NewLake Capital Partners Inc

Note 1 -Organization

NewLake Capital Partners, Inc. (the “Company”, “we”, “us", “our”), a Maryland corporation, was formed on April 9, 2019 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 conducts its operations through its subsidiary, NLCP Operating Partnership LP, a Delaware limited partnership (the “Operating Partnership” or “OP”). 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 8 for details. 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 and Consolidation

The accompanying consolidated financial statements and related notes have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The consolidated financial statements include the accounts of the Company, the Operating Partnership, as well as its wholly owned subsidiaries of the Operating Partnership and variable interest entities ("VIEs") in which the Company is considered the primary beneficiary. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

Variable Interest Entities

The Company consolidates a VIE in which it is considered the primary beneficiary. The primary beneficiary is the entity that has (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE.

NLCP Operating Partnership LP

The Operating Partnership is a 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 December 31, 2023 and 2022, 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 and corporate assets, the fair value of acquired real estate and in-place lease intangibles acquired and the valuation of stock-based compensation. Actual results could differ from those estimates.

Real Estate

Investments in real estate are presented at historical cost, less accumulated depreciation. Costs directly related to the properties’ acquisition, development, or redevelopment of the properties are capitalized. Repairs and maintenance cost incurred, if any, on the properties are expensed. Major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.

The Company capitalizes cost associated with property and tenant improvements (“TI”) when it is considered the accounting owner of the improvements. Property and tenant improvements generally consist of building additions or significant upgrades to existing facilities and are considered construction in progress until placed in service. Such improvements are considered placed in service when ready and available for its intended use.

Upon acquisition of a property, the Company allocates the purchase price of the real estate to land, building and improvements (inclusive of tenant improvements), site improvements and if applicable, determined intangibles, such as the value of above and below market leases and origination costs associated with the in-place lease. The tangible and intangible assets acquired and liabilities assumed are initially measured based upon their relative fair values. We estimate the fair value of land by reviewing comparable sales within the same submarket and/or region, the fair value of buildings on an as-if vacant basis and may engage third-party valuation specialists. Acquisition costs for asset acquisitions are capitalized as incurred. All of our real estate investments to date were recorded as asset acquisitions.

The Company depreciates the amount allocated to building and improvements on a straight-line basis over their estimated useful lives generally between 20 to 35 years and the amount allocated to site improvements at our buildings, if any, over the estimated useful lives, generally between 8 to 15 years. The Company amortizes the amount allocated to intangibles related to in-place leases over the remaining term of the lease.

Provision for Impairment

The Company reviews current activities and changes in the business condition of all of our properties to determine the existence of any triggering events or impairment indicators. The Company evaluates our investments in real estate assets for impairment on a property-by-property basis. If triggering events or impairment indicators are identified, the Company analyzes the carrying value of its real estate for any impairment. Such impairment indicators include but are not limited to, deterioration in rent rates for a property, decline in projected rental rates, evidence of material physical damage to the property, holding period, and tenant defaults.

A provision is made for impairment if estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property. Key inputs that the Company utilizes in this analysis include projected rental rates, estimated holding periods, capital expenditures and property sales capitalization rates.

Sale of Real Estate

The Company classifies real estate held for sale when the following criteria are met: (i) management commits to a plan to sell the property, (ii) the property is available for sale, (iii) the property is actively being marketed for sale at a price that is reasonable, (iv) the sale of the property within one year is considered probable, and (v) significant change to the plan to sell the property is not expected. A property classified as held for sale is no longer depreciated and is required to be reported at the lower of its carrying value or its fair value less cost to sell. A real estate asset held for sale is classified as "Property Held for Sale" in the consolidated balance sheets.

The Company recognizes gains or losses when real estate is sold in accordance with the provisions of Accounting Standards Codification ("ASC") ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets, The gain or loss recorded is measured as the difference between the sales price less cost to sell and the carrying amount of the real estate asset. The gain or loss from the sale of real estate is recognized in the consolidated statements of operations.

Revenue Recognition

The Company’s triple-net leases are accounted for as operating leases. Operating leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term, unless the collectability of minimum lease payments is not reasonably predictable. Rental increases based upon changes in the consumer price index are recognized only after the changes in the indexes have occurred and are then applied according to the lease agreements. Contractually obligated expenses as defined by the lease agreement that are paid directly by the tenant are not reflected in our consolidated financial statements.

Operating leases where the minimum lease payments are not reasonably predictable are recognized on a cash basis. Due to our tenants limited operating history and the uncertain regulatory environment in the United States relating to the cannabis industry, the Company records rental income, fees and reimbursables for its operating leases on a cash basis. Any rental payments received in advance of contractual due dates are recorded as “Rent Received in Advance” in the consolidated balance sheets.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are exposed to concentrations of credit risk. The Company has deposited cash and cash equivalents with three financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per financial institution. As of December 31, 2023, the Company had cash accounts in excess of FDIC insured limits. The Company mitigates the potential of losses with deposit accounts that offer FDIC insurance through a network of banks for its cash deposits in excess of $250,000. The Company did not hold any cash equivalents as of December 31, 2023 and December 31, 2022.

