EDGAR 10-K Filing

Company CIK: 1854964
Filing Year: 2022
Filename: 1854964_10-K_2022_0001437749-22-006633.json

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ITEM 1. BUSINESS
Item 1. Business.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Our Properties
We seek to acquire industrial properties and dispensaries that are strategic profit centers for our tenants and are well positioned for the regulatory evolution of the industry. Licensed industrial and dispensary locations are critical components of the cannabis industry, particularly in limited-license jurisdictions. As of December 31, 2021, we owned 28 properties comprised of 17 dispensaries and 11 cultivation facilities that are 100% leased to state-licensed cannabis operators, with a weighted average remaining lease term of 14.5 years. Additionally, during the fourth quarter, the Company funded a mortgage loan collateralized by a cultivation and processing facility. The loan is structured to convert to a twenty-year sale leaseback, unless a specific provision in the loan agreement is satisfied prior to July 29, 2022. Based on invested capital, as of December 31, 2021, our portfolio is comprised of approximately 89.3% cultivation facilities and 10.7% dispensaries.
As of December 31, 2021, we have aggregate unfunded commitments to invest $24.0 million for the development and improvement of our existing cultivation facilities in Arizona, Massachusetts, Missouri and Pennsylvania. We define these tenant reimbursement commitments as a commitment pursuant to our lease with the tenant to fund alterations, additions or improvements to the premises. Our leases are generally structured to disburse capital over specified periods of time. The leases also generally contain certain provisions that require tenants to pay rent on the full amount of capital under each lease, whether or not disbursed. As of December 31, 2021, our Pennsylvania cultivation facility is currently paying rent on approximately $7.0 million of unfunded capital.
Existing Portfolio. The table below sets forth our property portfolio as of December 31, 2021:
Property Type
State
Tenant/Borrower(1)
Rentable Square
Feet(2)
Capital
Investment(3)
Cultivation
Florida
Curaleaf
379,435
$ 55,000,000
Cultivation
Illinois
Cresco Labs
222,455
50,731,761
Cultivation
Massachusetts
Revolutionary Clinics
145,852
42,860,186 (4)
Cultivation
Pennsylvania
Trulieve
144,602
37,222,909 (5)
Cultivation
Pennsylvania
Hero Diversified Associates Inc.
99,200
30,000,000 (6)
Cultivation
Missouri
Organic Remedies
70,000
16,063,732 (7)
Cultivation
Massachusetts
Columbia Care
38,890
13,826,255
Cultivation
Illinois
Columbia Care
32,802
11,360,605
Cultivation
Pennsylvania
Acreage
30,625
10,160,872
Cultivation
Massachusetts
Acreage
38,380
9,790,499
Cultivation
Arizona
Mint
130,757
5,527,099 (8,9)
Dispensary
California
Columbia Care
2,470
3,773,941
Dispensary
Ohio
Curaleaf
7,200
3,353,213
Dispensary
Illinois
Curaleaf
5,040
3,361,956
Dispensary
Connecticut
Curaleaf
11,181
2,932,432
Dispensary
Pennsylvania
Curaleaf
3,500
2,227,066
Dispensary
Massachusetts
Columbia Care
4,290
2,320,264
Dispensary
North Dakota
Curaleaf
4,590
2,174,504
Dispensary
Arkansas
Curaleaf
7,592
2,157,438
Dispensary
Massachusetts
PharmaCann
11,116
2,087,116
Dispensary
Pennsylvania
Curaleaf
1,968
1,917,403
Cultivation
Massachusetts
Mint
39,600
1,600,000 (10)
Dispensary
Illinois
Curaleaf
6,100
1,733,729
Dispensary
Pennsylvania
PharmaCann
3,481
1,314,035
Dispensary
Illinois
Columbia Care
4,736
1,215,421
Dispensary
Illinois
Curaleaf
4,200
1,024,162
Dispensary
Connecticut
Acreage
2,872
928,251
Dispensary
Massachusetts
PharmaCann
3,850
820,819
Dispensary
Illinois
Curaleaf
1,851
594,680
Total
1,458,635
$ 318,080,348
(1)
Lease/Loan is with a subsidiary of this entity, for which this entity or an affiliate is a guarantor.
(2)
Includes estimated rentable square feet at completion of construction.
(3)
Includes the purchase price (and transaction costs that have been capitalized into the purchase price), mortgage loan and tenant reimbursement commitments funded, if any, as of December 31, 2021. Excludes tenant reimbursement commitments not funded as of December 31, 2021. See footnotes below.
(4)
Includes 88,200 OP Units issued in connection with the purchase of the property.
(5)
Excludes $7,046,612 of tenant reimbursement commitments not funded as of December 31, 2021. The tenant is currently paying rent on this unfunded commitment.
(6)
Mortgage loan collateralized by a cultivation and processing facility. The loan is structured to convert to a twenty-year sale leaseback, unless a specific provision in the loan agreement is satisfied prior to July 29, 2022.
(7)
Excludes $5,026,934 of tenant reimbursement commitments not funded as of December 31, 2021.
(8)
Property is currently in development and we expect will receive final licensing upon occupancy.
(9)
Excludes $8,967,902 of tenant reimbursement commitments not funded as of December 31, 2021.
(10)
Excludes $3,000,000 of tenant reimbursement commitments not funded as of December 31, 2021.
Lease Expirations
The following table sets forth a summary of the lease expirations for leases in place as of December 31, 2021 for each of the ten full calendar years beginning January 1, 2021. The information set forth in the table assumes that tenants exercise no renewal options.
Year of Lease Expiration
Number of
Leases
Expiring
Square
Footage of
Expiring
% of
Portfolio
Net
Rentable
Square Feet
Annualized
Base Rent(1)
% of
Portfolio
Annualized
Base Rent
Annualized
Base Rent per
Leased Square
Foot(2)
-
-
-
-
-
$ -
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
11,496
0.84 %
814,848
2.27 %
70.88
-
-
-
-
-
-
18,447
1.36
558,453
1.55 %
30.27
Thereafter
1,329,492
97.80
34,602,761
96.18 %
26.03
Total/Weighted Average(3)
1,359,435
100.0 %
$ 35,976,062
100.0 %
$ 26.46
(1)
Annualized base rent is calculated by multiplying (i) rental payments (defined as cash rents without regard to rental abatements) for the month ended December 31, 2021, by (ii) 12.
