• |
other factors affecting the real estate industry generally; |
• |
the competitive environment in which we operate; |
• |
the estimated growth in and evolving market dynamics of the regulated cannabis market; |
• |
the expected medical-use or adult-use cannabis legalization in certain states; |
• |
shifts in public opinion regarding regulated cannabis; |
• |
the additional risks that may be associated with certain of our tenants cultivating adult-use cannabis in our cultivation facilities; |
• |
the risks associated with the development of cultivation centers and dispensaries; |
• |
our ability to successfully identify opportunities in target markets; |
• |
the lack of tenant security deposits will impact our ability to recover rents should our tenants default under their respective lease agreement; |
• |
our status as an emerging growth company and a smaller reporting company; |
• |
our lack of operating history; |
• |
our tenants’ lack of operating history; |
• |
the concentration of our tenants in certain geographical areas; |
• |
our failure to generate sufficient cash flows to service any outstanding indebtedness; |
• |
defaults on, early terminations of or non-renewal of leases by tenants, including significant tenants; |
• |
our failure to acquire the properties in our identified pipeline successfully, on the anticipated timeline or at the anticipated costs; |
• |
our failure to properly assess employment growth or other trends in target markets and other markets in which we seek to invest; |
• |
lack or insufficient amounts of insurance; |
• |
bankruptcy or insolvency of a significant tenant or a substantial number of smaller tenants; |
• |
our access to certain financial resources, including banks and other financial institutions; |
• |
our failure to successfully operate acquired properties; |
• |
our ability to operate successfully as a public company; |
• |
our dependence on key personnel and ability to identify, hire and retain qualified personnel in the future; |
• |
conflicts of interests with our officers and/or directors stemming from their fiduciary duties to other entities, including our operating partnership; |
• |
our failure to obtain necessary outside financing on favorable terms or at all; |
• |
fluctuations in interest rates and increased operating costs; |
• |
the impact of inflation and the change in interest; |
• |
financial market fluctuations; |
• |
general volatility of the market price of our common stock; |
• |
changes in GAAP; |
• |
environmental uncertainties and risks related to adverse weather conditions and natural disasters; |
• |
our failure to maintain our qualification as a REIT for federal income tax purposes; and |
• |
changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs. |
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this report, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal year ended December 31, 2021 included in our most recent Annual Report on Form 10-K.
This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special Note Regarding Forward-Looking Information" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in our most recent annual report on Form 10-K and our subsequent Quarterly Reports on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
NewLake Capital Partners, Inc., ("the “Company,” "we," "our," "us,") is an internally managed REIT and a leading provider of real estate capital to state-licensed cannabis operators primarily through sale-leaseback transactions, third-party purchases and funding for build-to-suit projects. Our properties are leased to single tenants on a long-term, triple-net basis, which obligates the tenant to be responsible for the ongoing expenses of a property, in addition to its rent obligations.
We were incorporated in Maryland on April 9, 2019. We conduct our business through a traditional umbrella partnership REIT structure, in which properties are owned by an operating partnership, directly or through subsidiaries. We are the sole general partner of our operating partnership and currently own approximately 98% of the OP Units. We have elected to be taxed as a REIT for U.S. federal income tax purposes beginning with our short taxable year ended December 31, 2019 and intend to operate our business so as to continue to qualify as a REIT.
On March 17, 2021, we consummated a merger pursuant to which we combined our company with a separate company, or the Target, that owned a portfolio of cultivation facilities and dispensaries utilized in the cannabis industry, and renamed ourselves “NewLake Capital Partners, Inc.” The Merger was completed through the issuance of 7,699,887 shares of common stock valued at $21.15 per share and warrants to purchase up to 602,392 shares of the Company’s common stock valued at approximately $4.8 million. The Company also incurred approximately $2.1 million in merger-related transaction costs. The consideration issued was based upon the relative value of the two entities, such that the shareholders of the Company and the Target, immediately prior to the Merger, owned 56.79% and 43.21%, respectively, of the outstanding post-merger common stock of the Company. The Company issued warrants to Target shareholders based on the pre-merger options outstanding, using the equivalent proportion described in the previous sentence. Upon completion of the Merger, we owned 24 properties across nine states, and became one of the largest REITs in the cannabis industry. The Merger has been treated as an asset acquisition, and we were the accounting acquirer. In connection with the Merger, we also entered into various arrangements and agreements with certain of our significant stockholders, including director nomination rights.
