In this edition of "Rising High," The Fly conducted an exclusive interview with Anthony Coniglio, President and Chief Executive 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 real estate investment trust that acquires industrial and retail properties through sale-leaseback transactions, third-party purchases and build-to-suit projects. The company owns a portfolio of 32 cultivation facilities and dispensaries that are leased to single tenants, including some of the leading operators in the U.S. state-licensed cannabis industry.
“We have been doing great,” Coniglio said. “We’ve continued to raise our dividend on a quarterly basis and we’re at the point now where we’ve had six consecutive quarterly dividend increases.”
He pointed to the company’s execution of three transactions announced in July with a total investment value of $50M.
“We acquired two properties for AYR (AYRWF), one in Pennsylvania and one in Nevada, and we did an add-on investment for property that we own with Curaleaf (CURLF) in Florida,” the CEO said. “The combination of those three transactions and then additionally putting out tenant improvement dollars, we put out probably $50M-$60M since the last time we spoke in May.”
NewLake also added two lenders to its existing five-year revolving credit facility and upsized the aggregate commitment under the facility to $90M from $30M, he noted.
“That facility combined with cash we have on the balance sheet gives us approximately $100M of dry powder to go and do new deals,” Coniglio said. “We’ve been pretty active.”
Q3 EARNINGS: In November, NewLake reported third quarter revenue of $11.6M and adjusted funds from operations per share of 49c, which compared to revenue of $8M and AFFO per share of 31c for the same period last year.
“We were very pleased with our third quarter results and the strength of our business,” the CEO said. “We had record net income and record AFFO.”
He said the earnings report indicates NewLake’s ability to deploy capital as well as the quality of the company’s portfolio.
“It signals that we are entrenched in the industry as a core capital provider to the cannabis sector,” Coniglio said. “The fact that we’re able to raise a $90M bank credit facility demonstrates the broad market belief that we have quality assets, we are good stewards of capital and we have the ability to make sound investments. It also speaks to our industry leading rent collection as we’ve received all rent since the inception of the company, which is a real differentiator for us.”
SHARE BUYBACK, ESG COMMITTEE: Additionally in November, the company announced a $10M share repurchase program and the formation of an independent Environmental, Social & Governance committee of the Board of Directors.
“When we look at our stock price, we believe investors are undervaluing the portfolio and the opportunity to generate meaningful above market yield over time,” Coniglio said. “While we do have significant investment opportunities in our core business and in the broader cannabis space, we did want to take a portion of our capital to be able to take advantage of the fabulous investment opportunity with where our stock was trading.”
Turning to the ESG Committee, he said NewLake was aware the company needed to play a part in ESG, especially given that it owns 1.7M square feet of real estate.
“This business can often consume a fair amount of energy,” the CEO said. “While we don’t control the properties that are operated by our tenants, we certainly do our part to try to influence better outcomes for the environment.”
The Committee will also focus on executing on best-in-class governance and accomplishing social goals the board wants to put together, he said.
“Companies often make this a responsibility of one of their committees,” Coniglio said. “We felt that it was so important that as a board we wanted to make a statement to the market that this is a priority for our organization and we made it a direct committee of the board.”
STATE LEGALIZATION: In the U.S. midterm elections, voters in Maryland and Missouri approved legalization for recreational use, while similar proposals were rejected in Arkansas, North Dakota and South Dakota.
“I believe President Biden’s pardon created a more political environment for the ballot initiatives than existed previous to his announcement,” the CEO said. “By putting marijuana in the political dialogue just weeks prior to the election, while it may have served the Democratic Party’s purpose, I think it turned away a number of Moderates and Republicans.”
He added those Moderates and Republicans might have been for legalization in those ballot initiatives but were swayed due to their view of its associations with the Biden agenda.
“If you look at the polling before the announcement and the polling after, you’ll see the drop-off in support,” Coniglio said.
