Housing Cannabis: A Talk with NewLake CEO Anthony Coniglio – Cannabis Business Executive

Founded in 2019, New Canaan, Connecticut-based NewLake Capital Partners (OTCQX: NLCP) is a triple-net lease REIT that utilizes its cannabis, real estate, and financial services experience to purchase properties leased to U.S. cannabis operators. The company has tenants that span the cannabis supply chain, working in cultivation, manufacturing, and retail, including leading multistate operators such as PharmaCann, Columbia Care, Curaleaf, and Trulieve. According to data supplied by the company, NewLake has evaluated over $1 billion of cannabis real estate assets, with $420 million deployed, and currently owns 31 properties, 100 percent of which are leased. NewLake also boasts year-over-year dividend growth of 5.4 percent, zero rent deferrals or vacancies, 12.2 percent annual yield, 2.6 percent annual rent escalations, and 14.3 years as the weighted average remaining lease term. And its stock is currently trading a smidge above $16.

With numbers like these, NewLake is certainly doing something right in an overall environment for cannabis businesses that most people would define as challenging at best. To find out what that is, Cannabis Business Executive spoke recently with Anthony Coniglio, who serves as President, Chief Executive Officer, and a member of NewLake’s board of directors. Coniglio co-founded NewLake in 2019 and served as its Chief Executive Officer until its March 2021 merger with GreenAcreage.

“I had been running businesses that were in various forms providing capital to organizations that needed it, and in many cases filling a void where folks didn’t have it readily access to capital, or we were creating new capital-oriented products within my securitization background,” said Coniglio about his life before cannabis. “I previously was running a mortgage company that I founded, we sold that, and I was looking for what to do next, looking for an industry that had similar types of elements to the opportunity.”

Naturally, that industry was weed. “When I came across cannabis,” he continued, “I saw that the industry was suffering from a significant lack of capital, particularly for real estate. We quickly recognized that real estate was critically important for these organizations because of interstate restrictions that required them to replicate their infrastructure on a state-by-state basis. And then, as we dug into it, we heard story after story of organizations that weren’t able to secure property through lease because the landlord had debt and the lender threatened to pull the debt because of the use of the property. We saw a need and recognized that there was little competition, and those are dynamics we liked from a business perspective, and really the key catalysts for us getting in.”

It was also a heady time, when there was a lot of money coming in spurring growth and enthusiasm. “It was probably mid-December of 2018 when me and a couple of other folks looked at each other and said, ‘We are going to go do this.’ We determined that we had done enough research, and in early 2019 we formed the organization. We developed our marketing materials and started raising capital in April of 2019 for our business, and by that summer we had raised just short of $100 million. We raised roughly $90 million of capital by August of 2019 and closed our first transaction in October of 2019.”

The legal industry was nascent, but Coniglio had worked in other highly regulated businesses, with one big difference. “I operated businesses that were highly regulated,” he concurred. “I was a banker for nearly 15 years at JPMorgan; lots of regulations around that – IPOs, follow-ons, bond offerings, M&A. And then after I left JPMorgan, I started a residential mortgage company, which has a significant amount of regulation for very complex business. The cannabis industry had many of those highly regulated hallmarks, but I had never before been involved in a business that was considered federally illegal, and that was an adaptation for sure.”

What about an industry with a lot of startups and small businesses all the way up to MSOs and publicly traded companies? “It’s actually a great point,” replied Coniglio. “When I was a banker at JP Morgan, one of the groups that I led was specialty finance investment banking. These were non-bank lenders, so there were startups in this – auto finance lenders, credit card lenders, installment loan companies – and companies that were started because they satisfied a particular customer niche or service need for the industry, and yet they competed with large banks that also provided home loans or car loans or installment loans.

“And when I looked at this industry,” he added, “I saw it growing in 2018, when the MSOs weren’t what they were today. You did see the beginnings of this group of organizations that would be very large and could dominate across state markets, but you’d always have this group of smaller companies that filled a particular niche or service need at the local level that maybe the MSOs would not be able to deal with. So, I saw some of those similar dynamics to specialty finance. Same thing for mortgage, which competes against the Wells Fargo’s and the Chases of the world, but also the mom and pop that is a wholesale lender around the corner from me.”