On August 13, 2021, we completed our IPO of 3,905,950 shares of our common stock, par value $0.01 per share at a public offering price of $26.00 per share for gross proceeds of approximately $102.0 million, before deducting placement agent fees and offering expenses. Net proceeds were approximately $93.5 million. Our common stock trades on the OTCQX® Best Market operated by the OTC Markets Group, Inc., under the symbol “NLCP”.
As of September 30, 2022, we owned a geographically diversified portfolio consisting of 31 properties across 12 states with 13 tenants, comprised of 16 dispensaries and 15 cultivation facilities.
Emerging Growth Company
We have elected to be an emerging growth company, as defined in the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company, among other things:
• |
We are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act; |
• |
We are permitted to provide less extensive disclosure about our executive compensation arrangements; and |
• |
We are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements. |
We have elected to use an extended transition period for complying with new or revised accounting standards.
We may take advantage of the other provisions for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company upon the earliest to occur of: (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the exchange, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.
Factors Impacting Our Operating Results
Our results of operations are affected by a number of factors and depend on the rental revenue we receive from the properties that we own, the timing of lease expirations, general market conditions, the regulatory environment in the cannabis industry, and the competitive environment for real estate assets that support the cannabis industry.
Rental Revenues
We receive income from rental revenue generated by the properties that we own and expect to receive income from rental revenue generated by properties we expect to acquire in the future. The amount of rental revenue depends upon a number of factors, including:
• |
Our ability to enter into new leases at market value rents inclusive of annual rent increases; and |
• |
Rent collection, which primarily relates to each of our current and future tenant’s or guarantor’s financial condition and ability to make rent payments to us on time. |
The properties that we own consist of real estate assets that support the cannabis industry. Changes in current favorable state or local laws in the cannabis industry may impair our ability to renew or re-lease properties and the ability of our tenants to fulfill their lease obligations could materially and adversely affect our ability to maintain or increase rental rates for our properties.
Conditions in Our Markets
Positive or negative changes in regulatory, economic or other conditions and natural disasters in the markets where we acquire properties may affect our overall financial performance.
Inflation and Supply Chain Constraints
Recently, inflation has trended significantly higher than in prior periods, which may be negatively impacting some of our tenants. This inflation has impacted costs for labor and production inputs for regulated cannabis operators, in addition to increasing costs of construction for development and redevelopment projections. Ongoing labor shortages and global supply chain issues, driven in part by the COVID-19 pandemic, geopolitical issues and the war in Ukraine, also continue to adversely impact costs and timing for completion of these development and redevelopment projects, which are resulting in cost overruns and delays in commencing operations on certain of our tenants' projects.
Reduced Capital Availability for Tenants and the Company
Recently, financial markets have been volatile, reflecting heightened geopolitical risks and material tightening of financial conditions since the U.S. Federal Reserve began increasing interest rates in spring of 2022 and continued uncertainty regarding monetary policy.
Competitive Environment
We face competition from a diverse mix of market participants, including but not limited to, other companies with similar business models, independent investors, hedge funds and other real estate investors, mortgage REITs, hard money lenders, as well as would-be tenants and cannabis operators themselves, all of whom may compete with us in our efforts to acquire real estate zoned for cannabis cultivation, production or dispensary operations. Competition from others may diminish our opportunities to acquire a desired property on favorable terms or at all. In addition, this competition may put pressure on us to reduce the rental rates below those that we expect to charge for the properties that we own and expect to acquire, which would adversely affect our financial results.
Financial Performance and Condition of Our Tenants/Borrower
As of September 30, 2022, all of our rental revenues were derived from 13 tenants. All of our leases include a parent or other affiliate guarantee by what we consider a well-capitalized guarantor. Our revenues are therefore, dependent on our tenants (and related guarantors) ability to meet their respective obligations to us. Our tenants operate in the regulated cannabis industry, which is an evolving and highly regulated space. Further, because the regulated cannabis industry is a relatively new space, some of our existing tenants have limited operating histories and may be more susceptible to payment and other lease defaults. Thus, our operating results will be significantly impacted by the ability of our tenants to achieve and sustain positive financial results.
Triple-net Leases; Operating Expenses
Our triple-net leases obligate the tenant for all the ongoing expenses of a property, including real estate taxes, insurance, maintenance and utilities, in addition to its rent obligations. Our leases also typically include annual rent escalations (typically within the range of 2-3%) as a set percentage or based on an inflation index, which generally provides us with contractual revenue growth and inflation-protected returns. Our operating expenses include general and administrative expenses, including personnel costs, legal, accounting, and other expenses related to corporate governance. In connection with becoming publicly traded, we have experienced an increase in expenses, including those related to insurance and compliance with the various provisions of U.S. securities laws.
