NewLake Capital Partners Inc
For the period ended Dec 31, 2024. Filed Mar 6, 2025.
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FY2024 · Filed Mar 6, 2025
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What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-K
Period ended 2023-12-31; filed 2024-03-11.
0001854964-24-000007
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-K
Period ended 2024-12-31; filed 2025-03-06.
0001854964-25-000004
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 146 previous paragraphs and 155 current paragraphs.
74 unchanged; 34 reworded; 43 added; 37 removed; 1 previous and 4 current paragraphs rearranged.
Tables are not compared: 5 previous and 5 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (43)
Current report
Condition of Our Tenants
Current report
During the fourth quarter of 2023, we amended our leases with: a) Revolutionary Clinics, Inc. (“Revolutionary Clinics”), as part of a restructuring of their business, their receipt of new third-party capital and new management; and b) Calypso Enterprises (“Calypso”) in connection with their sale to Canvas Acquisition Corporation. Both tenants experienced operating challenges during the latter half of 2024, impacting their ability to pay rent as described below.
Current report
From June 2024 through December 2024, Revolutionary Clinics paid approximately 50% of its contractual rent. On December 13, 2024, Revolutionary Clinics entered into receivership. The Company is currently working with the receiver and the tenant and has reserved all rights under the lease agreement.
Current report
Calypso Enterprises
Current report
From September through December 2024, Calypso did not pay the contractual rent due under its lease agreement. We held an escrow deposit equivalent to approximately six months of rent and we applied approximately $1.2 million from the escrow deposit to cover the outstanding rent for this period. Additionally, as of September 2024, in accordance with the lease agreement, we suspended our obligation to fund the remaining improvement allowance of approximately $987 thousand until all outstanding rent is paid and the escrow deposit is replenished. The remaining balance of the escrow deposit as of December 31, 2024, was approximately $446 thousand. We are currently in discussion with the tenant and have reserved all our rights under the lease agreement.
Current report
2024 Financial Markets Update
Current report
During the first half of the year ended December 31, 2024, financial markets generally showed stability, though lingering risks from the prior year remained. In September 2024, the U.S. Federal Reserve cut interest rates by 50 basis points, followed by additional cuts of 25 basis points in November and December, totaling a full percentage point decrease for the second half of the year. This decision reflects the central bank's commitment to balancing its dual mandate of price stability and maximum full employment.
Current report
Before these rate cuts, the central bank was focused on combating inflation, with interest rates at their highest levels in over twenty years. For U.S. corporations, this high-interest rate environment increased the cost of capital. Despite the rate cuts in the latter part of 2024, interest rates remain relatively high compared to historical standards.
Current report
However, as of January 2025, the prime lending rate has come down to 7.5%, providing some relief to businesses by lowering the cost of borrowing. This reduction offers some support, but businesses still face challenges due to the overall high-interest rate environment. Access to capital remains somewhat constrained, and financial management strategies are still crucial. Consequently, the availability and cost of capital for our tenants remain high, necessitating the adoption of prudent financial management strategies.
Current report
Regulatory Update
Current report
On May 21, 2024, the Justice Department published a Notice of Proposed Rulemaking in the Federal Register for the Drug Enforcement Administration (“DEA”) to reschedule cannabis from Schedule I of the Controlled Substances Act (“CSA”), a list of completely prohibited drugs, to Schedule III, which includes prescription medications such as ketamine, Tylenol with codeine, and anabolic steroids. The proposed rule is based on an August 2023 recommendation by the Department of Health and Human Services (“HHS”). The comment period concluded on July 22, 2024. After reviewing over 43,000 comments to the proposed rule, including numerous requests for a hearing, the DEA Administrator granted a hearing and appointed an Administrative Law Judge (“ALJ”) to preside over the proceedings.
Current report
The ALJ held a procedural hearing in December 2024 and scheduled oral arguments to commence in January 2025. However, the hearing was delayed by at least 90 days due to a motion filed by parties in the proceedings to remove the DEA from hearings. This motion was granted by DEA Administrative Law Judge John Mulrooney, who cited compelling evidence suggesting that the DEA may have violated certain rules within the Administrative Procedures Act. A new hearing date has not been scheduled and is pending resolution of the request for the DEA’s removal.
Current report
The rescheduling of cannabis would mark a significant milestone, as we believe this reclassification would lift certain restrictions under IRS Section 280E, which currently prevents cannabis operators from taking certain tax deductions, resulting in onerous effective tax rates on state legal cannabis operators. Additionally, rescheduling should facilitate medical research and provide much-needed medical trials to document the efficacy of cannabis in treating multiple medical conditions.
Current report
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 costs 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.
Current report
We capitalize costs associated with building and tenant improvement when it is considered the accounting owner of such improvements. These improvements generally consist of building additions or significant upgrades to existing facilities. The improvements are classified under Buildings and Improvements in the consolidated balance sheet and are considered construction in progress until placed in service. Such improvements are considered placed in service when they are ready and available for their intended use.
