NewLake Capital Partners, Inc.: Form 10-Q for the period ended Sep 30, 2024

SPECIAL NOTE REGARDING FORWARD LOOKING INFORMATION

NewLake Capital Partners, Inc. ("the Company," "we," "our," "us,") makes statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In particular, statements pertaining to our capital resources, property performance, leasing rental rates, future dividends and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations, adjusted funds from operations, anticipated market conditions, demographics, and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believe,” “continue,” "remain," “could,” “expect,” “may,” “will,” “should,” “would,” “seek,” “approximately,” “intend,” “plan,” “pro forma,” “estimates,” “forecast,” “project,” or “anticipate” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

• actions and initiatives of the U.S. or state governments and changes to government policies and the execution and impact of these actions, initiatives and policies, including the fact that cannabis remains illegal under federal law;
• reduced liquidity of our common stock resulting from limited availability of clearing firms that will settle our securities and settle our securities in secondary offerings;
• general economic conditions;
• adverse economic or real estate developments, either nationally or in the markets in which our properties are located;
• other factors affecting the real estate industry generally;
• the impacts of the potential rescheduling of cannabis;
• increase in interest rates and operating costs;
• the impact of inflation;
• financial market fluctuations;
• the competitive environment in which we operate;
• the estimated growth in and evolving market dynamics of the regulated cannabis market;
• adverse economic effects on the cannabis market;
• the expected medical-use or adult-use cannabis legalization in certain states;
• shifts in public opinion regarding regulated cannabis;
• the additional risks that may be associated with certain of our tenants cultivating adult-use cannabis in our cultivation facilities;
• the risks associated with the development of cultivation centers and dispensaries;
• our ability to successfully identify opportunities in target markets;
• the lack of tenant security deposits will impact our ability to recover rents should our tenants default under their respective lease agreement;
• our status as an emerging growth company and a smaller reporting company;
• our lack of an extensive operating history;
• the concentration of our tenants in certain geographical areas;
• our failure to generate sufficient cash flows to service any outstanding indebtedness;
• defaults on, early terminations of or non-renewal of leases by tenants, including significant tenants;
• our failure to acquire the properties in our identified pipeline successfully, on the anticipated timeline or at the anticipated costs;
• our failure to properly assess employment growth or other trends in target markets and other markets in which we seek to invest;
• lack or insufficient amounts of insurance;
• bankruptcy or insolvency of a significant tenant or a substantial number of smaller tenants;
• our access to certain financial resources, including banks and other financial institutions;
• our failure to successfully operate acquired properties;
• our ability to operate successfully as a public company;
• our dependence on key personnel and ability to identify, hire and retain qualified personnel in the future;
• conflicts of interests with our officers and/or directors stemming from their fiduciary duties to other entities, including our operating partnership;
• our failure to obtain necessary outside financing on favorable terms or at all;
• general volatility of the market price of our common stock;
• changes in U.S. generally accepted accounting principles ("GAAP");
• environmental uncertainties and risks related to adverse weather conditions and natural disasters;
• our failure to maintain our qualification as a REIT for federal income tax purposes; and
• changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this report, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading

"Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal year ended December 31, 2023 included in our most recent Annual Report on Form 10-K and our subsequent Quarterly Reports on Form 10-Q.

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 "Special Note Regarding Forward-Looking Information" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in our most recent 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

NewLake Capital Partners, Inc., ("the “Company,” "we," "our," "us,") is 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 for the ongoing expenses of the leased 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.

As of September 30, 2024, we owned a geographically diversified portfolio consisting of 32 properties across 12 states with 13 tenants, comprised of 17 dispensaries and 15 cultivation facilities.

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 $1.2 billion (subject to adjustment for inflation), (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, 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, (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period, or (iv) the last day of the fiscal year following the fifth anniversary of our initial public offering.

