Operator: Greetings, and welcome to the NewLake Capital Third Quarter 2021 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Valter Pinto, Managing Director of KCSA Strategic Communications. Thank you. You may begin.

Valter Pinto: Thank you, operator. Good morning, and welcome, everyone, to the NewLake Capital Partners Third Quarter 2021 Earnings Conference Call. I'm joined today by Gordon DuGan, Chairman of the Board; David Weinstein, Chief Executive Officer; Anthony Coniglio, President and Chief Investment Officer; and Fred Starker, Chief Financial Officer.

Before we begin, I'd like to remind everyone that statements made during today's conference call may be deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks and uncertainties and other factors. For a detailed discussion of some of the ongoing risks and uncertainties in the company's business, I refer you to the press release issued this morning and filed with the SEC on Form 8-K as well as the company's reports filed periodically with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that, it's my pleasure to turn the call over to Mr. Gordon DuGan. Gordon?

Gordon DuGan: Thank you, Valter, and thanks again, everyone, for joining our call. I'm very excited to be speaking with you this morning. It's our first earnings call since our IPO in August. So again, good morning, and welcome.

By way of background, for those who don't know me, I spent 30 years in the real estate industry, most recently as CEO of Gramercy Property Trust, which was a company that we took from $300 million in assets to $7.6 billion over a 7-year period and sold to Blackstone at the end of 2018. Prior to that, I was CEO of W.P. Carey, which is one of the largest triple-net lease REITs in the United States.

The reason I bring that up, in -- from my perspective, the cannabis REIT industry is one of the most compelling opportunities that I've seen in my career. While in a short period of time, the industry has matured dramatically even since we started the predecessor company to NewLake Capital. We're still in the very early innings of the growth trajectory of cannabis and the cannabis REIT industry that's attendant to that. It's an industry that is expected -- the cannabis industry is expected to exceed $33 billion in revenue by 2025 and provides very attractive market dynamics that for real estate capital providers like NewLake Capital is a very exciting opportunity.

To be specific, when we first looked at data centers at W. P. Carey, you could buy data centers with yields of 7%, 8%, 9%. Today, data centers are a 4% asset class from a yield perspective. Similar thing has happened in towers, biomedical space. A variety of other specialized asset classes have seen significant tightening in yields in that asset class.

Cannabis real estate assets by, in contrast, are double-digit yielding assets. NewLake's yield on invested capital currently stands at 12.4%, but we're able to generate double-digit yields in a world where there are no double-digit yields. In the United States, industrial real estate today is trading between 3.25% and 4.5% from a yield perspective. And our industrial real estate in the cannabis industry is, again, creating double-digit yields. That's just extremely powerful and very unusual.

There are very few opportunities. This is a sort of once-in-a-lifetime type opportunity. And I think we've seen that play out in our competitor, IIPR, and what they've been able to accomplish. And we're doing the same thing. We have the same playbook.

I became involved in this space as Chairman of GreenAcreage in 2019. It was during this time that David Weinstein and I began to work together in this business. In a short period, we were able to get GreenAcreage to deploy our capital into high-quality properties in limited license jurisdictions with high-quality tenants and emerge as one of the top sale leaseback cannabis REITs. At the same time, Anthony Coniglio and his team at NewLake shared the same vision as us, and they were doing their own excellent job, similarly investing in high-quality properties in the space.

In March of this year, we merged the 2 businesses together, creating the second-largest cannabis REIT, further diversifying our portfolio, achieving the scale required to attract capital and importantly, positioning our business to be one of the 2 providers that can provide the capital necessary for larger transactions in this sector. We also joined together management teams and Boards that had complementary skill sets.

In August of this year, we closed our IPO, raising an additional $102 million in gross proceeds, and you'll hear about the progress we're making at deploying that capital. This additional capital will continue our growth strategy by adding more high-quality properties and tenants to our portfolio. As Anthony will discuss, we have deployed $30 million since the closing of our IPO, and our team is actively working on other opportunities to deploy our capital.

I would now like to turn the call over to David Weinstein, NewLake's Chief Executive Officer. David?