(2)
Annualized base rent per leased square foot is calculated by dividing (i) annualized base rent (without regard to rental abatements) by (ii) net rentable square feet.
(3)
Does not include a Mortgage loan collateralized by a cultivation and processing facility. The loan is structured to convert to a twenty-year sale leaseback, unless a specific provision in the loan agreement is satisfied prior to July 29, 2022.
Our Tenants
We target companies that have successfully navigated complex state regulation and fulfilled rigorous state-licensing requirements. We believe we have been diligent in partnering with a diverse tenant base of experienced operators in limited licensed jurisdictions that have strong management teams. Our tenants have generally demonstrated access to capital, which is critical to continuing to execute on their respective business plans.
As of December 31, 2021, all of our revenues were derived from nine tenants. The following table sets forth the tenants in our property portfolio as of December 31, 2021. All of our leases include a parent or other affiliate guarantee by what we consider a well-capitalized guarantor.
Tenant(1)
Capital
Investment(2)
Number of
Leases
Percentage of
Annualized
Rental
Revenue(3)
Curaleaf
$ 76,476,584
25.8 %
Cresco Labs
50,731,761
17.2 %
Trulieve
37,222,909 (4)
14.7 %
Revolutionary Clinics
42,860,186 (5)
14.0 %
Columbia Care
32,496,486
10.9 %
Acreage
20,879,622
8.1 %
Organic Remedies
16,063,732 (6)
5.1 %
Mint
7,127,099 (7)
2.6 %
PharmaCann
4,221,969
1.6 %
Total
$ 288,080,348
100.0 %
(1)
Lease is with a subsidiary of this entity, for which this entity or an affiliate is a guarantor.
(2)
Includes the purchase price (and transaction costs that have been capitalized into the purchase price) and tenant reimbursement commitments funded, if any, as of December 31, 2021. Excludes tenant reimbursement commitments not funded as of December 31, 2021. See footnotes below.
(3)
Annualized Revenue represents the annualized monthly base rent of executed leases and annualized interest income on mortgage loan as of December 31, 2021.
(4)
Excludes $7,046,612 of tenant reimbursement commitments not funded as of December 31, 2021. The tenant is currently paying rent on this unfunded commitment.
(5)
Includes 88,200 OP Units issued in connection with the purchase of a property.
(6)
Excludes $5,026,934 of tenant reimbursement commitments not funded as of December 31, 2021.
(7)
Excludes $11,967,902 of tenant reimbursement commitments not funded as of December 31, 2021.
Curaleaf
We own ten dispensaries and one cultivation facility that are leased to subsidiaries of Curaleaf, which is, or an affiliate is, the corporate guarantor. Curaleaf is publicly-traded on the CSE and OTC markets under the symbols CURA and CURLF, respectively. Curaleaf’s filings, including their financial information, are electronically available at www.sec.gov and from the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com, the Canadian equivalent of the SEC electronic document gathering and retrieval system.
Cresco Labs
We own one cultivation facility that is leased to a subsidiary of Cresco Labs, which is the corporate guarantor. Cresco Labs is publicly-traded on the CSE and the OTC markets under the symbols CL and CRLBF, respectively. Cresco Lab’s filings, including their financial information, are electronically available at www.sec.gov and from the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com, the Canadian equivalent of the SEC electronic document gathering and retrieval system.
Our Borrower
While our focus is primarily on sale leaseback transactions, we may, from time to time, incorporate loan elements into a transaction to be strategic with our tenants/borrowers and differentiate ourselves from competitors. We anticipate that any loans we provide will be part of a transaction with the objective to acquire the subject property and secure a long-term lease consistent with our sale leaseback program.
At December 31, 2021, we had one loan outstanding that was structured to convert to a twenty-year sale leaseback, unless a specific provision in the loan agreement is satisfied prior to July 29, 2022. Interest for the loan period was prepaid at closing and a repayment premium would be due if the loan is repaid. Interest payments from this borrower during the loan period are classified as “Interest Income from Mortgage Loan” in our Consolidated Statement of Operations. Upon conversion to a sale leaseback transaction, the lease payments would be considered rental revenue, consistent with our other tenant relationships.
As of December 31, 2021, all of our Interest Income from Mortgage Loan was derived from one borrower. The following table sets forth the borrower in our portfolio as of December 31, 2021. Our loan includes a parent or other affiliate guarantee by what we consider a well-capitalized guarantor.
Borrower
Capital Investment
Number of
Loans
Percentage of Annualized Interest Income on Mortgage Loan
Hero Diversified Associates Inc.
$ 30,000,000
100.0 %
Total
$ 30,000,000
100.0 %

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2021, we were not a party to any proceedings. From time to time, we may in the future be a party to various claims and routine litigation arising in the ordinary course of business.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock began trading on the OTCQX Best Market operated by the OTC Markets Group, Inc., on August 20, 2022, under the symbol "NLCP".
We generally intend to continue to declare quarterly dividends on our common stock, subject to the board of director’s discretion and applicable law. The actual amount and timing of dividends, however, will be at the discretion of our board of directors and will depend upon our financial condition in addition to the requirements of the Code, and no assurance can be given as to the amounts or timing of future distributions, if any.
Shareholder Information
As of December 31, 2021, there were approximately 322 holders of record of our common stock. This figure does not represent the actual number of beneficial owners of our common stock because shares of our common stock is frequently held in “street name” by securities dealers and others for the benefit of beneficial owners who may vote the shares.
Sales of Unregistered Securities
The following sets forth information regarding unregistered securities sold from January 1, 2021 through December 31, 2021:
Between January 1, 2021 and February 21, 2021, we issued 1,871,932 shares of our common stock at a purchase price of $21.15 per share, for net proceeds of $39.6 million after deducting offering expenses. There was no placement agent.
On March 17, 2021, in connection with the Merger, we issued warrants to purchase up to 602,392 shares of our common stock, valued at $4.8 million.
On March 17, 2021, in connection with the Merger, we issued 7,699,887 shares of our common stock to NLCP Holdings, LLC, valued at $162.9 million.
In 2021, prior to the completion of our initial public offering, we issued 39,849 restricted stock units, which each represent the right to receive one share of our common stock, to certain of our officers and directors, valued at $0.8 million.
On June 30, 2021, in connection with the acquisition of a cultivation facility in Massachusetts leased to a subsidiary of Revolutionary Clinics, we issued 88,200 OP units to Oak Hill Fitchburg Property Owner LLC, valued at $2,205,000. This does not include 132,727 OP Units to be issued if certain conditions are met. Subject to certain terms and conditions, OP Units are redeemable for shares of our common stock.
