Cannabis REIT Investing: Sale-Leasebacks, Risk & the Next Growth Markets

Anthony Coniglio (00:00)
There is one that jumps out, Scott, and it’s a funny one. During the heyday, during 2020, 2021, 2022, can’t tell you how many conversations started with, man, we grow the best pot out there. That was a deal killer. Literally, people would start the conversation like that.

We’ll set that aside. I would say for us, it’s realistic projections. We ask everybody when we’re looking at a deal, tell us what you think this facility, whether it’s a cultivation facility or retail facility, tell us what you think this facility could do and show us the detail behind your model. We want to make sure that they understand exactly what they’re doing.

Scott Bursey (02:10)
Welcome back to the Real Estate Pros podcast, powered by Investor Fuel. I’m your host, Scott Bursey. Glad you’re with us. Today we’re diving deep into the high-stakes world of institutional real estate. We’re pleased to be joined by Anthony Coniglio, CEO of NewLake Capital Partners. Anthony is a titan in the Triple Net Lease and Cannabis REIT (Real Estate Investment Trust) space, bringing massive experience in institutional underwriting and sale-leasebacks. Expect to learn exactly how institutional players evaluate risk in emerging high-growth industries. Anthony, welcome to the show.

Anthony Coniglio (02:46)
Thank you, Scott. It’s great to be here.

Scott Bursey (02:47)
Anthony, it is more than a pleasure having you here. And please tell our listeners how your career ignited and where you’re pouring your fuel now.

Anthony Coniglio (02:56)
Wow, my career. We’re going back over 30 years. I started my career at Price Waterhouse auditing banks and asset managers. I was hired by one of my clients, a Canadian bank, that I audited for a few years to focus on what was called structured finance. I then started originating and structuring transactions. And I was hired by Chase to help start up a business line in structured finance, running various structured finance businesses before becoming a more traditional investment banker at what became JPMorgan. Spent nearly 15 years at JPMorgan. I was running specialty finance and asset management investment banking, and part my coverage universe was real estate investment trusts. I left JPMorgan in 2011, started a residential mortgage company. We raised money from a publicly traded real estate investment trust or REIT. We used that capital to acquire a platform, scale it up national, and we sold it to a portfolio company of Blackstone.

And then we started NewLake, and here’s where I’ve been pouring my fuel for the last seven and a half years into focusing on cannabis real estate. And today, as we sit here, we are the second largest owner at NewLake Capital Partners, the second largest owner of cannabis real estate in the US.

Scott Bursey (04:06)
Wow, that is quite a journey. And Anthony, what really caught my attention about you was the way you’ve been able to scale a powerhouse REIT like NewLake Capital while navigating the incredibly complex regulatory landscape of the cannabis industry. Taking that a step further, what do you consider the greatest competitive strength of NewLake’s current portfolio?

Anthony Coniglio (04:28)
Yeah, I think you hit the nail on the head, Scott. This is an unbelievably complex regulatory environment because each state regulates the product very differently. You have some states that have no access to cannabis. You have some states that are medical cannabis, some that are recreational cannabis, some that force verticalization. That means they have to plant, grow, package, manufacture, and sell it all by themselves. In some states, you have wholesale business, retail.

It is very complex. But I think what we’ve done well is at the beginning, we pulled together a team of people that really understood what we thought were the various important components. One is understanding that regulatory risk. So having people on our board and on our team that understand the cannabis industry inside it out, the P&Ls, the balance sheets, the leverage, the regulatory environment, but also having people that understand triple net lease REITs unbelievably well. And we’ve got that on our board, decades of experience with some of the largest net lease REITs in the world on our board to be able to implement the leases in an appropriate manner for this highly complex industry. We also have people that understand capital markets because capital is a lifeblood of our business. Without capital, we don’t have the capital to deploy. And then lastly, we have people that understand restructuring. And you may be saying, what does that have to do with anything? Well, we always knew at the outset of our business, with the complexities of this regulatory environment, the lack of regular way access to the capital markets for this industry, that there would be restructurings and failures. We wanted to have the skill set necessary to deal with that. Well, not only deal with it, but incorporate it into our lease structure up front and then deal with it when it ultimately occurs. So it’s a long-winded way of saying the team is probably the most precious asset of the organization because it’s that combination of skill sets that we think delivered our outsized performance.