Loan Receivable, net

Loans originated by the Company are initially recorded at their principal amount net of any premium or discount and is accounted for under ASC 326, Financial Instruments - Credit Losses ("CECL"). The CECL expected loss model requires the Company to record an allowance for the expected credit loss for the life of a loan receivable, which is recognized when the loan is either originated or acquired. The allowance for credit losses is deducted from, or added to the amortized cost basis of the loan receivable to present the net amount expected to be collected on the financial asset(s). At each reporting period, the Company updates its estimate and adjusts the allowance for credit losses accordingly. Changes in the allowance are recorded in the consolidated statement of operations in “Other Income (Expenses). Decreases in the allowance are recorded as a reversal of credit loss expense. The Company generally uses a discounted cash flow model approach to determine the credit loss, if any, for its loans receivable subject to the CECL guidance.

Interest income on loans is recorded using the effective interest method based on the contractual payment terms of the loan. Any premium amortization or discount accretion will be reflected as a component of “Interest Income from Loans” in the consolidated statements of operations.

Investment in Equity Securities

The Company records its investment in warrants under ASC 321, Investments - Equity Securities (“ASC 321”). This guidance provides an alternative to the requirement to carry equity interests at fair value in accordance with ASC 820, Fair Value Measurement. The measurement alternative applies to certain equity interests without readily determinable fair values that are within the scope of ASC 321 and are otherwise required to be measured at fair value. Application of the measurement alternative is optional and is applied upon acquisition of an equity interest on an instrument-by-instrument basis. The Company elected to use the measurement alternative to value its investment in warrants which is reported at cost and is classified in “Other Assets” in the consolidated balance sheets.

Deferred Financing Costs

Deferred financing costs represent commitment fees, legal, title and other third-party costs associated with obtaining commitments for financing, which result in a closing of such financing. These costs are amortized over the terms of the respective agreements. Costs incurred in seeking financing transactions, which do not close, are expensed in the period in which it is determined that the financing will not close. Deferred financing costs related to the Company’s revolving credit facility are amortized on a straight-line basis and are classified in “Other Assets” in the consolidated balance sheets.

Offering and Organization Costs

Offering costs incurred by the Company in connection with common stock offerings and private placements are reflected as a reduction of additional paid-in-capital. Offering costs incurred by the Company in connection with its shelf registration will be deferred and recorded in "Other Assets" until such time the Company completes a common stock offering where all or a portion will be reclassified and reflected as a reduction of additional paid-in-capital. The deferred offering costs will be expensed upon the expiration of the shelf if the Company does not complete an equity offering. Organization costs are expensed as incurred.

Loan Payable, net

The Company records its loan payable net of discount in our consolidated balance sheets. The discount is amortized as a non-cash interest expense using the effective interest method or other method that is not materially different, over the life of the loan payable. Any premium amortization or discount accretion will be reflected as a component of “Interest Expense” in the consolidated statement of operations.

Lease Classification

The Company elected the practical expedients that allow an entity not to reassess upon adoption (i) whether an expired or existing contract contains a lease, (ii) the lease classification related to expired or existing lease arrangements, and (iii) whether costs incurred on expired or existing leases qualify as initial direct costs, and as a lessor, the practical expedient not to separate certain non-lease components, such as common area maintenance, from the lease component if the timing and pattern of transfer are the same for the non-lease component and associated lease component, and the lease component would be classified as an operating lease if accounted for separately.

Lease classification for leases under which the Company is the lessor are evaluated at lease commencement and leases not classified as sales-type leases or direct financing leases are classified as operating leases. Leases qualify as sales-type leases if the contract includes either transfer of ownership clauses, certain purchase options, a lease term representing a major part of the economic life of the asset, or the present value of the lease payments and residual guarantees provided by the lessee exceeds substantially all of the fair value of the asset. Additionally, leasing an asset so specialized that it is not deemed to have any value to the Company at the end of the lease term may also result in classification as a sales-type lease. Leases qualify as direct financing leases when the present value of the lease payments and residual value guarantees provided by the lessee and unrelated third parties exceeds substantially all of the fair value of the asset and collection of the payments is probable.

Lease classification for those leases under which the Company is the lessee are evaluated at lease commencement as finance or operating leases. Leases qualify as finance leases if the lease transfers ownership of the asset at the end of the lease term, the lease grants an option to purchase the asset that we are reasonably certain to exercise, the lease term is for a major part of the remaining economic life of the asset, or the present value of the lease payments exceeds substantially all of the fair value of the asset. Leases that do not qualify as finance leases are deemed to be operating leases. At lease commencement, the Company records a lease liability which is measured as the present value of the lease payments and a right of use asset which is measured as the amount of the lease liability and any initial direct costs incurred. The Company applies a discount rate to determine the present value of the lease payments. If the rate implicit in the lease is not known, the Company uses a discount rate reflective of the Company’s incremental borrowing rate. On the consolidated statements of operations, operating leases are expensed through rent expense while financing leases are expensed through amortization and interest expense.