Unless otherwise stated, the issuances of the above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder as transactions by an issuer not involving any public offering. None of the foregoing transactions involved any underwriters, underwriting discounts or commissions or any public offering.
On April 4, 2021, we redeemed the 125 outstanding shares of our Series A Preferred Stock at a redemption price of $1,000 per share, plus accrued but unpaid dividends of $33.33 per share.
Use of Proceeds from Sales of Registered Securities
On August 11, 2021, our Registration Statement on Form S-11, as amended (File No. 333-257253) was declared effective in connection with our IPO, pursuant to which we issued and sold 3,905,950 shares of our common stock at a price to the public of $26.00 per share. The IPO closed August 13, 2021. Ladenburg Thalmann & Co. Inc., Compass Point Research & Trading LLC and Loop Capital Markets LLC acted as placement agents for the IPO.
We received net proceeds of approximately $93.5 million, after deducting placement agent fees of $6.1 million and offering expenses of $1.9 million. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates.
There has been no material change in the expected use of the net proceeds from our IPO as described in our prospectus, dated August 12, 2021, filed with the SEC in accordance with Rule 424(b) of the Securities Act on August 13, 2021. The net proceeds from our IPO have been contributed to our operating partnership in exchange for OP Units and our operating partnership intends to use the net proceeds received from us to acquire our target assets in a manner consistent with our investment strategy. Pending application of the net proceeds from our IPO, we have invested the net proceeds in interest bearing accounts, money market accounts and interest-bearing securities in a manner that is consistent with our intention to remain qualified for taxation as a REIT. Such investments may include, for example, government and government agency certificates, government bonds, interest-bearing bank deposits, money market accounts and mortgage loan participations.
Securities Authorized for Issuance Under Equity Compensation Plan
The information required by Item 5 is incorporated by reference to our definitive Proxy Statement for our 2022 annual stockholders’ meeting.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. RESERVED.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K
This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Cautionary Statement Regarding Forward-Looking Statements" in this Annual Report on Form 10-K. You should review the disclosure under the heading "Risk Factors" in this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
We are an internally managed REIT and a leading provider of real estate capital to state-licensed cannabis operators primarily through sale-leaseback transactions, third-party purchases and funding for build-to-suit projects. 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.
We were incorporated in Maryland on April 9, 2019. We conduct our business through a traditional umbrella partnership REIT structure, in which properties are owned by an operating partnership, directly or through subsidiaries. We are the sole general partner of our operating partnership and currently own approximately 98% of the OP Units. We have elected to be taxed as a REIT for U.S. federal income tax purposes beginning with our short taxable year ended December 31, 2019 and intend to operate our business so as to continue to qualify as a REIT.
On March 17, 2021, we completed the acquisition of a separate company that owned a portfolio of cultivation facilities and dispensaries utilized in the cannabis industry (see “The Merger” below). As of December 31, 2021, we owned a geographically diversified portfolio consisting of 28 properties across 11 states with nine tenants, comprised of 17 dispensaries and 11 cultivation facilities. Additionally, during the fourth quarter, the Company funded a mortgage loan collateralized by a cultivation and processing facility. The loan is structured to convert to a twenty-year sale leaseback, unless a specific provision in the loan agreement is satisfied prior to July 29, 2022.
We derive substantially all our revenue from rents received from single tenants of each of our properties under triple-net leases. Our triple-net leases obligate the tenant for all the ongoing expenses of a property, including real estate taxes, insurance, maintenance and utilities, in addition to its rent obligations. Our leases also typically include annual rent escalations (typically within the range of 2-3%) as a set percentage or based on an inflation index, which generally provides us with contractual revenue growth and inflation-protected returns. All of our leases include a parent or other affiliate guarantee by what we consider a well-capitalized guarantor.
Our business strategy includes the acquisition of additional properties utilized in the cannabis industry as well as the provision of capital to our tenants for the development and expansion of our properties. As of December 31, 2021, we have aggregate unfunded commitments to invest $24.0 million for the development and improvement of our existing cultivation facilities in Arizona, Massachusetts, Missouri and Pennsylvania. Our leases are generally structured to disburse capital over specified periods of time. The leases also contain certain provisions that require tenants to pay rent on the full amount of capital under each lease, whether or not disbursed. Our Pennsylvania cultivation facility is currently paying rent on approximately $7.0 million of unfunded capital.
As of December 31, 2021, our properties had a weighted average remaining lease term of 14.5 years. Our tenants include affiliates of what we believe to be some of the leading and most well-capitalized companies in the industry, such as Curaleaf, Cresco Labs, Trulieve and Columbia Care.
As of December 31, 2021, the Company had a $3.8 million loan payable in connection with the purchase and leaseback of a cultivation facility in Chaffee, Missouri. The loan is payable in annual principal installments of $1.8 million, $1 million and $1 million in January 2022, 2023 and 2024, respectively.
Recent Developments
During the first quarter, as of March 15, 2022, the Company funded approximately $3.4 million of tenant improvements to our cultivation facilities in Massachusetts and Missouri.
On March 15, 2022, the board of directors declared a first quarter 2022 cash dividend of $0.33 per share of common stock for the period beginning on January 1, 2022, through the end of the first quarter, March 31, 2022. The dividend is payable on April 14, 2022 to stockholders of record at the close of business on March 31, 2022.
Initial Public Offering
On August 13, 2021, we completed our IPO of 3,905,950 shares of our common stock, par value $0.01 per share at a public offering price of $26.00 per share for gross proceeds of approximately $102 million, before deducting placement agent fees and offering expenses. Net proceeds were approximately $93.5 million. Our common stock trades on the OTCQX® Best Market operated by the OTC Markets Group, Inc., under the symbol “NLCP”.
