NewLake Capital Partners Inc

General

NewLake Capital Partners, Inc., (“the “Company” “we,” “our,” “us,”), a Maryland corporation, was formed on April 9, 2019 under the Maryland General Corporation Law, as GreenAcreage Real Estate Corp. (“GARE”) and subsequently changed our name to NewLake Capital Partners, Inc. We are an internally managed real estate investment trust (“REIT”) focused on providing real estate capital to state-licensed cannabis operators through sale-leaseback transactions, third-party purchases and funding for build-to-suit projects. We elected to be taxed as a REIT beginning with our short taxable year ended December 31, 2019 and intend to continue to operate our business so as to continue to qualify as a REIT.

Our properties are leased to single tenants on a long-term, triple-net basis, which obligates the tenant to be responsible for the ongoing expenses of a property, in addition to its rent obligations. Our tenants operate in the fast-growing cannabis industry. We supply necessary real estate capital primarily to companies that cultivate, produce and/or dispense cannabis. We believe we fill a need in an underserved market that has been created by, among other factors, the misalignment of federal and state legislation regarding cannabis. Moreover, we believe the banking industry’s general reluctance to finance owners of cannabis-related facilities, coupled with the owners’ need for capital to fund the growth of their operations, should result in significant opportunities for us to acquire cultivation properties and dispensaries that provide stable and increasing rental revenue along with the potential for long-term appreciation in value.

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. Our leases include a parent or other affiliate guarantee.

Our Investment Strategy

According to BDSA, legal cannabis sales in the U.S. totaled $29.5 billion in 2023. Sales for 2024 are expected to total $32.4 billion and reach $46 billion in 2028. As the regulated state-legal cannabis industry continues to expand, we believe it presents a compelling opportunity to invest in revenue-centric cultivation and dispensary real estate, which is mission-critical to the industry. This growth is expected to drive significant demand for real estate capital due to the industry's real estate-intensive nature and the limited availability of capital for operators, creating a unique market opportunity for us. Furthermore, we anticipate that acquisition opportunities will increase as more states legalize medical-use and adult-use cannabis and license new retail dispensaries and cultivation operations.

The federal status of cannabis has significantly limited state-licensed industry participants' access to the U.S. banking system and traditional financing sources. Due to this lack of access, our sale-leaseback transactions provide an attractive financing solution to state-licensed medical-use and adult-use cannabis retailers and cultivators. While future changes in federal and state laws may eventually open up new financing options, we believe these changes will take time, and our sale-leaseback solutions will remain appealing to industry participants.

We capitalize on this market opportunity by purchasing medical-use and adult-use retail cannabis dispensaries and cultivation facilities in states that permit such activities. We aim to provide long-term, single-tenant, triple-net sale-leaseback and build-to-suit transactions, including property acquisitions and capital for tenant development and expansion.

Our target markets are states and municipalities where licensed cannabis properties are in high demand and connected to the operating license. States with licensing limitations and rigorous requirements present more attractive investment opportunities due to better-capitalized operators and more valuable properties for remarketing. Additionally, states with relaxed regulatory environments but strict municipal laws may offer similar opportunities.

Since transporting cannabis across state lines remains illegal, each state has its own supply and demand dynamics driven by its cannabis laws and regulations. We prioritize states with favorable dynamics for tenant credit risk, focusing on population, licensing limits, approved medical conditions, and the number of licenses. Limited-license jurisdictions typically have more restrictions, creating a natural barrier to entry and a more favorable operating environment for our lessees, reducing their credit risk compared to operators in states with unlimited licenses.

Our Properties

We believe that our focus on cannabis properties in limited-license jurisdictions, where the property is an integral part of the license application process and moving the licensee’s operations from one location to another would require regulatory or other approvals, provides the opportunity to capture rental income on properties with above-market property level cash flows and greater re-leasing probability as these properties are generally in high demand. Generally, a tenant’s ability to meet rental obligations is strongly correlated to the tenant’s revenues derived from the property. In our experience, cannabis operations in limited-license jurisdictions generally have less competition and produce a higher revenue per square foot than unlimited-license cannabis jurisdictions, as well as traditional industrial and retail businesses. We believe that our portfolio has a property rent coverage (generally, the ability of the tenant to generate income sufficient to satisfy its rent and other financial obligations) that is significantly greater than the average for the overall commercial real estate industry.