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, interest income we receive from the loans we originate, the timing of lease expirations, general market conditions, the regulatory environment in the cannabis industry, and the competitive environment for real estate assets that support the cannabis industry.

Rental Revenues

We generate rental income from our real estate properties that we own and from any real estate properties that we expect to acquire in the future. The amount of rental income 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.

For the nine months ended September 30, 2024, all of our rental income was derived from triple-net leases to 13 tenants. Our leases include a parent or other affiliate guarantee and obligate the tenant for all the ongoing expenses of a property, including real estate taxes, insurance, maintenance and utilities. Our rental income is, therefore, dependent on our tenants (and related guarantors) ability to meet their respective obligations to us. Our tenants operate in the cannabis industry. Changes in current state or local laws in the cannabis industry may impair our ability to renew or re-lease properties and the ability of our tenants to fulfill their lease obligations and could materially and adversely affect our ability to maintain or increase rental rates for our properties. Further, some of our existing tenants have limited operating histories and may be more susceptible to payment and other lease defaults. Thus, our operating results will be significantly impacted by the ability of our tenants to achieve and sustain positive financial results.

Financial Performance and Condition of Our Tenants

We own 32 properties, leased to 13 tenants. As of September 30, 2024, all of our tenants are performing under their lease agreement with the exception of two tenants discussed below.

Condition of Our Tenants

During the fourth quarter of 2023, we amended our leases with: a) Revolutionary Clinics as part of a restructuring of their business, their receipt of new third-party capital and new management, and b) Calypso in connection with their sale to Canvas Acquisition Corporation. Both tenants experienced recent operating challenges impacting their ability to pay rent as described below. We are currently in discussion with these tenants and have reserved all rights under the lease agreements.

Revolutionary Clinics

Revolutionary Clinics did not pay approximately 50% of the contractual rent from June 2024 through October 2024.

Calypso Enterprises

Calypso Enterprises did not pay its September and October 2024 contractual rent due under its lease agreement. We held an escrow deposit amounting to approximately six months of Calypso Enterprises' contractual rent payments and we applied approximately $299 thousand from this escrow deposit to cover the outstanding September 2024 rent. Additionally, in accordance with the lease agreement, we have suspended our obligation to fund the remaining improvement allowance of approximately $987 thousand until all outstanding rent is paid and the escrow deposit is replenished.

Financial Markets Update

During the nine months ended September 30, 2024, financial markets generally showed a measure of stability, yet they continued to be shadowed by lingering risks from the prior year. However, in September 2024, the Federal Reserve cut interest rates by 50 basis points. This decision reflects the central bank’s commitment to stimulate economic growth and activity. Before the rate cut, the central bank was focused on combating inflation, with interest rates at their highest levels in over twenty years. For U.S. corporations, this high interest rate scenario led to increased pressure on the cost of capital. Even with the interest rate cut in the latter part of 2024, interest rates remain high, and businesses still face challenges due to constricted access to capital. Consequently, the availability and cost of capital for both us and our tenants remains high, necessitating the adoption of judicious financial management strategies

On May 21, 2024, the Justice Department published a Notice of Proposed Rulemaking in the Federal Register for the Drug Enforcement Administration (“DEA”) to reschedule marijuana from Schedule I of the Controlled Substances Act (“CSA”), a list of completely prohibited drugs, to Schedule III, which includes prescription medications such as ketamine, Tylenol with codeine, and anabolic steroids. The proposed rule is based on an August 2023 recommendation by the Department of Health and Human Services (“HHS”). The comment period concluded on July 22, 2024, and the DEA is currently reviewing over 43,000 comments that were submitted in considering a final rule.

The DEA public hearing initially scheduled for December 2, 2024, to discuss the proposed rescheduling of cannabis has been postponed to early next year. President-Elect Trump has openly supported rescheduling and banking rights for the cannabis industry, which we believe is a positive sign. However, the timing and implementation of a final rule, if any, will depend on President-Elect Trump's appointment of Attorney General.