Coniglio also had the distinction of having taken MasterCard public. “JP Morgan and Goldman Sachs were both the lead bankers on the IPO of MasterCard,” he explained. “I was the JP Morgan banker.”

I wondered how that experienced compared with cannabis, if at all. “I’d say the most common feature between the two activities is understanding the details and being in the weeds, so to speak,” he said. “In order to execute our business plan across all the businesses that I’ve run and the transactions that I’ve executed on, it’s about being thoughtful, methodical, having a plan, and executing that strategy. In the case of MasterCard, how do you position the organization to win? How do you navigate the IPO process? How do you provide great service to the customer, in that case, MasterCard?

“And those principles really apply to our business today,” he added. “How do we make sure the product that we have – in our case, the NewLake sale leaseback – is what the operators need, how does it satisfy their needs, how are we interacting with them upon the execution, and would they recommend us to others? I think it’s all about what you do, and having 13 tenants, I think we’ve got a good reputation in the industry trying to find a way to work for people and satisfy their issues. Because any transaction on the surface seems like it’s plain vanilla, but there are always nuances, each customer has their own particular needs, and having the flexibility to structure around those is important to advancing the relationship.”

That said, I assumed he went through a cannabis learning curve when he got in. “It’s been a very rapid learning and steep learning curve,” he concurred. “Part of it is the evolution of the industry, so let me take you back. It was a little over five years ago when we all said, in December, that we were going to go do this. And when we’re thinking about this, I turned to one of my key partners, and I said, ‘This isn’t only a real estate business. We need to understand cannabis. We can’t just focus on real estate.’ And so, from the outset, we focused on three core skill sets: real estate, because that’s the core of what we do; cannabis; and financial services and restructure, because we knew this nascent industry would have fits and starts and it would have periods of growth but also periods of distress. On the cannabis side, one of the first people we partnered with was Pete Kadens, who at the time was the recently retired CEO of Green Thumb Industries.”

It was a priceless education. “We spent a lot of time with Pete institutionalizing his knowledge of the cannabis industry,” said Coniglio. “Think about it. He ran one of these companies, he built the buildings, he understood the equipment, and he understood the licensing requirements. We institutionalized that knowledge into our organization and then added to the knowledge base with additional board members – for instance, we now have Joyce Johnson on our Board; she is the independent director of our strategies and is involved in a number of other cannabis businesses.

But outside help was not the only ingredient to success. “By doing transactions, watching the operators, executing their business strategy and seeing what works, we were able to accumulate a significant amount of knowledge not just about cannabis real estate and what in our opinion has the best value, but also about the industry and the business models that we think can survive for the long term, as well as the business models that maybe we don’t want to be part of investing in because we think they’re their model is challenged from a long term perspective. To wrap that all up, we’ve learned a ton from people inside of the business and from what we learned interacting with the industry, but also, as this industry has evolved, we’ve learned how these markets evolve for medical and adult use.”

Deploying the Millions

I asked Coniglio how long it took for NewLake to invest the $420 million that it has deployed? “Part of that is $20 million of commitments,” he first reminded me. “We do build-to-suit transactions as well as buying currently operational buildings, and the build-to-suits tend to take anywhere from 12 to 18 months, so we still have $20 million that’s going out the door to fund the completion of those projects.

“I’d say most of that has been executed or committed from 2019 through early 2023,” he added. “We have not done a lot of new transactions since the first quarter of ‘23. We’ve been watching both the macro-economic environment and interest rates as it relates to that, but also watching how the cannabis operators are adapting to the new reality of lower margins, higher costs, and lower wholesale prices. It’s been important to us to make sure that we understand that landscape, and now that things seem to have settled down in terms of price compression, and organizations focusing on generating free cash flow and extending out maturities, which is also important, 2024 is hopefully the year we can return to some transactions.”