David Weinstein: Thanks, Gordon. So Gordon and I worked closely at GreenAcreage, where I initially served as a director and after 1 year, became CEO. I have a tremendous amount of respect for Gordon, his knowledge and experience and his original vision for the company, which we still share today. I had a similar experience at MPG Office Trust, a New York Stock Exchange office REIT, where I served as a director for 2 years and was then appointed CEO. 3 years later, we sold MPG to Brookfield.

Additionally, I spent 12 years as a private real estate investor and operator, including leading the management of a portfolio of 22 limited-service hotels and a 6 million square foot redevelopment project in Brooklyn. I also spent 10 years at Goldman Sachs as a real estate investment banker and investor.

We believe this company is uniquely positioned to take advantage of this time in the cannabis space. First, we believe our management team and our Board have all of the skills required to be successful in this business, not only real estate investment and finance experience, but also a critical understanding of the cannabis industry, its operators and where the real estate sits in each state's ecosystem. We are lean and will continue to be so. We do not expect our SG&A to grow significantly as we grow our portfolio, providing operating leverage and amplifying our returns.

Second, we currently own a diversified portfolio of 27 properties, including 10 cultivation facilities and 17 dispensaries located in 10 states. On an invested capital basis, approximately 90% are cultivation facilities. These properties are leased to 8 tenants, including some of the highest-quality cannabis operators in the country, including public companies such as Cresco, Curaleaf, Columbia Care and Trulieve and private companies, such as PharmaCann and The Mint. As we continue to invest our capital, we will expand our tenant roster and the number of states in which we have a presence.

Our current owned portfolio has an average duration of 14.4 years, a 12.4% weighted average yield and built-in annual increases of 2.5%. We've also provided a 9-month, $30 million senior secured loan that is structured to convert to a 20-year sale leaseback unless a specific provision in the loan agreement is satisfied. We have no debt, which will allow us to enhance our returns with modest leverage in the future.

Third, given our position as one of the leading capital providers in the industry and our existing relationships, we are sitting at the epicenter of an industry that is experiencing explosive growth. To fuel this anticipated industry growth, significant investment in cannabis-related real estate and expansion must occur. As a public company with no debt, we have access to that capital.

And finally, fourth, we are highly disciplined in our underwriting approach. We see ourselves as property investors and risk managers. We are very focused on the underlying real estate, the quality of our operator tenants, rent coverage ratios and the cannabis dynamics in each state. We ensure that all properties are mission-critical to our tenants as our assets are all leased on a long-term basis and guaranteed by parent entities. Our expertise in these areas is hard for others to replicate. A testament to our underwriting approach is reflected in the fact that to date, we've had 100% rent collection with no rent deferrals.

I'd like -- I'd now like to turn the call over to Anthony, President and Chief Investment Officer, to discuss our investment portfolio in more detail.

Anthony Coniglio: Thanks, David, and thank you, everyone, for joining our call today. Before I start, I want to thank our team for all of their efforts over the last 9 months in closing our merger, completing the IPO and executing more than $125 million of investments. It's been a busy time, but we're energized and we're excited for the future.

Prior to merging with GreenAcreage earlier this year, I was Co-Founder and CEO of NewLake Capital Partners. I'm thrilled that we combined our companies to create the second-largest cannabis REIT and then successfully closed our initial public offering in August. I share Gordon and David's optimism for the growth in the industry, and I believe we're poised to be an important provider of real estate capital to the cannabis sector for years to come.

Prior to cofounding NewLake, I was the Founder and CEO of a residential mortgage company. Over a 5-year period, our team grew the mortgage business from a start-up to a 42-state, $2 billion national mortgage originator, ultimately selling the business to a Blackstone portfolio company. I also spent 14 years at JPMorgan, where I led multiple investment banking businesses, each to a #1 market share. I'm excited for the growth opportunity ahead of us, and I believe our team has the collective experience necessary to continue Newlake's success and deliver quality returns for you, our investors.

For those new to our story, NewLake is a triple-net lease REIT focused on revenue-centric properties in the fast-growing cannabis sector. We acquire mission-critical properties from and for experienced cannabis operators. Simply put, we collect rent and our investors enjoy a stable and growing quarterly dividend.

Our investments will include the acquisition of fully built and operational facilities, facilities requiring improvements or retrofits as well as build-to-suit transactions. In these latter instances, what we do is we commit capital in conjunction with the initial investment to reimburse construction costs typically over a 6- to 12-month period.