Property Expenses

The Company’s 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. Under certain circumstances, the Company will pay for certain expenses on behalf of the tenant and the tenant is required to reimburse the Company. The presentation in the statements of operations for these expenses are gross where the Company records revenue and a corresponding reimbursable expense. Expenses paid directly by a tenant are not reimbursable and therefore are not reflected in the statements of operations. The expense and reimbursable amounts may differ due to timing. The revenues associated with the reimbursable expenses were classified in "Fees and Reimbursables" in the accompanying consolidated statements of operations.

Reportable Segment

We are engaged in the business of providing real estate/financing for the regulated cannabis industry. We have aggregated the properties intoone reportable segment as our properties are similar in that they are leased to state-licensed operators on long-term triple-net basis and consist of improvements that are reusable and have similar economic characteristics. The financial information disclosed herein represents all of the financial information related to ourone reportable segment.

Income Taxes

We have made an election to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with 2019, our initial taxable year. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to currently distribute at least 90% of the REIT’s ordinary taxable income to stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we will continue to be organized and operate in such a manner as to qualify for treatment as a REIT and intend to operate in the foreseeable future in such a manner that we will remain qualified as a REIT for federal income tax purposes.

Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income.

The Company elected to treat a domestic subsidiary as a taxable REIT subsidiary ("TRS") and may elect to treat other subsidiaries as TRSs in the future. In general, a TRS is utilized to hold assets and engage in activities that the Company cannot hold or engage in directly. Generally, a TRS may engage in any real estate or non-real estate-related business.

A domestic TRS may declare dividends to the Company which will be included in the Company’s taxable income/(loss) and may necessitate a distribution to stockholders. Conversely, if the Company retains earnings at the domestic TRS level, no distribution is required. A domestic TRS is subject to U.S. federal, state and local corporate income taxes.

Stock-Based Compensation

The Company recognizes stock-based compensation expense for its equity awards in accordance with ASC 718 - Compensation-Stock Compensation (“ASC 718”).

Restricted Stock Units

Under ASC 718, stock based compensation expense for restricted stock units (“RSUs”) is based on the grant date fair value of the equity awards and is recognized over the requisite service or performance period. If awards are forfeited prior to vesting, the Company will reverse any previously recognized expense related to such awards in the period during which the forfeiture occurs.

Performance Stock Units

Under ASC 718, stock based compensation expense for performance stock units (“PSUs”) is recorded at fair value of the equity award and is recognized over the performance period whether or not the performance hurdles are achieved. The fair value of the PSUs are determined using a Monte Carlo simulation for the future stock price of the Company and its corresponding peer group over the performance period. If awards are forfeited prior to vesting, the Company will reverse any previously recognized expense related to such awards in the period during which the forfeiture occurred. If performance hurdles are not met as of the last day of the performance period, the units are cancelled and no reversal of previously recognized expense is recorded for the cancelled units.

Earnings Per Share

The Company calculates earnings per share (“EPS”) in accordance with ASC 260 – Earnings Per Share (“ASC 260”). Under ASC 260, non-vested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in computing basic EPS pursuant to the two-class method. GAAP requires use of the two-class method in computing earnings per share for all periods presented for each class of common stock and participating securities as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity. The Company’s participating securities are not allocated a share of the net loss, as the participating securities do not have a contractual obligation to share in the net losses of the Company.

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.

Reclassifications

Certain prior year balances have been reclassified to conform to our current year presentation of compensation expense and property expenses.

Recently Adopted Accounting Pronouncements

Recently Issued Accounting Pronouncements

Note 3 -Real Estate

2023 Real Estate Portfolio

As of December 31, 2023, the Company owned 31 properties located in 12 states. The following table represents the Company’s real estate portfolio as of December 31, 2023 (dollars in thousands):

(1) Includes construction in progress in the amount of $24.2 million that had been funded as of December 31, 2023.

(2) A portion of this investment is currently under development or undergoing building improvements. Once the development or improvements are completed and placed-in-service, the Company will begin depreciating the applicable part of the property.

(3) GL Partners, Inc. (dba Greenlight), acquired the tenant and was added as a guarantor. Curaleaf remains as an additional guarantor subject to certain conditions in the lease agreement.

2022 Real Estate Portfolio

As of December 31, 2022, the Company owned 32 properties located in 12 states. The following table represents the Company’s real estate portfolio as of December 31, 2022 (dollars in thousands):

(1) Includes construction in progress in the amount of $12.1 million that had been funded as of December 31, 2022.

(2) GL Partners, Inc. (dba Greenlight), acquired the tenant and was added as a guarantor. Curaleaf remains an as additional guarantor subject to certain conditions in the lease agreement.

(3) This property is under development. Once the development is completed and placed-in-service, the Company will begin depreciating this asset.

Real Estate Acquisitions

2023 Acquisitions

During the year ended December 31, 2023, the Company exercised its option to acquire an adjacent parcel of land to expand its cultivation facility in Missouri and invested approximately $350 thousand and committed to fund $16.2 million to expand the facility (refer to the Tenant Improvements (“TI”) table below).

