Well, good morning, everybody. Let's give a warm welcome for Anthony with NewLake Technologies.
Capital Partners. Capital. I wish we were a technology. Actually, we should put .ai at the end of our website, and we'll see a ton of action, won't we? Thanks everybody for coming and paying attention to NewLake Capital Partners. We are a real estate investment trust focused exclusively on the cannabis sector. I'm going to try to move through this pretty quickly because I much prefer to get to a Q&A, because I feel like that gives you more of the information you're looking for from this. I'm going to tell you a story about a company that was formed nine years ago to focus on the disconnect between state and federal law by putting in place a portfolio of real estate, a portfolio of leases that we think will appreciate in value over time. Quickly, what is NewLake Capital Partners?
The second largest owner of cannabis real estate in the country. We own 34 properties across 12 states, with 13 different tenants. We have some of the leading cannabis operators in the world in our portfolio, names like Curaleaf, Cresco, and Trulieve, which are our top three tenants and represent about 50% of our rental streams. The analogy I like to utilize would be cell towers in the 1990s. In the 1990s, cell towers were really underappreciated, and they were underserviced from a capital perspective. What that afforded early investors is the opportunity to gather a portfolio of long-duration leases with above-market yields, and that's what we've been doing at NewLake for the last few years. Let's talk a little bit about our company.
Our company today, as I said, we were founded almost eight years ago, deployed nearly a half a billion dollars in transactions across these 34 properties. Let me give you a little bit of texture for what that means. These properties are 15 cultivation facilities. When I say cultivation facility, visualize an 80,000-100,000 square foot industrial building that's retrofitted for indoor agriculture. A lot of people think immediately it's farms, it's outdoor farming. We don't have any of that. We don't have hoop houses. To the extent there's a greenhouse element at one of our properties, it is a fixed glass greenhouse that has HVAC, climate control, irrigation inside. Again, indoor agriculture. 19 of our properties are dispensaries. Again, here you think about a single-pad site. Could be an outlot of a mall, which happens, we have an outlot at the King of Prussia Mall.
They'll be anywhere from 1,500-3,000 square feet. I talked about long duration. We focus on owning the properties. We're the landlord. We focus on owning the properties, our leases that we enter into are typically 15- 20-year leases. As we sit here today, across the portfolio, we have about 12 years of remaining lease term. If you look at the yield on our assets, our rental rates are in the low teens%. If you think about commercial real estate, whether it's retail or industrial, it's anywhere from, say, a 4 cap for the best credits that are out there or the better credits out there, up to, say, an 8 cap for an industrial asset.
We're getting typically 500, 600 basis points of rental premium because this industry isn't banked by your traditional banks and your traditional real estate capital providers, that's the opportunity we went after to get that higher yield for the long duration. A lot of people look at our company today and they say, "Wow, you've got a nearly 12% dividend yield on your stock." For those that focus on REITs, usually when you see a higher yield like that on a REIT, you see you have one of two problems. Either you have a leverage problem or your portfolio stinks and you're about to lose a lot of tenants, in essence, all of that would mean you're about to have to cut your dividend, they'll price your dividend high.
To give you a sense, other equity REITs outside of the cannabis sector would be trading in the 6%-7% range from a yield perspective. Why is that? Part of our story here today is we're an unlevered REIT. We have $7 million of debt outstanding. We're one of the lowest levered REITs that we could find. We actually can't find anybody with less leverage than us. We're actually in a net cash position because we have $24 million of cash on the balance sheet, we're in a net debt position. Again, we can't find a single publicly traded REIT that has a net cash position. We're unlevered. It's not leveraged, so maybe we have a terrible portfolio. When you look at a REIT, the key metric for a REIT is your AFFO payout ratio. AFFO, available funds from operations.
That is our measure of free cash flow. As a REIT, since we have to pay out our dividend, you look at what % of your free cash flow are you utilizing to pay out your dividend. In the most recent quarter, it was a 90% payout ratio. We're covered from a dividend perspective. We could even take more dislocation in the portfolio if there was dislocation to occur and still be able to cover that dividend. Anthony, if it's not that you're over-levered and it's not that you have a terrible portfolio, what are investors missing? What I'd say is, actually, I'm going to tell you to look around the room. There's not many of you in here, and it's because institutional investors can't focus on our company. Why can't they focus on our company? Because we're OTC listed.