Scott Bursey (07:03)
Anthony, we’d love to hear about a specific operational weakness or hurdle in the cannabis REIT model that keeps you on your toes.

Anthony Coniglio (07:14)
Yeah, it’s all about credit. We underwrite our transactions really focusing on four-wall coverage. It’s what is the cash flow profile of that property that will deliver cash flow to the tenant because we know if they’re making cash flow, they’re likely to pay rent. But underwriting a transaction that has a 15 to 20 year lease term has its limitations. And while we’ve priced in and modeled in price compression, this is where the price of the product for our tenant decreases.

In some states, that price compression has happened faster and deeper than we had expected. And so we’re dealing in some cases with some distressed tenants. And so in that case, we’re looking to either find a new tenant, retenant a property, or tenant the property that may have come back to us that is now available for lease. And so it’s working through the distress in the cannabis space in being a partner to our tenants so that we can make sure we have as little disruption to our rental flows as possible. But also defending our position and our leases and finding those new tenants.

Scott Bursey (08:19)
That transparency is huge. And we’re interested in where the biggest untapped opportunity lies for sale-leaseback deals in the next, let’s say, twelve to eighteen months, in your view.

Anthony Coniglio (08:31)
Yeah, I think you would need to look at the states that are adopting new cannabis programs or expanding programs. A couple of examples for you. In Kentucky, there is a newer medical marijuana program. In fact, we just closed a transaction last month for a dispensary in Kentucky. And I should probably pause there. When I talk about cannabis real estate, I want to be clear for your listeners. This isn’t farmland. When of the 35 properties that we owned, 15 are indoor cultivation facilities. So visualize a 50 to 100,000 square foot industrial building that’s been modified with power, HVAC, irrigation systems for that indoor agriculture. The other 20 of our properties that we own and lease out are dispensaries. Typically, think of them as a 2,000, 3,000 square foot pad site, single-tenant type of property that’s used as a retail distribution home.

And so back to my point about the opportunities for growth, in that Kentucky transaction, that was a dispensary for that new medical state. You have Georgia as an example, significantly expanded their medical marijuana program, which will require additional retail distribution as well as additional cultivation capacity. And Texas, as my other example, would be a state, a massive state of over 30 million people that had a very, very tiny medical marijuana program. And they recently significantly expanded that medical marijuana program. And I think we’re going to see significant scaling up of manufacturing capabilities and square footage, but also those retail distribution footprints. And so I’d be looking at those expansion states, and there’s others that I could go on about, but that’s where I’d be looking.

Scott Bursey (10:18)
Does that opportunity rely on federal rule changes?

Anthony Coniglio (11:03)
No, the states have been legalizing for decades. In fact, California was one of the first states to start legalizing medical marijuana back, I believe it was in the late 80s, early 90s. And so we’ve seen the states grow in terms of evolving these medical marijuana programs also into adult-use programs. And as we sit here today, over half the country lives in a state that has adult-use cannabis as a legal product. Over half the country lives in a state with adult use as legal product. And you’ve got over eighty percent of this country, close to ninety percent lives in a state that has either adult-use or medical cannabis in their state.

Scott Bursey (11:45)
Massive opportunity there, Anthony. And can you share what do you view as the primary external threat to the triple net lease model in today’s economic climate?

Anthony Coniglio (11:55)
I think it will specifically the triple net lease model, let’s just unpack that for a moment. Let’s remember triple net is about the tenant being responsible for repairs to the building, responsible for taxes, responsible for insurance, responsible for maintenance. These are usually single-tenant properties. And so everything is on the tenant in terms of that responsibility. And it’s not just cannabis companies that utilize this type of approach. I should sell you stock or remind your listeners that companies like a Walgreens or a Home Depot, anybody that has a large real estate footprint will utilize sale-leasebacks as a component of funding their real estate capital needs. And so from a headwind perspective, specifically for cannabis sale-leasebacks, would be the cost of the sale-leaseback relative to the debt. And so if you’re an operator in the cannabis sector that’s looking to execute a sale-leaseback and be tied to that yield or that rental payment for the next 15 to 20 years, and you have a significant set of regulatory catalysts that you think will lower your cost of capital, you may decide to sit on the sidelines and wait to see how all that plays out, what your ultimate cost of capital is. And so we have those conversations with folks every day about whether they should wait or not.