We acquire both industrial and retail properties. We like the diversification of owning properties across the supply chain. And likewise, our tenants like that we can provide capital for all of their real estate needs.

Important to our strategy is our focus on limited license states and jurisdictions. In these limited license jurisdictions, the license and the property are typically connected to each other, which creates additional value and protection for our portfolio. Building this portfolio over the last 2.5 years, I can't stress enough, has really allowed our team to create strong industry relationships and a deep knowledge of the sector. This has been and continues to be an important component of our success.

And with that, and David teased earlier, we're pleased to have recently announced our first investment since the closing of our IPO in August, providing Hero Diversified Associates with a $30 million 9-month senior secured loan. We uniquely structured a 9-month senior secured loan that converts to a 20-year sale leaseback unless a specific provision in the loan agreement is satisfied. We think this transaction is indicative of our team's creativity and our understanding of the cannabis industry and being responsive to our client needs.

HDAI, as we call them, is a state-licensed grower and processor of medical marijuana in Pennsylvania, a limited license state that we already have a presence in and are very, very keen on. HDAI is a wholesaler to the top dispensaries across Pennsylvania. Collateral for our loan includes a first lien mortgage on HDAI's cultivation and processing facility in Erie, Pennsylvania as well as other assets of the company. As I mentioned earlier, this transaction converts to a 20-year sale leaseback unless a specific provision is satisfied.

During our IPO road show, we communicated our expectation to deploy capital raised in our IPO over a 6- to 9-month period. We continue to be comfortable with that timing, and the HDAI transaction is a strong step towards that objective. As we grow our portfolio, we will continue to focus on diversification. And in fact, our last 4 transactions were all with new high-quality clients.

In addition to the HDAI transaction, we also funded previously committed tenant improvements of $1.7 million during the third quarter. We also funded $6.7 million of tenant improvements since September 30, 2021. As of today, we have approximately $19 million of remaining tenant improvement commitments that we have a weighted average disbursement period of approximately 4 months.

Now let's turn to a review of our top 5 tenants. Our largest tenant, Curaleaf, where we own 10 dispensaries and 1 cultivation facility, and those are across 7 limited license states. Curaleaf posted Q3 revenue of $317 million and adjusted EBITDA of $71 million. It's an increase of approximately 70% year-over-year. These are impressive results and speak to the depth and breadth of Curaleaf's business.

Our second largest tenant, Cresco, where we own an Illinois cultivation facility, reported Q3 earnings yesterday, delivering $215 million of revenue and $56 million of adjusted EBITDA. This represents yet another record quarter for this high-quality cannabis operator. And cannabis sales in Illinois, where our property is located, continue to accelerate, with adult-use sales up 64% year-over-year in October, just October alone.

Revolutionary Clinics, a private premium flower producer with 3 dispensaries, is our third largest tenant. We own their cultivation facility in the limited license state of Massachusetts. And while their company is private and we cannot share financial information, we can tell you that we continue to be very comfortable with the credit risk profile of this tenant. And the cannabis sales in Massachusetts continue to grow, by the way, where that state is on pace for record sales in 2021.

Trulieve is our fourth largest tenant, and we own their Pennsylvania cultivation facility. They're reporting results next week, but their Q2 results delivered $95 million of adjusted EBITDA on an industry-leading 67% gross margin. Trulieve continues to deliver best-in-class margins and Pennsylvania, again, where our property is located, is a strong medical market that is poised for approval of adult use in the not-too-distant future.

Rounding out our top 5 tenants is Columbia Care. We own 5 of their facilities: 3 dispensaries and 2 cultivation facilities. Columbia Care reported earlier this morning. They not only delivered record results last quarter, but from my review of the headline results, another record quarter of revenue and adjusted EBITDA. This company has a strong footprint in large limited license markets, which bodes well for their continued long-term success. We'll continue to monitor our entire tenant base, but we feel really good about the financial performance and the trajectory of this high group of cannabis companies.

Before turning it over to Fred and a discussion of our financials, I'd like to touch on the cannabis industry in general for a moment. In only a few years, the growth of the industry, predominantly driven by West Coast-led operators, has now expanded to a nationwide industry with growth accelerating even further as adult-use legalization has significantly expanded the total addressable market. We expect this trend will continue with several Northeast states launching adult-use programs in the near future. Naturally, we expect sales to shift over time as the estimated $60 billion illicit cannabis market moves into legal transactions as we believe consumers will demand complete transparency of the products they're consuming and assurance of its high quality and safety through regulated operations.