Current report
Impairment of Real Estate
Current report
Revenue Recognition
Current report
Our 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.
Current report
Operating leases where the minimum lease payments are not reasonably predictable are recognized on a cash basis. The collectability criteria for our operating leases is assessed quarterly on an individual basis, incorporating several financial metrics, which include but are not limited to, free cash flow, profitability, debt profile and federal tax liability. In our assessment, we also consider the impact of federal regulatory uncertainty and state regulatory challenges in the cannabis industry, including the fact that cannabis remains illegal under federal law. These environmental factors are significant in our assessment of collectability of lease payments given the pervasive impacts on our tenants' financial performance and ability to continue as a going concern. Based on this assessment, we determined collectibility of rent for each of our tenants is uncertain and rental income was recorded on a cash basis. We will continue to assess quarterly the collectability of lease payments for each tenant as required by ASC 842.
Current report
In May 2024, we purchased a cultivation facility in Connecticut for approximately $4.0 million and committed to fund approximately $12.0 million in improvements.
Current report
Improvements Allowances
Current report
(1) Funded commitments related to the Missouri cultivation facility expansion project.
Current report
Loan Payable
Current report
During the year ended December 31, 2024, the Company’s board of directors declared cash dividends totaling $1.70 per share of common stock.
Current report
At the Market Program
Current report
On June 10, 2024, we entered into an Equity Distribution Agreement (the "EDA"), relating to shares of our common stock, $0.01 par value per share, pursuant to an “At The Market” (“ATM”) offering program. On November 20, 2024, we entered into another Equity Distribution Agreement (collectively the “EDAs”) related to our ATM program to add an additional sales agent. In accordance with the terms of the EDAs, we may offer and sell shares of our common stock having an aggregate offering amount of up to $50.0 million from time to time through a sales agent.
Current report
Revenues
Current report
•Generated approximately $0.4 million in rental income from the purchase of a cultivation facility in Connecticut in May 2024, reflecting approximately eight months of rental income for the year ended December 31, 2024.
Current report
•Generated a full year of rental income in 2024 from the acquisition and development of our Missouri cultivation facility's expansion project, which was acquired in the first quarter of 2023. This resulted in an additional $0.2 million in rental income for the year ended December 31, 2024.
Current report
•The funding of $15.1 million of improvements at our cultivation facilities in Arizona, Connecticut, Missouri and Pennsylvania generated approximately $1.4 million in rental income during the year ended December 31, 2024.
Current report
•Annual escalations within our portfolio generated an increase of approximately $1.8 million in rental income during the year ended December 31, 2024.
Current report
The increases in rental income during 2024 described above were offset by decreases in rental income primarily attributable to:
Current report
•In 2023, Revolutionary Clinics defaulted under their lease agreement, leading us to amend the lease in the fourth quarter as part of their business restructuring, which included receiving new third-party capital and appointing new management. As part of the amendment, we collected a portion of the back rent and received warrants in Revolutionary Clinics. However, in the second half of 2024, the tenant faced new operating challenges that impacted their ability to pay their full contractual rent, resulting in partial rent payments. Consequently, our rental income decreased year over year by $1.1 million due to these rent shortfalls in 2024 and the one-time rental revenue recorded in 2023 from the warrants received in lease restructuring.
Current report
•A decrease in rental income of approximately $0.2 million related to the sale of a cultivation facility in Massachusetts in October 2023.
Current report
Interest income from loans increased slightly due to the annual rate adjustment on our one loan receivable.
Current report
Fees and reimbursables for the year ended December 31, 2024 increased by approximately $0.2 million, to approximately $0.7 million, compared to approximately $0.4 million for the year ended December 31, 2023. The increase is primarily due to timing of revenue reimbursements year over year.
Current report
Depreciation and amortization expense for the year ended December 31, 2024, increased by approximately $0.4 million to approximately $14.7 million, compared to $14.3 million for the year ended December 31, 2023. The increase in depreciation was attributable to; (i) the acquisition of one cultivation facility acquired in May 2024 for approximately $4.0 million, which generated an increase of approximately $67 thousand; and (ii) an increase of approximately $0.4 million from approximately $37.3 million of improvements from our Arizona, Missouri and two Pennsylvania cultivation facilities that were placed into service during 2024.
Current report
Compensation expense for the year ended December 31, 2024, increased by approximately $0.2 million to approximately $4.7 million, compared to approximately $4.5 million for the year ended December 31, 2023. The increase was primarily due the annual grant of restricted stock units (“RSUs”) and performance stock units (“PSUs”) to certain officers, employees and directors in 2024.