FEDERAL LEGALIZATION: Additionally in the midterm elections, Republicans won control of the House of Representatives while Democrats retained control of the Senate.
“It could be the best setup for cannabis legislation,” the CEO said, “But I don’t think there will be federal legalization for quite some time.”
He said he believes politicians will want to see some definitive research on cannabis so they can incorporate that data as part of a legalization process.
“Federal legalization, decriminalization or descheduling, I think all of that is at least two years out,” Coniglio said. “It’s probably in the three to five year range. But given the set up going into this next Congress, depending on how people come out of the gate and what Republicans want to focus on in House, I think there is potentially a better pathway in this setup than in the previous Congress.”
CANNABIS RESEARCH BILL: The Senate recently passed the Medical Marijuana and Cannabidiol Research Expansion Act, the first cannabis bill passed by both chambers of Congress. The bill will make it easier for scientists to conduct medical marijuana research as well as protect doctors who discuss the drug with patients.
“It’s another great step in the right direction,” the CEO said. “If you look at President Biden’s pardons and at this passage, it reinforces the inevitable recognition of cannabis as a legal substance at some point in the future.”
Federal legalization is not a question of if, but of when, he said.
“This is an important step in that journey, but I still think it will take us at least three to five years to get to that promised land,” Coniglio said.
SAFE BANKING: Following the passage of the research bill, Senate Minority Leader Chuck Schumer said he was hopeful to pass more cannabis reform before the current term ends, which could include the SAFE Banking Act.
“I don’t see it passing, I think the legislative calendar for the lame duck is a crowded one and the commentary coming out of politicians doesn’t sound very confident,” Coniglio said. “Hopefully, I am wrong because we support SAFE and we want it to pass. I just don’t see the stepping stones to getting it done by December 31.”
2023 PREDICTIONS: When looking at cannabis industry predictions for 2023, the CEO noted many believe the space will see massive consolidation in the year, but he does not expect it.
“There’s a whole host of reasons we’re just not going to see as much consolidation as everybody thinks,” he said. “Everybody thought 2022 was going to be a big consolidation year and it really hasn’t been, it’s hasn’t come to fruition.”
Coniglio also said while the world is negative on cannabis operators and their performance in 2023, he is somewhat optimistic.
“I think we’re going to see the fruits of the industry’s labors bear out in better margins in 2023,” he said. “The industry has suffered through a very difficult 2022. They’ve worked really hard to ring out costs and create efficiencies in their business models, I think you’ll really see the benefit of that.”
The CEO said he expects the steep price decline that has occurred in many markets to begin to stabilize because of the lack of investment in 2022.
“We’ve had relatively low capex in 2022 and therefore I don’t see a tremendous amount of capacity coming on line to sustain this strong downward trend in pricing,” he said. “I expect pricing to moderate in 2023 and margins to get a little bit better because companies are doing a good job to try to ring out those costs to improve margins.”
CHALLENGES: When asked about the largest hurdles facing the cannabis space, Coniglio pointed to inflation as the biggest challenge for the industry.
“Inflation is biting into the pocketbooks of the cannabis consumer, while also eroding margin for the operators,” he said. “That confluence of events is creating some economic headwinds for the operators and the P&Ls.”
The CEO also noted access to capital continues to be a significant problem for the space.
“While the first issue is about being able to generate cash flow and profit, the second one is about the industry’s ability to refinance itself and have capital to fund expansion or the negative cash burn that a business may have. Those are the two biggest existential threats to the industry.”
OPPORTUNITIES: As the cannabis industry develops and matures, Coniglio said he sees the biggest opportunities for cannabis companies in expanding sales in states coming on line.
“It's about getting New York up and running, continuing to grow New Jersey, getting Connecticut on line and the same for Missouri and Maryland, although Maryland will take quite some time,” he said. “It’s also about trying to get the illicit market under control.”
With the recent round of inflation causing consumers to tighten their belts, the CEO said he believes that many have moved to the illicit market to try to get more for their dollar.