The table below summarizes our portfolio by property type for the year ended December 31, 2024:

(1) 2024 rental income represents the total rental income, including fees and escrow/security deposits applied and excluding reimbursables of approximately $471 thousand, collected during the year ended December 31, 2024.

Competition

The current market for properties that meet our investment objectives is limited. In addition, we believe finding properties that are appropriate for the specific use of allowing medical-use and adult-use cannabis operators may be limited as more competitors enter the market, and as regulated cannabis operators obtain greater access to alternative financing sources, including but not limited to equity and debt financing sources.

We face significant competition from a diverse mix of market participants, including but not limited to, other companies with similar business models, including those companies involved in the sale of certain hemp extract products (including delta-8 THC, among others), independent investors, hedge funds and other real estate investors, hard money lenders, and cannabis operators themselves, all of whom may compete with us in our efforts to acquire real estate zoned for regulated cannabis facilities. In some instances, we will be competing to acquire real estate with persons who have no interest in the cannabis industry but have identified value in a real estate location that we may be interested in acquiring. In particular, we face competition from established companies in this industry, as well as local real estate investors, particularly for smaller retail assets. We have also seen competition from emerging debt funds. We believe that most cannabis cultivation facilities typically require capital in excess of $20.0 million, which could provide some barriers for smaller potential competitors.

These competitors may prevent us from acquiring desirable properties, may cause an increase in the price we must pay for properties or may lower the yield on the properties we acquire. Our competitors may have greater financial and operational resources than we do and may be willing to pay more for certain assets or may be willing to accept more risk than we believe can be prudently managed. In particular, larger companies may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Our competitors may also adopt transaction structures similar to ours, which would decrease our competitive advantage in offering flexible transaction terms.

In addition, due to a number of factors, including but not limited to potential greater clarity of the laws and regulations governing regulated cannabis by state and federal governments, the number of entities and the amount of funds competing for suitable investment properties may increase substantially, resulting in increased demand and increased prices paid for these properties. Furthermore, changes in federal regulations pertaining to cannabis could also lead to increased access to U.S. capital markets for our competitors and for regulated cannabis operators (including but not limited to access to Nasdaq and/or the New York Stock Exchange). We compete for the acquisition of properties primarily based on their purchase price and lease terms. If we pay higher prices for properties or offer lease terms that are less attractive for us, our profitability may decrease, and investors may experience a lower return on our common stock. Increased competition for properties may also preclude us from acquiring those properties that would generate attractive returns to us.

Risk Management

We are focused on further creating a diversified portfolio based on tenants, geographical concentration and license concentration (i.e., dispensary vs. cultivation). In completing rigorous asset-level and tenant due diligence, we draw upon a pool of highly experienced professionals within our management team, investment committee and third parties to underwrite, evaluate and diligence investment opportunities. We may obtain third-party property condition reports, environmental reviews and other customary diligence items.

Our underwriting criteria primarily focuses on the following; (i) the tenant quality, the property including earnings before interest, income taxes, depreciation, amortization, and rent (“EBITDAR”), and track record of paying obligations; (ii) the tenant and the guarantor’s financial stability and capacity to meet all their respective obligations, including rent, insurance and taxes; and (iii) the tenant’s ability to withstand varying market conditions and adjust to an evolving market landscape.

We are active in the management of our portfolio to minimize risk. We are hands-on and work with our tenants and industry participants more broadly, to understand the operating environment and continually reassess the risk profile of our investments and our broader strategy. From time to time, we will work with our tenants to identify opportunities to reposition assets to optimize long term value for our shareholders. If a tenant default arises, our team will work diligently with the tenant to identify a path to cure such default and in some cases may seek to re-tenant the building with a better quality tenant.

We evaluate the credit quality of our tenants and any guarantors on an ongoing basis. In addition, we monitor the payment history data for all of our tenants and, in some instances, we monitor our tenants by periodically conducting site visits and meeting with the tenants to discuss their operations. We generally receive financial information from our tenants and review as part of our evaluation. For additional risks associated with our tenants refer to “Risks Related to Our Business” under Item 1A, “Risk Factors.”

Our Financing Strategy

We intend to meet our long-term liquidity needs through cash flow from operations, the issuance of equity and debt securities, including common stock, preferred stock and long-term notes, credit facilities and asset level financing from financial institutions. Where possible, we also may issue limited partnership interests in NLCP Operating Partnership, our operating partnership (“OP Units”) to acquire properties from existing owners seeking a tax-deferred transaction. We expect to issue equity and debt securities at times when we believe that our stock price or cost of debt capital, respectively, is at a level that allows for the reinvestment of offering proceeds in accretive property acquisitions. We may also issue common stock to permanently finance properties that were previously financed by debt securities. However, we cannot assure you that we will have access to the capital markets at times and on terms that are acceptable to us. Our investment guidelines provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at the time of any new borrowing, subject to our board of directors’ discretion.