Current report
Impairment Loss on Warrants
Current report
During the fourth quarter of 2024, Revolutionary Clinics entered into receivership. Based on our impairment assessments, we determined that the investment in warrants was impaired due to the significant concerns about Revolutionary Clinics' ability to continue as a going concern raised by the receivership (See “Note 10 - Warrants” for further information). As a result, we recorded an impairment loss on warrants of $522 thousand.
Showing the first 40 of 43 passages. Open the source sections for the rest.
Removed paragraphs (37)
Previous report
During the year ended December 31, 2023, we had one tenant, Revolutionary Clinics, Inc., (“Revolutionary Clinics”), who did not pay contractual rent commencing on January 1, 2023 on our cultivation facility located in Massachusetts. We held a security deposit of approximately three months of the base year contractual rent, of which we applied $315 thousand each quarter, or approximately $1.3 million towards the outstanding rent during 2023. As of December 31, 2023, the security deposit had been fully applied.
Previous report
On October 27, 2023, the Company entered into a lease amendment and forbearance agreement (the "Agreements”) for its existing lease agreement with Revolutionary Clinics. Under the terms of the Agreements, the lease term was extended by five years and we received approximately $480 thousand of unpaid rent which was recognized as rental income in the fourth quarter of 2023. Under the terms of the Agreements, the rental payments have annual fixed escalations and may escalate quarterly as the tenant’s business achieves certain gross revenue metrics based on the trailing twelve months performance. 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.
Previous report
Calypso
Previous report
On November 15, 2023, our tenant, Calypso Enterprises (“Calypso”) was sold by its parent Hero Diversified Associates, Inc. (“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, we reduced the rent payments, provided up to $3.0 million in tenant improvements allowance, provided an option to purchase the property at our cost basis, (inclusive of funding the $3.0 million of tenant improvements), and received six-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, we would receive a make-whole payment for rent through December 31, 2025. As compensation for providing such lease modifications, HDAI agreed to pay us approximately $1.5 million of additional rent to be paid in 5 installments over 18 months from November 15, 2023.
Previous report
Market Conditions
Previous report
During the year ended December 31, 2023, financial markets were volatile, reflecting heightened geopolitical risks and material tightening of financial conditions since the U.S. Federal Reserve began increasing interest rates in the spring of 2022. The tense regional banking crisis was short-lived as the banking system remained steady. Central banks continued to shrink their balance sheets during the latter half of the year, reducing market liquidity. There continues to be uncertainty regarding monetary policy and inflation. While most concerns about an economic recession have been pushed to the second half of 2024, or later, and while inflation has trended downward, there are concerns that inflation may still prove stickier than the market anticipates, creating risks to corporate profit margins. The Federal Reserve left rates unchanged so far in 2024, it has been signaling higher rates for longer and will not consider a rate cut as it continues to fight inflation, with borrowing costs at the highest level in 22 years. The increasing cost of capital is pressuring many U.S. Corporations. U.S. corporate defaults increased in 2023 compared to 2022. These current market conditions have increased the cost of capital and reduced the availability of capital for us and our tenants.
Previous report
Provision for Impairment
Previous report
During 2023, we exercised our option to purchase the adjacent parcel of land to expand our cultivation facility in Missouri for approximately $350 thousand and committed to fund $16.2 million in tenant improvements.
Previous report
Tenant Improvements Funded
Previous report
Disposal of Real Estate
Previous report
On October 27, 2023, we closed on the sale of our property in Palmer, Massachusetts, for $2.0 million, which was leased to Mint. Our 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.
Previous report
In January 2023, we paid our annual principal and interest payment of $1.0 million on our loan payable, which we entered into in connection with a sale leaseback transaction, to the seller of our cultivation facility in Chaffee, Missouri. The loan's outstanding balance as of December 31, 2023 was $1.0 million and the discount had been fully amortized.
Previous report
Stock Repurchase Program
Previous report
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.
Previous report
During the year ended December 31, 2023, pursuant to the stock repurchase program, we 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.
Previous report
Recent Developments
Previous report
Tenant Improvements
Previous report
Subsequent to December 31, 2023, we funded approximately $5.6 million of tenant improvements to our cultivation facilities in Arizona and Missouri.
Previous report
Revenue
Previous report
•A full year of rental income from two cultivation facilities acquired at the end of the second quarter of 2022. The increase also includes nine months 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. These acquisitions generated approximately $1.6 million of rental income during the year ended December 31, 2023.
Previous report
•Rental income from one cultivation facility that converted from a mortgage loan to a twenty-year sale-leaseback on August 5, 2022, which generated an increase of approximately $1.8 million of rental income during the year ended December 31, 2023.
Previous report
•Funding of tenant improvements at our Arizona, Florida, Pennsylvania and both Missouri cultivation facilities, which generated approximately $2.1 million of rental income during the year ended December 31, 2023.
Previous report
•Annual escalations on our portfolio which generated an increase of approximately $0.8 million of rental income during the year ended December 31, 2023.
