Rising High: Exclusive talk with cannabis REIT NewLake Capital

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 is an internally-managed real estate investment trust that provides capital to cannabis businesses through sale-leaseback transactions, third-party purchases and funding for build-to-suit projects. The company owns a portfolio of 32 cultivation facilities and dispensaries that are leased to single tenants on a triple-net basis. “When we started the business, our intent was to differentiate ourselves by creating meaningful relationships with our tenants and providing a more flexible, tailored approach to their unique issues,” Coniglio said. “Every property tends to have an issue unique to it that requires the landlord to have some flexibility, so we really leverage our institutional knowledge in the cannabis sector to provide those solutions to our tenants.”

He noted competition for the services and capital NewLake provides is more limited today than when the business was started in 2019. “Over the next two years, we’ll see Schedule III happen and I think that’s going to bring in a limited number of some additional organizations that are looking at the sector,” the CEO said. “We have the set up here for additional reform, for additional states to approve, and I think it will be a growing segment that will attract more people to it. Specifically, competition for us is going to be more limited because of the products we provide. We provide long-term non-dilutive capital through our sale-leaseback transactions, and I think it is going to be very hard for people to raise capital for that type of a strategy.”

C3 PARTNERSHIP: In September, C3 Industries announced the expansion of its cultivation facility in O’Fallon, Missouri, through an ongoing partnership with NewLake. The 50,000 square foot addition features automation and environmental control systems, significantly increasing the company’s production capacity in the state. “We think that C3 is a quality company with a talented management team,” Coniglio said.  “We started that expansion quite a couple of quarters ago in response to legalization in Missouri and the expansion of the Missouri market. That partnership is a great example of where we have created a strong relationship with a tenant. We acquired and did build out for their original cultivation facility in Missouri and then we provided expansion capital once Missouri approved adult-use. That partnership has allowed us to provide that capital so they could grow their business and realize the full potential of their Missouri licenses.”

EARNINGS: In August, NewLake reported second quarter adjusted funds from operations per share of 53c on revenue of $12.5M, which compared to AFFO per share of 46c and revenue of $11.4M for the same period last year. “With the year-over-year comparison, it compared to a prior year where there was a tenant that wasn’t paying full rent during the comparable period,” the CEO said. “That should be noted when you are comparing the two periods.”

When looking at the growth trajectory for the company, he stated NewLake sees growth from three key components. “Number one is our annual escalators,” Coniglio said. “We have across the portfolio a 2.6% annual growth in our rental payments and that is contractual. Every year we collect rent, we grow our revenue by 2.6%. The second place we get revenue from is from our tenant improvement dollars. When we enter into a transaction, often there are these tenant improvement commitments to provide capital to improve the properties. As a result, as that money goes out on those commitments, we will start charging rent and we end up growing our revenue.”

The third way NewLake grows is by executing on the available credit facility, funding deals in its pipeline as well as new deals, he said. “When you look back at Q2, what we announced during the quarter is that we executed a transaction with C3 in the state of Connecticut,” the CEO said. “That was a $16M transaction, where we purchased a building for $4M and committed to fund approximately $12M. As we exited the quarter, we still had roughly $16M of these commitments that we needed to fund. That sets us up to continue to deploy capital and continue to see revenue grow as we deploy that capital.”

SCHEDULING: In August, the Drug Enforcement Administration announced that it would be holding a hearing on December 2 on the proposal to reclassify cannabis as lower-risk and reschedule the drug from Schedule I to Schedule III. “The announcement of the hearing is positive, not for the timing, but for the process,” Coniglio said. “The DEA is moving through this entire process in a very thorough, pragmatic and responsible manner and most importantly to the letter of the law. There are statutes that they have to follow to move this process forward, so I think it is a positive step, it is just going to take time. I do believe that in 2025, we will see them finalize the rescheduling to Schedule III.”