That's not the only reason, though. Give me a moment, because you're going to say institutional investors can buy OTC in many cases. We're OTC listed, but rules around custody for cannabis say that if you're not listed on New York or Nasdaq, you can't be custodied because it's a marijuana-related business. Why are we not on New York or Nasdaq? We're not on New York or Nasdaq, even though we comply in all respects with their listing requirements, we're not there because we focus on cannabis, and they won't have us. There is a competitor that's on the New York Stock Exchange, went public before New York changed their rules, so that's why they've been grandfathered in. When you look at our company, I meet with institutional investors, and they say, "I get it. I love it. I just can't.
I'd love to buy the yield on this and enjoy that yield and grow with you as you grow, but I can't do it because I can't get custody." It's one of those unique situations where retail investors and smaller institutional investors typically are chasing institutions for the opportunities, and the desk at Morgan Stanley or Goldman, or at any of the large shops, are always directing those opportunities to institutions. Here, they just can't play. Where the retail and small investor typically has to follow the institutions, here, the retail actually has the opportunity to lead to be with us before we do get that up-listing. We'll talk about a couple of catalysts on what that's going to look like. Let's keep going. We have a great team. Does anybody say that their team isn't great, unless they're taking over?
What I'd point to here, when you look at the management team and you look at the board, is it's about bringing that complement of skills. When we started focusing on the cannabis sector, when we started this business nine years ago, we realized it wasn't a real estate business. We didn't want to be dominated by real estate think. We knew this was a business that you had to understand cannabis. We've had people on our board from inception that have been deeply rooted, pun intended. Nobody laughed at that one. Deeply rooted in the cannabis sector.
We institutionalized that knowledge, we used it to inform our underwriting, and I think that underwriting has resulted in my opinion, but also you could look at it empirically and from a data perspective, the best portfolio in the industry, whether it's in equity or mortgage REIT. We also have restructuring experience. We knew there would never be a straight line for this industry from 2018 all the way to the Promised Land without some dislocation. You can't have an industry that's trying to legalize an illicit market that's federally illegal, has different state infrastructure requirements across 40 different states, none of them are uniform, and expect that there was going to be no dislocation. When we started the business from the outset, we pulled together the skillsets we thought were necessary to have duration for the long term with our business.
We have a couple of really, really exciting things going on in the cannabis sector right now, I want to go over these catalysts for you. Back in April, the federal government rescheduled medical cannabis. For those that don't know, we have a Controlled Substances Act here. We have scheduling of drugs. Schedule 1, which would be heroin, is where cannabis has resided since the 1960s. Most people generally agree cannabis is not equivalent to heroin. Schedule 3 would be Tylenol with codeine, as an example. Federal government rescheduled medical cannabis on April 23rd, and with that, 50% of our tenant base is now federally legal. It's as legal as selling a tulip or a cardboard box or a cup of coffee. This is a very important development.
Not only does it legalize, our tenant base has been operating under an onerous taxation regime called 280E. I'll try not to go into too much detail. It overtaxed the industry. What 280E says is if you're selling a Schedule 1 or Schedule 2 substance, no matter what it is, if you're selling that without a DEA license or selling it at all, you cannot deduct anything beyond cost of goods sold. You can't deduct interest expense. You can't deduct SG&A. Nothing below cost of goods sold. As a result, our tenant base had an effective tax rate of approximately 50%-70%, depending on how they structured their business. Think about how onerous that is to your cash flow and to your financial profile. By moving to Schedule 3, unburdens those medical sales.
For those that are paying attention, I didn't say all marijuana, it's only 50% of our book because adult use is continuing down a different path for rescheduling. Kind of odd. How do you take the same exact molecule and regulate it different ways? That's for the DEA to explain. There is a separate process underway, there's a hearing that starts later this month at the DEA to complete the rescheduling for adult use purposes. We think that'll happen sometime in the fall. They've already said the hearing will start on the 29th of June, will end on the 15th of July, we expect that the DEA will finalize the rescheduling, pursuant to an executive order, by the way, by President Trump back in December, that they will reschedule in the fall.
That could make, if it comes with DEA registrations, could make the entirety of our business federally legal, eliminating that barrier to up-listing for us for New York and Nasdaq. Another very big catalyst for the industry is hemp restrictions. Hemp and cannabis, same plant. We won't get into it. One plant has a chemical reaction to create THC, which is a psychoactive ingredient. The other plant doesn't. Federal government legalized hemp, thinking they were legalizing hemp to create rope, textiles, clothing, but some entrepreneurial people a few years ago figured out, "Oh, there's a chemical reaction to create THC. I am going to recreate that in the lab." They took federally legal hemp. They mixed it with chemicals. They create synthetically derived THC products the consumer does not differentiate with the state legal market.