Previous report
The increase in rental revenue was partially offset by a decrease of approximately $2.7 million primarily attributable to:
Previous report
•During the year ended December 31, 2023, Revolutionary Clinics, the tenant of our cultivation facility in Massachusetts, failed to pay seven months of contractual rent under its lease agreement of approximately $3.0 million. We applied their security deposit of approximately $1.3 million, towards the outstanding rent. On October 27, 2023, we entered into a lease amendment and forbearance agreement and collected a portion of the back rent of approximately $480 thousand for August and September and we collected rent at the full amended contractual amount for October through December 2023, totaling $1.2 million. The application of the security deposit and rent collected during the year ended December 31, 2023 resulted in a net decrease of rental income of approximately $2.6 million compared to rental income collected for the year ended December 31, 2022.
Previous report
•The sale of two Massachusetts properties, one during 2022 and one during 2023, that resulted in a net decrease to rental income of approximately $31 thousand for the year ended December 31, 2023.
Previous report
Interest income from loans decreased by approximately $1.9 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was attributable to the conversion of the $30.0 million mortgage loan that we entered into during the fourth quarter of 2021 that converted to a twenty-year sale-leaseback, in accordance with the loan agreement, on August 5, 2022.
Previous report
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. 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 are 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.
Previous report
Depreciation and amortization expense for the year ended December 31, 2023, increased by approximately $1.4 million to approximately $14.3 million, compared to $12.8 million for the year ended December 31, 2022. The increase in depreciation was attributable to; (i) a full year of depreciation on approximately $27.1 million related to the three cultivation facilities and one dispensary we acquired during 2022, which generated an increase of approximately $403 thousand; (ii) a full year of depreciation on approximately $28.5 million related to the cultivation facility that converted from a mortgage loan to a twenty-year sale-leaseback on August 5, 2022, which generated an increase of approximately
Previous report
$584 thousand; (iii) a full year of depreciation on approximately $21.0 million that was funded during the second quarter of 2022 in connection with the expansion at an existing cultivation facility in Florida, which generated an increase of approximately $300 thousand; (iv) approximately $30.8 million of improvements that were placed into service during 2022 and subsequent, which generated an increase of approximately $429 thousand; and (v) to a lesser extent, a full year of depreciation on approximately $0.1 million related to corporate assets that were placed into service during the third quarter of 2022, which generated an increase of approximately $12 thousand. These increases were slightly offset by a decrease of approximately $325 thousand related to adjustments for properties sold and assets that became fully depreciated.
Previous report
Compensation expense for the year ended December 31, 2023, decreased by approximately $1.6 million to $4.5 million, compared to $6.1 million for the year ended December 31, 2022. The decrease was primarily due to the following; (i) in connection with the retirement and the separation of certain executive officers during 2022 we incurred one-time severance payments of approximately $1.7 million; and (ii) the associated accelerated vesting of their restricted stock units (“RSUs”) of $0.2 million. The decrease was partially offset by (i) a full year of compensation expense for one executive officer and two employees hired during 2022; and (ii) increased expenses on RSUs and performance stock units (“PSUs”) granted to certain officers, employees and directors during 2023.
Previous report
Loss on Sale of Real Estate
Previous report
On March 21, 2022, we sold our dispensary in Franklin, Massachusetts for approximately $0.8 million, which was leased to PharmaCann. We recognized a loss on sale of property of $60 thousand during the year ended December 31, 2022.
Previous report
Interest expense increased during the year ended December 31, 2023 by approximately $0.1 million to $0.4 million compared to $0.3 million for the year ended December 31, 2022. The increase was mainly attributable to a full year of interest expense on the draw of $1.0 million from the Revolving Credit Facility we entered into on May 6, 2022, and the associated non-cash interest expense, which increased by approximately $268 thousand related to the amortization of deferred financing costs incurred in connection with this facility. The increase was partially offset by a decrease in interest expense on our loan payable in connection with the $1.0 million principal pay down in January 2023.
Previous report
Dividends
Previous report
As of December 31, 2023, the Company had $1.0 million drawn on our Revolving Credit Facility which bears interest at a rate of 5.65% per annum.
Previous report
The loan payable outstanding balance as of December 31, 2023 was $1.0 million and the discount had been fully amortized. Principal on the loan was payable in annual installments of which $1.8 million and $1.0 million were paid in January 2022 and January 2023, respectively. The final principal payment of $1.0 million was made on January 3, 2024.
Reworded paragraphs (34)
Previous wording
As of December 31, 2023, we owned a geographically diversified portfolio consisting of 31 properties across 12 states with 13 tenants, comprised of 17 dispensaries and 14 cultivation facilities.
Current wording
As of December 31, 2024, we owned a geographically diversified portfolio consisting of 32 properties across 12 states with 13 tenants, comprised of 17 dispensaries and 15 cultivation facilities.