NewLake currently has 31 properties, down one following a recent sale. “It was 32,” said Coniglio, “but we announced on our earnings call that we had sold one property, and if you can indulge me, this is an example of where we think we create goodwill and a good reputation by partnering with our tenants to accomplish their goals. In this situation, we acquired a property for a company – Mint – where we acquired the building and were going to provide capital for them to retrofit it to become a cultivation facility in Massachusetts. We executed that deal a couple of years ago, and we watched the Massachusetts market evolve. We approached Mint beginning of last year and said, ‘As you’re looking to launch this renovation, the Massachusetts market is different than when you started, and are you really better-served taking our capital and finishing out the Arizona facility we’re doing for you instead of building this out and having a cost structure in a very difficult environment that’s experienced significant price compression in a very rapid period of time?’ They agreed and so we worked in partnership to sell that property.

“We sold it for what we purchased it for,” he added, “and I think that speaks to how we buy properties with value, and now Mint is able to focus their resources on a much more attractive state for them in Arizona, which is their home state, and they even used capital to acquire Cresco dispensaries. We could have said, ‘Hey, it doesn’t matter that Massachusetts turned terrible; we have a deal, we’re going to fund that and you’re going to pay us rent.’ Instead, we said. ‘Maybe it’s better for you and also better for us from a risk perspective to redeploy that capital. I think that’s a good example of where we can partner with people and try to build good relationships with the industry.”

In that scenario, NewLake was clearly evaluating the strengths and weaknesses of individual markets rather than assessing overall market conditions. “We separate it out,” he clarified. “We think that market-by-market analysis is critical to success, and you can’t paint each market with the same brush. We think that would be a very dangerous approach, but it also speaks to how we underwrite and that feeds into this conversation around Massachusetts and what’s happened there relative to other markets. Today, we own 14 cultivation facilities and 17 dispensaries. We need both and we like both, but over 90 percent of our capital is in cultivation facilities, which are much larger than what a dispensary would be to build. And in our underwriting approach, where there is more focus for us in the licensing infrastructure, we focus on three primary attributes: licensing, tenant quality, and the real estate itself.

“But we also focus on limited license jurisdictions,” he said of what may be the most decisive factor. “We think it’s important to protect the value of our investment because it’s a better operating environment for the tenant. Just think about it. If you have limited licenses, you’re limiting competition, so it’s a better operating environment, and you also generally see that pricing is higher in these limited license jurisdictions, which allows people to have potentially higher margins if they run their businesses well. Just look at Illinois versus a California or an Oregon or Colorado. It also creates more value for the real estate, because with a limited number of licenses, typically that license is tied to the real estate in some form depending on the state. Therefore, if somebody wants that license, they’ll assume the lease for that particular real estate, and we’ve seen that play out in a number of cases. And then finally, if the operator can’t make it in that particular state, they’re unlikely to toss the keys or just give up because in a limited license state, that license actually has some intrinsic value.”

California provides a perfect example. “With thousands of dispensary licenses, it’s very easy to get a dispensary license in California, and if somebody can’t make it, there’s no value in trying to sell the license. But in a limited license jurisdiction like Pennsylvania., someone’s going to want that license. If one group can’t make it, there’ll be another group to step in, and we’ve seen that occur. So, licensing is critically important. Obviously, tenant quality is also important, and then when we look at real estate, we’re not just looking at its alternative use values, but importantly we’re looking at the property level cash flows. How much cash flow can this operator generate in order to pay their rent? Quite frankly, that’s what it comes down to for us.

“When you look at that on a market-by-market basis,” he continued, “there are dynamics that change in our underwriting analysis. If you’re looking at Massachusetts, Pennsylvania, or a state like Oklahoma, where it’s unlimited, we expected and modeled-out rapid price compression. But we didn’t anticipate as-rapid price compression in Illinois because it’s a more limited licensed state, so it really does depend on the state. Now, I don’t want to say we predicted what happened in Massachusetts, but we saw the elements of its precursor, which was the significant amount of demand for capital to build out cultivation capacity in the state.