Such meaningful growth does require a significant investment by cannabis operators to expand production and retail capacity to meet that growing demand. We estimate the industry will need over 10 million square feet of real estate in just the next 2 to 3 years alone. We're not unrealistic, though, to think that yields will not come over -- come down over time. But we do expect for sure that premium yields will continue, and the value of assets will certainly appreciate as federal legalization works its way through the legislative process and the industry races to meet the growing demand for cannabis.

These dynamics set the stage for visibility of growth for our company for many years to come. And we eagerly anticipate this next stage of development as the current landscape is prime for NewLake to scale our sizable, existing portfolio and serve the real estate capital needs of the cannabis industry.

With that, I'll hand it over to our CFO, Fred Starker, to walk through our financial results in more detail. Fred, over to you.

Fredric Starker: Thanks, Anthony, and good morning. Rental income for the 3 months ended September 30, 2021, increased by approximately $4.6 million to approximately $8.1 million compared to approximately $3.4 million for the 3 months ended September 30, 2020. The increase in rental revenue was primarily attributable to the 19 properties acquired in March 2021 in connection with the merger, which generated approximately $2.5 million of rental revenue during the 3 months ended September 30, 2021.

Our Mount Dora, Florida property, which we acquired in August 2020, generated approximately $1.8 million of revenue for the 3 months ended September 30, 2021, compared to $1.1 million of rental income during the 3 months ended September 30, 2020. The 3 properties we acquired during the second quarter of 2021 generated approximately $1.4 million of revenue in 2021. The property sold in November 2020 generated $100,000 of rental income during the 3 months ended September 30, 2020. In addition, approximately $200,000 of the increase in rental revenue is attributable to annual rent escalations from properties acquired in prior periods and rental income from funding of tenant improvements.

Rental income for the 9 months ended September 30, 2021, increased by approximately $11.6 million to approximately $19.2 million compared to $7.6 million for the 9 months ended September 30, 2020. This increase in rental revenue was primarily attributable to the 19 properties acquired in March 2021 in connection with the merger, which generated approximately $5.2 million of rental revenue in 2021, representing the period from the merger closing on March 17, 2021 through September 30, 2021; the Mount Dora, Florida property acquired in August 2020, which generated approximately $5.4 million of rental income during the 9 months ended September '21; and approximately $1.1 million of rental income during the 9 months ended September 30, '20.

The 3 properties acquired during the second quarter of 2021 generated approximately $1.5 million of rental income in 2021. The property sold in November 2020 generated $400,000 of rental income for the 9 months ended September 30, 2020. In addition, $900,000 of the increase in rental revenue was attributable to annual rent escalations from properties acquired in prior periods and rental income from funding of tenant improvements.

Net income attributable to common shareholders for the 3 months ended September 30, 2021, increased to $2.7 million or $0.14 per basic and diluted share compared to a net loss attributable to common shareholders of $14.6 million for the same period in 2020. Net income attributable to common shareholders for the 9 months ended September 30, 2021, increased to $6.9 million or $0.44 per basic and diluted share compared to a net loss attributable to common shareholders of $13.6 million for the same period in 2020. The net losses during the 2020 periods were generated by the internalization of our outside manager in July 2020.

Our general and administrative expenses for the 3 months ended September 30, 2021, increased by approximately $1.1 million to approximately $2.1 million as compared to $900,000 for the 3 months ended September 30, 2020. For the 9 months ended September 30, 2021, our G&A expense increased by approximately $1.4 million to approximately $4.6 million as compared to $3.3 million for the 9 months ended September 30, 2020. It's important to note the increase in our G&A expense was significantly impacted by nonrecurring merger and public company expenses, partially offset by the elimination of reimbursements to our former manager.

For the third quarter of 2021, AFFO attributable to common shareholders was approximately $6 million or $0.31 per basic and diluted share. FFO attributable to common shareholders was approximately $5.2 million or $0.27 and $0.26 per basic and diluted share, respectively. For the 9 months of 2021, AFFO attributable to common shareholders was approximately $14.3 million or $0.92 per basic and diluted share. FFO attributable to common shareholders was approximately $12.4 million or $0.80 per basic and diluted share.

