In this edition of "Rising High," The Fly conducted an exclusive interview with Anthony Coniglio, president and chief investment officer of NewLake Capital Partners (NLCP), a provider of real estate capital to state-licensed cannabis operators. Here are some highlights:
CANNABIS REAL ESTATE: NewLake, founded in 2019, is a triple-net lease REIT that acquires industrial and retail properties through sale-leaseback transactions, third-party purchases and build-to-suit projects. The company’s tenants include some of the leading operators in the U.S. state-licensed cannabis industry and NewLake serves as a trusted partner for their real estate needs. “The most significant expense for cannabis operators when they’re scaling up is typically around real estate,” Coniglio said. “As they are looking to gain incremental scale, often we find that capital expenditures for real estate are a meaningful component of those plans.
NewLake’s ability to provide capital for players as they grow in the space is a key differentiator for the firm, he said, adding partners also benefit from the company’s understanding of the industry. “We’re very comfortable with all the special modifications necessary for a cultivation facility as well as a retail location in the industry,” the CIO said. “Sometimes landlords that aren’t familiar with the cannabis industry may be uncomfortable with the types of modifications that are necessary for real estate to comply with the applicable regulations.”
MISSOURI ACQUISITION: NewLake announced in April the closing of part one of a three-part commitment for a cultivation property in Missouri. The commitment includes the purchase of a 40,000-square-foot industrial property in O’Fallon, Missouri, and entering into a long-term, triple-net lease with an affiliate of C3 Industries, which is guaranteeing the lease. NewLake’s $34M aggregate commitment will be invested across three parts. Part one begins with NewLake’s $7.3M purchase of the company’s Missouri cultivation facility with a commitment to fund an additional $5.2M to finish construction, which is expected to be completed by June.
“This is a great example where we can see that we provided capital for multiple phases,” the CIO said. “C3 needed up to $12M of capital for Phase 1 and we also ended up providing a commitment for their Phase 2, where we acquire the adjacent parcel and provide them with another $16.5M for construction of a 65,000 square foot building.” Phase 2 will occur over the next 12-18 months, he said. “We look at it as an opportunity to have a strong tenant that has the chance to grow and utilize the capital that we can provide them,” Coniglio said. He added the Missouri market also presents an opportunity as a strong medical market with continued growth. “There is a ballot initiative that’s expected for later this year to legalize adult use,” the CIO said. “So while there is a strong and growing medical market we do believe over the long-term, Missouri will become another high-quality adult-use market over the next couple of years.”
NJ RECREATIONAL SALES: The state of New Jersey recently began recreational cannabis sales in April and Coniglio said NewLake is excited about the program’s launch for a host of reason. “While we don’t have any properties in New Jersey, there are three tenants in our portfolio that recently launched or were approved to launch recreational sales,” he said. “We think that will benefit us as that added volume and that added profitability and cash flow will only improve the credit profile of those pre-existing tenants.” The CIO said he also expects the commencement of sales to put added pressure on New York to launch its recreational program and accelerate that launch. “Ultimately it will also put pressure on Pennsylvania to address that market and seek the opportunity to legalize adult-use,” he said.
LEGALIZATION: In April, the U.S. House of Representatives passed the MORE Act, a federal marijuana legalization bill, by a vote of 220 for to 204 against. The House previously passed the bill in December 2020, however it was not taken up by the Senate. The CIO said he does not expect the MORE Act to get a hearing in the Senate this time as well due to a plan by Senators Chuck Schumer and Cory Booker to launch a cannabis legalization bill later this year. “I don’t believe that legalization will occur in the near-term,” Coniglio said. “I think we still have at least a couple of years of evolution in the Senate’s appetite for cannabis legalization.”
However, he added he does see bipartisan support for the measure and he believes legalization is inevitable. “There are few things in this country that the electorate agrees on so resoundingly as this electorate agrees on medical cannabis and even a number of polls show, recreational cannabis,” he said. “But like other social issues, it will take a while for the politicians in Washington to catch up to the social direction of the country. The policy implementation approach is going to take some negotiation between the sides since there are different perspectives on how to execute legalization and so it will take a number of years for that to play out.”
LIMITED EQUITY INVESTMENT: At the end of 2021, NewLake predicted that equity investment in U.S. plant-touching businesses will be limited, contending that continued uncertainty around timing of legalization will drive equity capital premiums that will be difficult for U.S. businesses to accept. At the time, the company said it expected equity investors to be more focused on the ancillary businesses and plant touching companies to look to debt and sale leaseback transactions to fund their growth. “We have seen it play out that way,” Coniglio said. “You can look at the valuations of the public MSOs, or in particular the MSOS Index, and you can see that there is a continued decline in these equity valuations in light of the group continuing to demonstrate year-on-year growth and positive momentum in terms of profitability targets and cash flow generation.” He said he believes that there will continue to be few if any near-term catalysts for these equity valuations. “Perhaps we get a temporary bump when Schumer, Biden and Booker issue their bill over the summer,” the CIO said. “That will generate some limited enthusiasm for the stocks with the belief that maybe that legislation will actually happen. But I think any bump will be short-lived and valuations will retreat as the realization that legalization isn’t happening any time soon returns to the forefront.”