In summary, while we believe the rescheduling announcement represents a significant milestone, it is just one step in a lengthy process that will likely take many more months before a final rule is issued. Although moving marijuana to Schedule III should facilitate medical research and provide a financial boost to the cannabis industry, it will leave federal law largely unchanged.

Inflation and Supply Chain Constraints

While inflation has begun to subside, it continues to trend higher than in prior periods, which may be negatively impacting some of our tenants. The annual inflation rate for the United States was 2.4% for the 12 months ended September 2024. This inflation has impacted costs for labor and production inputs for regulated cannabis operators, in addition to increasing costs of construction for development and redevelopment projects.

Ongoing labor shortages, global supply chain issues, and geopolitical tensions continue to adversely impact costs and timing for the completion of these development and redevelopment projects. These factors may result in cost overruns and delays in commencing operations for certain of our tenants’ projects.

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 and 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.

Critical Accounting Policies and Estimates

In accordance with GAAP, our consolidated financial statements require the use of estimates and assumptions that involve the exercise of judgment and use of assumptions. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. Actual results could differ materially from those estimates and assumptions.

We believe that all of the decisions and assessments upon which our consolidated financial statements have been based were reasonable at the time made and based upon information available to us at that time. There have been no changes to the Company's critical accounting policies included in Note 2 to the Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2023.

Third Quarter 2024 Highlights

Investment Activity

Improvement Allowances

During the three months ended September 30, 2024, we funded approximately $2.6 million of improvement allowances to our cultivation facilities in Arizona, Connecticut, Missouri and Pennsylvania.

The following table presents the funded commitments and the unfunded commitments for the three months ended September 30, 2024 (in thousands):

(1) Funded commitments and unfunded commitments relate to the Missouri cultivation facility expansion project.

(2) Effective June 6, 2024, the lease agreement was amended to include an additional commitment of $800 thousand.

Capital Market Activity

Dividends

On September 12, 2024, the Company’s Board of Directors declared a third quarter 2024 cash dividend of $0.43 per share of common stock, equivalent to an annualized dividend of $1.72 per share of common stock. The dividend was paid on October 15, 2024, to stockholders of record at the close of business on September 30, 2024.

Recent Developments

Funded Commitments

Subsequent to September 30, 2024, we funded approximately $0.4 million of improvements to our cultivation facility located in Connecticut.

Results of Operations

General

We derive substantially all our revenue from rents received from single tenants at each of our 32 properties under triple-net leases. As of September 30, 2024, we have low leverage on the portfolio with only $7.6 million outstanding under our Revolving Credit Facility and a low general and administrative expense with an annualized ratio of 1.5% of total assets.

Comparison of the three months ended September 30, 2024 and 2023 (in thousands):

Revenues

Rental Income

Rental income for the three months ended September 30, 2024 increased by approximately $1.0 million to approximately $12.3 million, compared to approximately $11.3 million for the three months ended September 30, 2023. The increase in rental income was mainly attributable to:

• Three months of rental income from the purchase of a cultivation facility in Connecticut in May 2024, which generated approximately $0.1 million of rental income during the three months ended September 30, 2024.
• Funding of building and tenant improvements at our Arizona, Connecticut, Missouri and Pennsylvania cultivation facilities, which generated approximately $0.4 million of additional rental income during the three months ended

September 30, 2024. The additional rental income from our Missouri cultivation facility was derived from the expansion and development of the adjacent land parcel we acquired during the first quarter of 2023.

• Annual rent escalations on our portfolio, which generated an increase of approximately $0.6 million of rental income during the three months ended September 30, 2024.
• In the third quarter of 2024, we collected approximately 50% of the contractual rent from Revolutionary Clinics. In contrast, they did not pay any rent in the third quarter of 2023. During that period, we applied $315 thousand of their security deposit towards the owed amount. This resulted in an increase of approximately $0.1 million in rental income when compared to the three months ended September 30, 2023.
• These increases were offset by: (i) a decrease in rental income of approximately $0.1 million related to the sale of a cultivation facility in Massachusetts in October 2023; and (ii) a decrease in rental income of approximately $0.1 million, which is a result of one lease modification for one of our cultivation facilities located in Pennsylvania, in the fourth quarter of 2023.