FFO and AFFO are supplemental non-GAAP financial measures used in the real estate industry to measure and compare the operating performance of real estate companies. A complete reconciliation containing adjustments from GAAP net income attributable to common shareholders to FFO and AFFO and definitions of terms are included at the end of our press release.

In mid-September, we declared a partial third quarter 2021 cash dividend of $0.12 per share for the period beginning on August 13, the closing of the company's IPO, through the end of the third quarter. The dividend was paid on October 15, 2021, to shareholders of record at the close of business on September 30, 2021. On August 12, 2021, the company paid a special cash dividend of $0.12 per share for the period beginning on July 1, 2021, through the closing of the company's initial public offering on August 13, 2021, to stockholders of record at the close of business on August 11, 2021.

With that, I'll turn you back to Gordon for closing remarks.

Gordon DuGan: Thank you, Fred. And again, thank you all for joining us this morning. I think as you saw in the press release and Fred's remarks, the cash flow that we're generating is really impressive. If you go through the press release and the financials, we're generating a tremendous amount of cash flow, no CapEx. It's a really powerful business model. And I contrast it to almost any REIT out there. This is an entity that can generate tons of free cash flow and earnings and grow both of them significantly.

So to finish this morning, NewLake is built on the foundation of a very talented team with financial, real estate and cannabis expertise that I have full confidence in to continue to grow our real estate portfolio in the cannabis space. As the second largest cannabis REIT, NewLake is capitalizing on its early-mover advantage as a premier capital provider to the rapidly growing cannabis industry. With a robust pipeline, a team built to execute on our diversified funding strategy and a strong balance sheet with cash and no debt, NewLake is well positioned to strategically deploy its capital and reward its shareholders through this predictable growing future cash flow that I mentioned.

We'd now like to open it up for -- the call for questions. Operator, please?

Operator: [Operator Instructions] Our first question comes from the line of John Massocca with Ladenburg Thalmann.

John Massocca: So I was just wondering, can you provide some more color maybe with regards to the recent transaction with Hero Diversified? Just looking for any color you can provide in terms of cap rates or initial yield.

Anthony Coniglio: Sure. John, it's Anthony. So naturally, we are not disclosing specifics about transactions. What we can say is that the loan component and the returns that we're getting for investors is consistent with what you would see in other loan transactions in the sector. And the terms of the sale leaseback, the 20-year sale leaseback that it's structured to convert into is consistent with terms that we've had in other transactions.

David Weinstein: And John, I would just add that -- let me just add that we're in the sale leaseback business. So we did this to be creative. But this transaction, we believe, there's a high probability this will convert into the sale leaseback.

John Massocca: That was like maybe my next question. Just I wonder why was this kind of secured loan to sale leaseback structure used? And what is the provision, if you can disclose it, that would be needed to essentially not have it convert to a net lease transaction?

Anthony Coniglio: We're precluded from sharing what that provision is but it is a narrow circumstance that, if satisfied, they have the ability to repay the loan. And if they did, we're going to be very happy with the total return that we actually have on deploying this capital.

But our expectation in structuring the deal and entering into the transaction with them and fully negotiating a 20-year lease is the recognition on their part there, there is a reasonable likelihood that this will convert to a long-term transaction. I realize that's probably a little vague and maybe slightly unfulfilling in an answer, but it's about as much as we can give within the latitude that our commitments allow.

John Massocca: Yes. I understand.

Gordon DuGan: John, just I would add, it was to meet the company's corporate objective. So we customized the transaction so that it worked for what their corporate objectives are.

John Massocca: Okay. Understood. And then as you think about your pipeline and beyond, maybe what are you seeing in terms of cap rate trends? Essentially, what are the broad ranges for initial yields on your targeted cannabis real estate investments today?

Anthony Coniglio: Yes. We had guided during our IPO process that we would deploy capital. We thought somewhere at a blended 11% cap. I'd say that, that is generally intact today. And I would say that like many businesses or all industries that have a credit element, there is a tiering of pricing, as we know, based on the quality. And so that range today, I would say, would probably be from mid-9s to 12%, depending on the operator, the location, the jurisdiction and the property type.