“That occurred in late ‘20 and early ’21, and it coincided with the same period when a significant amount of capital came into the industry,” he added. “Every week, we’d get one or two decks of people looking for capital to build out a cultivation facility, and our view was, ‘Oh, boy, what’s going to happen when all those deals get funded, and all that product comes online?’ I don’t want to sit here and say we knew exactly what was going to happen in Massachusetts, but we were smelling the issue a year ahead of time, and we pulled back on providing additional capital to the state in the anticipation that a lot of those projects would get funded, product gets on the market, and then we saw the significant price compression.”

Can markets become so limited license that they become captured markets? “I think where they can go too far is when they’re so overly limited that the prices remain elevated for a prolonged period of time, allowing the illicit market to be economically attractive, and never converting the illicit sales into the legal channel,” said Coniglio. “What’s really interesting is, as you look at price compression, what we’ve seen from market to market to market, as the retail price comes down, is you actually see unit sales go up. We believe that part of that is due to the fact that as the number of dispensaries increase in a market, and that price comes down, people have greater access and better price-point entry to buy their product in the legal channel versus the illicit channel that they had previously been buying from. So yes, if a market is too restrictive, it could limit that conversion. I think Texas is a great example. It is extremely limited and therefore they have a tiny patient population, and so that market needs to expand more, needs to have greater access for the consumers, and needs more form factors in order to grow that market.”

What about Connecticut, where there currently is a serious lack of form factors. “It’s all about capital,” answered Coniglio. “It’s why, when you look at Connecticut’s under supply, there are folks out there that would like to grow in the state, but cannot because of a lack of capital, which as you know has been very hard to come by. And Connecticut by some investors’ standards isn’t a massive enough market for them to want to put their capital into somebody that’s operating. I think that’s the sole issue. It’s the flip side of Massachusetts, where capital was readily available, you had the overbuilding, and then you had the oversupply. In Connecticut, capital wasn’t available, you had under-building, and now you have under-supply.”

Triple Net Basis

“When we say triple net, what we mean is all of the expenses pertaining to the building, or the obligation of the tenant,” explained Coniglio. “You can have a single net, you can have double net, and you can have triple net. Think about electric bills, snow plowing, lawn maintenance, sweeping the parking lot, all the maintenance for the building is covered by the tenant on a triple net. That is important for us as a real estate investment trust, because with it we don’t have capex budgets that we have to worry about to repave the parking lot, or to reface the building. A lot of that maintenance stuff is all the responsibility of the tenant, so it improves the cash flow profile of our business.”

With all of that pressure on the tenants, and with many operators unable to pay their bills, had NewLake experienced any distress with its tenants? “We did have a tenant in Massachusetts in 2023 that was unable to pay for a period of time,” said Coniglio. “In the fourth quarter, we announced a settlement with that operator where we were able to recover some back rent, they brought in some third-party capital, we reduced rent going forward, and we took equity in the company. It was another example of where we could have said, ‘We’re just going to evict you, we’re going to take you to court,’ but we were able to find an amicable way to move forward. We believe that’s the best net present value proposition for our shareholder base, because while we like to be nice people, we have to look out for what’s best for our shareholders. So, we thought the best decision was to work with them.

“We did also have a tenant in Pennsylvania that paid all the way through Q3,” he added. “Their platform was on sale for well over a year, and we announced in the fourth quarter that they did sell to another company. And here, specific to what I said earlier these licenses being worth something, previous ownership wasn’t making the money they wanted, they wanted out and to sell the business, and didn’t want to run it anymore, but that license had intrinsic value. They were able to buy a company that has much a better financial profile, and they’ll be bringing brands to the state that can compete effectively. But aside from those, we’ve been very happy with the portfolio.”

I had just published an article on distressed assets and had been told they are throughout the country. But what I seemed to be hearing from Conglio was that they are more numerous in markets like a Massachusetts, and they’re definitely location vulnerable.