The following table presents the real estate acquisitions for the year ended December 31, 2023 (in thousands):

2022 Acquisitions

During the year ended December 31, 2022, the Company invested approximately $67.0 million to acquire four cultivation facilities andone dispensary. Included in the acquisitions is the August 5, 2022 conversion of the $30.0 million mortgage loan with Hero Diversified Associates, Inc (“HDAI”) to a sale leaseback with Calypso Enterprises.

The following table presents the real estate acquisitions for the year ended December 31, 2022 (in thousands):

(1) Includes the purchase price (and in some cases, transaction costs that have been capitalized into the purchase price) and tenant improvement commitments funded at closing, if any, as of December 31, 2022. Excludes tenant improvement commitments not funded as of December 31, 2022.

(2) Includes approximately $5.0 million of tenant improvements funded at closing of the property.

(3) The Company entered into a $30.0 million mortgage loan on October 29, 2021, which converted to real estate through a sale leaseback transaction on August 5, 2022.

Tenant Improvements Funded

2023 Tenant Improvements

During the year ended December 31, 2023, the Company funded approximately $14.4 million of tenant improvements. The following table presents the tenant improvements funded for the year ended December 31, 2023 (in thousands):

(1) Effective June 1, 2023, the lease agreement was amended to include an additional TI commitment of approximately $6.5 million.

2022 Tenant Improvements

During the year ended December 31, 2022, the Company funded approximately $45.2 million of tenant improvements. The following table presents the tenant improvements funded for the year ended December 31, 2022 (in thousands):

(1) On June 16, 2022, the Company funded the expansion of an existing property.

(2) The tenant had been paying rent for the remaining commitment since July 2022 in accordance with the lease agreement.

(3) The tenant had been paying rent for the TI since December 2021 in accordance with the lease agreement. As of May 2022, the TI had been fully funded.

(4) The unfunded commitments did not include an option, because the Company did not have an obligation to acquire the adjacent property from an existing tenant and fund TIs.

Disposal of Real Estate

On October 27, 2023, the Company closed on the sale of its property in Palmer, Massachusetts, for $2.0 million, which was leased to Mint. The Company's investment in the property was $1.9 million. Upon closing, Mint's lease agreement was terminated and they paid a portion of the closing costs, resulting in a break-even sale of the property. Therefore, the Company did not recognize a gain or loss on sale of the property.

On March 21, 2022, the Company soldone of its Massachusetts properties for approximately $0.8 million, which was leased to PharmaCann. The Company recognized a loss on sale of the property of approximately $60 thousand. PharmaCann continued to pay rent for the sold Massachusetts property through increased rent payments from each of the remainingtwo properties leased by PharmaCann until a suitable replacement property was found. On November 3, 2022, a replacement property in Wapakoneta, OH was acquired by the Company and leased to PharmaCann.

Construction in Progress

Construction in progress was $24.2 million and $12.1 million on December 31, 2023 and 2022, respectively and is included in “Buildings and Improvements” in the accompanying consolidated balance sheets.

2023 Construction in Progress

The following table summarizes the construction in progress balance for the year ended December 31, 2023 (in thousands):

(1) These tenant improvements were never placed in service. The property was sold on October 27, 2023.

2022 Construction in Progress

The following table summarizes the construction in progress balance for the year ended December 31, 2022 (in thousands):

(1) These tenant improvements were never placed in service. The property was sold on March 21, 2022.

Depreciation and Amortization

Depreciation expense on the Company’s real estate assets was approximately $12.3 million and $10.6 million for the years ended December 31, 2023 and 2022, respectively.

Amortization of the Company’s acquired in-place lease intangible assets were approximately $2.0 million and $2.2 million for the years ended December 31, 2023 and 2022, respectively. Acquired in-place lease intangible assets have a weighted average remaining amortization period of 10.2 years.

In-place Leases

The following table presents the future amortization of the Company’s acquired in-place leases as of December 31, 2023 (in thousands):

Impairment

The Company reviewed tenant activities and changes in the business condition of all of its properties and there wereno triggering events or impairment indicators as of December 31, 2023 and 2022, requiring an impairment loss to be recognized.

Note 4 –Leases

As Lessor

The Company’s 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. Under certain circumstances the Company will pay for certain expenses on behalf of the tenant and the tenant is required to reimburse the Company. The presentation in the statement of operations for these expenses are gross where the Company records revenue and a corresponding reimbursable expense. Expenses paid directly by a tenant are not reimbursable and therefore not reflected in the statement of operations. The expense and reimbursable amounts may differ due to timing. The revenues associated with the reimbursable expenses were classified in "Fees and Reimbursables" in the accompanying consolidated statements of operations. For the year ended December 31, 2023 and 2022, the reimbursable revenues were $255.8 thousand and $206.3 thousand, respectively. Reimbursable expenses are classified as "Property Expenses" in the accompanying consolidated statements of operations.