United States Federal and State Regulatory Update

As of December 31, 2024, 46 U.S. states have approved a medical or limited medical cannabis program and 24 states have legalized cannabis for both medical and adult-use. All considered, 92% of the U.S. population resides in a market where some form of medical cannabis is legal.

Despite the legal, regulatory, and political obstacles the cannabis industry currently faces, it has continued to grow. Our expectation is that the federal government will eventually repeal the federal prohibition on cannabis and thereby leave the states to decide whether to permit regulated cannabis cultivation, production, and sale, just as states are free today to decide policies governing the distribution of alcohol or tobacco.

Rescheduling of Cannabis

In connection with President Biden's October 6, 2022 announcement directing the Secretary of Health and Human Services (“HHS”)and the Attorney General to conduct a review of how marijuana is scheduled under federal law, in August 2023, the HHS requested the Drug Enforcement Administration (“DEA”) reschedule cannabis from a Schedule I to a Schedule III under the Controlled Substances Act (“CSA”).

On May 21, 2024, the Justice Department published a Notice of Proposed Rulemaking in the Federal Register for the DEA to reschedule marijuana from Schedule I of the 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 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.

The ALJ held a procedural hearing in December 2024 and scheduled oral agruments to commence in January 2025. However, the hearing was delayed at least 90 days due to a motion to remove the DEA from the hearings. This motion was granted by Chief DEA Administrative Law Judge John Mulrooney, who cited 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.

The rescheduling of marijuana would mark a significant milestone, as we believe this reclassification would lift current 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 could facilitate medical research and provide much-needed medical trials to document the efficacy of cannabis in treating multiple medical conditions.

The rescheduling process may be impacted by political appointees such as the DEA Administrator, Attorney General and Secretary of Health and Human Services, While President Trump has voiced his support for cannabis reforms such as rescheduling to Schedule III, the Secure and Fair Enforcement (“SAFE”) Banking Act and the States Reform Act (the “States Act”), a number of his appointees have expressed a historical perspective that are more conservative perspectives regarding these reforms.

The Secure and Fair Enforcement Act

The SAFE Banking Act aims to provide protections for financial institutions that serve state-sanctioned marijuana businesses. The bill would prevent federal banking regulators from penalizing banks and credit unions for providing services to cannabis-related businesses. This would include ensuring that proceeds from transactions involving state-sanctioned marijuana businesses are not considered unlawful. The SAFE Banking Act has been passed by the House of Representatives multiple times but has faced challenges in the Senate. In September 2023, the Senate Banking Committee passed the Secure and Fair Enforcement Regulation (“SAFER”) Banking Act with bipartisan support, which aims to further normalize financial transactions for cannabis businesses. The bill never received a Senate floor vote. However, it is expected that the bill will be reintroduced during the current legislative period. If passed, the bill would provide protections for financial institutions that serve state-sanctioned marijuana businesses, allowing them to access traditional banking services without fear of federal penalties.

The Marijuana Opportunity Reinvestment and Expungement Act

The Marijuana Opportunity Reinvestment and Expungement (“MORE”) Act seeks to decriminalize marijuana at the federal level by removing it from the list of scheduled substances under the Controlled Substances Act. The bill also aims to address social justice issues by expunging prior cannabis convictions and providing reinvestment in communities adversely impacted by the War on Drugs. Additionally, the MORE Act includes provisions to prohibit the denial of federal benefits based on cannabis-related conduct and to support small businesses in the cannabis industry through grants and loans. The MORE Act passed the House of Representatives on April 1, 2022. However, it has faced challenges in the Senate and was not brought to a vote. The MORE Act was refiled in the House in September 2023, but did not get a floor vote.

Other Regulatory and Legal Developments

Advocates for gun rights have filed numerous lawsuits challenging the federal ban on firearm possession by medical marijuana patients, arguing that it infringes on Second Amendment rights. Federal Circuit Courts have differed on the issue and appeal to the Supreme Court is possible. Meanwhile, a lawsuit led by David Boies contests federal authority over state-regulated cannabis markets, asserting states' rights to regulate their own economies without federal oversight. These legal challenges underscore the ongoing complexities and uncertainties in the regulatory landscape for the cannabis industry.