Critical Accounting Estimates
In accordance with GAAP, our consolidated financial statements require the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements have been based were reasonable at the time made and based upon information available to us at that time. There have been no significant changes to our critical accounting estimates that were disclosed in our most recent Annual Report on Form 10-K for the year ended December 31, 2021.
Investment Activity
Our investment strategy is to provide long-term, single-tenant, triple-net sale-leaseback and build-to-suit transactions for the cannabis industry, which includes the acquisition of properties and to provide capital to our tenants for development and expansion of the property. As of September 30, 2022, we owned a geographically diversified portfolio consisting of 31 properties across 12 states with 13 tenants, comprised of 16 dispensaries and 15 cultivation facilities with a weighted average remaining lease term of 14.9 years. Our tenants include affiliates of what we believe to be some of the leading and most well-capitalized companies in the industry, such as Curaleaf, Cresco Labs, Trulieve and Columbia Care.
We derive substantially all our revenue from rents received from single tenants of each of our properties Our leases obligate the tenant for all the ongoing expenses of a property, including real estate taxes, insurance, maintenance and utilities, in addition to its rent obligations. Our leases also typically include annual rent escalations (typically within the range of 2-3%) as a set percentage or based on an inflation index, which generally provides us with contractual revenue growth and inflation-protected returns. All of our leases include a parent or other affiliate guarantee by what we consider a well-capitalized guarantor.
Additionally, we had funded one mortgage loan collateralized by a cultivation and processing facility in Pennsylvania and have one unsecured loan to our tenant at an owned cultivation site in Missouri. On August 5, 2022, in accordance with the loan agreement the mortgage loan converted to a twenty-year sale-leaseback. Refer to Note 4 in the Notes to Consolidated Financial Statements in Part I – Item 1 for further information.
As of September 30, 2022, we have aggregate unfunded commitments to invest $4.8 million for the development and improvement of our existing cultivation facilities in Arizona, Massachusetts, Missouri and Pennsylvania. Our leases are generally structured to disburse capital over specified periods of time. The leases also contain certain provisions that require tenants to pay rent on the full amount of capital under each lease, whether or not disbursed. As of September 30, 2022, there was one tenant paying rent on unfunded capital.
The following table presents the Company's investment activity for the nine months ended September 30, 2022 (in thousands):
Tenant |
Market |
Site Type |
Closing Date |
Real Estate Acquisition Costs |
|||
Bloom Medicinal |
Missouri |
Cultivation |
April 1, 2022 |
$ | 7,301 | (1) | |
Ayr Wellness, Inc. |
Pennsylvania |
Cultivation |
June 30, 2022 |
14,529 | |||
Ayr Wellness, Inc. |
Nevada |
Cultivation |
June 30, 2022 |
13,579 | |||
Calypso Enterprises |
Pennsylvania |
Cultivation |
August 5, 2022 |
30,000 | (2) | ||
Total |
$ | 65,409 |
(1) |
Includes $5.0 million of TI funded at closing of the property. |
(2) |
The Company entered into a $30.0 million mortgage loan on October 29, 2021, which converted to a 20 year sale-leaseback on August 5, 2022. |
The following table presents the tenant improvements funded during the nine months ended September 30, 2022 (in thousands):
Tenant |
Market |
Site Type |
Acquisition Closing Date |
Tenant Improvements Funded |
Unfunded Commitments |
|||||||
Curaleaf |
Florida |
Cultivation |
August 4, 2020 |
$ | 20,983 | (1) | $ | — | ||||
Mint |
Massachusetts |
Cultivation |
April 1, 2021 |
349 | — | (4) | ||||||
Mint |
Arizona |
Cultivation |
June 24, 2021 |
5,906 | (2) | 3,063 | ||||||
PharmaCann |
Massachusetts |
Dispensary |
March 17, 2021 |
25 | — | |||||||
Trulieve |
Pennsylvania |
Cultivation |
March 17, 2021 |
7,046 | (3) | — | ||||||
Organic Remedies |
Missouri |
Cultivation |
December 20, 2021 |
4,745 | 282 | |||||||
Bloom Medicinal |
Missouri |
Cultivation |
April 1, 2022 |
4,464 | 752 | (5) | ||||||
Ayr Wellness, Inc. |
Pennsylvania |
Cultivation |
June 30, 2022 |
— | 750 | |||||||
Total |
$ | 43,518 | $ | 4,847 |
(1) |
On June 16, 2022, the Company funded the expansion of an existing property. |
(2) |
The tenant has been paying rent on the remaining commitment since July 2022 in accordance with the lease agreement. |
(3) |
The tenant had been paying rent on the TI since December 2021 in accordance with the lease agreement. As of May 2022, the TI had been fully funded. |
(4) |
Does not include approximately $2.7 million of commitments that were released from obligation subsequent to September 30, 2022. |
(5) |
The $0.8 million of unfunded commitments does not include a $16.5 million option but not obligation to acquire an adjacent property from an existing tenant. |
Financing Activity
Seller Financing
In connection with the purchase and leaseback of a cultivation facility in Chaffee, Missouri on December 20, 2021, the Company entered into a $3.8 million loan payable to the seller, which is an independent third party from the tenant. The loan bears interest at a rate of 4.0% per annum. Principal on the loan is payable in annual installments of which $1.8 million was paid in January 2022. The remaining principal is payable in annual installments of $1.0 million and $1.0 million in January 2023 and 2024, respectively. The loan's outstanding balance as of September 30, 2022 was $2.0 million and the remaining unamortized discount was $20.3 thousand.
