NewLake Capital Partners Inc

General

We derive substantially all our revenue from rents received from single tenants at each of our 31 properties under triple-net leases. As of March 31, 2024, we have low leverage on the portfolio with only $4.0 million outstanding under our revolving credit facility and a low general and administrative expense with an annualized ratio of 1.6% of total assets.

Comparison of the three months ended March 31, 2024 and 2023 (in thousands):

Revenues

Rental Income

Rental income for the three months ended March 31, 2024 increased by approximately $1.0 million to approximately $12.1 million, compared to approximately $11.2 million for the three months ended March 31, 2023. The increase in rental income was mainly attributable to:

•A full quarter of rental income from exercising our option to acquire the adjacent land parcel to expand one of our existing cultivation facilities in Missouri during the first quarter of 2023, which generated approximately $0.1 million of rental income during the three months ended March 31, 2024.

•Funding of tenant improvements at our Arizona, Missouri and Pennsylvania cultivation facilities which generated approximately $0.4 million of additional rental income during the three months ended March 31, 2024.

•Annual escalations on our portfolio which generated an increase of approximately $0.2 million of rental revenue during the three months ended March 31, 2024.

•A full quarter of rental income from one tenant that did not perform during the first quarter of 2023. We applied $315 thousand of the tenant's security deposit during the first quarter of 2023 and collected full rent for the first quarter of 2024 which generated an increase of $0.4 million of rental income.

These increases were offset by a decrease of a full quarter of rental income of approximately $0.1 million related to the sale of a cultivation facility in Massachusetts in October 2023 and a decrease of a full quarter of rental income of approximately $0.1 million which is a result of a reduction in contractual base rent per lease modifications in the fourth quarter of 2023.

Interest income from loans was relatively flat quarter over quarter.

Fees and Reimbursables

Fees and reimbursables for the three months ended March 31, 2024 increased by approximately $219 thousand to $350 thousand, compared to approximately $131 thousand for the three months ended March 31, 2023. The increase was driven by an increase in fees associated with our leases and the timing of reimbursable expenses related to TI fundings.

Expenses

Property Expenses

The Company will pay for certain expenses on behalf of the tenant and the tenant is required to reimburse the Company. The expense and reimbursable amounts may differ due to timing. Property expenses were relatively flat quarter over quarter.

Depreciation and Amortization Expense

Depreciation and amortization expense was relatively flat quarter over quarter.

General and Administrative Expenses

The increase in general and administrative expense is described below by category.

Compensation Expense

Compensation expense includes compensation to employees and officers of the Company and stock-based compensation awards. Compensation expense increased by approximately $0.1 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was attributable to stock based compensation expense for 2024 RSU and PSU grants.

Professional Fees

Professional fees generally include fees paid for audit, tax, legal and consulting services. For the three months ended March 31, 2024, professional fees increased by approximately $0.1 million to approximately $0.4 million compared to approximately $0.3 million for the three months ended March 31, 2023. The increase was primarily related to tax fees paid for the preparation of 2023 entity tax returns and consulting fees paid for officer employment contract and compensation advice.

Other General and Administrative Expenses

For the three months ended March 31, 2024, other general and administrative expense decreased by approximately $0.1 million to approximately $0.4 million compared to approximately $0.5 million for the three months ended March 31, 2023. The decrease was a result of lower state and local taxes and associated fees, director and officer insurance premiums and fees paid for public relations and branding. Other general and administrative expenses is primarily comprised of director and officer insurance, information technology fees, public relations fees, filing and regulatory fees, reporting fees, corporate rent and various other expenses.

Provision for Current Expected Credit Loss

We used a discounted cash flow model to determine an expected credit loss on our loan receivable. For the three months ended March 31, 2024, we recorded a reduction in the provision for current expected credit loss of approximately $14 thousand which resulted in the allowance for credit loss to be $152.3 thousand as of March 31, 2024.

Other Income (Expense)

Other Income

Interest income decreased during the three months ended March 31, 2024 by approximately $120 thousand, to $100 thousand compared to $220 thousand for the three months ended March 31, 2024, primarily due to lower cash balances in our money market accounts as we primarily used cash liquidity to fund TI and pay dividends. Refer to the "Summary of Cash Flows" below for further information.

Interest Expense

Interest expense remained relatively flat quarter over quarter.

Non-GAAP Financial Information and Other Metrics

Funds from Operations and Adjusted Funds from Operations

Funds from Operations ("FFO") and Adjusted Funds from Operations ("AFFO") are non-GAAP financial measures and should not be viewed as alternatives to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that FFO and AFFO are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs.

We calculate FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. NAREIT currently defines FFO as follows: net income (loss) (computed in accordance with GAAP) excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by an entity. Other REITs may not define FFO in accordance with the NAREIT definition or may interpret the current NAREIT definition differently than we do and therefore our computation of FFO may not be comparable to such other REITs.

We calculate AFFO by starting with FFO and adjusting for non-cash and certain non-recurring transactions, including non-cash components of compensation expense and the effect of provisions for credit loss. Other REITs may not define AFFO in the same manner as we do and therefore our calculation of AFFO may not be comparable to such other REITs. You should not consider FFO and AFFO to be alternatives to net income as a reliable measure of our operating performance;

nor should you consider FFO and AFFO to be alternatives to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity.