Previous wording
Our results of operations are affected by a number of factors and depend on the rental income we receive from the properties that we own, interest income we receive from the loans we originate, 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.
Current wording
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, interest income we receive from the loans we originate, 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.
Previous wording
We generate rental income from our real estate properties that we own and from real estate properties that we expect to acquire in the future. The amount of rental income depends upon a number of factors, including:
Current wording
We generate rental income from our real estate properties that we own. The amount of rental income depends upon a number of factors, including:
Previous wording
For the year ended December 31, 2023, all of our rental income was derived from triple-net leases to 13 tenants. Our leases include a parent or other affiliate guarantee and obligate the tenant for all the ongoing expenses of a property, including real estate taxes, insurance, maintenance and utilities. Our rental income is, therefore, dependent on our tenants (and related guarantors) ability to meet their respective obligations to us. Our tenants operate in the cannabis industry. Changes in current 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 and could materially and adversely affect our ability to maintain or increase rental rates for our properties. 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.
Current wording
For the year ended December 31, 2024, all of our rental income was derived from triple-net leases to 13 tenants. Our leases include a parent or other affiliate guarantee and obligate the tenant for all the ongoing expenses of a property, including real estate taxes, insurance, maintenance and utilities. Our rental income is, therefore, dependent on our tenants (and related guarantors) ability to meet their respective obligations to us. Our tenants operate in the cannabis industry. Changes in current 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 and could materially and adversely affect our ability to maintain or increase rental rates for our properties. Further, 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.
Previous wording
We have 31 properties, leased to 13 tenants. All of our tenants are performing under their lease agreements as of December 31, 2023.
Current wording
We own 32 properties, leased to 13 tenants. As of December 31, 2024, all of our tenants are performing under their lease agreement with the exception of two tenants discussed below.
Previous wording
Inflation continues to trend 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 with global supply chain issues, and geopolitical issues, also continue to adversely impact costs and timing for completion of these development and redevelopment projects, which may result in cost overruns and delays in commencing operations on certain of our tenants' projects.
Current wording
Ongoing labor shortages with global supply chain issues, and geopolitical issues, also continue to adversely impact costs and timing for the completion of these development and redevelopment projects. These factors may result in cost overruns and delays in commencing operations on certain of our tenants' projects.
Previous wording
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. Below is a summary of our critical accounting policies that involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations. This discussion of our critical accounting estimates is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates and assumptions. For further discussion of our significant accounting policies, see Note
Current wording
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. Below is a summary of our critical accounting estimates that involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations. This discussion of our critical accounting estimates is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates and assumptions. For further discussion of our significant accounting policies, refer to Note
Previous wording
Investment in Real Estate Properties and Depreciation
Current wording
Investment in Real Estate
Previous wording
All of our acquisitions of rental properties to date were accounted for as asset acquisitions because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets. Upon acquisition of a property, we allocate the purchase price of the real estate to land, building and improvements (inclusive of tenant improvements and site improvements) and, if applicable, determine 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 exercise judgement to determine the estimated fair value. For example the fair value of the land is determined by reviewing comparable sales within the same submarket and/or region, the fair value of buildings on an as-if vacant basis may be based on assumption of projected growth in rental rates and operating expenses, anticipated trends and market/economic conditions and we may engage third-party valuation specialists. The determination of the fair value at acquisition based on the above methodology for land and building may involve inputs that require significant judgment. The use of different assumptions can affect the amount of consideration allocated to the acquired depreciable/amortizable asset, which in turn can impact our net income due to the recognition of the related depreciation/amortization expense in our consolidated statements of operations.
Current wording
Upon acquisition of a property, we allocate the purchase price of the real estate to land, building and 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.
Previous wording
We depreciate the amounts 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. Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment.
Current wording
We depreciate the amount allocated to building and improvements on a straight-line basis over their estimated useful lives, which generally range from 20 to 35 years. Site improvements at our buildings, if any, are depreciated over the estimated useful lives, generally range from 8 to 15 years. Tenant improvements are depreciated on a straight-line basis over the lease term and intangibles related to in-place leases are amortized over the remaining lease term.
Previous wording
We review current activities and changes in the business condition of all of our properties to determine the existence of any triggering events or impairment indicators. We evaluate our real estate assets for impairment on a property-by property basis. If triggering events or impairment indicators are identified, we analyze the carrying value of our 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.
Current wording
We review current activities and changes in the business condition of all of our properties to identify any triggering events or impairment indicators. Each real estate asset is evaluated for impairment on a property-by-property basis. If triggering events or impairment indicators are identified, we assess the carrying value of the real estate for potential impairment. Indicators of impairment may 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.
Previous wording
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 we utilize in this analysis include projected rental rates, estimated holding periods, capital expenditures and property sales capitalization rates. Our undiscounted cash flow and fair value calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flow and property fair values, including determining our estimated holding period and selecting the discount or capitalization rate that reflects the risk inherent in future cash flow. If the actual net cash flow or actual market capitalization rates significantly differ from our estimates, the impairment evaluation for an individual asset could be materially affected.