State Laws Applicable to the Medical-use and Adult-use Cannabis Industry

In states that have legalized medical or adult-use cannabis, operators generally need one or more licenses for growing, processing, and dispensing cannabis, in accordance with state requirements. State and local governments also impose various regulations on these activities. Consequently, laws and regulations vary widely, covering aspects such as permitted cannabis products, qualifications of health professionals, medical conditions qualifying for cannabis use, product testing, enforcement levels, taxation, local bans, and licensing processes.

If tenants default under their leases, finding new tenants who can legally engage in cannabis cultivation, processing, or dispensing may be difficult. There is no guarantee that state laws will not be repealed, amended, or overturned, nor that local authorities won't limit the applicability of state laws. Until Congress amends or repeals the CSA with respect to cannabis, and the President approves such action, federal authorities may enforce current federal laws. If federal enforcement occurs or state laws are repealed or curtailed, our business, operations, financial condition, and prospects could be adversely affected.

Financial Services for Cannabis Industry

The federal status of cannabis has significantly limited state-licensed industry participants' ability to fully access the U.S. banking system and traditional financing sources. These restrictions, combined with the high costs of maintaining licensed and stringently regulated cannabis facilities, substantially increase production costs. While future changes in federal and state laws may open up new financing options, our sale-leaseback and other real estate solutions remain attractive capital options for regulated state operators. However, some regional banks and credit unions have stepped up to fill this gap, offering services such as business checking accounts, cash depository, merchant services, and loans.

In addition, for our tenants that are publicly-traded companies, securities clearing firms may refuse to accept deposits of securities of those tenants, which may negatively impact the trading and valuations of such tenants and have a material adverse impact on our tenants’ ability to finance their operations and growth through the capital markets.

The increased uncertainty surrounding financial transactions related to cannabis activities may also result in financial institutions discontinuing services to the cannabis industry. See “Risk Factors - Risks Related to Regulation.”

Agricultural Regulation

The medical-use and adult-use cannabis properties that we own that are used primarily for cultivation and production of medical-use and adult-use cannabis are subject to the laws, ordinances and regulations of state, local and federal governments, including laws, ordinances and regulations involving land use and usage, water rights, treatment methods, disturbances, the environment, and eminent domain.

Each governmental jurisdiction has its own distinct laws, ordinances and regulations governing the use of agricultural lands and water. Many such laws, ordinances and regulations seek to regulate water usage and water runoff because water can be in limited supply, as is the case in certain locations where our properties are located. In addition, runoff from rain or from irrigation is governed by laws, ordinances and regulations from state, local and federal governments. Additionally, if any of the water used on or running off from our properties flows to any rivers, streams, ponds, the ocean or other waters, there may be specific laws, ordinances and regulations governing the amount of pollutants, including sediments, nutrients and pesticides, that such water may contain.

We believe that our existing properties have, and other properties that we acquire in the future will have, sources of water, including wells and/or surface water that provide sufficient amounts of water necessary for the current operations at each location. However, should the need arise for additional water from wells and/or surface water sources, we may be required to obtain additional permits or approvals or to make other required notices prior to developing or using such water sources. Permits for drilling water wells or withdrawing surface water may be required by federal, state and local governmental entities pursuant to laws, ordinances, regulations or other requirements, and such permits may be difficult to obtain due to drought, the limited supply of available water within the districts of the states in which our properties are located or other reasons.

In addition to the regulation of water usage and water runoff, state, local and federal governments also seek to regulate the type, quantity and method of use of chemicals and materials for growing crops, including fertilizers, pesticides and nutrient rich materials. Such regulations could include restricting or preventing the use of such chemicals and materials near residential housing or near water sources. Further, some regulations have strictly forbidden or significantly limited the use of certain chemicals and materials. Licenses, permits and approvals must be obtained from governmental authorities requiring such licenses, permits and approvals before chemicals and materials can be used at grow facilities. Reports on the usage of such chemicals and materials must be submitted pursuant to applicable laws, ordinances, and regulations and the terms of the specific licenses, permits and approvals. Failure to comply with laws, ordinances and regulations, to obtain required licenses, permits and approvals or to comply with the terms of such licenses, permits and approvals could result in fines, penalties and/or imprisonment.