The Merger
On March 17, 2021, we consummated a merger pursuant to which we combined our company with a separate company, or the Target, that owned a portfolio of cultivation facilities and dispensaries utilized in the cannabis industry, and renamed ourselves “NewLake Capital Partners, Inc.” The Merger was completed through the issuance of 7,699,887 shares of common stock valued at $21.15 per share and warrants to purchase up to 602,392 shares of the Company’s common stock valued at approximately $4.8 million. The Company also incurred approximately $2.1 million in merger-related transaction costs. The consideration issued was based upon the relative value of the two entities, such that the shareholders of the Company and the Target, immediately prior to the Merger, owned 56.79% and 43.21%, respectively, of the outstanding post-merger common stock of the Company. The Company issued warrants to Target shareholders based on the pre-merger options outstanding, using the equivalent proportion described in the previous sentence. Upon completion of the Merger, we owned 24 properties across nine states, and became one of the largest REITs in the cannabis industry. We consummated the Merger and combined businesses with the Target to, among other things, benefit from increasing economies of scale as we continue to grow, and as part of our evolution toward entering the public markets. The Merger has been treated as an asset acquisition, and we are treated as the accounting acquirer. In connection with the Merger, we also entered into various arrangements and agreements with certain of our significant stockholders, including director nomination rights.
Emerging Growth Company
We have elected to be an emerging growth company, as defined in the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company, among other things:
●
We are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act;
●
We are permitted to provide less extensive disclosure about our executive compensation arrangements; and
●
We are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements.
We have elected to use an extended transition period for complying with new or revised accounting standards.
We may take advantage of the other provisions for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company upon the earliest to occur of: (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the exchange, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.
Factors Impacting Our Operating Results
Our results of operations are affected by a number of factors and depend on the rental revenue we receive from the properties that we own, the timing of lease expirations, general market conditions, the regulatory environment in the cannabis industry, and the competitive environment for real estate assets that support the cannabis industry.
COVID-19
Throughout most of 2020 and to date, the ongoing COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. Many countries, including the U.S., have instituted quarantines, mandated business and school closures and restricted travel. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including the regulated cannabis industry. COVID-19 (or a future pandemic) could have material and adverse effects on our tenants and their operations, and in turn on our business. As of December 31, 2021, COVID-19 had not had a material impact to the Company's operations or financial condition, however, any future impacts of COVID- 19 are highly uncertain and cannot be predicted.
Rental Revenues
We receive income from rental revenue generated by the properties that we own and expect to receive income from rental revenue generated by properties we expect to acquire in the future. The amount of rental revenue depends upon a number of factors, including:
•
Our ability to enter into new leases at market value rents inclusive of annual rent increases; and
•
Rent collection, which primarily relates to each of our current and future tenant’s or guarantor’s financial condition and ability to make rent payments to us on time.
The properties that we own consist of real estate assets that support the cannabis industry. Changes in current favorable state or local laws in the cannabis industry may impair our ability to renew or re-lease properties and the ability of our tenants to fulfill their lease obligations and could materially and adversely affect our ability to maintain or increase rental rates for our properties.
Conditions in Our Markets
Positive or negative changes in regulatory, economic or other conditions and natural disasters in the markets where we acquire properties may affect our overall financial performance.
Competitive Environment
We face competition from a diverse mix of market participants, including but not limited to, other companies with similar business models, independent investors, hedge funds and other real estate investors, mortgage REITs, hard money lenders, as well as would-be tenants, cannabis operators themselves, all of whom may compete with us in our efforts to acquire real estate zoned for cannabis cultivation, production or dispensary operations. Competition from others may diminish our opportunities to acquire a desired property on favorable terms or at all. In addition, this competition may put pressure on us to reduce the rental rates below those that we expect to charge for the properties that we own and expect to acquire, which would adversely affect our financial results.
Financial Performance and Condition of Our Tenants/Borrower
As of December 31, 2021, all of our rental revenues were derived from nine tenants. All of our leases include a parent or other affiliate guarantee by what we consider a well-capitalized guarantor. Our revenues are, therefore, dependent on our tenants (and related guarantors) ability to meet their respective obligations to us. Our tenants operate in the regulated cannabis industry, which is an evolving and highly regulated space. Further, because the regulated cannabis industry is a relatively new space, some of our existing tenants have limited operating histories and may be more susceptible to payment and other lease defaults. Thus, our operating results will be significantly impacted by the ability of our tenants to achieve and sustain positive financial results.
As of December 31, 2021, the Company collects interest income on one mortgage loan. The loan is structured to convert to a twenty-year sale leaseback, unless a specific provision in the loan agreement is satisfied prior to July 29, 2022. The loan is collateralized by a cultivation and processing facility, as well as other assets of Hero Diversified Associates, Inc. Thus, our operating results may be impacted if the loan does not convert.
Triple-net Leases; Operating Expenses
Our triple-net leases obligate the tenant for all the ongoing expenses of a property, including real estate taxes, insurance, maintenance and utilities, in addition to its rent obligations. Our leases also typically include annual rent escalations (typically within the range of 2-3%) as a set percentage or based on an inflation index, which generally provides us with contractual revenue growth and inflation-protected returns. Our operating expenses include general and administrative expenses, including personnel costs, legal, accounting, and other expenses related to corporate governance. In connection with becoming publicly traded, we have experienced an increase in expenses, including those related to insurance and compliance with the various provisions of U.S. securities laws. We expect such increases to continue, as compared to such expenses of a private company.
Results of Operations
Comparison of the Year Ended December 31, 2021 and 2020 (in thousands):
For the Year ended December 31,
Increase/(Decrease)
2021 vs 2020
Revenue:
Rental Income
$ 27,588
$ 11,663
$ 15,925
Interest Income from Mortgage Loan
-
Total Revenue
28,201
11,663
16,538
Expenses:
8,097
2,603
5,494
Depreciation and Amortization Expense
6,445
4,056
2,389
General and Administrative Expense
2,020
4,721
(2,701 )
Stock Based Compensation
-
Property Expenses
-
12,360
(12,360 )
Management Internalization Costs
16,706
23,740
(7,034 )
Total Expenses
Gain on Sale of Real Estate
-
1,491
(1,491 )
Income (Loss) from Operations
11,495
(10,586 )
22,081
Other income (expense)
Interest Income
(53 )
Interest Expense
(6 )
-
(6 )
Total other income (expense)
(59 )
Net income (loss)
11,589
(10,433 )
22,022
Preferred stock dividend
(4 )
(16 )
Net income attributable to non-controlling interests
(356 )
(234 )
(122 )
Net income (loss) attributable to common shareholders
$ 11,229
$ (10,683 )
$ 21,912
Revenues
Rental Income for the year ended December 31, 2021 increased by approximately $15.9 million, to approximately $27.6 million, compared to approximately $11.7 million for the year ended December 31, 2020. The increase in rental revenue was primarily attributable to:
•
The nineteen properties we acquired in March 2021 in connection with the Merger generated approximately $8.5 million of rental revenue in 2021, representing the period from Merger closing on March 17, 2021 to December 31, 2021.