Current wording
An impairment provision is recorded 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 we utilize in this analysis include projected rental rates, estimated holding periods, capital expenditures and property sales capitalization rates. Our undiscounted cash flow and fair value calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flow and property fair values, including determining our estimated holding period and selecting the discount or capitalization rate that reflects the risk inherent in future cash flow. If the actual net cash flow or actual market capitalization rates significantly differ from our estimates, the impairment evaluation for an individual asset could be materially affected. The amount of the impairment recorded is based on the fair market value of the real estate asset.
Previous wording
Lease classification for leases under which we are 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 us 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. The determination of lease classification requires the calculation of the rate implicit in the lease or the use of an appropriate cap rate requires significant judgement.
Current wording
Lease classification for leases under which we are 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 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 us 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. The determination of lease classification requires the calculation of the rate implicit in the lease or the use of an appropriate capitalization rate which requires significant judgement.
Previous wording
During 2023, we funded approximately $14.4 million of tenant improvements to our cultivation facilities in Arizona, Missouri and Pennsylvania.
Current wording
During the year ended December 31, 2024, we funded approximately $15.1 million of improvements to our cultivation facilities in Arizona, Connecticut, Missouri and Pennsylvania.
Previous wording
The following table presents the tenant improvements funded during the year ended December 31, 2023 (in thousands):
Current wording
The following table presents the funded commitments and the remaining unfunded commitments for the year ended December 31, 2024 (in thousands):
Previous wording
(1) Effective June 1, 2023, the lease agreement was amended to include an additional TI commitment of approximately $6.5 million.
Current wording
(2) Effective June 6, 2024, the lease agreement was amended to include an additional commitment of approximately $800 thousand which was funded during the year ended December 31, 2024.
Previous wording
On January 3, 2024, we paid our annual principal and interest payment of $1.0 million on our loan payable, which we entered into in connection with a sale leaseback transaction, to the seller of our cultivation facility in Chaffee, Missouri. This represents the final installment payment on our loan payable.
Current wording
On January 3, 2024, we made our final annual principal and interest payment of approximately $1.0 million on our loan payable to the seller of a cultivation facility in Chaffee, Missouri.
Previous wording
As of December 31, 2023, we had outstanding borrowings of $1.0 million under our Revolving Credit Facility and $89.0 million in funds available to be drawn, subject to sufficient collateral in the borrowing base.
Current wording
As of December 31, 2024, we had outstanding borrowings of $7.6 million under our Revolving Credit Facility and $82.4 million in funds available to be drawn, subject to sufficient collateral in the borrowing base. For further discussion of our Revolving Credit Facility, refer to Note 6 “Financings” to our consolidated financial statements included in this Form 10-K.
Previous wording
We derive substantially all our revenue from rents received from single tenants at each of our 31 properties under triple-net leases. We have low leverage on the portfolio with only $1.0 million outstanding under our revolving credit facility and low general and administrative expense with an annualized ratio of 1.33% of total assets.
Current wording
We derive substantially all our revenue from rents received from single tenants at each of our 32 properties, all of which are under triple-net leases. As of December 31, 2024, our portfolio remains conservatively leveraged, with only $7.6 million outstanding under our Revolving Credit Facility. Additionally, we maintain low general and administrative expenses with an annualized ratio of 1.4% of total assets.
Previous wording
Rental income for the year ended December 31, 2023 increased by approximately $4.1 million, to approximately $46.3 million, compared to approximately $42.2 million for the year ended December 31, 2022. The increase in rental income was primarily attributable to:
Current wording
Rental income for the year ended December 31, 2024 increased by approximately $2.6 million, to approximately $48.9 million, compared to approximately $46.3 million for the year ended December 31, 2023. The increase in rental income was primarily attributable to:
Previous wording
Property expenses for the year ended December 31, 2023 increased by approximately $0.4 million to approximately $0.7 million, compared to $0.2 million for the year ended December 31, 2022. The increase was primarily attributable to insurance, real estate taxes and legal fees paid on behalf of certain tenants, which will be reimbursed to us.
Current wording
Property expenses for the year ended December 31, 2024 decreased by approximately $0.4 million to approximately $0.2 million, compared to $0.7 million for the year ended December 31, 2023. The decrease was primarily attributable to the timing of insurance costs incurred in 2023, which were reimbursed to us during 2024.
Previous wording
Total general and administrative expenses for the year ended December 31, 2023 decreased by approximately $1.8 million, to $7.6 million, compared to $9.4 million for the year ended December 31, 2022. The decrease in general and administrative expense is described below by category.
Current wording
Total general and administrative expenses for the year ended December 31, 2024 increased by approximately $0.4 million, to approximately $7.9 million, compared to approximately $7.6 million for the year ended December 31, 2023. The increase in general and administrative expense is described below by category.