“Yes, but I’d go a little step further and say that they’re more in the unlimited license jurisdictions, like California, Colorado, Michigan,” he replied. “When you look at the kind of the high profile ones, like Skymint in Michigan, when you look at some of these distressed properties that are being taken back by lenders and competitors of ours, they tend to be in California and Michigan, these unlimited license states. It’s not to say you don’t find them in a limited license states, but you find it much, much less than and it stands to reason that people are going to take more risk in these unlimited license states because they are easier to get into.”

Does it makes sense for an operator who wants out but has a valuable asset to wait for a catalyst like rescheduling, which would erase 280E tax burdens? “That’s not the typical profile of the organization that we would engage in,” he said. “When you look at our tenant base, we have some of the larger companies – like Curaleaf, Trulieve, and Cresco – in the book. But what you’re describing is what I hear happening all the time. I think the reality for these folks is that it’s a cash decision. Do they have the cash, or don’t they have the cash? Can they survive, or can’t they survive, and I think the notion of 280E helping in the near term is misplaced for them, because if they’re in that much distress they’re likely not paying their federal taxes anyway, or they’re at least a year or two behind. So, the fact that 280E would go away isn’t going to help their cash flow over the next 12 months. They really need to have a cash flow profile that allows them to survive the next 12 months to get to 2025, where if they were paying their 2024 taxes in 2025, they can get the cash flow benefit then. But if people are thinking, ‘I’m going to hold on because my business is going to be worth more after 280E, maybe, but if your business is in deep distress with a massive cashflow deficit, I don’t know that folks are going to want to step into somebody else’s problem. I think they’re going to look to buy something that’s a bit healthier or take it out of receivership the way you’ve seen a couple of folks execute recently.”

A Quality Portfolio in a Stable Environment

Whatever challenges face the industry, it seemed apparent that NewLake’s impressive performance could be chalked up to the quality of its portfolio. “Yes, it’s the quality of the portfolio,” concurred Coniglio, “which is driven by the quality of our underwriting approach and the strategic decisions we made when we started the business four or five years ago in how we wanted to construct the business and where we wanted to focus our capital. And I go back to limited license jurisdictions and focus on property level cash flows. I think those are the two keys that have allowed us to perform the way we’ve performed.”

With little debt, there is also no need to raise additional capital in anticipation of acquisitions and deals. “We don’t have any need for capital right now because we have a $90 million credit facility that’s available to us,” said Coniglio. “That’s a five-year credit facility that still has over three years left on it, and we only drew a million dollars, so it’s largely entirely available to us, and we can easily tap that for growth.

“What makes me say that 2024 is the year where we could potentially see ourselves getting back to doing deals is because of predictive capability,” he added. “We have a more stable environment, we have a more stable economic outlook, we have a more stable rate outlook, and we have a more stable cannabis operating climate for us to be able to underwrite transactions into. We also understand more about where debt is and how debt is extended, and how the debt holders and the bondholders behave in a period where a company needs to extend and have more time. And so, when I look at that, all of those are more stable pictures than they were 12 months ago.”

Are there any specific markets of interest. It is already March, after all. “Don’t rush it,” joked Coniglio. “We look at deals in any market. Even if it was in an unlimited license, we don’t just say no. What we like to talk about is the deal we would do as opposed to the deal we’re not going to do, so even if you’re in a limited license state, we could do a transaction. It would just mean that the real estate value would have to be really, really good, and the tenant quality would have to be really, really good, in order to compensate us for the risk of going into an unlimited license jurisdiction. Think of it as if each one of these are levers and we’re going to be pulling on them. You can always have that right mix, so we’ll look at any market in taking an underwriting approach and pricing a transaction.