Interest Income from Loans

Interest income from loans increased slightly due to the annual interest rate increase on our one loan receivable.

Fees and Reimbursables

Fees and reimbursables increased slightly due to timing of revenue reimbursements quarter over quarter.

Expenses

Property Expenses

Under certain circumstances we will pay for expenses on behalf of the tenant and the tenant is required to reimburse us. The expense and reimbursable amounts may differ due to timing. Property expenses were relatively flat quarter over quarter.

Depreciation and Amortization Expense

Depreciation and amortization increased slightly from: (i) the acquisition of one cultivation facility acquired in May 2024; (ii) approximately $16.2 million of improvements from our Missouri cultivation facility expansion project that were placed into service during 2024; and (iii) $0.8 million of improvements from our Pennsylvania cultivation facility that were placed into service during 2024.

General and Administrative Expenses

The increase in general and administrative expense is described below by category.

Compensation Expense

Compensation expense includes compensation to employees and officers of the Company and stock-based compensation awards. The change was relatively flat quarter over quarter.

Professional Fees

Professional fees generally include fees paid for audit, tax, legal and consulting services. For the three months ended September 30, 2024, professional fees were approximately $475 thousand compared to approximately $300 thousand for the three months ended September 30, 2023. The increase was primarily driven by higher legal fees incurred during the third quarter of 2024.

Other General and Administrative Expenses

Other general and administrative expenses are primarily comprised of director and officer insurance, information technology fees, public relations fees, filing and regulatory fees, public reporting fees, corporate rent and various other expenses. Other general and administrative expenses were relatively flat quarter over quarter.

Provision for Current Expected Credit Loss

We used a discounted cash flow model to determine an expected credit loss on our loan receivable. For the three months ended September 30, 2024, we recorded a reduction in the provision for current expected credit loss of approximately $12 thousand, which reduced the allowance for credit loss to approximately $128.4 thousand as of September 30, 2024.

Other Income (Expense)

Other Income

Other income, which is mainly comprised of interest income, decreased during the three months ended September 30, 2024 by approximately $98 thousand, to $80 thousand compared to $178 thousand for the three months ended September 30, 2023, due to lower cash balances. We primarily used cash liquidity to pay dividends and fund improvement allowances. Refer to the "Summary of Cash Flows" for further information.

Interest Expense

Interest expense mainly relates to our revolving credit facility. For the three months ended September 30, 2024, interest expense increased by approximately $0.1 million, to approximately $0.2 million compared $0.1 million in the same period of 2023. The increase was due to a higher outstanding balance on our revolving credit facility.

Comparison of the nine months ended September 30, 2024 and 2023 (in thousands):

Revenues

Rental Income

Rental income for the nine months ended September 30, 2024 increased by approximately $3.0 million to approximately $36.7 million, compared to approximately $33.6 million for the nine months ended September 30, 2023. The increase in rental income was primarily attributable to:

• Approximately five months of rental income from the purchase of a cultivation facility in Connecticut in May 2024, which generated approximately $0.2 million of rental income during the nine months ended September 30, 2024.
• During the nine months ended September 30, 2024, we earned an additional two months of rental income from the acquisition and development of the adjacent parcel of land for our Missouri cultivation facility,

which we acquired in the first quarter of 2023. This resulted in an extra $0.1 million of rental income during the nine months ended September 30, 2024.