Previous wording
Professional fees for the year ended December 31, 2023, decreased by approximately $0.2 million to $1.4 million, compared to $1.6 million for the year ended December 31, 2022. The decrease was mainly attributable to a reduction of approximately $115 thousand related to the elimination of outsourced accounting functions, a decrease of approximately $196 thousand in recruiting fees not incurred during 2023, and a reduction of approximately $139.4 thousand related to costs incurred for potential restructuring. These decreases were partially offset by increases in consulting fees, legal fees and tax preparation fees.
Current wording
Professional fees for the year ended December 31, 2024, increased by approximately $0.1 million to approximately $1.5 million, compared to approximately $1.4 million for the year ended December 31, 2023. The increase was mainly attributable to an increase of approximately $0.2 million of legal fees and approximately $0.1 million related to costs incurred for potential restructuring. These increases were partially offset by a reduction of approximately $0.1 million in audit and tax fees due to timing of these services.
Previous wording
Other general and administrative expenses were relatively flat year over year. 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.
Current wording
Other general and administrative expenses are primarily comprised of director and officer insurance, information technology fees, public relations fees, filing and regulatory fees, public reporting fees, corporate rent and various other expenses. Other general and administrative expenses were relatively flat year over year.
Previous wording
On January 1, 2023, we adopted ASC 326, Financial Instruments - Credit Losses. In connection with this adoption, we used a discounted cash flow model to determine an expected credit loss on our loan receivable and recorded a provision for current expected credit loss of $167 thousand during the year ended December 31, 2023.
Current wording
On January 1, 2023, we adopted ASC 326, Financial Instruments - Credit Losses. In connection with this adoption, we used a discounted cash flow model to determine an expected credit loss on our loan receivable and recorded a provision for current expected credit loss of $167 thousand during the year ended December 31, 2023. During the year ended December 31, 2024, we recorded a reduction in the provision for current expected credit loss of approximately $51 thousand, which reduced the allowance for credit loss to approximately $116 thousand as of December 31, 2024.
Previous wording
Interest income increased during the year ended December 31, 2023, by approximately $0.6 million, to $0.7 million, compared to $0.1 million for the year ended December 31, 2022, primarily due to higher interest rates on our cash balances in our money market accounts.
Current wording
Other income, which is mainly comprised of interest income decreased during the year ended December 31, 2024, by approximately $0.3 million, to $0.4 million, compared to $0.7 million for the year ended December 31, 2023, due to lower cash balances in our money market accounts. We primarily used cash liquidity to pay dividends and fund improvement allowances. Refer to the “Summary of Cash Flows” for further information.
Previous wording
Our cash requirements include the payment of dividends to our shareholders, distributions to our OP Unitholders, general and administrative expenses, debt service, other expenses related to managing our existing portfolio as well as acquisitions 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 OP Units to acquire properties from existing owners seeking a tax-deferred transaction.
Current wording
Our cash requirements include the payment of dividends to our shareholders, distributions to our OP Units holders (“OP Unitholders”), general and administrative expenses, debt service, other expenses related to managing our existing portfolio, as well as acquisitions and unfunded improvement commitments on our properties. The sources of liquidity to fund these cash requirements include rental income 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, including issuance of common stock under our ATM Program, if markets permit. Where possible, we also may issue OP Units to acquire properties from existing owners seeking a tax-deferred transaction.
Previous wording
As of December 31, 2023, we had $114.8 million of liquidity comprised of $25.8 million of cash and cash equivalents and $89.0 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.
Current wording
As of December 31, 2024, we had $102.6 million of liquidity comprised of $20.2 million of cash and cash equivalents and $82.4 million available on our $90.0 million Revolving Credit Facility, subject to sufficient collateral in the borrowing base. Additionally, the ATM Program allows us to raise capital up to $50.0 million. 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.
Previous wording
Net cash provided by operating activities for the years ended December 31, 2023 and 2022 were approximately $40.1 million and $37.0 million, respectively. Net cash flows provided by operating activities primarily related to contractual rent and security deposits from our properties, partially offset by our general and administrative expenses.
Current wording
Net cash provided by operating activities for the years ended December 31, 2024 and 2023 were approximately $43.3 million and approximately $40.1 million, respectively. Net cash flows provided by operating activities primarily related to contractual rent received from our properties, partially offset by our general and administrative expenses.
Previous wording
Net cash used in investing activities for the years ended December 31, 2023 and 2022 were approximately $12.8 million and $86.5 million, respectively. Net cash used in investing activities for the year ended December 31, 2023 related to approximately $350 thousand used to purchase an adjacent parcel of land by an existing cultivation facility in Missouri and approximately $14.4 million used to fund tenant improvements, offset by approximately $1.9 million of proceeds received in connection with the sale of our Palmer, Massachusetts property. Net cash used in investing activities for the year ended December 31, 2022 related to approximately $37.0 million used to purchase three cultivation facilities and one dispensary, approximately $45.2 million used to fund tenant improvements, and $5.0 million used to fund an unsecured loan receivable at our cultivation facility in Missouri, partially offset by approximately $0.8 million of proceeds received from the sale of our Franklin, Massachusetts property.