He noted the potential 280E benefits from a possible rescheduling are widely known. “The impact for NewLake is very positive,” the CEO said. “We estimate just our tenant base can save over $500M in federal taxes by moving to Schedule III. That is an immediate credit improvement for our entire portfolio.”

Looking at rescheduling more broadly, Coniglio said he believes it will derisk the entire industry from an investor and political perspective. “I don’t expect it to result in a rush of investors into cannabis, but I do think it’s going to help bring in the marginal investors that have been looking for catalysts to step in,” he said. “I also think it is very helpful at the state level for states that are looking at medical programs or expansion of medical programs. Moving to Schedule III certainly gives those efforts a shot in the arm. And states that don’t yet have a robust medical program or any program at all could look to Schedule III and see, maybe there is a proof of medical efficacy, meaning we should pursue either the establishment or meaningful growth of a program. Then lastly in D.C., it also helps again at the margin with those members of congress who are anti today and maybe can move more towards the middle on this topic with rescheduling.”

The announced hearing by the DEA struck down the hope of a Final Rule rescheduling cannabis coming before the 2024 Presidential Election, however former President Donald Trump announced his support for the potential rescheduling in September. “Trump’s statement derisked the industry from an election perspective,” the CEO said. “Before his Truth Social post some people were looking at cannabis as an election trade and saying if Trump was elected you wouldn’t see rescheduling completed. He’s clearly said that he supports the rescheduling and now obviously it depends who is placed in the DOJ. But by and large, most people think that under both administrations, the likelihood of completion of Schedule III has gone up materially after those statements.”

SAFER BANKING: In September 2023, a U.S. Senate committee voted to advance The Secure and Fair Enforcement Regulation Banking Act bill, which seeks to ensure that all businesses, including cannabis businesses, have access to deposit accounts, insurance and other financial services. “I don’t think it has made a ton of progress from what I am hearing over the past few months and that it’s not surprising, because frankly in an election year when you get beyond June, it is hard to see much of anything getting done that isn’t critical to running the country,” Coniglio said. “What I know about SAFER Banking is both sides of the current draft see something that they want. It is not important enough to put it at the very top of the list in terms of legislative priorities, but the legislation has something that both sides want. It just depends on when can we get it to a high enough priority where they hammer out the final details so we can get some floor action on it.”

HEMP REGULATION: In September 2024, Senator Ron Wyden introduced the Cannabinoid Safety & Regulation Act, which would regulate cannabinoid products derived from hemp. The CSRA would establish a national age restriction and require that all hemp-derived products are tested for safety. “Sides are still being drawn in this battle between the unregulated hemp industry and the regulated cannabis industry,” the CEO said. “We are likely to see that play out in the new congress particularly around the Farm Bill. I’m doubtful that a new Farm Bill will entirely close the loophole as those in the farming industry have a very strong lobby.  I do think that politicians will want to regulate that as there is way too much negative noise out there around unregulated products potentially harming individuals.”

He added he believes it would be logical for lawmakers to keep the ability to manufacture hemp but provide more regulations around the industry and bring it more in line with state legal business. “I’d love to see all of the THC-oriented products under one regulatory regime,” Coniglio said. “Quite frankly, this is actually a clarion call to congress to act. Now not only are we going to have this disconnect between state and federal law, but we are going to have a disconnect between state-regulated product and unregulated legal federal product. If ever there was a need for congress to step up to its responsibility and finally put some federal policy in place around cannabis, now is the time.”

FLORIDA VOTE: In April, the Florida Supreme Court approved an adult-use measure for the November ballot. “It’s hard for me to sit here and say that I believe 100% it’s going to pass,” the CEO said. “Elections these days are a little to wonky to be able to make predictions. The polls we are all looking at do suggest it will pass, but 60% is a very high threshold and you do have some meaningful opposition in the governor and some other notable state republicans.”