• Funding of improvement allowances at our Arizona, Connecticut, Missouri and Pennsylvania cultivation facilities, which generated approximately $1.4 million of additional rental income during the nine months ended September 30, 2024.
• Annual escalations on our portfolio, which generated an increase of approximately $1.1 million of rental income during the nine months ended September 30, 2024.
• For the nine months ended September 30, 2024, we received rental income from Revolutionary Clinics. However, starting in June 2024, we received only approximately 50% of the contractual rent. In contrast, they did not pay any rent for the same period in 2023. During that time, we applied $945 thousand of their security deposit toward the owed amount. This resulted in an increase of approximately $0.7 million in rental income during the nine months ended September 30, 2024.
• These increases were offset by: (i) a decrease of rental income of approximately $0.2 million related to the sale of a cultivation facility in Massachusetts in October 2023; and (ii) a decrease of rental income of approximately $0.3 million, which is a result of one lease modification for one of our cultivation facilities located in Pennsylvania in the fourth quarter of 2023.

Interest Income from Loans

Interest income from loans increased slightly due to the annual interest rate increase on our $5.0 million loan receivable to a tenant.

Fees and Reimbursables

Fees and reimbursables increased year over year due to timing of revenue reimbursements.

Expenses

Property Expenses

For the nine months ended September 30, 2024, property expenses decreased by approximately $49 thousand to approximately $179 thousand compared to approximately $228 thousand for the nine months ended September 30, 2023. In certain cases, we will pay for certain expenses on behalf of the tenant and the tenant is required to reimburse us which can differ due to timing. The expense and reimbursable amounts may also differ due to timing.

Depreciation and Amortization Expense

Depreciation and amortization expense increased slightly from: (i) the acquisition of one cultivation facility acquired in May 2024; (ii) approximately $16.2 million of improvements from our Missouri cultivation facility expansion project that were placed into service during 2024; (iii) $0.8 million of improvements from our Pennsylvania cultivation facility that were placed into service during July 2024; and (iv) to a lesser extent, a full year of depreciation on approximately $0.2 million of improvements from our Missouri cultivation facility that were placed into service during June 2023.

General and Administrative Expenses

The increase in general and administrative expense is described below by category.

Compensation Expense

Compensation expense includes compensation to employees and officers of the Company and stock-based compensation awards. Compensation expense increased by approximately $0.1 million during the nine months ended September 30, 2024 to approximately $3.6 million compared to approximately $3.5 million for the nine months ended September 30, 2023. The increase was primarily due to an increase in compensation awards granted to certain officers and employees of the Company.

Professional Fees

Professional fees for the nine months ended September 30, 2024 were approximately $1.1 million compared to approximately $1.0 million for the nine months ended September 30, 2023. The increase was primarily driven by higher legal fees incurred during the 2024.

Other General and Administrative Expenses

Other general and administrative expenses are primarily comprised of director and officer insurance, information technology fees, public relations fees, filing and regulatory fees, public reporting fees, corporate rent and various other expenses. Other general and administrative expenses for the nine months ended September 30, 2024 remained relatively flat compared to the nine months ended September 30, 2023.

Provision for Current Expected Credit Loss

We used a discounted cash flow model to determine an expected credit loss on our loan receivable. For the nine months ended September 30, 2024, we recorded a reduction in the provision for current expected credit loss of approximately $38 thousand, which reduced the allowance for credit loss to approximately $128.4 thousand as of September 30, 2024.

Other Income (Expense)

Other Income

Other income, which is mainly comprised of interest income, decreased during the nine months ended September 30, 2024 by approximately $0.3 million, to $0.3 million compared to $0.6 million for the nine months ended September 30, 2023, due to lower cash balances. We primarily used cash liquidity to pay dividends, fund our acquisition and fund improvement allowances. Refer to the "Summary of Cash Flows" for further information.

Interest Expense

Interest expense mainly relates to our revolving credit facility. For the nine months ended September 30, 2024, interest expense increased by approximately $0.1 million, to approximately $0.4 million compared to $0.3 million in the same period of 2023. The increase was due to a higher outstanding balance on our revolving credit facility.