Current wording
Net cash used in investing activities for the years ended December 31, 2024 and 2023 were approximately $19.1 million and approximately $12.8 million, respectively. Net cash used in investing activities for the year ended December 31, 2024 related to approximately $4.0 million used to purchase a cultivation facility in Connecticut and approximately $15.1 million used to fund improvements at four cultivation facilities. Net cash used in investing activities for the year ended December 31, 2023 related to approximately $0.4 million used to purchase an adjacent parcel of land by an existing cultivation facility in Missouri and approximately $14.4 million used to fund improvement at four cultivation facilities, partially offset by approximately $1.9 million of proceeds received from the sale of our Palmer, Massachusetts property.
Previous wording
Net cash used in financing activities for the years ended December 31, 2023 and 2022 were approximately $46.6 million and $32.5 million, respectively. Cash used in financing activities for the year ended December 31, 2023, related to approximately $33.7 million in dividend payments to holders of our common stock as well as distributions to OP Unitholders and dividend equivalents to RSU holders, $1.0 million to pay down principal on our loan payable, approximately $11.8 million to buy back stock under the stock repurchase program, approximately $28 thousand in deferred financing costs related to updating our Revolving Credit Facility and approximately $43 thousand of cash paid for taxes in lieu of issuance of common stock. Net cash provided by financing activities for the year ended December 31, 2022, were related to approximately $29.7 million in dividend payments to holders of our common stock as well as distributions to OP Unitholders and dividend equivalents to RSU holders, $1.8 million to pay down principal on our loan payable, approximately $1.2 million in deferred financing costs related to obtaining our Revolving Credit Facility and approximately $813 thousand of cash paid for taxes in lieu of issuance of common stock, offset by $1.0 million drawn on our Revolving Credit Facility.
Current wording
Net cash used in financing activities for the years ended December 31, 2024 and 2023 was approximately $29.8 million and approximately $46.6 million, respectively. Cash used in financing activities for the year ended December 31, 2024, related to approximately $35.0 million in dividend payments to holders of our common stock, as well as distributions on our OP Units, $1.0 million to pay down our loan payable, approximately $0.3 million of deferred offering costs incurred in connection with our ATM Program and approximately $84 thousand of cash paid for taxes in lieu of issuance of common stock. These cash outflows were offset by a cash inflow of $6.6 million from draws on our Revolving Credit Facility. Net cash used in financing activities for the year ended December 31, 2023, mainly related to approximately $33.7 million in dividend payments to holders of our common stock, as well as distributions on our OP Units, $1.0 million to pay down our loan payable, approximately $11.8 million to buy back stock under the stock repurchase program and approximately $43 thousand of cash paid for taxes in lieu of issuance of common stock.
Previous wording
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 year ended December 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 approximately $1.57 per share. During the year ended December 31, 2022, 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 approximately $1.44 per share.
Current wording
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 year ended December 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 the Operating Partnership, we authorized distributions on our OP Units totaling $1.70 per share.
Previous wording
As of December 31, 2023, we had aggregate unfunded commitments to invest $14.4 million to develop and improve our existing cultivation facilities in Arizona, Missouri, and Pennsylvania.
Current wording
As of December 31, 2024, we had aggregate unfunded commitments to invest approximately $11.0 million to develop and improve our existing cultivation facility in Connecticut.
Previous wording
As of December 31, 2023, we are 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. The office lease has a remaining average lease term of approximately 2.7 years.
Current wording
As of December 31, 2024, we are 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. The office lease has a remaining average lease term of approximately 1.67 years.
Rearranged current paragraphs (4)
Current report — wording carried from elsewhere
While inflation has begun to subside, it continues to trend higher than in prior years, which may be negatively impacting some of our tenants. Based on the Bureau of Labor Statistics, the annual inflation rate for the United States was 2.9% for the twelve month period ended December 2024. 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 projects.
Current report — wording carried from elsewhere
We expect that our cash flow from continuing operations over the next twelve months, combined with our cash reserves, will be sufficient to fund our business operations, pay cash dividends to our shareholders, make distributions on our OP Units, and cover debt service.
Current report — wording carried from elsewhere
Acquisitions and unfunded improvement allowance costs may require funding from borrowings, equity issuance and/or issuance of OP Units.
Current report — wording carried from elsewhere
During the year ended December 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 $1.57 per share.
Rearranged previous paragraphs (1)
Previous report — wording carried elsewhere
Fees and reimbursables remained relatively flat year over year.