•
The three properties we acquired during the second quarter of 2021 and the one property we acquired during the fourth quarter of 2021 generated approximately $3.0 million of rental revenue during the year ended December 31, 2021.
•
Rental income from the pre-merger portfolio properties generated an increase of approximately $4.9 million of rental income during the year ended December 31, 2021.
•
The property we sold in November 2020 generated approximately $0.5 million of rental income for during the year ended December 31, 2020.
Interest Income from Mortgage Loan for the year ended December 31, 2021 was approximately $0.6 million, compared to $0 for the year ended December 31, 2020. The increase in Interest Income from Mortgage Loan was attributable to the nine-month mortgage loan we entered into during the fourth quarter of 2021.
Expenses
Depreciation and Amortization Expense
Depreciation and amortization expense for the year ended December 31, 2021, increased by approximately $5.5 million to approximately $8.1 million, compared to $2.6 million for the year ended December 31, 2020, due to the impact of the 19 properties acquired in March 2021 in connection with the Merger, the acquisition of three properties during the second quarter of 2021 and the acquisition of one property during the fourth quarter of 2021.
Stock Based Compensation
Stock-based compensation expense for the year ended December 31, 2021 decreased by approximately $2.7 million from approximately $4.7 million in 2020 to approximately $2.0 million in 2021. The 2021 expense was primarily attributable to expense on RSUs that vested upon the completion of our IPO. The 2020 expense was primarily attributable to the issuance of stock options in conjunction with our internalization on July 15, 2020.
General and Administrative Expense
The following table summarizes general and administrative expenses for the year ended December 31, 2021 and 2020 (in thousands):
For the Year Ended December 31,
Increase / (Decrease)
2021 vs. 2020
Payroll
$ 2,770
$
$ 2,136
Legal and professional
1,970
1,872
Management fees
-
(657 )
Reimbursements to our manager
-
(351 )
Other
1,705
1,163
Total
$ 6,445
$ 4,056
$ 2,389
General and administrative expense for the year ended December 31, 2021 increased by approximately $2.4 million, to approximately $6.4 million, compared to approximately $4.0 million for the year ended December 31, 2020. The increase in general and administrative expense was primarily due to increased payroll, D&O insurance, investor relations and other expenses related to the merger and becoming a public company, partially offset by the elimination of management fees and reimbursements to our former manager.
Management Internalization
In connection with the internalization of our outside manager on July 15, 2020, the Operating Partnership issued 419,798 OP Units valued at $8,395,960, the Company issued 152,654 shares of its common stock valued at $3,053,079 and incurred $911,289 in legal, severance and professional costs.
Gain on Sale of Real Estate
The Loss from Operations during the year ended December 31, 2020 was partially offset by a gain on property sale of approximately $1.5 million.
Other Income (Expense)
Interest Income declined during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to lower interest rates.
The Company incurred Interest Expense on the loan payable entered into during the year ended December 31, 2021. The Company did not have a loan payable during the year ended December 31, 2020.
Cash Flows
The following summary discussion of our cash flows is based on the consolidated statements of cash flows in our consolidated financial statements and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (in thousands):
For the Year
Ended December 31, 2021
For the Year
Ended December 31, 2020
Net cash provided by operating activities
$ 26,697
$ 7,347
Net cash (used in) investing activities
$ (39,907 )
$ (65,054 )
Net cash provided by financing activities
$ 120,690
$ 10,423
Ending cash and cash equivalents
$ 127,097
$ 19,617
Net cash provided by operating activities for the year ended December 31, 2021 and 2020 were approximately $26.7 million and $7.3 million, respectively. Net cash flows provided by operating activities primarily related to contractual rent and security deposits from our properties, partially offset by our general and administrative expenses. Net cash flows provided by operating activities for the year ended December 31, 2021 were greater than the year ended December 31, 2020, due to the increase in number of properties.
Net cash used in investing activities for the year ended December 31, 2021 and 2020 were approximately $39.9 million and $65.1 million, respectively. Net cash used in investing activities for the year ended December 31, 2021 primarily related to $64.4 million of cash acquired in connection with the Merger, offset by $2.1 million of Merger transaction related costs, $15.2 million advanced for tenant improvements, $30.0 million invested in a mortgage loan receivable and approximately $57.0 million related to the purchase of investments in real estate. Cash flows used in investing activities for the year ended December 31, 2020 were related to the expansion of the Lincoln, IL property and the purchase of the Mount Dora, FL property.
Net cash provided by financing activities for the year ended December 31, 2021 and 2020 were approximately $120.7 million and $10.4 million, respectively. Net cash provided by financing activities for the year ended December 31, 2021, were primarily related to approximately $133.1 million in net proceeds from our issuance of common stock, partially offset by approximately $12.3 million in dividend payments to holders of our common stock, as well as distributions to OP Units and restricted stock unit holders and $0.1 million paid to redeem our preferred stock. Net cash flows provided by financing activities during the year ended December 31, 2020 were primarily related to approximately $15.7 million in net proceeds from our issuance of common stock, partially offset by $5.3 million in dividend payments to holders of our common stock as well as distributions to OP Units and restricted stock unit holders.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements. We expect to use significant cash to acquire additional properties, develop and redevelop existing properties, pay dividends to our stockholders, fund our operations, and meet other general business needs.
Sources and Uses of Cash
We derive substantially all of our revenues from the leasing of our properties. This source of revenue represents our primary source of liquidity to fund our dividends, general and administrative expenses and other expenses related to managing our existing portfolio. Currently, all our tenants are paying their rent on a timely basis. We raise new capital for property development and redevelopment activities and investing in additional properties. We expect to fund our investment activity generally through equity or debt issuances either in the public or private markets. Where possible, we also may issue OP Units to acquire properties from existing owners seeking a tax-deferred transaction. We issued 419,798 OP Units in 2020 to purchase GreenAcreage Management Owner LLC as part of the internalization and we issued 88,200 OP Units in June 2021 in connection with the purchase of a property. In addition, the Company is required to issue 132,727 OP Units pursuant to a contribution agreement if certain conditions are met by June 30, 2022.