The table below is a reconciliation of net income attributable to common stockholders to FFO and AFFO for the three months ended March 31, 2024 and 2023 (in thousands):

Liquidity and Capital Resources

Our cash requirements include the payment of dividends, to our shareholders, distributions to our holders of OP Units ("OP Unitholders"), general and administrative expenses, debt service, other expenses related to managing our existing portfolio as well as acquisition and unfunded tenant commitments. The sources of liquidity to fund these cash requirements include rental revenue from the leasing of our properties, which is our primary source of cash flow, borrowings under our revolving credit facility and equity and debt issuances either in the public or private markets, if markets permit. Where possible, we also may issue limited partnership interests in the Operating Partnership ("OP Units") to acquire properties from existing owners seeking a tax-deferred transaction.

As of March 31, 2024, we had $107.5 million of liquidity comprised of $21.5 million of cash and cash equivalents and $86.0 million available on our $90.0 million revolving credit facility, subject to sufficient collateral in the borrowing base. The challenges posed by the increase in interest rates and inflation could adversely impact our cash flow from continuing operations but we expect that cash flow from continuing operations over the next twelve months, together with cash on hand, will be adequate to fund our business operations, cash dividends to our shareholders, distributions to our OP Unitholders and debt service. Acquisitions and unfunded tenant improvement costs may require funding from borrowings, equity issuance and/or issuance of OP Units. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to us in sufficient amounts in the future.

Summary of Cash Flows

The following summary discussion of our cash flows is based on the consolidated statements of cash flows in our consolidated financial statements and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (in thousands):

Net Cash Provided by Operating Activities:

Net cash provided by operating activities for the three months ended March 31, 2024 and 2023 were approximately $10.0 million and $8.2 million, respectively. Net cash flows provided by operating activities for the three months ended March 31, 2024 and 2023 were primarily related to contractual rent received from our properties, partially offset by our general and administrative expenses.

Cash Used in Investing Activities:

Cash used in investing activities for the three months ended March 31, 2024 and the three months ended March 31, 2023 were approximately $7.9 million and $1.8 million, respectively. Cash used in investing activities for the three months ended March 31, 2024 related to approximately $7.9 million used to fund tenant improvements at our cultivation facilities in Arizona and Missouri. Cash used in investing activities for the three months ended March 31, 2023 related to $350.0 thousand used to exercise our option to purchase an adjacent parcel of land by an existing cultivation facility in Missouri and approximately $1.4 million used to fund tenant improvements at our cultivation facilities in Arizona and Missouri.

Net Cash Used in Financing Activities:

Net cash used in financing activities for the three months ended March 31, 2024 and the three months ended March 31, 2023 were approximately $6.4 million and $10.2 million, respectively. Net cash used in financing activities for the three months ended March 31, 2024, related to approximately $8.4 million in dividend payments to holders of our common stock and dividend payments on vested RSUs, as well as distributions to OP Unitholders, $1.0 million to pay down our loan payable and approximately $46 thousand of cash paid for taxes in lieu of issuance of common stock offset by $3.0 million drawn on our Revolving Credit Facility. Cash used in financing activities for the three months ended March 31, 2023, were related to approximately $8.5 million in dividend payments to holders of our common stock and vested RSUs, as well as distributions to OP Units holders, $1.0 million to pay down our loan payable, approximately $0.6 million to buy back stock under the stock repurchase program and approximately $45 thousand in deferred financing costs related to updating our Revolving Credit Facility.

Dividends

To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding capital gains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our taxable income. We evaluate each quarter to determine our ability to pay dividends to our stockholders based on our net taxable income if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service payments. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution.

As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. During the three months ended March 31, 2024, we declared, and our board of directors approved, cash dividends on our common stock and restricted stock units and in our capacity as general partner of our Operating Partnership, authorized distributions on our OP Units of $0.41 per share. During the three months ended March 31, 2023, we declared, and our board of directors approved, cash dividends on our common stock and restricted stock units and in our capacity as general partner of the Operating Partnership, authorized distributions on our OP Units totaling $0.39 per share.

Contractual Obligations and Commitments

Unfunded Commitments

As of March 31, 2024, the Company had aggregate unfunded commitments of $6.5 million to develop and improve our existing cultivation facilities in Arizona, Missouri, and Pennsylvania.

Corporate Office Lease

As of March 31, 2024, we were 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 approximately $85 thousand in year four. The office lease has a remaining weighted average term of approximately 2.4 years.

As of March 31, 2024, we had $4.0 million drawn on our Revolving Credit Facility which bears interest at a rate of 5.65% per annum.

Adoption of New or Revised Accounting Standards

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

Interest Rate Risk

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our Revolving Credit Facility. As of March 31, 2024, we had $4.0 million principal drawn on our Revolving Credit Facility, at a fixed interest rate of 5.65% through May 2025 and a floating rate thereafter. Therefore, if interest rates decrease, our required interest payments may exceed those based on current market rates. If interest rates remain higher for longer, our cost of financing will significantly increase when the Revolving Credit facility adjusts to a floating rate in May 2025. We may choose to mitigate such interest rate risk through the use of interest rate derivative instruments.

Impact of Inflation

The U.S. economy has experienced an increase in inflation over the past two years. We enter into leases that generally provide for annual fixed increases in rent at a fixed rate. In some instances, leases provide for annual increases in rent based on the increase in annual CPI. We expect these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.

Seasonality

Our business is not, and we do not expect our business to be, subject to material seasonal fluctuations.