This industry has been siphoning off sales from the state legal market for the last three years. Ohio has banned the sale of hemp products a few months ago. Early returns out of Ohio. We were at a conference in Chicago yesterday and the day before talking to tenants and operators in Ohio. 15%-20% increase in sales just in the last month or two as that hemp ban went into effect. This is important because this is going to bring growth back into the dispensary. It'll bring growth back to our tenants, and that growth, it's not new infrastructure they have to create. It's going to give pricing power and it's going to give additional cash flow and additional return to our tenant base. This is going to help the industry return to growth. There are legislative pathways for banking and capital.
There's renewed vigor in Washington on the back of President Trump's executive order to reschedule marijuana to Schedule III last December. The CLIMB Act has been filed. SAFER is expected to be filed. We don't think those legislations are as much of a catalyst as they could have been a few months ago with the rescheduling, but they're out there, and we'd be excited to see them passed. Interestingly, Supreme Court is also taking a cannabis case up, and it could be a watershed moment also for the cannabis industry. We expect a decision by the end of June when they report, and this was a case where somebody was arrested having marijuana in their vehicle, but also possessing a gun.
Gun rights groups have been on this, and some of you may have seen an article in the Journal just earlier this week or late last week talking about why is the Supreme Court talking about drunkards back in the 1700s, because it's that precedent that they use to talk about disarming. There's lots to watch for this sector and lots of potentially positive catalysts. Two other quick ones that we don't have up here. One is one of the close presidential advisors, Howard Kessler, has launched a pilot program through Medicaid CMS to use CBD products that have THC in them for wellness, and the federal government will reimburse up to $500 a person per year for these products. Howard Kessler's whole mission is to get CBD in the hands of seniors because he believes in the wellness aspects of the product.
There's tremendous momentum, we think, in the federal government around this product. We're across, as I said, 12 states around the country. What are the catalysts that are going to keep cannabis growing? Not only will we see growth as the hemp ban goes into effect, but we still have very large states that have almost no program whatsoever. Case in point, Texas. Massive state that has a huge hemp market, only has about 17,000 patients. They've recently revised the program, and they have added conditions. They've added licenses. Texas will be a phenomenal market of supply growth. Georgia just recently did the same thing. Very small medical population. They've, in essence, mimicked Florida's program. Florida is a wildly successful medical program. We're going to get big growth out of Georgia. You have North Carolina, South Carolina. There's nothing. Very large hemp markets, hemp-derived markets.
There's still a lot of growth to happen as this country legalizes cannabis. What's also driving this underneath the surface is this shift at the younger demographic to consume less alcohol and to consume greater portions of cannabis in order to get that relaxation or get that mood adjustment that they're looking for at the end of a hard day or at the end of a week. In fact, I had dinner last night with my nephew that lives here, 22 years old, and we weren't even really talking about this. We were talking about going out. We had a beer. He said, "I don't really drink anymore. If we're going out, a lot of my friends are consuming cannabis today in order to relax or consume less alcohol." People don't like the way it makes them feel.
These trends are undeniable, and you even hear the alcohol companies talk about it on their earnings calls. You can continue to see growth. Talking about growth, where do we get growth? It's great. Our tenants are growing. We have four avenues for growth. In our leases, we have contractual annual escalators. If we collect rent, every year rent goes up by 2.6% across the portfolio. We don't have to spend another dime. We don't spend CapEx on our properties. These are all triple net leases. All of those expenses are borne by the tenant, and our revenue is going up 2.6% a year. Number 2, funding our tenant improvements. Oftentimes, when we purchase a building, like we did last year, a dispensary in Ohio, we provided capital for them to take that retail site and convert it into a dispensary.
It's refurbishing the facility, putting in the proper security apparatus, and as those dollars that we've committed are distributed, we start charging rent. That's another addition. We're actually at a very low point right now with our commitments only down to $375,000. We also have available properties. We have three properties in the portfolio we're seeking to lease. We're carrying the cost of those properties. As we tenant those properties, we're not only adding revenue, but we're minimizing expense by taking out those carrying costs. The 240,000 sq ft, as we rent that up, that'll add additional AFFO, available funds from operations, and then new transaction deployments are occurring. With that growth in the industry that we were talking about, with those catalysts, we're actually seeing more interest in expansion.
This industry has been not focused on expansion, not a lot of CapEx over the last couple of years, but I will say a notable increase since the rescheduling announcement. I am getting close to the Q&A. I hope you all start thinking about that because that is the fun part. We talked about our tenants. One of the key things I want to point out on this page, well, two key things. Number one, our focus on limited license jurisdictions. At the outset, we recognized that it was better to focus on operators that were in a state that had limited competition. Anybody here from the Northeast? Me, I am. Okay. For us Northeasterners, you don't just go to the supermarket like you do in California and you get a bottle of wine or liquor or beer.