In August 2019 we issued 7,060,250 shares of our common stock, resulting in net proceeds to us of approximately $131.5 million. In December 2020 we issued 745,241 shares of our common stock, resulting in net proceeds to us of approximately $15.7 million. In January and February 2021, we issued 1,871,932 shares of our common stock, resulting in net proceeds to us of approximately $39.6 million. In connection with the Merger we acquired $64.4 million of cash. In August 2021, we issued 3,905,950 shares of our common stock, in connection with our IPO, resulting in net proceeds to us of approximately $93.5 million. As of December 31, 2021, we had approximately $127.1 million in cash.
Initial Public Offering
On August 13, 2021, we completed our IPO of 3,905,950 shares of our common stock, par value $0.01 per share at a public offering price of $26.00 per share for gross proceeds of approximately $102 million, before deducting placement agent fees and offering expenses. Net proceeds from the IPO were approximately $93.5 million.
We expect to meet our liquidity needs through cash and cash equivalents on hand, cash flows from operations and cash flows from future capital raises. We believe that our liquidity and sources of capital are adequate to satisfy our short and long-term cash requirements. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to us in sufficient amounts in the future.
Dividends
We are required to pay dividends to our stockholders at least equal to 90% of our taxable income in order to maintain our qualification as a REIT. As a result of this distribution requirement, our operating partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. During the year ended December 31, 2021, we declared cash dividends on our common stock, dividend equivalents on our restricted stock units and, in our capacity as general partner of the operating partnership, authorized distributions on our OP Units totaling approximately $18.1 million ($1.02 per share) and cash dividends on our Series A Preferred Stock totaling approximately $4,167. Our Series A Preferred Stock was redeemed in full on April 6, 2021. During 2020, we declared cash dividends on our common stock, dividend equivalents on our restricted stock units and, in our capacity as general partner of the operating partnership, authorized distributions on our OP Units totaling approximately $6.2 million ($0.84 per share), and cash dividends on our Series A Preferred Stock totaling approximately $15,625.
Commitments
As of December 31, 2021, we have aggregate unfunded commitments to invest $24.0 million for the development and improvement of our existing properties.
Non-GAAP Financial Information and Other Metrics
Funds from Operations and Adjusted Funds from Operations
FFO and AFFO are non-GAAP financial measures and should not be viewed as alternatives to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that FFO and AFFO are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs.
We calculate FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. NAREIT currently defines FFO as follows: net income (loss) (computed in accordance with GAAP) excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by an entity. Other REITs may not define FFO in accordance with the NAREIT definition or may interpret the current NAREIT definition differently than we do and therefore our computation of FFO may not be comparable to such other REITs.
We calculate AFFO by starting with FFO and adding back non-cash and certain non-recurring transactions, including non-cash components of compensation expense and our internalization costs. Other REITs may not define AFFO in the same manner as we do and therefore our calculation of AFFO may not be comparable to such other REITs. You should not consider FFO and AFFO to be alternatives to net income as a reliable measure of our operating performance; nor should you consider FFO and AFFO to be alternatives to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity.
The table below is a reconciliation of net income attributable to common stockholders to FFO and AFFO for the year ended December 31, 2021 and 2020 (in thousands, except share and per share amounts):
For the Year ended December 31,
Net income (loss) attributable to common stockholders
$ 11,229
$ (10,683 )
Real estate depreciation and amortization
7,848
2,545
FFO attributable to common stockholders
19,077
(8,138 )
Stock- based compensation
1,958
4,615
Management Internalization Costs
-
12,360
AFFO attributable to common stockholders
$ 21,035
$ 8,837
FFO per share - basic
$ 1.12
$ (1.14 )
FFO per share - diluted
$ 1.09
$ (1.14 )
AFFO per share - basic
$ 1.24
$ 1.24
AFFO per share - diluted
$ 1.20
$ 1.24
Weighted average shares outstanding - basic
17,011,991
7,123,165
Weighted average shares outstanding - diluted
17,566,470
7,123,165
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with GAAP, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ materially from those estimates and assumptions. Set forth below is a summary of our accounting policies that we believe are critical to the preparation of our consolidated financial statements. Our accounting policies are more fully discussed in our consolidated financial statements.
Acquisition of Rental Property, Depreciation, Amortization and Impairment
We exercise judgement to determine key assumptions used in each estimate. For example, we are required to use judgment and make a number of assumptions, upon the acquisition of a property, including those related to projected growth in rental rates and operating expenses, anticipated trends and market/economic conditions. The use of different assumptions can affect the amount of consideration allocated to the acquired depreciable/amortizable asset, which in turn can impact our net income due to the recognition of the related depreciation/amortization expense in our consolidated statements of operations.
Upon acquisition of property, the tangible and intangible assets acquired and liabilities assumed are initially measured based upon their relative fair values. We estimate the fair value of land by reviewing comparable sales within the same submarket and/or region, the fair value of buildings on an as-if vacant basis and may engage third-party valuation specialists. Acquisition costs are capitalized as incurred since all our acquisitions to date were recorded as asset acquisitions.
We depreciate each of our buildings and improvements over its estimated remaining useful life, not to exceed 35 years. We depreciate tenant improvements at our buildings where we are considered the owner over the estimated useful life, not to exceed 35 years. We amortize the value of in-place lease costs over the remaining life of the in-place lease. Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment.
The determination of whether we or the tenant is the owner of tenant improvements for accounting purposes is subject to significant judgment. In making that determination, we consider numerous factors and perform an evaluation of each individual lease. No one factor is determinative in reaching a conclusion. The factors we evaluate include but are not limited to whether the lease agreement requires landlord approval of how the tenant improvement allowance is spent prior to installation of the tenant improvements, whether the lease agreement requires the tenant to provide evidence to the landlord supporting the cost and what the tenant improvement allowance was spent on prior to payment by the landlord for such tenant improvements, whether the tenant improvements are unique to the tenant or reusable by other tenants, whether the tenant is permitted to alter or remove the tenant improvements without the consent of the landlord or without compensating the landlord for any lost utility or diminution in fair value and whether the ownership of the tenant improvements remains with the landlord or remains with the tenant at the end of the lease term. When we conclude that we are the owner of tenant improvements for accounting purposes using the factors discussed above, we record the cost to construct the tenant improvements as our capital asset.