“How do we make sure people continue to shop in the legal market and how do we get the right amount of uptake to get new consumers to pivot from the illicit to legal market for states that are recently legalizing?” he said.
When asked about the opportunities NewLake is most excited about, Coniglio pointed to states that have recently approved legalization.
“We have a couple tenants in Missouri and we’re excited for those tenants,” he said. “We think there could potentially be some expansion opportunities in Missouri and Maryland.”
The CEO added NewLake is very, very bullish long-term on the industry.
“We think the industry is set up to continue this long-term secular growth trend that it is in and the industry needs significant amounts of real estate capital in order to realize its operational goals,” he said. “We want to be there to be able to provide the capital to the industry.”
CANNABIS/PSYCHEDELIC STOCKS: Publicly-traded companies in the space include Acreage (ACRHF), Akerna (KERN), Aleafia (ALEAF), Atai Life Sciences (ATAI), Audacious (AUSAF), Aurora Cannabis (ACB), Awakn Life Sciences (AWKNF), Body and Mind (BMMJ), Canopy Growth (CGC), Cannara Biotech (LOVFF), Chicago Atlantic (REFI), Clever Leaves (CLVR), Columbia Care (CCHWF), Compass Pathways (CMPS), CordovaCann (LVRLF), Cresco Labs (CRLBF), Cronos (CRON), CURE Pharmaceutical (CURR), CV Sciences (CVSI), Cybin (CYBN), Delic Holdings (DELCF), Delta 9 (DLTNF), Entourage Health (ETRGF), Fire & Flower (FFLWF), Flora Growth (FLGC), General Cannabis (CANN), Greenlane (GNLN), The Green Organic Dutchman (TGODF), Green Thumb (GTBIF), Goodness Growth (GDNSF), GrowGeneration (GRWG), Hemp (HEMP), HEXO (HEXO), High Tide (HITI), India Globalization Capital (IGC), Indiva (NDVAF), Innovative Industrial Properties (IIPR), InterCure (INCR), IM Cannabis (IMCC), Khiron (KHRNF), Wellbeing Digital (KONEF), Lowell Farms (LOWLF), Lotus Ventures (LTTSF), MediPharm Labs (MEDIF), MedMen (MMNFF), Neptune Wellness (NEPT), Organigram (OGI), Planet 13 (PLNHF), Reunion Neuroscience (REUN), Revitalist (RVLWF), RIV Capital (CNPOF), Relmada (RLMD), RYAH Group (RYAHF), Safe Harbor (SHFS), SLANG Worldwide (SLGWF), Sproutly (SRUTF), Stem Holdings (STMH), Small Pharma (DMTTF), Skye Biosciences (SKYE), SNDL (SNDL), Sunniva (SNNVF), TerrAscend (TRSSF), Tetra Bio-Pharma (TBPMF), Tilray (TLRY), Trulieve (TCNNF), Tryp Therapeutics (TRYPF), The Valens Company (VLNS), Verano Holdings (VRNOF), Village Farms (VFF), Wesana Health (WSNAF), Zynerba (ZYNE) and 4Front Ventures (FFNTF).
NewLake Capital Partners
+1.16 (+6.90%)
Ayr Wellness
+0.044 (+1.53%)
Curaleaf
+0.114 (+1.73%)
Aurora Cannabis
+ (+0.00%)
CV Sciences
+
CannTrust
+
Canopy Growth
+0.01 (+0.29%)
Cronos Group
-0.02 (-0.65%)
Trees Corporation
+
Goodness Growth
+
Green Thumb Industries
+0.39 (+3.02%)
IGC Pharma
+
Tilray
-0.025 (-0.66%)
Trulieve Cannabis
+0.82 (+6.73%)
ZYNE
+
Atai Life Sciences
-0.015 (-0.47%)
Compass Pathways
-0.1 (-0.95%)
Relmada Therapeutics
+0.09 (+1.72%)