You actually have to go, if you're in Pennsylvania, a package store to a liquor store. Those states that are more restrictive on distributing alcohol typically took a more restrictive approach to licensing cannabis, and you could see it right here. Look at Washington State, well over 1,000 licenses, but you go to Pennsylvania, you only have 33. Fewer licenses mean fewer competitors, means better margin, better cash flow, better credit profile. Our business is all about collecting rent. The other thing here is we focus on property-level cash flow. If a property cash flows, they are going to pay rent. We have some industry-leading property-level cash flows there. I am going to pause there because we only have about five minutes left. I would love to go Q&A. If we don't get a question, I am going to call on people. Please.
This was about maybe seven, eight years ago. I was in a room just like this with people just like this.
It was much more crowded.
No. Was it? I don't think it was.
Okay.
The company we focused on then, I read a newsletter, big knockouts. We look at companies that have that torque, have that ability to knock out the competition.
My people wanted me to look at NewLake.
Okay.
Of course, because we could IPO at about $8 and it went up to $300 for us. You guys, it seems to me like you're in better position if 280E that's at $15 USD right now. 90. You guys got all the numbers. I don't mean to blow your head up or anything. You guys are in better shape right now than they were.
Yes. I think what we didn't do is we didn't grow for growth's sake. You go back to any of the earnings calls that we've done since we IPO'd in 2021, we were about quality growth, and we talked all the time about quality growth. I think we took a lot of flak back in 2021 and 2022 for not doing a lot of the deals that we saw others do.
They were.
What the market was valuing was significant growth for them, and they felt the need to deliver growth. For us, it was about quality growth. Again, you have duration, right? One of the jokes I like to say, so hopefully everybody laughs, it's easier to do the deal, it's harder to collect the rent for 15 years. I think that's the differentiator. I think our portfolio proves it out. I think if you look at the payout ratio, there was a class of other companies that started doing what we do back in 2019 and 2020. There's really only two of us left. Everybody else has fallen to the wayside because of their underwriting approach. I think they ignored limited license states, and they ignored property-level cash flows.
You said 2.6% rent escalating, obviously inflation is becoming an issue. When you're renegotiating these things, are you trying to put inflation component in there-
Yeah
or are you just letting that face inflation?
Two parts to that answer. Let me just say, we already have above-market yields. To put inflation kickers in, I guess the first part of the answer was we do have one or two leases that do have inflation adjusters. Most of them are fixed. When you start already at 500 basis points above market, to accelerate that even faster in a 4% inflation environment is kind of hard for the tenant to take on because in a 15-year lease, you get 4% versus 2.6. It starts to compound every year for them because the base goes up. Better for us. It's hard for us to negotiate that when we're so high on a yield.
Sorry for a second question, if, let's say some really sweetheart deals start coming in one year from now, do you think you'd ever use stock to purchase? Do you think you'd just use debt facilities or a combination?
Right now, we are under-levered. Okay? We have, as we said, net cash. My background as a banker, we're not capital optimized. As we grow, we're going to utilize that balance sheet to be able to grow and our $90 million available credit facility to put on these accretive transactions. We'll get to a point we could add additional debt once we get through this credit facility, I believe. Once we get to a point, we're not going to over-lever this thing. This is a risky industry, and it's the reason we're getting above-market yields. We will not over-lever this. Once we get through that debt capacity, then yes, we would look to equity.
Hopefully at that point, our equity's trading at a premium, we can be raising equity at a premium because we're delivering the above-market yields with a good track record of collections, delivering solid AFFO for our investors. No, I don't see any need for equity anytime soon. Other questions? These are good ones. Yes.
Follow-up.
Yes.
Is it safe to say that your company, NewLake, is knocking out the competition?
I'm not going to say that. What I will say is we've been disciplined, we have stuck to our underwriting approach, we think that's served our investors well. We've seen people reach on credit metrics. We've seen people ignore underwriting fundamentals, such as property-level cash flows, doing. Listen, this is not specific to cannabis. I used to do specialty finance investment banking. We see it across the board. Whenever there was a sector, capital flow to it, people first competed on price, then when they couldn't compete on price, they competed on structure. That's where you start losing. If you're not getting the proper return, you don't have the right structure, you end up losing. Same thing here. If you underwrite a property that has one times EBITDA, that property sees price compression, has difficulty. There's no money to pay rent.
It's quite simple. You have cash flow, you pay rent. Well, thank you everybody for coming out today. If you want to follow up, please follow up with us. We have a table. We have a website. We're on Twitter. We're everywhere.