Long-lived assets are individually evaluated for impairment when conditions exist that may indicate that the carrying amount of a long-lived asset may not be recoverable. The carrying amount of a long-lived asset to be held and used is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Impairment indicators or triggering events for long-lived assets to be held and used are assessed by property and include significant fluctuations in estimated net operating income, occupancy changes, significant near-term lease expirations, current and historical operating and/or cash flow losses, construction costs, estimated completion dates, rental rates, and other market factors. We assess the expected undiscounted cash flows based upon numerous factors, including, but not limited to, construction costs, available market information, current and historical operating results, known trends, current market/economic conditions that may affect the property, and our assumptions about the use of the asset, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration. Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value. We may adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives.
Revenue Recognition and Leases
Our existing tenant leases and future tenant leases are generally expected to be triple-net leases, an arrangement under which the tenant maintains the property while paying us rent. We account for our leases as operating leases. Operating leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term, unless the collectability of lease payments is not reasonably predictable. Rental increases based upon changes in the U.S. Consumer Price Index (“CPI”), if any, are recognized only after the changes in the indexes have occurred and are then applied according to the lease agreements. Contractually obligated reimbursements from tenants for recoverable real estate taxes, insurance and operating expenses, if any, are included in rental revenue in the period when such costs are incurred. Contractually obligated real estate taxes that are paid directly by the tenant to the tax authorities are not reflected in our consolidated financial statements.
We record revenue for each of our properties on a cash basis due to the uncertainty of collectability of lease payments from each tenant due to their limited operating history and the uncertain regulatory environment in the U.S. relating to the cannabis industry.
Stock-Based Compensation
We account for awards of stock, stock options, restricted stock units and performance stock units in accordance with Accounting Standards Codification (“ASC”) ASC 718-10, “Compensation-Stock Compensation.” ASC 718-10 requires that compensation cost for all stock awards be recorded at fair value at the grant date and amortized over the service period (generally equal to the vesting period). The compensation cost for stock option grants is determined using option pricing models, intended to estimate the fair value of the awards at the grant date less estimated forfeitures. We used the Black-Scholes option pricing model to estimate the fair value of options awards at the time of their grant on July 15, 2020. The fair value of performance stock awards is determined using a Monte Carlo simulation for the future stock price of the Company and the corresponding peer group.
There is significant uncertainty in the estimation of the valuation of our performance stock units as they do not vest until December 31, 2023 and 2024, as well as additional uncertainty around forfeitures as we cannot determine if or when forfeitures will happen. The valuation of units can vary significantly since units are based upon target amounts that may or may not be met.
Determination of Fair Value of our Common Stock
Prior to our IPO, the estimated fair value of our common stock was determined by our board of directors as of the date of each equity grant to be equal to the sales price per share in our most recent equity private placement.
Following the closing of our IPO, our board of directors determines the fair market value of our common stock based on its closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded.
Income Taxes
We have been organized to operate our business so as to qualify to be taxed as a REIT. Under the REIT operating structure, we are permitted to deduct dividends paid to our stockholders in determining our taxable income for U.S. federal income tax purposes. As long as our dividends equal or exceed our taxable net income, we generally will not be required to pay U.S. federal income tax on such income.
Adoption of New or Revised Accounting Standards
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-02, Leases; in July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases-Targeted Improvements; and in December 2018, the FASB issued ASU 2018-20, Narrow-Scope Improvements for Lessors. This group of ASUs is collectively referred to as Topic 842 and will be effective for the Company beginning January 1, 2022. Topic 842 supersedes the existing standards for lease accounting (Topic 840, Leases).
Topic 842 requires lessees to record most leases on their balance sheet through a right-of-use ("ROU") model, in which a lessee records a ROU asset and a lease liability on their balance sheet. Leases that are less than 12 months do not need to be accounted for under the ROU model. As of December 31, 2021, the Company is the lessee under one office lease and one furniture lease that are for less than 12 months.
We will adopt Topic 842 effective as of January 1, 2022 using the effective date method and will elect the package of practical expedients that allows an entity not to reassess upon adoption (i) whether an expired or existing contract contains a lease, (ii) lease classifications related to expired or existing lease arrangements, and (iii) whether costs incurred on expired or existing leases qualify as initial direct costs, and as a lessor, the practical expedient not to separate certain non-lease components, such as common area maintenance, from the lease component if the timing and pattern of transfer are the same for the non-lease component and associated lease component, and the lease component would be classified as an operating lease if accounted for separately.
As lessor, for each of our real estate transactions involving the leaseback of the related property to the seller or affiliates of the seller, we determine whether these transactions qualify as sale and leaseback transactions under the accounting guidance. For these transactions, we consider various inputs and assumptions including, but not necessarily limited to, lease terms, renewal options, discount rates, and other rights and provisions in the purchase and sale agreement, lease and other documentation to determine whether control has been transferred to the Company or remains with the lessee. A transaction involving a sale leaseback will be treated as a purchase of a real estate property if it is considered to transfer control of the underlying asset from the lessee. A lease will be classified as direct-financing if risks and rewards are conveyed without the transfer of control and will be classified as a sales-type lease if control of the underlying asset is transferred to the lessee. Otherwise, the lease is treated as an operating lease. These criteria also include estimates and assumptions regarding the fair value of the leased facilities, minimum lease payments, the economic useful life of the facilities, the existence of a purchase option, and certain other terms in the lease agreements. The lease accounting guidance requires accounting for a transaction as a financing lease in a sale leaseback when the seller-lessee is provided an option to purchase the property from the landlord at the tenant’s option.
Our leases will continue to be classified as operating leases under Topic 842 and we will continue to record revenue for each of our properties on a cash basis. Upon adoption of Topic 842, the Company expects to continue to combine tenant reimbursements with rental revenues on the Company’s consolidated statements of operations. The Company has historically not capitalized allocated payroll cost incurred as part of the leasing process, which was allowable under ASC 840 but, will no longer qualify for classification as initial direct costs under Topic 842. Also, the Narrow-Scope Improvements for Lessors under ASU 2018-20 allows the Company to continue to exclude from revenue, costs paid by our tenants on our behalf directly to third parties, such as property taxes.
Two of our leases that were entered into in December 2019 provide the lessee with a purchase option to purchase the leased property at the end of the initial lease term in December 2029, subject to the satisfaction of certain conditions. The purchase option provision allows the lessee to purchase the leased property for an amount based on our investment and fair market. As of December 31, 2021, our gross investment in the properties with the purchase options was approximately $6.3 million.
Our leases generally contain options to extend the lease terms with an increase in rent (typically between 2% and 3%) over the expiring rental rate at the time of expiration. Certain of our leases provide the lessee with a right of first refusal or right of first offer in the event we market the leased property for sale.