Scott Bursey (13:14)
Anthony, if you could tell us more about the core strategy behind your institutional underwriting that allows you to deploy capital so confidently.

Anthony Coniglio (13:23)
Yeah, well, you know, and I’m we’re not taking any victory laps here. We certainly have had people have to vacate buildings in our portfolio. I think our portfolio is held up better than anybody else that focuses on the sector. But I think it’s performed better because in the underwriting we focused on that four-wall coverage. We also focused on limited license states. So depending where you live in this country, it could be really, really easy for you to buy liquor or it could be a little bit more difficult.

On the two extremes, you can walk into a supermarket in California and buy just about anything you want. In Pennsylvania, as an example, you need to go into a package store, state-run package store to do that. Well, when it comes to cannabis, not surprisingly, the states have taken similar, either restrictive or permissive approaches. And in the states where you have a more restrictive approach, we believe that creates intrinsic value for the license to operate the way a liquor store would have some intrinsic value to that license. And naturally less of an opportunity to see the operator either go out of business or throw you the proverbial keys, they’d seek to monetize that license. And typically these cultivation licenses are attached to a property. And it’s not as easy to separate them from the operations at the property. And so for those reasons, cash flow and the limited license jurisdictions that we focus on, we think that’s created a better performance for our shareholders.

Scott Bursey (14:46)
What is the one red flag, if you will, that will make you walk away from a deal every single time?

Anthony Coniglio (14:53)
There is one that jumps out, Scott, and it’s a funny one. During the heyday, during 2020, 2021, 2022, can’t tell you how many conversations started with, man, we grow the best pot out there. That was a deal killer. Literally, people would start the conversation like that.

We’ll set that aside. I would say for us, it’s realistic projections. We ask everybody when we’re looking at a deal, tell us what you think this facility, whether it’s a cultivation facility or retail facility, tell us what you think this facility could do and show us the detail behind your model. We want to make sure that they understand exactly what they’re doing. What are the unit prices? What do they expect sale prices? Do they project price compression?

Because in a market that’s growing, and is ultimately a commodity, you will have price compression. If your business isn’t built to be able to absorb that, we’re gonna have difficulties collecting rent from you. And so it’s first and foremost, how thoughtful and how detailed are their projections for their business.

Scott Bursey (15:55)
Anthony, if somebody’s listening and they’re thinking to themselves, hey, this is somebody that I really like and perhaps would like to do business with, what would you like them to know first about NewLake Capital Partners?

Anthony Coniglio (16:06)
Yeah, NewLake first off, you can find us at newlake.com and there’s a contact page there. We’re a publicly traded company. We’ve deployed almost half a billion dollars into cannabis real estate. I think what we’re looking for is we’re looking for quality deals that are what I would call institutional quality. And so if you’re a startup, very difficult to see us getting comfortable with a startup with no operational history to really be able to underwrite. That would be another, I don’t want to call it a red flag because we were a startup at one point, but our orientation is really about understanding an organization’s ability to operate these businesses, not just have a strategy to go and execute. We really don’t want to take that execution risk or that startup risk.

Scott Bursey (16:53)
When it comes to networking and your professional relationships, what has made the biggest difference for you?

Anthony Coniglio (16:59)
Yeah, it’s gosh, it’s trite, but it’s so true. It’s about getting out there and making relationships, making connections. It was very clear when we started this business back in 2019 that we weren’t going to be able to rely on the broker network. In fact, many of the large brokerages restricted their brokers from transacting in cannabis-related properties. Now, some of that has thawed, but way back when we weren’t able to rely on brokers.