PROFESSIONALIZATION: NewLake also predicted that the industry will continue to professionalize as companies evaluate the best strategy to survive long-term in the market. “We have seen this,” the CIO said. “We see board members being added to various companies that have tremendous credentials. We see turnover in the C-Suite at some of the companies where boards are taking the opportunity to bring in individuals that are more experienced in say CPG, manufacturing, or product development.” Professionalization will take time though, he noted, adding NewLake expects the process to continue through the balance of the year and into the next.
CONSOLIDATION, INFLATION: 2022 has seen a wave of consolidation as well as a surge of inflation creating challenges for small- and mid-sized operators in the industry. Coniglio said he expects some operators to succeed despite the obstacles, while others will not. “In all industries, there are small and mid-sized companies that can be highly successful because they identify their niche in the market and they execute with tremendous capability,” he said. “The cannabis industry is no different.” The CIO added NewLake has some small single-state operators in its portfolio that executed phenomenally well with financial performance that rivals some of the top MSOs. “It’s not always about size and scale but for sure, there will be companies this year that will experience some pain,” he said. “Either inability to refinance maturing debt, inability to raise capital that is necessary within their business plan and in some cases the inability to manage the P&L and cash flows of the business sufficient to keep the doors open.” Coniglio said he believes the space will see a mix of both types of companies as the industry develops. “I think we’re going to see some small and mid-sized companies really rise up, differentiate themselves and solidify their fair share of the market, but we will see others who will lose share and unfortunately either fall to wayside or get consolidated,” he said.
CHALLENGES: When asked about the largest hurdles facing the cannabis space, Coniglio cited the industry’s lack of access to capital. “Companies do have some cash on their balance sheet and some of the larger players expect to generate modest cash flow from operations, but it permeates most of the industry because it limits the ability for folks to invest in the future,” he said. “It creates uncertainty around refinancing maturing obligations and the lack of catalysts in the near-term makes me believe that, in the near term, we will not see a meaningful influx of new capital participants to the cannabis industry.” The CIO added NewLake stands to benefit currently as it will be available to provide capital for those real estate needs.
OPPORTUNITIES: As the cannabis industry develops and matures, the CIO said he sees opportunities in states that are launching and about to launch recreational cannabis programs like New Jersey, New York and Vermont. “We’re also excited to watch some of the ballot initiatives that we expect to see in November,” he said. “We’re excited for the states that have already approved and are launching programs. We’re also excited for those medical states that are getting ballot initiatives, which are expected to pass and see recreational cannabis over the next couple of years.”
OTHER CANNABIS/PSYCHEDELIC STOCKS: Publicly-traded companies in the space include Acreage (ACRHF), Akerna (KERN), Aleafia (ALEAF), Atai Life Sciences (ATAI), Awakn Life Sciences (AWKNF), Audacious (AUSAF), Aurora Cannabis (ACB), Ayr Wellness (AYRWF), BC Craft (CRFTF), Body and Mind (BMMJ), CanaFarma (CNFHF), Cannara Biotech (LOVFF), Canopy Growth (CGC), RIV Capital (CNPOF), Chicago Atlantic (REFI), Columbia Care (CCHWF), Compass Pathways (CMPS), CordovaCann (LVRLF), Clever Leaves (CLVR), Cresco Labs (CRLBF), Cronos Group (CRON), CV Sciences (CVSI), Curaleaf (CURLF), CURE Pharmaceutical (CURR), Delic Holdings (DELCF), Delta 9 (DLTNF), Entourage Health (ETRGF), Fire & Flower (FFLWF), Flora Growth (FLGC), FluroTech (FLURF), General Cannabis (CANN), Goodness Growth (GDNSF), Greenlane (GNLN), Green Thumb (GTBIF), GrowGeneration (GRWG), Harborside (HBORF), Hemp (HEMP), HEXO (HEXO), High Tide (HITI), Innovative Industrial Properties (IIPR), IM Cannabis (IMCC), India Globalization Capital (IGC), Indiva (NDVAF), InterCure (INCR), Wellbeing Digital (KONEF), Khiron Life Sciences (KHRNF), Lowell Farms (LOWLF), Lotus Ventures (LTTSF), MediPharm (MEDIF), MedMen (MMNFF), MJardin Group (MJARF), Neptune Wellness (NEPT), NewLake Capital (NLCP), Thermic Science (ENDO), Organigram (OGI), Planet 13 (PLNHF), Relmada (RLMD), RYAH Group (RYAHF), Sproutly (SRUTF), Stem Holdings (STMH), Small Pharma (DMTTF), Skye Biosciences (SKYE), Sundial Growers (SNDL), Sunniva (SNNVF), TerrAscend (TRSSF), Tetra Bio-Pharma (TBPMF), Tilray (TLRY), Trulieve (TCNNF), Valens (VLNCF), Verano Holdings (VRNOF), Village Farms (VFF), Wesana Health (WSNAF), Zynerba (ZYNE) and 4Front Ventures (FFNTF)
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