“From an investor’s perspective,” he added, “we’ve been paying a dividend, and we raised our dividend in December to 40 cents a share. So, I do think it’s a safer way for people to play the cannabis sector, because you have hard assets in real estate that reside in our portfolio, you’re getting paid a dividend, and you’ll still have the benefit of a catalyst such as Schedule III, or ultimately, federal legalization. You still have that benefit through the value of our stock because it improves the credit quality of all of our tenants, which improves the quality of our cash flow, which improves the valuation of the business. So, because of the fact that we’re generating over $40 million of free cash flow per year, paying out a healthy dividend off of that, and building our capital base with the cash we retain, we feel like we’re in a pretty good spot. Now, to be fair, we’re not going to be up 10x the way some of these cannabis companies will be over the next five years if federal legalization occurs. They have much more upside, but we certainly aren’t going to go to zero the way some of these companies could if the DEA says we’re going to stay in Schedule I or the federal government starts to crack down on the industry.”

Would he say they take a cautious approach to the market, no matter what happens? “No, I wouldn’t say we’re taking a cautious approach, no matter what,” he clarified. “I’d say it’s a different play for investors. Let’s say an investor wants to get involved in cannabis. They could say ‘I’m going to go long a particular stock,’ or, ‘I’m going to go long with a cannabis ETF,’ and that ETF will have significant volatility to it. It’ll have multiples to the upside, and also multiples to the downside. With us, you remove some of that volatility, plus you have the dividend.”

What are the inherent risks to NewLake’s business model, and is there a hedge against them? “The main risk is rent collection, and the credit quality of our underlying tenants to be able to continue to pay us rent,” said Coniglio. “There isn’t a hedge per se, but the way you protect yourself from that, or the way you ensure that you’ll get paid rent, is you have to do quality underwriting upfront, and you have to keep an eye on the properties and intervene when problems emerge. We’ve said for years to our investors that we’re not going to be perfect, and there’s no way you can invest in a portfolio of triple net assets that have 15-to-20-year terms and not have a rent issue, especially in a nascent industry like cannabis. And so, for us, in order to maximize returns, we need to make sure that we pay rent, and we seek alternatives when rent can’t be paid. That’s probably the biggest risk for us, certainly in the near term. In the long term, it would be the potential obsolescence of the properties we own. But I don’t foresee that happening, because I think cannabis is a product that’s going to be here for decades and decades, and I don’t see synthetic cannabis becoming a viable product alternative, particularly since I’ve seen the government crackdown on synthetic compounds for other legal substances.”

But it can all change quickly, can’t it? There will probably be less need for large scale cultivation within the next five years or so. How do you plan for future cultivation and retail in cannabis?

“That’s another reason why we like the limited license jurisdictions, which are typically the same jurisdictions that significantly regulate the sale of alcohol, wine, and spirits. In Connecticut, for instance, we still have to go to a liquor store to buy vodka. We own dispensaries in Connecticut, a state that, in our view, isn’t going to let cannabis be distributed through convenience stores. We think you’ll have to distribute through a licensed cannabis distributor for as far as the eye can see, and that’s why we like these limited license jurisdictions. Often we’ll hear people say, ‘But wait a minute, when interstate commerce happens, everyone’s going to shut down their facilities and move to Arizona, because it’s cheaper there.’ I don’t think so. First, interstate commerce is probably from two to four years after federal legalization, so we’re probably five to seven years out, and my guess on federal legalization is that if we get Schedule III, people are going to feel like we’ve got no reason to do anything more for a handful of years.

“But let’s say it’s five to seven years out,” he continued. “The states have invested too much into building up their state infrastructure, they like the tax revenue, and they like the jobs, so they are going to push a state’s rights issue. I don’t think the states are going to give up those jobs and that tax revenue without a fight, so I think they fight it, fight it, fight it, and that’ll drag on for a few more years. Ultimately, they’ll probably lose. In an environment where you have interstate commerce, the backdrop is federal legalization, which means a significant growth environment for the industry. I don’t think all of the operators are going to take their large-scale cultivation facilities offline in the midst of that to relocate to save some money. They have hundreds of people that are trained in these facilities, they have equipment in these facilities that they’ve purchased, and they’re delivering to the local market. So now they’re going to shut that down, have to hire people in a new location, get new equipment or move equipment and then build a supply chain? No, I don’t believe that.