Gordon DuGan: And as you can imagine, John, as the credits improve, a lot of these companies have gotten very large. They're generating a tremendous amount of EBITDA. There is downward pressure on cap rates, just to be clear. And it affects everyone in the industry.

John Massocca: Okay. And then just moving on, maybe to something that's more kind of detailed. Thoughts on what we should expect with regards to cash G&A maybe for the remainder of the year and roughly through 2022. Just is the current quarter's run rate a good number? Or I understand you're a small company so there's some level of volatility there. But just any kind of guidance, rough guidance you can provide on G&A.

Fredric Starker: Yes. Some of the costs that we incurred during the third quarter are nonrecurring costs, including registering shares for the pre-IPO shareholders. So we do expect our G&A to come down on a quarterly basis from the third quarter. And we do expect it to be higher than the second quarter because we're now a public company and have increased costs, including our D&O insurance for being a public company.

Anthony Coniglio: I would add as you and others are thinking about a model, right, SG&A is an important component, you could probably assume that we'll be somewhere around $6.2 million to $6.5 million, roughly speaking on a run rate basis for SG&A.

John Massocca: Okay. And then one last one. What's the Board's thoughts on the dividend policy going forward? Just thinking about that in the context of -- the last quarter was a little bit strange, right, with the sub dividend paid pre- and post-IPO. So just any kind of color you can provide on that.

David Weinstein: So John, once again, as we talked about when we were on the road, we are targeting 75% to 85% of AFFO as we go forward. And I agree that the -- it's a little hard to track. We basically paid $0.24 a share if you add up the pre-IPO -- this is for the last quarter, the pre-IPO dividend and the dividend we recently paid.

Anthony Coniglio: We needed to kind of clean out the earnings pre-IPO, and that's why it was double. But you'll see us on a regular quarterly cadence of announcing dividends and paying out dividends.

John Massocca: Okay. And within that kind of target range. All right.

Operator: [Operator Instructions] Our next question comes from the line of Orin Chessen with BTIG.

Kevin Chessen: So Anthony, the 20-year lease with HDAI was kind of eye-opening. Can you maybe give us some color as it relates to future transactions? If you would expect the lease term to also come in at that length relative to the 14.8% that you've disclosed in the prospectus?

Anthony Coniglio: Yes. We're generally seeing stickiness for the industrial properties in that 15- to 20-year range. And so I would expect that as we continue to pursue transactions, you'll see us announcing sale leasebacks with 15- to 20-year terms.

Kevin Chessen: Great. And then also on the yields, you talked about the cap rates in the industry coming down. Would you mind maybe giving us some color on the spread that you're seeing between cap rates for the Curaleafs and Crescos of the world and everybody else? Maybe how much are cap rates coming down for the second-tier borrowers?

Anthony Coniglio: Well, over time, it's undeniable that there is cap rate compression that will occur for the entire industry as it gains more acceptance and more capital availability, but also importantly, as these companies mature and become better credit qualities, right? We look at the Curaleafs and the Trulieves and some of the numbers I described earlier on the call with respect to their earnings, their adjusted EBITDA and their revenue, and 2 to 3 years ago, these companies were all scratching at trying to get profitable. And so we think the cap rate compression is a natural evolution.

To be specific in your answer, it's a bit of a depends answer because there are what we would consider 3 tiers of pricing. Tier 1 would be your large names, like the Curaleafs and the Trulieves, that have robust access to capital, significant ability to generate free cash flow in their business as well as cash on the balance sheet. Then Tier 2 would be the smaller public companies or the larger private companies with maybe a little bit less cash on the balance sheet, a little bit less access to capital. And then there's the Tier 3, which, by the way, this is not credit quality, this is just access to capital. There are some really super high credit quality companies in Tier 3 that just have more limited access to capital.

And so I'd say probably, if I was using broad strokes, a 100 basis point difference from category 1 to category 2 and then from another 100 basis points from category 2 to category 3. And we're pursuing transactions across all 3 of those categories.

Kevin Chessen: Congratulations on the IPO.

David Weinstein: Thanks, Orin.

Anthony Coniglio: Thank you.

Operator: Our next question comes from the line of Aaron Grey with Alliance Global Partners.