Revolving Credit Facility
On May 6, 2022, we entered into a loan and security agreement (the “Loan and Security Agreement”) with a commercial federally regulated bank, as a lender and as agent for lenders that become party thereto from time to time (the “Agent”). The Loan and Security Agreement matures on May 6, 2027. The Loan and Security Agreement includes the following, among other features: Revolving Facility: The Loan and Security Agreement provides, subject to the Accordion Feature described below, $30.0 million in aggregate commitments for secured revolving loans (“Revolving Credit Facility”), the availability of which is based on a borrowing base consisting of fee simple owned real properties that satisfy eligibility criteria specified in the Loan and Security Agreement and the lease income thereunder which are owned by certain subsidiaries of the Operating Partnership. On July 29, 2022, the Operating Partnership, entered into an amendment to the Revolving Credit Facility, amending the Loan and Security Agreement, dated as of May 6, 2022, to increase the aggregate commitment under the Revolving Credit Facility from $30.0 million to $90.0 million and added two additional lenders. The Loan and Security Agreement also allows us, subject to certain conditions, to request additional revolving incremental loan commitments such that the Revolving Credit Facility may be increased to a total aggregate principal amount of up to $100.0 million. Borrowings under the Revolving Credit Facility may be voluntarily prepaid and re-borrowed, subject to certain fees. The Revolving Credit Facility bears a fixed rate of 5.65% for the first three years and thereafter a variable rate based upon the greater of (a) the Prime Rate quoted in the Wall Street Journal (Western Edition) (“Base Rate”) plus an applicable margin of 1.00% or (b) 4.75%. The facility is subject to certain liquidity and operating covenants and includes customary representations and warranties, affirmative and negative covenants and events of default. As of September 30, 2022, the Company is compliant with the covenants of the agreement.
The outstanding borrowings under the Revolving Credit Facility was $1.0 million as September 30, 2022. Refer to Note 5 in the Notes to Consolidated Financial Statements in Part I – Item 1 for further information.
Results of Operations
General
We derive substantially all our revenue from rents received from single tenants of each of our properties under triple-net leases. Our triple-net leases obligate the tenant for all the ongoing expenses of a property, including real estate taxes, insurance, maintenance and utilities, in addition to its rent obligations. Our leases also typically include annual rent escalations (typically within the range of 2-3%) as a set percentage or based on an inflation index, which generally provides us with contractual revenue growth and inflation-protected returns. All of our leases include a parent or other affiliate guarantee by what we consider a well-capitalized guarantor.