The Company’s tenants operate in the cannabis industry. All of our leases generally contain annual increases in rent (typically between 2% and 3%) over the expiring rental rate at the time of expiration. Certain of our leases also contain a Tenant Improvement Allowance (“TIA”). TIA is generally available to be funded between 12 and 18 months. In some leases, the tenant becomes liable to pay rent as if the full TIA has been funded, even if there are still unfunded commitments. TIA also contains annual increases which generally increase at the same rate as base rent, per the lease agreement. Certain of the Company’s leases provide the lessee with a right of first refusal or right of first offer in the event the Company markets the leased property for sale. Two of the Company’s leases that were entered into in December 2019 provide the lessee with a purchase option to purchase the leased property at the end of the initial lease term in December 2029, subject to the satisfaction of certain conditions. The purchase option provision allows the lessee to purchase the leased property for an amount based on the fair market value of the Company’s investment. As of December 31, 2023, the Company’s gross investment in thesetwo properties was approximately $6.3 million.

Lease Amendments

Revolutionary Clinics

On October 27, 2023, the Company entered into a lease amendment and forbearance agreement (the "Agreements”) for its existing lease agreement with Revolutionary Clinics on its cultivation facility in Massachusetts, where Revolutionary Clinics is the sole tenant. Under the terms of the Agreements, the lease term was extended by 5 years, the Company received $480 thousand of unpaid rent and applied the remaining $315 thousand of security deposit. Under the terms of the Agreements, the rental payments have annual fixed escalations and may also escalate as the tenant’s business achieves certain gross revenue metrics based on a trailing 12 months and calculated quarterly. Under the forbearance agreement, the Company provided forbearance for approximately $2.0 million of back rental income, fees and reimbursable expenses. Lastly, the Company received warrants which if exercised will entitle the Company to receive 26,058 of common units in Revolutionary Clinics. Refer to Note 10 for additional details.

Calypso Enterprises

On November 15, 2023, the Company’s tenant Calypso Enterprises (“Calypso”) was sold by its parent HDAI to Canvas Acquisition Corporation, LLC (“Canvas”) an independent third party, whose parent replaced HDAI as the lease guarantor. In connection with the sale, the Company and Canvas agreed to certain revised terms through a lease amendment. Under the terms of the amendment, the Company reduced the rent payments, provided up to $3.0 million in tenant improvements allowance, provided an option to purchase the property at the Company’s cost basis, (inclusive of funding the $3.0 million of tenant improvements), and received 6 months of rent escrow, among other provisions. The purchase option is exercisable from December 1, 2024 through December 31, 2025, with notice to be delivered no later than December 31, 2024. In the event the purchase option is exercised prior to December 31, 2025, the Company would receive a make-whole rent payment for rent through December 31, 2025.

As compensation for providing such lease modifications, HDAI agreed to pay the Company approximately $1.5 million of additional rent to be paid in 5 installments over 18 months from November 15, 2023.

Lease Income

The following table presents the future contractual minimum rent under the Company’s operating leases as of December 31, 2023 (in thousands):

(1) This table includes future contractual minimum rent from the Company’s existing lease agreements as of December 31, 2023.

Credit Risk and Geographic Concentration

The ability of any of the Company’s tenants to honor the terms of its lease are dependent upon the economic, regulatory, competition, natural and social factors affecting the community in which that tenant operates.

As of December 31, 2023, the Company owned 31 properties leased to 13 tenants across 12 states including Arizona, Arkansas, California, Connecticut, Florida, Illinois, Massachusetts, Missouri, Nevada, North Dakota, Ohio, and Pennsylvania. During the year ended December 31, 2022, the Company owned 32 properties leased to 13 tenants across 12 states.

Credit Risk Concentration

The following table presents the tenants in the Company’s portfolio that represented the largest percentage of the Company’s total rental revenue, excluding reimbursable revenues, for each of the periods presented:

(1) Calculated based on rental income received during the period. This amount excludes revenue reimbursements.

(2) This tenant held a mortgage loan during the six months ended June 30, 2022, therefore the Company received interest income rather than rental income during that period. In August 2022, the mortgage loan converted to atwenty year sale-leaseback.

Geographic Concentration

The following table presents the states in the Company’s portfolio that represented the largest percentage of the Company’s total rental income, excluding reimbursable revenues, for each of the periods presented:

(1) Included in the number of properties and revenue is one Massachusetts property sold in October 2023.

(2) Included in the number of properties and revenue is one Massachusetts property sold in March 2022.

As Lessee

As of December 31, 2023 the Company was the lessee underone office lease for a term offour years, subject to annual escalations. The annual rent payments range from approximately $72.0 thousand in year one to approximately $85.0 thousand in year four. The office lease qualifies under the right-of-use ("ROU") model. Upon entering into the lease in June 2022, the Company recorded a ROU asset of $273 thousand which is classified in “Other Assets” and a lease liability, which is classified in “Other Liabilities” in the accompanying consolidated balance sheets. The ROU asset is amortized over the remaining lease term. The amortization is made up of the principal amortization under the lease liability plus or minus the straight-line adjustment of the operating lease rent.