But instead, we immersed ourselves in the industry that we were focused on. And we did that not only to create the relationships to source the opportunities, but also two other reasons. Also to understand this industry. Given the nature of these properties, you really need to understand the cannabis industry and what the issues are and what those opportunities are. And that’s the only way you could really underwrite this sector, in my opinion. And then the other reason was because we needed to be where the transactions were. And that was with the tenants and the operators in the industry. And creating that connectivity is really where we sourced all of the thirty-five transactions or thirty-five properties that we have today.

Scott Bursey (18:06)
Thank you for highlighting that. How do you accurately price the cost of capital for cannabis operator when the legal status remains a moving target?

Anthony Coniglio (18:15)
Yes, yes. We publish in our investor presentation that our yield on our tenanted properties is around thirteen percent. And that is high. That is the cap rate. So that’s the average across the portfolio. So that’s very high relative to what you’d find in industrial or what you would find in retail. There’s a couple of reasons for that.

Number one, we’re taking elevated risk. This isn’t a regular way industrial company, right? We’ve talked about the complexity and the regulatory issues. And the fact it is federally for non-medical today, it remains federally illegal to have these activities go on at our property. So there’s an elevated level of risk. Number two, our cost of capital is higher. As I explained, even though we comply in all respects to be New York and Nasdaq, they won’t have us. So now we’re still on OTC. And while we did recently bring down the cost of our debt, it’s still elevated to where I would see others do it, where I would see others execute. And so all of that goes into us needing that premium yield on our portfolio and then also absorbing the risk when you ultimately have tenancy, you want to maintain that cash flow. So you put all of that in and you go to price and then it’s really more art than science in pricing it.

Because the other thing you don’t want to do is you can’t make it too expensive. If you make it too expensive, well, then you’re going to put financial stress on the tenant, and you’re only hurting yourself if you have financial strain on the tenant.

Scott Bursey (19:39)
Great insight there, Anthony. And you have delivered a lot of really good insight here today. But is there any additional words, golden nugget or two that you’d like to leave with our listeners?

Anthony Coniglio (19:49)
Yeah, I would say to the extent that listeners haven’t yet come across a cannabis real estate transaction, I would expect that you will. I think there are a number of catalysts coming our way as an industry. We’ve already mentioned the DEA rescheduling to Schedule III. We didn’t talk about intoxicating hemp products being banned later this year and a lot of those products moving out of, say, the smoke shop channel and the convenience store channel back into the regulated cannabis channel.

I think we’re going to see more and more growth. And so people should be aware of the industry and also be aware that there should be some meaningful consolidation amongst the operators. I think when I look at the industry, the best analogy I could give you is the beer industry, where there were a lot of brands early on after Prohibition, but then over time the industry consolidated. And so I’d be focusing on property-level cash flow, being aware of consolidation, and knowing that this is a product that most Americans want to see available to them as a resident. And I’ll finish with a quote from the recent Gallup poll that said over 90% or approximately 90% of Americans surveyed think medical cannabis should be legal. 90% of Americans surveyed think medical cannabis should be legal. And so this isn’t a partisan issue.

And to the extent it hasn’t reached your community, I expect it will in the next three to five years. And therefore, as a real estate investor, I think you’ll see more opportunities to deploy capital to those types of transactions.

Scott Bursey (21:27)
Anthony, for those of our listeners that want to keep this conversation moving, in your lane, or perhaps collaborate with you on future deals, what is the best way for them to reach you?

Anthony Coniglio (21:36)
They can contact us through our website at newlake.com. They could also follow us on Twitter. We’re very active on Twitter and LinkedIn under our #NewLake. I also am on Twitter as well, and they can find me at @AnthonyConigli0, but the O is actually a zero. And I often am commenting on what’s going on in the industry as well.

Scott Bursey (22:00)
Anthony, thank you so much for joining us today on the Real Estate Pros podcast.

Anthony Coniglio (22:04)
Scott, it’s been wonderful. Appreciate the opportunity to chat with you and your audience.

Scott Bursey (22:08)
And to our listeners, we appreciate you. If you receive value from today’s episode, please subscribe. We’ll be fueling your tanks with the lineup of elite guests, just like Anthony, who are accelerating and setting the pace for the rest of the industry. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.