Non-GAAP Financial Information and Other Metrics

Funds from Operations and Adjusted Funds from Operations

Funds from Operations ("FFO") and Adjusted Funds from Operations ("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 adjusting for non-cash and certain non-recurring transactions, including non-cash components of compensation expense and the effect of provisions for credit loss. 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 three and nine months ended September 30, 2024 and 2023 (in thousands):

Liquidity and Capital Resources

Our cash requirements include the payment of dividends to our shareholders, distributions to our holders of OP Units ("OP Unitholders"), general and administrative expenses, debt service, other expenses related to managing our existing portfolio as well as acquisition and unfunded tenant commitments. The sources of liquidity to fund these cash requirements include rental revenue from the leasing of our properties, which is our primary source of cash flows, borrowings under our Revolving Credit Facility and equity and debt issuances, including issuance of common stock under our ATM Program, if markets permit. Where possible, we also may issue OP Units to acquire properties from existing owners seeking a tax-deferred transaction.

As of September 30, 2024, we had $102.2 million of liquidity comprised of $19.8 million of cash and cash equivalents and $82.4 million available on our $90.0 million Revolving Credit Facility, subject to sufficient collateral in the borrowing base. Additionally, the ATM Program allows us to issue equity to raise capital up to $50.0 million. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to us in sufficient amounts in the future.

Recently, the Federal Reserve eased its monetary policy by cutting the target range for the federal funds rate by 50 basis points to 4.75%-5% in September 2024. Despite this reduction, interest rates have not changed significantly. As of September, the annual inflation rate in the U.S. stands at 2.4% 2024. Consumer prices increased by 0.2% in September, indicating a relatively stable inflation environment. Nonetheless, challenges remain due to higher interest rates, and inflation that may adversely impact our cash flow from ongoing operations. We expect that our cash flow from continuing operations over the next twelve months, along with our cash reserves, will be sufficient to fund our business operations, pay cash dividends to our shareholders, make distributions on our OP Units, and cover debt service.

Acquisitions and unfunded improvement allowance costs may require funding from borrowings, equity issuance and/or issuance of OP Units.

Summary of 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):

Net Cash Provided by Operating Activities:

Net cash provided by operating activities for the nine months ended September 30, 2024 and 2023 were approximately $32.7 million and $27.6 million, respectively. Net cash flows provided by operating activities for the nine months ended September 30, 2024 and 2023 were primarily related to contractual rent received from our properties, partially offset by our general and administrative expenses.

Net Cash Used in Investing Activities:

Net cash used in investing activities for the nine months ended September 30, 2024 and 2023 were approximately $18.0 million and $6.0 million, respectively. Net cash used in investing activities for the nine months ended September 30, 2024 related to approximately $4.0 million used to purchase a cultivation facility in Connecticut and approximately $14.0 million used to fund improvement allowances at our cultivation facilities in Arizona, Connecticut, Missouri and Pennsylvania. Net cash used in investing activities for the nine months ended September 30, 2023 related to $350.0 thousand used to purchase an adjacent parcel of land by an existing cultivation facility in Missouri and approximately $5.6 million used to fund improvement allowances at our cultivation facilities in Arizona and Missouri.

Net Cash Used in Financing Activities:

Net cash used in financing activities for the nine months ended September 30, 2024 and 2023 were approximately $20.8 million and $35.8 million, respectively. Net cash used in financing activities for the nine months ended September 30, 2024, was mainly related to approximately $26.0 million in dividend payments to holders of our common stock and dividend payments on vested RSUs, as well as distributions on our OP Units, $1.0 million to pay down our loan payable and approximately $0.3 million of deferred offering costs incurred in connection with our ATM Program. These cash outflows were offset by a cash inflow of $6.6 million from draws on our Revolving Credit Facility. Net cash used in financing activities for the nine months ended September 30, 2023, was mainly related to approximately $25.5 million in dividend payments to holders of our common stock and dividend payments on vested RSUs, as well as distributions on our OP Units, $1.0 million to pay down our loan payable and approximately $9.3 million to buy back stock under the stock repurchase program.