With respect to the impact on the market, passage of an adult-use measure would be significant, he said. “The Florida market already has a very, very well-developed dispensary count,” Coniglio said. “Given the large number of dispensaries in the state, once a program gets turned on and activated, you’ll have a tremendous amount of the population with easy access to adult-use cannabis. And then we all talk about the tourist activity in Florida. It has such a large tourism industry that there is an opportunity for Florida sales to significantly accelerate if those tourists are consuming product.”

CHALLENGES: When asked about the largest hurdles facing the cannabis space, the CEO pointed to custody of securities as one of the biggest challenges. “This industry needs capital,” he said. “It needs debt capital and ultimately equity capital, and there is a large swath of the investment community that if they wanted to participate, they cannot because their prime broker will not custody those securities. To me, that is one of the biggest impediments to this industry really capturing its full financial potential.”

Coniglio noted a lot of the companies could probably refinance at better interest rates if they had access to greater demand for their securities. “But given the limited number of investors available to provide capital, it certainly raises the cost of capital, which has a reverberating impact across the industry,” he said. “To lower that cost of capital by getting custody, it could allow these companies to perform better and, in some cases, to transfer that proof of financial performance on to the consumer in better pricing, which could expand the market. When you lower that price point, you’re pivoting more and more product sales away from the illicit channel and into the legal channel.”

OPPORTUNITIES: As the cannabis space develops, the CEO said the biggest opportunities for cannabis operators lie in near-term state activations. “If you have a license in one of those states, you need to really optimize that opportunity,” he said.  “For NewLake, what we get most excited about is being able to partner with our tenants and potential new tenants on some of those state activations and on the expansion of some of those restrictive medical programs that are out there. This industry is very capital intensive both in the retail channel as well as in the cultivation channel, so there is meaningful demand for the products and services that we offer. We get excited about continuing to see this industry grow and meeting that growth and demand for capital with our capital and products.”

CANNABIS/PSYCHEDELIC STOCKS: Publicly-traded companies in the space include Acreage (ACRHF), Ascend Wellness (AAWH), Atai Life Sciences (ATAI), Aurora Cannabis (ACB), Avant Brands (AVTBF), Ayr Wellness (AYRWF), The Cannabist Company (CBSTF), Cannara Biotech (LOVFF), Canopy Growth (CGC), Cansortium (CNTMF), Chicago Atlantic (REFI), Clearmind (CMND), Clever Leaves (CLVR), Compass Pathways (CMPS), CordovaCann (LVRLF), Cresco Labs (CRLBF), Cronos Group (CRON), Curaleaf (CURLF), CV Sciences (CVSI), Cybin (CYBN), Entourage Health (ETRGF), Enveric Biosciences (ENVB), Flora Growth (FLGC), Trees Corporation (CANN), Greenlane (GNLN), Green Thumb (GTBIF), GrowGeneration (GRWG), Hemp (HEMP), Heritage Cannabis (HERTF), High Tide (HITI), IGC Pharma (IGC), IM Cannabis (IMCC), Innovative Industrial Properties (IIPR), InterCure (INCR), Lowell Farms (LOWLF), Lucy Scientific Discovery (LSDI), MediPharm (MEDIF), MindMed (MNMD), NewLake Capital (NLCP), Numina’s (NUMIF), Optimi Health (OPTHF), Organigram (OGI), PharmAla Biotech (MDXXF), Planet 13 (PLNHF), Psyence Biomedical (PBM), Red White & Bloom (RWBYF), Relmada Therapeutics (RLMD), Reunion Neuroscience (REUN), RIV Capital (CNPOF), Safe Harbor Financial (SHFS), Skye Bioscience (SKYE), SNDL (SNDL), Stem Holdings (STMH), TerrAscend (TRSSF), Tilray (TLRY), Trulieve (TCNNF), Tryp Therapeutics (TRYPF), Verano (VRNOF), Village Farms (VFF), Vireo Health (VREOF) and 4Front Ventures (FFNTF).