The Company plans to apply Topic 842 based on the prospective optional transition method, in which comparative periods will continue to be reported in accordance with Topic 840. The Company also anticipates expanded disclosures upon adoption, as the new standard requires more extensive quantitative and qualitative disclosures as compared to Topic 840 for both lessees and lessors. The Company does not anticipate that the adoption of Topic 842 on January 1, 2022, will have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies will be required to use a new forward- looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which among other updates, clarifies that receivables arising from operating leases are not within the scope of this guidance and should be evaluated in accordance with Topic 842. We do not expect these standards to be effective for us until January 1, 2023. Since we expect our leases to be operating leases and do not expect our mortgage loan receivable to be outstanding upon adoption, we do not anticipate these standards will have a material impact on our consolidated financial statements.
Impact of Inflation
We enter into leases that generally provide for annual fixed increases in rent, and in certain cases have entered into leases that provide for annual increases in rent equal to the greater of a fixed increase and the increase in annual CPI. We expect these lease provisions to result in rent increases over time. During times when inflation is greater than increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.
Seasonality
Our business is not, and we do not expect our business to be, subject to material seasonal fluctuations.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is incorporated by reference to our Financial Statements beginning on page of this report.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
On April 12, 2021, with the approval of our audit committee, we dismissed Davidson & Company LLP (“Davidson”) as our independent registered public accounting firm. Davidson’s audit report on our consolidated financial statements as of December 31, 2020 and December 31, 2019, did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles. During our existence, there were no (a) disagreements between us and Davidson on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Davidson, would have caused Davidson to make reference to the subject matter of the disagreement in its report on our consolidated financial statements, or (b) “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K under the Exchange Act.
On April 12, 2021, with the approval of our audit committee, we engaged BDO USA, LLP (“BDO”) as our new independent registered public accounting firm. Prior to the engagement of BDO, neither we nor anyone acting on our behalf consulted BDO regarding any of the matters or events set forth in Item 304(a)(2) of Regulation S-K.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. Controls and Procedures.
Our management, under the supervision and with the participation of our principal executive and financial officer, is responsible for and has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, including ensuring that such information is accumulated and communicated to our company's management, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officer have concluded that such disclosure controls and procedures were effective as of December 31, 2021 (the end of the period covered by this Annual Report).
Management’s Annual Report on Internal Control Over Financial Reporting
This report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.
Limitations on Controls
Our system of internal control over financial reporting was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. Other Information.
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 10 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2021.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. Executive Compensation.
The information required by Item 11 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2021.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 12 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2021.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 13 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2021.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. Principal Accounting Fees and Services.
The information required by Item 14 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2021.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. Exhibits, Financial Statement Schedules.
(a)
Documents filed as part of this report:
1.
Financial Statements. See Index to Financial Statements below.
2.
Schedules to Financial Statements. See Index to Financial Statements below.
All financial statement schedules not included have been omitted because they are either inapplicable or the information required is provided in our Financial Statements and Notes thereto.
3. Exhibits. See Exhibit Index below.
EXHIBIT INDEX
Exhibit
Number
Description
3.1
Articles of Amendment and Restatement of NewLake Capital Partners, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
3.2
Amended and Restated Bylaws of NewLake Capital Partners, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-11 filed on July, 23 2021).
4.1*
Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
10.1
Amended and Restated Agreement of Limited Partnership of NLCP Operating Partnership LP (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.2†*
NewLake Capital Partners, Inc. 2021 Equity Incentive Plan.
10.3†
Employment Agreement between NewLake Capital Partners, Inc. and David Weinstein (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.4†
Employment Agreement between NewLake Capital Partners, Inc. and Anthony Coniglio (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.5†
Employment Agreement between NewLake Capital Partners, Inc. and Fredric Starke (incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.6†
Indemnification Agreement between NewLake Capital Partners, Inc. and David Weinstein (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.7†
Indemnification Agreement between NewLake Capital Partners, Inc. and Anthony Coniglio (incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.8†
Indemnification Agreement between NewLake Capital Partners, Inc. and Fredric Starker (incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.9†
Indemnification Agreement between NewLake Capital Partners, Inc. and Gordon DuGan (incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.10†
Indemnification Agreement between NewLake Capital Partners, Inc. and Alan Carr (incorporated by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.11†
Indemnification Agreement between NewLake Capital Partners, Inc. and Joyce Johnson-Miller (incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.12†
Indemnification Agreement between NewLake Capital Partners, Inc. and Peter Kadens (incorporated by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.13†
Indemnification Agreement between NewLake Capital Partners, Inc. and Peter Martay (incorporated by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.14
Amended and Restated Investor Rights Agreement (incorporated by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.15
Amended and Restated Registration Rights Agreement (incorporated by reference to Exhibit 10.16 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.16
Warrant Agreement between NewLake Capital Partners, Inc, and NLCP Holdings, LLC (incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.17†
Form of Nonqualified Stock Option Grant Agreement (incorporated by reference to Exhibit 10.18 to the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
10.21†
Form of Senior Executive Restricted Stock Unit Agreement under the NewLake Capital Partners, Inc. 2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed December 20, 2021).
10.22†
Form of Senior Executive Performance Stock Unit Agreement under the NewLake Capital Partners, Inc. 2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed December 20, 2021).
10.23†
Form of Employee Restricted Stock Unit Agreement under the NewLake Capital Partners, Inc. 2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed December 20, 2021).
10.24†
Form of Employee Performance Stock Unit Agreement under the NewLake Capital Partners, Inc. 2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed December 20, 2021).
10.25†
Form of Non-Employee Director Restricted Stock Unit Agreement under the NewLake Capital Partners, Inc. 2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant's Current Report on Form 8-K filed December 20, 2021).
16.1
Letter from Davidson & Company LLP to the Securities and Exchange Commission dated June 21, 2021 (incorporated by reference to Exhibit 16.1 of the Registrant's Registration Statement on Form S-11 filed on June 21, 2021).
21.1*
List of Subsidiaries of the Registrant.
23.1*
Consent of BDO USA, LLP
23.2*
Consent of Davidson & Company LLP
31.1*
Certification of Annual Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Annual Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
Inline XBRL Instance Document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
_______________________
† Management contracts or compensatory plans required to be filed as Exhibits to this Form 10-K.
* Filed herewith.