The following table presents the future contractual rent obligations as lessee as December 31, 2023 (in thousands):

(1) The lease is scheduled to expire in August 31, 2026. The lease allows forone renewal option of 3 years commencing immediately upon the expiration of the initial term.

As of December 31, 2023, the weighted-average discount rate used to calculate the lease liability was 5.65% and remaining lease term was 2.7 years.

Note 5 -Loan Receivable, net

Loan Receivable

The Company funded a $5.0 million unsecured loan to Bloom Medicinals on June 10, 2022. The loan initially bore interest at a rate of 10.25% and is structured to increase annually in April by the product of 1.0225 times the interest rate in effect immediately prior to the anniversary date. The loan is interest only for the first four years and can be prepaid at any time without penalty. If full principal payment on the loan is not made on June 30, 2026, the loan will begin amortizing principal and interest over the next 5 years, with a final maturity of June 30, 2031. The loan is cross defaulted with their lease agreement with the Company. As of December 31, 2023 and December 31, 2022, the loan earned interest at a rate of 10.48% and 10.25%, respectively, and the aggregate principal amount outstanding on the unsecured loan receivable as of December 31, 2023 and 2022 was $5.0 million.

CECL Reserve

The Company recorded a provision for current expected credit loss on the $5.0 million unsecured loan (discussed above). Estimating the CECL allowance for credit loss requires significant judgement. The Company used a discounted cash flow analysis to determine the expected credit loss of approximately $167 thousand as of December 31, 2023, which is included in “Other Expense” on the consolidated statement of operations.

Note 6 –Financings

Loan Payable, net

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 and $1.0 million were paid in January 2022 and January 2023, respectively. The remaining principal of $1.0 million and accrued interest is payable in January 2024 (refer to Note 16 for further information on the repayment). The discount has been fully amortized as of December 31, 2023 and the loans outstanding principal balance as of December 31, 2023 and 2022 was $1.0 million and $2.0 million, respectively.

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 addedtwo 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 1.0% or (b)4.75%.

Note 6 – Financings (continued)

As of December 31, 2023 and 2022, the Company had outstanding borrowings of $1.0 million under its Revolving Credit Facility, respectively. As of December 31, 2023, $89.0 million in funds available to be drawn, subject to sufficient collateral in the borrowing base.

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 December 31, 2023, the Company was in compliance with the terms of such covenants under the agreement.

Note 7 -Related Party Transactions

Investor Rights Agreement

Pursuant to our Investor Rights Agreement (the “Investor Rights Agreement”) HG Vora Capital Management, LLC (“HG Vora”), 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 and NL Ventures, LLC (“Pangea”) hold certain nomination rights with respect of members to our board of directors so long as they individually own in the aggregate certain percentages of the Company’s issued and outstanding common stock for 60 consecutive days.

Separation and Retirement of Executive Officers

There wereno severance costs incurred by the Company during the year ended December 31, 2023. 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 $1.8 million, which were included in “Compensation Expense” on our consolidated statement of operations for the year ended December 31, 2022.

Note 8 -Noncontrolling Interests

The Company’s noncontrolling interests represent limited partnership interests in the Operating Partnership not held by the Company. Noncontrolling interests represented 1.8% and 1.7% ownership interest in the Operating Partnership at December 31, 2023 and 2022, respectively.

The following table presents the activity for the Company’s noncontrolling interests issued by the Operating Partnership for the years ended December 31, 2023 and 2022:

Note 9 -Stock Based Compensation

The Company’s 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 the Company 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 often years until August 12, 2031. As of December 31, 2023 and 2022, there were 1,950,251 and 2,081,600 shares, respectively, available for issuance under the Plan, which assumes maximum performance is achieved with respect to PSUs.

Restricted Stock Units

Restricted Stock Units (“RSU, RSUs”) are granted to certain directors, officers and employees of the Company. Per the terms of the agreements, certain director RSUs that vest cannot be converted until the director separates from the Company. Total outstanding RSUs as of December 31, 2023 and 2022 were 100,434 and 47,789, respectively.

Unvested Restricted Stock Units

The following table sets forth the Company’s unvested RSU activity for the years ended December 31, 2023 and 2022:

(1) Vested shares does not include 2,666 shares withheld to satisfy tax and other compensation related withholdings associated with the vested RSUs issued under the 2021 Equity Incentive Plan.

Vested Restricted Stock Units

The following table sets forth the Company’s vested RSU activity for the years ended December 31, 2023 and 2022:

(1) Represents the gross number of RSUs vested, which includes 2,666 shares withheld for taxes and not converted to common stock.

(2) Represents the gross number of RSU’s vested, which includes 47,273 shares withheld for taxes and not converted to common stock.

Each RSU represents the right to receiveone share of common stock upon vesting. The vested RSUs are also entitled to receive an accumulated dividend payment equal to the dividends paid on each share of common stock during the vesting period. During the years ended December 31, 2023 and 2022, the Company paid $35,264 and $17,628, respectively of accumulated dividends that became earned upon vesting of RSUs. Accrued unearned dividends on unvested RSUs as of December 31, 2023 and 2022 were $114,189 and $38,575, respectively.