Aaron Grey: So first question for me, just in terms of kind of CapEx coming down, I just have a broader question. Because we've also seen debt rates for a lot of the MSOs coming down. So just want to know if there's any impact that you've seen, maybe and demand, in how some of the MSOs are looking to raise capital, utilizing sale leaseback or more traditional debt forms? Just because we've also seen some of those more traditional debt form rates also coming down. So just any color in terms of demand? Still seems very strong pipeline from your commentary in the prepared remarks, but if you could expand upon that, that would be helpful.

Anthony Coniglio: Sure. Good to talk to you. It's Anthony. I'll start with that. First, I would say the industry has a significant need for capital. Let's just start with that. There is demand for capital. Like any industry, debt has a position in the capital stack.

What I do believe is that this is a huge market. And when we look at operators utilizing debt, what we understand is that the debt isn't always at the headline rate. Debt is often a little bit more expensive than what the headline rate may actually imply. There could be OID, there could be fees in, fees out and prepayment penalties, and in some limited instances, warrants, maybe not for the top operators. But we think that the cost of capital perhaps is a little bit more expensive than what the headline indicates.

What I would say is that as we see operators turning to debt alternatives, they're doing that to fund on a shorter-term basis. But when we look at our business, where we're funding a hard asset like real estate for the long term, we don't actually see companies over the long term, utilizing debt as that long-term funding mechanism for real estate. It's why a Walgreens or a Starbucks or a FedEx all utilized sale leaseback transactions to fund their real estate footprint.

And so in the intermediate term, yes, for sure, some of the larger operators may turn to debt as an alternative. But we think long term, CFOs and CEOs across the industry recognize that it's not a good use of their capital to fund a hard asset like real estate.

Aaron Grey: Very helpful color. And then second question, again, keeping it more high level, a lot of people talk about potential for the SAFE Act being within the defense bill, and now a new, more broad legalization bill being introduced by a Republican house representative on Monday. So I just wanted to get your commentary in terms of how you feel you're positioned for different environments. Whether or not the SAFE Act, how you think that might have an impact for different instruments for companies to be able to utilize or something that's more broad legalization in terms of your business?

Anthony Coniglio: Yes. Well, thank you. It's an important question. We're actually excited for legalization. It's a net benefit for our business and allow me to explain. Number one, upon SAFE Banking passing or, ultimately federal legalization, improves the cash flow, profitability and risk profile of our in-place tenant base. And that improves the value of our assets or increases the value of the assets that we own today.

Each one of these legislative steps also ushers in another boost to the industry in terms of acceptance and, more importantly, growth. And as we know, the centerpiece for growth for all of these businesses is rooted around real estate, locations to grow, manufacture, process, distribute, but also to sell. And so we've estimated, I said in the prepared remarks, approximately 10 million square feet of real estate will be needed over the next few years alone.

And so when we look at this improvement in the credit quality of our tenant, and we look at the need for growth capital, again, rooted around real estate, we think it bodes well for the improvement in quality of our portfolio and the growth prospects for our business. And it will also lower our cost of capital over time as well. And that will allow us to continue to provide ever-more efficient capital funding alternatives to our tenant base and to our future tenants.

Operator: Our next question comes from the line of [ Evan Degas ] with [ Relentless Equities ].

Unknown Analyst: Congratulations on the great quarter and strong growth. I just have -- just piggying back off the SAFE Act and some legislation. You've mentioned a couple of times about levering the business in the future. Can you talk a little bit further about how that would relate specifically to NewLake? Is that tied into SAFE Banking? Are you looking at levering up the business today? What's the timing of something like this?

David Weinstein: So we don't have a specific timing yet, but we do expect to put some leverage onto this business, probably not more than 25% of the value of the business. But the markets are open. The private debt markets are open for us. Other folks have tapped those markets, and the pricing on that debt has come down significantly. So I would expect, and you should expect us at some point to borrow some debt and use that to reduce our AFFO a bit.

Operator: Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. DuGan for any final comments.

Gordon DuGan: Well, it's our first call since the IPO. So we're very excited to be here speaking with all of you. The team, starting with David and Anthony and Fred are doing a great job. We couldn't be more excited about our positioning in this business and the future prospects of it. So again, thank you all for joining us. We've gone on long enough, so we're signing off now. Thank you.

Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.