Comparison of the three months ended September 30, 2022 and 2021 (in thousands):
For the Three Months Ended September 30, |
||||||||
2022 |
2021 |
|||||||
Revenue: |
||||||||
Rental Income |
$ | 11,639 | $ | 8,048 | ||||
Interest Income from Loans |
434 | — | ||||||
Total Revenue |
12,073 | 8,048 | ||||||
Expenses(1): |
||||||||
Depreciation and Amortization Expense |
3,630 | 2,464 | ||||||
General and Administrative Expenses: |
||||||||
Compensation expense |
760 | 805 | ||||||
Stock-Based Compensation |
280 | 816 | ||||||
Professional fees |
279 | 574 | ||||||
Other general and administrative expenses |
414 | 631 | ||||||
Total general and administrative expenses |
1,733 | 2,826 | ||||||
Total Expenses |
5,363 | 5,290 | ||||||
Income From Operations |
6,710 | 2,758 | ||||||
Other Income (Expenses): |
||||||||
Interest Income |
7 | 21 | ||||||
Interest Expense |
(94 | ) | — | |||||
Total Other Income (Expense) |
(87 | ) | 21 | |||||
Net Income |
6,623 | 2,779 | ||||||
Net Income Attributable to Noncontrolling Interests |
(113 | ) | (82 | ) | ||||
Net Income Attributable to Common Stockholders and Participating Securities |
$ | 6,510 | $ | 2,697 |
(1) |
Property expenses are included in Other general and administrative expense and are expensed and reimbursed by the tenant generally in the same period however it's possible to have expenses we have not yet been reimbursed for due to timing differences. |
Revenues
Rental Income
Rental Income for the three months ended September 30, 2022 increased by approximately $3.6 million to approximately $11.6 million, compared to approximately $8.0 million for the three months ended September 30, 2021. The increase in rental revenue was primarily attributable to:
• |
A full quarter of rental income from four cultivation facilities acquired subsequent to the third quarter of 2021, which generated approximately $1.4 million of rental revenue during the three months ended September 30, 2022. |
• |
Rental income increases from tenant improvements at our Arizona, Massachusetts, Florida and Pennsylvania cultivation facilities which generated approximately $1.0 million of additional rental revenue during the three months ended September 30, 2022. |
• |
Approximately $0.6 million of rental income from a mortgage loan which converted to a 20 year sale-leaseback during the three months ended September 30, 2022. |
• |
Annual escalations on our portfolio generated an increase of approximately $0.7 million of rental revenue during the three months ended September 30, 2022. |
Interest Income on Loans
The increase in interest income from loans of approximately $0.4 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, was attributable to one month of interest income in the third quarter of 2022 from the $30.0 million mortgage loan we entered into during the fourth quarter of 2021. On August 5, 2022 the mortgage loan was converted to a 20 year sale-leaseback in accordance with the loan agreement. Also, we recognized approximately $0.1 million of interest income in connection with a $5.0 million unsecured loan entered into with the purchase of a Missouri cultivation facility in May 2022.
Expenses
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended September 30, 2022, increased by approximately $1.2 million to approximately $3.6 million compared to $2.5 million for the three months ended September 30, 2021. The increase in deprecation was attributable to the acquisition of four operational cultivation facilities purchased subsequent to the third quarter 2021 and approximately $30.6 million of improvements that were placed into service during 2022.
General and Administrative Expense
General and administrative expenses for the three months ended September 30, 2022 decreased by approximately $1.1 million, to approximately $1.7 million, compared to approximately $2.8 million for the three months ended September 30, 2021. The decrease in general and administrative expense was primarily due to lower professional fees from a reduction in outsourced accounting administration fees, lower D&O insurance, a decrease in non-recurring legal expenses and a decrease in stock compensation expense.
Compensation Expense
Compensation expense was relatively flat quarter over quarter.
Stock Based Compensation
Stock-based compensation expense for the three months ended September 30, 2022, decreased by approximately $0.5 million to approximately $0.3 million, compared to approximately $0.8 million for the three months ended September 30, 2021. Prior to our IPO, we granted 127,176 RSUs to officers and certain of our directors primarily in connection with achieving specific targets for certain capital raises.. As of September 30, 2021, all unvested RSUs vested, resulting in $0.8 million of expense during the three months ended September 30, 2021.
Professional Fees
Professional fees for the three months ended September 30, 2022, decreased by approximately $0.3 million to approximately $0.3 million, compared to $0.6 million for the three months ended September 30, 2021. The decrease was mainly attributable to lower legal fees and the elimination of outsourced accounting functions.
Other General and Administrative Expenses
For the three months ended September 30, 2022, other general and administrative expenses decreased by approximately $0.2 million to approximately $0.4 million, compared to $0.6 million for the three months ended September 30, 2021. Other general and administrative expenses is comprised of director and officer insurance, information technology, public relations fees and various other expenses. The decrease was mainly attributable to lower director and officer insurance.
Comparison of the nine months ended September 30, 2022 and 2021 (in thousands):
For the Nine Months Ended September 30, |
||||||||
2022 |
2021 |
|||||||
Revenue: |
||||||||
Rental Income |
$ | 30,317 | $ | 19,083 | ||||
Interest Income from Loans |
2,301 | — | ||||||
Total Revenue |
32,618 |