Because properties we own may be used for growing medical-use and adult-use cannabis, there may be other additional land use and zoning regulations at the state or local level that affect our properties that may not apply to other types of agricultural uses. For example, certain states in which our properties are located require stringent security systems in place at grow facilities and require stringent procedures for disposal of waste materials.

As an owner of cultivation facilities, we may be liable or responsible for the actions or inactions of our tenants with respect to these laws, regulations and ordinances.

Environmental Matters

Our properties and the operations thereon are subject to federal, state and local environmental laws, ordinances and regulations, including laws relating to water, air, solid wastes and hazardous substances. Our properties and the operations thereon are also subject to federal, state and local laws, ordinances, regulations and requirements related to the federal Occupational Safety and Health Act, as well as comparable state statutes relating to the health and safety of our employees and others working on our properties. Although we believe that we and our tenants are in material compliance with these requirements, there can be no assurance that we will not incur significant costs, civil or criminal penalties or liabilities, including those relating to claims for damages to persons, property or the environment resulting from operations at our properties. Furthermore, many of our properties have been repurposed for regulated cannabis operations, and historically were utilized for other purposes, including heavy industrial uses, which expose us to additional risks associated with historical releases of substances at the properties.

Real Estate Industry Regulation

Generally, the ownership and operation of real properties are subject to various laws, ordinances and regulations, including regulations relating to zoning, land use, water rights, wastewater, storm water runoff and lien sale rights and procedures. These laws, ordinances or regulations, such as the Comprehensive Environmental Response and Compensation Liability Act and its state analogs, or any changes to any such laws, ordinances or regulations, could result in or increase the potential liability for environmental conditions or circumstances existing, or created by tenants or others, on our properties. Laws related to upkeep, safety and taxation requirements may result in significant unanticipated expenditures, loss of our properties or other impairments to operations, any of which would adversely affect our cash flows from operating activities.

REIT Qualification

We elected to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with our taxable year ended December 31, 2019. We will generally not be subject to corporate U.S. federal income tax to the extent that we make qualifying distributions to stockholders, and provided that we satisfy, on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which we lost our REIT qualification. The failure to qualify as a REIT could have a material adverse impact on our results of operations and amounts available for distribution to stockholders.

Americans with Disabilities Act

Our properties must comply with Title III of the Americans with Disabilities Act (“ADA”) to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe the existing properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. Although our tenants are generally responsible for all maintenance and repairs of the property pursuant to our leases, including compliance with the ADA and other similar laws or regulations, we could be held liable as the owner of the property for a failure of one of our tenants to comply with these laws or regulations.

Available Information

We make available to the public free of charge through our internet website our Definitive Proxy Statement, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission (“SEC”). Our internet website address is www.newlake.com. The SEC also maintains electronic versions of the Company’s reports on its website at www.sec.gov. You can also access on our website our Code of Business Conduct and Ethics, Corporate Governance Guidelines, Audit Committee Charter, Compensation Committee Charter, and Nominating and Corporate Governance Committee Charter. The content of our website is not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our website are intended to be inactive textual references only.

Human Capital Resources

At December 31, 2024, we had eight employees. Our employees are our most valuable asset and critical to our long-term success. We believe we have created an inclusive and engaging work environment, where each person is an integrated member of the team. We meet regularly as a full team, and each member is encouraged to actively participate in a wide range of topics relating to our company’s business activities.

We have a seasoned team of people with meaningful experience across real estate, cannabis and financial services. We believe that attracting, developing and retaining our team is a high priority. To that end, we believe we offer a highly competitive compensation (including salary, bonuses and equity) and benefits package for each member of our team, which include the following:

•Comprehensive health insurance, including medical, dental and vision, to each employee at no cost to the employee;

•At least three weeks of paid time off each year for each employee, which are in addition to Company holidays;

•Supplemental paid family medical leave;

•401(k) plan with a portion matched by the Company;

•Life and Disability insurance;

•Company sponsorship of continuing education courses related to our Company’s business; and

•An employer charitable match program for donations to eligible non-profit 501(c)(3) organizations.

We are also proud to be an equal opportunity workplace and employer. We are committed to the principle of equal employment opportunity for all employees and to providing employees with an inclusive work environment free of discrimination and harassment. All employment decisions are based on qualifications, merit and business needs, without regard to race, color, creed, gender, religion, sex, national origin, ancestry, pregnancy, age, marital status, registered domestic partner status, sexual orientation, gender identity, protected medical condition, genetic information, physical or mental disability, veteran status, or any other status protected by the laws or regulations in the locations where we operate.