“Instead, I think what’s likely to happen is two things,” he added. “One, I think the growth needs for that significant market will be filled by building their next building in a location that enables interstate commerce from there. And for those that do ultimately move out of a location, because maybe they’re consolidating into one from three, I think you’re going to see craft growers step in much the same way you see in the beer industry. We see that in Illinois, where craft growers are creating brands to create local connectivity with the consumer.”

Vision for the Future

I wondered if Coniglio believed that cannabis will one day be sold in K-Mart, 7-11, and other convenience outlets? “I don’t think so,” he replied. “For this industry to have mass adoption in the legal channel, and for it to be truly successful and realize its potential, it needs the very casual consumer and the new consumer to really participate. I’ve seen stats that roughly 70 percent of industry sales are to heavy consumers, people who consume on a very regular basis.

“But in order for this industry to be very healthy,” he added, “it needs new or very occasional consumers, and I think the key to their wallet isn’t by having them walk into a convenience store or some sort of a quick-buy experience, like, ‘I’m going to get Doritos and Coca Cola, and a pack of gum.’ I think they need to be navigated through consultation and advice from a budtender. I think it’s going to look more like a wine store, where they walk in and they say, ‘This is what I’m looking for,’ than them just going in for Doritos and a pack of gum. The reason people walk in and grab a bag of Doritos, a pack of gum, and a Coke is because those products offer consistency to the consumer. You know exactly what you’re going to get before you take the top off or open the bag. You don’t have that today in cannabis, and I don’t think it’ll be truly commoditized like that for a couple of decades, until the industry can truly commoditize the delivery of products that you can’t commoditize today.”

It clearly is a different sort of CPG industry. “Bespoke isn’t the right word for it,” said Coniglio. “It’s more of a curated consumer product than it is a mass consumer product.”

I asked if Coniglio has anything he wanted to add, and he jumped at the opportunity. “I think the key to really explosive growth in this industry is beverages,” he said unexpectedly. “I have this view that from the time we are literally infants, we’re always holding a beverage in our hand. The baby bottle transitions to the juice box, which transitions to the soda, which transitions to the beer or the drink. And we’re conditioned from very early on in our lives that having something in our hand and grabbing a drink in our hand is connected with satisfaction and feeling good. And I think that if we can get the drink segment right that this industry will explode with growth, because it plays right into that psychological connection with holding something. It’s part of the reason I’m negative on consumption lounges. I just don’t think there’s a huge market for people to want to sit around and consume cannabis and not also drink.”

Can that interest be incorporated into the business? “We haven’t yet,” he admitted. “It’s hard for me to see how [beverages] impact the industry in the near term. And I’ve yet to see a company that does beverages well, although I have not canvassed the universe, so that is an uninformed perspective. I think the bigger issue is how do we keep the hemp-derived THC products from taking demand away from our tenant base, which could reduce their sales, reduce their cash flow, and adversely impact them? We haven’t underwritten anything in the current environment where these are becoming a bigger component, and it’ll be interesting to see if legislators do anything later this year with the Farm Bill to close that loophole. We’re certainly seeing states close that loophole. So, when we go to underwrite deals, we’ll certainly consider if a state allows Delta 8, Delta 9, whether they are going to be closing that loophole, and how that impacts potential sales for your pure-play cannabis companies.”

And what about the competitive environment in NewLake’s neck of the woods? “There are a few organizations that provide capital for real estate projects in the public domain, including four REITs: NewLake, IIPR, Chicago Atlantic, and AFC Gamma,” said Coniglio. “Chicago Atlantic and AFC Gamma are mortgage companies, so they don’t own the properties the way we and IIPR do. We also have seen AFC Gamma pivot away from cannabis to a large extent, and they’ve said recently that they are going to refocus on cannabis, but there just aren’t a lot of organizations. There were a number around the same time that we started that stayed private, and a couple of them are doing deals here and there, but I would say that it’s a very small competitive landscape today. It’s probably less competitive today than when we got into it in 2019.”

NewLake will host a fourth quarter and full year 2023 earnings call on March 11 at 11:00 a.m. ET. The call can be accessed here.