Dividends

To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding capital gains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our taxable income. We evaluate each quarter to determine our ability to pay dividends to our stockholders based on our net taxable income if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service payments. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution.

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 nine months ended September 30, 2024, our board of directors approved, and we declared, cash dividends on our common stock and restricted stock units and in our capacity as general partner of our Operating Partnership, we authorized distributions on our OP Units of $1.27 per share. During the nine months ended September 30, 2023, our board of directors approved, and we declared, and our board of directors approved, cash dividends on our common stock and restricted stock units and in our capacity as general partner of the Operating Partnership, we authorized distributions on our OP Units totaling $1.17 per share.

Contractual Obligations and Commitments

Unfunded Commitments

As of September 30, 2024, we had aggregate unfunded commitments of $12.2 million to develop and improve our existing cultivation facilities in Arizona and Connecticut.

Corporate Office Lease

As of September 30, 2024, we were the lessee under one office lease for a term of four years, subject to annual escalations. The annual rent payments range from approximately $72 thousand in year one to approximately $85 thousand in year four. The office lease has a remaining weighted average term of approximately 1.92 years.

Revolving Credit Facility

As of September 30, 2024, we had $7.6 million drawn on our Revolving Credit Facility which bears interest at a rate of 5.65% per annum.

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.

Interest Rate Risk

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our Revolving Credit Facility. As of September 30, 2024, we had $7.6 million principal drawn on our Revolving Credit Facility, at a fixed interest rate of 5.65% through May 2025 and a floating rate thereafter. Therefore, if interest rates decrease, our required interest payments may exceed those based on current market rates. If interest rates remain higher for longer, our cost of financing will significantly increase when the Revolving Credit facility adjusts to a floating rate in May 2025. We may choose to mitigate such interest rate risk through the use of interest rate derivative instruments.

Impact of Inflation

The U.S. economy has experienced an increase in inflation over the past two years. However, as of September 2024, the annual inflation rate has declined to approximately 2.4% from highs of 6.5% at the end of 2022. We enter into leases that generally provide for annual fixed increases in rent at a predetermined rate. In some instances, leases provide for annual increases in rent based on the increase in the Consumer Price Index ("CPI"). We expect these lease provisions to result in rent increases over time. However, during periods when inflation exceeds the rent increases stipulated in the leases, rent increases may not keep pace with the rate of inflation.

Seasonality

Our business is not, and we do not expect our business to be, subject to material seasonal fluctuations.

In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, the U.S. credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and U.S. credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.

Our management, including our Chief Executive Officer (the "CEO") and Chief Financial Officer (the "CFO"), reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of the period covered by this report. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed, (1) were effective in ensuring that information required to be disclosed by the Company in reports it files or submits under the Securities Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure and (2) were effective in ensuring that information required to be disclosed by the Company in reports it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

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 have been no changes in our internal controls over financial reporting that occurred during the three months ended September 30, 2024 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

There have been no material changes to the risk factors set forth in the section titled “Risk Factors” included in our Annual Report on Form 10-K, dated March 11, 2024, filed with the SEC. Our business involves significant risks. You should carefully consider the risks and uncertainties described in our Annual Report on Form 10-K, together with all of the other information in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report. The risks and uncertainties described in our Annual Report are not the only ones we face. Additional risk and uncertainties that we are unaware of or that we deem immaterial may also become important factors that adversely affect our business. The realization of any of these risks and uncertainties could have a material adverse effect on our reputation, business, financial condition, results of operations, growth and future prospects as well as our ability to accomplish our strategic objectives. In that event, the market price of our common stock could decline and you could lose part or all of your investment.