The amortization of compensation costs for the awards of RSUs are classified in “Compensation Expense” in the accompanying consolidated statements of operations and amounted to approximately $0.7 million and $0.9 million for the years ended December 31, 2023 and 2022, respectively. Included in the $0.9 million of stock-based compensation for the year ended December 31, 2022, is approximately $0.2 million of accelerated expense related to the retirement and separation of certain officers. There wasno accelerated expense during the year ended December 31, 2023. 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 1.1 years as of December 31, 2023.

Performance Stock Units

Performance Stock Units (“PSU, PSUs”) are granted to officers and certain employees of the Company. Total outstanding PSUs as of December 31, 2023 and 2022 were 103,000 and 66,841, respectively.

The following table sets forth the Company’s unvested performance stock activity for the years ended December 31, 2023 and 2022:

(1) The Company did not meet the performance hurdles for 18,858 PSUs granted on December 14, 2021. Accordingly, the awards were not issued on December 31, 2023, which was the end of the performance period. Under the terms of the Plan, the canceled PSUs were recycled back into the Plan.

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 206,000 depending upon performance. The performance periods are January 1, 2022 through December 31, 2024, and January 1, 2023 through December 31, 2025 and 47,983 and 55,017 PSUs are scheduled to vest at the end of each performance period, respectively.

The fair value of PSUs is determined using a Monte Carlo simulation for our future stock price and the corresponding peer group. The grant date fair value is an equally weight value comprised of (i) total shareholder return of the Company and a peer group of companies (“rTSR”); and (ii) the Company’s absolute compound annual growth rate (“CAGR”). To derive the value of rTSR, the Company uses a stochastic stock price simulation model using Geometric Brownian Motion (“GBM”) to model the future stock prices of the Company and the peer group companies. The key inputs to the GBM model include the standard deviation of the movement of the share price, also expressed as stock price volatility. Historical volatility is analyzed for the Company and peer group companies based on publicly traded shares of common stock. The model also assists in deriving a value of the Company’s CAGR which is then subjected to the vesting percentages according to the terms of the PSU agreements. The key inputs to calculate CAGR are the ending stock price, initial stock price and vesting period. The GBM simulates the ending stock price that is used in the CAGR model to determine the grant date fair value.

Using the above methodology, grant date fair values of $24.00 and $11.23 were used for PSUs with performance periods ending December 31, 2024 and 2025, respectively. 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 represents the right to receiveone share of common stock upon vesting. Upon vesting each PSU is also entitled to receive an accumulated dividend payment equal to the dividend paid on each share of common stock during the performance period. If PSUs do not meet the performance hurdles and are cancelled, no dividends are paid on the cancelled units. During the years ended December 31, 2023 and 2022, no PSUs vested and therefore the Company did not pay any dividends. Unearned dividends on unvested PSUs as of December 31, 2023 and 2022 were $245,680 and $116,972, respectively.

The amortization of compensation costs for the awards of PSUs are classified in “Compensation Expense” in the accompanying consolidated statements of operations and amounted to approximately $0.8 million and $0.6 million for the years ended December 31, 2023 and 2022, respectively. The remaining unrecognized compensation cost of approximately $0.8 million for PSU awards is expected to be recognized over a weighted average amortization period of 1.5 years as of December 31, 2023.

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. As of December 31, 2023 and 2022, the Options were fully exercisable and expire on July 15, 2027.

Note 10 -Warrants

Warrants Issued

On March 17, 2021, the Company entered into a warrant agreement which granted the holder the right to purchase 602,392 shares of common stock of the Company at a purchase price of $24.00 per share. Warrants were immediately exercisable and expire on July 15, 2027. As of December 31, 2023 and 2022, the warrants were fully exercisable.

Investment in Warrants

On October 27, 2023, the Company entered into a lease amendment and forbearance agreement for its existing lease agreement with Revolutionary Clinics on its cultivation facility in Massachusetts. Under the forbearance agreement, the Company provided forbearance of 7 months of delinquent rent and received warrants. The warrants are accounted for under ASC 321. The Company elected to use the measurement alternative to value its investment in warrants, since the fair value was not readily determinable. The investment in warrants is classified in “Other Assets” in the consolidated balance sheets at its initial cost value of $522 thousand. The cost value was determined based upon the implied recapitalized equity value of Revolutionary Clinics.

Note 11 -Stockholder’s Equity

Preferred Stock

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.

As of December 31, 2023 and 2022, the Company had 100,000,000 shares of preferred stock authorized and 0 shares of Series A preferred stock outstanding.

Common Stock

On August 13, 2021, the Company completed its IPO of 3,905,950 shares of common stock, with a par value of $0.01 per share.

Note 11 - Stockholder’s Equity (continued)

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 $10.0 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. On September 15, 2023, the board of directors authorized an amendment to the stock repurchase program of up to an additional $10.0 million of outstanding common stock and extended the program through December 31, 2024.The stock repurchase program may be suspended or discontinued by us at any time and without prior notice.

During the year ended December 31, 2023, pursuant to the stock repurchase program, the Company acquired 908,394 shares of common stock with an average purchase price, including commissions of $13.00 totaling approximately $11.8 million. The remaining availability under the stock repurchase program as of December 31, 2023 was approximately $8.2 million. The Company didnot repurchase any shares of common stock under the stock repurchase program during the year ended December 31, 2022.

Conversion of OP Units

There wereno OP Units converted to common stock during the year ended December 31, 2023. During the year ended December 31, 2022,79,721 OP Units were convertedone for one into shares of the Company’s common stock.

Conversion of RSUs

During the year ended December 31, 2023 and 2022,3,720 and 92,559 RSUs were converted into shares of our common stock.

Note 11 - Stockholder’s Equity (continued)

Dividends

The following tables describe the cash dividends declared on the Company’s common stock and vested RSUs and in the Company’s capacity as general partner of the operating partnership, authorized distributions on our OP Units declared by the Company during the years ended December 31, 2023 and 2022:

Note 12 -Earnings Per Share

The following table presents the computation of basic and diluted earnings per share (in thousands, except share data):

Note 12 - Earnings Per Share (continued)

During the year ended December 31, 2023, the effect of including OP Units and unvested RSUs were included in the Company’s calculation of weighted average shares of common stock outstanding – diluted. The effect of 175,952 and 602,392 outstanding stock options and warrants, respectively, were excluded in the Company’s calculation of weighted average shares of common stock outstanding – diluted as their inclusion would have been anti-dilutive. During the year ended December 31, 2022, the effect of including OP Units was included in the Company’s calculation of weighted average shares of common stock outstanding – diluted. The effect of 175,952 and 602,392 outstanding stock options and warrants, respectively, and 29,255 unvested RSUs were excluded in the Company’s calculation of weighted average shares of common stock outstanding – diluted as their inclusion would have been anti-dilutive. The Company does not include the effect of outstanding PSUs in the calculation of earnings per share due to the nature of the shares being performance based since there is no guarantee the PSUs will vest and be converted to common stock.

Note 13 -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 following table presents the carrying value and estimated fair value of financial instruments at December 31, 2023 and 2022 (in thousands):

(1) The fair value measurement of the $5.0 million Note Receivable is based on unobservable inputs, and as such, is classified as Level 3. The carrying value reflects the provision for current expected credit loss of $167 thousand

(2) The fair value measurement of the Company’s Revolving Credit Facility and Loan Payable is based on observable inputs, and as such, are classified as Level 2.

As of December 31, 2023, the Company’s investment in warrants was valued based on the initial investment, less impairment. The Company determined the investment wasnot impaired as of December 31, 2023. Since these securities are not actively traded, the Company will apply valuation adjustments if and when such indicators become available. As such, these securities are carried at cost and are classified as Level 3 of the fair value hierarchy.

Note 13 - Fair Value Measurements (continued)

As of December 31, 2023 and 2022, the carrying amounts of financial instruments such as cash and cash equivalents, accounts payable and accrued expenses, and other liabilities approximate their fair values due to the generally short-term nature and the market rates of interest of these instruments. As such, these financial instruments are classified as Level 1.

Note 14 -Income Taxes

As a REIT, the Company is not subject to federal income tax to the extent that it makes qualifying distributions to its stockholders, and provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution, and stock ownership tests. The state and local tax jurisdictions for which the Company is subject to tax-filing obligations recognize the Company’s status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions. The Company may, however, be subject to certain minimum state and local tax filing fees as well as certain excise, franchise, or business taxes.

Taxable REIT Subsidiaries

In October 2023, the Company elected to treat a domestic subsidiary as a TRS. The TRS is subject to U.S. federal, state and local corporate income taxes at the current federal statutory rate of 21%. The Company’s effective tax rate differs from its combined U.S. federal, state and local corporate statutory tax rate primarily due to income earned at the REIT, which is not subject to tax, due to the deduction for qualifying distributions made by the Company. For the year ended December 31, 2023, the TRS had limited activity and did not generate taxable income.

Note 15 -Commitments and Contingencies

As of December 31, 2023, the Company had aggregate unfunded commitments to invest $14.4 million to develop and improve of our existing cultivation facilities in Arizona, Missouri and Pennsylvania. Refer to Note 16- “Subsequent Events” for details on commitments the Company entered into after December 31, 2023.

As of December 31, 2023, the Company is the lessee underone office lease. Refer to Note 4 for further information.

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 16 -Subsequent Events

Tenant Improvements

Subsequent to December 31, 2023, the Company funded approximately $5.6 million of tenant improvements to our cultivation facilities in Arizona and Missouri.

Note 16 - Subsequent Events (continued)

On January 3, 2024, the Company made its annual principal and interest payment of approximately $1.0 million on its loan payable to the seller of a cultivation facility in Chaffee, Missouri. This represents the final installment payment on the Company’s loan payable.